<PAGE>
As filed with the Securities and Exchange Commission on April 2, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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GREEN TREE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 41-1807858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1100 Landmark Towers
345 St. Peter Street
Saint Paul, Minnesota 55102-1639
(612) 293-3400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Joel H. Gottesman
1100 Landmark Towers
345 St. Peter Street
Saint Paul, Minnesota 55102-1639
(612) 293-3400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Charles F. Sawyer Jeffrey J. Murphy
Dorsey & Whitney LLP Thacher Proffitt & Wood
220 South Sixth Street Two World Trade Center
Minneapolis, Minnesota 55402 New York, New York 10048
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Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered Registered per unit(1) offering price fee(2)
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<S> <C> <C> <C> <C>
Certificates for Home
Improvement and Home
Equity Loans .......... $4,000,000,000 100% $4,000,000,000 $1,112,000
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Limited Guaranty of
Green Tree Financial
Corporation............ (3) (3) (3) (3)
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum aggregate offering price, pursuant to
Rule 457(c).
(2) The amount of Certificates for Home Improvement and Home Equity Loans
being carried forward from Registration Statement No. 333-63305 pursuant
to Rule 429 is $618,087,069, and the Registrant previously paid a filing
fee with respect to such securities of $182,335.69 (calculated at the rate
of 1/29th of 1% of the amount of securities being registered, the rate in
effect at the time such Registration Statement was filed).
(3) No additional consideration will be paid for the Limited Guaranty;
accordingly, no separate filing fee is being paid herewith pursuant to
Rule 457(n).
Pursuant to Rule 429, the Prospectuses contained in this Registration
Statement also relate to and constitute Post-Effective Amendment No. 1 to
Registration Statement No. 333-63305, which became effective on October 14,
1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
GREEN TREE FINANCIAL CORPORATION
Certificates for Home Improvement and Home Equity Loans
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EXPLANATORY NOTE
This Registration Statement includes seven different Base Prospectuses, with
an accompanying form of Prospectus Supplement, describing different
combinations of assets or transaction structures that might be employed by the
Registrant:
Base No. 1Home Equity Loans, REMIC
The assets of the related Trust would consist of home equity loans.
Each such home equity loan would constitute a "qualified mortgage"
for purposes of the REMIC provisions of the Internal Revenue Code.
The Trust would be structured to qualify as a "real estate mortgage
investment conduit"("REMIC") under the Internal Revenue Code, and
would issue certificates constituting "regular interests" in the
REMIC.
Base No. 2 High-LTV Home Equity Loans , Owner Trust
The assets of the related Trust would consist of home equity loans.
For various reasons, which may include a loan-to-value ratio in
excess of 125%, Green Tree is unable to represent that such home
equity loans constitute "qualified mortgages" for purposes of the
REMIC provisions of the Internal Revenue Code. The Trust would be
structured as an "owner trust," issuing notes pursuant to an
indenture representing indebtedness of the Trust, and possibly
issuing certificates representing beneficial interests in the Trust.
Base No. 3 Secured Home Improvement and Home Equity Loans, REMIC
The assets of the related Trust would consist of home improvement
loans and home equity loans. Each such home improvement loan and each
such home equity loan would constitute a "qualified mortgage" for
purposes of the REMIC provisions of the Internal Revenue Code. The
Trust would be structured to qualify as a REMIC under the Internal
Revenue Code, and would issue certificates constituting "regular
interests" in the REMIC.
Base No. 4 Secured Home Improvement Loans, REMIC
The assets of the related Trust would consist of home improvement
loans. Each such home improvement loan would constitute a "qualified
mortgage" for purposes of the REMIC provisions of the Internal
Revenue Code. The Trust would be structured to qualify as a REMIC
under the Internal Revenue Code, and would issue certificates
constituting "regular interests" in the REMIC.
Base No. 5 Unsecured Home Improvement Loans and High-LTV Home Equity Loans ,
Owner Trust
The assets of the related Trust would consist of home improvement
loans and home equity loans. For various reasons, which may include
the lack of a mortgage on the related improved real estate or a loan-
to-value ratio of such loan in excess of 125%, Green Tree is unable
to represent that such home improvement loans and home equity loans
constitute "qualified mortgages" for purposes of the REMIC provisions
of the Internal Revenue Code. The Trust would be structured as an
"owner trust," issuing notes pursuant to an indenture representing
indebtedness of the Trust, and possibly issuing certificates
representing beneficial interests in the Trust.
Base No. 6 Unsecured Home Improvement Loans , Grantor Trust
The assets of the related Trust would consist of home improvement
loans. For various reasons, which may include the lack of a mortgage
on the related improved real estate or a loan-to-value ratio of such
loan in excess of 125%, Green Tree is unable to represent that such
home improvement loans constitute "qualified mortgages" for purposes
of the REMIC provisions of the Internal Revenue Code. The Trust would
be structured to qualify as a "grantor trust" under the Internal
Revenue Code, and would issue certificates representing beneficial
interests in the Trust.
Base No. 7 Unsecured Home Improvement Loans , Owner Trust
The assets of the related Trust would consist of home improvement
loans. For various reasons, which may include the lack of a mortgage
on the related improved real estate or a loan-to-value ratio of such
loan in excess of 125%, Green Tree is unable to represent that such
home improvement loans constitute "qualified mortgages" for purposes
of the REMIC provisions of the Internal Revenue Code. The Trust would
be structured as an "owner trust," issuing notes pursuant to an
indenture representing indebtedness of the Trust, and possibly
issuing certificates representing beneficial interests in the Trust.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary Prospectus Supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final Prospectus Supplement for definitive +
+information on any matter contained herein. This preliminary Prospectus +
+Supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT Prospectus Supplement to Base No. 1
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Equity Loans
Series 1999-A
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The certificates will consist of 15 classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate C Pass-Through Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- -------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
A-1A ARM................ $ (4)
A-1B ARM................ $ (5)
A-1..................... $
A-2..................... $
A-3..................... $
A-4..................... $
A-5..................... $
A-6 IO.................. $ (7)
M-1..................... $
M-2..................... $
B-1..................... $
B-2A.................... $
Total................... $
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The lesser of one-month LIBOR plus the Class A-1A pass-through margin or
the available funds pass-through rate, but in no case more than 14%.
(5) The lessor of one-month LIBOR plus the Class A-1B pass-through margin or
the available funds pass-through rate, but in no case more than 14%.
(6) Or the weighted average of the rates on the loans, if less.
(7) Interest on the class A-6 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $ (or
the Class A principal balance, if less) for the first 24 months and will
equal zero thereafter.
Investing in the certificates involves certain risks. Prospective investors
should consider carefully the Risk Factors beginning on page S- in this
prospectus supplement and on page in the prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
These certificates will be delivered through the same-day funds settlement
system of the Depository trust Company on or about , 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- in this prospectus supplement and
on page in the prospectus.
----------
[Underwriters]
The date of this prospectus supplement is , 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................. S-4
Risk Factors............................................................. S-12
Structure of the Transaction............................................. S-13
Use of Proceeds.......................................................... S-13
The Loans................................................................ S-14
Yield and Prepayment Considerations...................................... S-35
Green Tree Financial Corporation......................................... S-45
Description of the Certificates.......................................... S-46
Description of the Class B-2 Limited Guaranty............................ S-72
Certain Federal Income Tax Consequences.................................. S-73
ERISA Considerations..................................................... S-74
Underwriting............................................................. S-78
Legal Matters............................................................ S-79
Annex I.................................................................. A-1
Prospectus
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 8
The Trust Fund........................................................... 9
Use of Proceeds.......................................................... 10
Green Tree Financial Corporation......................................... 10
Yield Considerations..................................................... 11
Maturity and Prepayment Considerations................................... 11
Description of the Certificates.......................................... 12
Certain Legal Aspects of the Loans; Repurchase Obligations............... 23
ERISA Considerations..................................................... 32
Certain Federal Income Tax Consequences.................................. 34
Legal Investment Considerations.......................................... 50
Ratings.................................................................. 51
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the certificates in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there
S-2
<PAGE>
has not been any change in the facts set forth in this prospectus supplement
and prospectus or in the affairs of the Green Tree Home Equity Loan Trust 1999-
A since the date hereof.
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home equity lending business, and about any series of
certificates for home equity loans that Green Tree may wish to sell. This
prospectus supplement contains more detailed information about this series of
certificates. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these certificates has been or will be prepared in
the United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These certificates may not be offered or sold, or re-offered
or re-sold, to persons in the United Kingdom, except (1) to persons whose
ordinary activities involve them in acquiring, holding, managing and disposing
of investments (as principal or agent) for the purpose of their businesses, or
(2) in circumstances that will not constitute or result in an offer to the
public in the United Kingdom within the meaning of the United Kingdom Public
Offers of Securities Regulation 1995. You may not pass this prospectus
supplement and prospectus, or any other document inviting applications or
offers to purchase certificates or offering certificates for purchase, to any
person in the United Kingdom who (1) does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
(2) is not otherwise a person to whom passing this prospectus supplement and
prospectus would be lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the certificates,
read this entire prospectus supplement and the accompanying prospectus.
The 13 classes of certificates, Series 1999-A, listed on the table below will
represent interests in a trust consisting of a pool of home equity loans.
<TABLE>
<CAPTION>
Pass-Through Approximate S&P Fitch
Class Rate Principal Amount(1) Rating Rating
- ----- ------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
A-1A ARM......................... (3) $
A-1B ARM......................... (4)
A-1..............................
A-2..............................
A-3..............................
A-4..............................
A-5..............................
A-6 IO...........................
M-1..............................
M-2..............................
B-1A.............................
B-2A.............................
B-2(6)...........................
</TABLE>
- -------
(1) May vary plus or minus 5%.
(2) Or the weighted average of the rates on the loans, if less.
(3) The lesser of one-month LIBOR plus the Class A-1A pass-through margin or
the available funds pass-through rate, but in no case more than %.
(4) The lesser of one-month LIBOR plus the Class A-1B pass-through margin or
the available funds pass through rate, but in no case more than %.
(5) Interest on the class A-6 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $
(or the Class A principal balance, if less) for the first 24 months and
will equal zero thereafter.
(6) Green Tree will retain the Class B-2 certificates initially, but may sell
them later pursuant to this prospectus supplement.
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 regular business day, the next regular
business day. The first payment date will be on
15, 1999.
Record Date................ The business day immediately prior to the payment
date (for example, if the payment day is June 15,
the record date would be June 14, assuming both
days are regular business days).
Description of The Class A-1A ARM, Class A-1B ARM, Class A-1,
Certificates............... Class A-2, Class A-3, Class A-4, Class A-5, and
Class A-6 IO certificates are senior
certificates. We call all of these certificates
the "Class A certificates."
S-4
<PAGE>
The Class M-1 and Class M-2 certificates are
subordinated certificates. We call these
certificates the "Class M certificates."
The Class B-1, Class B-2A and Class B-2
certificates are also subordinated certificates.
We call these certificates the "Class B
certificates."
Distributions on the Distributions on the certificates on any payment
Certificates............ date will be made primarily from amounts
collected on the home equity loans comprising the
pool during the prior calendar month This is the
amount available for distribution. On each
payment date, the trustee will apply these
amounts to make distributions of principal and
interest on the certificates in the following
order of priority:
^ Class A interest;
^ Class M-1 interest;
^ Class M-2 interest;
^ Class B-1 interest;
^ Class A-1A ARM and Class A-1B ARM principal;
^ Class A principal (other than the Class A-6
IO certificates);
^ Class M-1 principal;
^ Class M-2 principal;
^ Class B-1 principal;
^ Class B-2A interest;
^ Class B-2A principal;
^ Class B-2 interest;
^ Class B-2 principal; and
^ Class B-2A additional principal.
See "Description of the Certificates--Payments on
Loans" for a detailed description of the amounts
that will constitute the amount available for any
payment due.
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,
S-5
<PAGE>
and then to the Class B-1 certificates, to the
extent of the amount available. See "Description
of the Certificates--Distributions on
Certificates" and "--Losses on Liquidated Loans"
for a more detailed description of the
calculation of interest payable on the
certificates.
B. Principal on the Class
A, Class M and
Class B-1 Certificates
........................
After payment of the interest due on the
certificates described above, the trustee will
then apply any remaining amount available, to pay
principal on the Class A (except the Class A-6 IO
certificates, which will receive no principal),
Class M and Class B-1 certificates in the amounts
and order of priority set forth below:
First, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the adjustable rate
loans for that payment date, to the Class A-1A
ARM certificates and the Class A-1B ARM
certificates.
Second, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the home equity
loans for that payment date, to the Class A
certificates.
These distributions will be made:
^ 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,
and then
^ to the Class A-5 certificates until retired.
After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply any remaining
amount available to pay principal to the
Class M-1 and Class M-2 certificates and the
Class B-1 certificates. The amount of principal
payable on the Class M and Class B-1 certificates
will depend on the satisfaction of certain tests
relating to the performance of the home equity
loans.
See "Description of the Certificates--
Distributions on Certificates" for a more
detailed description of the calculation of
principal payable on the certificates.
C. Class B-2A Interest..... After paying the amount of interest and principal
due on the certificates described above, the
trustee will then apply the
S-6
<PAGE>
remaining amount available to pay interest on the
Class B-2A certificates.
D. Class B-2A Principal.... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply the remaining
amount available to pay principal due on the
Class B-2A certificates. Principal will be
distributed generally according to a formula
amount dictated by the principal balance of the
home equity loans.
E. Class B-2 Interest...... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply any remaining
amount available to pay interest on the Class B-2
certificates.
F. Class B-2 Principal..... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply the remaining
amount available to pay principal due on the
Class B-2 certificates. Principal will be
distributed generally according to a formula
amount dictated by the principal balance of the
home equity loans.
G. Class B-2 Limited Green Tree will guarantee payment of interest and
Guaranty................... principal on the Class B-2 certificates. The
Class B-2 Limited Guaranty is of no benefit to
any other class of certificates and will be an
unsecured general obligation of Green Tree
unsupported by any letter of credit or other
credit enhancement. See "Description of the Class
B-2 Limited Guaranty" for a complete description
of Green Tree's obligation under the Class B-2
Limited Guaranty.
H. Additional Class B-2A After paying the amounts of interest and
Principal.................. principal due on the certificates described
above, the trustee will apply 50% of the
remaining amount available, if any, to the
payment of principal on the Class B-2A
certificates.
Subordination of Class M
and Class B Certificates...
The Class M and Class B-1 certificates will be
subordinate to the Class A certificates, meaning
that the trustee will apply the amount available
to pay all interest then due on the Class A
certificates before paying the interest then due
on the Class M certificates and the Class B-1
certificates, and the trustee will likewise apply
the remaining amount available (after paying
interest on the Class A, Class B and Class B-1
certificates) to pay all principal then due on
the Class A certificates before paying any
principal on the Class B or Class B-1
certificates. In addition, the Class M
certificates and the Class B-1 certificates are
entitled to principal distributions only after
all the Class A certificates are paid in full, or
if certain tests relating to the performance of
the home equity loans are met. This increases the
possibility that the Class A certificates would
be paid in full but the Class M and Class B-1
certificates would not. The Class B-2A
certificates will be subordinated to the Class A,
S-7
<PAGE>
Class M and Class B-1 certificates, with interest
payable from the amount available only after
payment of all interest and principal then due on
the Class A, Class M and Class B-1 certificates.
See "Description of the certificates--
Distributions on certificates" for a more
detailed description of the manner and order of
priority of distributions on the certificates.
In addition, in the event of severe losses and
delinquencies on the home equity loans comprising
the pool, those losses will first be imposed on
the Class B-2 certificates, then on the Class B-
2A certificates, then on the Class B-1
certificates, and then on the Class M-2
certificates, and so on through classes of
increasing seniority. See "Description of
certificates--Losses on Home Equity Loans" for a
more detailed description of the allocation of
losses on the home equity loans.
Home Equity Loans.......... The pool will include two types of home equity
loans: fixed-rate home equity loans and
adjustable rate home equity loans. In this
summary, we sometimes refer to the home equity
loans as the "loans."
A. Fixed-Rate Home Equity This prospectus supplement provides information
Loans................... regarding a portion of the fixed-rate home equity
loans, representing about % of all the fixed-
rate home equity loans. Green Tree will transfer
another portion of the fixed-rate home equity
loans to the trust on the closing date, and will
transfer the remaining fixed-rate home equity
loans to the trust within 90 days after the
closing date.
With respect to the fixed-rate home equity loans
(as of the cut-off date):
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ the contract rates range from % to
%, with a weighted average of %;
^ the weighted average term to schedule
maturity, as of their dates of origination,
was months, and the weighted average term to
scheduled maturity, as of the cut-off date,
was months;
^ are balloon loans and the rest provide
for level monthly payments for the duration
of the loan;
^ the weighted average contract rate on the
balloon loans was ;
^ the balloon loans had a weighted average
term to scheduled maturity, as of their
dates of origination, of months; and a
weighted average to maturity as of the cut-
off date of months; and
^ the latest scheduled maturity date was in ,
.
S-8
<PAGE>
See "The Loans--Fixed Rate Loans" for a more
detailed description of the fixed-rate home
equity loans and the permissible characteristics
of the second and third portions of the fixed-
rate home equity loans.
B. Adjustable Rate Home
Equity Loans............
This prospectus supplement provides information
regarding a portion of the adjustable rate home
equity loans, representing about % of all the
adjustable rate home equity loans. Green Tree
will transfer another portion of the adjustable
rate home equity loans to the trust on the
closing date, and will transfer the remaining
adjustable rate home equity loans to the trust
within 90 days after the closing date.
For purposes of calculating the amount of
principal payable on each Payment Date on the
Class A-1A ARM and Class A-1B ARM certificates,
the adjustable rate loans have been divided into
Group I and Group II. This prospectus supplement
provides information regarding the initial group
I adjustable rate loans and the initial group II
adjustable rate loans.
C. Group I................. With respect to the Group I loans (as of the Cut-
Off Date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ each loan accrues interest at a fixed rate
for no more than months, and thereafter
the interest rate adjusts annually or
semiannually to equal the sum of the six-
month LIBOR or one year treasury index and
the gross margin specified in the that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average
term to scheduled maturity, as of the cut-off
date, was months.
2. Group II ............... With respect to the Group II loans (as of the
Cut-Off Date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ each loan accrues interest at a fixed rate
for no more than months, and thereafter
the interest rate adjusts annually or
semiannually to equal the sum of the six-
month LIBOR or one year treasury index and
the gross margin specified in the that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average
term to scheduled maturity, as of the cut-off
date, was months.
S-9
<PAGE>
Pre-Funding Account........ If the aggregate principal balance of the loans
transferred by Green Tree to the trust on the
closing date is less that the aggregate original
principal balance of the pool of certificates,
that difference (which Green Tree expects will be
approximately $ ) 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 , 1999. If those funds are not
completely used by , 1999, the remaining funds
(if any) will be distributed as principal on the
Class A-1 certificates (to the extent of
remaining funds that had been allocated for the
purchase of fixed-rate loans), and on the A-1B
ARM certificates (to the extent of remaining
funds that had been allocate for the purchase of
adjustable rate loans) on the , 1999 payment
date.
Advances................... The servicer is obligated to make advances each
month of any scheduled payments on the loans that
were due but not received during the prior due
period, but it will be entitled to reimbursement
for any advance. See "Description of the
certificates--Advances" in this prospectus
supplement and in the prospectus for a more
detailed description of the servicer's obligation
to make advances and its right to be reimbursed
for advances.
Repurchase or Substitution
Obligations................
Green Tree will make representations and
warranties about the loans when it transfers them
to the trust. If a representation or warranty is
breached in a way that materially and adversely
affects the interests of the certificateholders,
then Green Tree must, within 90 days, either (i)
cure the breach or (ii) repurchase the defective
loans. During the first two years after the
closing date, Green Tree 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 for a more complete description of
Green Tree's representations and warranties about
the loans, its repurchase obligation, and its
right to substitute loans.
Repurchase Options......... After the scheduled principal balance of the
loans is less than 10% of the aggregate principal
balance of the certificates on the closing date,
Green Tree will have the option to purchase all
of the outstanding loans. See "Description of the
certificates--Repurchase Option" in this
prospectus supplement and in the prospectus for a
more detailed description of the terms of this
repurchase option.
Ratings.................... The certificates will not be issued and sold
unless Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("Fitch") have
assigned the ratings specified on page S-4 (or
better) to the certificates.
The ratings on each class of certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each class of certificates by Fitch
addresses the likelihood of the receipt of
S-10
<PAGE>
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 Green Tree's
ability to make payments under the Class B-2
Limited Guaranty. Any reduction in the rating of
the Company's debt securities may result in a
similar reduction in the ratings of the Class B-2
certificates.
Green Tree has not requested a rating of the
certificates from any rating agencies other than
S&P and Fitch. You cannot assume that another
rating agency will assign a rating to any of
these certificates, nor can you assume what any
such rating, if issued, would be.
Tax Status................. In the opinion of counsel to Green Tree, for
federal income tax purposes the trust will
consist of two segregated asset pools--the
"master REMIC" and the "subsidiary REMIC" and
each will be treated as a separate "real estate
mortgage investment conduit" or "REMIC." Each
class of certificates will constitute "regular
interests" in the master REMIC and generally will
be treated as debt instruments of the trust for
federal income tax purposes. A holder of a
Certificate will be required to include as income
all interest paid on the certificates (including
any original issue discount), in accordance with
the accrual method of accounting, even if the
holder usually uses the cash method of
accounting. The Class A-6 IO certificates will be
considered to have been issued with original
issue discount. See "Certain Federal Income Tax
Consequences" in this prospectus supplement and
in the prospectus for a more detailed description
of the tax status of the certificates.
ERISA Considerations....... Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
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.
Legal Investment The certificates will not constitute "mortgage
Considerations............. related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the loans are not secured by
first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the
certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
certificates.
S-11
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase certificates. There are more risk factors that are applicable to any
series of certificates like these. Those risk factors are printed in the
prospectus and you should consider those risk factors also.
Reliance on Historical Data With Respect to Home Equity Loans. If you
purchase a certificate, the return on your investment will depend largely on
the performance of the loans constituting the underlying pool. We have
disclosed Green Tree's historical delinquency experience with home equity loans
under "The Loans" in this prospectus supplement, but the historical experience
may not be an accurate prediction of the performance of the home equity loans
constituting the pool for several reasons. First, Green Tree's historical
experience with home equity loans is limited: it began purchasing and servicing
them in January 1996. If Green Tree's historical experience were longer, or
involved a larger number of home equity loans, the data might well be
substantially different, and some investors might consider the data a better
predictor of the performance of the pool. Second, historical experience with
the performance of one pool of loans is never a completely reliable predictor
of the future performance of another pool of loans. Third, the information
incorporates some home equity loans that are not of the type to be included in
the pool, and therefore the information presented is not necessarily indicative
of Green Tree's delinquency experience with respect to home equity loans
similar to the home equity loans comprising the pool. You must not assume that
the pool will experience delinquencies and losses identical to the historical
data presented here.
Balloon Loans. A substantial number (approximately %) of the loans are
"balloon loans." These loans require equal monthly payments, consisting of
principal and interest, based on a stated amortization schedule, and a single
payment of the remaining principal balance of the loan at maturity. The
remainder of the loans require substantially equal monthly payments that are,
if timely paid, sufficient to amortize fully the principal balance of the loan
on or before its maturity date. The balloon loans may present a higher risk of
default than the fully-amortizing loans, because the balloon loan borrowers are
required to make a larger payment at maturity. If you purchase a certificate,
the return on your investment will depend largely on the performance of the
loans constituting the pool. If a substantial number of the balloon loans
default, causing higher than expected defaults and losses on the pool, you may
suffer a loss on your investment.
Truth-in-Lending Considerations. It is likely that some loans in the pool
will be subject to the Home Ownership and Equity Protection Act of 1994 (the
"Home Protection Act"). The Home Protection Act adds certain additional
provisions to Regulation Z, the implementing regulation of the Federal Truth-
in-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans
with high interest rates or up-front fees and charges. A violation of these
provisions of the Home Protection Act can affect the enforceability of the
related loan, and it subjects any assignee of such a loan (such as the trust)
to all the claims and defenses that the consumer could assert against the
creditor, including the right to rescind the loan. If you purchase a
certificate, the return on your investment will depend largely on the
performance of the loans constituting the pool. If Green Tree is found to have
violated provisions of the Home Protection Act with respect to any loan that is
subject to the Home Protection Act, the trust may be unable to collect on that
loan. Green Tree would, however, be obligated to repurchase that loan because
of the breach of its representation warranty.
Variations in Loan Characteristics. This prospectus supplement describes a
portion of the loans. The additional loans and the subsequent loans that Green
Tree delivers after the closing date will have characteristics that differ
somewhat form 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" in this prospectus supplement. We will file Current Reports on
Form 8-K following the purchase of additional loans and subsequent loans by the
trust and following the termination of the funding period. The Current Report
on Form 8-K will include the same type of information regarding the subsequent
loans that is included in this prospectus supplement with respect to the
initial loans.
S-12
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about March 18, 1999 (the "Closing Date"), the Company will establish
the Trust pursuant to a Pooling and Servicing Agreement to be dated as of
February 1, 1999 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
The Class A-1A ARM, Class A-1B ARM, Class A-1, Class A-2, Class A-3, Class A-
4, Class A-5, Class A-6 IO, Class M-1, Class M-2, Class B-1, Class B-2A and
Class B-2 Certificates (the "Certificates") will be issued by the Trust, the
corpus of which will consist primarily of the Loans, including all rights to
receive payments due on such Loans after (i) February 1, 1999 (or the date of
origination thereof, if later) for each Loan other than the Subsequent Loans
and (ii) for each Subsequent Loan, the date on which such Loan is purchased by
the Trust (the "Cut-off Date"), liens on the related real estate and amounts
held for the Trust in the Certificate Account (as defined below). The Trust
will also issue several other classes of more subordinated certificates, which
are not being offered hereby.
Payments and recoveries in respect of principal and interest on the Loans
will be paid into a separate trust account maintained at an Eligible
Institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Certificate Account"), no later than one
Business Day after receipt. Payments on deposit in the Certificate Account and
constituting the Amount Available will be applied on the fifteenth day of each
month (or, if such day is not a Business Day, the next succeeding Business Day)
(each a "Payment Date") to make the distributions to the Certificateholders as
of the immediately preceding Record Date as described under "Description of the
Certificates--Distribution on Certificates" herein and to pay certain monthly
fees to the Servicer as compensation for its servicing of the Loans (the
"Monthly Servicing Fee").
The Servicer will be obligated to advance for each Payment Date any scheduled
payments on the Loans that were due but not received during the prior Due
Period ("Advances"). The Servicer will be entitled to reimbursement of an
Advance from funds available therefor in the Certificate Account. The Servicer
will not be required to make any Advance to the extent that it does not expect
to recoup the Advance from subsequent funds available therefor in the
Certificate Account. If the Servicer fails to make any Advance required under
the Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Loans from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the Certificates--Conveyance of Loans"
herein and (c) certain indemnities. The Company is obligated under the
Agreement to repurchase at the Repurchase Price (as defined herein), or, at its
option, to substitute another loan for, any Loan on the first Payment Date
which is more than 90 days after the Company becomes aware, or the Company
receives written notice from the Trustee, of any breach of any such
representation and warranty in the Agreement that materially and adversely
affects the Certificateholders' interest in such Loan if such breach has not
been cured prior to such date. The Agreement also provides that the Company has
certain obligations to repurchase Loans and to indemnify the Trustee and
Certificateholders with respect to certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home equity loans, providing warehouse financing for
the purchase of loans and other costs of maintaining such loans until they are
pooled and sold to other investors.
S-13
<PAGE>
THE LOANS
Fixed-Rate Loans
The Loan Pool includes Fixed-Rate Loans (meaning all Loans other than the
Adjustable Rate Loans, described separately below). This Prospectus Supplement
contains information regarding the Initial Fixed-Rate Loans, which will
represent approximately 46.21% of all Fixed-Rate Loans, and which consist of
closed-end home equity loans originated through January 31, 1999. The
information for each Initial Fixed-Rate Loan is as of the Cut-off Date for such
Loan. Under the Agreement, the Trust may purchase Additional Fixed-Rate Loans
on the Closing Date and may purchase Subsequent Fixed-Rate Loans for a period
of up to 90 days thereafter. See "Description of the Certificates--Conveyance
of Subsequent Loans and Pre-Funding Account" below.
The Initial Fixed-Rate Loans have an aggregate principal balance of
$415,867,677.54. Each Fixed-Rate Loan is a closed-end home equity loan
originated by the Company or by a Company-approved correspondent lender and
purchased by the Company. Each Fixed-Rate Loan is secured by a lien on the
related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Fixed-Rate Loan is fully amortizing and
provides for level monthly payments over the term of such loan, computed on the
simple interest method (except for the Balloon Loans and the step-up rate
Loans), (b) each Initial Fixed-Rate Loan has its last scheduled payment due no
later than February 6, 2029, and (c) each Fixed-Rate Loan is secured by a lien
on the related real estate. The Fixed-Rate Loans will be originated or acquired
by the Company in the ordinary course of the Company's business. A detailed
listing of the Initial Fixed-Rate Loans is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of the
Initial Fixed-Rate Loans has a Loan Rate of at least 4.75% per annum and not
more than 18.95% and the weighted average of the Loan Rates of the Initial
Fixed-Rate Loans as of the Cut-off Date is 11.31%. As of the Cut-off Date, the
Initial Fixed-Rate Loans had remaining maturities of at least 26 months but not
more than 360 months and original maturities of at least 36 months but not more
than 360 months. The Initial Fixed-Rate Loans had a weighted average term to
scheduled maturity, as of origination, of 248 months, and a weighted average
term to scheduled maturity, as of the Cut-off Date, of 247 months. The average
principal balance per Initial Fixed-Rate Loan as of the Cut-off Date was
$58,938.16 and the principal balances on the Initial Fixed-Rate Loans as of the
Cut-off Date ranged from $5,840.20 to $425,000.00. The Balloon Loans included
in the Initial Fixed-Rate Loans consisted of 1,167 closed-end home equity loans
and have a principal balance as of the Cut-off Date of $97,968,009.12. The
weighted average of the Loan Rates of such Balloon Loans as of the Cut-off Date
was 11.11%, and such Balloon Loans had a weighted average term to scheduled
maturity, as of origination, of 199 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of 198 months. The Initial Fixed-
Rate Loans arise from loans relating to real property located in 48 states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately 9.40% of the Initial Fixed-Rate Loans were secured by real
property located in California, 6.37% in Ohio, 5.57% in Michigan and 5.33% in
North Carolina. No other state represented 5% or more of the Cut-off Date Pool
Principal Balance of the Initial Fixed-Rate Loans.
S-14
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Fixed-Rate Loans.
Geographical Distribution of Mortgaged Properties--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial % of Initial
Fixed-Rate Loans Fixed-Rate Loans
Number of by Number of Aggregate Principal by Outstanding
Loans as of Loans as Balance Outstanding Principal Balance
Cut-off Date of Cut-off Date as of Cut-off Date as of Cut-off Date
------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total............... 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
S-15
<PAGE>
Years of Origination--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-
Rate Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1995.................... %
1996....................
1997....................
1998....................
1999....................
----- -------------- ------
Total............... 100.00%
===== ============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-
Rate Loans by
Aggregate Principal Outstanding Principal
Original Loan Amount Number of Loans Balance Outstanding Balance as of
(in Dollars) as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than $10,000....... %
$ 10,000 to $ 19,999....
$ 20,000 to $ 29,999....
$ 30,000 to $ 39,999....
$ 40,000 to $ 49,999....
$ 50,000 to $ 59,999....
$ 60,000 to $ 69,999....
$ 70,000 to $ 79,999....
$ 80,000 to $ 89,999....
$ 90,000 to $ 99,999....
$100,000 to $109,999....
$110,000 to $119,999....
$120,000 to $129,999....
$130,000 to $139,999....
$140,000 to $149,999....
$150,000 to $159,999....
$160,000 to $169,999....
$170,000 to $179,999....
$180,000 to $189,999....
$190,000 to $199,999....
$200,000 to $209,999....
$210,000 to $219,999....
Greater than $220,000...
----- -------------- ------
Total............... 100.00%
===== ============== ======
</TABLE>
S-16
<PAGE>
Loan Rates--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Range of Loans by Loan Rate as of Cut-off Date as of Cut-off Date Cut-off Date
- --------------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 7.000%........... $ %
7.001 to 8.000%..........
8.001 to 9.000%..........
9.001 to 10.000%..........
10.001 to 11.000%..........
11.001 to 12.000%..........
12.001 to 13.000%..........
13.001 to 14.000%..........
14.001 to 15.000%..........
15.001 to 16.000%..........
16.001 to 17.000%..........
Greater than 17.000%.......
----- --------------- ------
Total.................. $ 100.00%
===== =============== ======
</TABLE>
Remaining Months to Maturity--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Months Remaining to Aggregate Principal Outstanding Principal
Scheduled Maturity Number of Loans Balance Outstanding Balance as of
As of Cut-off Date as of Cut-off Date as of Cut-off Date Cut-off Date
------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Fewer than 31........... $ *
31 to 60.............. %
61 to 90..............
91 to 120..............
121 to 150..............
151 to 180..............
181 to 210..............
211 to 240..............
241 to 270..............
271 to 300..............
301 to 330..............
331 to 360..............
----- --------------- ------
Total............... $ 100.00%
===== =============== ======
</TABLE>
- --------
* Indicates an amount greater than zero but less than 0.005% of the aggregate
principal balance of the Initial Fixed-Rate Loans.
S-17
<PAGE>
Lien Position--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
as of Cut-off Date as of Cut-off Date Cut-off Date
------------------ ------------------- -----------------------
<S> <C> <C> <C>
First........... $ %
Second..........
Third...........
----- --------------- ------
Total....... $ 100.00%
===== =============== ======
</TABLE>
Loan-to-Value Ratio--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 10.0001%...... %
10.0001 to 20.0000%.....
20.0001 to 30.0000%.....
30.0001 to 40.0000%.....
40.0001 to 50.0000%.....
50.0001 to 60.0000%.....
60.0001 to 70.0000%.....
70.0001 to 80.0000%.....
80.0001 to 90.0000%.....
Greater than 90.0000%...
----- ----------- ------
Total............... $ 100.00
===== =========== ======
</TABLE>
Adjustable Rate Loans
The Loan Pool includes Adjustable Rate Loans. This Prospectus Supplement
contains information regarding the Initial Adjustable Rate Loans, which will
represent approximately % of all Adjustable Rate Loans, and which consist of
closed-end loans originated through . The information for each Initial
Adjustable Rate Loan is as of the Cut-off Date for such Loan. Under the
Agreement, the Trust may purchase Additional Adjustable Rate Loans on the
Closing Date and may purchase Subsequent Adjustable Rate Loans for a period of
up to days thereafter. See "Description of the Certificates--Conveyance of
Subsequent Loans and Pre-Funding Account" below.
Each Adjustable Rate Loan is a closed-end loan originated by the Company or
by a Company-approved correspondent lender and purchased by the Company. Each
Adjustable Rate Loan is secured by a lien on the related real estate.
The Initial Adjustable Rate Loans have Loan Rates subject to semiannual
adjustment after an initial period of up to 36 months on the day of the month
specified in the Adjustable Rate Loan (each such date, an "Adjustment Date"),
to equal the sum of (i) the Six-Month LIBOR Index (as defined below) and (ii) a
fixed percentage amount specified in the related Adjustable Rate Loan (the
"Gross Margin"). The Loan Rates will not increase on any Adjustment Date by
more than 2% per annum. All of the Initial Adjustable Rate Loans further
provide that the Loan Rate will in no event be more than the fixed percentage
set forth in the Adjustable Rate Loan (such rate, the "Maximum Loan Rate").
Each Initial Adjustable Rate Loan provides that in no event will the Loan Rate
be less than a specified lifetime interest rate floor (such rate, the "Minimum
Loan Rate").
S-18
<PAGE>
Effective with the first payment due on an Initial Adjustable Rate Loan after
each related Adjustment Date, the monthly payment will be adjusted to an amount
which will fully amortize the outstanding principal balance of such Adjustable
Rate Loan over its remaining term, and pay interest at the Loan Rate as so
adjusted. All of the Initial Adjustable Rate Loans were originated with a Loan
Rate less than the sum of (i) the Six-Month LIBOR Index at the time the initial
Loan Rate was established and (ii) the Gross Margin. The Six-Month LIBOR Index
is a per annum rate equal to the average of interbank offered rates for six-
month U.S. dollar-denominated deposits in the London market based on quotations
of major banks, as published in The Wall Street Journal and as most recently
available as of the date specified in the related Adjustable Rate Loan.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Loan is fully amortizing and
provides for monthly payments, except, in the case of a Balloon Loan, for the
final monthly payment, over the term of such loan, computed on the simple
interest method, (b) each Adjustable Rate Loan has its last scheduled payment
due no later than May 2028, and (c) each Adjustable Rate Loan is secured by a
lien on the related real estate. The Adjustable Rate Loans will be originated
or acquired by the Company in the ordinary course of the Company's business. A
detailed listing of the Adjustable Rate Loans will be appended to the
Agreement. See "Description of the Certificates" herein and in the Prospectus.
For purposes of calculating the amount of principal payable on each Payment
Date on the Class A-1A ARM and Class A-1B ARM Certificates, the Adjustable Rate
Loans have been divided into Group I and Group II. This Prospectus Supplement
provides information regarding the Initial Group I Adjustable Rate Loans and
the Initial Group II Adjustable Rate Loans.
Group I Adjustable Rate Loans
As of the Cut-off Date, the Initial Group I Adjustable Rate Loans had Loan
Rates ranging from % to % and a weighted average Loan Rate of %. As of
the Cut-off Date, the weighted average Maximum Loan Rate of the Initial Group I
Adjustable Rate Loans was %, with Maximum Loan Rates that range from % to
%. As of the Cut-Off Date, the Initial Group I Adjustable Rate Loans had a
weighted average gross margin of % and gross margins ranging from % to %.
As of the Cut-off Date, the Initial Group I Adjustable Rate Loans had remaining
maturities of at least months but not more than months and original
maturities of at least months but not more than months. The Initial Group I
Adjustable Rate Loans had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity, as
of the Cut-off Date, of months. The average principal balance per Initial
Group I Adjustable Rate Loan as of the Cut-off Date was $ and the principal
balances on the Initial Group I Adjustable Rate Loans as of the Cut-off Date
ranged from $ to $ . The Initial Group I Adjustable Rate Loans arise from
loans relating to real property located in states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately % of the
Initial Group I Adjustable Rate Loans were secured by real property located in
California, % in Maryland, % in Ohio, 6.62% in Washington, % in Colorado
and % in Florida. No other state represented % or more of the aggregate
Cut-off Date Principal Balance of the Initial Group I Adjustable Rate Loans.
S-19
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group I Adjustable Rate Loans.
Geographical Distribution of Mortgaged Properties--Initial Group I Adjustable
Rate Loans
<TABLE>
<CAPTION>
% of Initial
% of Initial Group I
Group I Adjustable
Adjustable Rate Loans
Rate Loans Aggregate Principal by Outstanding
by Number of Balance Principal
Number of Loans Loans as Outstanding as of Balance as of
as of Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
California..............
Colorado................
Delaware................
District Of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Nebraska................
Nevada..................
New Hampshire...........
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
--- ------ -------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============== ======
</TABLE>
S-20
<PAGE>
Years of Origination--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1997.................... $ %
1998....................
1999....................
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial
Group I Adjustable
Rate
Loans by
Aggregate Principal Outstanding Principal
Original Loan Amount Number of Loans Balance Outstanding Balance as of
(in Dollars) as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 30,000....... $ %
$ 30,000 to $ 39,999....
$ 40,000 to $ 49,999....
$ 50,000 to $ 59,999....
$ 60,000 to $ 69,999....
$ 70,000 to $ 79,999....
$ 80,000 to $ 89,999....
$ 90,000 to $ 99,999....
$100,000 to $109,999....
$110,000 to $119,999....
$120,000 to $129,999....
$130,000 to $139,999....
$140,000 to $149,999....
$150,000 to $159,999....
$160,000 to $169,999....
$170,000 to $179,999....
$180,000 to $189,999....
$190,000 to $199,999....
$200,000 to $249,999....
$250,000 to $299,999....
Greater than $299,999...
--- ------------- ------
Total............... $ 100.00%
=== ============= ======
</TABLE>
S-21
<PAGE>
Current Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Range of Loans by Number of Loans Balance Outstanding Outstanding Principal
Loan Rate as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
----------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 7.000......... $ %
7.001 to 8.000.........
8.001 to 9.000.........
9.001 to 0.000.........
10.001 to 1.000.........
11.001 to 2.000.........
12.001 to 3.000.........
13.001 to 3.250.........
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Remaining Months to Maturity--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Months Remaining to Aggregate Principal Adjustable Rate Loans by
Scheduled Maturity Number of Loans Balance Outstanding Outstanding Principal
As of Cut-off Date as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
331 to 360.............. $ 100.00%
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Lien Position--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------ ------------------- --------------------------
<S> <C> <C> <C>
First Lien Position..... $ 100.00%
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Loan-to-Value Ratio--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
20.01 to 30.00.......... $ %
30.01 to 40.00..........
40.01 to 50.00..........
50.01 to 60.00..........
60.01 to 70.00..........
70.01 to 80.00..........
80.01 to 90.00..........
Over 90.00..............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-22
<PAGE>
Month of Next Rate Adjustment--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Month of Next Rate Adjustment as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
February 1999............... $ %
March 1999..................
April 1999..................
May 1999....................
June 1999...................
September 1999..............
October 1999................
December 1999...............
January 2000................
February 2000...............
March 2000..................
April 2000..................
May 2000....................
June 2000...................
July 2000...................
August 2000.................
September 2000..............
October 2000................
November 2000...............
December 2000...............
January 2001................
February 2001...............
June 2001...................
July 2001...................
August 2001.................
September 2001..............
October 2001................
November 2001...............
December 2001...............
January 2002................
--- -------------- ------
Total................... $ 100.00%
=== ============== ======
</TABLE>
S-23
<PAGE>
Distribution of Gross Margin--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Gross Margin as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 4.499%........ $
4.500 to 4.749%.........
4.750 to 4.999%.........
5.000 to 5.249%.........
5.250 to 5.499%.........
5.500 to 5.749%.........
5.750 to 5.999%.........
6.000 to 6.249%.........
6.250 to 6.499%.........
6.500 to 6.749%.........
6.750 to 6.999%.........
7.000 to 7.249%.........
7.250 to 7.499%.........
7.500 to 7.749%.........
7.750 to 7.999%.........
8.000 to 8.249%.........
8.250 to 8.499%.........
8.500 to 8.749%.........
8.750 to 8.999%.........
9.000 to 9.249%.........
9.250 to 9.499%.........
9.500 to 9.749%.........
Greater than 9.750%.....
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-24
<PAGE>
Maximum Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Adjustable Rate Loans
Number of Loans Aggregate Principal by Outstanding Principal
as of Cut-off Balance Outstanding Balance as of
Maximum Loan Rates Date as of Cut-off Date Cut-off Date
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%....... $ %
13.000 to 13.249%.......
13.250 to 13.499%.......
13.500 to 13.749%.......
13.750 to 13.999%.......
14.000 to 14.249%.......
14.250 to 14.499%.......
14.500 to 14.749%.......
14.750 to 14.999%.......
15.000 to 15.249%.......
15.250 to 15.499%.......
15.500 to 15.749%.......
15.750 to 15.999%.......
16.000 to 16.249%.......
16.250 to 16.499%.......
16.500 to 16.749%.......
16.750 to 16.999%.......
17.000 to 17.249%.......
17.250 to 17.499%.......
17.500 to 17.749%.......
17.750 to 17.999%.......
18.000 to 18.249%.......
18.250 to 18.499%.......
18.500 to 18.749%.......
18.750 to 18.999%.......
19.000 to 19.249%.......
19.250 to 19.499%.......
Greater than 19.500%....
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-25
<PAGE>
Minimum Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of
Initial Group I
Adjustable Rate
Number of Loans
Loans Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Minimum Loan Rates off Date as of Cut-off Date Cut-off Date
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... $ %
7.250 to 7.499%......
7.500 to 7.749%......
7.750 to 7.999%......
8.000 to 8.249%......
8.250 to 8.499%......
8.500 to 8.749%......
8.750 to 8.999%......
9.000 to 9.249%......
9.250 to 9.499%......
9.500 to 9.749%......
9.750 to 9.999%......
10.000 to 10.249%......
10.250 to 10.499%......
10.500 to 10.749%......
10.750 to 10.999%......
11.000 to 11.249%......
11.250 to 11.499%......
11.500 to 11.749%......
11.750 to 11.999%......
12.000 to 12.249%......
12.250 to 12.499%......
Greater than 12.750%...
--- -------------- ------
Total................ $ 100.00%
=== ============== ======
</TABLE>
Group II Adjustable Rate Loans
As of the Cut-off Date, the Initial Group II Adjustable Rate Loans had Loan
Rates ranging from % to % and a weighted average Loan Rate of %. As of
the Cut-off Date, the weighted average Maximum Loan Rate of the Initial Group
II Adjustable Rate Loans was %, with Maximum Loan Rates that range from %
to %. As of the Cut-Off Date, the Initial Group II Adjustable Rate Loans had
a weighted average gross margin of % and gross margins ranging from % to
%. As of the Cut-off Date, the Initial Group II Adjustable Rate Loans had
remaining maturities of at least months but not more than months and
original maturities of at least months but not more than months. The
Initial Group II Adjustable Rate Loans had a weighted average term to scheduled
maturity, as of origination, of months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of months. The average principal
balance per Initial Group II Adjustable Rate Loan as of the Cut-off Date was
$ and the principal balances on the Initial Group II Adjustable Rate Loans
as of the Cut-off Date ranged from $ to $ . The Initial Group II
Adjustable Rate Loans arise from loans relating to real property located in
states and the District of Columbia. By principal balance as of the Cut-off
Date, approximately % of the Initial Group II Adjustable Rate Loans were
secured by real property located in California, % in Maryland, % in Ohio,
% in Washington, % in Colorado and % in Florida. No other state
represented % or more of the aggregate Cut-off Date Principal Balance of the
Initial Group II Adjustable Rate Loans.
S-26
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group II Adjustable Rate Loans.
Geographical Distribution of Mortgaged Properties--Initial Group II Adjustable
Rate Loans
<TABLE>
<CAPTION>
% of Initial
% of Initial Group II
Group II Adjustable
Adjustable Rate Loans
Rate Loans Aggregate Principal by Outstanding
by Number of Balance Principal
Number of Loans Loans as Outstanding as of Balance as of
as of Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District Of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maryland................
Massachusetts...........
Michigan................
Mississippi.............
Missouri................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
--- ------ -------------- ------
Total............... 100.00% $ 100.00%
=== ====== ============== ======
</TABLE>
S-27
<PAGE>
Years of Origination--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1997.................... $ %
1998....................
1999....................
--- --------------- ------
Total............... $ 100.00%
=== =============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Original Loan Amount Number of Loans Balance Outstanding Balance as of
(in Dollars) as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 30,000....... $ %
$ 30,000 to $ 39,999....
$ 40,000 to $ 49,999....
$ 50,000 to $ 59,999....
$ 60,000 to $ 69,999....
$ 70,000 to $ 79,999....
$ 80,000 to $ 89,999....
$ 90,000 to $ 99,999....
$100,000 to $109,999....
$110,000 to $119,999....
$120,000 to $129,999....
$130,000 to $139,999....
$140,000 to $149,999....
$150,000 to $159,999....
$160,000 to $169,999....
$170,000 to $179,999....
$180,000 to $189,999....
$190,000 to $199,999....
$200,000 to $209,999....
$210,000 to $219,999....
Greater than $220,000...
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-28
<PAGE>
Current Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Range of Loans by Number of Loans Balance Outstanding Outstanding Principal
Loan Rate as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
----------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 7.000......... $ %
7.001--8.000............
8.001--9.000............
9.001--10.000...........
10.001--11.000..........
11.001--12.000..........
12.001--13.000..........
Over 13.000.............
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Remaining Months to Maturity--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Months Remaining to Aggregate Principal Adjustable Rate Loans by
Scheduled Maturity Number of Loans Balance Outstanding Outstanding Principal
As of Cut-off Date as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
331--360................ $ 100.00%
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
Lien Position--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------ ------------------- --------------------------
<S> <C> <C> <C>
First........ $ 100.00%
--- -------------- ------
Total.... $ 100.00%
=== ============== ======
</TABLE>
Loan-to-Value Ratio--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
10.01--20.00............ $ %
20.01--30.00............
30.01--40.00............
40.01--50.00............
50.01--60.00............
60.01--70.00............
70.01--80.00............
80.01--90.00............
Greater than 90.00......
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-29
<PAGE>
Month of Next Rate Adjustment--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Month of Next Rate Adjustment as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
January 1999................ $ %
February 1999...............
March 1999..................
April 1999..................
May 1999....................
June 1999...................
September 1999..............
October 1999................
December 1999...............
January 2000................
February 2000...............
March 2000..................
April 2000..................
May 2000....................
June 2000...................
July 2000...................
August 2000.................
September 2000..............
October 2000................
November 2000...............
December 2000...............
January 2001................
February 2001...............
June 2001...................
July 2001...................
August 2001.................
September 2001..............
October 2001................
November 2001...............
December 2001...............
--- -------------- ------
Total................... $ 100.00%
=== ============== ======
</TABLE>
S-30
<PAGE>
Distribution of Gross Margin--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Gross Margin as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 4.750%........ $ %
4.750 to 4.999%.........
5.000 to 5.249%.........
5.250 to 5.499%.........
5.500 to 5.749%.........
5.750 to 5.999%.........
6.000 to 6.249%.........
6.250 to 6.499%.........
6.500 to 6.749%.........
6.750 to 6.999%.........
7.000 to 7.249%.........
7.250 to 7.499%.........
7.500 to 7.749%.........
7.750 to 7.999%.........
8.000 to 8.249%.........
8.250 to 8.499%.........
8.500 to 8.749%.........
8.750 to 8.999%.........
9.000 to 9.249%.........
9.250 to 9.499%.........
9.500 to 9.749%.........
Greater than 9.749%.....
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-31
<PAGE>
Maximum Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate Loans
Number of Loans Aggregate Principal by Outstanding Principal
as of Cut-off Balance Outstanding Balance as of
Maximum Loan Rates Date as of Cut-off Date Cut-off Date
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%....... $ %
13.000 to 13.249%.......
13.250 to 13.499%.......
13.500 to 13.749%.......
13.750 to 13.999%.......
14.000 to 14.249%.......
14.250 to 14.499%.......
14.500 to 14.749%.......
14.750 to 14.999%.......
15.000 to 15.249%.......
15.250 to 15.499%.......
15.500 to 15.749%.......
15.750 to 15.999%.......
16.000 to 16.249%.......
16.250 to 16.499%.......
16.500 to 16.749%.......
16.750 to 16.999%.......
17.000 to 17.249%.......
17.250 to 17.499%.......
17.500 to 17.749%.......
17.750 to 17.999%.......
18.000 to 18.249%.......
18.250 to 18.499%.......
18.500 to 18.749%.......
18.750 to 18.999%.......
19.000 to 19.249%.......
19.250 to 19.499%.......
19.500 to 19.749%.......
19.750 to 19.999%.......
Greater than 19.999%....
--- -------------- ------
Total............... $ 100.00%
=== ============== ======
</TABLE>
S-32
<PAGE>
Minimum Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of
Initial Group II
Adjustable Rate
Number of Loans
Loans Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Minimum Loan Rates off Date as of Cut-off Date Cut-off Date
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... $ %
7.250 to 7.499%......
7.500 to 7.749%......
7.750 to 7.999%......
8.000 to 8.249%......
8.250 to 8.499%......
8.500 to 8.749%......
8.750 to 8.999%......
9.000 to 9.249%......
9.250 to 9.499%......
9.500 to 9.749%......
9.750 to 9.999%......
10.000 to 10.249%......
10.250 to 10.499%......
10.500 to 10.749%......
10.750 to 10.999%......
11.000 to 11.249%......
11.250 to 11.499%......
11.500 to 11.749%......
11.750 to 11.999%......
12.000 to 12.249%......
12.250 to 12.499%......
12.500 to 12.749%......
Greater than 12.750%...
--- --------------- ------
Total................ $ 100.00%
=== =============== ======
</TABLE>
S-33
<PAGE>
Delinquency Information
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in the
Loan Pool and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Loans. In addition, the Company began originating, purchasing and
servicing home equity loans in January 1996, and thus has no significant
experience with respect to the performance of such loans. Moreover, because all
such home equity loans have been recently originated, it is likely that this
experience is not indicative of the delinquency experience to be expected from
a more seasoned portfolio.
Delinquency Experience
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Number of Loans Outstanding(1)............................... 114,399 65,355
Number of Loans Delinquent(2)(3)
30-59 Days................................................. 2,390 1,141
60-89 Days................................................. 670 283
90 Days or More............................................ 801 411
-------- -------
Total Loans Delinquent....................................... 3,861 1,835
Delinquencies as a Percent of Loans Outstanding(4)........... 3.38% 2.81%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month. These tables do not include as delinquent the home
equity loans of obligors who have entered bankruptcy proceedings, provided
that such obligors are current under their bankruptcy payment plan.
(4) By number of loans.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-34
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Certificate will depend on the price paid by the
Certificateholder and will be sensitive to the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations) on the
Loans, which may fluctuate significantly from time to time. The Loans generally
may be prepaid in full or in part at any time.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Loan, to reduce the outstanding principal balance on the Loans)
will increase the yield on Certificates purchased at a price less than the
undivided ownership interest in the aggregate principal balance of the Loans
represented by such Certificates and will decrease the yield on Certificates
purchased at a price greater than the undivided ownership interest in the
aggregate principal balance of the Loans represented by such Certificates. The
Company has no significant experience with respect to the rate of Principal
Prepayments on home equity loans. Because the Loans have scheduled due dates
throughout the calendar month, prepayments on the Loans would affect the amount
of funds available to make distributions on the Certificates on any Payment
Date only if a substantial portion of the Loans prepaid prior to their
respective due dates in the preceding month (thus paying less than 30 days'
interest for that month) while very few Loans prepaid after their respective
due dates in the preceding month. In addition, liquidations of Defaulted Loans
or the Servicer's exercise of its option to repurchase the entire remaining
pool of Loans (see "Description of the Certificates--Repurchase Option" herein)
will affect the timing of principal distributions on the Certificates. Under
the Agreement, the Company has the option of substituting new loans for Loans
which are prepaid in full prior to , 1999. See "Description of the
Certificates--Conveyance of Loans" herein. There is no assurance that the
Company will exercise its option to make any such substitutions nor, should it
desire to exercise such option, that loans meeting the eligibility criteria
will be available therefor. To the extent any such substitutions are made, the
impact on the Loan Pool and the Certificates of what would otherwise have
constituted a Principal Prepayment will be averted.
The Class A-1B ARM Certificates and the Class A-1 Certificates will be
prepaid in part on the first Payment Date after the Funding Period in the event
that any Pre-Funded Amount remains in the Pre-Funding Account on such Payment
Date after the purchase by the Trust of the Subsequent Loans. Any amounts
remaining which had been allocated to the purchase of Subsequent Adjustable
Rate Loans will be paid to the Class A-1B ARM Certificateholders and any
amounts remaining which had been allocated to the purchase of Subsequent Fixed-
Rate Loans will be paid to the Class A-1 Certificateholders. The Company
believes that the principal amount of Subsequent Loans to be purchased by the
Trust will require the application of substantially all of the Pre-Funded
Amount. It is unlikely, however, that the aggregate principal amount of
Subsequent Loans purchased by the Trust will be identical to the Pre-Funded
Amount, and that consequently, Class A-1B ARM Certificateholders and Class A-1
Certificateholders will receive some prepayment of principal.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model. The Constant
Prepayment Rate ("CPR") model assumes that the outstanding principal balance of
a pool of loans prepays each month at a specified constant annual rate. The
Certificates were priced using a prepayment assumption of, with respect to the
Fixed-Rate Loans, 125% of the applicable Prepayment Assumption (as described
below), and with respect to the Adjustable Rate Loans, 30% of CPR. There can be
no assurance that the Loans will prepay at the applicable rate, and it is
unlikely that prepayments or liquidations of the Loans will occur at any
constant rate.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class, or in the case of the Class A-6 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates, other than the
Class A-1A ARM and the Class A-1B ARM Certificates, will be computed on the
basis of a 360-day year of twelve 30-day months. Interest on the Class A-1A ARM
and the Class A-1B ARM Certificates
S-35
<PAGE>
will be computed on the basis of actual days elapsed in a 360-day year.
Certificateholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Certificate Account are
sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on Certificates." As required by applicable state
laws, interest paid by Obligors on the Loans is computed according to the
simple interest method.
The final scheduled payment date on the Initial Loan with the latest maturity
is in .
Weighted Average Life of the Certificates
The following information is given solely to illustrate the effect of
prepayments of the related Loans on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the related Loans is paid.
Principal payments on Loans may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Loans).
The rate of principal payments on pools of home equity loans is influenced by
a variety of economic, geographic, social and other factors, including the
level of interest rates and the rate at which homeowners sell their homes or
default on their loans. Other factors affecting prepayment of Loans include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such loans, the loans are likely to be subject to higher
prepayment rates than if prevailing interest rates remained at or above the
rates borne by such loans. Conversely, if prevailing interest rates rise above
the interest rates on such home equity loans, the rate of prepayment would be
expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments are made at the indicated
percentages of the model as described below set forth in the table; (ii) the
Servicer exercises its option to repurchase the Loans, as described under
"Description of the Certificates--Repurchase Option;" (iii) the aggregate
principal balance of the Initial Loans as of the Cut-off Date is $ and
such Loans have the characteristics set forth under "The Loans--Fixed-Rate
Loans" and "The Loans--Adjustable Rate Loans;" (iv) the Initial Fixed-Rate
Loans will, as of the Cut-off Date, be grouped into ten pools having the
additional characteristics set forth below under "Assumed Initial Fixed-Rate
Loan Characteristics" and the Additional and Subsequent Fixed-Rate Loans will,
as of the Cut-off Date, be grouped into ten pools having the additional
characteristics set forth below under "Assumed Additional and Subsequent Fixed-
Rate Loan Characteristics;" (v) the Initial Group I Adjustable Rate Loans will,
as of the Cut-off Date, be grouped into four pools having the additional
characteristics set forth below under "Assumed Initial Group I Adjustable Rate
Loan Characteristics" and the Additional and Subsequent Group I Adjustable Rate
Loans will, as of the Cut-off Date, be grouped into four pools having the
additional characteristics set forth below under "Assumed Additional and
Subsequent Group I Adjustable Rate Loan Characteristics;" (vi) the Initial
Group I Adjustable Rate Loans will, as of the Cut-off Date, be grouped into
four pools having the additional characteristics set forth below under "Assumed
Initial Group I Adjustable Rate Loan Characteristics" and the Additional and
Subsequent Group I Adjustable Rate Loans will, as of the Cut-off Date, be
grouped into four pools having the additional characteristics set forth below
under "Assumed Additional and Subsequent Group I Adjustable Rate Loan
Characteristics;" (vii) each Class of the Certificates (other than the Class A-
6 IO Certificates) has an Original Principal Balance as shown on the cover page
of this Prospectus Supplement; (viii) the rate for one-month LIBOR is %;
(ix) the Subsequent Loans will have their first scheduled payment date in ;
(x) no interest shortfalls will arise in connection with prepayments in full of
the Loans; (xi) no delinquencies or losses are experienced on the Loans;
(xii) distributions are made on the Certificates on the
S-36
<PAGE>
15th day of each month, commencing in April 15, 1999; and (xiii) the
Certificates are issued on March 18, 1999. No representation is made that the
Loans will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement, one for the Adjustable
Rate Loans and the other for the Fixed-Rate Loans. Reference in this Prospectus
Supplement to a "Prepayment Assumption" shall refer to the appropriate model,
depending upon whether the reference is with respect to the Adjustable Rate
Loans or the Fixed-Rate Loans.
The percentages and weighted average life information for the Class A-1A ARM
Certificates and the Class A-1B ARM Certificates in the following tables are
based on a CPR model that assumes that the outstanding principal balance of the
Group I Adjustable Rate Loans and the Group II Adjustable Rate Loans,
respectively, will prepay at the percentages of CPR set forth in the Prepayment
Scenarios table below.
The Prepayment Assumption used for the Fixed-Rate Loans represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans for the life of such home equity loans.
The "100% Prepayment Assumption" assumes a constant prepayment of 4% per annum
of the then outstanding principal balance of such loans in the first month of
the life of such loans and an additional 1.45% (precisely, 16/11%) per annum in
each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of such loans, the 100% Prepayment
Assumption assumes a constant prepayment rate of 20% per annum each month.
It is not likely that the Loans will prepay at any constant percentage of the
Prepayment Assumption or of the CPR to maturity or that all of the Loans will
prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Prepayment Scenarios
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Loans
(1)....................
Fixed-Rate Loans (2)....
</TABLE>
- --------
(1) As a CPR percentage.
(2) As a percentage of the Prepayment Assumption.
Assumed Initial Fixed-Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted Balloon Loan
Cut-off Weighted Average Average Weighted
Date Pool Average Remaining Term Original Term Average
Principal Loan to Maturity to Maturity Amortization
Pool Balance Rate (months) (months) Term
- ---- --------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............... $ %
2. ...............
3. ...............
4. ...............
5. ...............
6. ...............
7. ...............
8. ...............
9. ...............
10. ..............
</TABLE>
S-37
<PAGE>
Assumed Additional and Subsequent Fixed-Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted Balloon Loan
Cut-off Weighted Average Average Weighted
Date Pool Average Remaining Term Original Term Average
Principal Loan to Maturity to Maturity Amortization
Pool Balance Rate (months) (months) Term
- ---- --------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. .............. $ %
2. ..............
3. ..............
4. ..............
5. ..............
6. ..............
7. ..............
8. ..............
9. ..............
10. ..............
</TABLE>
Assumed Initial Group I Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- --------- -------- --------- -------- -------- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
</TABLE>
Assumed Initial Group II Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- --------- -------- --------- -------- -------- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
</TABLE>
Assumed Additional and Subsequent Group I Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- --------- -------- --------- -------- -------- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
</TABLE>
S-38
<PAGE>
Assumed Additional and Subsequent Group II Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- --------- -------- --------- -------- -------- ---- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ % % % % %
2. .....................
3. .....................
4. .....................
</TABLE>
Based on the foregoing assumptions, the following tables indicated the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the Original Principal Balance of each Class that would be
outstanding after each of the dates shown, under the indicated Prepayment
Scenarios.
Percentage of the Original Principal Balance of the Class A-1A ARM
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-1A ARM Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class A-1A ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1A ARM Certificate.
Percentage of the Original Principal Balance of the Class A-1B ARM
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
April 15, 2010..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-1B ARM Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class A-1B ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1B ARM Certificate.
S-39
<PAGE>
Percentage of the Original Principal Balance of the Class A-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
Percentage of the Original Principal Balance of the Class A-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
Percentage of the Original Principal Balance of the Class A-3 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
S-40
<PAGE>
Percentage of the Original Principal Balance of the Class A-4 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-4 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
Percentage of the Original Principal Balance of the Class A-5 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class A-5 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-5 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-5 Certificate.
S-41
<PAGE>
Percentage of the Original Principal Balance of the Class M-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
April 15, 2010..........
April 15, 2011..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
Percentage of the Original Principal Balance of the Class M-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
April 15, 2010..........
April 15, 2011..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
S-42
<PAGE>
Percentage of the Original Principal Balance of the Class B-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
S-43
<PAGE>
Percentage of the Original Principal Balance of the Class B-2A
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
April 15, 2010..........
April 15, 2011..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class B-2A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2A Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2A Certificate.
Percentage of the Original Principal Balance of the Class B-2
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
April 15, 2000..........
April 15, 2001..........
April 15, 2002..........
April 15, 2003..........
April 15, 2004..........
April 15, 2005..........
April 15, 2006..........
April 15, 2007..........
April 15, 2008..........
April 15, 2009..........
April 15, 2010..........
April 15, 2011..........
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-44
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing home
equity loans in January 1996. The Company also purchases, pools and services
installment sales contracts for various consumer products. The Company's
principal executive offices are located at 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639 (telephone (651) 293-3400). The
Company's quarterly and annual reports, which are incorporated by reference in
this Prospectus Supplement and in the Prospectus, are available from the
Company upon written request made to the Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings to fixed charges for the
past five years ended December 31, 1997 and the nine months ended September 30,
1998. For the purposes of compiling these ratios, earnings consist of earnings
before income taxes plus fixed charges. Fixed charges consist of interest
expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, Sept 30,
------------------------ -----------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........ 4.81 7.98 7.90 5.44 3.94 (.53)*
</TABLE>
- --------
* On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges
are directly related to (1) $148 million in merger-related costs, and (2) a
$350 million non-cash supplemental reserve against the valuation of Green
Tree's interest-only securities and servicing rights. As a result, the ratio
of earnings (losses) to fixed charges was less than 1.00 for the nine months
ended September 30, 1998 and earnings were inadequate to cover fixed charges
for such period. The amount of the coverage deficiency for such period was
$251,600,000.
Recent Developments
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-45
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
General
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"--Registration of the Certificates" below. The Trust consists primarily of the
Loans and the rights, benefits, obligations and proceeds arising therefrom or
in connection therewith, including liens on the related real estate, amounts
held in the Certificate Account and the Class B-2 Limited Guaranty of the
Company for the benefit of the Class B-2 Certificateholders.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "--Registration of the Certificates"
below. The first Payment Date for the Certificates will be in April 1999.
Payments will be made by check mailed to such Certificateholder at the address
appearing on the Certificate Register (except that a Certificateholder who
holds an aggregate Percentage Interest of at least 5% of a Class of
Certificates may request payment in respect of its Percentage Interest in such
Class by wire transfer). Final payments will be made only upon tender of the
Certificates to the Trustee for cancellation.
Conveyance of Loans
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial and Additional Loans, including all
principal and interest received on or with respect to such Loans (other than
receipts of principal and interest due on such Loans before the Cut-off Date).
The Agreement permits the Trust to purchase up to approximately $ aggregate
principal balance of Subsequent Loans on or within 90 days after the Closing
Date on one or more closing dates (each a "Subsequent Transfer Date"). See "--
Conveyance of Subsequent Loans and Pre-Funding Account" below.
On behalf of the Trust, as the issuer of the Certificates offered hereby, the
Trustee, concurrently with each conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Loans will be described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. Such list will include the amount of monthly payments due on
each Loan as of the date of issuance of the Certificates, the Loan Rate on each
Loan and the maturity date of each Loan. The list will be attached as an
exhibit to the Agreement and will be available for inspection by any
Certificateholder at the principal office of the Company. Prior to the
conveyance of the Loans to the Trust, the Company will have completed a review
of all the Loan files, confirming the accuracy of each item on the list of
Loans delivered to the Trustee. Any Loan discovered not to agree with such list
in a manner that is materially adverse to the interests of the
Certificateholders will be repurchased by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit cash
in the Certificate Account in an amount sufficient to offset such discrepancy.
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The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans to
the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
Dorsey & Whitney LLP, counsel to the Company, will render an opinion to the
Trustee that the transfer of the Loans from the Company to the Trust would, in
the event the Company became a debtor under the United States Bankruptcy Code,
be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Loans from the Company to the Trust were treated
as a pledge to secure borrowings by the Company, the distribution of proceeds
of the Loans to the Trust might be subject to the automatic stay provisions of
the United States Bankruptcy Code, which would delay the distribution of such
proceeds for an uncertain period of time. In addition, a bankruptcy trustee
would have the power to sell the Loans if the proceeds of such sale could
satisfy the amount of the debt deemed owed by the Company, or the bankruptcy
trustee could substitute other collateral in lieu of the Loans to secure such
debt, or such debt could be subject to adjustment by the bankruptcy trustee if
the Company were to file for reorganization under Chapter 11 of the United
States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Loan, including that: (a) for each Loan other than the
Subsequent Loans, as of the applicable Cut-off Date, the most recent scheduled
payment was made or was not delinquent more than 59 days; (b) for each
Subsequent Loan, as of the respective Subsequent Cut-off Date, the most recent
scheduled payment was made or was not delinquent more than 59 days; (c) no
provision of a Loan has been waived, altered or modified in any respect, except
by instruments or documents included in the Loan file and reflected on the list
of Loans delivered to the Trustee; (d) each Loan is a legal, valid and binding
obligation of the Obligor and is enforceable in accordance with its terms
(except as may be limited by laws affecting creditors' rights generally); (e)
no Loan is subject to any right of rescission, set-off, counterclaim or
defense; (f) each Loan was originated by a home equity lender in the ordinary
course of its business or was originated by the Company directly; (g) no Loan
was originated in or is subject to the laws of any jurisdiction whose laws
would make the transfer of the Loan or an interest therein pursuant to the
Agreement or the Certificates unlawful; (h) each Loan complies with all
requirements of law; (i) no Loan has been satisfied, subordinated to a lower
lien ranking than its original position (if any) or rescinded; (j) each Loan
creates a valid and perfected lien on the related real estate; (k) all parties
to each Loan had full legal capacity to execute such Loan; (l) no Loan has been
sold, conveyed and assigned or pledged to any other person and the Company has
good and marketable title to each Loan free and clear of any encumbrance,
equity, lien, pledge, charge, claim or security interest, and is the sole owner
and has full right to transfer such Loan to the Trustee; (m) as of the Cut-off
Date there was no default, breach, violation or event permitting acceleration
under any Loan (except for payment delinquencies permitted by clauses (a) and
(b) above), no event that with notice and the expiration of any grace or cure
period would constitute a default, breach, violation or event permitting
acceleration under such Loan, and the Company has not waived any of the
foregoing; (n) each Loan is a fully-amortizing loan and provides for level
monthly payments based on its applicable Loan Rate, except, in the case of a
Balloon Loan, for the final monthly payment, over the term of such Loan; (o)
each Loan contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for realization against the
collateral; (p) the description of each Loan set forth in the list delivered to
the Trustee is true and correct; (q) there is only one original of each Loan;
(r) each Loan was originated or purchased in accordance with the Company's
then-current underwriting guidelines; and (s) each Loan is a "qualified
mortgage" under section 860G(a)(3) of the Internal Revenue Code of 1986, as
amended.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) each Loan (other than
the Adjustable Rate Loans) has a contractual rate of interest of at least %;
(ii) no Loan had a remaining term to maturity at origination of more than 360
months; (iii) no more than 1% of the Loans, by principal balance as of the Cut-
off Date, were secured by properties located in an area with the same zip code;
(iv) no more than 5.0% of the Loans, by principal balance as of the Cut-off
Date, were originated by any one lender; and (v) no adverse selection
procedures were employed in selecting
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the Loans from the Company's portfolio. The Company will make certain
additional representations and warranties with respect to the Subsequent Loans.
See "--Conveyance of Subsequent Loans and Pre-Funding Account" below.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Loan that is materially and
adversely affected by a breach of a representation and warranty with respect to
such Loan made in the Agreement if such breach has not been cured within 90
days of the day it was or should have been discovered by the Servicer or the
Trustee. The "Repurchase Price," with respect to any Loan to be so repurchased
or with respect to a Liquidated Loan, means the outstanding principal balance
of such Loan (without giving effect to any Advances made by the Servicer or the
Trustee), plus interest on such Loan at the Pass-Through Rate (which will be
the weighted average of the Pass-Through Rates of the related Classes of
Certificates) from the end of the Due Period with respect to which the Obligor
last made a scheduled payment (without giving effect to any Advances made by
the Servicer or the Trustee) through the date of such repurchase or
liquidation. This repurchase obligation constitutes the sole remedy available
to the Trust and the Certificateholders for a breach of a representation or
warranty under the Agreement with respect to the Loans (but not with respect to
any other breach by the Company of its obligations under the Agreement).
In lieu of repurchasing a Loan as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Loan (as defined below) for the Loan
that it is otherwise obligated to repurchase (referred to herein as the
"Replaced Loan"). An Eligible Substitute Loan is a Loan that satisfies, as of
the date of its substitution, the representations and warranties specified in
Article III of the Agreement, has a Scheduled Principal Balance that is not
greater than the Scheduled Principal Balance of the Replaced Loan, has a Loan
Rate that is at least equal to the Loan Rate of the Replaced Loan and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Loan. The Company will be required
to deposit in the Certificate Account cash in the amount, if any, by which the
Scheduled Principal Balance of the Replaced Loan exceeds the Scheduled
Principal Balance of the Loan being substituted. Such deposit will be deemed to
be a Partial Principal Prepayment.
Under the Agreement, the Company may, at its option, substitute new loans for
Loans which are prepaid in full prior to , 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, such excess shall be distributed to
Certificateholders on the related Payment Date as a prepayment of principal.
Notwithstanding the foregoing, there is no assurance that the Company will opt
to make any such substitutions nor, should it desire to exercise such option,
that Eligible Substitute Loans will be available therefor.
Pursuant to the Agreement, the Servicer will service and administer the Loans
conveyed and assigned to the Trustee as more fully set forth below.
Conveyance of Subsequent Loans and Pre-Funding Account
An account (the "Pre-Funding Account") will be established by the Trustee and
funded by the Company with up to approximately $ (the "Pre-Funded Amount")
on the Closing Date to provide the Trust with sufficient funds to purchase
Subsequent Loans. The Pre-Funding Account will be used to purchase Subsequent
Loans during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) 90 days after the Closing Date or (iii) the date on which an
Event of Termination occurs under the Agreement (the "Funding Period"). The
Pre-Funded Amount will be reduced during the Funding Period by the amount used
to purchase Subsequent Loans in accordance with the Agreement.
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Under the Agreement, the Trust will be obligated to purchase Subsequent Loans
from the Company during the Funding Period, subject to the availability
thereof. In connection with the purchase of Subsequent Loans on such dates of
transfer (the "Subsequent Transfer Dates"), the Trust will be required to pay
to the Company from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Loans purchased on such
date. The amount paid from the Pre-Funding Account on each Subsequent Transfer
Date will not include accrued interest on the related Subsequent Loans.
Following each Subsequent Transfer Date, the aggregate principal balance of the
Subsequent Loans will increase by an amount equal to the aggregate principal
balance of the Loans so purchased and the amount in the Pre-Funding Account
will decrease accordingly.
Any Pre-Funded Amount remaining after the end of the Funding Period will be
applied on the next Payment Date to prepay principal on the Class A-1B ARM
Certificates and the Class A-1 Certificates. Any amounts remaining which had
been allocated to the purchase of Subsequent Adjustable Rate Loans will be paid
to the Class A-1B ARM Certificateholders and any amounts remaining which had
been allocated to the purchase of Subsequent Fixed-Rate Loans will be paid to
the Class A-1 Certificateholders. Although no assurance can be given, the
Company anticipates that the principal amount of the related Subsequent Loans
purchased by the Trust will require the application of substantially all of the
related Pre-Funded Amount (as defined herein) and that there should be no
material amount of principal prepaid to the Class A-1B ARM Certificateholders
or the Class A-1 Certificateholders from the Pre-Funding Account. However, it
is unlikely that the Company will be able to deliver Subsequent Loans with an
aggregate principal balance identical to the remaining Pre-Funded Amount.
Any conveyance of Subsequent Loans on a Subsequent Transfer Date is subject
to certain conditions including, but not limited to: (a) each Subsequent Loan
must satisfy the representations and warranties specified in the related
subsequent transfer instrument and the Agreement; (b) the Company may not
select Subsequent Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) as of the respective Subsequent Cut-
off Date the Subsequent Loans must satisfy the following criteria: (i) no
Subsequent Loan may be more than 59 days contractually delinquent as of the
related Subsequent Cut-off Date; (ii) the remaining stated term to maturity of
each Subsequent Loan may not exceed 360 months; (iii) each Subsequent Loan must
have been underwritten in accordance with the Company's standard underwriting
criteria; (iv) as a result of the purchase of the Subsequent Loans, the
weighted average loan to value ratio of the Loan Pool will not be more than 200
basis points more than such ratio with respect to the Initial Loans; (v) as a
result of the purchase of the Subsequent Loans, the Class A Certificates will
not receive from S&P or Fitch a lower credit rating than the rating assigned at
the initial issuance of such Certificates; and (vi) an independent accountant
will provide a letter stating whether or not the characteristics of the
Subsequent Loans conform to the characteristics described herein.
Payments on Loans
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
with trust powers organized under the laws of the United States or any state,
the deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corporation (the "FDIC"), whose short-term deposits
have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by S&P and Fitch (if rated by Fitch), and which is subject to
supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee, which depository institution or trust company has capital and surplus
of not less than $50,000,000; or (iv) an account that will
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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. The
Servicer may authorize the Trustee to invest the funds in the Certificate
Account in Eligible Investments (as defined in the Agreement) that will mature
not later than the Business Day preceding the applicable monthly Payment Date.
Such Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least "AA" from S&P and Fitch (if rated by Fitch) not in excess of
10% of amounts in the Certificate Account at the time of such investment; and
commercial paper assigned a rating of at least A-1+ by S&P and at least F-1+ by
Fitch (if rated by Fitch). Any losses on such investments will be deducted from
other investment earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Loans, including
Principal Prepayments and advance payments by Obligors not constituting
Principal Prepayments ("Advance Payments"), shall be paid into the Certificate
Account no later than one Business Day following receipt thereof, except
amounts received as extension fees or assumption fees not allocated to regular
installments due on Loans, which are retained by the Servicer as part of its
servicing fees and are not paid into the Certificate Account and except for
certain proceeds from Liquidated Loans which are used to reimburse the Servicer
for customary out-of-pocket liquidation expenses. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses" herein. In
addition, all payments under FHA Insurance received by the Servicer, any
Advances by the Servicer or the Trustee as described under "Description of the
Certificates--Advances," and amounts paid by the Company for Loans repurchased,
or upon substitution for a Loan otherwise required to be repurchased, as a
result of a breach of representations or warranties under the Agreement, as
described under "Description of the Certificates--Conveyance of Loans," shall
be paid into the Certificate Account.
On the second Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Amount Available in the Certificate
Account and the amount of funds necessary to make all payments to be made on
the next Payment Date from the Certificate Account. Not later than one Business
Day after the Determination Date, the Company will deposit in the Certificate
Account the Repurchase Price of any Loans required to be repurchased on such
Payment Date, or any amounts required to be deposited upon substitution for any
Loan otherwise required to be repurchased on such Payment Date, as a result of
a breach of representations and warranties under the Agreement.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(a) if neither the Company nor any wholly owned subsidiary of the
Company is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(b) to pay interest and principal on the Certificates, in the manner
and the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is
the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(d) to pay any Class B-2A Additional Principal Distribution Amount, as
described under "--Distributions on Certificates--Class B-2A Principal"
below;
(e) 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;
(f) to reimburse the holder of the Class C Certificates for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(g) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments;
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(h) to pay the Class B-3I Distribution Amount on the Class B-3I
Certificates; and
(i) to pay any remaining amounts to the holder of the Class C
Certificates.
The Scheduled Principal Balance of a Loan with respect to any Payment Date is
its principal balance as of the scheduled payment date (the "Due Date") in the
calendar month preceding such Payment Date as specified in its amortization
schedule, after giving effect to any previous partial Principal Prepayments and
to the scheduled payment due on such Due Date, but without giving effect to any
delinquency in payment or adjustments due to bankruptcy or similar proceedings.
The Pool Scheduled Principal Balance as of any Payment Date is the aggregate of
the Scheduled Principal Balances of Loans comprising the Loan Pool that were
outstanding during the preceding Due Period. A Liquidated Loan is a defaulted
Loan as to which all amounts that the Servicer expects to recover on account of
such Loan have been received.
Distributions on Certificates
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made 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.
Certificateholders will be entitled to receive on each Payment Date
commencing in April 1999, to the extent that the Amount Available (as defined
herein) in the Certificate Account (together with, in the case of the Class B-2
Certificates, the Class B-2 Guaranty Payment, as described below) is sufficient
therefor, distributions allocable to interest and principal, as described
herein. The rights of the Class M and Class B Certificateholders to receive
distributions in respect of the Amount Available are subordinated to the rights
of the Class A Certificateholders; the rights of the Class M-2 and Class B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class M-1 Certificateholders; the rights of the Class B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class M-2 Certificateholders; the rights of the Class B-2A
and Class B-2 Certificateholders to receive such distributions are further
subordinated to the rights of the Class B-1 Certificateholders; and the rights
of the Class B-2 Certificateholders to receive such distributions are further
subordinated to the rights of the Class B-2A Certificateholders. Distributions
will be made on each Payment Date commencing in April 1999 to holders of record
on the related Record Date, except that the final distribution in respect of
the Certificates will only be made upon presentation and surrender of the
Certificates at the office or agency appointed by the Trustee for that purpose
in Minneapolis or St. Paul, Minnesota.
See "Payments on Loans" above for a detailed description of the amounts on
deposit in the Certificate Account that will constitute the Amount Available on
each Payment Date. The Amount Available will consist primarily of payments made
on or in respect of the Loans and will include amounts payable, subject to the
subordination described herein, to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) as the Monthly
Servicing Fee, and to the Class B-3 and Class C Certificateholders.
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. Interest on the
outstanding Class A Principal Balance (or, in the case of the Class A-6 IO
Certificates, on the Notional Principal Amount), Class M-1 Adjusted Principal
Balance, Class M-2 Adjusted Principal Balance and Class B-1 Adjusted Principal
Balance, as applicable, will accrue at the related Pass-Through Rate from March
18, 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 Class A
Certificates, other than the Class A-1A ARM and Class A-1B ARM Certificates,
will be computed on the basis of a 360-day year of twelve 30-day months.
Interest on the Class A-1A ARM and Class A-1B ARM Certificates will be computed
on the basis of actual days elapsed in a 360-day year. The "Principal Balance"
of a Class of Certificates (other than the Class A-6 IO Certificates, which has
no Principal Balance)
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as of any Payment Date is the Original Principal Balance of such Class less all
amounts previously distributed in respect of principal of such Class. The
"Class A Principal Balance" as of any Payment Date is the sum of the Class A-1A
ARM Principal Balance, the Class A-1B ARM Principal Balance, the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance, the Class A-4 Principal Balance and the Class A-5 Principal Balance.
The "Class M Principal Balance" as of any Payment Date is the sum of the Class
M-1 Principal Balance and the Class M-2 Principal Balance. The "Class M-1
Adjusted Principal Balance" as of any Payment Date is the Class M-1 Principal
Balance less any Class M-1 Liquidation Loss Amount (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 Amount (described below under "Losses on Liquidated Loans").
The "Class B Principal Balance" as of any Payment Date is the sum of the Class
B-1 Principal Balance, the Class B-2A Principal Balance and the Class B-2
Principal Balance. 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
Amount (described below under "Losses on Liquidated Loans").
The Pass-Through Rates for the Class A (other than the Class A-1A ARM and
Class A-1B ARM), Class M and Class B-1 Certificates are set forth on the cover
of this Prospectus Supplement.
The Class A-1A ARM Pass-Through Rate is a floating rate equal to the lesser
of one-month LIBOR plus the Class A-1A Pass-Through Margin or the Available
Funds Pass-Through Rate, but in no case more than 14%. The Class A-1A Pass-
Through Margin will equal % per annum on each Payment Date on which the Pool
Scheduled Principal Balance is 10% or more of the Cut-off Date Pool Principal
Balance, and % per annum on each Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance.
The Class A-1B ARM Pass-Through Rate is a floating rate equal to the lesser of
one-month LIBOR plus the Class A-1B Pass-Through Margin or the Available Funds
Pass-Through Rate, but in no case more than 14%. The Class A-1B Pass-Through
Margin will equal % per annum on each Payment Date on which the Pool Scheduled
Principal Balance is 10% or more of the Cut-off Date Pool Principal Balance,
and % per annum on each Payment Date on which the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance. The
Available Funds Pass-Through Rate for any Payment Date will be a rate per annum
equal to the weighted average of the Expense Adjusted Loan Rates on the then
outstanding Adjustable Rate Loans. The Expense Adjusted Loan Rate on any
Adjustable Rate Loan is equal to the then applicable Loan Rate thereon, minus
the Expense Fee Rate. The Expense Fee Rate is 0.50%. One-month LIBOR with
respect to any monthly interest period will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR business day prior to such monthly
interest period. For a description of the method used to calculate one-month
LIBOR, see "Calculation of One-Month LIBOR" below.
Interest will be calculated on the Class HE: A-6 IO Certificates on each
Payment Date based on the Notional Principal Amount, which for the first 24
Payment Dates is equal to $120,000,000 (or the Class A Principal Balance for
such Payment Date, if less), and will thereafter equal zero. The Notional
Principal Amount provides a basis for calculating interest payments only, and
does not represent the right to receive any distributions of principal.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of 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 such 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 such Class will be allocated
among the outstanding Certificates of such Class pro rata in accordance with
their respective entitlements to interest, and the amount of the shortfall will
be carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Any such amount so carried forward will bear
interest at the applicable Pass-Through Rate, to the extent legally
permissible.
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Principal on the Class A, Class M-1, Class M-2 and Class B-1 Certificates.
The Class A (other than the Class A-6 IO Certificates, which will receive no
distributions of principal), Class M-1, Class M-2 and Class B-1 Certificates
will be entitled to receive on each Payment Date distributions of principal in
the order of priority set forth and as otherwise described below, to the extent
of the Amount Available in the Certificate Account after payment of all
interest then accrued on the Class A Principal Balance, Class A-6 IO Notional
Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted
Principal Balance and Class B-1 Adjusted Principal Balance.
Holders of the Class A-1A ARM Certificates and the Class A-1B ARM
Certificates will be entitled to receive, as payments of principal, an amount
equal to the Group I ARM Formula Principal Distribution Amount and the Group II
ARM Formula Principal Distribution Amount, respectively. The "Group I ARM
Formula Principal Distribution Amount" on or before the Payment Date on which
the Class A-1A ARM Certificates have been paid in full will generally be equal
to the lesser of (A) the Class A-1A ARM Principal Balance or (B) the sum of the
following:
(i) all scheduled payments of principal due on each outstanding Group
I Adjustable Rate Loan during the related Due Period;
(ii) the Scheduled Principal Balance of each Group I Adjustable Rate
Loan which, during the related Due Period, was purchased by the Company
pursuant to the Agreement on account of certain breaches of its
representations and warranties;
(iii) the Scheduled Principal Balance of each Group I Adjustable Rate
Loan that became a Liquidated Loan during the related Due Period;
(iv) all partial Principal Prepayments applied and Principal
Prepayments in Full received on each Group I Adjustable Rate Loan during
the related Due Period; and
(v) on any Payment Date which is on or after the Payment Date on which
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
have been paid in full, a pro rata portion (based on the Class A-1A ARM
Principal Balance versus the Class A-1B ARM Principal Balance) of (a) the
Senior Percentage times the sum of the amounts described in clause (A) of
the definition of the Formula Principal Distribution Amount less (b) the
amount, if any, to be distributed in payment of principal on the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates on such Payment
Date.
The "Group II ARM Formula Principal Distribution Amount" on or before the
Payment Date on which the Class A-1B ARM Certificates have been paid in full
will generally be equal to the lesser of (A) the Class A-1B ARM Principal
Balance or (B) the sum of the following:
(i) all scheduled payments of principal due on each outstanding Group
II Adjustable Rate Loan during the related Due Period;
(ii) the Scheduled Principal Balance of each Group II Adjustable Rate
Loan which, during the related Due Period, was purchased by the Company
pursuant to the Agreement on account of certain breaches of its
representations and warranties;
(iii) the Scheduled Principal Balance of each Group II Adjustable Rate
Loan that became a Liquidated Loan during the related Due Period;
(iv) all partial Principal Prepayments applied and Principal
Prepayments in Full received on each Group II Adjustable Rate Loan during
the related Due Period; and
(v) on any Payment Date which is on or after the Payment Date on which
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
have been paid in full, a pro rata portion (based on the Class A-1B ARM
Principal Balance versus the Class A-1A ARM Principal Balance) of (a) the
Senior Percentage times the sum of the amounts described in clause (A) of
the definition of the Formula Principal Distribution Amount less (b) the
amount, if any, to be distributed in payment of principal on the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates on such Payment
Date.
S-53
<PAGE>
The "Scheduled Principal Balance" of a Loan with respect to any Payment Date
is its principal balance as of the scheduled payment date (the "Due Date") in
the Due Period, after giving effect to any previous partial Principal
Prepayments applied and to the scheduled payment due on such Due Date, and
after giving effect to any adjustments due to bankruptcy or similar
proceedings.
The Class A-6 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Holders of the Class A Certificates (other than the Class A-1A ARM
Certificates, the Class A-1B ARM Certificates and the Class A-6 IO
Certificates), the Class M-1 Certificates, the Class M-2 Certificates and the
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 the "Formula Principal Distribution Amount," which is (A) the
sum of (i) all scheduled payments of principal due on each outstanding Loan
during the related Due Period, (ii) the Scheduled Principal Balance of each
Loan which, during the related Due Period, was purchased by the Company
pursuant to the Agreement on account of certain breaches of its representations
and warranties, (iii) all partial Principal Prepayments applied and all
Principal Prepayments in Full received during the related Due Period in respect
of Loans, (iv) the Scheduled Principal Balance of each Loan that became a
Liquidated Loan during the related Due Period and (v) any amount described in
clauses (i) through (iv) above that was not previously distributed because of
an insufficient amount of funds available in the Certificate Account if (a) the
Payment Date occurs on or after the Payment Date on which the Class B-2
Principal Balance has been reduced to zero, or (b) such amount was not covered
by a Class B-2 Guaranty Payment and corresponding reduction in the Class B-2
Principal Balance, minus (B) the sum of those portions of the Group I ARM
Formula Principal Distribution Amount and the Group II ARM Formula Principal
Distribution Amount described in clauses (B)(i) through (iv) of the respective
definitions thereof. 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 such Class.
The "Senior Percentage" for any Payment Date prior to the Class B Cross-over
Date (as described below), and for any Payment Date on or after the Class B
Cross-over Date 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 (excluding the Class A-1A ARM Principal Balance and
the Class A-1B ARM Principal Balance) and the Class M Principal Balance for
such Payment Date and the denominator of which is the Pool Scheduled Principal
Balance of the Loans (excluding the Adjustable Rate Loans) for the immediately
preceding Payment Date.
The "Pool Scheduled Principal Balance" as of any Payment Date is the
aggregate of the Scheduled Principal Balances of Loans 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.
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 A-6 IO Notional
Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted
Principal Balance and Class B-1 Adjusted Principal Balance, as follows: (i)
that portion, if any, of the Senior Percentage of the Formula Principal
Distribution Amount equal to the Class A-5 Lockout Pro Rata Distribution Amount
will be distributed to the Class A-5 Certificateholders; and (ii) the remainder
of the Senior Percentage of the Formula Principal Distribution Amount will be
distributed in the following order: first, to the Class A-1 Certificateholders
until the Class A-1 Principal Balance has been reduced to zero, then to the
Class A-2 Certificateholders until the Class A-2 Principal Balance has been
reduced to zero, then to the Class A-3 Certificateholders until the Class A-3
Principal Balance has been reduced to zero, then to the Class A-4
Certificateholders until the Class A-4 Principal Balance has been reduced to
zero, then to the Class A-5
S-54
<PAGE>
Certificateholders until the Class A-5 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.
The "Class A-5 Lockout Pro Rata Distribution Amount," as to any Payment Date,
is an amount equal to the lesser of:
(a) the product of (1) the Class A-5 Lockout Percentage, and (2) the
product of (A) a fraction, the numerator of which is the Class A-5
Principal Balance immediately preceding such Payment Date and the
denominator of which is the Class A Principal Balance (excluding the Class
A-1A ARM Principal Balance and the Class A-1B ARM Principal Balance)
immediately preceding such Payment Date, and (B) the Senior Percentage of
the Formula Principal Distribution Amount for such Payment Date, and
(b) the Class A-5 Principal Balance immediately preceding such Payment
Date.
The "Class A-5 Lockout Percentage," as to any Payment Date occurring during
the periods set forth below, is the percentage designated as such as follows:
<TABLE>
<CAPTION>
Class A-5
Period (dates inclusive) Lockout Percentage
------------------------ ------------------
<S> <C>
April 1999 through March 2001............................. 0%
April 2001 through March 2003............................. 20%
April 2003 through March 2004............................. 80%
April 2004 through March 2005............................. 100%
April 2005 and thereafter................................. 300%
</TABLE>
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
Payment Date thereafter only if each Class B Principal Distribution Test is
satisfied on such Payment Date (unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to zero). The "Class B Cross-over
Date" will be the earlier of (A) the Payment Date on which the Class M-2
Principal Balance is reduced to zero and (B) the first Payment Date on or after
the Payment Date in April 2002 on which the fraction, expressed as a
percentage, the numerator of which is the Class B Principal Balance as of such
Payment Date and the denominator of which is the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date, is equal to or greater
than 15.3%.
On each Payment Date on or after the Class B Cross-over Date and prior to the
Payment Date on which the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero, holders of Class B Certificates will be
entitled to distributions of principal only if each of the following tests
(each a "Class B Principal Distribution Test") is satisfied on such Payment
Date: (i) the average of the Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Payment Date and the prior two Payment Dates must not
exceed 10%; (ii) the average of the Thirty-Day Delinquency Ratio (as defined in
the Agreement) as of such Payment Date and the prior two Payment Dates must not
exceed 12%; (iii) the Cumulative Realized Loss Ratio (as defined in the
Agreement) as of such Payment Date must not exceed 7.5%; (iv) the Current
Realized Loss Ratio (as defined in the Agreement) as of such Payment Date must
not exceed 2.0%; and (v) (a) the sum of the Class B Principal Balance plus the
amount, if any, by which the Aggregate Certificate Principal Balance exceeds
the Pool Scheduled Principal Balance as of the immediately preceeding Payment
Date, divided by (b) the Pool Scheduled Principal Balance as of the immediately
preceding Payment Date, must be equal to or greater than 15.3%.
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 Principal Balance, Class A-6 IO Notional Principal
Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted Principal
Balance and Class B-1 Adjusted Principal Balance 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.
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<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, if any, 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 (which is the amount, if any, by
which the Pool Scheduled Principal Balance plus the Pre-Funded Amount is less
than the Class A Principal Balance), the remaining Amount Available, after
payment of all interest then accrued on the Class A Principal Balance, Class A-
6 IO Notional Principal Amount, 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 (but in no event will such amount exceed the
Principal Balance of any such Class).
If, as to any Payment Date, the remaining Amount Available, after payment of
all interest then accrued on the Class A Principal Balance, Class A-6 IO
Notional Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2
Adjusted Principal Balance and Class B-1 Adjusted Principal Balance, is less
than the sum of the Group I ARM Formula Principal Distribution Amount, the
Group II ARM Formula Principal Distribution Amount and the Senior Percentage of
the Formula Principal Distribution Amount the amounts to be distributed to the
Class A-1A ARM Certificateholders and Class A-1B ARM Certificateholders, on the
one hand, and the remaining Class A Certificateholders, Class M-1
Certificateholders and Class M-2 Certificateholders, on the other, will be
allocated pro rata based upon the respective portions of the Amount Available
that would have been distributed to the Class A, Class M-1 and Class M-2
Certificateholders, as described above, had the remaining Amount Available been
sufficient therefor.
Class B-2A Interest
Interest on the outstanding Class B-2A Adjusted Principal Balance will accrue
from March , 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 composed of twelve 30-day months.
To the extent of the remaining Amount Available, if any, for a Payment Date
after payment of all interest and principal then payable on the Class A, Class
M and Class B-1 Certificates, interest will be paid to the Class B-2A
Certificateholders on such Payment Date at the Class B-2A Pass-Through Rate on
the then outstanding Class B-2A Adjusted Principal Balance. The Class B-2A
Pass-Through Rate is set forth on the cover of this Prospectus Supplement. The
"Class B-2A Principal Balance" is the Original Class B-2A Principal Balance
less all amounts previously distributed to the Class B-2A Certificateholders in
respect of principal. The "Class B-2A Adjusted Principal Balance" as of any
Payment Date is the Class B-2A Principal Balance less any Class B-2A
Liquidation Loss Amount (described below under "Losses on Liquidated Loans").
In the event that, on a particular Payment Date, the remaining Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the Class B-2A Certificateholders, the amount of
the deficiency will be carried forward as an amount that the Class B-2A
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-2A Pass-Through Rate.
Class B-2A Principal
Except for payment of any Class B-2A Additional Principal Distribution
Amount, as described below, payment of principal on the Class B-2A Certificates
will not commence until the Payment Date on which the Class B-1 Principal
Balance has been reduced to zero (the "Class B-1 Cross-over Date"), and will be
made on that Payment Date and each Payment Date thereafter only if each Class B
Principal Distribution Test is satisfied on such Payment Date (unless the Class
A Principal Balance and the Class M Principal Balance have been reduced to
zero). On any such Payment Date, the Class B Percentage of the Formula
Principal Distribution Amount will be distributed, to the extent of the Amount
Available after payment of all interest and
S-56
<PAGE>
principal on the Class A and Class M Certificates and all interest on the Class
B-2A Certificates, to the Class B-2A Certificateholders until the Class B-2A
Principal Balance has been reduced to zero.
The Class B-2A Certificateholders will also be entitled to receive additional
distributions in respect of principal (each a "Class B-2A Additional Principal
Distribution Amount") on each Payment Date to the extent there is any Amount
Available remaining after payment of all interest and principal on the Class A,
Class M and Class B Certificates and the Monthly Servicing Fee to the Servicer
for such Payment Date. The Class B-2A Additional Principal Distribution Amount
for any Payment Date will be equal to the lesser of (i) one-half of such
remaining Amount Available, and (ii) the amount necessary to reduce the Class
B-2A Principal Balance to zero (after taking into account any distributions to
made pursuant to the preceding paragraph).
Class B-2 Interest.
Interest on the outstanding Class B-2 Principal Balance will accrue from
March , 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.
To the extent of (i) the remaining Amount Available, if any, for a Payment
Date after payment of all interest and (except for anyClass B-2A Additional
Principal Distribution Amount) principal then payable on the Class A, Class M-
1, Class M-2, Class B-1 and Class B-2A Certificates, and (ii) the Class B-2
Guaranty Payment, if any, for such date, interest will be paid to the Class B-2
Certificateholders on such Payment Date at the Class B-2 Pass-Through Rate on
the then outstanding Class B-2 Principal Balance. The Class B-2 Pass-Through
Rate is %, subject to a maximum rate equal to the weighted average of the
Loan Rates on the Loans. 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 (including any Class B-2 Guaranty Payments) in respect of
principal.
In the event that, on a particular Payment Date, the remaining Amount
Available in the Certificate Account plus any amounts actually paid under the
Class B-2 Limited Guaranty are not sufficient to make a full distribution of
interest to the Class B-2 Certificateholders, the amount of 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
Payment Date on which the Class B-1 and the Class B-2A Principal Balances have
been reduced to zero (the "Class B-1 and B-2A Cross-over Date"), and will be
made on that Payment Date and each Payment Date thereafter only if each Class B
Principal Distribution Test is satisfied on such Payment Date (unless the Class
A Principal Balance and the Class M Principal Balance have been reduced to
zero). On any such Payment Date, the Class B Percentage of the Formula
Principal Distribution Amount will be distributed, to the extent of the Amount
Available, after payment of all interest and principal then due on the Class A
and Class M 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.
S-57
<PAGE>
Calculation of One-Month LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date"). "Telerate Page 3750" means the
display page so designated on the Dow Jones Telerate Service (or such other
page as may replace that page on that service, or such other service as may be
designated by the Calculation Agent as the information vendor, for the purpose
of displaying London interbank offered rates of major banks). If such rate
appears on Telerate Page 3750, LIBOR will be such rate. "LIBOR Business Day" as
used herein means a day that is both a business day and a day on which banking
institutions in the City of London, England are not required or authorized by
law to be closed. If on any LIBOR Determination Date the offered rate does not
appear on Telerate Page 3750, the Calculation Agent will request each of the
reference banks (which shall be major banks that are engaged in transactions in
the London interbank market selected by the Calculation Agent) to provide the
Calculation Agent with its offered quotation for United States dollar deposits
for one month to prime banks in the London interbank market as of 11:00 A.M.,
London time, on such date. If at least two reference banks provide the
Calculation Agent with such offered quotations, LIBOR on such date will be the
arithmetic mean, rounded upward, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point rounded upward, of
all such quotations. If on such date fewer than two of the reference banks
provide the Calculation Agent with such offered quotations, LIBOR on such date
will be the arithmetic mean, rounded upward, if necessary, to the nearest
1/100,000 of 1% (.0000001), with five one-millionths of a percentage point
rounded upward, of the offered per annum rates that one or more leading banks
in the City of New York selected by the Calculation Agent are quoting as of
11:00 A.M., New York City time, on such date to leading European banks for
United States dollar deposits for one month; provided, however, that if such
banks are not quoting as described above, LIBOR for such date will be LIBOR
applicable to the monthly interest period immediately preceding such monthly
interest period. Notwithstanding the foregoing, however, LIBOR for a Payment
Date shall not be based on LIBOR for the prior Payment Date for three
consecutive Payment Dates. If, under the priorities described above, LIBOR for
a Payment Date would be based on LIBOR for the previous Payment Date for the
second consecutive Payment Date, the Calculation Agent shall select an
alternative comparable index (over which the Calculation Agent has no control)
used for determining one-month Eurodollar lending rates that is calculated and
published (or otherwise made available) by an independent third party. The
"Calculation Agent" will initially be the Trustee.
Subordination of Class 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 Amount Available, will be subordinated, to the
extent described herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to enhance the likelihood of
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
such 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. Thereafter, any
remaining Amount Available in the Certificate Account will be applied to the
payment of interest due 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.
S-58
<PAGE>
After payment of all interest then accrued on the Class A Principal Balance,
Class A-6 IO Notional Principal Amount, Class M-1 Adjusted Principal Balance,
Class M-2 Adjusted Principal Balance and Class B-1 Adjusted Principal Balance
as aforesaid, any remaining Amount Available will be distributed in the
following order of priority, to the extent sufficient therefor: 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; 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-2A 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-2A Certificateholders will be entitled to distributions of interest and
principal on the Class B-2A 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
the Company fails to pay such amount pursuant to its 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
As described above, the distribution of principal to the Class A
Certificateholders is intended to include the Senior Percentage of the
Scheduled Principal Balance of each Loan (other than the Adjustable Rate Loans)
that became a Liquidated Loan during the preceding Due Period and the Scheduled
Principal Balance of each Adjustable Rate Loan that became a Liquidated Loan
during the preceding Due Period. If the Net Liquidation Proceeds from such
Liquidated Loan are less than the Scheduled Principal Balance of such
Liquidated Loans plus accrued and unpaid interest thereon, the deficiency will,
in effect, be absorbed by the Class C Certificateholder, then the Class B-3I
Certificateholder, then the Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer), then the Class B-2 Certificateholders, then the Class B-2A
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. Likewise, to the extent
the Class M-1 Certificateholders, the Class M-2 Certificateholders or the Class
B-1 Certificateholders are entitled to receive distributions of principal,
similar deficiencies could result for each Class of Certificates with a lower
payment priority.
In the event the Amount Available for any Payment Date is insufficient to
distribute the full Formula Principal Distribution Amount for such Payment Date
to the Certificateholders, 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. Because
of the Class B-2A Additional Principal that will be paid on each Payment Date,
assuming that the Amount Available is sufficient therefor, it is unlikely that
distributions of principal on one or more Payment Dates of less than the
Formula Principal Distribution Amount for the Payment Dates would result in the
aggregate outstanding Principal Balance of the Certificates being greater than
the Pool Scheduled Principal Balance. Nevertheless, severe losses and
delinquencies on the Loan Pool will create such a deficiency. In such event,
the amount of such deficiency (the "Liquidation Loss Amount") would be
allocated first to the Class B-2 Certificates (the "Class B-2 Liquidation Loss
Amount"), and the Company would be obligated to pay the amount of such Class B-
2 Liquidation Loss Amount to the
S-59
<PAGE>
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
Principal Balance, the Class M-2 Principal Balance, the Class B-1 Principal
Balance and the Class B-2A Principal Balance, were equal to the Pool Scheduled
Principal Balance, no further Liquidation Loss Amounts could be allocated to
the Class B-2 Certificates and any further Liquidation Loss Amounts would be
allocated to reduce the Class B-2A Adjusted Principal Balance (a "Class B-2A
Liquidation Loss Amount"). If the Class B-2A Adjusted Principal Balance were
reduced to zero, no further Liquidation Loss Amounts would be allocated to the
Class B 2-A Certificates and any further Liquidation Loss Amounts realized
would be allocated to reduce the Class B-1 Adjusted Principal Balance (a "Class
B-1 Liquidation Loss Amount"). If the Class B-1 Adjusted Principal Balance were
reduced to zero, any further Liquidation Loss Amounts realized would be
allocated to reduce the Class M-2 Adjusted Principal Balance (a "Class M-2
Liquidation Loss Amount"). If the Class M-2 Adjusted Principal Balance were
reduced to zero, any further Liquidation Loss Amounts realized would be
allocated to reduce the Class M-1 Adjusted Principal Balance (a "Class M-1
Liquidation Loss Amount"). Any such Liquidation Loss Amounts would be reduced
on subsequent Payment Dates to the extent that the Amount Available in the
Certificate Account 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, Class B-2A or Class B-1 Certificates were reduced by a Liquidation
Loss Amount, interest accruing on such Class would be calculated on the reduced
Adjusted Principal Balance of such Class. The interest accruing on such Class's
Liquidation Loss Amount each month (such Class's "Liquidation Loss Interest
Amount"), plus interest at the applicable Certificate Rate on any Liquidation
Loss Interest Amount due on a prior Payment Date but not paid, would be paid to
the Certificateholders of such Class from the Amount Available, after
distributions of principal on all Class A, Class M, Class B-1 and Class B-2A
Certificates (other than Class B-2A Additional Principal), 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 and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans, the Class M-1 Certificateholders
will absorb all losses on each Liquidated Loans in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class B and Class C
Certificates and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Loans, the Class M-2 Certificateholders
will absorb all losses on each Liquidated Loan in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class B-3I, Class B-2, Class B-
2A and Class C Certificates and the related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans, the Class B-1
Certificateholders will absorb all losses on each Liquidated Loan in the amount
by which its Net Liquidation Proceeds are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the related Monthly
Servicing Fee.
But for the effect of the subordination of the Class B-3I, Class B-2 and
Class C Certificates and the related Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) with respect to the Loans, the Class B-2A
Certificateholders will
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absorb all losses on each Liquidated Loan in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the payments under the Class B-2 Limited Guaranty described below and
the subordination of the Class B-3I and Class C Certificates and the related
Monthly Servicing Fee otherwise payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company is the Servicer) with respect to
the Loans, the Class B-2 Certificateholders will absorb all losses on each
Liquidated Loan in the amount by which its Net Liquidation Proceeds are less
than its unpaid principal balance plus accrued and unpaid interest thereon less
the related Monthly Servicing Fee.
Advances
To the extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a Delinquent Payment on a Loan only to the extent that
the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
Reports to Certificateholders
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of the
related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class
A Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class
A Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included and (2) that portion
of any such distribution to Class A-5 Certificateholders constituting the
Class A-5 Lockout Pro Rata Distribution Amount);
(c) the amount, if any, by which the Class A Formula Distribution
Amount exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates and
the Notional Principal Amount for the Class A-6 IO Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage and the Class A-5 Lockout Percentage for
such Payment Date;
(f) the Pool Scheduled Principal Balance for such Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the
numerator of which is the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal Balance and the denominator of
which is the Cut-off Date Pool Principal Balance plus the amount in the
Pre-Funding Account); and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
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Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class A Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
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(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-2A
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included and (2) that portion of any such distribution
constituting the Class B-2A Additional Principal Distribution Amount);
(b) the amount of such distribution to holders of the Class B-2A
Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-2A Formula Distribution
Amount exceeds the Class B-2A Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-2A Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class B-2A Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
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(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-2A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-2A 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-2A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2
Certificates allocable to interest;
(b) the amount of such distribution to holders of Class B-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Liquidation Loss Principal Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B-2 Guaranty Payment, if any, for such Payment Date;
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance for such Payment Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) and clause (g) will
be expressed as dollar amounts for a Class B-2 Certificate with a 1% Percentage
Interest or per $1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
Repurchase Option
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Loans (other than any Loan as to which title to
the underlying property has been assigned) at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such amount will be distributed on such Payment Date.
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Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
Loans, exercising the degree of skill and care consistent with the highest
degree of skill and care that the Servicer exercises with respect to similar
loans (including manufactured housing contracts) serviced by the Servicer. The
Servicer will not be required to cause to be maintained, or otherwise monitor
the maintenance of, hazard insurance on the improved properties. The Company
does, however, as a matter of its own policy, monitor proof of hazard insurance
coverage (other than flood insurance) and require that it be named as an
additional loss payee on all first lien secured loans and generally on junior
lien secured loans with amounts financed of over $20,000.
Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Loans equal to one-
twelfth of the product of .75% and the remaining Pool Scheduled Principal
Balance plus the related Pre-Funded Amount (if any).
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Loan for customary out-of-pocket liquidation expenses incurred by
it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Loans, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with the servicing of the Loans and paid by the
Servicer from its servicing fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders.
Evidence as to Compliance
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "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 Agreement. On or before May 1 of each year, beginning in
2000, the Servicer will deliver to the Trustee a report of
PricerwaterhouseCoopers LLP, or another nationally recognized accounting firm,
stating that such firm has examined certain documents and records relating to
the servicing of loans serviced by the Servicer and stating that, on the basis
of such examination, such servicing has been conducted in compliance with the
Agreement, except for any exceptions set forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
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Transferability
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
Certain Matters Relating to the Company
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
Events of Termination
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four Business Days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its debts as they become due, or takes any
corporate action in furtherance of the foregoing; (f) the Servicer fails to be
an Eligible Servicer; or (g) the Servicer's seller-servicer loan with GNMA is
terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon an Event of Termination
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Loans for breaches of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement.
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Loans for breaches of
representations or warranties under the Agreement. In the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court
of competent jurisdiction for the appointment of, an Eligible Servicer to act
as successor to the Servicer under the Agreement. The Trustee and such
successor may agree upon the servicing compensation to be paid (after receiving
comparable bids from
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other Eligible Servicers), which may not be greater than the Monthly Servicing
Fee payable to the Company as Servicer under the Agreement without the consent
of all of the Certificateholders.
Termination of the Agreement
The Agreement will terminate (after distribution of all principal and
interest then due to the Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance is reduced to zero; or (b)
the Payment Date occurring in the month following the Servicer's repurchase of
the Loans as described under "Description of the Certificates--Repurchase
Option." However, the Company's representations, warranties and indemnities
will survive any termination of the Agreement.
Amendment; Waiver
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Loans or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without the unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
Indemnification
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or any
affiliate thereof of any real estate securing a Loan, (b) for any taxes which
may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans to the Trust (but not including any federal, state or
other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Loan.
Duties and Immunities of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company in consideration of the conveyance of the Loans, or
deposited into the Certificate Account by the Servicer. If no Event of
Termination has occurred, the Trustee will be required to perform only those
duties specifically required of it under the Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the Agreement.
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Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and (c) to
indemnify the Trustee for, and to hold it harmless against, any loss, liability
or expense incurred without negligence or bad faith on its part, arising out of
or in connection with the acceptance or administration of the Trust and its
duties thereunder, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of any of
its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
The Trustee
U.S. Bank Trust National Association has its corporate trust offices at 180
East Fifth Street, St. Paul, Minnesota 55101.
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
Registration of the Certificates
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on behalf
of the CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and
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facilitates the clearance and settlement of securities transactions between
Participants in such securities through electronic book-entry changes in
accounts of Participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and interest
on, the Certificates from the Trustee through DTC and Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
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.
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<PAGE>
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under loan
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the
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<PAGE>
Federal Reserve System and the New York State Banking Department, as well as
the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
S-71
<PAGE>
DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Loans, the Company
will provide a guaranty (the "Class B-2 Limited Guaranty") against losses that
would otherwise be borne by the Class B-2 Certificates. Each payment required
to be made under the Class B-2 Limited Guaranty is referred to as a "Class B-2
Guaranty Payment." Prior to the Class B-1 and B-2A Cross-over Date, and on any
Payment Date on or after the Class B-1 and B-2A Cross-over Date on which the
Class B Principal Distribution Test is not satisfied, the Class B-2 Guaranty
Payment will equal the amount, if any, by which (i) the sum of (a) the Class B-
2 Formula Distribution Amount for such Payment Date (which will be equal to
accrued and unpaid interest on the Class B-2 Certificates) and (b) the Class B-
2 Liquidation Loss Principal Amount, if any, for such Payment Date exceeds (ii)
the Class B-2 Distribution Amount for such Payment Date. The Class B-2
Liquidation Loss Principal Amount for any Payment Date equals the amount, if
any, by which the Aggregate Certificate Principal Balance exceeds the Pool
Scheduled Principal Balance for such Payment Date (but in no event greater than
the Class B-2 Principal Balance). The Class B-2 Liquidation Loss Principal
Amount is, in substance, the amount of delinquencies and losses experienced on
the Loans during the related Due Period that was not absorbed by the Class B-3I
and Class C Certificates and the related Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans. On each Payment Date
on or after the Class B-1 and B-2A Cross-over Date, if the Class B Principal
Distribution Test is satisfied on such Payment Date, the Class B-2 Guaranty
Payment will equal the amount, if any, by which (a) the sum of (i) the Class B-
2 Formula Distribution Amount for such Payment Date (which will include both
interest and principal) and (ii) the Class B-2 Principal Liquidation Loss
Amount, if any, for such Payment Date exceeds (b) the Class B-2 Distribution
Amount for such Payment Date.
The Class B-2 Limited Guaranty will be an unsecured general obligation of the
Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in any
way, or result in any payment to, the Class A-1A ARM, Class A-1B ARM, Class A-
1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 IO, Class M-1, Class
M-2, Class B-1 or Class B-2A Certificateholders.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Dorsey & Whitney LLP, counsel to the
Company, will deliver its opinion that, assuming that two separate elections
are made to treat segregated portions of the assets of the Trust as REMICs
(respectively, the "Master REMIC" and the "Subsidiary REMIC"), and further
assuming ongoing compliance with the terms of the Agreement, the Master REMIC
and the Subsidiary REMIC will each qualify as a REMIC, the Subsidiary REMIC
Regular Interests, which are not being offered hereunder, will be treated as
"regular interests" in the Subsidiary REMIC, and each Class of Certificates
will be treated as "regular interests" in the Master REMIC for federal income
tax purposes. The Class C Subsidiary Certificate, which is not being offered
hereby, will constitute the sole class of "residual interests" in the
Subsidiary REMIC, and the Class C Master Certificate, which is not being
offered hereby, will constitute the sole class of "residual interests" in the
Master REMIC.
Other than the Class A-6 IO Certificates, the Certificates will not be issued
with original issue discount for federal income tax purposes. Although the tax
treatment is not entirely certain, the Class A-6 IO Certificates will be
treated as having been issued with original issue discount for federal income
tax purposes equal to the excess of all expected payments of interest on such
Certificates over their issue price. The prepayment assumption that will be
used to determine the rate of accrual of original issue discount, market
discount and premium, if any, will be based on the assumption that the Loans
will prepay at a rate equal to 125% of the applicable Prepayment Assumption as
to the Fixed-Rate Loans and 30% CPR as to the Adjustable Rate Loans. Although
unclear, a holder of a Class A-6 IO Certificate may be entitled to deduct a
loss to the extent that its remaining basis exceeds the maximum amount of
future payments to which such Certificateholder would be entitled if there were
no further prepayments of the Loans.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(4)(A)
of the Code, respectively, in the same proportion that the assets in the Master
REMIC consist of qualifying assets under such sections. Furthermore, interest
paid with respect to Certificates held by a real estate investment trust will
be considered to be "interest on obligations secured by mortgages on real
property or on interests in real property" for purposes of Section 856(c)(3) of
the Code to the extent that such Certificates are treated as "real estate
assets" under Section 856(c)(4)(A) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
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<PAGE>
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws. However, any such governmental or church plan which is qualified under
section 401(a) of the Code and exempt from taxation under section 501(a) of the
Code is subject to the prohibited transaction rules set forth in section 503 of
the Code.
The U.S. Department of Labor ("DOL") has granted an administrative exemption
to Lehman Brothers Inc. (Prohibited Transaction Exemption No. 91-14, 56 Fed.
Reg. 7413 (1991)), (the "Exemption") from certain of the prohibited transaction
rules of ERISA and the Code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates representing interests in
asset-backed pass-through trusts that consist of certain receivables, loans and
other obligations that meet the conditions and requirements of the Exemption.
The receivables covered by the Exemption include home equity loans such as the
Loans. The Exemptions will apply to the acquisition, holding, and resale of the
Class A Certificates by a Plan, provided that specified conditions (certain of
which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either S&P, Fitch, Duff & Phelps Credit
Rating Co. or Moody's Investors Service, Inc. (the "Exemptions Rating
Agencies");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection
with the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Loans to the Trust represents not more than the
fair market value of such Loans. The sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A Certificates in
connection with the initial issuance, at least fifty percent (50%) of the Class
A Certificates, as applicable, are acquired by persons independent of the
Restricted Group, (ii) the Plan's investment in Class A Certificates does not
exceed twenty-five percent (25%) of all of the Class A Certificates, as
applicable, outstanding at the time of
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<PAGE>
the acquisition and (iii) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Company, the Underwriters, the Trustee, the Servicer, any
obligor with respect to Loans included in the Trust constituting more than five
percent (5%) of the aggregate unamortized principal balance of the assets in
the Trust or any affiliate of such parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Loan Pool, the amendment
will generally allow related Loans supporting payments to related
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the related Certificates, to be transferred to the Trust
during the Pre-Funding Period, instead of requiring that all such Loans be
either identified or transferred on or before the Closing Date. In general, the
relief applies to the purchase, sale and holding of Certificates which
otherwise qualify for the Exemption, provided that the following general
conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered must be less
than or equal to 25%;
(2) all Subsequent Loans transferred to the Loan Pool after the
Closing Date must meet the same terms and conditions for eligibility as the
Initial Loans, which terms and conditions have been approved by one of the
Exemptions Rating Agencies;
(3) the transfer of the Subsequent Loans to the Trust during the Pre-
Funding Period must not result in the Certificates to be covered by the
Exemption receiving a lower credit rating from an Exemptions Rating Agency
upon termination of the Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the
Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for the Loan
Pool at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the Average Interest Rate for the Initial Loans;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Loans must be monitored
by an insurer or other credit support provider which is independent of
the Company; or
(ii) an independent accountant retained by the Company must
provide the Company with a letter (with copies provided to the
Exemptions Rating Agency rating the Certificates, the Underwriter and
the Trustee) stating whether or not the characteristics of the
Subsequent Loans conform to the characteristics described in the
Prospectus or Prospectus Supplement and/or Agreement. In preparing such
letter, the independent accountant must use the same type of procedures
as were applicable to the Initial Loans;
(6) the Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the related
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemptions Rating
Agencies rating the Certificates, and such investment must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality thereof (provided that such obligations
are backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemptions Rating
Agencies;
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<PAGE>
(8) the Prospectus or Prospectus Supplement must describe the duration
of the Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts to
provide trust services) must be a substantial financial institution or
trust company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemption, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-funding account that was used only to acquire assets that
are specifically identified by the sponsor or originator as of the closing
date, but transferred to the trust after the closing date for administrative or
other reasons. Although the Pre-Funding Account may not satisfy the conditions
of the amendment in that the Pre-Funding Account may exceed 25% of the total
principal amount of the related Certificates, funds in the Pre-Funding Account
in excess of such 25% threshold will be used by the Trust solely to purchase
Subsequent Home Equity Loans in accordance with the Agreement from a fixed pool
of loans that will have been specifically identified prior to the Closing Date.
It is expected that all of the loans in such fixed pool, except for those which
are determined not to meet the criteria for purchase set forth in the
Agreement, will be acquired using the Pre-Funding Account. Accordingly, the
Company believes that the existence of the Pre-Funding Account should not cause
the Exemption to be inapplicable.
The Company believes that the Exemption will apply to the acquisition and
holding of Class A Certificates sold by the Underwriters and by Plans and that
all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, no obligor with
respect to Loans included in the Trust constitutes more than 5% of the
aggregate unamortized principal balance of the assets of the Trust. Any Plan
fiduciary who proposes to cause a Plan to purchase Class A Certificates should
consult with its own counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Class A
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that the Exemption or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
In addition to the Exemption, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, PTCE 91-38, which
exempts certain transactions involving employee benefit plans and bank
collective investment funds and PTCE 96-23, which exempts certain transactions
involving employee benefit plans and in-house asset managers. There also may be
other exemptions applicable to a particular transaction involving the Trust. A
Plan that intends to acquire any class of the Certificates should consult with
its own counsel regarding whether such investment would cause a prohibited
transaction to occur and whether the terms and conditions of an applicable
class exemption may be satisfied.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general
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<PAGE>
account. Pursuant to Section 401(c) of ERISA, the DOL published proposed
regulations ("Proposed 401(c) Regulations") on December 22, 1997 to provide
guidance for the purpose of determining, in cases where insurance policies
supported by an insurer's general account are issued to or for the benefit of a
Plan on or before December 31, 1998, which general account assets constitute
Plan assets. Section 401(c) of ERISA generally provides that, until the date
which is 18 months after the Proposed 401(c) Regulations become final, no
person will be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan assets, unless (i) as
otherwise provided by the Secretary of Labor in the Proposed 401(c) Regulations
to prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the Proposed 401(c)
Regulations may be treated as Plan assets. In addition, because Section 401(c)
does not relate to insurance company separate accounts, separate account assets
are still treated as Plan assets of any Plan invested in such separate account.
Insurance companies contemplating the investment of general account assets in
the Certificates should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Certificates after the date which is 18 months
after the date on which the Proposed 401(c) Regulations become final.
No transfer of any Class of Certificates other than the Class A Certificates
will be permitted to be made to a Plan unless such Plan, at its expense,
delivers to the Trustee and the Company an opinion of counsel (in form
satisfactory to the Trustee and the Company) to the effect that the purchase or
holding of any other Class of Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring such a Certificate will be deemed to represent
to the Trustee, the Company and the Servicer either (i) that such person is
neither a Plan, nor acting on behalf of a Plan, subject to ERISA or to Section
4975 of the Code or (ii) that the purchase and holding of the Certificate by
such Plan will not result in the assets of the Trust being deemed to be Plan
assets and subject to the prohibited transaction provisions of ERISA and the
Code and will not subject the Trustee, the Company or the Servicer to any
obligation or liability in addition to those undertaken in the Agreement.
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<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of
Class A-1A ARM Class A-1B ARM Class A-1 Class A-2 Class A-3 Class A-4
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- -------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated..... $ $ $ $ $ $
Chase Securities Inc. ..
Credit Suisse First
Boston.................
First Union Capital
Markets................
Lehman Brothers Inc. ...
--------- --------- --------- --------- --------- ---------
Totals................ $ $ $ $ $ $
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Principal Percentage Principal Principal Principal Principle
Amount of Interest of Amount of Amount of Amount of Amount of
Class A-5 Class A-6 IO Class M-1 Class M-2 Class B-1 Class B-2A
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated..... $ % $ $ $ $
Chase Securities Inc. ..
Credit Suisse First
Boston.................
First Union Capital
Markets................
Lehman Brothers Inc.....
--------- --- --------- --------- --------- ---------
Totals................ $ 100% $ $ $ $
========= === ========= ========= ========= =========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of the respective amounts set forth
in the table below (expressed as a percentage of the relative Certificate
Principal Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of the respective amounts set forth in the table below
to certain other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
----- ---------- -----------
<S> <C> <C>
A-1A ARM............................ % %
A-1B ARM............................ % %
A-1................................. % %
A-2................................. % %
A-3................................. % %
A-4................................. % %
A-5................................. % %
A-6 IO.............................. % %
M-1................................. % %
M-2................................. % %
B-1................................. % %
B-2A................................ % %
</TABLE>
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<PAGE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Certificates. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pegging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Certificates in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement loan or home equity loan pass-through certificates without the
consent of the Underwriters.
Each of the Underwriters (or affiliates thereof) has from time to time
provided warehouse and other financing to the Company.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by Dorsey & Whitney LLP, St. Paul and
Minneapolis, Minnesota, and for the Underwriters by Thacher Proffitt & Wood,
New York, New York. The material federal income tax consequences of the
Certificates will be passed upon for the Company by Dorsey & Whitney LLP.
S-79
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Base Prospectus No. 1
Home Equity Loans
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Equity Loans
(Issuable In Series)
We are offering certificates for home equity loans under this prospectus and
a prospectus supplement. The prospectus supplement will be prepared separately
for each series of certificates offered. We refer to the certificates for home
equity loans as "certificates" and to each separate series of certificates as a
"series." 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 equity 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 , 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: (a) this prospectus, which provides general
information, some of which many not apply to a particular series of
certificates, including your series; and (b) the prospectus supplement related
to the particular terms of your series of certificates.
If the terms of your series of certificates described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the certificates of each series certain
monthly and annual reports concerning the certificates and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the certificates--Reports to
Certificateholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), 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.
2
<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 and the accompanying prospectus supplement.
Title of Securities.......... We call the securities certificates for home eq-
uity loans.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the certificates. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of certificates. Payments on the
certificates will be made primarily from
payments on the related pool of loans. The terms
of the certificates issued by a trust will be
governed by a Pooling and Servicing Agreement
between Green Tree and the trustee for that
series. We will identify the trustee for a
series of certificates in the related prospectus
supplement.
Seller and servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
certificates. You should read carefully the
section entitled "Risk Factors" beginning on
page 8 of this prospectus.
The Loans.................... The loans underlying a series of certificates
form a loan pool. The loans in a loan pool will
be fixed or variable rate loans. All of the
loans will be closed-end home equity loans. Each
loan will be secured by the related real estate.
The prospectus supplement for each series will
provide information about the following:
^ the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
^ the weighted average and range of
contractual rates of interest on the loans;
^ the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
^ the average outstanding principal balance
of the loans as of the cut-off date;
^ the range of loan-to-value ratios; and
^ the geographic location of improved real
estate underlying the loans.
3
<PAGE>
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
Description of The trust will issue the certificates of the
Certificates................ related series of certificates on the terms
specified in the related prospectus supplement.
Each series of certificates will evidence an
interest in the loan pool and other property
held in trust for the benefit of
certificateholders. If we so specify in the
related prospectus supplement, a series of
certificates may include one or more classes
with different rights to payments of principal
and interest, including classes which:
^ are entitled to receive only distributions
of interest,
^ are entitled to receive only distributions
of principal,
^ are entitled to receive principal on a
planned amortization schedule or a targeted
amortization schedule, or
^ are entitled to receive principal only
after other classes have received a
specified amount of principal.
We will issue the certificates in fully
registered form in the authorized denominations
that we specify in the related prospectus
supplement. No government agency or other
insurer will guarantee or insure the
certificates, unless we otherwise specify in the
related prospectus supplement. Similarly, no
government agency or other insurer will
guarantee or insure the loans, except as we
specify in this prospectus and in the related
prospectus supplement.
Subordinated Certificates.... We may subordinate one or more classes of any
series of certificates, as specified in the
related prospectus supplement. The rights of
holders of subordinated certificates to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior certificates to the extent
and in the manner we specify in the related
prospectus supplement. If a series of
certificates contains more than one class of
subordinated certificates, distributions and
losses will be allocated among those classes in
the manner specified in the related prospectus
supplement. The rights of holders of
subordinated certificates, to the extent not
subordinated, may be on a parity with holders of
senior certificates. By subordinating a class of
certificates, we intend to:
4
<PAGE>
^ enhance the likelihood of regular receipt
by holders of senior certificates of the
full amount of scheduled monthly payments
of principal and interest due them, and
^ protect holders of senior certificates
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated certificates the benefits of other
forms of credit enhancement that would benefit
only those subordinated certificates.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated certificates, we may provide credit
enhancement with respect to a series of
certificates by pool insurance, letters of
credit, surety bonds, a guarantee of Green Tree
Financial Corporation, cash reserve funds or
other forms of enhancement acceptable to each
nationally recognized rating agency rating a
series of certificates. We will describe any
such credit enhancement in the related
prospectus supplement.
Interest..................... We will pay interest on the certificates on the
dates specified in the related prospectus
supplement, unless we indicate otherwise. The
related prospectus supplement will describe the
pass-through rate, if any, for each class or the
method of determining the pass-through rate.
This rate may be fixed, variable or adjustable,
as specified in the related prospectus
supplement. For a more complete description of
interest payable on the certificates, see "Yield
Considerations" and "Description of the
certificates" in this prospectus. As we specify
in the related prospectus supplement, classes of
a series of certificates may not be entitled to
receive interest or may be entitled to receive
interest which is not proportionate to the
principal allocable to such certificates.
Principal (Including Principal on each loan, including any principal
Prepayments)................ prepayments, will be passed through on each
payment date, except as we otherwise describe in
the related prospectus supplement. For a more
complete description of principal on the
certificates, see "Maturity and Prepayment
Considerations" and "Description of the
certificates" in this prospectus.
Optional Termination......... Unless we specify otherwise in the related
prospectus supplement, Green Tree may repurchase
all the loans relating to a series of
certificates remaining outstanding at the time
and under the circumstances we specify in the
related prospectus supplement. Unless we
otherwise provide in the related prospectus
supplement, the repurchase price will equal the
principal amount of the loans plus accrued and
unpaid interest. For a more complete description
of optional termination of the certificates, see
"Description of the certificates--Termination of
the Agreement" in this prospectus.
5
<PAGE>
Representations and
Warranties of Green Tree
Financial Corporation .......
Green Tree will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to Green Tree's conveyance of any loan pool to
the trust fund. If Green Tree becomes aware of a
breach of any representation or warranty that
materially adversely affects the trust fund's
interest in any loan or receives written notice
of a breach from the trustee or the servicer,
then Green Tree must either cure the breach,
repurchase the affected loan or, if the related
prospectus supplement so provides, substitute
for the affected loan, under the conditions
further described in this prospectus and in the
prospectus supplement. For a more complete
description of the representations and
warranties of Green Tree, see "Description of
the certificates--Conveyance of Loans."
Federal Income Tax We may make an election to treat the trust fund
Considerations.............. represented by a series of certificates or a
segregated portion of them as a real estate
mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended. If we
so choose, the Classes of certificates that we
offer may constitute "regular interest" or
"residual interests" in that REMIC under the
Internal Revenue Code of 1986, as amended, with
the tax consequences described in this
prospectus and in the related prospectus
supplement. If we so specify in the prospectus
supplement, a Class of certificates that we are
offering may represent interests in a "two-tier"
REMIC, but all interest in the first and second
tier REMIC will be created under the Pooling and
Servicing Agreement.
If we do not make a REMIC election with respect
to a series of certificates, the trust fund
represented by those certificates may be treated
as a grantor trust for federal income tax
purposes and not as an association taxable as a
corporation. In such an event, each holder of a
Certificate will be treated as the owner of an
undivided pro rata interest in income and corpus
attributable to the related loan pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the loans included in such loan
pool. If we do not make a REMIC election with
respect to a series of certificates and the
Trust Fund represented by such certificates will
not be treated as a grantor trust, the federal
income tax consequences of owning such
certificates will be described in the related
prospectus supplement. For a more complete
description of the Federal income tax
considerations related to the certificates, see
"Certain Federal Income Tax Consequences--Non-
REMIC series."
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
6
<PAGE>
you should review carefully with your legal
advisors whether the purchase or holding of
certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in your prospectus
supplement.
Legal Investment............. Unless the related prospectus supplement
indicates otherwise, the certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984, as amended. For a more complete
description of legal considerations regarding
investment in the certificates, see "Legal
Investment Considerations" in this prospectus
and in your prospectus supplement.
Ratings...................... We will not issue the certificates unless one or
more nationally recognized rating agencies have
assigned a rating to the certificates in one of
their four highest rating categories.
The rating of each series of certificates
addresses the likelihood of the timely receipt
of interest and payment of principal on that
series on or before the stated maturity date for
that series. A 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
certificates do not address the likelihood of
payment of principal on any series of
certificates prior to the stated maturity date
or the possibility of the imposition of United
States withholding tax with respect to non-
United States persons. For a more complete
description of the ratings of the certificates,
see "Ratings" in this prospectus and in your
prospectus supplement.
7
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the certificates.
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the certificates will not represent an interest
in or obligation of Green Tree. Neither the government, any underwriter
or its affiliates, the servicer nor any other party will insure or
guarantee any of the certificates of any series (except as we otherwise
specify in the related prospectus supplement).
^ Junior Mortgage Liens; Value of Mortgaged Property. Green Tree expects
that a substantial number of the liens on improved real estate securing
the loans in a given loan pool will be junior to other liens on that
real estate. This subordinates the rights of the trust fund (and
consequently the holders of certificates of the related series), as
beneficiary under a conventional junior deed of trust or as mortgagee
under a conventional junior mortgage, to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to cause the
property securing the loan to be sold upon default of the mortgagor or
trustor. This extinguishes the junior mortgagee's or junior
beneficiary's lien unless the servicer on behalf of the trust fund
asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans.
For a more complete description of the risks associated with junior
mortgage liens, see "Certain Legal Aspects of the Loans--Repurchase
Obligations."
We expect a substantial portion of the loans included in a 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 and of the loan an 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.
^ Limited Liquidity. 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.
^ Non-recordation of Mortgage Assignments. Green Tree 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 creditors of or purchasers from Green Tree or
a trustee in bankruptcy of Green Tree.
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the certificates.
8
<PAGE>
THE TRUST FUND
General
A trust find (the "Trust Fund") will evidence the interest specified in the
related Prospectus Supplement in the Loan Pool (as defined below) and certain
other property held in trust for the benefit of the Certificateholders (as
defined below). Each Trust Fund will include (i) closed-end home equity Loans
(the "Loans") underlying a series of Certificates (the "Loan Pool"), (ii) the
amounts held from time to time in a trust account (the "Certificate Account")
maintained by the trustee (the "Trustee") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement"), (iii) 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 (each, a "Series") of
Certificates for Home Equity Loans ("Certificates"), and (iv) such other
property as may be specified in the related prospectus supplement (the
"Prospectus Supplement").
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, 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 (the "Cut-off Date") specified in the related
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 with
respect to any other Series of Certificates. If so specified in the related
Prospectus Supplement, the Trust Fund may include funds on deposit in a pre-
funding account (a "Pre-Funding Account") which would be used to purchase
additional Loans ("Subsequent Loans") from the Company during the pre-funding
period specified in the related Prospectus Supplement (the "Pre-Funding
Period"). The related Prospectus Supplement will specify the conditions that
must be satisfied prior to 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 the Company in the ordinary course of
its business. Specific information respecting the Loans included in each Trust
Fund will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Certificates. A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Loans relating to such Series
will be attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
Whenever in this Prospectus terms such as "Loan Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Loan Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of Certificates.
The Loan Pools
Except as otherwise specified in the related Prospectus Supplement, the Loan
Pool will consist of the Loans, originated by the Company on an individual
basis in the ordinary course of business. All Loans will be secured by the
related real estate. Except as otherwise specified in the related Prospectus
Supplement, the Loans will be fully amortizing and will bear interest at a
fixed or variable annual percentage rate (the "Loan Rate").
For each Series of Certificates, the Company will assign the Loans
constituting the Loan Pool to the Trustee named in the related Prospectus
Supplement. The Company, as Servicer (in such capacity referred to herein as
the "Servicer", which term shall include any successor to the Company in such
capacity under the applicable Agreement), will service the Loans pursuant to
the Agreement. See "Description of the Certificates--Servicing." Unless
otherwise specified in the related Prospectus Supplement, the Loan documents
will be held by the Trustee or a custodian on its behalf.
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<PAGE>
Each Loan Pool will be composed of Loans bearing interest at the Loan Rates
specified in the Prospectus Supplement. Unless otherwise stated in the related
Prospectus Supplement, each registered holder of a Certificate will be entitled
to receive periodic distributions, which will be monthly unless otherwise
specified in the related Prospectus Supplement, of all or a portion of
principal on the underlying Loans or interest on the principal balance of such
Certificate (or on some other principal balance unrelated to that of such
Certificate) at the pass-through rate (the "Pass-Through Rate"), or both. The
Prospectus Supplement will set forth the rate at which interest will be paid to
Certificateholders of each Class of a given Series. Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify for the Loans contained in the
related Loan Pool, among other things, 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 the geographic location of improved real estate
securing the Loans. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Loans, including the requisite
characteristics of the Subsequent Loans.
Green Tree Financial Corporation (in its capacity as the Seller, the
"Company") 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 certain information furnished to the
Trustee in respect of each such Loan. Upon a breach of any representation or
warranty that materially and adversely affects the interests of the
Certificateholders in a Loan, the Company will be obligated to cure the breach
in all material respects, or to repurchase or substitute for the Loan as
described below. This repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Loans."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home equity
loans, costs of carrying such 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
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing home
equity loans in January 1996. The Company also purchases, pools and services
installment sales contracts for various consumer products. The Company's
principal executive offices are located at 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639 (telephone (651) 293-3400). The
Company's quarterly and annual reports are available from the Company upon
written request made to the Company.
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Loan Origination
The Company has originated closed-end home equity loans since January 1996.
As of December 31, 1997, the Company had approximately $3,116,054,406 aggregate
principal amount of outstanding closed-end home equity loans.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity position,
the creditworthiness of the borrower must be stronger (or may be weaker). The
loan-to-value ratio of the requested loan, combined with any existing loans
with a senior lien position, may not exceed 95% without senior management
approval. In most circumstances, an appraisal of the property is required.
Currently, loans secured by a first mortgage with an obligor having a superior
credit rating may not exceed $300,000 without senior management approval, and
loans secured by a second mortgage with an obligor having a superior credit
rating may not exceed $250,000 without senior management approval.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average and range of contractual
rates of interest (each, a "Loan Rate") of the Loans (as of the related Cut-off
Date) relating to each Series of Certificates will be set forth in the related
Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Loans. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the 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 otherwise described 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. The
Company has no significant experience with respect to the rate of principal
prepayments on home equity loans. Because the Loans have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed through
to Certificateholders of the related Series on the Payment Date following the
Due Period in which such principal prepayment occurred, prepayments on the
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 (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 the Company's exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option") will affect the timing of principal
distributions on the Certificates of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Certificates, there can be no assurance that the Loans will prepay at
such 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
the Company's or Servicer's option to repurchase the Loans comprising part of a
Trust Fund when the aggregate outstanding principal balance of such Loans is
less than a specified percentage of the initial aggregate outstanding principal
balance of such Loans as of the related Cut-off Date. See also "The Trust
Fund--The Loan Pools" for a description of the obligations of the Company to
repurchase a Loan in case of a breach of a representation or warranty relative
to such Loan.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement to be
entered into among the Company, as seller and Servicer, and the Trustee named
in the related Prospectus Supplement, and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
General
The Certificates may be issued in one or more Classes. If the Certificates of
a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a Series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
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<PAGE>
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate Trust Fund created pursuant to the related Agreement. The Trust
Fund will be held by the Trustee for the benefit of the Certificateholders.
Each Trust Fund, to the extent specified in the related Prospectus Supplement,
will include (i) Loans (the "Loan Pool") which are subject to the Agreement,
(ii) the amounts held in the Certificate Account from time to time, (iii) 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 (iv) such other property as may be specified in the related
Prospectus Supplement. Except as otherwise specified in the related Prospectus
Supplement, the Certificates will be freely transferable and exchangeable at
the corporate trust office of the Trustee at the address set forth in the
related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each 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 ("Subordinated Certificates") which are subordinated in right of
distribution to one or more other Classes ("Senior Certificates"), as provided
in the related Prospectus Supplement. Certificates of a Series which includes
Senior and Subordinated Certificates are referred to herein collectively as
"Senior/Subordinated Certificates." A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. The Prospectus Supplement with respect to a
Series of Senior/Subordinated Certificates will set forth, among other things,
the extent to which the Subordinated Certificates are subordinated (which may
include a formula for determining the subordinated amount or for determining
the allocation of the Amount Available (hereinafter defined) among Senior
Certificates and Subordinated Certificates), the allocation of losses among the
Classes of Subordinated Certificates, the period or periods of such
subordination, the minimum subordinated amount, if any, and any distributions
or payments which will not be affected by such subordination. The protection
afforded to the Senior Certificateholders from the subordination feature
described above will be effected by the preferential right of such
Certificateholders to receive current distributions from the Loan Pool. If a
Series of Certificates contains more than one Class of Subordinated
Certificates, losses will be allocated among such Classes in the manner
described in the Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, Mezzanine Certificates or other Classes of Subordinated
Certificates may be entitled to the benefits of other forms of credit
enhancement and may, if rated in one of the four highest rating categories by a
nationally recognized statistical rating organization, be offered pursuant to
this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Loans evidenced by a single Certificate of each
Class of Certificates of a Series (a "Single Certificate").
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Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
Global Certificates
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the Certificates contained in this Prospectus assumes that
the Certificates will be issued in definitive form. If the Certificates of a
Class are issued in the form of one or more Global Certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global Certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests
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in a Global Certificate or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for the related Global Certificate or Certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any Certificates of a Class represented by one or more Global
Certificates and, in such event, will cause to be issued Certificates of such
Class in definitive form in exchange for the related Global Certificate or
Certificates. Further, if the Company so specifies with respect to the
Certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing Certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
Certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of Certificates of the Class represented by such
Global Certificate equal in denominations to such beneficial interest and to
have such Certificates registered in its name.
Conveyance of Loans
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Loans, including
all principal and interest received on or with respect to the Loans (other than
receipts of principal and interest due on the Loans before the Cut-off Date).
On behalf of the Trust Fund, as the issuer of the related Series of
Certificates, the Trustee, concurrently with such conveyance, will execute and
deliver the Certificates to the order of the Company. The Loans will be as
described on a list attached to the Agreement. Such list will include the
amount of monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
Such list will be available for inspection by any Certificateholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Loans to the Trust Fund, the Company's 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 such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit cash
in the separate account maintained at an Eligible Institution in the name of
the Trustee (the "Certificate Account") in an amount sufficient to offset such
discrepancy. If the Trust Fund includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent 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 the Company's accounting records and computer systems will also
reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Loans from the
Company to the related Trust Fund would, in the event the Company became a
debtor under the United States Bankruptcy Code, be treated as a true sale and
not as a
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<PAGE>
pledge to secure borrowings. If, however, the transfer of the Loans from the
Company to the Trust Fund were treated as a pledge to secure borrowings by the
Company, the distribution of proceeds of the Loans to the Trust Fund might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the Loans
if the proceeds of such sale could satisfy the amount of the debt deemed owed
by the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Loans to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Loan as of the related Closing Date, including that: (a) as of
the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a 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;
(c) 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); (d) no Loan is subject to any right of
rescission, set-off, counterclaim or defense; (e) each Loan was originated by a
home equity lender in the ordinary course of such lender's business and
assigned to the Company or was originated by the Company directly; (f) no Loan
was originated in or is subject to the laws of any jurisdiction whose laws
would make the transfer of the Loan or an interest therein pursuant to the
Agreement or the Certificates unlawful; (g) each Loan complies with all
requirements of law; (h) no Loan has been satisfied, subordinated to a lower
lien ranking than its original position (if any) or rescinded; (i) each Loan
creates a valid and perfected lien on the related improved real estate; (j) all
parties to each Loan had full legal capacity to execute such Loan; (k) no Loan
has been sold, conveyed and assigned or pledged to any other person and the
Company has good and marketable title to each Loan free and clear of any
encumbrance, equity, loan, pledge, charge, claim or security interest, and is
the sole owner and has full right to transfer such Loan to the Trustee; (l) 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 (a) above), no event that with notice and the expiration of any grace or
cure period would constitute a default, breach, violation or event permitting
acceleration under such Loan, and the Company has not waived any of the
foregoing; (m) each Loan is a fully-amortizing loan with a fixed rate of
interest and provides for level payments over the term of such Loan; (n) 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; (o) the description of each Loan set forth in the list delivered to
the Trustee is true and correct; (p) there is only one original of each Loan;
and (q) each Loan was originated or purchased in accordance with the Company's
then-current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Loan or receives written notice of such a breach from
the Trustee or the Servicer, then the Company will be obligated either to cure
such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Loan, in each case under the conditions
further described herein and in the Prospectus Supplement. This repurchase
obligation will constitute the sole remedy available to the Trust Fund and the
Certificateholders for a breach of a representation or warranty under the
Agreement with respect to the Loans (but not with respect to any other breach
by the Company of its obligations under the Agreement). If a prohibited
transaction tax under the REMIC provisions of the Code is incurred in
connection with such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Loan at any time means the outstanding principal
amount of such Loan (without giving effect to any Advances made by the Servicer
or the Trustee), plus interest at the applicable Pass-Through Rate on such Loan
from the end of the Due Period with respect to which the Obligor last made a
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payment (without giving effect to any Advances made by the Servicer or the
Trustee) through the end of the immediately preceding Due Period.
Payments on 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 (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to the limits established by the FDIC), the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained or (v) otherwise acceptable to the rating
agency without reduction or withdrawal of the rating assigned to the relevant
Certificates. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and certain other
high-quality investments specified in the applicable Agreement ("Eligible
Investments"). A Certificate Account may be maintained as an interest-bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Loans
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Loans;
(ii) all Obligor payments on account of interest on the Loans;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Loans, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vi) all proceeds of any Loan or property acquired in respect thereof
repurchased by the Servicer or the Company, as described under "Conveyance
of Loans" above or under "Repurchase Option" below.
Distributions on Certificates
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Loans that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited,
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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 (v) amounts representing
reimbursement for any unpaid Servicing Fee. In the case of a Series of
Certificates which includes only one Class, the Amount Available for each
Payment Date will be distributed pro rata to the holders of such Certificates.
In the case of any other Series of Certificates, the Amount Available for each
Payment Date will be allocated and distributed to holders of the Certificates
of such Series pursuant to the method and in the order of priority specified
in the applicable Prospectus Supplement. The amount of principal and interest
specified in the related Prospectus Supplement to be distributed to
Certificateholders is referred to herein as the "Certificate Distribution
Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Loans.
Advances
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Loan or from liquidation proceeds thereof. The
Servicer will deposit any Advances in the Certificate Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Loan from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including foreclosure
resale proceeds), if any, of the Loan, and will release its right to
reimbursements in conjunction with the purchase of the Loan by the Company for
breach of representations and warranties. If the Servicer determines in good
faith that an amount previously advanced will not ultimately be recoverable
from payments by or on behalf of the Obligor or from liquidation proceeds
(including foreclosure resale proceeds), if any, of the Loan (an
"Uncollectible Advance"), the Servicer will be entitled to reimbursement from
payments on other Loans or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Loan or from liquidation proceeds
thereof, if any, or (ii) the Trustee determines that it is not legally able to
make such Advance.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Loans and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
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Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the 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.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Loan is prepaid in
full, interest on the amount prepaid is collected from the Obligor only to
the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
Indemnification
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Loans) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Loan and (b) for any taxes which may at any time be asserted with respect to,
and as of the date of, the conveyance of the Loans to the Trust Fund (but not
including any federal, state or other tax arising out of the creation of the
Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Loans, to defend and indemnify the Trust Fund, the Trustee and
the Certificateholders (which indemnification will survive any removal of the
Servicer as servicer of the Loans) against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Loan while it was the Servicer.
Servicing
Pursuant to the Agreement, the Servicer will service and administer the Loans
assigned to the Trustee as more fully set forth below. The Servicer will
perform diligently all services and duties specified in each Agreement, in the
same manner as prudent lending institutions of mortgage loans of the same type
as the Loans in those jurisdictions where the related real properties are
located or as otherwise specified in the Agreement. The duties to be performed
by the Servicer will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
foreclosure of Loans.
The Servicer will make reasonable efforts to collect all payments called for
under the Loans and, consistent with the Agreement, will follow such collection
procedures with respect to the Loans as it follows with respect to mortgage
loans serviced by it that are comparable to the Loans.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date,
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setting forth certain information regarding the Loan Pool and the Certificates
of such Series as is specified in the related Prospectus Supplement. Each such
report to the Trustee will be accompanied by a statement from an appropriate
officer of the Servicer certifying the accuracy of such report and stating that
the Servicer has not defaulted in the performance of its obligations under the
Agreement. On or before May 1 of each year, the Servicer will deliver to the
Trustee a report of a nationally recognized accounting firm stating that such
firm has examined certain documents and records relating to the servicing of
home equity loans serviced by the Servicer under pooling and servicing
agreements similar to the Agreement and stating that, on the basis of such
procedures, such servicing has been conducted in compliance with the Agreement,
except for any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home equity
loans having an aggregate principal amount of $10 million or more and which are
generally regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Loans, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust Fund 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 the
Company from its Monthly Servicing Fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders, except that the Servicer shall
be reimbursed out of the liquidation proceeds of a liquidated Loan for
customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in
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respect of the Servicer in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appoints a
receiver, liquidator, assignee, custodian, trustee, or sequestrator (or similar
official) of the Servicer, as the case may be, or enters a decree or order for
any substantial liquidation of its affairs; (e) the Servicer commences a
voluntary case under any applicable bankruptcy, insolvency or similar law, or
consents to the entry of an order for relief in an involuntary case under any
such law, or consents to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian or its creditors, or fails to, or
admits in writing its inability to, pay its debts as they become due, or takes
any corporate action in furtherance of the foregoing; (f) the Servicer fails to
be an Eligible Servicer; or (g) if the Company is the Servicer, the Company's
servicing rights under its master seller-servicer contract with GNMA are
terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
Series shall, terminate all of the rights and obligations of the Servicer under
the related Agreement and in and to the Loans, and the proceeds thereof,
whereupon (subject to applicable law regarding the Trustee's ability to make
advances) the Trustee or a successor Servicer under the Agreement will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
obligation of the Company to repurchase 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 prior to a transfer
of the Servicer's servicing and related functions or for any breach by such
Servicer of any of its obligations contained in the Agreement. Notwithstanding
such termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Loans for breaches of representations or
warranties under the Agreement. In the event that the Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of, a Servicer. Pending such appointment, the Trustee is obligated to act in
such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which the Trustee may incur.
Reports to Certificateholders
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly
Principal, specifying the amounts constituting scheduled payments by
Obligors, principal prepayments on the Loans, and other payments with
respect to the Loans;
(b) the amount of such distribution which constitutes Monthly
Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the amount of fees payable out of the Trust Fund;
(e) the Pool Factor (a percentage derived from a fraction the
numerator of which is the remaining Principal Balance of the Certificates
and the denominator of which is the Initial Principal Amount of the
Certificates) immediately before and immediately after such Payment Date;
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(f) the number and aggregate principal balance of Loans delinquent (i)
31-59 days, (ii) 60-89 and (iii) 90 or more days;
(g) the number of Loans liquidated during the Due Period ending
immediately before such Payment Date;
(h) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(i) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Loans in the related Loan
Pool at a price equal to the greatest of (i) 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 thereon,
plus the fair market value (as determined by the Servicer) of any acquired
properties, (ii) the fair market value of all of the assets of the Trust Fund,
and (iii) an amount equal to the Aggregate Certificate Principal Balance of the
related Certificates plus interest on such Certificates payable on and prior to
the Payment Date occurring in the month following such repurchase (less amounts
on deposit in the Certificate Account and available to pay such principal and
interest). Such price will be paid on the Payment Date on which such purchase
occurs to the Certificateholders of record on the last Business Day of the
immediately preceding Due Period in immediately available funds against the
Trustee's delivery of the Loans and any acquired properties to the Servicer.
The distribution of such purchase price to Certificateholders will be in lieu
of any other distribution to be made on such Payment Date with respect to the
related Loans.
Amendment
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment that reduces in any manner the amount of, or delays the timing of,
any payment received on or with respect to Loans which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
Termination of the Agreement
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Loan or the disposition of all
property acquired upon
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foreclosure of any Loan; or (b) the Payment Date on which the Company or the
Servicer repurchases the Loans as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
The Trustee
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company, as seller, in consideration of the conveyance of the
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 Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Agreement.
Whether or not an Event of Termination has occurred, the Trustee is not
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of its duties or the exercise of its powers if it
has reasonable grounds to believe that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may be
attributable to the Trustee's negligence or bad faith. The Company has agreed
to indemnify the Trustee for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of the
Trust Fund and the Trustee's duties thereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of the Trustee's powers or duties
thereunder.
CERTAIN LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Loans to
a Trust Fund, the Certificateholders of such Series, as the beneficial owners
of the Trust Fund, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Loans). The following discussion
contains summaries of certain legal aspects of home equity loans secured by
residential properties which are general in nature. Because such legal aspects
are governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the 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.
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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, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage: the mortgagor, who is the borrower, and the
mortgagee, who is the lender. In a mortgage state, the mortgagor delivers to
the mortgagee a note or retail installment contract evidencing the loan and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties: the borrower, or trustor, the lender as beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure repayment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by applicable state law, the express provisions of the
deed of trust or mortgage, and, in some cases with respect to deeds of trust,
the directions of the beneficiary. Some states use a security deed or deed to
secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior to
liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms, the
knowledge of the parties to such instrument in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the 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 Fund (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the 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 Fund asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior loan or
loans. As discussed more fully below, a junior mortgagee or beneficiary may
satisfy a defaulted senior loan in full, or in some states may cure such
default and bring the senior loan current, in either event usually adding the
amounts expended to the balance due on the junior loan. Although the Company
generally does not cure defaults under a senior mortgage or deed of trust, it
is the Company's standard practice to protect its interest by attending any
foreclosure sale and bidding for property only if it is in the Company's best
interests to do so.
The standard form of the mortgage or deed of trust used by most institutional
lenders, like that of the Company, confers on the mortgagee or beneficiary the
right both to receive all proceeds collected under any hazard insurance policy
and all awards made in connection with any condemnation proceedings, and to
apply such proceeds and awards to any indebtedness secured by the mortgage or
deed of trust, in such order as the mortgagee or beneficiary may determine.
Thus, in the event improvements on the property are damaged or destroyed by
fire or other casualty, or in the event the property is taken by condemnation,
the mortgagee or beneficiary under the underlying first mortgage or deed of
trust will have the prior right to collect any insurance proceeds payable under
a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. Proceeds in excess of the amount of first mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage or deed of trust.
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The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The priority
of any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the senior mortgagee or beneficiary
had actual knowledge of such intervening junior mortgages or deeds of trust and
other liens at the time of the advance. Where the mortgagee or beneficiary is
not obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other
liens, the advance will be subordinate to such intervening junior mortgages or
deeds of trust and other liens. Priority of advances under the clause rests, in
some states, on state statutes giving priority to all advances made under the
loan agreement to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the borrower is additionally burdened. Third, if the borrower defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the
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mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not
willful. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to foreclosure
is contested, the legal proceedings necessary to resolve the issue can be time-
consuming. After the completion of a judicial foreclosure proceeding, the court
may issue a judgment of foreclosure and appoint a referee or other officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, prior to a sale, the
trustee must record a notice of default and send a copy to the borrower trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, prior to such sale, the trustee must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. Certain states require
that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from such sale may be
reduced by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
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.
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The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Loan, and
any such taxes or fees imposed may reduce liquidation proceeds with respect to
such property, as well as distributions payable to the Certificateholders.
Second or Third Mortgages
The 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.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such
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action. Those having an equity of redemption must generally be made parties and
duly summoned to the foreclosure action in order for their equity of redemption
to be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a
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mortgage loan on a debtor's residence by paying arrearages and reinstate the
original mortgage loan payment schedule even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state court
(provided no sale of the property had yet occurred) prior to the filing of the
debtor's Chapter 13 petition. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by paying arrearages over a
number of years. In the case of a mortgage loan not secured by the debtor's
principal residence, courts with federal bankruptcy jurisdiction may also
reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Consumer Protection Laws with respect to 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 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Loans included in a Loan Pool may be
subject to such provisions. The Home Protection Act applies to mortgage loans
originated on or after the effective date of such regulations. These laws can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a 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 Fund against such Obligor. The
Home Protection Act provides that assignees of certain high-interest, non-
purchase money mortgage loans (which may include some 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
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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 certain states there are or may be specific limitations upon
late charges which a lender may collect from a borrower for delinquent
payments. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Company) will be retained by the Company as additional
servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a junior mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under mortgages or the deeds of trust receive notices in
addition to statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protection to the borrower.
"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 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Loans) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any 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 (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
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property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Garn-
St. Germain Act and the regulations thereunder. As a result, a lesser number of
Loans which contain "due-on-sale" clauses may extend to full maturity than
earlier experience would indicate with respect to single-family mortgage loans.
The extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Loans, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in 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.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust Fund and reduce the amounts otherwise distributable to the holders of
the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Loans.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The Company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from
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the presence or effect of contaminants. However, the Company will not foreclose
on related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the 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 thereafter. Thus, 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 in connection therewith. 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
The Company will represent and warrant under each Agreement that each Loan
complies with all requirements of law. Accordingly, if any Obligor has a claim
against the related Trust Fund for violation of any law and such claim
materially adversely affects the Trust Fund's interest in a Loan, such
violation would constitute a breach of a representation and warranty under the
Agreement and would create an obligation to repurchase such Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
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Plan Asset Regulations
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in Certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the Certificates. Therefore, neither
Plans nor such entities should acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests. The prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
apply to the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the Company
and the Servicer that such person is neither a Plan, nor acting on behalf of a
Plan, nor purchasing with Plan Assets of any Plan.
Consultation With Counsel
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
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responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are subject to change (which
change may be retroactive) or possibly differing interpretations. The
discussion does not purport to deal with federal income tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors to determine the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each series will indicate whether or not an election
to be treated as a REMIC has been or will be made with respect thereto. The
following discussion deals first with Series with respect to which a REMIC
Election is made and then with Series with respect to which a REMIC Election is
not made.
REMIC Series
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel to
the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price contract in effect on the Startup
Day. The REMIC Regulations provide that a 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 (i) 80% of the issue price
(generally, the principal balance) of the Loan at the time it was originated or
(ii) 80% of the adjusted issue price (the then-outstanding principal balance,
with certain 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 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
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(other than the personal liability of the obligor). A qualified mortgage also
includes a qualified replacement mortgage that is used to replace any qualified
mortgage within three months of the Startup Day or to replace a defective
mortgage within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular Certificates.
In accordance with Section 860G(a)(7) of the Code, a reserve fund must be
"promptly and appropriately" reduced as payments on contracts are received.
Foreclosure property will be a permitted investment only to the extent that
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
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Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item of gross income and as a separate item of expense
to those Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated as
a fixed investment trust under applicable law but for its qualification as a
REMIC, or a REMIC that is substantially similar to an investment trust but is
structured with the principal purpose of avoiding this allocation requirement
imposed by the Temporary Treasury Regulations. Generally, a pass-through
interest holder refers to individuals, trusts and estates, certain other pass-
through entities beneficially owned by one or more individuals, trusts or
estates, and regulated investment companies. Such an individual, estate, trust
or pass-through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds a threshold amount specified in the Code ($ for 1999, in the
case of a joint return) will be reduced by the lesser of (i) 3% of the excess
of adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of such an
individual, trust, estate or pass-through entity that is a holder of a Regular
Certificate in such a REMIC, no deduction will be allowed for such holder's
allocable portion of the foregoing expenses, even though an amount equal to the
total of such expenses will be included in such holder's gross income for
alternative minimum tax purposes. Unless otherwise stated in the related
Prospectus Supplement, the foregoing expenses will not be allocated to holders
of a Regular Certificate in a REMIC. If the foregoing limitations apply,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
Regular Certificates in such a "single class-REMIC" may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Such
prospective investors should carefully consult with their own tax advisors
prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code and interest thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code. If less than 95% of the average
adjusted basis of the assets comprising the REMIC are assets qualifying under
any of the foregoing Sections of the Code (including assets described in
Section 7701(a)(19)(C) of the Code), then the Regular Certificates will be
qualifying assets only to the extent that the assets comprising the REMIC are
qualifying assets. Furthermore, interest paid with respect to Certificates held
by a real estate investment trust will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code to the same extent that the
Certificates themselves are treated as real estate assets. Regular Certificates
held by a regulated investment company or a real estate investment trust will
not constitute "Government securities" within the meaning of Sections
851(b)(4)(A)(i) and 856(c)(5)(A) of the Code, respectively. In addition, the
REMIC Regulations provide that
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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 Code. Entities affected by the foregoing
provisions of the Code that are considering the purchase of Certificates should
consult their own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been issued. Nonetheless, the Code requires that a
prepayment assumption be used with respect to the underlying assets of a REMIC
in computing the accrual of original issue discount on Regular Certificates,
and that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or initial interest
rate holiday) includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that Regular Certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest
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that accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
Regular Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable on
Regular Certificates, including rates based upon the weighted average interest
rate of a Loan Pool, may not be treated as qualified stated interest. In such
case, the OID Regulations would treat interest under such rates as contingent
interest which generally must be included in income by the Regular
Certificateholder when the interest becomes fixed, as opposed to when it
accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest as
being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all 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 Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any accrual period a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid
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or compounded with respect to such Regular Certificate, beginning with their
date of issuance and ending with the maturity date. The "adjusted issue price"
of a Regular Certificate at the beginning of any accrual period is the sum of
the issue price and accrued original issue discount for each prior accrual
period reduced by the
amount of payments other than payments of qualified stated interest made during
each prior accrual period. The Code requires the present value of the remaining
payments to be determined on the bases of (a) the original yield to maturity
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period), (b) events, including
actual prepayments, which have occurred before the close of the accrual period,
and (c) the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption. The effect of this method is to
increase the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Loans held by the Trust Fund that occur at a rate that exceeds
the Prepayment Assumption and to decrease (but not below zero for any period)
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the 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 Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on such a Regular Certificate may be computed and accrued under
the same methodology that applies to Regular Certificates paying qualified
stated interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate Regular Certificates are issued,
the related Prospectus Supplement will describe the manner in which the
original issue discount rules may be applied with respect thereto and the
method to be used in preparing information returns to the holders of such
adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return on
the Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the adjustable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest is
not
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payable in all circumstances. In these situations, as well as others, it is
unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary income
as payments of principal are received on such Regular Certificate or upon the
sale or exchange of the Regular Certificate. In general, the holder of a
Regular Certificate may elect to treat market discount as accruing either (i)
under a constant yield method that is similar to the method for the accrual of
original issue discount or (ii) under a ratable accrual method (pursuant to
which the market discount is treated as accruing in equal daily installments
during the period the Regular Certificate is held by the purchaser), in each
case computed taking into account the Prepayment Assumption. Because the
regulations referred to above have not been issued, it is not possible to
predict what effect, if any, such regulations, when issued, might have on the
tax treatment of a Regular Certificate purchased at a discount in the secondary
market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. It appears that the Prepayment Assumption should be
taken into account in determining the term of a Regular Certificate for this
purpose. Amortizable bond premium with respect to a Regular Certificate will be
treated as an offset to interest income on such Regular Certificate, and a
Certificateholder's deduction for amortizable bond premium will be limited in
each year to the amount of interest income derived with respect to such Regular
Certificate for such year. Any election to deduct amortizable bond premium will
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Certificateholder at the beginning of
the first taxable year to which the election applies or thereafter acquired,
and may be revoked only with the consent of the Service. Bond
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premium on a Regular Certificate held by a Certificateholder who does not elect
to deduct the premium will decrease the gain or increase the loss otherwise
recognized on the disposition of the Regular Certificate. Certificateholders
who pay a premium for a Regular Certificate should consult their tax advisors
concerning such an election and rules for determining the method for amortizing
bond premium.
Realized Losses. Holders of a Regular Certificate acquired in connection
with a trade or business should be allowed to deduct as ordinary losses any
losses sustained during a taxable year in which the Regular Certificates become
wholly or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a Regular Certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until such
holder's certificate becomes wholly worthless, which may not occur until its
outstanding principal balance has been reduced to zero. Any such loss may be
characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a Regular Certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Except as discussed below or with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other taxable disposition of a Regular Certificate will be capital gain if the
Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in the
holder's income if the yield on such Regular Certificate had equaled 110% of
the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the Loans, plus
any cancellation of
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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 (i) the prepayment may be
used in whole or in part to make distributions on Regular Certificates, and
(ii) 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 (i.e., a fast-pay, slow-pay structure), this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates, when distributions
are being made in respect of earlier classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses would
be allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of Regular
Certificates, may increase over time as distributions are made on the lower
yielding classes of Regular Certificates, whereas interest income with respect
to any given 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 Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
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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 such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
Regular Certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule described therein.
The REMIC will have market discount income in respect of the Loans if, in
general, the basis of the REMIC in such Loans is exceeded by their unpaid
principal balances. The REMIC's basis in such Loans is generally the fair
market value of the Loans immediately after the transfer thereof to the REMIC
(which will equal the aggregate issue prices of the REMIC Certificates which
are sold to investors and the estimated fair market value of any classes of
Certificates which are retained). In respect of the Loans that have market
discount to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income. Market
discount income generally should accrue in the manner described above under
"REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Loans exceeds the unpaid principal
balances thereof, 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 thereof 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. A portion (or all) of the
REMIC taxable income includable in determining the federal income tax liability
of a Residual Holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for such quarterly period of (i) 120% of the long-term
applicable Federal rate that would have applied to the Residual Certificate (if
it were a debt instrument) on the Startup Day under Section 1274(d) of the
Code, multiplied by (ii) the adjusted issue price of such Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue
price of the Residual Certificate, plus the amount of such daily accruals of
REMIC income described in this paragraph for all prior quarters, decreased by
any distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder is
an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company owns
a Residual Certificate, a portion (allocated under Treasury Regulations yet to
be issued) of dividends paid by such real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders and would constitute unrelated business taxable income for tax-
exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax
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credits from reducing the taxpayer's income tax to an amount lower than the
tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit, under penalties of perjury, that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may
be waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays such amount of tax as
the Treasury Department may require (presumably, a corporate tax on the excess
inclusion for the period the residual interest is actually held by the
Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above. The REMIC
Regulations explain that a significant
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purpose to impede the assessment or collection of tax exists if the transferor,
at the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A safe harbor is provided if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Agreement
with respect to each series of REMIC Certificates will require the transferee
of a Residual Certificate to certify to the statements in clause (ii) of the
preceding sentence as part of the affidavit described above under "Restrictions
on Transfer of Residual Certificates."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a Residual Certificate should consult their
tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a 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. In the event that a REMIC holds Convertible ARM Loans
which are convertible at the option of the Obligor into fixed-rate, fully
amortizing, level payment Loans, a sale of such Loans by the REMIC pursuant to
a purchase agreement or
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other contract with the Company 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 Code also imposes a 100% tax on contributions to
a REMIC made after the Startup Day, unless such contributions are payments made
to facilitate a cleanup call or a qualified liquidation of the REMIC, payments
in the nature of a guaranty, contributions during the three-month period
beginning on the Startup Day or contributions to a qualified reserve fund of
the REMIC by a holder of a residual interest in the REMIC. The Code also
imposes a tax on a REMIC at the highest corporate rate on certain net income
from foreclosure property that the REMIC derives from the management, sale, or
disposition of any real property, or any personal property incident thereto,
acquired by the REMIC in connection with the default or imminent default of a
loan. Generally, it is not anticipated that a REMIC will incur a significant
amount of such taxes or any material amount of state or local income or
franchise taxes. However, if any such taxes are imposed on a REMIC they will be
paid by the Company or the Trustee, if due to the breach of the Company's or
the Trustee's obligations, as the case may be, under the related Pooling and
Servicing Agreement or in other cases, such taxes shall be borne by the related
Trust Fund resulting in a reduction in amounts otherwise payable to holders of
the related Regular or Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (iii) an estate the income of which
is includible in gross income for United States tax purposes regardless of its
source, or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one
or more United States 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 (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax
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home" in the United States, or (ii) the gain is effectively connected with the
conduct by the Foreign Holder of a trade or business within the United States.
It appears that a Regular Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
Certificate. Backup withholding, however, does not apply to payments on a
Certificate made to certain exempt recipients, such as corporations and tax-
exempt organizations, and to certain foreign persons. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
Non-REMIC Series
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Loan Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Loans and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the 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 therein. The
following discussion assumes the Trust Fund will be so classified as a grantor
trust.
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Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Loans under these Code sections and should, in addition,
consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the Loans comprising such Loan Pool, including
interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Loans. (For purposes of this discussion, the term
"disposition," when used with respect to the Loans, 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 Code to deduct their pro rata share of
related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($121,200 for 1997, in the case of a joint return) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. Furthermore, in determining the alternative
minimum taxable income of an individual, trust, estate or pass-through entity
that is a holder of a Non-REMIC Certificate, no deduction will be allowed for
such holder's allocable portion of the foregoing expenses, even though an
amount equal to the total of such expenses will be included in such holder's
gross income for alternative minimum tax purposes. To the extent that a Non-
REMIC Certificateholder is not permitted to deduct servicing fees allocable to
a Non-REMIC Certificate, the taxable income of the Non-REMIC Certificateholder
attributable to that Non-REMIC Certificate will exceed the net cash
distributions related to such income. Non-REMIC Certificateholders may deduct
any loss on disposition of the Loans to the extent permitted under the 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 such discount in such Loans prior to
receipt of cash related to such discount. See the discussion above under "REMIC
Series--Original Issue Discount." Similarly, Code provisions concerning market
discount and amortizable premium will apply to the 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 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
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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 Certificates will constitute
Stripped Certificates and will be subject to these rules under various
circumstances, including the following: (i) if any servicing compensation is
deemed to exceed a reasonable amount; (ii) if the Company or any other party
retains a Retained Yield with respect to the Loans comprising a Loan Pool;
(iii) if two or more classes of Non-REMIC Certificates are issued representing
the right to non-pro rata percentages of the interest or principal payments on
the Loans; or (iv) if Non-REMIC Certificates are issued which represent the
right to interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code,
the issue price of a Stripped Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the original issue discount de minimis rules described above. A purchaser
of a Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
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 Fund with
respect to which a REMIC election is not made, the Code appears to require that
such a prepayment assumption be used in computing yield with respect to
Stripped Certificates. In the absence of authority to the contrary, the Company
intends to base information reports and returns to the Service and the holders
of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Loan or (ii) a separate installment obligation for each Loan
representing the Stripped Certificate's pro rata share of principal and/or
interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Loans as exceeding a reasonable fee for the services
being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Loans. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
49
<PAGE>
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 thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital gain
or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under "REMIC
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the 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
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the Non-REMIC
Certificates.
Other Tax Consequences
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of 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
50
<PAGE>
securities. In addition, certain state regulators have taken positions that may
prohibit regulated institutions subject to their jurisdiction from holding
securities representing residual interests, including securities previously
purchased. There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Securities Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
51
<PAGE>
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus supplement for definitive +
+information on any matter contained herein. This preliminary prospectus +
+supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement to Base No. 2
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Green Tree Home Equity Trust 1999-
Loan-Backed Notes and Certificates
----------
The securities will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate Interest Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- -------- ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
A-1 Notes............... $ % % % %
A-2 Notes............... $ % % % %
A-3 Notes............... $ % % % %
A-4 Notes............... $ % % % %
Total................... $ $ $
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
Investing in the notes and the certificates involves certain risks.
Prospective investors should consider carefully the Risk Factors beginning on
page S- in this prospectus supplement and on page in the prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
The notes will be delivered through the same-day funds settlement system of
the Depository Trust Company on or about , 1999.
The underwriters named below will offer the notes 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- in this prospectus supplement and
on page in the prospectus.
----------
[Underwriters]
The date of this prospectus supplement is , 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Notes........................................ S-4
Risk Factors............................................................. S-12
The Trust................................................................ S-13
The Trust Property....................................................... S-14
The Contract Pool........................................................ S-15
Green Tree Financial Corporation......................................... S-20
Yield and Prepayment Considerations...................................... S-23
Description of the Notes................................................. S-25
Description of the Counterparty.......................................... S-33
Description of the Certificates.......................................... S-33
Description of the Trust Documents and Indenture......................... S-35
Certain Federal and State Income Tax Consequences........................ S-42
ERISA Considerations..................................................... S-42
Underwriting............................................................. S-44
Legal Matters............................................................ S-45
Annex I.................................................................. A-1
Prospectus
Important Notice About Information Presented in This Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 11
The Trusts............................................................... 13
Green Tree Financial Corporation......................................... 14
Yield Considerations..................................................... 16
Maturity and Prepayment Considerations................................... 16
Pool Factor.............................................................. 17
Use of Proceeds.......................................................... 18
The Notes................................................................ 18
The Certificates......................................................... 22
Certain Information Regarding the Securities............................. 24
Description of the Trust Documents....................................... 27
Description of FHA Insurance............................................. 37
Certain Legal Aspects of the Contracts; Repurchase Obligations........... 38
Certain Federal Income Tax Consequences.................................. 40
Certain State Income Tax Considerations.................................. 47
ERISA Considerations..................................................... 47
Legal Investment Considerations.......................................... 48
Ratings.................................................................. 48
Underwriting............................................................. 48
Legal Matters............................................................ 50
Experts.................................................................. 50
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the notes in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Equity Loan Trust 1999- since the date hereof.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home equity lending business, and about any series of
certificates or notes for home equity loans that Green Tree may wish to sell.
This prospectus supplement contains more detailed information about this series
of notes. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these notes has been or will be prepared in the
United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These notes may not be offered or sold, or re-offered or re-
sold, to persons in the United Kingdom, except (1) to persons whose ordinary
activities involve them in acquiring, holding, managing and disposing of
investments (as principal or agent) for the purpose of their businesses, or (2)
in circumstances that will not constitute or result in an offer to the public
in the United Kingdom within the meaning of the United Kingdom Public Offers of
Securities Regulation 1995. You may not pass this prospectus supplement and
prospectus, or any other document inviting applications or offers to purchase
notes or offering notes for purchase, to any person in the United Kingdom who
(1) does not fall within article 11(3) of the Financial Services Act 1986
(Investment Advisements) (Exemptions) Order 1996 or (2) is not otherwise a
person to whom passing this prospectus supplement and prospectus would be
lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE NOTES
This summary highlights selected information regarding the notes, 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 notes, read this
entire prospectus supplement and the accompanying prospectus.
Green Tree Home Improvement Trust 1999- will issue the classes of securities
listed in the table below.
<TABLE>
<CAPTION>
Interest Approximate Moody's S&P
Class Rate Principal Amount (1) Rating Rating
- ----- -------- -------------------- ------- ------
<S> <C> <C> <C> <C>
A-1 Notes.......................... % $
A-2 Notes..........................
A-3 Notes..........................
A-4 Notes..........................
</TABLE>
- --------
(1) May vary plus or minus 5%.
Issuer ..................... Green Tree Home Improvement and Home Equity Loan
Trust 1999- , a Delaware business trust.
Seller and Servicer......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Indenture Trustee........... [Indenture Trustee], not in its individual
capacity but solely as trustee under the trust
indenture.
Owner Trustee............... [Owner Trustee], not in its individual capacity
but solely as owner trustee under the trust
agreement.
Payment Date................ The fifteenth day of each month (or, if that
fifteenth day is not a business day, the next
succeeding business day) beginning on 15,
1999.
Record Date................. The business day just before the related payment
date, beginning in 1999.
Distributions on Notes...... Distributions on the notes on any payment date
will be made primarily from amounts collected on
the home equity loans comprising the loan pool
during the prior calendar month. This is the
amount available for distribution. On each
payment date, the indenture trustee will apply
the amount available, less certain fees to the
note insurer and servicer (if other than Green
Tree), to make distributions of principal and
interest on the notes in the following order of
priority:
^ The Class A-1 interest;
^ The Class A-1 principal;
^ The Class A-2 interest;
^ The Class A-2 principal;
^ The Class A-3 interest;
^ The Class A-3 principal;
S-4
<PAGE>
^ The Class A-4 interest; and
^ The Class A-4 principal;
See "Description of the notes--Payments on Loans"
for a detailed description of the amounts that
will constitute the amount available for any
payment date.
A. Class A-1 Interest ...... We will pay interest on the Class A-1 notes that
has accrued from the previous distribution date.
If there are not enough funds available to pay
interest on the Class A- notes, we will carry
the shortfall forward and add it to the amount of
interest payable on the next distribution date.
B. Class A-1 Principal...... We will pay the Class A-1 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the Trust Documents
and Indenture--Distributions."
C. Class A-2 Interest....... We will pay interest on the Class A-2 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-2 notes from
funds available after we pay interest on the
previous class of notes. If there are not enough
funds available to pay interest on the Class A-2
notes, we will carry the shortfall forward and
add it to the amount of interest payable on the
next distribution date.
D. Class A-2 Principal...... We will pay the Class A-2 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the trust Documents
and Indenture--Distributions."
E. Class A-3 Interest....... We will pay interest on the Class A-3 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-3 notes from
funds available after we pay interest on the
previous classes of notes. If there are not
enough funds available to pay interest on the
Class A-3 notes, we will carry the shortfall
forward and add it to the amount of interest
payable on the next distribution date.
F. Class A-3 Principal ..... We will pay the Class A-3 noteholders principal
on each distribution date, to the extent
available after paying interest and
S-5
<PAGE>
principal on the previous classes of notes, in an
amount equal to % (approximate) of a formula
principal distribution amount plus any unpaid
shortfall of principal, if any, from a previous
distribution date. For more information on how we
calculate the amount of principal we pay each
month on the notes, see "Description of the trust
Documents and Indenture--Distributions."
G. Class A-4 Interest....... We will pay interest on the Class A-4 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-4 notes from
funds available after we pay interest on the
previous classes of notes. If there are not
enough funds available to pay interest on the
Class A-4 notes, we will carry the shortfall
forward and add it to the amount of interest
payable on the next distribution date.
H. Class A-4 Principal...... We will pay the Class A-4 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the Trust Documents
and Indenture--Distributions."
Interest Rate Cap The Class A-1 noteholders will have the benefit
Agreement................... of an Interest Rate Cap Agreement, dated ,
1999 between the trust and [counterparty]. Under
the Interest Rate Cap Agreement, [counterparty]
will make a payment to the trust on each
distribution date, to the extent that the Class
A-1 rate exceeds 10%, pursuant to a pre-set
formula. For more information about calculations
under the Interest Rate Cap Agreement, see
"Description of the Notes--Interest Rate Cap
Agreement" and "Description of the Counterparty."
Spread Account.............. The Class A-2, Class A-3 and Class A-4
noteholders will have the benefit of a separate
sub-account for each class contained in a spread
account. The indenture trustee will hold the
spread account. On any distribution date, if
there are not enough funds to distribute interest
on the Class A-2, Class A-3 or Class A-4 notes,
the indenture trustee will withdraw the amount of
the deficiency from the applicable sub-account
for distribution to the applicable class of
notes.
On the closing date, the amount on deposit in the
Class A-2, Class A-3 and Class A-4 sub-accounts
will be zero. On each distribution date, the
indenture trustee will deposit all funds
remaining in the collection account, after
distribution of all interest and principal on the
notes first to the Class A-2 sub-account, then to
the Class A-3
S-6
<PAGE>
sub-account and then to the Class A-4 sub
account, until the amount on deposit in each of
the sub-accounts equals $ , $ and
$ . If the indenture trustee withdraws
funds from any sub-account, that sub-account will
be replenished as provided in the Sale and
Servicing Agreement and the Indenture. The spread
account will be included in the property of the
trust. For more information about calculation of
the amounts in the spread account, see
"Description of the Notes--The Spread Account."
Reserve Account............. Noteholders will have the benefit of a reserve
account. The indenture trustee will hold the
reserve account. On any distribution date, if the
funds in the note distribution account are
insufficient to make full payment of interest or
principal payable on a class of notes, the
indenture trustee will withdraw the amount of the
deficiency from the reserve account and deposit
that amount in the note distribution account for
distribution to the applicable class of notes.
On the closing date, the amount on deposit in the
reserve account will be zero. On each
distribution date, the indenture trustee will
deposit into the reserve account all funds
remaining in the collection account, after
distribution of all interest and principal
payable on the notes, all interest payable on the
certificates and all deposits in the spread
account, until the amount in the reserve account
equals % of the pool scheduled principal
balance. If the reserve account is drawn upon, it
will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture.
The reserve account will be included in the trust
property. See "Description of the Notes--The
Reserve Account."
Terms of the Certificates... Below are the principal terms of the
certificates:
A. Distributions............ Certificateholders will be entitled to receive on
each distribution date commencing in 1999,
to the extend the amount available in the
collection account including the guaranty payment
is sufficient, their distributable amount. For a
description of the certificateholders'
distributable amount, see "Description of the
Trust Documents and Indenture."
B. Pass-Through Rate........ % per year payable monthly at one-twelfth
the annual rate calculated on the basis of a 360-
day year consisting of twelve 30- day months.
C. Interest................. On each distribution date, the Owner trustee will
distribute to the certificateholders accrued
interest at the pass-through rate on the
outstanding certificate principal balance.
Interest will accrue from , 1999 or from the
most recent distribution date up to but excluding
the following distribution date. The certificate
principal balance on any distribution date will
be the original certificate principal balance
minus all amounts previously distributed to the
certificateholders in respect of principal and
minus any unreimbursed liquidation losses
absorbed by the certificates.
S-7
<PAGE>
We will pay interest on the certificates to the
extent of funds available on each distribution
date after payment of all interest and principal
then payable on the notes. If there are not
enough funds available to make a full
distribution of interest on the certificates, the
amount of the shortfall will be carried forward
and added to the amount of interest payable on
the next distribution date. Any amount carried
forward will bear interest at the pass-through
rate, to the extent legally permissible. For a
more detailed description of how interest will be
paid on the certificates, see "Description of the
Certificates."
D. Principal................ We will not pay principal on the certificates
until we have paid off all of the notes in full.
On each distribution date after we have paid off
the notes, we will pay principal on the
certificates in an amount equal to the formula
principal distribution amount for that
distribution date, plus any unpaid shortfall from
prior distribution dates.
E. Limited Guarantee........ To mitigate the effect of the subordination of
the certificates and the effect of liquidation
losses on the loans, we will entitle the
certificateholders to receive on each
distribution date an amount equal to the guaranty
payment, if any, under Green Tree's limited
guaranty. The guaranty payment for any
distribution date will equal the difference
between the certificateholders' distributable
amount and the remaining funds available in the
collection account after payment of all interest
and principal on the notes and the deposit in any
sub-account of the spread account or the reserve
account of any amounts previously withdrawn and
not previously replenished. The
certificateholders' distributable amount equals
the unpaid and accrued interest on the
certificates, plus on each distribution date
after the notes are paid off, principal in an
amount equal to the formula principal
distribution amount for that distribution date
plus any unpaid Certificate principal shortfall
for that distribution date and plus any
unreimbursed certificate principal liquidation
loss.
The limited guaranty will be an unsecured general
obligation of Green Tree and will not be
supported by any letter of credit or other
enhancement arrangement. The rating assigned to
the certificates may be affected by the rating of
Green Tree's debt securities.
F. Optional Prepayment...... If we exercise our option to purchase the loans
under the Sale and Servicing Agreement, the
certificateholders will receive an amount equal
to the principal amount together with accrued
interest and the certificates will be retired.
For more information about the process of
optional prepayment, see "Description of the
Certificates--Optional Prepayment."
Collection Account;
Priority of Payments........
Except under certain conditions described in this
prospectus or as otherwise acceptable to the
rating agencies, the servicer will be
S-8
<PAGE>
required to remit payments received on the loans
within one business day to an account in the name
of the indenture trustee. This account is the
collection account. On each distribution date,
the servicer will instruct the indenture trustee
to withdraw funds on deposit in the collection
account and to apply those funds as follows:
^ if Green Tree is not the servicer, the
monthly servicing fee,
^ reimbursement of any advance made that were
recovered during the prior monthly period,
^ the noteholders' interest and principal and
any amounts previously withdrawn from any
sub-account of the spread account or the
reserve account,
^ the certificateholders' interest and
principal after the notes have been paid in
full,
^ amounts necessary to fully fund the Class A-
2, Class A-3 and Class A-4 sub-accounts of
the spread account,
^ the amount necessary to fully fund the
reserve account and
^ any remaining amount to Green Tree as the
monthly servicing and guaranty fee.
Pre-Funding Account......... On the closing date, Green Tree will deposit
money in the pre-funding account to provide the
trust with sufficient funds to purchase the
subsequent loans. The pre-funded amount will
initially equal the difference between $
and the aggregate principal balance as of the
cutoff date of the initial loans. The pre-funding
account will be included in the trust's property.
Any reimbursement income earned on amounts on
deposit in the pre-funding account will be
taxable to Green Tree. For more detailed
information about the pre-funding account, see
"Yield and Prepayment Considerations" and
"Description of the Trust Documents and
Indenture--Accounts."
Tax Status.................. In the opinion of counsel to Green Tree, for
federal and Minnesota income tax purposes, the
notes will be characterized as debt, and the
trust will not be characterized as an association
(or a publicly traded partnership) taxable as a
corporation and neither the trust nor any portion
of the trust will constitute a taxable mortgage
pool taxable as a corporation. Each noteholder,
by the acceptance of a Note, will agree to treat
the notes as debt. Each certificateholder, by the
acceptance of a Certificate, will agree to treat
the trust as a partnership in which the
certificateholders are partners for federal
income tax purposes. See "Certain Federal Income
Tax Consequences" in this prospectus supplement
and in the prospectus for a more detailed
description of the federal income tax
consequences of an investment in the notes and
the certificates.
S-9
<PAGE>
ERISA Considerations........ If the notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States Department
of Labor, the acquisition or holding of notes by
or on behalf of a benefit plan will not cause the
assets of the trust to become plan assets,
thereby generally preventing the application of
certain prohibited transaction rules of the
Employee Retirement Income Security Act of 1974,
as amended, and the Internal Revenue Code of
1986, as amended, that otherwise would possibly
be applicable. Green Tree believes that the notes
should be treated as indebtedness without
substantial equity features for purposes of such
regulation. You may not acquire the certificates
if you are an employee benefit plan, individual
retirement account or Keogh Plan subject to
either Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the Internal
Revenue Code of 1986, as amended. See "ERISA
Considerations" in this prospectus supplement and
in the prospectus.
Ratings..................... The notes will not be issued and sold unless
Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Rating Services, a division of
the McGraw-Hill Companies, Inc. ("S&P"), have
assigned the ratings specified on page S- (or
better) to the notes.
The rating of each class of notes by Moody's and
S&P addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. 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.
Green Tree's senior debt securities were recently
downgraded by Moody's to "Bal".
Green Tree has not requested a rating of the
notes from any rating agencies other than Moody's
and S&P. You cannot assume that no other rating
agency will assign a rating to any of these
notes, nor can you assume what any such rating,
if issued, would be.
S-10
<PAGE>
RISK FACTORS
Consider the following risk factors in deciding whether to purchase the
securities. More risk factors, applicable to any series of securities like
these, are printed in the prospectus, and you should consider those risk
factors also.
The Class A-2, Class A-3 and Class A-4 notes will be subordinate.
Each class of notes will be subordinate for payment of interest and principal
to the holders of the class of notes with a prior numeric designation. The
certificates will be subordinate in priority of payment of interest and
principal to the notes. We will not pay principal on the certificates until the
outstanding principal amounts of all of the notes have been paid.
You must rely upon payments on the loans for payment of your interest and
principal. The trust will not have any significant assets or sources of funds
other than the loans, the spread account, the reserve account, the interest
rate cap payments and the limited guaranty of Green Tree.
We have limited delinquency, loan loss and repossession experience.
We have limited underwriting and servicing experience with home equity loans
similar to the loans under this transaction. Although we have calculated our
delinquency and net loss experience with respect to our servicing portfolio of
home equity loans, we cannot assure you that the information presented will
reflect actual experience with respect to the loans. In addition, we cannot
assure you that the future delinquency, loan loss or repossession experience of
the trust will be better or worse than our own experience. For more information
about delinquency, loan loss and repossession experience, see "The Loan Pool--
Delinquency, Loan Loss and Repossession Information."
The real estate securing the loans may be inadequate security.
As of the cutoff date, approximately % of the cutoff date principal
balance represented loans which were either unsecured or secured by subordinate
liens on the applicable real estate. As a result, the real estate securing a
loan is not likely to provide adequate security if it becomes necessary to
realize upon the collateral. Even if the real estate securing a given loan
provides adequate security, we could encounter substantial delays in connection
with the liquidation of that loan. This would result in current shortfalls in
distributions to the holders of the certificates. In addition, liquidation
expenses relating to the any liquidated loan will reduce the proceeds otherwise
available for payment to the holders of the certificates. In the event that any
real estate securing a loan fails to provide adequate security, any losses in
connection with that loan will be borne by the holders of the certificates.
The loans are located primarily in .
As of the cutoff date, obligors on approximately % of the initial loans
were located in . Accordingly, adverse economic conditions or other
factors particularly affecting this state could adversely affect the
delinquency, loan loss or repossession experience of the trust with respect to
the loans.
S-11
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Securityholders should consider, in addition to the information
below, the information under "The Trusts" in the accompanying Prospectus.
General
Green Tree Home Equity Loan Trust 1998- is a business trust formed under the
laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Contracts and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will initially be capitalized with equity equal to $
(approximate) from the sale of the Certificates to third party investors that
are expected to be unaffiliated with Green Tree or its affiliates. The equity
of the Trust, together with the proceeds of the initial sale of the Notes, will
be used by the Trust to purchase the Contracts from Green Tree pursuant to the
Sale and Servicing Agreement.
The Trust's principal offices are in Wilmington, Delaware, at the address
listed below under "--The Owner Trustee."
Capitalization of the Trust
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $
Class A-2 Notes..............................................
Class A-3 Notes..............................................
Class A-4 Notes..............................................
Certificates.................................................
------------
Total...................................................... $
============
</TABLE>
The Owner Trustee
[Name of Owner Trustee] is the Owner Trustee under the Trust Agreement.
[Owner Trustee] is a Delaware banking corporation and its principal offices are
located at , , Delaware . The Owner Trustee will
perform limited administrative functions under the Trust Agreement, including
making distributions from the Certificate Distribution Account. The Owner
Trustee's liability in connection with the issuance and sale of the
Certificates and the Notes is limited solely to the express obligations of the
Owner Trustee as set forth in the Trust Agreement.
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) the Contracts; (ii)
all rights to receive payments due thereon on or after the Cutoff Date
(excluding certain insurance premiums, late fees and other servicing charges);
(iii) such amounts as from time to time may be held in the Collection Account,
the Spread Account, the Reserve Account, the Pre-Funding Account and certain
other accounts established and maintained by the Servicer pursuant to the Sale
and Servicing Agreement, as described below (including all investments in the
Collection Account, the Spread Account, the Reserve Account and such other
accounts and all income from the
S-12
<PAGE>
investment of funds therein and all proceeds thereof); (iv) an assignment of
the mortgages on the real estate securing the related Home Equity Contracts;
and (v) certain other rights under the Trust Documents. See "The Contracts" and
"Description of the Trust Documents--Collections" in the accompanying
Prospectus.
Each Certificate will represent a fractional undivided interest in the Trust
Property. Pursuant to the Indenture the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders. Any proceeds of such security interest in the Trust Property would
be distributed according to the Indenture, as described below under
"Description of the Trust Documents and Indenture--Distributions."
[Indenture Trustee] or a custodian on its behalf will hold each original
Contract, as well as copies of documents and instruments relating to such
Contract and evidencing the mortgage, if any, on the related real property (the
"Contract Files"). In order to protect the Trust's ownership interest in the
Contracts, Green Tree will file a UCC-1 financing statement in Minnesota and
Delaware to give notice of the Trust's ownership of the Contracts and the
related Trust Property.
S-13
<PAGE>
THE CONTRACT POOL
General
This Prospectus Supplement contains information regarding the Initial
Contracts, which were originated through and will be transferred to
the Trust on the Closing Date. The information for each Contract is as of the
Cutoff Date for such Contract. The Contracts had an aggregate principal balance
as of the Cutoff Date of $ . The Sale and Servicing Agreement provides that
the Initial Contracts will be purchased by the Trust on the Closing Date and
that the Subsequent Contracts will be purchased by the Trust from time to time
during the Pre-Funding Period.
All of the Contracts will be purchased by Green Tree from dealers and
correspondent lenders who regularly originate and sell such contracts to Green
Tree, or will be originated by Green Tree directly. Substantially all of the
Home Equity Contracts have loan-to-value ratios equal to or greater than 125%.
A significant portion of the Home Equity Contracts were purchased by Green Tree
from an independent financing company. Green Tree believes that the
underwriting standards employed by such independent financing company are
similar to the standards used by Green Tree.
Certain Other Characteristics
The Contracts (i) had a remaining maturity, as of the Cutoff Date, of at
least months, but not more than months, (ii) had an original maturity of
at least months, but not more than months, (iii) had an original
principal balance of at least $ and not more than $ , (iv) had a
remaining principal balance as of the Cutoff Date of at least $ and not
more than .
The Home Equity Contracts have a principal balance as of the Cutoff Date of
approximately $ (the "Cutoff Date Principal Balance"). The Home Equity
Contracts were originated between and . A significant portion of the
Home Equity Contracts were purchased by Green Tree from an independent
financing company. Green Tree believes that the underwriting standards employed
by such independent financing company are similar to the standards used by
Green Tree.
S-14
<PAGE>
Geographic Concentration of Home Equity Contracts
<TABLE>
<CAPTION>
Number of
Contracts as of Percent of Number Principal Balance Percent of Cutoff Date
State (1) Cutoff Date of Contracts as of Cutoff Date Principal Balance
--------- --------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................. 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
- --------
(1) Based on the address of the Obligor set forth in Green Tree's records.
S-15
<PAGE>
Distribution of Original Contract Amounts of Home Equity Contracts
<TABLE>
<CAPTION>
Aggregate
Principal % of
Balance Contract Pool
Number of Outstanding by Outstanding
Contracts as of Cutoff Principal Balance
Original Contract Amount as of Cutoff Date Date as of Cutoff Date
------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $10,000......... $ %
Between $10,000 and
$19,999..................
Between $20,000 and
$29,999..................
Between $30,000 and
$39,999..................
Between $40,000 and
$49,999..................
Between $50,000 and
$59,999..................
Between $60,000 and
$69,999..................
Between $70,000 and
$79,999..................
Between $80,000 and
$89,999..................
Between $90,000 and
$99,999..................
Between $100,000 and
$109,999.................
Between $110,000 and
$119,999.................
Between $120,000 and
$129,999.................
Between $130,000 and
$139,999.................
Between $140,000 and
$149,999.................
Between $150,000 and
$159,999.................
Between $160,000 and
$169,999.................
Between $170,000 and
$179,999.................
Between $180,000 and
$189,999.................
Between $190,000 and
$199,999.................
Between $200,000 and
$249,999.................
Between $250,000 and
$299,999.................
Over $300,000.............
----- --------------- ------
Total................... $ 100.00%
===== =============== ======
</TABLE>
Year of Origination of Home Equity Contracts
<TABLE>
<CAPTION>
% of
Aggregate Contract Pool
Number of Principal Balance by Outstanding
Year of Contracts Outstanding Principal Balance
Oiginationr as of Cutoff Date as of Cutoff Date as of Cutoff Date
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1989.................... $ %
1990....................
1991....................
1992....................
1993....................
1994....................
1995....................
1996....................
1997....................
------ ------------- ------
Total................. $ 100.00%
====== ============= ======
</TABLE>
S-16
<PAGE>
Lien Position of Home Equity Contracts
<TABLE>
<CAPTION>
%
% of Contract Pool by
Number of Aggregate Principal Outstanding Principal
Number of Contracts Contracts as of Balance Outstanding Balance as of
as of Cutoff Date Cutoff Date as of Cutoff Date Cutoff Date
------------------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
Home Equity Contract Rates
<TABLE>
<CAPTION>
Aggregate Principal % of Contract Pool by
Number of Contracts Balance Outstanding Outstanding Principal
Contract Rate as of Cutoff Date as of Cutoff Date Balance as of Cutoff Date
------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.00%......... $ %
9.01% to 10.00%........
10.01% to 11.00%........
11.01% to 12.00%........
12.01% to 13.00%........
13.01% to 14.00%........
14.01% to 15.00%........
15.01% to 16.00%........
16.01% to 17.00%........
Over 17.00%.............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
S-17
<PAGE>
Remaining Months to Maturity of Home Equity Contracts
<TABLE>
<CAPTION>
Aggregate Principal % of Contract Pool by
Number of Contracts Balance Outstanding Outstanding Principal
Remaining Months to Maturity as of Cutoff Date as of Cutoff Date Balance as of Cutoff Date
- ---------------------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Fewer than 31............. $ %
31 to 60................
61 to 90................
91 to 120................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
Lien Position of Home Equity Contracts
<TABLE>
<CAPTION>
% of
Number of Home Equity
Contracts Contracts % of
as of as of Aggregate Principal Cutoff Date
Cut-off Cut- Balance Outstanding Principal
Lien Position Date off Date as of Cut-off Date Balance
------------- --------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
First..................... % $ %
Second....................
Third.....................
Fourth....................
----- ------ ------------- ------
Total................... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
S-18
<PAGE>
GREEN TREE FINANCIAL CORPORATION
The following information supplements the information in the Prospectus under
the heading "Green Tree Financial Corporation." No delinquency, loan loss or
liquidation information has been included with respect to home equity loans,
because Green Tree has only limited historical experience with respect to the
performance of such loans, and does not currently compile separate delinquency,
loan loss and liquidation information on home equity loans with high loan-to-
value ratios such as the Home Equity Contracts.
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul, Minnesota,
and its 200 local offices throughout the country. Lawrence M. Coss, Green
Tree's Chairman and Chief Executive Officer, has agreed to continue to manage
Green Tree's business for at least one year. Headquartered in Carmel, Indiana,
Conseco is among the nation's leading providers of supplemental health
insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-19
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The following information supplements the information in the Prospectus under
the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each has the option to purchase from the Trust
all remaining Contracts, and thereby effect early redemption of the Notes and
early retirement of the Certificates, on any Distribution Date when the Pool
Scheduled Principal Balance is 10% or less of the Cutoff Date Pool Principal
Balance. See "Description of the Trust Documents--Termination" in the
Prospectus.
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
Principal prepayments on the Home Equity Contracts will result in
accelerating principal payments on the Notes. The rate of principal payments on
pools of home equity loans is influenced by a variety of economic, geographic,
social and other factors, including the level of interest rates and the rate at
which homeowners sell their homes or default on their loans. Other factors
affecting prepayment of home equity loans and home improvement contacts include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. Since home equity loans are not generally viewed by
borrowers as permanent financing, the Home Equity Contracts may experience a
higher rate of prepayments than traditional mortgage loans. In addition, if
prevailing interest rates fall significantly below the interest rates on such
loans, the loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such loans.
Conversely, if prevailing interest rates rise above the interest rates on such
loans, the rate of prepayment would be expected to decrease.
Green Tree has no significant experience with respect to the rate of
principal prepayments on home equity loans. In addition, liquidations of
defaulted Contracts or the exercise by Green Tree or the Servicer of the option
to purchase the remaining pool of Contracts will affect the timing of principal
distributions on the Securities.
Weighted Average Life of the Notes and the Certificates
The following information is given solely to illustrate the effect of
prepayments on the Contracts on the weighted average life of the Notes and the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes and the
Certificates will be influenced by the rate at which principal on the Contracts
is paid. Principal payments on the Contracts may be in the form of scheduled
amortization or prepayments (including, for this purpose, liquidations due to
default).
The Base Case prepayment model is Green Tree management's best estimate of
the prepayment rates that may be experienced on the Contracts. Because Green
Tree began originating and servicing home equity loans only recently, such
estimate is based in part on industry experience with similar loans and
contracts rather than Green Tree's experience. There can be no assurance that
the Contracts will experience prepayments at such projected rates or in the
manner assumed by the prepayment model used for that type of Contract, or that
the
S-20
<PAGE>
Contracts in the aggregate will experience prepayments similar to the overall
prepayment rate or in the manner projected in the Base Case.
The model used in this Prospectus Supplement is the Constant Prepayment Rate
("CPR"). The CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the outstanding principal balance of the
Home Equity Contracts. The Base Case Prepayment Rate used with respect to the
Home Equity Contracts included in the Trust, for purposes of the following
tables, was % CPR.
As used in the following tables, the columns headed %, %, %, % and
% assume that prepayments on the Contracts are made at Base Case Prepayment
Rates of %, %, %, % and %, respectively. For example, % Base
Case Prepayment Rate and % Base Case Prepayment Rate mean that Home Equity
Contracts have been assumed to have a prepayment rate equal to % CPR and
% CPR, respectively. CPR DOES NOT PURPORT TO BE AN HISTORICAL DESCRIPTION
OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF CONTRACTS, INCLUDING THE CONTRACTS.
[PREPAYMENT TABLES HERE]
S-21
<PAGE>
DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying
Prospectus. Prospective Noteholders should consider, in addition to the
information below, the information in the accompanying Prospectus under "The
Notes," "Certain Information Regarding the Securities," and "Description of
the Trust Documents."
General
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of
the Indenture, as executed, will be filed with the Commission following the
issuance of the Securities. The following summary describes certain terms of
the Notes and the Indenture. The summary does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Notes and the Indenture. The following summary supplements
the description of the general terms and provisions of the Notes of any given
series and the related Indenture set forth in the accompanying Prospectus, to
which description reference is hereby made. [Indenture Trustee], a national
banking association headquartered in [ ], will be the Indenture Trustee.
Distributions
Noteholders will be entitled to receive on each Distribution Date commencing
in 1998, to the extent that funds available are sufficient therefor, the
Noteholders' Distributable Amount. Distributions on the Notes will be made
from funds available first to the holders of the Class A-1 Notes, then to the
holders of the Class A-2 Notes, then to the holders of the Class A-3 Notes and
then to the holders of the Class A-4 Notes, in the manner and order of
priority described below.
Class A-1 Interest
Interest on the outstanding Class A-1 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of any Distribution Date will be
the Original Class A-1 Principal Balance minus all amounts previously
distributed to the Class A-1 Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to the extent of funds
available on such Distribution Date. In the event the funds available are not
sufficient to make a full distribution of interest on the Class A-1 Notes, the
funds available will be applied pro rata to the Class A-1 Notes based on the
amount payable to such Class and the amount of the shortfall will be carried
forward and added to the amount of interest payable on the next Distribution
Date. Any amount so carried forward will bear interest at the Class A-1 Rate,
to the extent legally permissible.
Class A-1 Principal
To the extent of funds available after payment of all interest payable on
the Class A-1 Notes, the Class A-1 Noteholders will be entitled to receive on
each Distribution Date as payment of principal equal to the sum of %
(approximate) of the Formula Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for
such Distribution Date. In the event the funds available are not sufficient to
make a full distribution of principal on the Class A-1 Notes, the funds
available will be applied pro rata to the Class A-1 Notes based on the amount
payable to such Class.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Home Equity Contract: (i) all scheduled payments of principal due on each
outstanding Home Equity Contract during the
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related Monthly Period, (ii) all Partial Principal Prepayments applied and all
Principal Prepayments in Full received during the related Monthly Period in
respect of each Home Equity Contract, (iii) the Scheduled Principal Balance of
each Home Equity Contract that became a Liquidated Contract during the related
Monthly Period, (iv) the Scheduled Principal Balance of each Home Equity
Contract which, during the related Monthly Period, was purchased by Green Tree
as a result of a breach of a representation as warranty or by the Servicer as a
result of an uncured breach of a covenant under the Sale and Servicing
Agreement, and (v) with respect to the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding Account. The Formula Principal
Distribution Amount for the Distribution Date in , will be the sum of the
Note Principal Balance and the Certificate Principal Balance. A "Liquidated
Contract" means any defaulted Contract as to which the Servicer has determined
that all amounts which it expects to recover from or on account of such
Contract through the date of disposition of the related real property have been
recovered or any defaulted Contract in respect of which the related real
property has been realized upon and disposed of and the proceeds of such
disposition have been received. The "Unpaid Class A-1 Principal Shortfall" for
any Distribution Date will equal any amount required to be paid in respect of
principal on the Class A-1 Notes on any prior Distribution Date but not paid on
any intervening Distribution Date.
Class A-2 Interest
Interest on the outstanding Class A-2 Principal Balance will accrue from ,
, or from the most recent Distribution Date, to but excluding the following
Distribution Date, at the Class A-2 Rate for such monthly interest period. The
"Class A-2 Principal Balance" as of any Distribution Date will be the Original
Class A-2 Principal Balance minus all amounts previously distributed to the
Class A-2 Noteholders in respect of principal, and minus any unreimbursed Class
A-2 Principal Liquidation Loss (described below under "--Losses on Liquidated
Contracts").
Interest will be paid on the Class A-2 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-1 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-2 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-2 Rate, to the extent legally permissible.
Class A-2 Principal
Class A-2 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-1 Notes and after payment of all
interest payable on the Class A-2 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-2
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-2 Principal Liquidation Loss.
Class A-3 Interest
Interest on the outstanding Class A-3 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of any Distribution Date will be
the Original Class A-3 Principal Balance minus all amounts previously
distributed to the Class A-3 Noteholders in respect of principal, and minus any
unreimbursed Class A-3 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
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Interest will be paid on the Class A-3 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-2 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-3 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-3 Rate, to the extent legally permissible.
Class A-3 Principal
Class A-3 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-2 Notes and after payment of all
interest payable on the Class A-3 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-3
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-3 Principal Liquidation Loss.
Class A-4 Interest
Interest on the outstanding Class A-4 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of any Distribution Date will be
the Original Class A-4 Principal Balance minus all amounts previously
distributed to the Class A-4 Noteholders in respect of principal, and minus any
unreimbursed Class A-4 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-3 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-4 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-4 Rate, to the extent legally permissible.
Class A-4 Principal
Class A-4 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-3 Notes and after payment of all
interest payable on the Class A-4 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-4
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-4 Principal Liquidation Loss.
Optional Redemption
The Notes will be redeemed in whole, but not in part, on any Distribution
Date on which Green Tree exercises its option to purchase the Contracts. Green
Tree may purchase the Contracts when the Pool Scheduled Principal Balance has
declined to 10% or less of the Cutoff Date Pool Principal Balance, as described
in the accompanying Prospectus under "Description of the Trust Documents--
Termination." The "Pool Scheduled Principal Balance" is the aggregate Scheduled
Principal Balance of all outstanding Contracts during a Monthly
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Period. Such redemption will effect early retirement of the Notes. The
redemption price will be equal to the unpaid principal amount of the Notes
redeemed plus accrued and unpaid interest thereon.
Mandatory Prepayments
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
The Interest Rate Cap Agreement
Class A-1 Noteholders will have the benefit of the Interest Rate Cap
Agreement between the Trust and the Counterparty. Pursuant to the Interest Rate
Cap Agreement, the Counterparty will make a payment (the "Interest Rate Cap
Payment") to the Trust on each Distribution Date to the extent that the Class
A-1 Rate exceeds 10%, in an amount equal to the amount obtained by multiplying
the Class A-1 Principal Balance by the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over 10% or (y) 0% and (ii) the number of days in
the monthly interest period divided by 360. Payments received by the Indenture
Trustee pursuant to the Interest Rate Cap Agreement will be deposited in the
Collection Account. See "Description of the Counterparty."
The Spread Account
Class A-2, Class A-3 and Class A-4 Noteholders will have the benefit of a
separate sub-account for each Class contained in the Spread Account to be held
by the Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) is insufficient to distribute all interest
then payable on the Class A-2, Class A-3 or Class A-4 Notes, the Indenture
Trustee will withdraw the amount of the deficiency from the applicable sub-
account (or the amount on deposit in the applicable sub-account, if less) and
deposit such amount in the Note Distribution Account for distribution to the
applicable Class. On any Distribution Date, the amount of funds in the Spread
Account will not be available to cover a shortfall in principal distributable
on any Class of Notes, but would only be available to cover a shortfall in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes.
On the Closing Date, the amount on deposit in the Class A-2, Class A-3 and
Class A-4 sub-accounts will be zero. On each Distribution Date, the Indenture
Trustee will deposit all funds remaining in the Collection Account, after
distribution of all interest and principal then payable on the Notes and all
interest then payable on the Certificates, first to the Class A-2 sub-account,
then to the Class A-3 sub-account and then to the Class A-4 sub-account, until
the amount on deposit in such sub-accounts equals $ , $ and $ ,
respectively (subject to reduction as provided in, and to the other terms and
conditions contained in, the Sale and Servicing Agreement). If any sub-account
is drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Spread Account is included in the
Trust Property. Any amount remaining in the Spread Account upon termination of
the Trust will be distributed to Green Tree.
The Reserve Account
Noteholders will have the benefit of the Reserve Account to be held by the
Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of
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<PAGE>
Notes with a prior numeric designation) are insufficient to make full payment
in respect of interest or principal payable on a Class of Notes (after making
appropriate draws upon the Spread Account), the Indenture Trustee will withdraw
the amount of the deficiency from the Reserve Account (or the amount on deposit
in the Reserve Account, if less) and deposit such amount in the Note
Distribution Account for distribution to the applicable Class.
On the Closing Date, the amount on deposit in the Reserve Account will be
zero. On each Distribution Date, the Indenture Trustee will deposit all funds
remaining in the Collection Account, after distribution of all interest and
principal then payable on the Notes, all interest then payable on the
Certificates and all deposits in the Spread Account, until the amount on
deposit in the Reserve Account equals 1.5% of the Pool Scheduled Principal
Balance (subject to reduction as provided in, and to other terms and conditions
contained in, the Sale and Servicing Agreement). If the Reserve Account is
drawn upon, it will be replenished to the extent provided in the Sale and
Servicing Agreement and the Indenture. The Reserve Account is included in the
Trust Property. Any amount remaining in the Reserve Account upon termination of
the Trust will be distributed to Green Tree.
Losses on Liquidated Contracts
As described above, the distribution of principal to each Class of Notes is
intended to equal the applicable percentage of the Formula Principal
Distribution Amount. On each Distribution Date, each such amount includes the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the Monthly Period related to such Distribution Date. If the Net
Liquidation Proceeds from such Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, the deficiency will, in effect,
be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable
to Green Tree, then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders), and then by each Class of Notes in inverse numeric
order (although funds on deposit in the Reserve Account will be available to
pay any shortfall in the distribution of interest and principal to any Class of
Notes).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to more senior Classes of Notes, are
insufficient to make a full distribution of interest and/or principal to a
Class of Notes or the Certificates, such deficiency will be carried forward and
added to the amount to be distributed to such Class of Notes or the
Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding principal balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
Similarly, if the Certificate Principal Balance were reduced to zero (which
would be caused only by Certificate Principal Liquidation Losses, whether or
not Green Tree makes any required payments under the Limited Guaranty) and the
Pool Scheduled Principal Balance on any Distribution Date were less than the
aggregate outstanding principal balance of the Notes after giving effect to
distributions of principal on such Distribution Date, then the Class A-4
Principal Balance would be reduced by the amount of such deficiency (a "Class
A-4 Principal Liquidation Loss"). The funds on deposit in the Reserve Account
will be available to pay the amount of any such Class A-4 Principal Liquidation
Loss. If the funds available in the Reserve Account are insufficient to pay
such amount, however, the amount distributable on the Class A-4 Notes on future
Distribution Dates would include interest on any such Class A-4 Principal
Liquidation Loss at the Class A-4
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Rate (and, to the extent legally permissible, interest on such unpaid interest
at the Class A-4 Rate) accrued from the date such Class A-4 Principal
Liquidation Loss was incurred, and the amount of such Class A-4 Principal
Liquidation Loss. Each more senior Class of Notes would similarly be subject to
reduction in its outstanding principal balance if the aggregate outstanding
principal balance of all more junior Classes of Notes were reduced to zero and
the Pool Scheduled Principal Balance were less than the aggregate outstanding
principal balance of the Notes, and would similarly be entitled on future
Distribution Dates to receive interest on any such Principal Liquidation Loss
at the applicable Interest Rate, and the amount of such Principal Liquidation
Loss. The applicable percentage of the Formula Principal Distribution Amount
distributable to each Class of Notes on each Distribution Date will not be
affected by any Principal Liquidation Loss experienced by a Class of Notes.
Accordingly, even if a Class of Notes has experienced a Principal Liquidation
Loss, such Class will continue to be entitled to receive its applicable
percentage of the Formula Principal Distribution Amount (or, if the Amount
Available in the Collection Account is insufficient to make such distribution,
such Class will be entitled to receive the amount of such deficiency on
subsequent Distribution Dates as an Unpaid Principal Shortfall).
Book-Entry Registration
Holders of the Notes or the Certificates may hold through DTC (in the United
States) or, solely in the case of the Notes, CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations that
are participants in such systems. The Certificates may not be held, directly or
indirectly, through CEDEL or Euroclear.
Cede & Co., as nominee for DTC, will hold the Notes and the Certificates.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of the
CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
Transfers between DTC's participating organizations (the "Participants") will
occur in accordance with DTC rules. Transfers between CEDEL Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
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For a description of transfers between persons holding directly or indirectly
through DTC, see "Certain Information Regarding the Securities--Book-Entry
Registration" in the Prospectus.
Cedel Bank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the
clearance and settlement of securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of CEDEL Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in CEDEL in any of 28 currencies, including United
States dollars. CEDEL provides to its CEDEL Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary
Institute. CEDEL Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the Underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Federal Income Tax Consequences" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to this
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Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DESCRIPTION OF THE COUNTERPARTY
[insert description of counterparty, if any]
The description of the Counterparty set out above has been provided by the
Counterparty. The Counterparty has not, however, been involved in the
preparation of, and does not accept responsibility for, this Prospectus
Supplement as a whole.
DESCRIPTION OF THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Trust Documents."
General
The Certificates will be issued pursuant to the terms of the Trust Agreement,
a form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement, as executed, will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the
Certificates of any given series and the related Trust Agreement set forth in
the Prospectus, to which description reference is hereby made.
Distributions
Certificateholders will be entitled to receive on each Distribution Date
commencing in 1998, to the extent that funds available together with the
Guaranty Payment described below are sufficient therefor, the
Certificateholders' Distributable Amount.
Interest
On each Distribution Date, the Owner Trustee will distribute pro rata to
Certificateholders accrued interest at the Pass-Through Rate on the outstanding
Certificate Principal Balance. Interest in respect of a Distribution
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Date will accrue from , 1998, or from the most recent Distribution Date
to but excluding the following Distribution Date. The "Certificate Principal
Balance" as of any Distribution Date will be the Original Certificate Principal
Balance, reduced by all amounts allocable to principal previously distributed
to Certificateholders minus any unreimbursed Certificate Principal Liquidation
Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Certificates to the extent of funds available on
such Distribution Date, after payment of all interest and principal then
payable on the Notes and any amounts previously withdrawn from any sub-account
of the Spread Account or the Reserve Account and not previously replenished. In
the event such funds available are not sufficient to make a full distribution
of interest on the Certificates, the amount of the shortfall will be carried
forward and added to the amount of interest payable on the next Distribution
Date. Any amount so carried forward will bear interest at the Pass-Through
Rate, to the extent legally permissible. See "Description of the Certificates."
Principal
No distributions of principal on the Certificates will be payable until all
of the Notes have been paid in full. On each Distribution Date commencing on
the Distribution Date on which the Notes are paid in full, principal on the
Certificates will be payable in an amount equal to the Formula Principal
Distribution Amount for such Distribution Date (less, on the Distribution Date
on which the Notes are paid in full, the portion thereof payable on the Notes),
plus the Unpaid Certificate Principal Shortfall, if any, from prior
Distribution Dates.
The "Unpaid Certificate Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the
Certificates on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Certificate Principal Liquidation
Loss.
Optional Prepayment
If Green Tree exercises its option to purchase the Contracts when the Pool
Scheduled Principal Balance declines to 10% or less of the Cutoff Date Pool
Principal Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the outstanding principal amount together with accrued
interest at the Pass-Through Rate, which distribution will effect early
retirement of the Certificates. See "Description of the Trust Documents--
Termination" in the accompanying Prospectus.
Limited Guaranty
In order to mitigate the effect of the subordination of the Certificates and
the effect of liquidation losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on each Distribution Date the amount
equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The
Guaranty Payment for any Distribution Date will equal the difference, if any,
between the Certificateholders' Distributable Amount and the remaining funds
available in the Collection Account after payment of all interest and principal
on the Notes and the deposit in any sub-account of the Spread Account or the
Reserve Account of any amounts previously withdrawn therefrom and not
previously replenished. The "Certificateholders' Distributable Amount" equals
the unpaid and accrued interest on the Certificates, plus on each Distribution
Date commencing on the Distribution Date on which the Notes are paid in full,
principal in an amount equal to the Formula Principal Distribution Amount for
such Distribution Date (less, on the Distribution Date on which the Notes are
paid in full, the portion thereof payable on the Notes), plus any Unpaid
Certificate Principal Shortfall for such Distribution Date, and plus any
unreimbursed Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured general obligation of Green Tree
and will not be supported by any letter of credit or other enhancement
arrangement. The ratings assigned to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green Tree's senior debt securities
were recently downgraded by
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S&P from "A-" to "BBB+" and by Fitch from "A" to "A-", which has been reflected
in the ratings assigned to the Certificates. See "Summary of Terms--Ratings."
The Limited Guaranty will not benefit in any way, or result in any payment
to, the Class A-1, Class A-2, Class A-3 or Class A-4 Noteholders.
As compensation for servicing the Contracts and providing the Limited
Guaranty, Green Tree will be entitled to receive the Monthly Servicing and
Guaranty Fee on each Distribution Date, which will be equal to the Amount
Available remaining after payment of the Certificateholders' Distributable
Amount and any deposits into the Spread Account or the Reserve Account required
on that Distribution Date.
Transfers of Certificates
Certificateholders, other than individuals or entities holding Certificates
through a broker who reports sales of securities on Form 1099-B, are required
under the Trust Agreement to notify the Owner Trustee of any transfer of their
Certificates in a taxable sale or exchange within 30 days of such transfer.
Losses on Liquidated Contracts
As described above, the distribution of principal to the Certificates is
intended to equal the Class A-1:HE Formula Principal Distribution Amount. Such
amount includes the Scheduled Principal Balance of each Contract that became a
Liquidated Contract during the Monthly Period preceding such Distribution Date.
If the Net Liquidation Proceeds from such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated Contract, the deficiency will,
in effect, be absorbed first by the Monthly Servicing and Guaranty Fee
otherwise payable to Green Tree and the General Partner Fee payable to the
General Partner and then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the distribution
to the Certificateholders).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to the Notes, are insufficient to make
a full distribution of interest and/or principal to the Certificates, such
deficiency will be carried forward and added to the amount to be distributed to
the Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding Principal Balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
DESCRIPTION OF THE TRUST DOCUMENTS AND INDENTURE
The following summary describes certain terms of the Sale and Servicing
Agreement and the Trust Agreement (together, the "Trust Documents") and the
Indenture. Forms of the Trust Documents and Indenture, as executed, have been
filed as exhibits to the Registration Statement. A copy of each of the Trust
Documents and Indenture will be filed with the Commission following the
issuance of the Securities. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions
of the Trust Documents and Indenture. The following summary supplements, the
description of the
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general terms and provisions of the Trust Documents and Indenture (as such
terms are used in the accompanying Prospectus) set forth in the accompanying
Prospectus, to which description reference is hereby made.
Accounts
The Servicer will establish and maintain one or more accounts, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders,
into which all payments made on or with respect to the Contracts will be
deposited (the "Collection Account"). The Servicer will establish and maintain
the Spread Account, which will include sub-accounts for the Class A-2, Class A-
3 and Class A-4 Noteholders, in the name of the Indenture Trustee on behalf of
the Noteholders, in which amounts will be deposited to cover shortfalls in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes. In
addition, the Servicer will establish and maintain the Reserve Account in the
name of the Indenture Trustee on behalf of the Noteholders, in which amounts
will be deposited to cover shortfalls in interest or principal distributable on
the Notes. The Servicer will establish and maintain an account, in the name of
the Indenture Trustee on behalf of the Noteholders, in which amounts released
from the Collection Account, the Spread Account and the Reserve Account for
distribution to Noteholders will be deposited and from which all distributions
to Noteholders will be made (the "Note Distribution Account"). The Servicer
will also establish and maintain an account, in the name of the Owner Trustee
on behalf of the Certificateholders, in which amounts released from the
Collection Account for distribution to Certificateholders will be deposited and
from which all distributions to Certificateholders will be made (the
"Certificate Distribution Account"). See "Description of the Trust Documents--
Collections" in the accompanying Prospectus.
An account (the "Pre-Funding Account") will be established by the Indenture
Trustee and funded by Green Tree on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Contracts. The amount deposited in the
Pre-Funding Account (as reduced from time-to-time, the "Pre-Funded Amount")
will initially equal the difference between $ and the aggregate principal
balance as of the Cutoff Date of the Initial Contracts and Additional
Contracts. The Pre-Funding Account will be used to purchase Subsequent
Contracts during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) , 1998 or (iii) the date on which an Event of Termination
occurs under the Sale and Servicing Agreement (the "Pre-Funding Period"). The
Pre-Funded Amount will be reduced during the Pre-Funding Period by the amount
used to purchase Subsequent Contracts in accordance with the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, following the initial issuance of the
Securities, the Trust will be obligated to purchase Subsequent Contracts from
Green Tree during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Contract will have been underwritten in accordance with Green
Tree's standard underwriting criteria. Subsequent Contracts will be transferred
to the Trust pursuant to subsequent transfer instruments between Green Tree and
the Trust. In connection with the purchase of Subsequent Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to Green Tree from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. Green Tree will
designate the Subsequent Transfer Date as the Cutoff Date with respect to the
related Subsequent Contracts purchased on such date. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Contracts. Following each Subsequent
Transfer Date, the aggregate principal balance of the Subsequent Contracts in
the Trust will increase by an amount equal to the aggregate principal balance
of the Contracts so purchased and the amount in the Pre-Funding Account will
decrease accordingly. Any Pre-Funded Amount remaining after the purchase of
Subsequent Contracts will be applied on the first Distribution Date on or after
the last day of the Pre-Funding Period to prepay principal on the Class A-1
Class A-2, Class A-3 and Class A-4 Notes.
Any conveyance of Subsequent Contracts on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each
Subsequent Contract must satisfy the representations and warranties
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specified in the related subsequent transfer instrument and the Sale and
Servicing Agreement; (b) Green Tree will not select Subsequent Contracts in a
manner that it believes is adverse to the interests of the Securityholders; (c)
as of its respective Cutoff Date, each Subsequent Contract will satisfy the
following criteria: (i) no Subsequent Contract may be more than 59 days
contractually delinquent; (ii) the remaining stated term to maturity of each
Subsequent Contract will not exceed 240 months; (iii) each Subsequent Contract
will be underwritten in accordance with Green Tree's standard underwriting
criteria; and (iv) no Subsequent Contract will have a loan-to-value ratio
greater than 100%.
Distributions
On each Distribution Date, the Servicer shall instruct the Indenture Trustee
to distribute from the Collection Account the Amount Available in the following
order of priority:
1. If Green Tree or an affiliate is no longer the Servicer, then to the
Servicer, the Servicing Fee for the related Monthly Period.
2. To the Servicer, reimbursement for advances made with respect to
delinquent payments that were recovered during the prior Monthly Period.
3. To the Note Distribution Account, the Noteholders' Distributable
Amount and any amounts previously withdrawn from any sub-account of the
Spread Account or the Reserve Account and not previously replenished.
4. To the Certificate Distribution Account, the Certificateholders'
Interest Distributable Amount and, after the Notes have been paid in full,
the Certificateholders' Principal Distributable Amount.
5. To the Indenture Trustee for deposit in the Spread Account, to fund
the initial amounts required in the Class A-2, Class A-3 and Class A-4 sub-
accounts.
6. To the Indenture Trustee for deposit in the Reserve Account, to fund
the initial amount required therein.
7. To Green Tree, the Monthly Servicing and Guaranty Fee.
On each Distribution Date, the Indenture Trustee will distribute all amounts
on deposit in the Note Distribution Account in the following order of priority:
(i) to the Class A-1 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods;
(ii) to the Class A-2 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(iii) to the Class A-2 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-2 Notes and have not previously been replenished;
(iv) to the Class A-3 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(v) to the Class A-3 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-3 Notes and have not previously been replenished;
(vi) to the Class A-4 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(vii) to the Class A-4 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-4 Notes and have not previously been replenished; and
(viii) to the Reserve Account to the extent amounts have previously been
withdrawn therefrom to pay interest or principal on any Class of Notes and
have not previously been replenished.
On each Distribution Date, the Owner Trustee or its Paying Agent will
distribute all amounts on deposit in the Certificate Distribution Account to
the Certificateholders.
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For the purposes hereof, the following terms shall have the following
meanings:
"Amount Available" with respect to any Distribution Date, means generally the
sum of payments on the Contracts due and received during the preceding month,
prepayments and other unscheduled collections received during the preceding
month, any amounts deposited in respect of Purchased Contracts, any Interest
Rate Cap Payment, any Guaranty Payment, and all earnings from the investment of
funds in the Collection Account.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Home Equity Contract: (i) all scheduled payments of principal due on each
outstanding Home Equity Contract during the related Monthly Period, (ii) all
Partial Principal Prepayments applied and all Principal Prepayments in Full
received during the related Monthly Period in respect of each Home Equity
Contract, (iii) the Scheduled Principal Balance of each Home Equity Contract
that became a Liquidated Contract during the related Monthly Period, (iv) the
Scheduled Principal Balance of each Home Equity Contract which, during the
related Monthly Period, was purchased by Green Tree as a result of a breach of
a representation or warranty or by the Servicer as a result of an uncured
breach of a covenant under the Sale and Servicing Agreement, and (v) with
respect to the Distribution Date in 1998, any remaining amounts on deposit
in the Pre-Funding Account. The Formula Principal Distribution Amount for the
Distribution Date in 2029, will be the sum of the Note Principal Balance
and the Certificate Principal Balance.
"Liquidated Contract" means any defaulted Contract as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Contract through the date of disposition of the related real property
have been recovered; provided that any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and proceeds
of such disposition have been received shall be deemed to be a Liquidated
Contract.
"Purchased Contract" means a Contract (i) that Green Tree has become
obligated to repurchase (or, under certain circumstances, has elected to
repurchase) as a result of an uncured breach by Green Tree of a representation
or warranty made by Green Tree with respect to such Contract or (ii) that the
Servicer has become obligated to repurchase (or, under certain circumstances,
has elected to repurchase) as a result of an uncured breach of the covenants
made by it with respect to such Contract.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount.
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carryover
Shortfall for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect to
any Distribution Date, interest accrued for the related monthly interest period
on each Class of Notes at the respective Interest Rate for such Class on (i)
the outstanding Principal Balance of the Notes of such Class and (ii) the
aggregate unreimbursed Principal Liquidation Losses of such Class on each prior
Distribution Date, in each case after giving effect to all payments of
principal to the Noteholders of such Class on the immediately preceding
Distribution Date.
"Principal Liquidation Loss" means, with respect to any Distribution Date and
any Class of Notes, the amount by which the aggregate Principal Balance of such
Class and each junior Class and the Certificate Principal Balance (after giving
effect to any Principal Liquidation Losses imposed on such junior Classes and
Certificates) exceeds the Pool Scheduled Principal Balance, after giving effect
to all distributions of principal on such Distribution Date.
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"Principal Balance" means, with respect to any Determination Date and any
Class of Notes, the Original Principal Balance of such Class minus all amounts
previously distributed in respect of principal of such Class and minus any
unreimbursed Principal Liquidation Losses of such Class.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Noteholders' Interest Carryover Shortfall on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date, plus interest on the
amount of interest due but not paid to Noteholders on the preceding
Distribution Date, to the extent permitted by law, at the respective Interest
Rate for each Class of Notes for the applicable monthly interest period.
"Noteholder's Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Unpaid Principal
Shortfall as of the close of the preceding Distribution Date; provided,
however, that the Noteholders' Principal Distributable Amount shall not exceed
the outstanding principal balance of the Notes, and provided further, that the
Noteholders' Principal Distributable Amount on the Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect
to other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding
principal balances (including all unreimbursed Principal Liquidation Losses) of
all Classes of Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount plus the aggregate unreimbursed Principal Liquidation
Losses of each Class of Notes.
"Noteholders' Percentage" means, 100% until and including the Distribution
Date on which the aggregate Principal Balance of the Notes are paid in full and
0% thereafter.
"Noteholders' Unpaid Principal Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Unpaid Principal
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account on such
Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Interest Distributable
Amount and the Certificateholders' Principal Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, interest accrued at the Pass-Through Rate on
(i) the Certificate Principal Balance and (ii) the aggregate unreimbursed
Certificate Principal Liquidation Losses on each prior Distribution Date, in
each case after giving effect to all payments of principal to the
Certificateholders on the immediately preceding Distribution Date.
"Certificate Principal Liquidation Loss" means, with respect to any
Distribution Date, the amount by which the aggregate Principal Balance of the
Notes and the Certificate Principal Balance exceeds the Pool Scheduled
Principal Balance, after giving effect to all distributions of principal on
such Distribution Date.
"Certificate Principal Balance" equals, initially, $ (approximate) and,
thereafter, equals the Original Certificate Principal Balance, reduced by all
amounts allocable to principal previously distributed to Certificateholders
minus any unreimbursed Certificate Principal Liquidation Losses.
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"Certificateholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date, plus interest on such excess, to the extent permitted by
law, at the Pass-Through Rate from such preceding Distribution Date to but
excluding the current Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Certificateholders'
Unpaid Principal Shortfall as of the close of the preceding Distribution Date;
provided, however, that the Certificateholders' Principal Distributable Amount
shall not exceed the Certificate Principal Balance plus any unreimbursed
Certificate Principal Liquidation Losses. In addition, on the Final Scheduled
Distribution Date, the principal required to be deposited into the Certificate
Distribution Account shall not be less than the amount that is necessary (after
giving effect to the other amounts to be deposited in the Certificate
Distribution Account on such Distribution Date and allocable to principal) to
reduce to zero the Certificate Principal Balance plus the unreimbursed
Certificate Principal Liquidation Losses.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
Formula Principal Distribution Amount (less, on the Distribution Date on which
the Notes are paid in full, the portion thereof payable on the Notes).
"Certificateholders' Unpaid Principal Shortfall" means, as of the close of
any Distribution Date, the excess of the Certificateholders' Monthly Principal
Distributable Amount and any outstanding Certificateholders' Unpaid Principal
Shortfall from the preceding Distribution Date, over the amount in respect of
principal that is actually deposited in the Certificate Distribution Account.
Statements to Securityholders
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Indenture Trustee a statement to be delivered to the Noteholders and to
the Owner Trustee a statement to be delivered to the Certificateholders on such
Distribution Date. Such statements will be based on the information in the
related Servicer's Certificate setting forth certain information required under
the Trust Documents. Each such statement to be delivered to Noteholders will
include the following information as to the Notes, and each such statement to
be delivered to Certificateholders will include the following information as to
the Certificates, with respect to such Distribution Date or the period since
the previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Notes and to the Certificates;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Notes and to the Certificates;
(iii) the aggregate outstanding principal balance and the Note Pool
Factor for the Notes and the Certificate Principal Balance and the
Certificate Pool Factor for the Certificates after giving effect to all
payments reported under (ii) above on such date;
(iv) the Noteholders' Interest Shortfall, the Noteholders' Principal
Shortfall, the Certificateholders' Interest Shortfall and the
Certificateholders' Principal Shortfall, if any, and the change in such
amounts from the preceding statement;
(v) the amount, if any, of Principal Liquidation Losses, aggregate
unreimbursed Principal Liquidation Losses since the Closing Date and the
amount of the distribution allocable to such losses for the Notes and
Certificates;
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(vi) the amount, if any, deposited or withdrawn from each sub-account of
the Spread Account and the amount on deposit in each sub-account of the
Spread Account after giving effect to all withdrawals and deposits on such
Distribution Date;
(vii) the amount, if any, deposited or withdrawn from the Reserve Account
and the amount on deposit in the Reserve Account after giving effect to all
withdrawals and deposits on such Distribution Date;
(viii) the amount, if any, of the Interest Rate Cap Payment and the
Guaranty Payment;
(ix) the amount of the Monthly Servicing and Guaranty Fee paid to the
Servicer;
(x) the number and aggregate principal balances of delinquent Contracts,
the number of Products repossessed and repossessed and remaining in
inventory, the number of foreclosures and the number of Contracts that
became Liquidated Contracts with respect to the immediately preceding
Monthly Period; and
(xi) the aggregate amount of Servicer Advances made by the Servicer with
respect to such Distribution Date, and the aggregate amount paid to the
Servicer as reimbursement of Servicer Advances made on prior Distribution
Dates.
Each amount set forth pursuant to subclauses (i) through (vi) with respect to
Certificates or Notes will be expressed as a dollar amount per $1,000 of the
initial principal amount of the Notes or the initial Certificate Principal
Balance, as applicable.
Unless and until Definitive Notes or Definitive Certificates are issued, such
reports will be sent on behalf of the Trust to Cede & Co., as registered holder
of the Notes and the Certificates and the nominee of DTC. Note Owners and
Certificate Owners may receive copies of such reports upon written request,
together with a certification that they are Note Owners or Certificate Owners,
as the case may be, and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee or Owner Trustee. See
"Reports to Securityholders" herein and "Reports to Securityholders" and
"Certain Information Regarding the Securities" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder or
Certificateholder, a statement as to the aggregate amounts of interest and
principal paid to such Noteholder or Certificateholder, information regarding
the amount of servicing compensation received by the Servicer and such other
information as Green Tree deems necessary to enable such Noteholder or
Certificateholder to prepare its tax returns. See "Certain Federal Income Tax
Consequences" herein.
Administrator
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income tax
consequences relating to the purchase, ownership, and disposition of the Notes
and the Certificates. The discussion is based upon the current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder, and judicial or ruling authority, all of
which are subject to change, which change may be retroactive. For additional
information regarding federal and state income tax consequences, see "Certain
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Federal Income Tax Consequences--Owner Trust Series" and "Certain State Income
Tax Consequences" in the Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed herein or in the accompanying Prospectus, and no assurance can be
given that the IRS will not take contrary positions. Moreover, there are no
cases or IRS rulings on transactions similar to those described herein with
respect to the Trust, involving both debt and equity interests issued by a
trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
In the opinion of [Dorsey & Whitney LLP], for federal and Minnesota income
tax purposes, the Notes will be characterized as debt and the Trust will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation. Each Certificateholder, by
the acceptance of a Certificate, agrees to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes. The
Notes will not be issued with original issue discount ("OID"). The Class A-1
Notes provide for stated interest at a floating rate based on LIBOR. Under
Treasury regulations, stated interest payable at a variable rate is not treated
as OID or contingent interest if the variable rate is a qualified floating rate
or a qualified objective rate. The stated interest on the Class A-1 Notes
represents interest payable at a qualified floating rate and will be taxable to
holders of such Notes as interest and not as OID or contingent interest. The
Class A-2, Class A-3 and Class A-4 Notes will not be issued with OID or
contingent interest because interest will be payable at a single fixed rate at
least annually.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and or Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Securities might be deemed to constitute prohibited transactions under ERISA
and the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined
under the Plan Assets Regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Green Tree believes that the Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. However, without regard to whether the Notes are
treated as an Equity Interest for such purposes, the acquisition or holding of
Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, the Owner Trustee or the Indenture
Trustee, the owner of collateral, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan. In such case, certain exemptions from the prohibited transaction
rules could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited
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Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38 regarding investments by bank
collective investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers."
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity. By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank (decided December 13, 1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to make
purchases of the Certificates. In particular, such an insurance company should
consider the exemptive relief granted by the Department of Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995). The Small
Business Job Protection Act of 1996 (the "1996 Act") became effective on August
20, 1996. The 1996 Act amends ERISA to require the Department of Labor to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
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UNDERWRITING
[Underwriters] (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from Green Tree the
respective principal amounts of Notes and Certificates set forth below:
<TABLE>
<CAPTION>
Class A-1: Class A-2 Class A-3 Class A-4
Notes Notes Notes Notes Certificates
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $ $
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the Notes and Certificates offered hereby, if any of such Notes
and Certificates are purchased.
Green Tree has been advised by the Underwriter that it proposes initially to
offer the Notes and Certificates to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the Class A-1
Principal Balance, % of the Class A-2 Principal Balance, % of the Class
A-3 Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, and that the Underwriter and such dealers may
reallow a discount of not in excess of % of the Class A-1 Principal
Balance, % of the Class A-2 Principal Balance, % of the Class A-3
Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriter after
the initial public offering of the Notes and Certificates offered hereby.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market.
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 in the absence of such purchases.
Neither Green Tree nor the Underwriter 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 Securities. In addition, neither Green Tree
nor the Underwriter makes any representation that the Underwriter will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Securities to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Securities in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
S-40
<PAGE>
The Notes have not been and will not be registered under the Securities and
Exchange Law of Japan (the "Securities and Exchange Law") and the Underwriter
has agreed that it will not offer or sell any of the Notes, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan (which
term as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan), except pursuant
to an exemption from the registration requirements of, and otherwise in
compliance with, the Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Green Tree has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Green Tree does not intend to apply for listing of the Notes and Certificates
on a national securities exchange, but has been advised by the Underwriter that
the Underwriter currently intends to make a market in the Securities, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Securities and any such market may be
discontinued at any time at the sole discretion of the Underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Securities.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and Certificates
and with respect to the federal and Minnesota income tax matters discussed
under "Certain Federal and State Income Tax Consequences" will be passed upon
for Green Tree by , Minnesota. The validity of the Notes
and Certificates will be passed upon for the Underwriter by , New
York, New York.
S-41
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available only in
book-entry form (the "Global Notes"). Investors in the Global Notes may hold
such Global Notes through any of DTC, CEDEL or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Notes through CEDEL
and Euroclear will be conducted in the ordinary way in accordance with their
normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Notes through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of CEDEL and Euroclear (in such capacity)
and DTC Participants.
Non-U.S. holders (as described below) of Global Notes will be subject to U.S.
withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their participants.
Initial Settlement
All Global Notes will be held in book-entry form by DTC in the name of Cede &
Co. as nominee of DTC. Investors' interests in the Global Notes will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Notes through DTC will follow the
settlement practices applicable to United States corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Notes through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no "lock-
up" or restricted period. Global Notes will be credited to the securities
custody accounts on the settlement date against payments in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Notes are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
A-1
<PAGE>
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Notes against payment. Payment will include interest accrued on the Global
Notes from and including the last coupon payment date to and excluding the
settlement date. Payment will then be made by such Depositary to the DTC
Participant's account against delivery of the Global Notes. After settlement
has been completed, the Global Notes will be credited to the applicable
clearing system and by the clearing system, in accordance with its usual
procedures, to the CEDEL Participant's or Euroclear Participant's account. The
Global Notes credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the Global Notes will accrue from,
the value date (which would be the preceding day when settlement occurred in
New York). If settlement is not completed on the intended value date (i.e., the
trade fails), the CEDEL or Euroclear cash debit will be valued instead as of
the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Notes were credited to their
accounts. However, interest on the Global Notes would accrue from the value
date. Therefore, in many cases the investment income on the Global Notes earned
during that one-day period may substantially reduce or offset the amount of
such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Notes to the
respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Notes are to
be transferred by the respective clearing systems, through their respective
Depositaries, to a DTC Participant. The seller will send instructions to CEDEL
or Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases, CEDEL or Euroclear will
instruct their respective Depositaries, as appropriate, to deliver the Notes to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Notes from and including the last coupon payment date to
and excluding the settlement date. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day,
and receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the bank-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date. Finally, day traders that use CEDEL or
Euroclear and that purchase Global Notes from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
A-2
<PAGE>
(b) borrowing the Global Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Notes
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Notes holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of Notes
that are non-U.S. Persons generally can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 864(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10 percent shareholder (within the meaning
of Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Person with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner of Notes or such owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Notes. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global Notes.
A-3
<PAGE>
PROSPECTUS Base Prospectus No. 2
High-LTV Home Equity Loans--Owner Trust
Green Tree Financial Corporation, Seller and Servicer
Home Equity Trusts
(Issuable In Series)
We are offering loan-backed notes and loan-backed certificates for home
equity loans under this prospectus and a prospectus supplement. The prospectus
supplement will be prepared separately for each series of securities offered.
We refer to the notes and the certificates as "securities" and to each separate
series of securities as a "series." Green Tree Financial Corporation will form
a trust for each series, and the trust will issue the securities of that
series. The securities 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 securities within a series to receive payments may
be senior or subordinate to the rights of one or more of the other classes of
securities. In addition, a series of securities may include one or more classes
which on the one hand are subordinated to one or more classes of securities,
while on the other hand are senior to one or more classes of securities. The
rate of principal and interest payment on the securities of any class will
depend on the priority of payment of that class and the rate and timing of
payments of the related home equity loans.
----------------
The securities 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 securities unless
accompanied by the prospectus supplement relating to that series.
Prospectus dated , 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the securities in two separate documents that progressively
provide more detail: (a) this prospectus, which provides general information,
some of which many not apply to a particular series of securities, including
your series; and (b) the prospectus supplement related to the particular terms
of your series of securities.
If the terms of your series of securities described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
Some persons participating in this offering may engage in transactions that
stabilize, maintain or in some way affect the price of the securities. These
types of transactions may include stabilizing, the purchase of securities 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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the securities of each series certain
monthly and annual reports concerning the securities and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the securities--Reports to
Securityholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), after the date of this prospectus and prior to
the termination of the offering of the securities issued by that trust, will be
incorporated by reference into this prospectus.
2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the securities, 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 and the accompanying prospectus supplement.
Issuer....................... For each series of securities, Green Tree will
form a trust pursuant to a trust agreement. Each
trust will be the Issuer for a series of
securities.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the securities. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of securities. Payments on the securities
will be made primarily from payments on the
related pool of loans. The terms of the
securities issued by a trust will be governed by
a Pooling and Servicing Agreement between Green
Tree and the trustee for that series. We will
identify the trustee for a series of securities
in the related prospectus supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
securities. You should read carefully the
section entitled "Risk Factors" beginning on
page of this prospectus.
Trustee...................... The owner trustee for a trust. We will specify
the owner trustee in the related prospectus
supplement. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee............ We will specify the indenture trustee, with
respect to any series of securities, in the
related prospectus supplement.
The Loans.................... The loans underlying a series of securities form
a loan pool. The loans in a loan pool will be
fixed or variable rate loans. The loans consist
of closed-end home equity loans.
The home equity loans will be secured by a lien
on the related real estate, but may have a loan-
to-value ratio substantially in excess of 100%.
If we so specify in the related prospectus
supplement, we may divide the loan pool into two
or more sub-pools, in which the securities of
specified classes may be paid primarily from the
loans comprising a given sub-pool.
The prospectus supplement for each series will
provide information about the following:
- the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
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- the weighted average and range of
contractual rates of interest on the loans;
- the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
- the average outstanding principal balance
of the loans as of the cut-off date;
- the range of loan-to-value ratios; and
- the geographic location of improved real
estate underlying the loans.
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
The Notes.................... Each series of securities will include one or
more classes of notes. The notes will be issued
pursuant to an indenture.
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
notes in denominations of $1,000 and in integral
multiples thereof. These notes will be available
in book-entry form only. Unless we specify
otherwise in the related prospectus supplement,
beneficial owners of notes will receive
definitive notes only in the limited
circumstances described in this prospectus or in
the related prospectus supplement. See "Certain
Information Regarding the Securities--Book-Entry
Registration."
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the notes
or the underlying loans.
Unless we specify otherwise in the related
prospectus supplement, each class of notes will
have a stated principal amount and will accrue
interest at a specified rate or rates. Each
class of notes may have a different interest
rate, which may be a fixed, variable or
adjustable interest rate or any combination of
these. We will specify in the related prospectus
supplement the interest rate for each class of
notes and the method for determining subsequent
changes to the interest rate.
We may include two or more classes of notes in a
series which may differ as to timing and
priority of payment, seniority, allocations of
loss, interest rate or amount of payment of
principal or interest, or as to which payments
of principal or interest may or may not be made
upon the occurrence of specified events or on
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the basis of collections from designated
portions of the underlying pool. In addition, a
series may include one or more classes of notes
entitled to:
- principal payments with disproportionate,
nominal or no interest payments, or
- interest payments with disproportionate,
nominal or no principal payments.
The notes of a series may include one or more
classes which on the one hand are subordinated
to one or more classes of notes, while on the
other hand are senior to one or more classes of
notes.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
notes, if any, of that series as described in
the related prospectus supplement. In addition,
if the related prospectus supplement provides
that the property of a trust will include a pre-
funding account, we will partially redeem the
outstanding notes, if any, on or immediately
following the end of the pre-funding period in
an amount and manner specified in the related
prospectus supplement. In the event that we so
partially redeem, the owners of the notes may be
entitled to receive a prepayment premium from
the trust, in the amount and to the extent
provided in the related prospectus supplement.
The Certificates............. We will issue the certificates of any series of
securities pursuant to the related trust
documents. If we so specify in the related
prospectus supplement, we may include the
certificates of a series of one or more classes
which:
- are entitled to receive distributions only
in respect of the principal, interest or
any combination of these or in specified
proportions in respect of such payments,
and/or
- are entitled to receive distributions in
respect of principal before or after
specified principal distributions have been
made on one or more other classes of
certificates within that series, or on a
planned amortization schedule or upon the
occurrence of certain other specified
events. See "The Certificates."
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
certificates in denominations of $1,000 and in
integral multiples thereof. These certificates
will be available in book-entry form only.
Unless we specify otherwise in the related
prospectus supplement, beneficial owners of
certificates will receive definitive
certificates only in the limited circumstances
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described in this prospectus or in the related
prospectus supplement. See "Certain Information
Regarding the securities--Book-Entry
Registration."
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the
Certificates or the underlying loans.
Unless we specify otherwise in the related
prospectus supplement, each class of
certificates will have a stated certificate
balance and will accrue interest at a specified
rate or rates. Each class of certificates may
have a different pass-through rate, which may be
a fixed, variable or adjustable pass-through
rate, or any combination of these. We will
specify in the related prospectus supplement the
pass-through rate for each class of
certificates, or the initial pass-through rate
and the method for determining subsequent
changes to the pass-through rate.
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.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
certificates, if any, of such series as
described in the related prospectus supplement.
In addition, if the related prospectus
supplement provides that the property of a trust
will include a pre-funding account, we will
partially redeem the outstanding certificates,
if any, on or immediately following the end of
the pre-funding period in an amount and manner
specified in the related prospectus supplement.
In the event that we so partially redeem, the
owners of the certificates may be entitled to
receive a prepayment premium from the trust, in
the amount and to the extent provided in the
related prospectus supplement.
Subordinated Securities...... We may subordinate one or more classes of any
series of securities, as specified in the
related prospectus supplement. The rights of
holders of subordinated securities to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior securities to the extent
and in the manner we specify in the related
prospectus supplement. If a series of securities
contains more than one class of subordinated
securities, distributions and losses will be
allocated among those classes in the manner
specified in the related prospectus supplement.
The rights of holders of subordinated
securities, to the extent not subordinated, may
be on
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a parity with holders of senior securities. By
subordinating a class of securities, we intend
to:
^ enhance the likelihood of regular receipt
by holders of senior securities of the full
amount of scheduled monthly payments of
principal and interest due them, and
^ protect holders of senior securities
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated securities the benefits of other forms
of credit enhancement that would benefit only
those subordinated securities.
Trust Property............... Each note will represent an obligation of its
related trust. Each certificate will represent a
fractional undivided interest in its related
trust. The assets of each trust will include
(among other things):
^ a pool of fixed or variable rate home
equity loans or promissory notes,
^ amounts held in the collection account,
^ 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
securities,
^ certain other rights under the trust
documents, and
^ any other property that we specify in the
related prospectus supplement.
In addition, if we so specify in the related
prospectus supplement, the trust property will
include money on deposit in a pre-funding
account established by the indenture trustee or
the trustee, which we will use to purchase
subsequent loans from the Seller during the pre-
funding period. See "The Trusts."
If and to the extent we specify in the related
prospectus supplement, the related trust will be
obligated to purchase from us additional loans
during the pre-funding period. These loans will
have a total principal balance approximately
equal to the amount on deposit in the pre-
funding account on the closing date.
We must repurchase loans if we breach certain
representations and warranties that we make. See
"Description of the Trust Documents--Sale and
Assignment of the Contracts" and "Certain Legal
Aspects of the Contracts--Repurchase
Obligations."
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated securities, we may provide credit
enhancement with respect to a series of
securities
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<PAGE>
by pool insurance, letters of credit, surety
bonds, a guarantee of Green Tree, cash reserve
funds or other forms of enhancement acceptable
to each nationally recognized rating agency
rating a series of securities. We will describe
any such credit enhancement in the related
prospectus supplement.
Servicing ................... The servicer will manage, administer, service
and make collections on the loans held by each
trust. Unless we specify otherwise in the
related prospectus supplement, we will pay the
servicer a monthly fee on each distribution date
pursuant to a servicing fee formula. See
"Description of the Trust Documents--Servicing."
Advances..................... Unless we specify otherwise in the related
prospectus supplement, the servicer must make
advances each month of any scheduled payments on
the loans that were due but not received during
the prior due period. The servicer will then
receive a reimbursement of an advance from the
amount available for the related trust. The
servicer must make an advance only to the extent
it determines that the advance will be
recoverable from subsequent funds available in
the Collection Account for the related trust.
Collection Account........... The servicer will establish and maintain one or
more separate accounts for each series of
securities in the name of the indenture trustee
for the benefit of the owners of the securities.
We refer to this account as a "collection
account." We will deposit all of the payments we
receive from obligors under the loans in the
related collection account no later than one
business day after we receive them. Unless we
specify otherwise in the related prospectus
supplement, we will also deposit all of the
payments we receive from obligors with respect
to liquidated loans no later than one business
day after we receive them. Unless we specify
otherwise in the related prospectus supplement,
the servicer may use any alternative remittance
schedule acceptable to the rating agencies. See
"Description of the trust Documents--
Collections."
Optional Purchase of Loans... Unless we specify otherwise in the related
prospectus supplement, we may purchase all of
the loans held by a trust on any distribution
date following the first due period when the
total principal balance has declined to 10% or
less of the total principal balance as of the
cut-off date, subject to certain provisions in
the related trust documents. For a more complete
description of optional purchase of the loans,
see "Description of the Trust Documents--
Termination" in this prospectus.
Representations and
Warranties of Green Tree
Financial Corporation .......
We will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to our conveyance of any loan pool to a trust.
If we become aware of a
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<PAGE>
breach of any representation or warranty that
materially adversely affects the trust's
interest in any loan or receive written notice
of a breach from the trustee or the servicer,
then we must either cure the breach, repurchase
the affected loan or, if the related prospectus
supplement so provides, substitute for the
affected loan, under the conditions further
described in this prospectus and in the
prospectus supplement. For a more complete
description of our representations and
warranties, see "Description of the
Certificates--Conveyance of Loans."
Federal Income Tax In the opinion of our counsel, for federal and
Considerations.............. Minnesota income tax purposes, the notes will be
characterized as debt and the trust will not be
characterized as an association or a publicly
traded partnership taxable as a corporation.
Each noteholder, by the acceptance of a note,
will agree to treat the notes as debt. Each
certificateholder, by the acceptance of a
certificate, will agree to treat the trust as a
partnership in which the certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the trust, the
notes and the certificates are possible, but
would not result in materially adverse tax
consequences to noteholders or
certificateholders. See "Certain Federal Income
Tax Consequences" and "Certain State Income Tax
Consequences" in this prospectus.
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in your prospectus
supplement.
Legal Investment............. The Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984, as amended. For
a more complete description of legal
considerations regarding investment in the
Certificates, see "Legal Investment
Considerations" in this prospectus and in your
prospectus supplement.
Ratings...................... We will not issue the securities unless one or
more nationally recognized rating agencies have
assigned a rating to the securities in one of
their four highest rating categories.
We cannot assure you that the rating initially
assigned to your securities will not be
subsequently lowered or withdrawn by the rating
agency. If a rating agency lowers the rating
initially assigned to any securities, no person
or entity will provide any credit enhancement.
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<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the securities.
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the securities will not represent an interest in
or obligation of Green Tree. Neither the government, any underwriter or
its affiliates, the servicer nor any other party will insure or
guarantee any of the securities of any series (except as we otherwise
specify in the related prospectus supplement).
^ Risks to Investors upon any Insolvency of Green Tree. We intend that
any transfer of loans to the related trust will constitute a sale,
rather than a pledge of the loans to secure our indebtedness. However,
if we were to become a debtor under the federal bankruptcy code or
similar applicable state laws, our creditor or trustee in bankruptcy
might argue that such sale of loans by us was a pledge of the loans
rather than a sale. If this argument were accepted by a court, it would
cause the related trust to experience a delay in or reduction of
collections on the loans.
^ Junior Mortgage Liens; Value of Mortgaged Property. Green Tree expects
that a substantial number of the liens on improved real estate securing
the loans in a given loan pool will be junior to other liens on that
real estate. This subordinates the rights of the trust fund (and
consequently the holders of securities of the related series), as
beneficiary under a conventional junior deed of trust or as mortgagee
under a conventional junior mortgage, to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to cause the
property securing the loan to be sold upon default of the mortgagor or
trustor. This extinguishes the junior mortgagee's or junior
beneficiary's lien unless the servicer on behalf of the trust fund
asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans.
For a more complete description of the risks associated with junior
mortgage liens, see "Certain Legal Aspects of the Loans--Repurchase
Obligations."
We expect a substantial portion of the loans included in a 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 and of 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.
^ Limited Liquidity. We cannot assure to you that a secondary market will
develop for the securities 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 securities.
^ Subordination of Certain Classes of securities; Limited Assets. To the
extent we specify in the related prospectus supplement, we may
subordinate distributions of interest and principal on some or all
classes of securities of a series in priority or payment to interest
and principal due on the notes of such series and/or to distributions
of interest and principal on other classes of securities. In addition,
holders of certain classes of securities of any series may have the
right to take actions that are detrimental to the interests of the
holders of certain other classes of securities. For example, holders of
a class of more senior securities may be entitled to instruct the
trustee to liquidate the property of the trust when it is not in the
interest of holders of more junior classes of securities of that series
to do so. On the other hand, certain actions may require the consent of
a majority of Security owners of all classes of a series, which may
mean that owners of securities of more junior classes can prevent
10
<PAGE>
the owners of more senior classes of that series from taking action.
Moreover, no trust will have any significant assets or sources of funds
other than the loans and, to the extent provided in the related
prospectus supplement, a pre-funding account and any credit enhancement
specified in the related prospectus supplement. The notes of any series
will represent obligations solely of the related trust. The
certificates, if any, will represent interest solely in the related
trust. Except as we specify in the related prospectus supplement,
neither Green Tree, the servicer, the owner trustee, the indenture
trustee nor any other person or entity will insure or guarantee the
notes or certificates of any series. Consequently, holders of the
securities of any series must rely for payment upon payments on the
related loans and, to the extent available, amounts on deposit in a
pre-funding account and any credit enhancement (if any) as we specify
in the related prospectus supplement. If we so specify in the related
prospectus supplement, credit enhancement for a class of securities of
a series may cover one or more other classes of securities of that
series, and accordingly may be exhausted for the benefit of some
classes and thereafter be unavailable for other classes.
^ Yield and Prepayment Considerations. Full or partial prepayments on the
loans will reduce the weighted average life of the securities. Obligors
may prepay their loans without penalty. Prepayments may result from
payments by obligors, liquidations due to default, the receipt of
proceeds from physical damage or credit insurance, repurchases by us as
a result of certain uncured breaches of the warranties, purchases by
the servicer as a result of certain uncured breaches of the covenants
with respect to the loans made by it in the related Sale and Servicing
Agreement, or us or the servicer exercising our option to purchase all
of the remaining loans.
Unless we specify otherwise in the related prospectus supplement, the
amounts paid to Securityholders in respect of principal on any
distribution date will include all prepayments on the loans during the
corresponding due periods. The owners of notes and the owners of
certificates will bear all reinvestment risk resulting from the timing
of payments of principal on the securities.
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the Certificates.
THE TRUSTS
With respect to each Series of Securities, Green Tree will establish a Trust
pursuant to the related Trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related Trust Documents, the Trust will
have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the
Notes and the Certificates, if any, of such Series and distributing payments
thereon.
Each Note will represent an obligation of, and each Certificate, if any,
will represent a fractional undivided interest in, the related Trust. The
Trust Property of each Trust will include, among other things, (i) a Contract
Pool, (ii) such amounts as from time to time may be held in the Collection
Account (including all investments in the Collection Account and all income
from the investment of funds therein and all proceeds thereof) and certain
other accounts (including the proceeds thereof), (iii) 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 Securities, (iv)
certain other rights under the Trust Documents and (v) such other property as
may be specified
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<PAGE>
in the related Prospectus Supplement. See "The Contracts" and "Description of
the Trust Documents--Collections." The Trust Property will also include, if so
specified in the related Prospectus Supplement, monies on deposit in a Pre-
Funding Account to be established with the Indenture Trustee or the Trustee,
which will be used to purchase Subsequent Contracts from Green Tree from time
to time (and as frequently as daily) during the Pre-Funding Period specified in
the related Prospectus Supplement. Any Subsequent Contracts so purchased will
be included in the related Contract Pool forming part of the Trust Property,
subject to the prior rights of the related Indenture Trustee and the
Noteholders therein. In addition, to the extent specified in the related
Prospectus Supplement, a form of credit enhancement may be issued to or held by
the Trustee or the Indenture Trustee for the benefit of holders of one or more
Classes of Securities. Holders of Securities of a Series will have interests
only in such Contract Pool and will have no interest in the Contract Pool
created with respect to any other Series of Securities, except with respect to
FHA Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course of
its business. Specific information respecting the Contracts included in each
Trust will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Securities. A copy of the Sale and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Sale and Servicing Agreement delivered to the
Trustee upon delivery of the Securities.
Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale and
Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used, those
terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
The Contract Pools
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of closed-end home equity loans (the "Contracts")
originated by Green Tree on an individual basis in the ordinary course of
business. All Contracts will be secured by an interest in the related real
estate. Except as otherwise specified in the related Prospectus Supplement, the
Contracts will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate (the "Contract Rate").
For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and the
geographic location of improved real estate securing the Contracts. If the
Trust includes a Pre-Funding Account, the related Prospectus Supplement will
specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the Subsequent
Contracts.
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<PAGE>
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
The Trustee
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the Securities of such Series will be limited solely to the express obligations
of such Trustee set forth in the related Trust Documents. A Trustee may resign
at any time, in which event the General Partner will be obligated to appoint a
successor trustee. The General Partner may also remove the Trustee if the
Trustee ceases to be eligible to continue as Trustee under the related Trust
Documents or if the Trustee becomes insolvent. In such circumstances, the
General Partner will be obligated to appoint a successor trustee. Any
resignation or removal of a Trustee and appointment of a successor trustee will
be subject to any conditions or approvals specified in the related Prospectus
Supplement and will not become effective until acceptance of the appointment by
the successor trustee.
GREEN TREE FINANCIAL CORPORATION
General
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales
contracts, as well as home equity loans. Green Tree is the largest servicer of
government-insured manufactured housing contracts and conventional manufactured
housing contracts in the United States. Servicing functions are performed
through Green Tree Financial Servicing Corporation, a wholly owned subsidiary
of Green Tree. Through its principal offices in St. Paul, Minnesota, and
service centers throughout the United States, Green Tree serves all 50 states.
Green Tree also purchases, pools and services installment sales contracts for
various consumer products. Its principal executive offices are located at 1100
Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone (612) 293-3400).
Green Tree's Annual Report on Form 10-K for the year ended December 31, 1997,
most recent Proxy Statement and, when available, subsequent quarterly and
annual reports are available from Green Tree upon written request.
Contract Origination
Green Tree has originated closed-end home equity loans since January 1996. As
of December 31, 1997, Green Tree had approximately $3,116,054,406 aggregate
principal amount of outstanding closed-end home equity loans.
Through a system of regional offices, Green Tree markets its home equity
lending directly to consumers using a variety of marketing techniques. Green
Tree also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
Green Tree's credit approval process analyzes both the equity position of the
requested loan (including both the priority of the lien and the combined loan-
to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity position,
the creditworthiness
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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.
Loss and Delinquency Information
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home equity loans.
However, there can be no assurance that such experience will be indicative of
the performance of the Contracts included in a particular Contract Pool.
Ratio of Earnings to Fixed Charges for Green Tree
Set forth below are Green Tree's ratios of earnings to fixed charges for the
past five years. 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>
Year Ended December 31, Months Ended
------------------------ ----------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges...................... 4.81 7.98 7.90 5.44 3.94
</TABLE>
YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract Rate
of the Contracts (as of the related Cut-off Date) relating to each Series of
Securities will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Securities that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Securities that is offered at a premium to its principal amount or without any
principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 25 years.
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Prepayment Considerations
Contracts generally may be prepaid in full or in part without penalty. Green
Tree has no significant experience with respect to the rate of principal
prepayments on home equity loans. Because the Contracts have scheduled due
dates throughout the calendar month, and because (unless otherwise specified in
the related Prospectus Supplement) all principal prepayments will be passed
through to Securityholders of the related Series on the Payment Date following
the Due Period in which such principal prepayment occurred, prepayments on the
Contracts would affect the amount of funds available to make distributions on
the Securities on any Payment Date only if a substantial portion of the
Contracts prepaid prior to their respective due dates in a particular month
(thus paying less than 30 days' interest for that Due Period) while very few
Contracts prepaid after their respective due dates in that month. In addition,
liquidations of defaulted Contracts or the Servicer's or Green Tree's exercise
of its option to repurchase the entire remaining pool of Contracts (see
"Description of the Trust Documents--Termination") will affect the timing of
principal distributions on the Securities of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Securities, there can be no assurance that the Contracts will prepay
at such rate, and it is unlikely that prepayments or liquidations of the
Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions of
principal on such Distribution Date) as a fraction of the initial outstanding
principal balance of such Class of Notes. Each Certificate Pool Factor and each
Note Pool Factor will initially be 1.00000000; thereafter, the Certificate Pool
Factor and the Note Pool Factor will decline to reflect reductions in the
Certificate Balance of the applicable Class of Certificates or reductions in
the outstanding principal balance of the applicable Class of Notes, as the case
may be. The amount of a Certificateholder's pro rata share of the Certificate
Balance for the related Class of Certificates can be determined by multiplying
the original denomination of the Certificateholder's Certificate by the then
applicable Certificate Pool Factor. The amount of a Noteholder's pro rata share
of the aggregate outstanding principal balance of the applicable Class of Notes
can be determined by multiplying the original denomination of such Noteholder's
Note by the then applicable Note Pool Factor.
With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such reports will
be sent on behalf of the Trust to the Trustee and the Indenture Trustee and
Cede & Co., as
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registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive such reports, upon written
request, together with a certification that they are Certificate Owners or Note
Owners and payment of any expenses associated with the distribution of such
reports, from the Trustee and the Indenture Trustee at the addresses specified
in the related Prospectus Supplement. See "Certain Information Regarding the
Securities--Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of Securities
will be used to pay to Green Tree the purchase price for the Contracts and to
make the deposit of the Pre-Funded Amount into the Pre-Funding Account, if any,
to repay warehouse lenders and/or to provide for other forms of credit
enhancement specified in the related Prospectus Supplement. The net proceeds to
be received by Green Tree will be used for its general corporate purposes,
including the origination or acquisition of additional home equity loans, costs
of carrying such loans until sale of the related certificates and to pay other
expenses connected with pooling the Contracts and issuing the Securities.
THE NOTES
General
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. Unless otherwise specified in the related Prospectus Supplement, no Notes
will be issued as a part of any Series. The following summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Notes and the Indenture, and the following
summary will be supplemented in whole or in part by the related Prospectus
Supplement. Where particular provisions of or terms used in the Indenture are
referred to, the actual provisions (including definition of terms) are
incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the related
Prospectus Supplement, Notes will be available for purchase in denominations of
$1,000 and integral multiples thereof. Notes may be transferred or exchanged
without the payment of any service charge other than any tax or governmental
charge payable in connection with such transfer or exchange. Unless otherwise
provided in the related Prospectus Supplement, the Indenture Trustee will
initially be designated as the registrar for the Notes.
Principal and Interest on the Notes
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payment, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each Class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate (and which may be zero for certain Classes of Stripped Notes), or
any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes, or the
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initial Interest Rate and the method for determining the Interest Rate. One or
more Classes of Notes of a Series may be redeemable under the circumstances
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have the
same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Payment Date"), in which case each Class of Noteholders will receive their
ratable share (based upon the aggregate amount of interest due to such Class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all of the Notes of such
Class.
The Indenture
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of the applicable Indenture (without exhibits) upon request to a holder of
Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related
Indenture Trustee (on behalf of such Trust) may, without consent of the related
Noteholders, enter into one or more supplemental indentures for any of the
following purposes: (i) to correct or amplify the description of the collateral
or add additional collateral; (ii) to provide for the assumption of the Note
and the Indenture obligations by a permitted successor to the Trust; (iii) to
add additional covenants for the benefit of the related Noteholders; (iv) to
convey, transfer, assign, mortgage or pledge any property to or with the
Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify, eliminate or add to the provisions of the
Indenture in order to comply with the Trust Indenture Act of 1939, as amended;
and (viii) to add any provisions to, change in any manner, or eliminate any of
the provisions of, the Indenture or modify in any manner the rights of
Noteholders under such Indenture; provided that any action specified in this
clause (viii) shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any related Noteholder unless
Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the principal
balance of the outstanding related Notes (a "Note Majority"), the Owner Trustee
and the Indenture Trustee may execute a supplemental indenture to add
provisions, to change in any manner or eliminate any provisions of, the related
Indenture, or modify in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price
with respect thereto or change the manner of calculating any such payment, any
place of payment where, or the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with
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certain provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the related
Trust, any other obligor on the Notes, Green Tree or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the holders of which is required to direct the Indenture
Trustee to sell or liquidate the Contracts if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vii)
permit the creation of any lien ranking prior to or on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each Trust,
unless otherwise specified in the related Prospectus Supplement, "Events of
Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any such
default or the failure to cure such breach of a representation or warranty for
a period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of at least
25% in principal amount of the Notes then outstanding; or (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Trust. However,
the amount of principal due and payable on any Class of Notes on any Payment
Date (prior to the final scheduled payment date, if any, for such Class) will
generally be determined by amounts available to be deposited in the Note
Distribution Account for such Payment Date. Therefore, unless otherwise
specified in the related Prospectus Supplement, the failure to pay principal on
a Class of Notes generally will not result in the occurrence of an Event of
Default unless such Class of Notes has a final scheduled payment date, and then
not until such final scheduled payment date for such Class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration may,
under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the Notes
of any Series have been declared due and payable following an Event of Default
with respect thereto, the related Indenture Trustee may institute proceedings
to collect amounts due or foreclose on Trust Property, exercise remedies as a
secured party, sell the related Contracts or elect to have the Trust maintain
possession of such Contracts and continue to apply collections on such
Contracts as if there had been no declaration of acceleration. Unless otherwise
specified in the related Prospectus Supplement, the Indenture Trustee, however,
will be prohibited from selling the related Contracts following an Event of
Default, unless (i) the holders of all the outstanding related Notes consent to
such sale; (ii) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding Notes at the date of
such sale; or (iii) the Indenture Trustee determines that the proceeds of the
Contracts would not be sufficient on an ongoing basis to make all payments on
the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate outstanding amount of the Notes. Unless
otherwise specified in the related Prospectus Supplement, following a
declaration upon an Event of Default that the Notes are immediately due and
payable, (i) Note Owners will be entitled to ratable repayment of principal on
the basis of their respective unpaid principal balances and (ii) repayment in
full of
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the accrued interest on and unpaid principal balances of the Notes will be made
prior to any further payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with respect
to a Series of Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of such Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority in a Series will have the right to
direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and a Note Majority may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all of the
holders of such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee,
(iii) such holder or holders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding, and (v) no direction inconsistent with such written request has
been given to the Indenture Trustee during such 60-day period by the holders of
a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice of
the Event of Default within 90 days after it occurs. Except in the case of a
failure to pay principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by accepting
the related Notes, will covenant that they will not at any time institute
against the Seller or the related Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity, nor
any holder of a Certificate including, without limitation, Green Tree, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the related
Notes or for any agreement or covenant of the related Trust contained in the
Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted by
the Indenture, the Trust Documents or certain related documents for such Trust
(collectively, the "Related Documents"), sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the related
Notes (other than amounts withheld under the
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Code or applicable state law) or assert any claim against any present or former
holder of such Notes because of the payment of taxes levied or assessed upon
the Trust, (iii) dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the related Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to the
related Notes under such Indenture except as may be expressly permitted
thereby, or (v) except as expressly permitted by the Related Documents, permit
any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or proceeds
thereof.
No Trust may engage in any activity other than as specified under the section
of the related Prospectus Supplement entitled "The Trust." No Trust will incur,
assume or guarantee any indebtedness other than indebtedness incurred pursuant
to the related Notes and the related Indenture or otherwise in accordance with
the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Indenture
Trustee at the address specified in the related Prospectus Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor trustee. Green Tree
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, Green Tree will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus Supplement
and will not become effective until acceptance of the appointment by a
successor trustee.
THE CERTIFICATES
General
A Series of Securities may include one or more Classes of Certificates issued
pursuant to Trust Documents to be entered into between Green Tree, as Seller
and as Servicer, and the Trustee, forms of which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the material provisions of the Trust
Documents. Where particular provisions of or terms used in the Trust
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Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of this summary.
If the Certificates of a Series are issued in more than one Class, the
Certificates of all or less than all of such Classes may be sold pursuant to
this Prospectus, and there may be separate Prospectus Supplements relating to
one or more of such Classes so sold. Any reference herein to the Prospectus
Supplement relating to a Series comprised of more than one Class should be
understood as a reference to each of the Prospectus Supplements relating to the
Classes sold hereunder. Any reference herein to the Certificates of a Class
should be understood to refer to the Certificates of a Class within a Series or
all of the Certificates of a single-Class Series, as the context may require.
For convenience of description, any reference in this Prospectus to a "Class"
of Certificates includes a reference to any subclasses of such Class.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
Distributions of Interest and Principal
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in the
related Prospectus Supplement, will be made prior to distributions with respect
to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated Certificates),
the allocation of losses among the Classes of Subordinated Certificates, the
period or periods of such subordination, the minimum subordinated amount, if
any, and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the preferential
right of such Certificateholders to receive current distributions from the
Contract Pool. If a Series of Certificates contains more than one Class of
Subordinated Certificates, losses will be allocated among such Classes in the
manner described in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates which (i) are entitled to receive distributions only in
respect of principal ("Principal Only Certificates"), interest
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("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the Pass-Through Rate for each
Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of the
Certificates will be subordinate to payments in respect of the Notes, if any,
as more fully described in the related Prospectus Supplement. Distributions in
respect of principal of any Class of Certificates will be made on a pro rata
basis among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall be
as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and
may include certain other organizations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that the
only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners
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and Note Owners will be permitted to exercise the rights of Certificateholders
or Noteholders, as the case may be, only indirectly through Participants and
DTC.
With respect to any Series of Securities, while the Securities are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will be
able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their nominees,
rather than to DTC (such Certificates and Notes being referred to herein as
"Definitive Certificates" and "Definitive Notes," respectively), only if (i)
DTC, Green Tree or the Servicer advises the Trustee or the Indenture Trustee,
as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and Green Tree, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) Green Tree or the Administrator (if any) at its sole option has
advised the Trustee or the Indenture Trustee, as the case may be, in writing
that it elects to terminate the book-entry system through DTC and (iii) after
the occurrence of a Servicer Termination Event, the holders representing a
majority of the Certificate Balance (a "Certificate Majority") or a Note
Majority advises the Trustee or the Indenture Trustee, as the case may be,
through DTC, that continuation of a book-entry system is no longer in their
best interests. Upon issuance of Definitive Certificates or Definitive Notes to
Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which conflict
with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as physical
certificates or notes may adversely affect the liquidity of Certificates or
Notes in the secondary market and the ability of the Certificate Owners or Note
Owners to pledge them. In addition, since distributions on the Certificates and
the Notes will be made by the Trustee or the Indenture 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 or Note Owners, Certificate Owners and Note
Owners may experience delays in the receipt of such distributions.
Statements to Securityholders
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders on
such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related
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Servicer's Certificate setting forth certain information required under the
Trust Documents (the "Servicer's Certificate"). Unless otherwise specified in
the related Prospectus Supplement, each such statement to be delivered to
Certificateholders will include the following information as to the
Certificates with respect to such Distribution Date or the period since the
previous Distribution Date, as applicable, and each such statement to be
delivered to Noteholders will include the following information as to the Notes
with respect to such Distribution Date or the period since the previous
Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) the number and aggregate principal balance of Contracts
delinquent (i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(ix) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(x) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xi) such other information as may be specified in the related
Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued, such
reports with respect to a Series of Securities will be sent on behalf of the
related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate Owners
or Note Owners, as the case may be, and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Trustee or
the Indenture Trustee, as applicable. See "Reports to Securityholders" and "--
Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the end
of each calendar year during the term of a Trust, the Trustee and the Indenture
Trustee, as applicable, will mail to each holder of a Class of Securities who
at any time during such calendar year has been a Securityholder, and received
any payment thereon, a statement containing certain information for the
purposes of such Securityholder's preparation of federal income tax returns.
DTC will convey such information to its Participants, who in turn will convey
such information to their related indirect participants in accordance with
arrangements among DTC and such participants. Certificate Owners and Note
Owners may receive such reports upon written request, together with
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a certification that they are Certificate Owners or Note Owners and payment of
reproduction and postage expenses associated with the distribution of such
information, from the Trustee, with respect to Certificate Owners, or from the
Indenture Trustee, with respect to Note Owners, at the addresses specified in
the related Prospectus Supplement. See "Certain Federal Income Tax
Consequences."
Lists of Securityholders
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless otherwise specified in the related Prospectus
Supplement, the Trust Documents will not provide for holding any annual or
other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes have
been issued, the Indenture Trustee will, upon written request by three or more
Noteholders or one or more holders of Notes evidencing not less than 25% of the
aggregate principal balance of the related Notes, within five Business Days
after provision to the Indenture Trustee of a statement of the applicants'
desire to communicate with other Noteholders about their rights under the
related Indenture or the Notes and a copy of the communication that the
applicants propose to transmit, afford such Noteholders access during business
hours to the current list of Noteholders for purposes of communicating with
other Noteholders with respect to their rights under the Indenture. Unless
otherwise specified in the related Prospectus Supplement, the Indenture will
not provide for holding any annual or other meetings of Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust and
the Servicer will agree to service such Contracts on behalf of the Trust, and
pursuant to which such Trust will be created and Certificates will be issued.
Forms of the Trust Documents have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of such agreements (without exhibits) upon request to a holder of Securities
described therein. This summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of the
Trust Documents. Where particular provisions or terms used in the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summary.
Sale and Assignment of the Contracts
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes to or
upon the order of the Seller, and the Trustee will execute and deliver the
related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
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The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Securityholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the
Trustee, Green Tree's internal audit department will complete a review of all
of the Contract files confirming the accuracy of the list of Contracts
delivered to the Trustee. Any Contract discovered not to agree with such list
in a manner that is materially adverse to the interests of the Securityholders
will be repurchased or substituted for by Green Tree, or, if the discrepancy
relates to the unpaid principal balance of a Contract, Green Tree may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Collection Account") in an amount sufficient to offset
such discrepancy. If the Trust includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and Green Tree's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as a
pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and Servicing
Agreement with respect to each Contract as of the related Closing Date,
including that: (a) as of the Cut-off Date the most recent scheduled payment
was made or was not delinquent more than 59 days; (b) no provision of a
Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal, valid
and binding obligation of the Obligor and is enforceable in accordance with its
terms (except as may be limited by laws affecting creditors rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (e) each Contract was either (i) originated by a home equity lender in
the ordinary course of such lender's business and assigned to Green Tree or
(ii) was originated by Green Tree directly; (f) no Contract was originated in
or is subject to the laws of any jurisdiction whose laws would make the
transfer of the Contract or an interest therein pursuant to the Sale and
Servicing Agreement or the Securities unlawful; (g) each Contract complies with
all requirements of law; (h) no Contract has been satisfied, subordinated to a
lower lien ranking than its original position (if any) or rescinded; (i) each
Contract creates a valid and perfected lien on the related improved real estate
(j) all parties to each Contract had full legal capacity to execute such
Contract; (k) no Contract has been sold, conveyed and assigned or pledged to
any other person and Green Tree has good and marketable title to each Contract
free and clear of any encumbrance, equity, loan, pledge, charge, claim or
security interest, and is the sole owner and has full right to transfer such
Contract to the Trustee; (l) as of the Cut-off Date there was no default,
breach, violation or event permitting acceleration under any Contract (except
for payment delinquencies permitted by clause (a) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and Green Tree has not waived any of the foregoing; (m) each Contract
is a fully-amortizing loan with a fixed rate
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of interest and provides for level payments over the term of such Contract;
(n) each Contract contains customary and enforceable provisions such as to
render the rights and remedies of the holder thereof adequate for realization
against the collateral; (o) the description of each Contract set forth in the
list delivered to the Trustee is true and correct; (p) there is only one
original of each Contract; and (q) each Contract was originated or purchased
in accordance with Green Tree's then-current underwriting guidelines.
The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust and the Securityholders for a breach of a
representation or warranty under the Sale and Servicing Agreement with respect
to the Contracts (but not with respect to any other breach by Green Tree of
its obligations under the Sale and Servicing Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
Collections
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other
accounts to be established with respect to a Trust will be described in the
related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (ii) an account or accounts the deposits in
which are fully insured by either the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC; (iii) a "segregated trust account"
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company with trust powers and acting in its
fiduciary capacity for the benefit of
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the Trustee, which depository institution or trust company has capital and
surplus (or, if such depository institution or trust company is a subsidiary
of a bank holding company system, the capital and surplus of the bank holding
company) of not less than $50,000,000 and the securities of such depository
institution (or, if such depository institution is a subsidiary of a bank
holding company system and such depository institution's securities are not
rated, the securities of the bank holding company) has a credit rating from
each rating agency rating such Series of Notes and/or Certificates (a "Rating
Agency") in one of its generic credit rating categories which signifies
investment grade; or (iv) an account that will not cause any Rating Agency to
downgrade or withdraw its then-current rating assigned to the Securities, as
confirmed in writing by each Rating Agency. "Eligible Institution" means any
depository institution 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 Bank Insurance Fund (currently administered by the Federal Deposit
Insurance Corporation), whose short-term deposits have been rated in one of
the two highest rating categories or such other rating category as will not
adversely affect the ratings assigned to the Securities of such Series. On the
Closing Date specified in the related Prospectus Supplement, the Servicer will
cause to be deposited in the Collection Account all payments on the Contracts
received by the Servicer after the Cut-off Date and on or prior to the second
Business Day preceding the Closing Date.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Collection Account on a daily basis all proceeds
and collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vi) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or Green Tree, as described under "Sale
and Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating
Agency of the rating(s) then assigned to the Securities. Green Tree will also
deposit into the Collection Account on or before the Deposit Date the Purchase
Amount of each Contract to be purchased by it for breach of a representation
or warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the criteria specified in the related Trust Documents ("Eligible
Investments"). Eligible Investments shall mature no later than the Business
Day preceding the applicable Distribution Date for the Due Period to which
such amounts relate. Investments in Eligible Investments will be made in the
name of the Trustee or the Indenture Trustee, as the case may be, and such
investments will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar
fees or charges) received during a Due Period and Purchase Amounts deposited
with the Trustee prior to a Distribution Date will be applied first to any
outstanding
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Advances made by the Servicer with respect to such Contract, and then to
interest and principal on the Contract in accordance with the terms of the
Contract.
Servicing
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer will perform diligently all services and duties specified in each
Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts in
those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing Agreement. The duties to be
performed by the Servicer will include collection and remittance of principal
and interest payments, collection of insurance claims and, if necessary,
foreclosure of Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement, will
follow such collection procedures with respect to the Contracts as it follows
with respect to loans or contracts serviced by it that are comparable to the
Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment Date,
setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus Supplement.
Each such report to the Trustee will be accompanied by a statement from an
appropriate officer of the Servicer certifying the accuracy of such report and
stating that the Servicer has not defaulted in the performance of its
obligations under the Sale 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 such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing has
been conducted in compliance with the Sale and Servicing Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under a Sale and Servicing Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Servicer's obligations and duties under
such Sale and Servicing Agreement. The Servicer can only be removed as servicer
upon the occurrence of an Event of Termination as discussed below.
The Servicer shall keep in force throughout the term of the Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and such
fidelity bond shall be in such form and amount as is generally customary among
persons which service a portfolio of home improvement contracts having an
aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Aggregate Principal Balance for such Payment Date. As long
as Green Tree is the Servicer, the Trustee will pay Green Tree its Monthly
Servicing Fee from any monies remaining after the Securityholders have received
all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, 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.
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Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Securityholders and providing related data processing and
reporting services for Securityholders and on behalf of the Trustee. Expenses
incurred in connection with servicing of the Contracts and paid by Green Tree
from its Monthly Servicing Fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Contracts or payment of Trustee's fees, and payment of expenses
incurred in connection with distributions and reports to Securityholders,
except that the Servicer shall be reimbursed out of the liquidation proceeds of
a liquidated Contract for customary out-of-pocket liquidation expenses incurred
by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related Prospectus
Supplement) after the giving of written notice; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Trust Documents that materially and adversely
affects the interests of Securityholders, which, in either case, continues
unremedied for 30 days after the giving of written notice of such failure of
breach; (iii) any assignment or delegation by the Servicer of its duties or
rights under the Trust Documents, except as specifically permitted under the
Trust Documents, or any attempt to make such an assignment or delegation; (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer; (v) the Servicer is
no longer an Eligible Servicer (as defined in the Trust Documents) or (vi) if
Green Tree is the Servicer, Green Tree's receiving rights under its master
seller-servicer contract with GNMA are terminated. Notice as used herein shall
mean notice to the Servicer by the Trustee, the Indenture Trustee, if any, or
Green Tree, or to Green Tree, the Servicer, the Indenture Trustee, if any, and
the Trustee by the holders of Securities representing interests aggregating not
less than 25% of the outstanding principal balance of the Securities issued by
such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the Indenture
Trustee or the holders of at least 25% in aggregate principal balance of the
outstanding Securities issued by such Trust, by notice then given in writing to
the Servicer (and to the Trustee and the Indenture Trustee if given by the
Securityholders) may terminate all of the rights and obligations of the
Servicer under the Trust Documents. Immediately upon the giving of such notice,
and, in the case of a successor Servicer other than the Trustee, the acceptance
by such successor Servicer of its appointment, all authority of the Servicer
will pass to the Trustee or other successor Servicer. The Trustee, the
Indenture Trustee and the successor Servicer may set off and deduct any amounts
owed by the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to the
Servicer and will be subject to all the responsibilities, restrictions, duties
and liabilities of the Servicer under the related Trust Documents; provided,
however, that the successor Servicer shall have no liability with respect to
any obligation which was required to be performed by the prior Servicer prior
to the date that the successor Servicer becomes the Servicer or any claim of a
third party (including a Securityholder) based on any alleged action or
inaction of the prior Servicer.
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 Green Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust Documents. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
so to act, it may appoint, or petition to a court of competent jurisdiction for
the appointment of, a Servicer. Pending such appointment, the Trustee is
obligated to act in such capacity. The
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Trustee and such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the Servicer
under the Trust Documents without the consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred in
connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
Distributions
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest (or,
where applicable, of principal or interest only) on each Class of Securities
entitled thereto will be made by the Trustee or the Indenture Trustee, as
applicable, to the Certificateholders and the Noteholders. The timing,
calculation, allocation, order, source, priorities of and requirements for all
distributions to each Class of Certificateholders and all payments to each
Class of Noteholders will be set forth in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except as
otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be deposited
by Green Tree with respect to Contracts to be repurchased due to a breach of a
representation or warranty, minus (iv) any amounts paid by Obligors in the
related Due Period, but to be applied in respect of a regular monthly payment
due in a subsequent Due Period (an "Advance Payment"), minus (v) any amounts
incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if Green Tree is no
longer the Servicer, to pay the Monthly Servicing Fee to the successor
Servicer, and second, to reimburse the Servicer (including Green Tree) for any
Advances made with respect to a prior Due Period and subsequently recovered and
for any Advances previously made that the Servicer has determined are
Uncollectible Advances.
Enhancement
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, enhancement may be in the form of a financial guaranty
insurance policy, letter of credit, Green Tree guaranty, cash reserve fund,
derivative product, or other form of enhancement, or any combination thereof,
as may be described in the related Prospectus Supplement. If specified in the
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applicable Prospectus Supplement, enhancement for a Class of Securities of a
Series may cover one or more other Classes of Securities in such Series, and
accordingly may be exhausted for the benefit of a particular Class and
thereafter be unavailable to such other Classes. Further information regarding
any provider of enhancement, including financial information when material,
will be included in the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
Advances
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances each month of any scheduled payments on the
Contracts included in a Trust that were due but not received during the prior
Due Period. The Servicer will be entitled to reimbursement of an Advance from
the Amount Available in the Collection Account for the related Trust (i) when
the delinquent payment is recovered by the Trust, or (ii) when the Servicer has
determined that such Advance has become an Uncollectible Advance. The Servicer
will be obligated to make an Advance only to the extent that it determines that
such Advance will be recoverable from subsequent funds available therefor in
the Collection Account for the related Trust. The Servicer will be entitled to
recoup its advances on a Contract from subsequent payments by or on behalf of
the Obligor and from liquidation proceeds, if any, of the Contract, and will
release its right to reimbursements in conjunction with the purchase of the
Contract by Green Tree 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
Net Liquidation Proceeds, if any, of the Contract (an "Uncollectible Advance"),
the Servicer will be entitled to reimbursement from payments on other Contracts
or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections on the Contract or from
liquidation proceeds thereof, if any, or (ii) the Trustee determines that it is
not legally able to make such Advance.
Evidence as to Compliance
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and servicing
agreements or sale and servicing agreements similar to the Trust Documents and
stating that, on the basis of such procedures, such servicing has been
conducted in compliance with the applicable Trust Documents, except for any
exceptions set forth in such report. A copy of such statement may be obtained
by any Certificate Owner or Note Owner upon compliance with the requirements
described above. See "Certain Information Regarding the Securities--Statements
to Securityholders" above.
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Indemnification and Limits on Liability
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or willful
misfeasance, bad faith or negligence (including errors in judgment) in the
performance of its duties, or by reason of reckless disregard of obligations
and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business of
servicing consumer receivables. The Servicer may also perform other specific
duties through subcontractors; provided, however, that no such delegation of
such duties by the Servicer shall relieve the Servicer of its responsibility
with respect thereto.
Amendment
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of the
Securityholders. The Trust Documents may also be amended by Green Tree, the
Servicer and the Trustee and the Indenture Trustee, and a Certificate Majority
and a Note Majority, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Trust Documents or of
modifying, in any manner, the rights of the Certificateholders or the
Noteholders. No such amendment may (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments on the
related Contracts or distributions that are required to be made on any related
Certificate or Note or the related Pass-Through Rate or Interest Rate or (ii)
reduce the percentage of the Certificate Balance evidenced by Certificates or
of the aggregate principal amount of Notes then outstanding required to consent
to any such amendment, without the consent of the holders of all Certificates
or all Notes, as the case may be, then outstanding.
Termination
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later of
the final payment or other liquidation of the last Contract subject thereto and
the disposition of all property acquired upon repossession of any Product and
(ii) the payment to the Securityholders of all amounts held by the Servicer or
the Trustee and required to be paid to the Securityholders pursuant to the
Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any Due
Period as of the last day of which the Aggregate Principal Balance is equal to
or less than 10% (or such other percentage as may be specified in the related
Prospectus Supplement) of the Cut-off Date Principal Balance, all remaining
Contracts in the related Trust and the other remaining Trust Property at a
price equal to the aggregate of the Purchase Amounts therefor and the appraised
value of any other remaining Trust Property. The exercise of this right will
effect an early retirement of the related Certificates and Notes.
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If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the affairs
of the related Trust, unless within such 90 days the remaining General Partner,
if any, and holders of a majority of the Certificates of such Series agree in
writing to the continuation of the business of the Trust and to the appointment
of a successor to the former General Partner, and the Owner Trustee is able to
obtain an opinion of counsel to the effect that the Trust will not thereafter
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with respect
to each Series of Securities, the Trustee will give written notice of the final
distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
The Trustee
The Trustee or Owner Trustee, as applicable, for each Trust will be specified
in the related Prospectus Supplement. The Trustee, in its individual capacity
or otherwise, and any of its affiliates may hold Certificates or Notes in their
own names or as pledgee. In addition, for the purpose of meeting the legal
requirements of certain jurisdictions, the Trustee, with the consent of the
Servicer, shall have the power to appoint co-trustees or separate trustees of
all or any part of the related Trust. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the related Trust Documents will be conferred or imposed upon the Trustee and
such separate trustee or co-trustee jointly, or, in any jurisdiction where the
Trustee is incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus Supplement (or, if no such General Partner is specified, the
Servicer) may also remove the Trustee, if the Trustee ceases to be eligible to
serve, becomes legally unable to act, is adjudged insolvent or is placed in
receivership or similar proceedings. In such circumstances, the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer will 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.
Duties of the Trustee
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related documents, and
will not be accountable for the use or application by the Servicer of any funds
paid to the Servicer in respect of the Certificates, the Notes or the Contracts
prior to deposit in the related Collection Account.
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The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any right
under the Trust Documents to institute any proceeding with respect to such
Trust Documents, unless such holder has given the Trustee written notice of
default and unless the holders of Certificates evidencing not less than 25% of
the Certificate Balance or the holders of Notes evidencing not less than 25% of
the aggregate principal balance of the Notes then outstanding, as the case may
be, have made written request to the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 30 days after the receipt of such notice,
request and offer to indemnify has neglected or refused to institute any such
proceedings.
Administrator
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders 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 Contracts). The following discussion contains
summaries of certain legal aspects of home improvement contracts which are
general in nature. Because such legal aspects are governed by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the improved real estate is situated. The summaries
are qualified in their entirety by reference to the applicable federal and
state laws governing the Contracts.
Mortgages and Deeds of Trust
The Contracts will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the prevailing practice in the
state in which the underlying property is located, and may have first, second
or third priority. In some states, a mortgage creates a lien upon the real
property encumbered by the mortgage or deed of trust. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or retail installment contract evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the borrower, or trustor, the lender as beneficiary,
and a third-party grantee called the trustee. Under a deed of trust, the
borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure repayment of the loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by applicable state law, the express provisions
of the deed of trust or
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mortgage, and, in some cases with respect to deeds of trust, the directions of
the beneficiary. Some states use a security deed or deed to secure debt which
is similar to a deed of trust except that it has only two parties: a grantor
(similar to a mortgagor) and a grantee (similar to a mortgagee). Mortgages,
deeds of trust and deeds to secure debt are not prior to liens for real estate
taxes and assessments and other charges imposed under governmental police
powers. Priority between mortgages, deeds of trust and deeds to secure debt and
other encumbrances depends on their terms, the knowledge of the parties to such
instrument in some cases and generally on the order of recordation of the
mortgage, deed of trust or the deed to secure debt in the appropriate recording
office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Contracts in any Contract Pool are expected to
be second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the related Trust (and therefore the Securityholders), as beneficiary under a
junior deed of trust or as mortgagee under a junior mortgage, are subordinate
to those of the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive hazard insurance and condemnation proceeds and to cause the property
securing the Contract to be sold upon default of the mortgagor or trustor under
the senior mortgage or deed of trust, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the Servicer on behalf of the
Trust asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans. As
discussed more fully below, a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or in some states may cure such default and
bring the senior loan current, in either event usually adding the amounts
expended to the balance due on the junior loan. Although Green Tree generally
does not cure defaults under a senior mortgage or deed of trust, it is Green
Tree's standard practice to protect its interest by attending any foreclosure
sale and bidding for property only if it is in Green Tree's best interests to
do so.
The standard form of the mortgage or deed of trust used by most institutional
lenders, like that of Green Tree, confers on the mortgagee or beneficiary the
right both to receive all proceeds collected under any hazard insurance policy
and all awards made in connection with any condemnation proceedings, and to
apply such proceeds and awards to any indebtedness secured by the mortgage or
deed of trust, in such order as the mortgagee or beneficiary may determine.
Thus, in the event improvements on the property are damaged or destroyed by
fire or other casualty, or in the event the property is taken by condemnation,
the mortgagee or beneficiary under the underlying first mortgage or deed of
trust will have the prior right to collect any insurance proceeds payable under
a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. Proceeds in excess of the amount of first mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The priority
of any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the senior mortgagee or beneficiary
had actual knowledge of such intervening junior mortgages or deeds of trust and
other liens at the time of the advance. Where the mortgagee or beneficiary is
not obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other
liens, the advance will be subordinate to such intervening junior mortgages or
deeds of trust and other liens. Priority of advances under the clause rests, in
some states, on state
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statutes giving priority to all advances made under the loan agreement to a
"credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the borrower is additionally burdened. Third, if the borrower defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful. Generally, the action is
initiated by the service of legal pleadings upon all parties having an interest
of record in the real property. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a referee or other officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In certain states,
such foreclosure also may be accomplished by judicial
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action in the manner provided for foreclosure of mortgages. In some states,
prior to a sale, the trustee must record a notice of default and send a copy to
the borrower trustor and to any person who has recorded a request for a copy of
a notice of default and notice of sale. In addition, prior to such sale, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders.
Certain states require that a notice of sale be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers in a specified manner prior to the date of trustee's sale. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest of record in the
property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from such sale may be
reduced by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Contracts which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
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In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Contract,
and any such taxes or fees imposed may reduce liquidation proceeds with respect
to such property, as well as distributions payable to the Securityholders.
Second or Third Mortgages
The Contracts may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Securityholders as the holders of a junior deed of
trust, junior mortgage, or junior security deed are subordinate in lien and in
payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or beneficiary
to receive and apply hazard insurance and condemnation proceeds and, upon
default of the mortgagor under the senior mortgage or deed of trust, to cause a
foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the senior deed of
trust, the junior mortgagee's or junior beneficiary's lien will be extinguished
unless the junior lienholder satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. Such
extinguishment will eliminate access to the collateral for the Contract.
See "--Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt or security deed will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage, deed of trust, deed to secure debt
or security deed may have the right to perform the obligation itself.
Generally, all sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or
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of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a mortgage loan on a debtor's residence by paying arrearages and
reinstate the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. In the case of a mortgage
loan not secured by the debtor's principal residence, courts with federal
bankruptcy jurisdiction may also reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage
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lenders in connection with the origination, servicing and the enforcement of
mortgage loans. These laws include the federal Truth in Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, state licensing requirements, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
Consumer Protection Laws with respect to 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 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Loans included in a Contract Pool
may be subject to such provisions. The Home Protection Act applies to mortgage
loans originated on or after the effective date of such regulations. These laws
can impose specific statutory liabilities upon creditors who fail to comply
with their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Contract; however,
the Obligor also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought by the Trust against such Obligor. The
Home Protection Act provides that assignees of certain high-interest, non-
purchase money mortgage loans (which may include some Contracts) are subject to
all claims and defenses that the debtor could assert against the original
creditor, unless the assignee demonstrates that a reasonable person in the
exercise of ordinary due diligence could not have determined that the mortgage
loan was subject to the provisions of the Home Protection Act.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states there are or may be specific limitations upon
late charges which a lender may collect from a borrower for delinquent
payments. Under the Sale and Servicing Agreement, late charges (to the extent
permitted by law and not waived by Green Tree) will be retained by Green Tree
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
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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.
"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 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Loans) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any 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 (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Garn-
St. Germain Act and the regulations thereunder. As a result, a lesser number of
Loans which contain "due-on-sale" clauses may extend to full maturity than
earlier experience would indicate with respect to single-family mortgage loans.
The extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Contracts bearing
an interest rate below the current market rate being assumed by a new home
buyer rather than being paid off, which may have an impact upon the average
life of the Contracts and the number of Contracts which may be outstanding
until maturity.
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Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust and reduce the amounts otherwise distributable to the holders of the
related Series of Securities in certain circumstances if such cleanup costs
were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, Green Tree has not
made and will not make such evaluations prior to the origination of the Loans.
Neither Green Tree nor any replacement Servicer will be required by any Sale
and Servicing Agreement to undertake any such evaluations prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Green Tree does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, Green Tree will
not foreclose on related real property or accept a deed-in-lieu of foreclosure
if it knows or reasonably believes that there are material contaminated
conditions on such property. A failure so to foreclose may reduce the amounts
otherwise available to Securityholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the 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 Contracts, would result in a reduction of the
amounts distributable to the Securityholders. 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,
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during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation applies to any Contract which goes into
default, there may be delays in payment on the Securities in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Contracts resulting from similar legislation or regulations may result
in delays in payments or losses to Securityholders.
Repurchase Obligations
Green Tree will represent and warrant under each Sale and Servicing Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust for violation of any law and such
claim materially adversely affects the Trust's interest in a Contract, such
violation would constitute a breach of a representation and warranty under the
Sale and Servicing Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. The discussion does not
deal with federal income tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors are
encouraged to consult their own tax advisors with respect to the federal,
state, local, and any other tax consequences of the purchase, ownership, and
disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address only
those issues specifically identified below as being covered by such opinion;
however, the opinion of Counsel also will state that the additional discussion
set forth below accurately sets forth Counsel's advice with respect to material
tax issues. No ruling on any of the issues discussed below will be sought from
the Service.
Tax Status of the Trust
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for federal
income tax purposes. As a result, in the opinion of Counsel, the Trust itself
will not be subject to federal income tax but, instead, each Certificateholder
will be required to take into account its distributive share of items of income
and deduction (including deductions for distributions of interest to the
Noteholders) of the Trust as though such items had been realized directly by
the Certificateholder. This opinion will be based on the assumption that the
terms of the Trust Agreement and related documents will be complied with, and
on Counsel's conclusion that the nature of the income of the Trust will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations. There are, however, no cases or Service rulings on transactions
involving a trust issuing both debt and equity interests with terms similar to
those of the Notes and the Certificates. As a result, the Service may disagree
with all or a part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the
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Contracts, possibly reduced by its interest expense on the Notes. Any such
corporate income tax could materially reduce cash available to make payments on
the Notes and distributions on the Certificates.
Tax Consequences to Noteholders
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to be
issued with OID. This deemed OID could arise, for example, if interest payments
on the Notes are not deemed to be "qualified stated interest" because the Notes
do not provide for default remedies ordinarily available to holders of debt
instruments or do not contain terms and conditions that make the likelihood of
late payment or nonpayment a remote contingency. Based upon existing authority,
however, the Trust will treat interest payments on the Notes as qualified
stated interest under the OID regulations. If the Notes are issued or are
deemed to be issued with OID, all or a portion of the taxable income to be
recognized with respect to the Notes would be includible in the income of
Noteholders as OID. Any amount treated as OID would not, however, be includible
again when the amount is actually received. If the yield on a class of Notes
were not materially different from its coupon, this treatment would have no
significant effect on Noteholders using the accrual method of accounting.
However, cash method Noteholders may be required to report income with respect
to the Notes in advance of the receipt of cash attributable to such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in income
in advance of the receipt of cash representing that income. Each Noteholder is
encouraged to consult its own tax advisor regarding the impact of the OID rules
if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules provide that if a Noteholder purchases the Note
at a market discount (i.e., a discount from its original issue price plus any
accrued original issue discount) that exceeds a de minimis amount specified in
the Code, and thereafter recognizes gain upon a disposition, the lesser of (i)
such gain or (ii) the accrued market discount will be taxed as ordinary
interest income. Market discount also will be recognized and taxable as
ordinary interest income as payments of principal are received on the Notes to
the extent that the amount of such payments does not exceed the accrued market
discount. Generally, the accrued market discount will be the total market
discount on the Note multiplied by a fraction, the numerator of which is the
number of days the Noteholder held the Note and the denominator of which is the
number of days after the date the Noteholder acquired the Note until and
including
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its maturity date. The Noteholder may elect, however, to determine accrued
market discount under the constant-yield method, which election shall not be
revoked without the consent of the Service.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross income as it accrues and, if such Noteholder makes such an
election, is exempt from this rule. The adjusted basis of a Note subject to
such election will be increased to reflect market discount included in gross
income, thereby reducing any gain or increasing any loss on a sale or taxable
disposition. Any such election to include market discount in gross income as it
accrues shall apply to all debt instruments held by the Noteholder at the
beginning of the first taxable year to which the election applies or thereafter
acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such Note
for such year. Any election to deduct amortizable bond premium shall apply to
all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain or
increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income, and will be short-term, mid-term or
long-term capital gain or loss depending upon whether the Note was held for
more or less than one year or for more than eighteen months. Capital losses
generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold the
Note in connection with a United States trade or business will be treated as
"portfolio interest" and therefore will be exempt from the 30% withholding tax.
Such a Noteholder will be entitled to receive interest payments on the Notes
free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on gain from the disposition of a Note unless the Noteholder
is an individual who is present in the United States for 183 days or more
during the taxable year in which the disposition takes place and certain other
requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting
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requirements regarding such information as may be required with respect to
interest and original issue discount, if any, with respect to the Notes.
Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign person if the
Noteholder fails to provide the Indenture Trustee or the Noteholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Note. Backup withholding,
however, does not apply to payments on a Note made to certain exempt
recipients, such as corporations and tax-exempt organizations, and to certain
foreign persons. Noteholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a partnership could have adverse tax consequences to
certain holders. For example, income to foreign holders generally would be
subject to federal tax and federal tax return filing and withholding
requirements, income to certain tax-exempt entities (including pension funds)
would be "unrelated business taxable income," and individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses.
Tax Consequences to Certificateholders
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income, with the assets of the partnership being the assets held
by the Trust, the partners of the partnership being the Certificateholders and
the General Partner, and the Notes being debt of the partnership. The proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the General Partner, Green Tree and the Servicer, however, is not
certain because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example, because
the Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the Trust. Any such characterization would not
result in materially adverse tax consequences to Certificateholders as compared
to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Contracts (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of the Contracts. The Trust's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of the
Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms
47
<PAGE>
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Contracts
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price; (iii) Prepayment Premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Although it is not anticipated that
the Certificates will be issued at a price which exceeds their principal
amount, such allocations of Trust income to the Certificateholders will be
reduced by any amortization by the Trust of premium on Contracts that
corresponds to any such excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust will be allocated
to the General Partner. Based on the economic arrangement of the parties, this
approach for allocating Trust income should be permissible under applicable
Treasury regulations, although no assurance can be given that the Service would
not require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust might not have sufficient cash to make
current cash distributions of such amount. Thus, cash basis holders will in
effect be required to report income from the Certificates on the accrual basis,
and Certificateholders may become liable for taxes on Trust income even if they
have not received cash from the Trust to pay such taxes. In addition, because
tax allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including
an individual retirement account) will constitute "unrelated business taxable
income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. In addition, Section 68 of the Code provides
that the amount of itemized deductions (including those provided for in Section
212 of the Code) otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds a threshold amount determined under the
Code ($124,500 in 1998, in the case of a joint return) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. To the extent that a Certificateholder is not
permitted to deduct servicing fees allocable to a Certificate, the taxable
income of the Certificateholder attributable to that Certificate will exceed
the net cash distributions related to such income. Certificateholders may
deduct any loss on disposition of the Contracts to the extent permitted under
the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire the
Contracts at such a premium or at a market discount, the Trust will elect to
offset any such premium against interest income on the Contracts or to include
any such discount in income currently as it accrues over the life of the
Contracts. The Trust will make this premium or market discount calculation on
an aggregate basis but may be required to recompute it on a Contract-by-
Contract basis. As indicated above, a portion of such premium deduction or
market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before the
distribution. A Certificateholder will recognize loss upon termination of the
Trust or termination of the Certificateholder's interest in the Trust if the
Trust only
48
<PAGE>
distributes money to the Certificateholder and the amount distributed is less
than the Certificateholder's adjusted basis in the Certificates. Any such gain
or loss generally will be capital gain or loss if the Certificates are held as
capital assets and will be long-term gain or loss if the holding period of the
Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in exchange for
interests in the New Partnership. Such interests would be deemed distributed to
the partners of the Old Partnership in liquidation thereof, which would not
constitute a sale or exchange for United States federal income tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of the
Trust. A Certificateholder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Certificateholder's
share of unrecognized accrued market discount on the Contracts would generally
be treated as ordinary income to the Certificateholder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Certificates that exceeds the aggregate cash
distributions with respect thereto, such excess generally will give rise to a
capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing a
Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods before
the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may be
reallocated among the Certificateholders. The General Partner is authorized to
revise the Trust's method of allocation between transferors and transferees to
conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders may
49
<PAGE>
be allocated a greater or lesser amount of Trust income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. Pursuant to the Administration Agreement, the Trustee
will monitor the performance of the following responsibilities of the Trust by
other service providers. The Trust is required to keep or have kept complete
and accurate books of the Trust. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the Trust
will be the calendar year. The Trust will file a partnership information return
(IRS Form 1065) with the Service for each taxable year of the Trust and will
report each Certificateholder's allocable share of items of Trust income and
expense to Certificateholders and the Service on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with certain required information statements relating to identification of
beneficial owners of Certificates and such nominees will be required to forward
such information to such beneficial owners. Generally, Certificateholders must
file tax returns that are consistent with the information return filed by the
Trust or be subject to penalties unless the Certificateholder notifies the
Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust will be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
It is expected that the Trust will withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign Certificateholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust to change its withholding procedures. In determining a
Certificateholder's nonforeign status, the Trust may rely on Form W-8, Form W-9
or the Certificateholder's certification of nonforeign status signed under
penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the Service
and submit that number to the Trust on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Certificateholder generally will be
entitled to file with the Service a claim for refund with respect to taxes
withheld by the Trust, taking the position that no taxes are due because the
Trust is not engaged in a U.S. trade or business. However, the Service may
assert that additional taxes are due, and no assurance can be given as to the
appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
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<PAGE>
CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based upon
current statutory provisions and the regulations promulgated thereunder, and
applicable judicial or ruling authority, all of which are subject to change
(which may be retroactive). No ruling on any of the issues discussed below will
be sought from the Minnesota Department of Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of the
Notes. Noteholders already subject to income or franchise taxation in Minnesota
could, however, be required to pay such a tax on all or a portion of the income
generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise taxation
in Minnesota could, however, be required to pay such a tax on all or a portion
of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to the plan. ERISA also
imposes certain duties and certain prohibitions on persons who are fiduciaries
of plans subject to ERISA. Under ERISA, generally any person who exercises any
authority or control with respect to the management or disposition of the
assets of a plan is considered to be a fiduciary of such plan. A violation of
these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets of
a Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquired an "equity interest" in
the Trust and none of the exceptions contained in the Plan Assets Regulation
was applicable. An equity interest is defined under the Plan Assets Regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment of Notes and Certificates will be discussed in the related Prospectus
Supplement.
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<PAGE>
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Securities offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that are
secured by liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Securities.
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
Securities or to purchase Securities 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 Securities constitute
legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities should
be evaluated independently of similar security ratings assigned to other kinds
of securities.
UNDERWRITING
Green Tree may sell Securities of each Series to or through underwriters (the
"Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Securities directly
to other purchasers or through agents. Green Tree intends that Securities 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 Securities may be made through a combination
of such methods.
The distribution of the Securities 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
Securities, Green Tree or any affiliate thereof may purchase some or all of one
or more Classes of Securities of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to
52
<PAGE>
time offer and sell, pursuant to this Prospectus, some or all of such
Securities so purchased directly, through one or more Underwriters to be
designated at the time of the offering of such Securities or through broker-
dealers acting as agent and/or principal. Such offering may be restricted in
the manner specified in such Prospectus Supplement. Such transactions may be
effected at market prices prevailing at the time of sale, at negotiated prices
or at fixed prices.
In connection with the sale of the Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they may
act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities of a Series to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green Tree
and any profit on the resale of the Securities by them may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from Green Tree will be described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled to
indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by Green Tree. The obligation of any purchaser under any such contract
will be subject to the condition that the purchaser of the offered Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have responsibility
in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and the
Notes will be passed upon for Green Tree by the counsel for Green Tree
identified in the applicable Prospectus Supplement. The validity of the
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<PAGE>
Certificates and the Notes will be passed upon for the underwriters named in
the related Prospectus Supplement by the counsel for the underwriters
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their report given upon their authority
as experts in accounting and auditing.
54
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus Supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus Supplement for definitive +
+information on any matter contained herein. This preliminary prospectus +
+Supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there by any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement
to Base No. 3
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Improvement and Home Equity Loans
Series 1999-
-----------
The certificates will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Pass-
Approximate Through Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- ------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
HI: A-1................. $ % % % %
HI: A-2................. $ % % % %
HI: A-3................. $ % % % %
HE: A-1A NAS............ $ % % % %
HE: A-1B ARM............ $ (4) % % %
HE: A-1................. $ (5) % % %
HE: A-2................. $ % % % %
HE: A-3................. $ % % % %
HE: A-4................. $ %(6) % % %
HE: A-5 IO.............. % % % %
HE: M-1................. $ % % % %
Total................... $ $ $
</TABLE>
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The lesser of one-month LIBOR plus the Pass-Through Margin for the Class
HE: A-IB ARM or the Available Funds Pass-Through Rate, but in no case more
than 14%.
(5) For each payment date to and including the payment date, the
lesser of one-month LIBOR plus the pass-through margin for the Class HE:
A-1 or 14%. Beginning on the February payment date, the certificate
rate will equal the rate of the Class HE: A-1 Underlying certificates. See
"Description of the certificates."
(6) Or the weighted average of the rates on the contracts in the related
contract sub-pool, if less.
(7) Interest on the Class HE: A-5 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $ (or the
Class HE: A principal balance, if less) for the first 24 months, and will
equal zero thereafter.
Investing in the certificates involves certain risks. Prospective investors
should consider carefully the Risk Factors beginning on page S- in this
prospectus supplement and on page in the prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.
These certificates will be delivered through the same-day funds settlement
system of the Depository Trust Company on or about , 1999.
The underwriters named below will offer these securities (other than the
Class HE: A-5 IO and Class HE: M-1 certificates) to the public at the offering
price listed on this cover page and they will receive the discount listed
above. See "Underwriting" on page S- in this prospectus supplement and on
page in the prospectus.
[Underwriters]
The date of this prospectus supplement is , 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Summary of the Terms of the Certificates.................................. S-4
Risk Factors.............................................................. S-19
Structure of the Transaction.............................................. S-21
Use of Proceeds........................................................... S-23
The Contracts............................................................. S-24
Yield and Prepayment Considerations....................................... S-48
Green Tree Financial Corporation.......................................... S-67
Description of the Certificates........................................... S-68
Description of the Swap Counterparty and the Swap Agreement............... S-106
Description of the Limited Guaranties..................................... S-108
Certain Federal Income Tax Consequences................................... S-110
ERISA Considerations...................................................... S-111
Underwriting.............................................................. S-115
Legal Matters............................................................. S-117
Annex I................................................................... A-1
Prospectus
Important Notice about Information Presented in this Prospectus
and the Accompanying Prospectus Supplement............................... 2
Reports to Holders of the Certificates.................................... 2
Where you can find more Information....................................... 2
Summary of Terms of the Certificates...................................... 3
Risk Factors.............................................................. 8
The Trust Fund............................................................ 9
Use of Proceeds........................................................... 11
Green Tree Financial Corporation.......................................... 11
Yield Considerations...................................................... 13
Maturity and Prepayment Considerations.................................... 13
Description of the Certificates........................................... 14
Description of FHA Insurance.............................................. 25
Certain Legal Aspects of the Contracts; Repurchase Obligations............ 27
ERISA Considerations...................................................... 30
Certain Federal Income Tax Consequences................................... 38
Legal Investment Considerations........................................... 55
Ratings................................................................... 55
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the certificates in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Improvement and Home Equity Loan Trust 1999-
and Grantor trust 1999- since the date hereof.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home equity and home improvement lending business, and about
any series of certificates for home improvement and home equity loans that
Green Tree may wish to sell. This prospectus supplement contains more detailed
information about this series of certificates. Since the terms of this series
may differ from the general information provided in the prospectus, you should
rely on the information in this prospectus supplement rather than any different
information in the prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these certificates has been or will be prepared in
the United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These certificates may not be offered or sold, or re-offered
or re-sold, to persons in the United Kingdom, except (1) to persons whose
ordinary activities involve them in acquiring, holding, managing and disposing
of investments (as principal or agent) for the purpose of their businesses, or
(2) in circumstances that will not constitute or result in an offer to the
public in the United Kingdom within the meaning of the United Kingdom Public
Offers of Securities Regulation 1995. You may not pass this prospectus
supplement and prospectus, or any other document inviting applications or
offers to purchase certificates or offering certificates for purchase, to any
person in the United Kingdom who (1) does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
(2) is not otherwise a person to whom passing this prospectus supplement and
prospectus would be lawful.
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<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the certificates,
read this entire prospectus supplement and the accompanying prospectus.
Home Improvement and Home Equity Loan Trust 1999- and Grantor Trust 1999-
will issue the classes of certificates listed in the table below.
<TABLE>
<CAPTION>
Approximate Moody's Fitch
Class Certificate Rate Principal Amount (1) Rating Rating
- ----- ---------------- -------------------- ------- ------
<S> <C> <C> <C> <C>
HI: A-1.................... % $
HI: A-2....................
HI: A-3....................
HI: M-1....................
HI: M-2.................... (2)
HI: B-1....................
HI: B-2.................... (2)
HE: A-1A NAS...............
HE: A-1B ARM............... (3)
HE: A-1.................... (4)
HE: A-1 Underlying.........
HE: A-2....................
HE: A-3....................
HE: A-4.................... (2)
HE: A-5 IO.................
HE: M-1....................
HE: M-2....................
HE: B...................... (2)
C Master................... (6)
C Subsidiary............... (6)
</TABLE>
- --------
(1) May vary plus or minus 5%.
(2) Or the weighted average of the rates on the contracts in the related
contract sub-pool, if less.
(3) The lesser of one-month LIBOR plus the pass-through margin for the Class
HE: A-IB ARM or the available funds pass-through rate, but in no case more
than 14%.
(4) For each payment date to and including the payment date, the lesser of
one-month LIBOR plus the pass-through margin for the Class HE: A-1 or 14%.
Beginning on the payment date, the certificate rate will equal the
rate on the Class HE: A-1 underlying certificates. The Class HE A-1
underlying certificate, which bears a fixed rate of interest, will be
issued to Green Tree which will deposit it in the Grantor Trust 1999- . The
grantor trust will issue the Class HE A-1 certificates. See "Description of
the certificates."
(5) Interest on the Class HE: A-5 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $ (or the
Class HE: A Principal Balance, if less) for the first 24 months, and will
equal zero thereafter.
(6) This class is not entitled to any distributions of interest.
Only some classes of the certificates are being offered pursuant to this
prospectus supplement and the prospectus, and they are identified on the cover
page of this prospectus supplement. Green Tree (or an affiliate) initially will
retain the Class HI: M-1, Class HI: M-2, Class HI: B-1, Class HI: B-2,
Class HE: M-2, Class HE: B, Class C Master and Class C Subsidiary certificates,
but may sell any or all of these certificates at a later date.
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Seller and Servicer......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Trustee..................... [Trustee], as trustee for the Home Improvement
and Home Equity Loan Trust 1999- and Grantor
Trust 1999- .
Payment Date................ For the certificates (other than the Class HE: A-
1 certificates) the fifteenth day of each month
(or, if that fifteenth day is not a business day,
the next succeeding business day) beginning on
, 1999. For the Class HE: A-1 certificates,
the eighteenth day of each month during the term
of a swap agreement (or if that eighteenth day is
not a business day, the next succeeding business
day). The payment date for the Class HE: A-1
certificates will be an earlier day (but not
earlier than the payment date for the other
certificates) if the trustee receives any
required swap payment before 11:00 a.m. Central
Standard Time on the earlier day. The payment
date for the Class HE: A-1 certificates will be
the same as the payment date for the other
certificates after the swap agreement terminates.
Record Date................. The business day just before the related payment
date, beginning in 1999.
Sub-Pool HI Certificates.... Payments of principal and interest on some of the
certificates will be made primarily from payments
on the loans included in Sub-Pool HI. These
certificates all have an "HI" included in their
class designation, and will be referred to as a
group as the "Sub-Pool HI Certificates."
Sub-Pool HE Certificates.... Payments of principal and interest on some of the
certificates will be made primarily from payments
on the loans included in Sub-Pool HE. Certain
payments of interest on the Class HE: A-1
certificates may be made by a swap counterparty
under a swap agreement. These certificates all
have an "HE" included in their class designation,
and will be referred to as a group as the "Sub-
Pool HE Certificates."
Distributions on Sub-Pool
HI Certificates............
Distributions on the Sub-Pool HI certificates on
any payment date will be made primarily from
amounts collected on the Home Improvement
Contracts comprising Sub-Pool HI during the prior
calendar month (the "Sub-Pool HI amount
available"). On each payment date, the trustee
will apply the Sub-Pool HI amount available to
make distributions of principal and interest on
the Sub-Pool HI certificates in the following
order of priority:
^ Class HI: A interest;
^ Class HI: M-1 interest;
^ Class HI: M-2 interest;
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<PAGE>
^ Class HI: B-1 interest;
^ Principal on the class or classes of Class
HI: A certificates then entitled to
principal;
^ Principal on the Class HI: M certificates
(if due);
^ Class HI: B-1 principal (if due);
^ Class HI: B-2 interest; and
^ Class HI: B-2 principal (if due).
See "Description of the Certificates--Payments on
Contracts" for a detailed description of the
amounts that will constitute the Sub- Pool HI
amount available for any payment date.
A. Interest on the Class
HI: A, Class HI:M-1,
Class HI: M-2, and Class
HI: B-1 Certificates.....
Interest will be payable first to each class of
the Class HI: A certificates concurrently, then
to the Class HI: M-1 certificates, then to the
Class HI: M-2 certificates and then to the Class
HI: B-1 certificates, to the extent of the Sub-
Pool HI amount available. See "Description of the
Certificates--Distributions on Sub-Pool HI
Certificates" and "--Losses on Liquidated Home
Improvement Contracts" for a more detailed
description of the calculation of interest
payable on the Sub-Pool HI certificates.
B. Principal on the Class
HI: A, Class HI: M-1,
Class HI: M-2 and Class
HI: B-1 Certificates.....
After paying the amounts of interest due on the
Sub-Pool HI certificates described above, the
trustee will then apply the remaining Sub-Pool HI
amount available to pay principal on the Class
HI: A, Class HI: M-1, Class HI: M-2 and Class HI:
B-1 certificates. A predetermined class
percentage of scheduled (whether or not
collected) and unscheduled principal payments and
other recoveries on the Home Improvement
Contracts for that payment date, plus any
supplementary principal distribution required
because of high losses on the FHA Home
Improvement Contracts, will be paid:
^ to the Class HI: A-1 certificates until
retired, then
^ to the Class HI: A-2 certificates until
retired, then
^ to the Class HI: A-3 certificates until
retired, then
^ to the Class HI: M-1 certificates until
retired, and then
^ to the Class HI: M-2 certificates until
retired.
The trustee will pay principal on the Class HI:
B-1 certificates from available funds in an
amount equal to a percentage of the contract
payments and recoveries described above. Prior to
the payment date in , the percentage
will probably be zero. Thereafter, assuming
delinquencies, defaults and losses on the
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<PAGE>
Home Improvement Contracts remain below certain
thresholds and that the ratio of the aggregate
outstanding principal balance of the Class HI: B
certificates to the total outstanding balance of
Sub-Pool HI has become at least 20%, the
percentage will generally equal such ratio. See
"Description of the certificates--Distributions
on Sub-Pool HI certificates" for a more detailed
description of the calculation of principal
payable on the Sub-Pool HI certificates.
C. Class HI: B-2 Interest... After paying the amounts of interest and
principal due on the other Sub-Pool HI
certificates described above, the trustee will
then apply the remaining Sub-Pool HI amount
available to pay interest on the Class HI: B-2
certificates.
D. Class HI: B-2 After paying the amounts of interest and
Principal................... principal due on the Sub-Pool HI certificates
described above, the trustee will then apply the
remaining Sub-Pool HI amount available to pay
principal due on the Class HI: B-2 certificates.
In general, principal will not be payable on the
Class HI: B-2 certificates until the Class HI: B-
1 certificates have been retired. After that has
occurred, the Class HI: B-2 certificates will
generally be entitled to receive principal in an
amount equal to a percentage of the contract
payments and recoveries described above. The
principal balance of the Class HI: B-2
certificates will generally not be reduced below
$ until the Class HI: A, Class HI: M and
Class HI: B-1 certificates have been paid in
full.
E. Class HI: B-2 Limited Green Tree will guarantee payment of interest and
Guaranty.................... principal on the Class HI: B-2 certificates. The
Class HI: B-2 Limited Guaranty is of no benefit
to any other class of certificates and will be an
unsecured general obligation of Green Tree
unsupported by any letter of credit or other
credit enhancement. See "Description of the Class
HI: B-2 Limited Guaranty" for a complete
description of Green Tree's obligation under the
Class HI: B-2 Limited Guaranty.
Grantor Trust............... The Class HE: A-1 certificates will represent
undivided ownership interests in the assets held
by Green Tree Grantor trust 1999- . The assets of
the grantor trust will consist of (1) the Class
HE: A-1 Underlying certificates issued by the
Home Improvement and Home Equity Loan trust 1999-
and (2) a swap agreement between the Grantor
trust and a swap counterparty. Pursuant to the
swap agreement, the swap counterparty will be
obligated to pay to the trustee the amount, if
any, by which the interest due to the Class
HE: A-1 certificates on a payment date
(calculated based on a floating rate) exceeds the
amount of interest due to the trustee for such
payment date in respect of the Class HE: A-1
Underlying Certificate (calculated based on a
fixed rate). The grantor trust will be created
pursuant to a trust agreement between Green Tree
and the trustee.
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<PAGE>
Swap Counterparty........... Westdeutsche Landesbank Girozentrale, a bank
organized under the laws of the State of North
Rhine-Westphalia, acting through its New York
branch. See "Description of the Swap
Counterparty."
Reserve Account............. The Class HE: A and Class HE: M
Certificateholders will have the benefit of a
reserve account to cover liquidation losses on
the Home Equity Contracts. The reserve account
will equal $ on the closing date. Withdrawals
will be made from the reserve account to cover
liquidation losses on the home equity contracts,
and to repay the loan used to fund the reserve
account, as described below. Additions will be
made to the reserve account from the Sub-Pool HE
amount available in an amount equal to those
withdrawals from the reserve account that are
used to repay the loan upon certain triggering
events described below.
Reserve Account Loan........ The reserve account will be fully funded on the
closing date by a loan. Loan fees on the reserve
account loan will be paid on each payment date
from the amount available to pay the Class HE
certificateholders.
Amounts will be released on each payment date
from the reserve account to pay a portion of the
principal on the reserve account loan, commencing
on or after the payment date in if on that
payment date, certain tests have been met. The
loan reduction amount on any such payment date
will be the excess of the sum of the Class HE: B
adjusted principal balance and the reserve
account balance over 16% of the pool scheduled
principal balance of Sub-Pool HE as of that
payment date. However, if the Class HE: A and
Class HE: M Certificate principal balances have
been reduced to zero, the reserve account balance
will also be reduced to zero.
In addition, if on a payment date certain
triggering events have occurred, amounts will be
released from the reserve account to pay the
reserve account loan on that payment date, and on
each succeeding payment date, until the
triggering event is cured. In this case, the
amount of the repayment on that date will equal,
in general, the amount available to Class HE
certificateholders on that payment date less all
amounts which the Class HE: A and Class HE: M
certificateholders are entitled to receive on
that payment date. A triggering event will occur
if liquidation losses on contracts included in
Sub-Pool HE exceed specified amounts, if
prepayments fall below certain levels, or if the
Sub-Pool HE amount available, after payment of
interest and principal to Class HE: A and Class
HE: M certificateholders, is less than a
specified amount.
On the earlier of the payment date in or the
payment date on which any termination event has
occurred, a portion of the Sub-Pool HE amount
available may be applied to pay the reserve
account loan on that payment date, and on each
succeeding
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<PAGE>
payment date, until the reserve account loan has
been paid in full. In this case, the amount of
each repayment will equal, in general, the amount
available to the Class HE certificateholders on
that payment date, less all amounts which the
Class HE: A and Class HE: M certificateholders
are entitled to receive on that payment date.
Termination events include an event of default
under the reserve account loan agreement, the
exercise by the servicer of its right to purchase
the contracts in the trust created under the
Pooling and Servicing Agreement after the
scheduled principal balance of all such contracts
is less than 10% of the aggregate principal
balance of the certificates on the closing date,
and the failure of certain tests related to the
performance of the contracts included in Sub-Pool
HE.
Distributions on Sub-Pool
HE Certificates.............
Distributions on the Sub-Pool HE certificates on
any payment date will be made primarily from
amounts collected on the home equity contracts
comprising Sub-Pool HE during the prior calendar
month (the "Sub-Pool HE amount available"). The
portion of the Sub-Pool HE amount available
payable to the Class HE: A-1 Underlying
Certificate will be deposited by the trustee into
the grantor trust for payment to the Class HE: A-
1 certificates, together with any payments
received from the swap counterparty. On each
payment date, the trustee will apply these
amounts to make distributions of principal and
interest on the Sub-Pool HE certificates in the
following order of priority:
^ Class HE: A interest;
^ Class HE: M-1 interest;
^ Class HE: M-2 interest;
^ Principal on the class or classes of Class
HE: A certificates then entitled to
principal;
^ Principal on the Class HE: M certificates
(if due);
^ Class HE: B interest; and
^ Class HE: B principal (if due).
See "Description of the Certificates--Payments on
Contracts" for a detailed description of the
amounts that will constitute the Sub-Pool HE
amount available for any Payment date.
A. Interest on the Class
HE: A, Class HE: M-1 and
Class HE: M-2
Certificates.............
Interest will be payable first to each class of
Class HE: A certificates concurrently (including
the Class HE: A-1 Underlying Certificate but
excluding the Class HE: A-1 certificates), then
to the Class HE: M-1 certificates and then to the
Class HE: M-2 certificates, to the extent of the
Sub-Pool HE amount available. Certain payments of
interest on the Class HE: A-1 certificates may be
made by a swap counterparty under a swap
agreement. See
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<PAGE>
"Description of the Certificates--Distributions
on Sub-Pool HE Certificates" and "--Losses on
Liquidated Home Equity Contracts" for a more
detailed description of the calculation of
interest payable on the Sub-Pool HE certificates.
B. Principal on the Class
HE: A, Class HE: M-1 and
Class HE: M-2
Certificates.............
After paying the amounts due on the Sub-Pool HE
certificates described above and other amounts
due, the trustee will then apply any remaining
amounts available, plus withdrawals from a
reserve account to cover any liquidation losses,
to pay principal on the Class HE: A (except the
Class HE: A-5 IO certificates, which will receive
no principal), Class HE: M-1 and Class HE: M-2
certificates, in the amounts and order of
priority set forth below:
First, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the adjustable rate
home equity contracts for that payment date, to
the Class HE: A-1A NAS certificates and the Class
HE: A-1B ARM certificates according to the Class
HE: A-1A NAS Percentage and the Class HE: A-1B
ARM Percentage, respectively.
Second, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the Group I Home
Equity Contracts for that payment date, to the
Class HE: A-1 certificates. Each Group I
contract, together with any prior mortgage, has
an original principal balance of no more than
$ .
Third, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the Group II home
equity contracts for that payment date. The Group
II Contracts are all of the fixed rate home
equity contracts other than those specifically
designated as Group I Contracts. These
distributions will be made:
^ to the Class HE: A-2 certificates until
retired, then
^ to the Class HE: A-3 certificates until
retired, and then
^ to the Class HE: A-4 certificates until
retired.
After paying the amounts of interest and
principal due on the Sub-Pool HE certificates
described above and the satisfaction of certain
additional tests, the trustee will then apply any
remaining amounts available, plus withdrawals
from a reserve account to cover liquidation
losses, to pay principal to the Class HE: M-1 and
Class HE: M-2 certificates according to a formula
based on a percentage of the principal balance of
the home equity contracts.
See "Description of the Certificates--
Distributions on Sub-Pool HE Certificates" for a
more detailed description of the calculation of
principal payable on the Sub-Pool HE
certificates.
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<PAGE>
C. Class HE: B Interest..... After paying the amounts of interest and
principal due on the Sub-Pool HE certificates
described above, the trustee will then apply the
remaining Sub-Pool HE amount available to pay
interest on the Class HE: B certificates, unless
the reserve account lenders are entitled to loan
payments as a result of a triggering event or
termination event under the reserve account loan
described above.
D. Class HE: B Principal.... After paying the amounts of interest and
principal due on the Sub-Pool HE certificates
described above, the trustee will then apply the
remaining Sub-Pool HE amount available to pay
principal due on the Class HE: B certificates.
Class HE: B certificates will not be paid
principal before , the reserve account
(described above) has been reduced to zero and
certain tests are satisfied. The principal
balance of the Class HE: B certificates will
generally not be reduced below $ until the
Class HE: A and Class HE: M certificates have
been retired. Principal will be distributed
generally according to a formula amount dictated
by the principal balance of the Home Equity
Contracts.
E. Class HE: B Limited Green Tree will guarantee payment of interest and
Guaranty.................... principal on the Class HE: B certificates. The
Class HE: B Limited Guaranty is of no benefit to
any other class of certificates and will be an
unsecured general obligation of Green Tree
unsupported by any letter of credit or other
credit enhancement. See "Description of the Class
HE: B Limited Guaranty" for a complete
description of Green Tree's obligation under the
Class HE: B Limited Guaranty.
Subordination of Class HI:
M and Class HI: B
Certificates................
The Class HI: M certificates and Class HI: B
certificates will be subordinate to the Class HI:
A certificates in payment of both interest and
principal:
^ the trustee will apply the Sub-Pool HI
amount available to pay all interest then
due on the Class HI: A certificates and
Class HI: M certificates before paying the
interest then due on the Class HI: B
certificates;
^ the Class HI: M certificates are entitled to
principal distributions only after all the
Class HI: A certificates are paid in full;
and
^ The Class HI: B certificates are entitled to
principal distributions only after all the
Class HI: A certificates are paid in full,
or if certain tests are met.
This increases the possibility that the Class HI:
A certificates will be paid in full but the Class
HI: M and Class HI: B certificates will not. See
"Description of the certificates--Distributions
on Sub-Pool HI certificates" for a more detailed
description of the manner and order of priority
of distributions on the Sub-Pool HI certificates.
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<PAGE>
In addition, in the event of severe losses and
delinquencies on the home improvement contracts
comprising Sub-Pool HI, those losses will first
be imposed on the Class HI: B-2 certificates, and
then on the Class HI: B-1 certificates, and so on
through classes of increasing seniority. See
"Description of Certificates--Losses on Home
Improvement Contracts" for a more detailed
description of the allocation of losses on the
home improvement contracts.
Subordination of Class HE:
M and Class HE: B
Certificates................
The Class HE: M certificates will be subordinate
to the Class HE: A certificates, meaning that the
trustee will apply the Sub-Pool HE amount
available to pay all interest then due on the
Class HE: A certificates before paying the
interest then due on the Class HE: M
certificates, and the Class HE: M certificates
are entitled to principal distributions only
after all the Class HE: A certificates are paid
in full, or if certain tests are met. This
increases the possibility that the Class HE: A
certificates would be paid in full but the Class
HE: M certificates would not. The Class HE: B
certificates will be subordinated to all the
other Sub-Pool HE certificates, with interest
payable from the Sub-Pool HE amount available
only after payment of all interest and principal
then due on the other Sub-Pool HE certificates,
and principal due only after the Class HE: A
certificates have been retired, or if certain
tests are met. See "Description of the
Certificates--Distributions on Sub-Pool HE
Certificates" for a more detailed description of
the manner and order of priority of distributions
on the Sub-Pool HE certificates.
In addition, in the event of severe losses and
delinquencies on the home equity contracts
comprising Sub-Pool HE, those losses will first
be imposed on the Class HE: B certificates then
on the Reserve Account, and then on the Class HE:
M-2 certificates, and so on through classes of
increasing seniority. See "Description of
Certificates--Losses on Home Equity Contracts"
for a more detailed description of the allocation
of losses on the Home Equity Contracts.
Home Improvement Sub-Pool HI will consist of a pool of
Contracts................... conventional and FHA-insured home improvement
contracts and promissory notes. This prospectus
supplement provides information regarding a
portion of the home improvement contracts,
representing about % of Sub-Pool HI. Green Tree
will transfer another portion of the home
improvement contracts to the trust on the closing
date, and will transfer the remaining home
improvement contracts to the trust within 60 days
after the closing date.
With respect to the first portion of home
improvement contracts (as of the cut-off date):
^ are conventional and are FHA-
insured;
^ all are secured by a lien on the related
real property;
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^ the related properties are located in
states and the District of Columbia;
^ the contract rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months; and
^ the latest scheduled maturity date was in
.
See "The Contracts--Home Improvement Contracts"
for a more detailed description of the first
group of home improvement contracts and the
permissible characteristics of the second and
third groups of home improvement contracts.
Sub-Pool HI Pre-Funding If the aggregate principal balance of the home
Account..................... improvement contracts transferred by Green Tree
to the trust on the closing date is less than the
aggregate original principal balance of the Sub-
Pool HI certificates, that difference (which
Green Tree expects will be approximately $ )
will be deposited by the trustee in the Sub-Pool
HI pre-funding account, and those funds will be
used to purchase home improvement contracts from
time to time until , 1999. If those funds are
not completely used by , 1999, any remaining
funds will be distributed as principal on the
Class HI: A-1 certificates on the 1999
payment date.
Home Equity Contracts....... Sub-Pool HE will include both fixed-rate home
equity contracts (divided into Group I and Group
II) and adjustable rate home equity contracts.
A. Group I Fixed-Rate Home
Equity Contracts.........
This prospectus supplement provides information
regarding a portion of the Group I fixed-rate
home equity contracts, representing about % of
all the Group I fixed-rate home equity contracts.
Green Tree will transfer another portion of the
Group I fixed-rate home equity contracts to the
trust on the closing date, and will transfer the
remaining Group I fixed-rate home equity
contracts to the trust within 60 days after the
closing date.
Each Group I home equity contract, together with
any prior mortgage, has an original principal
balance of no more than $ .
With respect to the first portion of Group I
fixed-rate home equity contracts (as of the cut-
off date):
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
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^ there are loans;
^ the contract rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months;
^ % are balloon loans and the rest provide
for level monthly payments for the duration
of the loan;
^ the weighted average contract rate on the
balloon loans was %;
^ the balloon loans had a weighted average
term to scheduled maturity, as of their
dates of origination, of months; and a
weighted average to maturity as of the cut-
off date of months; and
^ the latest scheduled maturity date was in
.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
Group I fixed-rate home equity contracts and the
permissible characteristics of the second and
third portions of Group I fixed-rate home equity
contracts.
B. Group II Fixed-Rate Home
Equity Contracts.........
This prospectus supplement provides information
regarding a portion of the Group II fixed-rate
home equity contracts, representing about % of
all the Group II fixed-rate Home equity
contracts. Green Tree will transfer another
portion of the Group II fixed-rate home equity
contracts to the trust on the closing date, and
will transfer the remaining Group II fixed-rate
home equity contracts to the trust within 60 days
after the closing date.
With respect to the first portion of Group II
fixed-rate home equity contracts (as of the cut-
off date):
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ the contract rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months;
^ % are balloon loans and the rest provide
for level monthly payments for the duration
of the loan;
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<PAGE>
^ the weighted average contract rate on the
balloon loans was %;
^ the balloon loans had a weighted average
term to scheduled maturity, as of their
dates of origination, of months; and a
weighted average to maturity as of the cut-
off date of months; and
^ the latest scheduled maturity date was in
.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
Group II fixed-rate home equity contracts and the
permissible characteristics of the second and
third portions of Group II fixed-rate home equity
contracts.
C. Adjustable Rate Home
Equity Contracts.........
This prospectus Supplement provides information
regarding a portion of the adjustable rate home
equity contracts, representing about % of all
the adjustable rate Home Equity Contracts. Green
Tree will transfer another portion of the
adjustable rate Home Equity Contracts to the
trust on the closing date, and will transfer the
remaining adjustable rate home equity contracts
to the trust within 60 days after the closing
date.
With respect to the first portion of adjustable
rate Home Equity Contracts (as of the cut-off
date):
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ each loan accrues interest at a fixed rate
for no more than months, and thereafter
the interest rate adjusts annually or
semiannually to equal the sum of the six-
month LIBOR or one year treasury index and
the gross margin specified in that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months; and
^ the latest scheduled maturity date was in
.
See "The Contracts--Home Equity Contracts" for a
more detailed description of the first portion of
adjustable rate home equity contracts and the
permissible characteristics of the second and
third portions of adjustable rate home equity
contracts.
Sub-Pool HE Pre-Funding If the aggregate principal balance of the home
Account..................... equity contracts transferred by Green Tree to the
trust on the closing date is less than the
aggregate original principal balance of the Sub-
Pool HE certificates, that difference (which
Green Tree expects will be
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<PAGE>
approximately $ ) will be deposited by the
trustee in the Sub-Pool HE pre-funding Account,
and those funds will be used to purchase home
equity contracts from time to time until ,
1999. If those funds are not completely used by
, 1999, the remaining funds (if any) will be
distributed as principal on the Class HE: A-1
certificates (to the extent of remaining funds
that had been allocated for the purchase of Group
I fixed-rate home equity contracts), on the Class
HE: A-2 certificates (to the extent of remaining
funds that had been allocated for the purchase of
Group II fixed-rate home equity contracts) and on
the Class HE: A-1B ARM certificates (to the
extent of remaining funds that had been allocated
for the purchase of adjustable rate home equity
contracts) on the 1999 payment date.
Advances.................... The servicer is obligated to make advances each
month of any scheduled payments on the Contracts
that were due but not received during the prior
due period, but it will be entitled to
reimbursement for any advance. See "Description
of the certificates--Advances" in this prospectus
supplement and in the prospectus for a more
detailed description of the servicer's obligation
to make advances and its right to be reimbursed
for advances.
Repurchase or Substitution
Obligations.................
Green Tree will make representations and
warranties about the Contracts when it transfers
them to the trust. If a representation or
warranty is breached in a way that materially and
adversely affects the interests of the
certificateholders, then Green Tree must, within
90 days, either (i) cure the breach or (ii)
repurchase the defective contracts. During the
first two years after the closing date, Green
Tree may substitute other contracts instead of
repurchasing defective contracts. See
"Description of the certificates--Conveyance of
Contracts" herein and in the prospectus for a
more complete description of Green Tree's
representations and warranties about the
Contracts, its repurchase obligation, and its
right to substitute Contracts.
Repurchase Option........... After the scheduled principal balance of the
contracts is less than 10% of the aggregate
principal balance of the certificates on the
closing date, Green Tree will have the option to
purchase all of the outstanding Contracts. See
"Description of the certificates--Repurchase
Option" in this prospectus supplement and in the
prospectus for a more detailed description of the
terms of this repurchase option.
Tax Status.................. In the opinion of counsel to Green Tree, for
federal income tax purposes the trust, in part,
will consist of two segregated asset pools--the
"Master REMIC" and the "Subsidiary REMIC"--and
each will be treated as a separate "real estate
mortgage investment conduit" or "REMIC." Each
Class of Sub-Pool HI certificates
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and each Class of Sub-Pool HE certificates (other
than the Class HE:A-1 certificates) and the Class
HE: A-1 underlying certificates will constitute
"regular interests" in the master REMIC and
generally will be treated as debt instruments of
the trust for federal income tax purposes. A
holder of a Certificate will be required to
include as income all interest paid on the
certificates (including any original issue
discount), in accordance with the accrual method
of accounting, even if the holder usually uses
the cash method of accounting. The Class HE: A-5
IO certificates will be considered to have been
issued with original issue discount. The Class
HE:A-1 certificates will represent undivided
ownership interests in the assets held by a
grantor trust. No election will be made to treat
the grantor trust as a REMIC for federal income
tax purposes. See "Certain Federal Income Tax
Consequences" in this prospectus supplement and
in the prospectus for a more detailed description
of the federal income tax consequences of an
investment in the certificates.
ERISA Considerations........ Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
the following classes of certificates: Class HI:
A-1; Class HI: A-2; Class HI: A-3; Class HE: A-1A
NAS; Class HE: A-1B ARM; Class HE: A-2; Class HE:
A-3; Class HE: A-4 and Class HE: A-5 IO. An
employee benefit plan may not purchase any other
class of certificates, unless it satisfies the
conditions described under "ERISA Considerations"
in this prospectus supplement and in the
prospectus.
Legal Investment The certificates will not constitute "mortgage
Considerations.............. related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the contracts are not secured
by first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the
certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
certificates.
Ratings..................... The certificates will not be issued and sold
unless Moody's Investors Service, Inc.
("Moody's") and Fitch IBCA, Inc. ("Fitch") have
assigned the ratings specified on page S-4 (or
better) to the certificates.
The rating of each class of certificates by
Moody's addresses the likelihood of timely
receipt of interest and ultimate receipt of
principal. The rating of each class of
certificates by Fitch addresses the likelihood of
the receipt of Certificateholders of all
distributions to which such Certificateholders
are entitled. The ratings of the Class HE: A-1B
ARM certificates do not address the likelihood of
payment of supplemental interest in the event the
Available Funds Pass-Through Rate is less than
one month LIBOR plus the Pass-
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<PAGE>
Through Margin, as described under "Description
of the certificates--Distributions on Sub-Pool HE
certificates." A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency.
The ratings of the Class HE: B certificates and
Class HI: B-2 certificates are based in part on
an assessment of the Company's ability to make
payments under the Class HE: B Limited Guaranty
and the Class HI: B-2 Limited Guaranty. Any
reduction in the rating of the Company's debt
securities may result in a similar reduction in
the ratings of the Class HE: B and Class HI: B-2
certificates.
Green Tree's senior debt securities were recently
downgraded by Moody's to "Bal".
The ratings of the Class HE: A-1 certificates are
based partially on the creditworthiness of the
swap counterparty. Any reduction in the rating
assigned to the swap counterparty would likely
result in a reduction in the ratings of the
Class HE: A-1 certificates.
Green Tree has not requested a rating of the
certificates from any rating agencies other than
Moody's and Fitch. You cannot assume that no
other rating agency will assign a rating to any
of these certificates, nor can you assume what
any such rating, if issued, would be.
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<PAGE>
RISK FACTORS
Consider the following risk factors in deciding whether to purchase
certificates. More risk factors, applicable to any series of certificates like
these, are printed in the prospectus, and you should consider those risk
factors also.
Reliance on Historical Data With Respect to Home Improvement Contracts. If
you purchase a Sub-Pool HI Certificate, the return on your investment will
depend largely on the performance of the home improvement contracts
constituting Sub-Pool HI. We have disclosed Green Tree's historical delinquency
and loan loss and liquidation experience with home improvement contracts under
"The Contracts--Home Improvement Contracts" in this prospectus supplement, but
the historical experience may not be an accurate prediction of the performance
of the home improvement contracts constituting Sub-Pool HI for several reasons.
First, Green Tree's historical experience with home improvement contracts is
limited: it began purchasing and servicing FHA-insured home improvement
contracts in 1989 and conventional home improvement contracts in 1992. If Green
Tree's historical experience were longer, or involved a larger number of home
improvement contracts, the data might well be substantially different, and some
investors might consider that data a better predictor of the performance of
Sub-Pool HI. Second, historical experience with the performance of one pool of
loans is never a completely reliable predictor of the future performance of
another pool of loans. You must not assume that Sub-Pool HI will experience
delinquencies and losses identical to the historical data presented here. Also,
Green Tree has limited information on the performance of a portfolio of FHA-
insured home improvement contracts purchased in bulk from Empire Funding Corp.,
a mortgage lender engaged in the business of originating, purchasing, selling
and servicing home loans. The contracts purchased from Empire Funding Corp. are
expected to make up approximately % of Sub-Pool HI.
Reliance on Historical Data With Respect to Home Equity Loans. If you
purchase a Sub-Pool HE certificate, the return on your investment will depend
largely on the performance of the home equity contracts constituting Sub-Pool
HE. We have disclosed Green Tree's historical delinquency experience with home
equity loans under "The Contracts--Home Equity Contracts" herein, but the
historical experience may not be an accurate prediction of the performance of
the Home Equity Contracts constituting Sub-Pool HE for several reasons. First,
Green Tree's historical experience with home equity loans is limited: it began
purchasing and servicing them in January 1996. If Green Tree's historical
experience were longer, or involved a larger number of home equity loans, the
data might well be substantially different, and some investors might consider
that data a better predictor of the performance of Sub-Pool HE. Second,
historical experience with the performance of one pool of loans is never a
completely reliable predictor of the future performance of another pool of
loans. Third, the information incorporates some home equity loans that are not
of the type to be included in Sub-Pool HE, and therefore the information
presented is not necessarily indicative of the Company's delinquency experience
with respect to home equity loans similar to the home equity contracts
compromising Sub-Pool HE. You must not assume that Sub-Pool HE will experience
delinquencies and losses identical to the historical data presented here.
Balloon Loans. A substantial number (approximately 22%) of the home equity
contracts are "balloon loans." These loans require equal monthly payments,
consisting of principal and interest, based on a stated amortization schedule,
and a single payment of the remaining principal balance of the loan at
maturity. The remainder of the contracts require substantially equal monthly
payments that are, if timely paid, sufficient to amortize fully the principal
balance of the loan on or before its maturity date. The balloon loans may
present a higher risk of default than the fully-amortizing home equity
contracts, because the balloon loan borrowers are required to make a larger
payment at maturity. If you purchase a Sub-Pool HE Certificate, the return on
your investment will depend largely on the performance of the home equity
contracts constituting Sub-Pool HE. If a substantial number of the balloon
loans default, causing higher than expected defaults and losses on Sub-Pool HE,
you may suffer a loss on your investment.
Truth-in-Lending Considerations. It is likely that some contracts included
in the pool will be subject to the Home Ownership and Equity Protection Act of
1994 (the "Home Protection Act").
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<PAGE>
The Home Protection Act adds certain additional provisions to Regulation Z,
the implementing regulation of the Federal Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors
with respect to non-purchase money mortgage loans with high interest rates or
up-front fees and charges. A violation of these provisions of the Home
Protection Act can affect the enforceability of the related loan, and it
subjects any assignee of such a loan (such as the trust) to all the claims and
defenses that the consumer could assert against the creditor, including the
right to rescind the loan. If you purchase a Sub-Pool HE Certificate, the
return on your investment will depend largely on the performance of the home
equity contracts constituting Sub-Pool HE. If Green Tree is found to have
violated the provisions of the Home Protection Act with respect to any home
equity contract that is subject to the Home Protection Act, the trust may be
unable to collect on that contract. Green Tree would, however, be obligated to
repurchase that contract because of the breach of its representation and
warranty.
Variations in Contract Characteristics. This prospectus supplement provides
information regarding only a portion of the home improvement contracts and home
equity contracts that will be transferred to the trust. The subsequent home
improvement contracts and home equity contracts will have characteristics that
differ somewhat from the Contracts described herein. All of the subsequent
contracts must satisfy various criteria specified in the Pooling and Servicing
Agreement and described under "Description of the certificates--Conveyance of
Contracts," "--Conveyance of Subsequent Home Improvement Contracts and the Sub-
Pool HI Pre-Funding Account," and "--Conveyance of Subsequent Home Equity
Contracts and the Sub-Pool HE Pre-Funding Account." If you purchase a
Certificate, you must not assume that the characteristics of the contract pool
will be identical to the characteristics of the home improvement contracts and
home equity contracts disclosed in this prospectus supplement. Current Reports
on Form 8-K will be filed following each purchase of Contracts by the trust.
The final report will include the same type of information regarding the entire
contract pool as this prospectus supplement contains with respect to the first
group of home improvement contracts and home equity contracts.
The Swap Agreement. The purchase of the Class HE: A-1 certificates involves
risks associated with a swap agreement under which a swap counterparty is
obligated to make payments to support the interest paid to the holders of the
Class HE: A-1 certificates. Pursuant to the swap agreement, the swap
counterparty will be obligated to pay to the trustee the amount, if any, by
which the interest due to the Class HE: A-1 certificates on a payment date
(calculated based on a floating rate) exceeds the amount of interest due to the
trustee for such payment date in respect of the Class HE: A-1 underlying
certificate (calculated based on a fixed rate). In the event that the swap
counterparty fails to make the required payments or if the swap agreement is
terminated in accordance with its terms, holders of the Class HE: A-1
certificates would receive only the fixed pass-through rate on the Class HE: A-
1 underlying certificates. Apart from the swap counterparty's payment
obligation, there will be no other assets of the grantor trust available to
support the floating rate of interest on the Class HE: A-1 certificates.
The senior debt of the swap counterparty is rated Aa1 by Moody's and AAA by
Fitch. If the debt rating of the swap counterparty is withdrawn or reduced
below a level acceptable to Fitch and Moody's, the swap counterparty is
required, no later than the 30th day following such rating agency downgrade
either to enter into a collateral security agreement or secure a replacement
swap counterparty acceptable to Fitch and Moody's to maintain the ratings of
the Class HE: A-1 certificates. In the event that no such agreement is entered
into or replacement swap counterparty secured within such period, an early
termination of the swap agreement could occur.
The swap agreement will terminate on the earliest to occur of (a) , ,
(b) the date on which there are no further amounts due on the Class HE: A-1
underlying certificates and (c) such date designated by either the trustee or
swap counterparty as an early termination date with respect to the swap
agreement following a payment default by the swap counterparty or the trustee,
or certain other customary early termination events, such as the downgrade
referred to above. In the event of a termination pursuant to clause (a) or (b)
above, no termination fee will be payable either to or by the grantor trust. In
the event of a termination pursuant to clause (c) above, no termination fee
will be payable by the grantor trust and depending on the then-current market
conditions, the trust fund may receive a termination fee. Even if the trust
fund receives a fee, the holders of the Class HE: A-1 certificates might not
receive full interest payments.
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<PAGE>
STRUCTURE OF THE TRANSACTION
The Certificates for Home Improvement and Home Equity Loans, Series 1999-
(the "Certificates") will represent interests in a Trust (the "Trust")
consisting of a sub-pool ("Sub-Pool HI") of home improvement contracts and
promissory notes (the "Home Improvement Contracts") and a sub-pool ("Sub-Pool
HE") of fixed-rate home equity contracts (the "Fixed-Rate Home Equity
Contracts") and adjustable rate home equity contracts (the "Adjustable Rate
Home Equity Contracts"). The Company will convey the Home Improvement
Contracts, Fixed-Rate Home Equity Contracts and Adjustable Rate Home Equity
Contracts (together, the "Contracts") and certain related property to the
Trust. On or about , 1999 (the "Closing Date"), the Company will
establish the Trust pursuant to a Pooling and Servicing Agreement to be dated
as of , 1999 (the "Agreement"), between the Company, as Seller and
Servicer, and the Trustee.
The Class HI: A-1, Class HI: A-2, Class HI: A-3, Class HI: M-1, Class HI: M-
2, Class HI: B-1 and Class HI: B-2 Certificates (the "Sub-Pool HI
Certificates"), and the Class HE: A-1A NAS, Class HE: A-1B ARM, Class HE: A-2,
Class HE: A-3, Class HE: A-4, Class HE: A-5 IO, Class HE: M-1, Class HE: M-2,
Class HE: B, Class HE: A-1 Underlying, Class C Master and Class C Subsidiary
Certificates, will be issued by the Trust, the corpus of which will consist
primarily of the Contracts, including all rights to receive payments due on
such Contracts after (i) September 30, 1998 (or the date of origination
thereof, if later) for each Home Equity Contract other than the Subsequent Home
Equity Contracts (as defined below); (ii) October 31, 1998 with respect to all
Home Improvement Contracts other than Subsequent Home Improvement Contracts (as
defined below); and (iii) for each Subsequent Home Equity Contract or
Subsequent Home Improvement Contract, the date on which such Contract is
purchased by the Trust (each such date, a "Cut-off Date"), all rights under FHA
Insurance with respect to the FHA-insured Home Improvement Contracts, liens on
the related real estate, amounts held for the Trust in the Certificate Account
(as defined below), the Class HI: B-2 Limited Guaranty of the Company for the
benefit of the Class HI: B-2 Certificates, as described in "Description of the
Class HI: B-2 Limited Guaranty" herein, and the Class HE: B Limited Guaranty of
the Company for the benefit of the Class HE: B Certificates, as described in
"Description of the Class HE: B Limited Guaranty" herein. The Class HI: M-1,
Class HI: M-2, Class HI: B-1, Class HI: B-2, Class HE: A-1 Underlying
Certificates, Class HE: M-2, Class HE: B, Class C Master and Class C Subsidiary
Certificates are not being offered hereby. Sub-Pool HI and Sub-Pool HE will
each be deemed to be a separate sub-trust within the Trust.
The Class HE: A-1 Certificates will represent undivided ownership interests
in the assets held by Green Tree Grantor Trust 1999- (the "Grantor Trust").
The assets of the Grantor Trust will consist of (1) the Class HE: A-1
Underlying Certificates issued by the Trust and (2) a swap agreement (the "Swap
Agreement") between the Grantor Trust and Westdeutsche Landesbank Girozentrale,
New York branch (the "Swap Counterparty") pursuant to which the Swap
Counterparty, or any successor counterparty prior to the Payment Date in ,
will be obligated to pay to the Trustee the amount, if any, by which the
interest due on the Class HE: A-1 Certificates on a Payment Date (as defined
below) (which is calculated on a floating rate) exceeds the amount of interest
due to the Trustee for such Payment Date in respect of the Class HE: A-1
Underlying Certificate (which is calculated on a fixed rate). The Grantor Trust
will be created pursuant to a trust agreement (the "Grantor Trust Agreement")
to be dated as of , 1999, between the Company, as the depositor and
servicer, and [Trustee], as the trustee.
The Class HE: A-1A NAS, Class HE: A-1B ARM, Class HE: A-1, Class HE: A-2,
Class HE: A-3, Class HE: A-4, Class HE: A-5 IO, Class HE: M-1, Class HE: M-2,
and Class HE: B Certificates are referred to herein as the "Sub-Pool HE
Certificates."
Payments and recoveries in respect of principal and interest on the Contracts
will be paid into a separate trust account maintained at an Eligible
Institution (as defined below) (initially [Trustee]) in the name of the Trust
(the "Certificate Account"), no later than one business day after receipt.
Holders of Certificates (other than Class HE: A-1 Certificates) will receive
payments on the fifteenth day of each month (or, if such day is not a business
day, the next succeeding business day) and holders of the HE: A-1 Certificates
will receive payments on the eighteenth day of each month during the term of
the Swap Agreement (or if that eighteenth day is not a business day, the next
succeeding business day), (each
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<PAGE>
a "Payment Date"). The Payment Date for the Class HE: A-1 Certificates will be
an earlier day (but not earlier than the Payment Date for the other
Certificates) if the Trustee receives any required swap payment before 11:00
a.m. Central Standard Time on the earlier day. The Payment Date for the Class
HE: A-1 Certificates will be the same as the Payment Date for the other
Certificates after the Swap Agreement terminates. Payments on deposit in the
Certificate Account and trust account under the Grantor Trust Agreement will be
applied on each Payment Date to make the distributions to the
Certificateholders as of the immediately preceding Record Date as described
under "Description of the Certificates--Distributions on Sub-Pool HI
Certificates" and "--Distributions on Sub-Pool HE Certificates" herein and to
pay certain monthly fees to the Servicer as compensation for its servicing of
the Contracts (the "Monthly Servicing Fee") and to pay certain monthly fees to
the Company as compensation for providing the Class HI: B-2 Limited Guaranty
and the Class HE: B Limited Guaranty (the "Class HI: B-2 Guaranty Fee" and the
"Class HE: B Guaranty Fee").
The Servicer will be obligated to advance for each Payment Date any scheduled
payments on the Contracts that were due but not received during the prior Due
Period ("Advances"). The Servicer will be entitled to reimbursement of an
Advance from funds available therefor in the Certificate Account. The Servicer
will not be required to make any Advance to the extent that it does not expect
to recoup the Advance from subsequent funds available therefor in the
Certificate Account. If the Servicer fails to make any Advance required under
the Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, (d) the Class HI: B-2 Limited
Guaranty and (e) the Class HE: B Limited Guaranty. The Company is obligated
under the Agreement to repurchase at the Repurchase Price (as defined herein),
or, at its option, to substitute another contract for, any Contract on the
first Payment Date which is more than 90 days after the Company becomes aware,
or the Company receives written notice from the Trustee, of any breach of any
such representation and warranty in the Agreement that materially and adversely
affects the Certificateholders' interest in such Contract if such breach has
not been cured prior to such date. The Agreement also provides that the Company
has certain obligations to repurchase Contracts and to indemnify the Trustee
and Certificateholders with respect to certain other matters.
Distributions of interest and principal on the Sub-Pool HI Certificates will
be made primarily from amounts available in respect of the Home Improvements
Contracts comprising Sub-Pool HI, while distributions of principal and interest
on the Sub-Pool HE Certificates will be made primarily from amounts available
in respect of the Home Equity Contracts comprising Sub-Pool HE and the
payments, if any, by the Swap Counterparty. Under certain circumstances as
described herein, amounts available in respect of the Contracts in one Sub-Pool
may be available to make distributions to the holders of Certificates relating
to the other Sub-Pool. The rights of the holders of the Class HI: M-1, Class
HI: M-2, Class HI: B-1 and Class HI: B-2 Certificates to receive distributions
on each Payment Date will be subordinated to such rights of the holders of the
Class HI: A-1, Class HI: A-2, and Class HI: A-3 Certificates and, in addition,
to such rights of the holders of the Class HI: M-1 Certificates (in the case of
the Class HI: M-2, Class HI: B-1 and Class HI: B-2 Certificates), of the Class
HI: M-2 Certificates (in the case of the Class HI: B-1 and Class HI: B-2
Certificates) and of the Class HI: B-1 Certificates (in the case of the Class
HI: B-2 Certificates), all to the extent described herein. Likewise, the rights
of the holders of the Class HE: M-1, Class HE: M-2 and Class HE: B Certificates
to receive distributions on each Payment Date will be subordinated to such
rights of the holders of the Class HE: A-1A NAS, Class HE: A-1B ARM, Class HE:
A-1 Underlying, Class HE: A-1, Class HE: A-2, Class HE: A-3, Class HE: A-4 and
Class HE: A-5 IO Certificates and, in addition, to such rights of the holders
of the Class HE: M-1 Certificates (in the case of the Class HE: M-2 and Class
HE: B Certificates) and of the Class HE: M-2 Certificates (in the case of the
Class HE: B Certificates), all to the extent described herein.
Elections will be made to treat certain portions of the Trust as comprising
two separate real estate mortgage investment conduits (the "Master REMIC" and
"Subsidiary REMIC") for federal income tax
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<PAGE>
purposes. As described more fully herein, the Certificates (other than the
Class HE: A-1, Class C Master and Class C Subsidiary Certificates) will
constitute "regular interests" in the Master REMIC. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
There is currently no secondary market for the Certificates offered hereby,
and there is no assurance that any such market will develop or, if it does
develop, that it will continue. [Underwriters] (the "Underwriters") expect, but
are not obligated, to make a market in the Certificates.
All dollar amounts in this Prospectus Supplement and the Prospectus are
expressed in United States dollars.
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and home equity loans,
providing warehouse financing for the purchase of contracts and loans and other
costs of maintaining such contracts and loans until they are pooled and sold to
other investors.
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<PAGE>
THE CONTRACTS
Home Improvement Contracts
This Prospectus Supplement contains information regarding certain Home
Improvement Contracts, which will represent approximately % of all Home
Improvement Contracts by aggregate principal balance as of the Cut-Off Date,
and which consist of home improvement contracts and promissory notes originated
through (the "Initial Home Improvement Contracts"). The information for
each Initial Home Improvement Contract is as of the Cut-Off Date for such
Contract. The Agreement provides that additional Home Improvement Contracts
(the "Subsequent Home Improvement Contracts") will be purchased by the Trust up
to 60 days after the Closing Date. See "Description of the Certificates--
Conveyance of Subsequent Home Improvement Contracts and Sub-Pool HI Pre-Funding
Account" below.
The Initial Home Improvement Contracts have an aggregate principal balance as
of the Cut-off Date of $ . Each Home Improvement Contract is a home
improvement contract originated by a Company-approved home improvement
contractor and purchased by the Company, or a home improvement promissory note
originated by the Company directly. Each Home Improvement Contract is secured
by a lien on the related real estate. Each Home Improvement Contract finances
improvements to a one- to four-family residential property, an owner-occupied
condominium or town house or a manufactured home which either qualifies as real
estate under state law or is located in a Company-approved park.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Home Improvement Contract is fully
amortizing with a fixed contractual rate of interest and provides for level
monthly payments over the term of such loan, computed on the simple interest
method, (b) each Home Improvement Contract has its last scheduled payment due
no later than , (c) each FHA-insured Home Improvement Contract was
originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense, by FHA Insurance, and (d) each Home
Improvement Contract is secured by a lien (which is typically a subordinate
lien) on the related real estate. The Home Improvement Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Home Improvement Contracts is appended to
the Agreement. See "Description of the Certificates" herein and in the
Prospectus. Approximately % of the Initial Home Improvement Contracts, by
aggregate principal balance as of the Cut-off Date, are insured by FHA to the
extent described in "Description of FHA Insurance" in the Prospectus. Each of
the Initial Home Improvement Contracts has a Contract Rate of at least % per
annum and not more than % and the weighted average of the Contract Rates of
the Initial Home Improvement Contracts as of the Cut-off Date is %. As of
the Cut-off Date, the Initial Home Improvement Contracts had remaining
maturities of at least months but not more than months and original
maturities of at least months but not more than months. The Initial Home
Improvement Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per
Initial Home Improvement Contract as of the Cut-off Date was $ and the
principal balances on the Initial Home Improvement Contracts as of the Cut-off
Date ranged from $ to $ . The Initial Home Improvement Contracts
arise from loans relating to real property located in states and the
District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Initial Home Improvement Contracts financed
improvements to real estate located in , % in , % in , and
% in . No other state represented 5% or more of the aggregate principal
balance as of the Cut-off Date of the Initial Home Improvement Contracts.
Substantially none of the Initial Home Improvement Contracts provide for
recourse to the originating contractor in the event of a default by the
obligor.
S-24
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Home Improvement Contracts.
Geographical Distribution of Mortgaged Properties--Initial Home Improvement
Contracts
<TABLE>
<CAPTION>
% of
Initial
% of Sub-Pool
Initial HI by
Sub-Pool HI by Aggregate Principal Outstanding
Number of Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Alaska..................
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Hawaii..................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
Other...................
----- ------ ------------ ------
Total............... 100.00% $ 100.00%
===== ====== ============ ======
</TABLE>
S-25
<PAGE>
Years of Origination--Initial Home Improvement Contracts
<TABLE>
<CAPTION>
% of Initial
Number of Sub-Pool HI By
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Year of Origination off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1989...................... $ %
1990......................
1996......................
1997......................
1998......................
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
Distribution of Original Contract Amounts--Initial Home Improvement Contracts
<TABLE>
<CAPTION>
% of Initial
Number of Sub-Pool HI by
Contracts Aggregate Principal Outstanding Principal
Original Home Improvement as of Cut- Balance Outstanding Balance as of
Contract Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
- ---------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 10,000............ $ %
Between$ 10,000--$ 19,999....
Between$ 20,000--$ 29,999....
Between$ 30,000--$ 39,999....
Between$ 40,000--$ 49,999....
Between$ 50,000--$ 59,999....
Between$ 60,000--$ 69,999....
Between$ 70,000--$ 79,999....
Between$ 80,000--$ 89,999....
Between$ 90,000--$ 99,999....
Between$100,000--$109,999....
Between$110,000--$119,999....
Between$120,000--$129,999....
Between$130,000--$139,999....
Between$140,000--$149,999....
Between$150,000--$159,999....
Between$160,000--$169,999....
Between$170,000--$179,999....
Between$180,000--$189,999....
Between$190,000--$199,999....
Over $200,000...............
----- ------------- ------
Total.................... $ 100.00%
===== ============= ======
</TABLE>
Contract Rates--Initial Home Improvement Contracts
<TABLE>
<CAPTION>
% of Initial
Number of Sub-Pool HI by
Contracts Aggregate Principal Outstanding Principal
Range of Home Improvement as of Cut- Balance Outstanding Balance as of
Contracts by Contract Rate off Date as of Cut-off Date Cut-off Date
-------------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 7.01%-- 8.00%......... $ %
From 8.01%-- 9.00%.........
From 9.01%--10.00%.........
From 10.01%--11.00%.........
From 11.01%--12.00%.........
From 12.01%--13.00%.........
From 13.01%--14.00%.........
From 14.01%--15.00%.........
From 15.01%--16.00%.........
From 16.01%--17.00%.........
Over17.01%..................
----- ------------ ------
Total................... $ 100.00%
===== ============ ======
</TABLE>
S-26
<PAGE>
Remaining Months to Maturity--Initial Home Improvement Contracts
<TABLE>
<CAPTION>
% of
Initial
Number of Sub-Pool HI by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
as of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 31.............. $ %
31 to 60..................
61 to 90..................
91 to 120.................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241 to 270................
271 to 300................
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
Delinquency, Loan Default and Loss Information
The following tables set forth the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by the Company (other than Home Improvement
Contracts already in foreclosure).
Delinquency Experience--Conventional Home Improvement Contracts
<TABLE>
<CAPTION>
At December 31,
At , ------------------------------------
1999 1998 1997 1996 1995 1994
----------- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)............. 85,958 74,021 56,028 29,788
Number of Contracts
Delinquent(2)(3)
30-59 Days................ 946 656 394 57
60-89 Days................ 258 241 109 10
90 Days or More........... 338 279 126 15
--- --- ------ ------ ------ ------
Total Contracts Delinquent.. 1,542 1,176 629 82
Delinquencies as a Percent
of Contracts
Outstanding(4)............. % % 1.79% 1.59% 1.12% .28%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for 1996 and 1997 does not include
as delinquent the home improvement contracts of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of contracts.
S-27
<PAGE>
Delinquency Experience--FHA-Insured Home Improvement Contracts
<TABLE>
<CAPTION>
At December 31,
------------------------------------
At ,
1999 1998 1997 1996 1995 1994
----------- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Number of Contracts
Outstanding(1)............. 17,539 22,001 25,925 26,885
Number of Contracts
Delinquent(2)(3)
30-59 Days................ 439 459 462 237
60-89 Days................ 95 123 121 95
90 Days or More........... 141 198 183 146
---- ---- ------ ------ ------ ------
Total Contracts Delinquent.. 675 780 766 478
Delinquencies as a Percent
of Contracts
Outstanding(4)............. % % 3.85% 3.55% 2.95% 1.78%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information for 1996 and 1997 does not include
as delinquent the home improvement contracts of obligors who have entered
bankruptcy proceedings, provided that such obligors are current under their
bankruptcy payment plan.
(4) By number of contracts.
The following tables set forth the loan default and loss experience for the
periods indicated of the portfolios of conventional and FHA-insured secured
home improvement loans serviced by the Company.
Loan Default and Loss Experience--Conventional Home Improvement Contracts
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
---------------------------------------------------
At ,
1999 1998 1997 1996 1995 1994
----------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $1,741,669 $ $1,435,535 $1,147,111 $824,419 $418,055
Contract Defaults(2).... 1.08% % 1.60% 1.25% .53% .12%
Net Losses:
Dollars(3)............ $ 16,840 $ $ 16,034 $ 11,072 $ 3,424 $ 285
Percentage(4)......... .97% % 1.12% .97% .42% .07%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company has
commenced foreclosure or enforcement proceedings or the contract is 180
days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
S-28
<PAGE>
Loan Default and Loss Experience--FHA-Insured Home Improvement Contracts
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
-----------------------------------------------
At ,
1999 1998 1997 1996 1995 1994
----------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of
Contracts Serviced(1).. $98,915 $ $128,657 $161,438 $191,364 $199,286
Contract Defaults(2).... 4.03% % 3.17% 2.90% 1.81% 1.88%
Net Losses:
Dollars(3)............ $ 511 $ $ 500 $ 574 $ 291 $ 623
Percentage(4)......... .52% % .39% .36% .15% .31%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company has
submitted a claim to FHA, the Company has commenced foreclosure or
enforcement proceedings, or the contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. Includes unpaid interest to the date of FHA claim submission
and all expenses of liquidation, and reflects proceeds of FHA Insurance
claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes only
and there is no assurance that the delinquency, loan default and loss
experience of the Home Improvement Contracts will be similar to that set forth
above. Moreover, because the Company began originating and purchasing FHA-
insured home improvement contracts in April 1989, and secured conventional home
improvement contracts in September 1992, it is possible that the Company's
portfolio is not yet sufficiently seasoned to show the delinquencies and losses
that would be experienced if such data were collected over a longer period of
time. The delinquency, loan default and loss experience of home improvement
loans may be adversely affected by a downturn in regional or local economic
conditions. Regional and local economic conditions are often volatile, and no
predictions can be made regarding future economic conditions in any particular
area.
Fixed-Rate Home Equity Contracts
Sub-Pool HE includes Fixed-Rate Home Equity Contracts (meaning all Home
Equity Contracts other than the Adjustable Rate Home Equity Contracts,
described separately below). This Prospectus Supplement contains information
regarding certain Fixed-Rate Home Equity Contracts (divided into Group I and
Group II), which will represent approximately % of all Fixed-Rate Home
Equity Contracts by aggregate principal balance as of the Cut-off Date, and
which consist of closed-end home equity loans originated through (the
"Initial Fixed-Rate Home Equity Contracts"). The information for each Initial
Fixed-Rate Home Equity Contract is as of the Cut-off Date for such Contract.
The Agreement provides that additional Fixed-Rate Home Equity Contracts (the
"Subsequent Fixed-Rate Home Equity Contracts") will be purchased by the Trust
prior to or up to 60 days after the Closing Date. See "Description of the
Certificates--Conveyance of Subsequent Home Equity Contracts and Sub-Pool HE
Pre-Funding Account" below.
The initial Group I Fixed-Rate Home Equity Contracts (the "Initial Group I
Fixed-Rate Home Equity Contracts") have an aggregate principal balance of
$ . Each Group I Fixed-Rate Home Equity Contract is a closed-end home
equity loan originated by the Company or by a Company-approved correspondent
lender and purchased by the Company. Each Group I Fixed-Rate Home Equity
Contract is secured by a lien on the related real estate.
S-29
<PAGE>
The Company will make certain representations and warranties in the
Agreement, including that (a) each Group I Fixed-Rate Home Equity Contract is
fully amortizing and provides for level monthly payments over the term of such
loan, computed on the simple interest method (except for the Balloon Loans),
(b) each Group I Initial Fixed-Rate Home Equity Contract has its last scheduled
payment due no later than , and (c) each Group I Fixed-Rate Home Equity
Contract is secured by a lien on the related real estate. The Group I Fixed-
Rate Home Equity Contracts will be originated or acquired by the Company in the
ordinary course of the Company's business. A detailed listing of the Initial
Group I Fixed-Rate Home Equity Contracts is appended to the Agreement.
See "Description of the Certificates" herein and in the Prospectus. Each of the
Initial Group I Fixed-Rate Home Equity Contracts has a Contract Rate of at
least % per annum and not more than % and the weighted average of the
Contract Rates of the Initial Group I Fixed-Rate Home Equity Contracts as of
the Cut-off Date is %. As of the Cut-off Date, the Initial Group I Fixed-
Rate Home Equity Contracts had remaining maturities of at least months but
not more than months and original maturities of at least 48 months but not
more than months. The Initial Group I Fixed-Rate Home Equity Contracts had
a weighted average term to scheduled maturity, as of origination, of
months, and a weighted average term to scheduled maturity, as of the Cut-off
Date, of months. The average principal balance per Initial Group I Fixed-
Rate Home Equity Contract as of the Cut-off Date was $ and the
principal balances on the Initial Group I Fixed-Rate Home Equity Contracts as
of the Cut-off Date ranged from $ to $ . The Balloon Loans
included in the Initial Group I Fixed-Rate Home Equity Contracts consisted of
closed-end home equity loans and have a principal balance as of the Cut-off
Date of $ . The weighted average of the Contract Rates of such
Balloon Loans as of the Cut-off Date was %, and such Balloon Loans had a
weighted average term to scheduled maturity, as of origination, of months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The Initial Group I Fixed-Rate Home Equity Contracts arise from
loans relating to real property located in states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately % of
the Initial Group I Fixed-Rate Home Equity Contracts were secured by real
property located in , % in , % in , % in , and % in
. No other state represented 5% or more of the Cut-off Date Pool Principal
Balance of the Initial Group I Fixed-Rate Home Equity Contracts.
S-30
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Group I Fixed-Rate Home Equity Contracts.
Geographical Distribution of Mortgaged Properties--Initial Group I Fixed-Rate
Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
% of Initial Group I
Group I Fixed-Rate
Fixed-Rate Home Equity
Home Equity Contracts by
Contracts Aggregate Principal Outstanding
Number of by Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
---- ------ --------------- ------
Total............... 100.00% $140,757,066.53 100.00%
==== ====== =============== ======
</TABLE>
S-31
<PAGE>
Years of Origination--Initial Group I Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group I
Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Year of Origination off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1987................... $ %
1996...................
1997...................
1998...................
---- ------------ ------
Total.............. $ 100.00%
==== ============ ======
</TABLE>
Distribution of Original Contract Amounts--Initial Group I Fixed-Rate Home
Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group I
Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
Original Contract as of Cut- Balance Outstanding Balance as of
Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than$ 10,000....... $ %
Between$ 10,000--
$ 19,999...............
Between$ 20,000--
$ 29,999...............
Between$ 30,000--
$ 39,999...............
Between$ 40,000--
$ 49,999...............
Between$ 50,000--
$ 59,999...............
Between$ 60,000--
$ 69,999...............
Between$ 70,000--
$ 79,999...............
Between$ 80,000--
$ 89,999...............
Between$ 90,000--
$ 99,999...............
Between$100,000--
$109,999...............
Between$110,000--
$119,999...............
Between$120,000--
$129,999...............
Between$130,000--
$139,999...............
Between$140,000--
$149,999...............
Between$150,000--
$159,999...............
Between$160,000--
$169,999...............
Between$170,000--
$179,999...............
Between$180,000--
$189,999...............
Between$190,000--
$199,999...............
Between$200,000--
$209,999...............
Between$210,000--
$219,999...............
Over $220,000.........
---- ------------ ------
Total............... $ 100.00%
==== ============ ======
</TABLE>
S-32
<PAGE>
Contract Rates--Initial Group I Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group I Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Home Equity as of Cut- Balance Outstanding Balance as of
Contracts by Contract Rate off Date as of Cut-off Date Cut-off Date
- -------------------------- ---------- ------------------- -------------------------------
<S> <C> <C> <C>
From 7.00%-- 9.00%....... $ %
From 9.01%--10.00%.......
From 10.01%--11.00%.......
From 11.01%--12.00%.......
From 12.01%--13.00%.......
From 13.01%--14.00%.......
From 14.01%--15.00%.......
From 15.01%--16.00%.......
From 16.01%--17.00%.......
Over 17.00%...............
---- ------------ ------
Total................. $ 100.00%
==== ============ ======
</TABLE>
Remaining Months to Maturity--Initial Group I Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group I
Fixed-Rate
Number of Home Equity Contracts by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
31--60................. $ %
61--90.................
91--120................
121--150...............
151--180...............
181--210...............
211--240...............
241--270...............
271--300...............
301--330...............
331--360...............
----- ------------ ------
Total.............. $ 100.00%
===== ============ ======
</TABLE>
Lien Position--Initial Group I Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Group I
Fixed-Rate % of Initial Group I
Home Equity Fixed-Rate
Number of Contracts by Home Equity Contracts by
Contracts Number of Aggregate Principal Outstanding Principal
as of Cut- Contracts as of Balance Outstanding Balance as of
off Date Cut-off Date as of Cut-off Date Cut-off Date
---------- --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
----- ------ ------------ ------
Total............... 100.00% $ 100.00%
===== ====== ============ ======
</TABLE>
S-33
<PAGE>
Combined Loan-to-Value Ratio--Initial Group I Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group I
Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Combined Loan-to-Value Ratio off Date as of Cut-off Date Cut-off Date
- ---------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-10.00%........... $ %
From 10.01%-20.00%..........
From 20.01%-30.00%..........
From 30.01%-40.00%..........
From 40.01%-50.00%..........
From 50.01%-60.00%..........
From 60.01%-70.00%..........
From 70.01%-80.00%..........
From 80.01%-90.00%..........
Over 90.00%.................
----- ------------ ------
Total................... $ 100.00%
===== ============ ======
</TABLE>
The initial Group II Fixed-Rate Home Equity Contracts (the "Initial Group II
Fixed-Rate Home Equity Contracts") have an aggregate principal balance of
$ . Each Group II Fixed-Rate Home Equity Contract is a closed-end
home equity loan originated by the Company or by a Company-approved
correspondent lender and purchased by the Company. Each Group II Fixed-Rate
Home Equity Contract is secured by a lien on the related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Group II Fixed-Rate Home Equity Contract is
fully amortizing and provides for level monthly payments over the term of such
loan, computed on the simple interest method (except for the Balloon Loans) (b)
each Initial Group II Fixed-Rate Home Equity Contract has its last scheduled
payment due no later than , and (c) each Group II Fixed-Rate Home Equity
Contract is secured by a lien on the related real estate. The Group II Fixed-
Rate Home Equity Contracts will be originated or acquired by the Company in the
ordinary course of the Company's business. A detailed listing of the Initial
Group II Fixed-Rate Home Equity Contracts is appended to the Agreement. See
"Description of the Certificates" herein and in the Prospectus. Each of the
Initial Group II Fixed-Rate Home Equity Contracts has a Contract Rate of at
least % per annum and not more than % and the weighted average of the
Contract Rates of the Initial Group II Fixed-Rate Home Equity Contracts as of
the Cut-off Date is %. As of the Cut-off Date, the Initial Group II Fixed-
Rate Home Equity Contracts had remaining maturities of at least months but
not more than months and original maturities of at least months but not
more than months. The Initial Group II Fixed-Rate Home Equity Contracts had
a weighted average term to scheduled maturity, as of origination, of
months, and a weighted average term to scheduled maturity, as of the Cut-off
Date, of months. The average principal balance per Initial Group II Fixed-
Rate Home Equity Contract as of the Cut-off Date was $ and the
principal balances on the Initial Group II Fixed-Rate Home Equity Contracts as
of the Cut-off Date ranged from $ to $ . The Balloon Loans
included in the Initial Group II Fixed-Rate Home Equity Contracts consisted of
323 closed-end home equity loans and have a principal balance as of the Cut-off
Date of $ . The weighted average of the Contract Rates of such
Balloon Loans as of the Cut-off Date was %, and such Balloon Loans had a
weighted average term to scheduled maturity, as of origination, of months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The Initial Group II Fixed-Rate Home Equity Contracts arise from
loans relating to real property located in states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately % of
the Initial Group II Fixed-Rate Home Equity Contracts were secured by real
property located in California. No other state represented 5% or more of the
Cut-off Date Pool Principal Balance of the Initial Group II Fixed-Rate Home
Equity Contracts.
S-34
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Group II Fixed-Rate Home Equity Contracts.
Geographical Distribution of Mortgaged Properties--Initial Group II Fixed-Rate
Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
% of Initial Group II
Group II Fixed-Rate
Fixed-Rate Home Equity
Home Equity Contracts by
Contracts Aggregate Principal Outstanding
Number of by Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisianna..............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ ------------- ------
Total............... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
S-35
<PAGE>
Years of Origination--Initial Group II Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Group II Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Year of Origination off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
1995................... $ %
1996...................
1997...................
1998...................
----- ------------ ------
Total.............. $ 100.00%
===== ============ ======
</TABLE>
Distribution of Original Contract Amounts--Initial Group II Fixed-Rate Home
Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Group II Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
Original Contract as of Cut- Balance Outstanding Balance as of
Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Between$ 10,000--
$ 19,999............... $ %
Between$ 20,000--
$ 29,999...............
Between$ 30,000--
$ 39,999...............
Between$ 40,000--
$ 49,999...............
Between$ 50,000--
$ 59,999...............
Between$ 60,000--
$ 69,999...............
Between$ 70,000--
$ 79,999...............
Between$ 80,000--
$ 89,999...............
Between$ 90,000--
$ 99,999...............
Between$100,000--
$109,999...............
Between$110,000--
$119,999...............
Between$120,000--
$129,999...............
Between$130,000--
$139,999...............
Between$140,000--
$149,999...............
Between$150,000--
$159,999...............
Between$160,000--
$169,999...............
Between$170,000--
$179,999...............
Between$180,000--
$189,999...............
Between$190,000--
$199,999...............
Between$200,000--
$209,999...............
Between$210,000--
$219,999...............
Between$220,000--
$229,999...............
Between$230,000--
$239,999...............
Between$240,000--
$249,999...............
Between$250,000--
$299,999...............
Between$300,000--
$349,999...............
Between$350,000--
$399,999...............
Between$400,000--
$449,999...............
Between$450,000--
$499,999...............
----- ------------ ------
Total............... $ 100.00%
===== ============ ======
</TABLE>
S-36
<PAGE>
Contract Rates--Initial Group II Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group II
Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Home Equity as of Cut- Balance Outstanding Balance as of
Contracts by Contract Rate off Date as of Cut-off Date Cut-off Date
- -------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 7.01%-- 9.00%....... $ %
From 9.01%--10.00%.......
From 10.01%--11.00%.......
From 11.01%--12.00%.......
From 12.01%--13.00%.......
From 13.01%--14.00%.......
From 14.01%--15.00%.......
From 15.01%--16.00%.......
From 16.01%--17.00%.......
Over 17.00%...............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
Remaining Months to Maturity--Initial Group II Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial Group II
Fixed-Rate
Number of Home Equity Contracts by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
31--60................. $ %
61--90.................
91--120................
121--150...............
151--180...............
181--210...............
211--240...............
271--300...............
301--330...............
331--360...............
----- --------------- ------
Total.............. $140,753,245.78 100.00%
===== =============== ======
</TABLE>
Lien Position--Initial Group II Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Group II
Fixed-Rate % of Initial Group II
Home Equity Fixed-Rate
Number of Contracts by Home Equity Contracts by
Contracts Number of Aggregate Principal Outstanding Principal
as of Cut- Contracts as of Balance Outstanding Balance as of
off Date Cut-off Date as of Cut-off Date Cut-off Date
---------- --------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
First................... % $ %
Second..................
Third...................
----- ------ ------------ ------
Total............... 100.00% $ 100.00%
===== ====== ============ ======
</TABLE>
S-37
<PAGE>
Combined Loan-to-Value Ratio--Initial Group II Fixed-Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Group II
Fixed-Rate
Number of Home Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Combined Loan-to-Value Ratio off Date as of Cut-off Date Cut-off Date
- ---------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
From 0.00%-10.00%........... $ %
From 10.01%-20.00%..........
From 20.01%-30.00%..........
From 30.01%-40.00%..........
From 40.01%-50.00%..........
From 50.01%-60.00%..........
From 60.01%-70.00%..........
From 70.01%-80.00%..........
From 80.01%-90.00%..........
Over 90.01%.................
----- ------------ ------
Total................... $ 100.00%
===== ============ ======
</TABLE>
Adjustable Rate Home Equity Contracts
Sub-Pool HE includes Adjustable Rate Home Equity Contracts. This Prospectus
Supplement contains information regarding certain Adjustable Rate Home Equity
Contracts, which will represent approximately % of all Adjustable Rate Home
Equity Contracts by aggregate principal balance as of the Cut-off Date, and
which consist of closed-end home equity loans originated through , 1999
(the "Initial Adjustable Rate Home Equity Contracts"). The information for each
Initial Adjustable Rate Home Equity Contract is as of the Cut-off Date for such
Contract. The Agreement also provides that additional Adjustable Rate Home
Equity Contracts (the "Subsequent Adjustable Rate Home Equity Contracts") will
be purchased by the Trust up to 60 days after the Closing Date. See
"Description of the Certificates--Conveyance of Subsequent Home Equity
Contracts and Sub-Pool HE Pre-Funding Account" below.
The Initial Adjustable Rate Home Equity Contracts have an aggregate principal
balance of $ . Each Adjustable Rate Home Equity Contract is a closed-end
home equity loan originated by the Company or by a Company-approved
correspondent lender and purchased by the Company. Each Adjustable Rate Home
Equity Contract is secured by a lien on the related real estate.
The Initial Adjustable Rate Home Equity Contracts have Contract Rates subject
to annual or semiannual adjustment after an initial period of up to 36 months
on the day of the month specified in the Adjustable Rate Home Equity Contract
(each such date, an "Adjustment Date"), to equal the sum of (i) the Six-Month
LIBOR Index (as defined below) and (ii) a fixed percentage amount specified in
the related Adjustable Rate Home Equity Contract (the "Gross Margin"). The
Contract Rates will not increase on any Adjustment Date by more than 3% per
annum. All of the Initial Adjustable Rate Home Equity Contracts further provide
that the Contract Rate will in no event be more than the fixed percentage set
forth in the Adjustable Rate Home Equity Contract (such rate, the "Maximum
Contract Rate"). Each Initial Adjustable Rate Home Equity Contract provides
that in no event will the Contract Rate be less than the initial Contract Rate
(such rate, the "Minimum Contract Rate"). Effective with the first payment due
on an Initial Adjustable Rate Home Equity Contract after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of such Adjustable Rate Home
Equity Contract over its remaining term, and pay interest at the Contract Rate
as so adjusted. Substantially all of the Initial Adjustable Rate Home Equity
Contracts were originated with a Contract Rate less than the sum of (i) the
Six-Month LIBOR Index at the time the initial Contract Rate was established and
(ii) the Gross Margin. The Six-Month LIBOR Index is a per annum rate equal to
the average of interbank offered rates for six-month U.S. dollar-denominated
deposits in the London market based on quotations of major banks, as published
in The Wall Street Journal and as most recently available as of the date
specified in the related Adjustable Rate Home Equity Contract.
S-38
<PAGE>
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Home Equity Contract is
fully amortizing and provides for monthly payments, over the term of such loan,
computed on the simple interest method, (b) each Initial Adjustable Rate Home
Equity Contract has its last scheduled payment due no later than , and
(c) each Adjustable Rate Home Equity Contract is secured by a lien on the
related real estate. The Adjustable Rate Home Equity Contracts will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Initial Adjustable Rate Home Equity
Contracts is appended to the Agreement. See "Description of the Certificates"
herein and in the Prospectus. The Contract Rates on the Initial Adjustable Rate
Home Equity Contracts as of the Cut-off Date range from % to % with a
weighted average Contract Rate of %. As of the Cut-off Date, the weighted
average Maximum Contract Rate of the Initial Adjustable Rate Home Equity
Contracts was 15.28%, with Maximum Contract Rates that range from % to
%. As of the Cut-Off Date, the Initial Adjustable Rate Home Equity
Contracts had a weighted average gross margin of 6.51% and gross margins
ranging from % to %. As of the Cut-off Date, the Initial Adjustable Rate
Home Equity Contracts had remaining maturities of at least months but not
more than months and original maturities of at least months but not
more than months. The Initial Adjustable Rate Home Equity Contracts had a
weighted average term to scheduled maturity, as of origination, of months,
and a weighted average term to scheduled maturity, as of the Cut-off Date, of
months. The average principal balance per Initial Adjustable Rate Home
Equity Contract as of the Cut-off Date was $ and the principal
balances on the Initial Adjustable Rate Home Equity Contracts as of the Cut-off
Date ranged from $ to $ . The Initial Adjustable Rate Home
Equity Contracts arise from loans relating to real property located in
states and the District of Columbia. By principal balance as of the Cut-off
Date, approximately % of the Initial Adjustable Rate Home Equity Contracts
were secured by real property located in , % in , % in ,
% in , % in and % in . No other state represented 5%
or more of the Cut-off Date Pool Principal Balance of the Initial Adjustable
Rate Home Equity Contracts.
S-39
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Adjustable Rate Home Equity Contracts.
Geographical Distribution of Mortgaged Properties--Initial Adjustable Rate Home
Equity Contracts
<TABLE>
<CAPTION>
% of Initial
% of Initial Adjustable
Adjustable Rate Home
Rate Home Equity Contracts
Equity Contracts Aggregate Principal by Outstanding
Number of by Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
State Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
- ------------------------ --------------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
---- ------ ------------ ------
Total............... 100.00% $ 100.00%
==== ====== ============ ======
</TABLE>
S-40
<PAGE>
Years of Origination--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of Initial
Adjustable Rate
Home Equity
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Year of Origination off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1997...................... $ %
1998......................
--- --- ---
Total................. $ %
=== === ===
</TABLE>
Distribution of Original Contract Amounts--Initial Adjustable Rate Home Equity
Contracts
<TABLE>
<CAPTION>
% of Initial
Adjustable Rate
Home Equity
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
Original Contract Amount as of Cut- Balance Outstanding Balance as of
(in Dollars) off Date as of Cut-off Date Cut-off Date
------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Between$ 20,000--
$ 29,999................. $ %
Between$ 30,000--
$ 39,999.................
Between$ 40,000--
$ 49,999.................
Between$ 50,000--
$ 59,999.................
Between$ 60,000--
$ 69,999.................
Between$ 70,000--
$ 79,999.................
Between$ 80,000--
$ 89,999.................
Between$ 90,000--
$ 99,999.................
Between$100,000--
$109,999.................
Between$110,000--
$119,999.................
Between$120,000--
$129,999.................
Between$130,000--
$139,999.................
Between$140,000--
$149,999.................
Between$150,000--
$159,999.................
Between$160,000--
$169,999.................
Between$170,000--
$179,999.................
Between$180,000--
$189,999.................
Between$190,000--
$199,999.................
Between$200,000--
$249,999.................
Between$250,000--
$299,999.................
Over$300,000..............
--- ------------ -------
Total................. $ 100.00%
=== ============ =======
</TABLE>
Current Contract Rates--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate
Home Equity
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Contracts by as of Cut- Balance Outstanding Balance as of
Contract Rate off Date as of Cut-off Date Cut-off Date
---------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 7.00%--8.00%......... $ %
From 8.01%--9.00%.........
From 9.01%--10.00%.......
From 10.01%--11.00%.......
From 11.01%--12.00%.......
From 12.01%--13.00%.......
--- ------------ ------
Total................. $ 100.00%
=== ============ ======
</TABLE>
S-41
<PAGE>
Remaining Months to Maturity--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate Home
Number of Equity Contracts by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 346............. $ %
346-360...................
--- ------------ ------
Total................. $ 100.00%
=== ============ ======
</TABLE>
Lien Position--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable % of
Rate Home Initial
Equity Adjustable Rate Home
Number of Contracts by Equity Contracts by
Contracts Number of Aggregate Principal Outstanding Principal
as of Cut- Contracts as of Balance Outstanding Balance as of
off Date Cut-off Date as of Cut-off Date Cut-off Date
---------- --------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
First................... 100.00% $ 100.00%
--- ------ ------------ ------
Total............... 100.00% $ 100.00%
=== ====== ============ ======
</TABLE>
Loan-to-Value Ratio--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate Home
Number of Equity Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Loan-to-Value Ratio off Date as of Cut-off Date Cut-off Date
- ------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 30.01% to 40.00%..... $ %
From 40.01% to 50.00%.....
From 50.01% to 60.00%.....
From 60.01% to 70.00%.....
From 70.01% to 80.00%.....
From 80.01% to 90.00%.....
Over 90.00%...............
--- -------------- ------
Total................. $ 100.00%
=== ============== ======
</TABLE>
S-42
<PAGE>
Month of Next Rate Adjustment--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate
Number of Home Equity Contracts
Contracts Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Month of Next Rate Adjustment off Date as of Cut-off Date Cut-off Date
- ----------------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
February 1999............... $ %
March 1999..................
December 1999...............
January 2000................
February 2000...............
March 2000..................
April 2000..................
May 2000....................
June 2000...................
July 2000...................
August 2000.................
September 2000..............
October 2000................
February 2001...............
March 2001..................
June 2001...................
July 2001...................
August 2001.................
September 2001..............
--- ------------- ------
Total................... $ 100.00%
=== ============= ======
</TABLE>
S-43
<PAGE>
Distribution of Gross Margin--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate
Number of Home Equity Contracts
Contracts Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Gross Margin off Date as of Cut-off Date Cut-off Date
- ------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
4.250 to 4.499%........ $ %
4.500 to 4.749%........
4.750 to 4.999%........
5.000 to 5.249%........
5.250 to 5.499%........
5.500 to 5.749%........
5.750 to 5.999%........
6.000 to 6.249%........
6.250 to 6.499%........
6.500 to 6.749%........
6.750 to 6.999%........
7.000 to 7.249%........
7.250 to 7.499%........
7.500 to 7.749%........
7.750 to 7.999%........
8.000 to 8.249%........
8.250 to 8.499%........
8.500 to 8.749%........
8.750 to 8.999%........
9.000 to 9.249%........
9.250 to 9.499%........
9.500 to 9.749%........
Over 9.750%............
--- ------------- ------
Total.............. $ 100.00%
=== ============= ======
</TABLE>
S-44
<PAGE>
Maximum Contract Rates--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate
Number of Home Equity Contracts
Contracts Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Maximum Contract Rates off Date as of Cut-off Date Cut-off Date
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%...... $ %
13.000 to 13.249%......
13.250 to 13.499%......
13.500 to 13.749% .....
13.750 to 13.999%......
14.000 to 14.249%......
14.250 to 14.499%......
14.500 to 14.749%......
14.750 to 14.999%......
15.000 to 15.249%......
15.250 to 15.499%......
15.500 to 15.749%......
15.750 to 15.999%......
16.000 to 16.249%......
16.250 to 16.499%......
16.500 to 16.749%......
16.750 to 16.999%......
17.000 to 17.249%......
17.250 to 17.499%......
17.500 to 17.749%......
17.750 to 17.999%......
18.000 to 18.249%......
18.250 to 18.499%......
18.500 to 18.749%......
18.750 to 18.999%......
19.000 to 19.249%......
19.250 to 19.499%......
19.500 to 19.749%......
19.750 to 19.999%......
--- ------------- ------
Total.............. $ 100.00%
=== ============= ======
</TABLE>
S-45
<PAGE>
Minimum Contract Rates--Initial Adjustable Rate Home Equity Contracts
<TABLE>
<CAPTION>
% of
Initial
Adjustable Rate
Number of Home Equity Contracts
Contracts Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Minimum Contract Rates off Date as of Cut-off Date Cut-off Date
- ---------------------- ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... $ %
7.250 to 7.499%......
7.500 to 7.749%......
7.750 to 7.999%......
8.000 to 8.249%......
8.250 to 8.499%......
8.500 to 8.749%......
8.750 to 8.999%......
9.000 to 9.249%......
9.250 to 9.499%......
9.500 to 9.749%......
9.750 to 9.999%......
10.000 to 10.249%......
10.250 to 10.499%......
10.500 to 10.749%......
10.750 to 10.999%......
11.000 to 11.249%......
11.250 to 11.499%......
11.500 to 11.749%......
11.750 to 11.999%......
12.000 to 12.249%......
12.250 to 12.499%......
12.500 to 12.749%......
--- ------------- ------
Total................ $ 100.00%
=== ============= ======
</TABLE>
S-46
<PAGE>
Delinquency, Loan Default and Loss Information
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in Sub-
Pool HE, and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Home Equity Contracts comprising Sub-Pool HE. In addition, the Company
began originating, purchasing and servicing home equity loans in January 1996,
and thus has no significant experience with respect to the performance of such
loans. Moreover, because all such home equity loans have been recently
originated, it is likely that this experience is not indicative of the
delinquency experience to be expected from a more seasoned portfolio.
Delinquency Experience--Home Equity Contracts
<TABLE>
<CAPTION>
At December 31,
---------------------
At 30,
1999 1998 1997 1996
------------ ----- ------ ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding(1)........ 100,161 65,355 17,731
Number of Contracts Delinquent(2)(3)
30-59 Days.............................. 1,846 1,141 504
60-89 Days.............................. 531 283 94
90 Days or More......................... 686 411 52
------- ----- ------ ------
Total Contracts Delinquent................ 3,063 1,835 650
Delinquencies as a Percent of Contracts
Outstanding(4)........................... 3.06% % 2.81% 3.67%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month. The information does not include as delinquent the
home equity contracts of obligors who have entered bankruptcy proceedings,
provided that such obligors are current under their bankruptcy payment
plan.
(4) By number of contracts.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-47
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the related Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Contract, to reduce the outstanding principal balance on the
Contracts) will increase the yield on Certificates purchased at a price less
than the undivided ownership interest in the aggregate principal balance of the
Contracts represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership interest
in the aggregate principal balance of the Contracts represented by such
Certificates. The Company has no significant experience with respect to the
rate of Principal Prepayments on home improvement contracts or home equity
loans. Because the Contracts have scheduled due dates throughout the calendar
month, prepayments on the Contracts would affect the amount of funds available
to make distributions on the Certificates on any Payment Date only if a
substantial portion of the Contracts prepaid prior to their respective due
dates in the preceding month (thus paying less than 30 days' interest for that
month) while very few Contracts prepaid after their respective due dates in the
preceding month. In addition, liquidations of defaulted contracts or the
Servicer's exercise of its option to repurchase the entire remaining pool of
Contracts (see "Description of the Certificates--Repurchase Option" herein)
will affect the timing of principal distributions on the Certificates. Under
the Agreement, the Company has the option of substituting new contracts for
Contracts which are prepaid in full prior to . See "Description of the
Certificates--Conveyance of Contracts" herein. There is no assurance that the
Company will exercise its option to make any such substitutions nor, should it
desire to exercise such option, that contracts meeting the eligibility criteria
will be available therefor. To the extent any such substitutions are made, the
impact on the applicable Sub-Pool and related Certificates of what would
otherwise have consituted a Principal Prepayment will be averted.
The Class HI: A-1 Certificates will be prepaid in part on the first Payment
Date after the Funding Period in the event that any Pre-Funded Amount remains
in the Sub-Pool HI Pre-Funding Account on such Payment Date after the purchase
by the Trust of the Subsequent Home Improvement Contracts. The Class HE: A-1B
ARM Certificates, the Class HE: A-1 Certificates and the Class HE: A-2
Certificates will be prepaid in part on the first Payment Date after the
Funding Period in the event that any Pre-Funded Amount remains in the Sub-Pool
HE: Pre-Funding Account on such Payment Date after the purchase by the Trust of
the Subsequent Home Equity Contracts. Any amounts remaining which had been
allocated to the purchase of Subsequent Adjustable Rate Home Equity Contracts
will be paid to the Class HE: A-1B ARM Certificateholders; any amounts
remaining which had been allocated to the purchase of Subsequent Group I Home
Equity Contracts will be paid to the Class HE: A-1 Certificateholders and any
amounts remaining which had been allocated to the purchase of Subsequent Group
II Home Equity Contracts will be paid to the Class HE: A-2 Certificateholders.
The Company believes that the principal amount of Subsequent Home Improvement
Contracts and Subsequent Home Equity Contracts to be purchased by the Trust
will require the application of substantially all of the Pre-Funded Amount. It
is unlikely, however, that the aggregate principal amount of Subsequent Home
Improvement Contracts and Subsequent Home Equity Contracts purchased by the
Trust will be identical to the Pre-Funded Amount, and that consequently, Class
HI: A-1 Certificateholders, Class HE: A-1B ARM Certificateholders, Class HE: A-
1 Certificateholders and Class HE: A-2 Certificateholders will receive some
prepayment of principal.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model. The Constant
Prepayment Rate ("CPR") model assumes that the outstanding principal balance of
a pool of loans prepays each month at a specified constant annual rate. The
Sub-Pool HI Certificates were priced using a prepayment assumption of 100% of
the applicable Prepayment Assumption and the Sub-Pool HE Certificates were
priced using a prepayment assumption of, with respect to the Fixed-Rate
Contracts, 125% of the applicable Prepayment Assumption (as described below),
and with respect to the Adjustable Rate Contracts, 30% CPR. There can be no
assurance that the Contracts comprising each Sub-Pool will prepay at the
applicable rate, and it is
S-48
<PAGE>
unlikely that prepayments or liquidations of the Contracts in either Sub-Pool
will occur at any constant rate.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss amount adjustment) the
principal balance of such Class, or in the case of the Class HE: A-5 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates other than the
Class HE: A-1B ARM Certificates and Class HE: A-1 Certificates (prior to the
Payment Date), will be computed on the basis of a 360-day year of twelve
30-day months. Interest on the Class HE: A-1B ARM Certificates and Class HE: A-
1 Certificates (prior to the Payment Date) will be computed on the basis
of actual days elapsed in a 360-day year. On and after the February 2014
Payment Date, interest on the Class HE: A-1 Certificates will be computed on
the basis of a 360-day year of twelve 30-day months. Certificateholders will
receive payments in respect of principal on each Payment Date to the extent
that funds available in the Certificate Account are sufficient therefor, in the
priority described under "Description of the Certificates--Distributions on
Sub-Pool HI Certificates" and "--Distributions on Sub-Pool HE Certificates," as
applicable. As required by applicable state laws, interest paid by Obligors on
the Contracts is computed according to the simple interest method.
The final scheduled payment date on the Initial Home Improvement Contract
with the latest maturity is in November 2023. The expected final maturity of
each Class of Sub-Pool HI Certificates, based on the assumptions that there are
no defaults, prepayments or delinquencies with respect to payments due under
the Home Improvement Contracts and that the repurchase option has not been
exercised, are as follows:
<TABLE>
<CAPTION>
Class Expected Final Maturity
----- -----------------------
<S> <C>
HI: A-1..............................................
HI: A-2..............................................
HI: A-3..............................................
HI: M-1..............................................
HI: M-2..............................................
HI: B-1..............................................
HI: B-2..............................................
</TABLE>
The final scheduled payment date on the Initial Home Equity Contract with the
latest maturity is in October 2028. The expected final maturity of each Class
of Sub-Pool HE Certificates, based on the assumptions that there are no
defaults, prepayments or delinquencies with respect to payments due under the
Home Equity Contracts and that the repurchase option has not been exercised,
are as follows:
<TABLE>
<CAPTION>
Class Expected Final Maturity
----- -----------------------
<S> <C>
HE: A-1A NAS.........................................
HE: A-1B ARM.........................................
HE: A-1..............................................
HE: A-2..............................................
HE: A-3..............................................
HE: A-4..............................................
HE: A-5 IO...........................................
HE: M-1..............................................
HE: M-2..............................................
HE: B................................................
</TABLE>
Weighted Average Life of the Certificates
The following information is given solely to illustrate the effect of
prepayments of the related Contracts on the weighted average life of each Class
of Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts in either
Sub-Pool.
S-49
<PAGE>
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the related Contracts is paid.
Principal payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
The rate of principal payments on pools of home improvement contracts and
home equity loans is influenced by a variety of economic, geographic, social
and other factors, including the level of interest rates and the rate at which
homeowners sell their homes or default on their contracts or loans. Other
factors affecting prepayment of Contracts include changes in obligors' housing
needs, job transfers, unemployment and obligors' net equity in their homes. In
the case of home improvement contracts and home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such contracts or loans, the contracts or loans are likely to
be subject to higher prepayment rates than if prevailing interest rates
remained at or above the rates borne by such contracts or loans. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts or home equity loans, the rate of prepayment would be
expected to decrease. However, as described above and in "Description of the
Certificates--Conveyance of Contracts" herein, the Company has the option of
substituting new contracts for Contracts which are prepaid in full prior to
, 1999, which, if exercised, would neutralize the impact to related
Certificateholders of such prepayments.
Sub-Pool HI Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Improvement Contracts are received in a timely manner and prepayments are
made at the indicated percentages of the model as described below set forth in
the table; (ii) the Servicer does not exercise its option to repurchase the
Contracts, as described under "Description of the Certificates--Repurchase
Option"; (iii) the aggregate principal balance of the Initial Home Improvement
Contracts as of the Cut-off Date is $ and such Contracts have the
characteristics set forth under "The Contracts--Home Improvement Contracts";
(iv) the Home Improvement Contracts will, as of the Cut-off Date, be grouped
into 10 pools having the additional characteristics set forth below under
"Assumed Initial Home Improvement Contract Characteristics" and "Assumed
Subsequent Home Improvement Contract Characteristics"; (v) each Class of the
Sub-Pool HI Certificates has an Original Principal Balance as shown on the
cover page of this Prospectus Supplement; (vi) the Subsequent Home Improvement
Contracts will have the characteristics set forth in the table below and have
their first scheduled payment date in December 1998; (vii) the Pass-Through
Rates for the Certificates are as indicated in "Summary of the Terms of the
Certificates"; (viii) no interest shortfalls will arise in connection with
prepayments in full of the Home Improvement Contracts; (ix) no delinquencies or
losses are experienced on the Home Improvement Contracts; (x) distributions are
made on the Sub-Pool HI Certificates on the 15th day of each month, commencing
in 1999; (xi) the Sub-Pool HI Certificates are issued on , 1999 and
(xii) the Company does not exercise its option to substitute new contracts for
Sub-Pool HI Contracts prepaid in full prior to , 1999 (see "Description of
the Certificates--Conveyance of Contracts" herein). No representation is made
that the Home Improvement Contracts will not experience delinquencies or
losses.
The Prepayment Assumption (as defined below) used in this Prospectus
Supplement with respect to the Home Improvement Contracts represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of home improvement loans for the life of such home
improvement loans. The "100% Prepayment Assumption for Home Improvement
Contracts" assumes a constant prepayment of 12% per annum of the then
outstanding principal balance of such loans in the first month of the life of
such loans and an additional 1.09% (precisely, 12/11%) per annum in each month
thereafter until the twelfth month. Beginning in the twelfth month and in each
month thereafter during the life of such loans, the 100% Prepayment Assumption
for Home Improvement Contracts assumes a constant prepayment rate of 24% per
annum each month.
S-50
<PAGE>
It is not likely that the Home Improvement Contracts will prepay at any
constant percentage of the Prepayment Assumption or that all of the Home
Improvement Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Prepayment Scenarios
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV ScenarioV
---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Home Improvement
Contracts (1).......... % % % % %
</TABLE>
- --------
(1) As a percentage of the Prepayment Assumption for Home Improvement
Contracts.
Assumed Initial Home Improvement Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Weighted Average Average
Date Pool Average Remaining Term Original Term
Principal Contract to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................... $ %
2. ...........................
3. ...........................
4. ...........................
5. ...........................
</TABLE>
It is not likely that the Home Improvement Contracts will prepay at any
constant percentage of the CPR to maturity or that all of the Home Improvement
Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Assumed Subsequent Home Improvement Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Weighted Average Average
Date Pool Average Remaining Term Original Term
Principal Loan to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................... $ %
2. ...........................
3. ...........................
4. ...........................
5. ...........................
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HI Certificates, and
set forth the percentages of the Original Principal Balance of each Class that
would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
S-51
<PAGE>
Percentage of the Original Principal Balance of the Class HI: A-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV ScenarioV
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
Weighted Average Life
(1) (years)............
- --------
(1) The weighted average life of a Class HI: A-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-1 Certificate.
Percentage of the Original Principal Balance of the Class HI: A-2
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: A-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-2 Certificate.
S-52
<PAGE>
Percentage of the Original Principal Balance of the Class HI: A-3 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: A-3 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: A-3 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: A-3 Certificate.
Percentage of the Original Principal Balance of the Class HI: M-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: M-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: M-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: M-1 Certificate.
S-53
<PAGE>
Percentage of the Original Principal Balance of the Class HI: M-2 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: M-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: M-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: M-2 Certificate.
Percentage of the Original Principal Balance of the Class HI: B-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: B-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: B-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: B-1 Certificate.
S-54
<PAGE>
Percentage of the Original Principal Balance of the Class HI: B-2 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
December 15, 2019.......
December 15, 2020.......
December 15, 2021.......
December 15, 2022.......
December 15, 2023.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HI: B-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HI: B-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HI: B-2 Certificate.
S-55
<PAGE>
Sub-Pool HE Certificates
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Home Equity Contracts are received in a timely manner and prepayments are made
at the indicated percentages of the model as described below set forth in the
table; (ii) the Servicer does not exercise its option to repurchase the
Contracts, as described under "Description of the Certificates--Repurchase
Option;" (iii) the aggregate principal balance of the Initial Home Equity
Contracts as of the Cut-off Date is $ and such Contracts have the
characteristics set forth under "The Contracts--Fixed Rate Home Equity
Contracts" and "The Contracts--Adjustable Rate Home Equity Contracts"; (iv) the
Group I Fixed-Rate Home Equity Contracts will, as of the Cut-off Date, be
grouped into 14 pools having the additional characteristics set forth below
under "Assumed Initial Group I Fixed-Rate Home Equity Contract Characteristics"
and "Assumed Subsequent Group I Fixed-Rate Home Equity Contract
Characteristics"; (v) the Group II Fixed-Rate Home Equity Contracts will, as of
the Cut-off Date, be grouped into 14 pools having the additional
characteristics set forth below under "Assumed Initial Group II Fixed-Rate Home
Equity Contract Characteristics" and "Assumed Subsequent Group II Fixed-Rate
Home Equity Contract Characteristics"; (vi) the Adjustable Rate Home Equity
Contracts will, as of the Cut-off Date, be grouped into 38 pools having the
additional characteristics set forth below under "Assumed Initial Adjustable
Rate Home Equity Contract Characteristics" and "Assumed Subsequent Adjustable
Rate Home Equity Contract Characteristics"; (vii) each Class of the Sub-Pool HE
Certificates (other than the Class HE: A-5 IO Certificates) has an Original
Principal Balance as shown on the cover page of this Prospectus Supplement;
(viii) the rate for one-month LIBOR is 5.2764% and the rate for six-month LIBOR
is 5.1906%; (ix) the Pass-Through Rates for the Certificates are as indicated
in "Summary of the Terms of the Certificates"; (x) the Pass-Through Margin for
the Class HE: A-1B ARM Certificates is %; (xi) the Subsequent Home Equity
Contracts will have the characteristics set forth in the tables below and have
their first scheduled payment date in ; (xii) no interest shortfalls will
arise in connection with prepayments in full of the Home Equity Contracts;
(xiii) no delinquencies or losses are experienced on the Home Equity Contracts;
(xiv) distributions are made on the Sub-Pool HE Certificates on the 15th day of
each month, commencing in 1999; (xv) the Sub-Pool HE Certificates are
issued on ; (xvi) interest on the Class HE: A-1 Underlying Certificates
was computed on the basis of a 360-day year of twelve 30-day months and (xvii)
the Company does not exercise its option to substitute new contracts for Sub-
Pool HE Contracts prepaid in full prior to , 1999 (see "Description of the
Certificates--Conveyance of Contracts" herein). No representation is made that
the Home Equity Contracts will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement with respect to the
Adjustable Rate Home Equity Contracts, on the one hand, and the Fixed-Rate Home
Equity Contracts, on the other. Reference in this Prospectus Supplement to a
"Prepayment Assumption" shall refer to the appropriate model, depending upon
whether the reference is with respect to the Adjustable Rate Home Equity
Contracts or the Fixed-Rate Home Equity Contracts.
The percentages and weighted average life information for the Class HE: A-1A
NAS Certificates and the Class HE: A-1B ARM Certificates in the following table
are based on a CPR model that assumes that the outstanding principal balance of
the Adjustable Rate Home Equity Contracts will prepay at the indicated
percentages of CPR set forth in the table.
The Prepayment Assumption used in this Prospectus Supplement with respect to
the Fixed-Rate Home Equity Contracts represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of home
equity loans for the life of such home equity loans. The "100% Prepayment
Assumption for Fixed-Rate Home Equity Contracts" assumes a constant prepayment
of 4% per annum of the then outstanding principal balance of such loans in the
first month of the life of such loans and an additional 1.45% (precisely,
16/11%) per annum in each month thereafter until the twelfth month. Beginning
in the twelfth month and in each month thereafter during the life of such
loans, the 100% Prepayment Assumption assumes a constant prepayment rate of 20%
per annum each month.
S-56
<PAGE>
It is not likely that the Home Equity Contracts will prepay at any constant
percentage of the Prepayment Assumption or of the CPR to maturity or that all
of the Home Equity Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Prepayment Scenarios
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Home
Equity Contracts (1)... % % % % %
Fixed-Rate Home Equity
Contracts (2)..........
</TABLE>
- --------
(1) As a conditional prepayment rate ("CPR") percentage.
(2) As a percentage of the Prepayment Assumption for Fixed Rate Home Equity
Contracts.
Assumed Initial Group I Fixed-Rate Home Equity Contract Characteristics
<TABLE>
<CAPTION>
Balloon Loan
Weighted Weighted Weighted
Cut-off Weighted Average Average Average
Date Pool Average Remaining Term Original Term Amortization
Principal Contract to Maturity to Maturity Term
Pool Balance Rate (months) (months) (months)
- ---- ----------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............. $ %
2. .............
3. .............
4. .............
5. .............
6. .............
7. .............
Assumed Subsequent Group I Fixed-Rate Home Equity Contract Characteristics
<CAPTION>
Balloon Loan
Weighted Weighted Weighted
Cut-off Weighted Average Average Average
Date Pool Average Remaining Term Original Term Amortization
Principal Contract to Maturity to Maturity Term
Pool Balance Rate (months) (months) (months)
- ---- ----------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............. $ %
2. .............
3. .............
4. .............
5. .............
6. .............
7. .............
Assumed Initial Group II Fixed-Rate Home Equity Contract Characteristics
<CAPTION>
Balloon Loan
Weighted Weighted Weighted
Cut-off Weighted Average Average Average
Date Pool Average Remaining Term Original Term Amortization
Principal Contract to Maturity to Maturity Term
Pool Balance Rate (months) (months) (months)
- ---- ----------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............. $ %
2. .............
3. .............
4. .............
5. .............
6. .............
7. .............
</TABLE>
S-57
<PAGE>
Assumed Subsequent Group II Fixed-Rate Home Equity Contract Characteristics
<TABLE>
<CAPTION>
Balloon Loan
Weighted Weighted Weighted
Cut-off Weighted Average Average Average
Date Pool Average Remaining Term Original Term Amortization
Principal Contract to Maturity to Maturity Term
Pool Balance Rate (months) (months) (months)
- ---- ----------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ............ $ %
2. ............
3. ............
4. ............
5. ............
6. ............
7. ............
</TABLE>
Assumed Initial Adjustable Rate Home Equity Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Contract Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- ----------- -------- --------- -------- -------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. .................... $ % % % % %
2. ....................
3. ....................
4. ....................
5. ....................
6. ....................
7. ....................
8. ....................
9. ....................
10. ....................
11. ....................
12. ....................
13. ....................
14. ....................
15. ....................
16. ....................
17. ....................
18. ....................
19. ....................
</TABLE>
S-58
<PAGE>
Assumed Subsequent Adjustable Rate Home Equity Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Cut-off Weighted Remaining Original Weighted
Date Pool Average Term to Term to Average Month(s)
Principal Contract Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- ----------- -------- --------- -------- -------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. .................... $ % % % % %
2. ....................
3. ....................
4. ....................
5. ....................
6. ....................
7. ....................
8. ....................
9. ....................
10. ....................
11. ....................
12. ....................
13. ....................
14. ....................
15. ....................
16. ....................
17. ....................
18. ....................
19. ....................
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Sub-Pool HE Certificates, and
set forth the percentages of the Original Principal Balance of each Class that
would be outstanding after each of the dates shown, at the indicated
percentages of the applicable Prepayment Assumption.
Percentage of the Original Principal Balance of the Class HE: A-1A NAS
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1A NAS Certificate is determined
by (i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-1A NAS Certificate to the stated Payment
Date, (ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1A NAS Certificate.
S-59
<PAGE>
Percentage of the Original Principal Balance of the Class HE: A-1B ARM
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
December 15, 2019.......
December 15, 2020.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1B ARM Certificate is determined
by (i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-1B ARM Certificate to the stated Payment
Date, (ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1B ARM Certificate.
S-60
<PAGE>
Percentage of the Original Principal Balance of the Class HE: A-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-1 Certificate.
S-61
<PAGE>
Percentage of the Original Principal Balance of the Class HE: A-2 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-2 Certificate.
Percentage of the Original Principal Balance of the Class HE: A-3 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-3 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-3 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-3 Certificate.
S-62
<PAGE>
Percentage of the Original Principal Balance of the Class HE: A-4 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage.. 100% 100% 100% 100% 100%
December 15, 1999...
December 15, 2000...
December 15, 2001...
December 15, 2002...
December 15, 2003...
December 15, 2004...
December 15,
2005...............
December 15, 2006...
December 15, 2007...
December 15, 2008...
December 15, 2009...
December 15, 2010...
December 15, 2011...
December 15, 2012...
December 15, 2013...
December 15, 2014...
December 15, 2015...
December 15, 2016...
December 15, 2017...
December 15, 2018...
December 15, 2019...
Weighted Average
Life (1) (years)...
</TABLE>
- --------
(1) The weighted average life of a Class HE: A-4 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: A-4 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: A-4 Certificate.
S-63
<PAGE>
Percentage of the Original Principal Balance of the Class HE: M-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: M-1 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: M-1 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: M-1 Certificate.
S-64
<PAGE>
Percentage of the Original Principal Balance of the Class HE: M-2 Certificates
at the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: M-2 Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class HE: M-2 Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class HE: M-2 Certificate.
S-65
<PAGE>
Percentage of the Original Principal Balance of the Class HE: BCertificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
December 15, 1999.......
December 15, 2000.......
December 15, 2001.......
December 15, 2002.......
December 15, 2003.......
December 15, 2004.......
December 15, 2005.......
December 15, 2006.......
December 15, 2007.......
December 15, 2008.......
December 15, 2009.......
December 15, 2010.......
December 15, 2011.......
December 15, 2012.......
December 15, 2013.......
December 15, 2014.......
December 15, 2015.......
December 15, 2016.......
December 15, 2017.......
December 15, 2018.......
December 15, 2019.......
December 15, 2020.......
December 15, 2021.......
December 15, 2022.......
December 15, 2023.......
December 15, 2024.......
December 15, 2025.......
December 15, 2026.......
December 15, 2027.......
December 15, 2028.......
Weighted Average Life
(1) (years)............
</TABLE>
- --------
(1) The weighted average life of a Class HE: B Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class HE: B Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class HE: B Certificate.
S-66
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales contracts for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (651) 293-3400). The Company's quarterly and annual reports, which
are incorporated by reference in this Prospectus Supplement and in the
Prospectus, are available from the Company upon written request made to the
Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings (losses) to fixed
charges for the past five years and the nine months ended September 30, 1998.
For the purposes of compiling these ratios, earnings (losses) consist of
earnings (losses) before both income taxes and fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
Months
Ended
Year Ended December 31, ,
------------------------ ------
1993 1994 1995 1996 1997 1999
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings (Losses)
to Fixed Charges........... 4.81 7.98 7.90 5.44 3.94
</TABLE>
- --------
[*On July 6, 1998, Conseco, Inc. announced a second-quarter charge of $498
million, net of income taxes, related to the acquisition of Green Tree. The
charges are directly related to (1) $148 million in merger-related costs and
(2) $350 million non-cash supplemental reserve against the valuation of Green
Tree's interest only securities and servicing rights. As a result, the ratio of
earnings (losses) to fixed charges was less than 1.00 for the nine month period
ended September 30, 1998 and earnings were inadequate to cover fixed charges
for such period. The amount of the coverage deficiency for such period was
$251,600,000.]
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
continues to operate from its headquarters in St. Paul, Minnesota, and its 200
local offices throughout the country. Lawrence M. Coss, Green Tree's Chairman
and Chief Executive Officer has announced his retirement from active management
of Green Tree at the end of 1998, but will remain a director of Conseco, Inc.
Headquartered in Carmel, Indiana, Conseco is among the nation's leading
providers of supplemental health insurance, retirement annuities and universal
life insurance.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the alleged
class periods. In addition to Green Tree, certain current and former officers
and directors of Green Tree are
S-67
<PAGE>
named as defendants in one or more of the lawsuits. Green Tree and the other
defendants intend to seek consolidation of each of the lawsuits in the United
States District Court for the District of Minnesota. Plaintiffs in the lawsuits
assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. In each case, plaintiffs allege that Green Tree and the other defendants
violated federal securities laws by, among other things, making false and
misleading statements about the current state and future prospects of Green
Tree (particularly with respect to prepayment assumptions and performance of
certain of Green Tree's loan portfolios) which allegedly rendered Green Tree's
financial statements false and misleading. Green Tree believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously.
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
General
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"Description of the Certificates--Registration of the Certificates" herein. The
Trust consists primarily of the Contracts and the rights, benefits, obligations
and proceeds arising therefrom or in connection therewith, including liens on
the related real estate, rights under applicable FHA Insurance for FHA-insured
Home Improvement Contracts, amounts held in the Certificate Account and the
Class HI: B-2 Limited Guaranty and the Class HE: B Limited Guaranty of the
Company for the benefit of the Class HI: B-2 Certificateholders and the Class
HE: B Certificateholders, respectively.
Distributions on the Certificates will be made each month by the paying agent
(which shall initially be the Trustee) on each Payment Date to persons in whose
names the Certificates are registered as of the Business Day immediately
preceding the Payment Date (the "Record Date"). See "Description of the
Certificates--Registration of the Certificates" herein. The first Payment Date
for the Certificates will be in 1999. Payments will be made by check
mailed to such Certificateholder at the address appearing on the Certificate
Register (except that a Certificateholder who holds an aggregate Percentage
Interest of at least 5% of a Class of Certificates may request payment in
respect of its Percentage Interest in such Class by wire transfer). Final
payments will be made only upon tender of the Certificates to the Trustee for
cancellation.
Conveyance of Contracts
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial Home Improvement Contracts and the
Initial Home Equity Contracts, including all principal and interest received on
or with respect to such Contracts (other than receipts of principal and
interest due on such Contracts before the Cut-off Date). The Agreement permits
the Trust to purchase approximately $ aggregate principal balance of
Subsequent Home Improvement Contracts and approximately $ aggregate
principal balance of Subsequent Home Equity Contracts within 60 days after the
Closing Date on one or more closing dates. See "Conveyance of Subsequent Home
Improvement Contracts and Sub-Pool HI Pre-Funding Account" and "Conveyance of
Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding Account" herein.
S-68
<PAGE>
The Trustee, concurrently with each conveyance, will execute and deliver the
Certificates to or upon the order of the Company. The Contracts are described
on a list delivered to the Trustee and certified by a duly authorized officer
of the Company. Such list includes the amount of monthly payments due on each
Contract as of the date of issuance of the Certificates, the Contract Rate on
each Contract and the maturity date of each Contract. The list will be attached
as an exhibit to the Agreement and will be available for inspection by any
Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company will have completed a
review of all the Contract files, confirming the accuracy of each item on the
list of Contracts delivered to the Trustee. Any Contract discovered not to
agree with such list in a manner that is materially adverse to the interests of
the Certificateholders will be repurchased by the Company, or, if the
discrepancy relates to the unpaid principal balance of a Contract, the Company
may deposit cash in the Certificate Account in an amount sufficient to offset
such discrepancy.
The Trustee will maintain possession of the Contracts and any other documents
contained in the Contract files. Uniform Commercial Code financing statements
will be filed in Minnesota, reflecting the conveyance and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such conveyance and assignment.
[Company Counsel], counsel to the Company, will render an opinion to the
Trustee that the transfer of the Contracts from the Company to the Trust would,
in the event the Company became a debtor under the United States Bankruptcy
Code, be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Contracts from the Company to the Trust were
treated as a pledge to secure borrowings by the Company, the distribution of
proceeds of the Contracts to the Trust might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Contract, including that: (a) for each Contract other than
the Subsequent Home Improvement Contracts and the Subsequent Home Equity
Contracts, as of the applicable Cut-off Date, the most recent scheduled payment
was made or was not delinquent more than 30 days; (b) for each Subsequent Home
Improvement Contract and each Subsequent Home Equity Contract, as of the
respective Subsequent Cut-off Date, the most recent scheduled payment was made
or was not delinquent more than 30 days; (c) no provision of a Contract has
been waived, altered or modified in any respect, except by instruments or
documents included in the Contract file and reflected on the list of Contracts
delivered to the Trustee; (d) each Contract is a legal, valid and binding
obligation of the Obligor and is enforceable in accordance with its terms
(except as may be limited by laws affecting creditors' rights generally); (e)
no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (f) each Contract (if an FHA-insured Home Improvement Contract) was
originated in accordance with applicable FHA regulations and is insured,
without set-off, surcharge or defense, by FHA Insurance; (g) each Contract was
originated by a home improvement contractor or home equity lender in the
ordinary course of its business or was originated by the Company directly; (h)
no Contract was originated in or is subject to the laws of any jurisdiction
whose laws would make the transfer of the Contract or an interest therein
pursuant to the Agreement or the Certificates unlawful; (i) each Contract
complies with all requirements of law; (j) no Contract has been satisfied,
subordinated to a lower lien ranking than its original position (if any) or
rescinded; (k) each Contract creates a valid and perfected lien on the related
real estate; (l) all parties to each Contract had full legal capacity to
execute such Contract; (m) no Contract has been sold, conveyed and assigned or
pledged to any other person and the Company has good and marketable title to
each Contract free and clear of any encumbrance, equity, lien, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (n) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clauses (a) and (b) above), no
event that with notice and the expiration of any
S-69
<PAGE>
grace or cure period would constitute a default, breach, violation or event
permitting acceleration under such Contract, and the Company has not waived any
of the foregoing; (o) each Contract is a fully-amortizing loan and provides for
level monthly payments based on its applicable Contract Rate, except, in the
case of a Balloon Loan, for the final monthly payment, over the term of such
Contract; (p) each Contract contains customary and enforceable provisions such
as to render the rights and remedies of the holder thereof adequate for
realization against the collateral; (q) the description of each Contract set
forth in the list delivered to the Trustee is true and correct; (r) there is
only one original of each Contract; (s) each Contract was originated or
purchased in accordance with the Company's then-current underwriting
guidelines; and (t) each Contract is a "qualified mortgage" under section
860G(a)(3) of the Internal Revenue Code of 1986, as amended.
The Company will also make certain representations and warranties with
respect to the Home Improvement Contracts in the aggregate, including that (i)
each Home Improvement Contract has a contractual rate of interest of at least
7.00%; (ii) no Home Improvement Contract had a remaining term to maturity at
origination of more than 300 months; (iii) no more than 1% of the Home
Improvement Contracts, by principal balance as of the Cut-off Date, were
secured by properties located in an area with the same zip code; (iv) no more
than 5% of the Home Improvement Contracts, by principal balance as of the Cut-
off Date, were originated by any one contractor or lender, other than the Home
Improvement Contracts purchased from Empire Funding Corp.; and (v) no adverse
selection procedures were employed in selecting the Home Improvement Contracts
from the Company's portfolio. The Company will make certain additional
representations and warranties with respect to the Subsequent Home Improvement
Contracts. See "--Conveyance of Subsequent Home Improvement Contracts and Sub-
Pool HI Pre-Funding Account" herein.
The Company will also make certain representations and warranties with
respect to the Home Equity Contracts in the aggregate, including that (i) each
Home Equity Contract (other than the Adjustable Rate Home Equity Contracts) has
a contractual rate of interest of at least 6.00%; (ii) no Home Equity Contract
had a remaining term to maturity at origination of more than 360 months; (iii)
no more than 1% of the Home Equity Contracts, by principal balance as of the
Cut-off Date, were secured by properties located in an area with the same zip
code; (iv) no more than 7% of the Home Equity Contracts, by principal balance
as of the Cut-off Date, were originated by any one lender other than the
Company; and (v) no adverse selection procedures were employed in selecting the
Home Equity Contracts from the Company's portfolio. The Company will make
certain additional representations and warranties with respect to the
Subsequent Home Equity Contracts. See "--Conveyance of Subsequent Home Equity
Contracts and Sub-Pool HE Pre-Funding Account" herein.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price (as defined below), any Contract
that is materially and adversely affected by a breach of a representation and
warranty with respect to such Contract made in the Agreement if such breach has
not been cured within 90 days of the day it was or should have been discovered
by the Servicer or the Trustee. The "Repurchase Price," with respect to any
Contract to be so repurchased or with respect to a liquidated contract, means
the outstanding principal balance of such Contract (without giving effect to
any advances made by the Servicer or the Trustee), plus interest on such
Contract at the Pass-Through Rate (which will be the weighted average of the
Pass-Through Rates of the related Classes of Certificates) from the end of the
Due Period with respect to which the Obligor last made a scheduled payment
(without giving effect to any Advances made by the Servicer or the Trustee)
through the date of such repurchase or liquidation. This repurchase obligation
constitutes the sole remedy available to the Trust and the Certificateholders
for a breach of a representation or warranty under the Agreement with respect
to the Contracts (but not with respect to any other breach by the Company of
its obligations under the Agreement).
In lieu of repurchasing a Contract as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Contract (as defined below) for the
Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that
satisfies, as of the date of its substitution, the representations and
warranties specified in Article III of the Agreement, has a
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Scheduled Principal Balance that is not greater than the Scheduled Principal
Balance of the Replaced Contract, has a Contract Rate that is at least equal to
the Contract Rate of the Replaced Contract and has a remaining term to
scheduled maturity that is not greater than the remaining term to scheduled
maturity of the Replaced Contract. The Company will be required to deposit in
the Certificate Account cash in the amount, if any, by which the Scheduled
Principal Balance of the Replaced Contract exceeds the Scheduled Principal
Balance of the Contract being substituted. Such deposit will be deemed to be a
partial Principal Prepayment.
Under the Agreement, the Company may, at its option, substitute new contracts
for Contracts which are prepaid in full prior to , 1999. Any such
substitute contracts shall constitute Eligible Substitute Contracts and must be
substituted prior to the Determination Date immediately following the calendar
month in which the prepayment was received by the Servicer. In the event the
aggregate amount of principal received in respect of Contracts prepaid in full
in a given calendar month exceeds the aggregate of the Scheduled Principal
Balances of Eligible Substitute Contracts substituted therefor, such excess
shall be distributed to Certificateholders on the related Payment Date as a
prepayment of principal. Notwithstanding the foregoing, there is no assurance
that the Company will opt to make any such substitutions nor, should it desire
to exercise such option, that Eligible Substitute Contracts will be available
therefor.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
Conveyance of Subsequent Home Improvement Contracts and Sub-Pool HI Pre-Funding
Account
An account (the "Sub-Pool HI Pre-Funding Account") will be established by the
Trustee and funded by the Company with approximately $ (the "Sub-Pool HI
Pre-Funded Amount") on the Closing Date to provide the Trust with sufficient
funds to purchase Subsequent Home Improvement Contracts. In no event will the
Sub-Pool HI Pre-Funded Amount, less the aggregate principal balance of
Subsequent Home Improvement Contracts specifically identified for purchase by
the Trust as of the Closing Date, represent more than 25% of the Original Sub-
Pool HI Certificate Principal Balance. The Sub-Pool HI Pre-Funding Account will
be used to purchase Subsequent Home Improvement Contracts during the period
from the Closing Date until the earliest of (i) the date on which the amount on
deposit in the Sub-Pool HI Pre-Funding Account is less than $10,000, (ii) 60
days after the Closing Date or (iii) the date on which an event of termination
occurs under the Agreement (the "Funding Period"). The Sub-Pool HI Pre-Funded
Amount will be reduced during the Funding Period by the amount used to purchase
Subsequent Home Improvement Contracts in accordance with the Agreement.
Under the Agreement following the initial issuance of the Certificates, the
Trust will be obligated to purchase Subsequent Home Improvement Contracts from
the Company during the Funding Period, subject to the availability thereof. In
connection with the purchase of Subsequent Home Improvement Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to the Company from amounts on deposit in the Sub-Pool HI Pre-Funding
Account a cash purchase price of 100% of the principal balance thereof. The
Company will designate the Subsequent Transfer Date as the cut-off date (the
"Subsequent Cut-off Date") with respect to the related Subsequent Home
Improvement Contracts purchased on such date. The amount paid from the Sub-Pool
HI Pre-Funding Account on each Subsequent Transfer Date will not include
accrued interest on the related Subsequent Home Improvement Contracts.
Following each Subsequent Transfer Date, the aggregate principal balance of the
Subsequent Home Improvement Contracts in Sub-Pool HI will increase by an amount
equal to the aggregate principal balance of the Home Improvement Contracts so
purchased and the amount in the Sub-Pool HI Pre-Funding Account will decrease
accordingly.
Any Sub-Pool HI Pre-Funded Amount remaining after the end of the Funding
Period will be applied on the next Payment Date to prepay principal on the
Class HI: A-1 Certificates. Although no assurance can be given, the Company
anticipates that the principal amount of the related Subsequent Home
Improvement Contracts purchased by the Trust will require the application of
substantially all of the Sub-Pool HI Pre-Funded Amount and that there should be
no material amount of principal prepaid to the
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Class HI: A-1 Certificateholders from the Sub-Pool HI Pre-Funding Account.
However, it is unlikely that the Company will be able to deliver Subsequent
Home Improvement Contracts with an aggregate principal balance identical to the
remaining Sub-Pool HI Pre-Funded Amount.
Any conveyance of Subsequent Home Improvement Contracts on a Subsequent
Transfer Date is subject to certain conditions including, but not limited to:
(a) each Subsequent Home Improvement Contract must satisfy the representations
and warranties specified in the related subsequent transfer instrument and the
Agreement; (b) the Company may not select Subsequent Home Improvement Contracts
in a manner that it believes is adverse to the interests of the
Certificateholders; (c) as of the respective Subsequent Cut-off Date the
Subsequent Home Improvement Contracts must satisfy the following criteria: (i)
no Subsequent Home Improvement Contract may be more than 30 days contractually
delinquent as of the related Subsequent Cut-off Date; (ii) the remaining stated
term to maturity of each Subsequent Home Improvement Contract may not exceed
360 months; (iii) each Subsequent Home Improvement Contract must have been
underwritten in accordance with the Company's standard underwriting criteria;
(iv) no Subsequent Home Improvement Contract may have a loan-to-value ratio
greater than 100%; (v) as a result of the purchase of the Subsequent Home
Improvement Contracts, neither the Class HI: A Certificates nor the Class HE: A
Certificates will receive from Moody's or Fitch a lower credit rating than the
rating assigned at the initial issuance of such Certificates; and (vi) an
independent accountant will provide a letter stating whether or not the
characteristics of the Subsequent Home Improvement Contracts conform to the
characteristics described herein.
Conveyance of Subsequent Home Equity Contracts and Sub-Pool HE Pre-Funding
Account
An account (the "Sub-Pool HE Pre-Funding Account") will be established by the
Trustee and funded by the Company with approximately $ (the "Sub-Pool HE
Pre-Funded Amount") on the Closing Date to provide the Trust with sufficient
funds to purchase Subsequent Home Equity Contracts. In no event will the Sub-
Pool HE Pre-Funded Amount, less the aggregate principal balance of Subsequent
Home Equity Contracts specifically identified for purchase by the Trust as of
the Closing Date, represent more than 25% of the Original Sub-Pool HE
Certificate Principal Balance. The Sub-Pool HE Pre-Funding Account will be used
to purchase Subsequent Home Equity Contracts during the period from the Closing
Date until the earliest of (i) the date on which the amount on deposit in the
Sub-Pool HE Pre-Funding Account is less than $10,000, (ii) 60 days after the
Closing Date or (iii) the date on which an Event of Termination occurs under
the Agreement (the "Funding Period"). The Sub-Pool HE Pre-Funded Amount will be
reduced during the Funding Period by the amount used to purchase Subsequent
Home Equity Contracts in accordance with the Agreement.
Under the Agreement following the initial issuance of the Certificates, the
Trust will be obligated to purchase Subsequent Home Equity Contracts from the
Company during the Funding Period, subject to the availability thereof. In
connection with the purchase of Subsequent Home Equity Contracts on such dates
of transfer (the "Subsequent Transfer Dates"), the Trust will be required to
pay to the Company from amounts on deposit in the Sub-Pool HE Pre-Funding
Account a cash purchase price of 100% of the principal balance thereof. The
Company will designate the Subsequent Transfer Date as the cut-off date (the
"Subsequent Cut-off Date") with respect to the related Subsequent Home Equity
Contracts purchased on such date. The amount paid from the Sub-Pool HE Pre-
Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Home Equity Contracts. Following each
Subsequent Transfer Date, the aggregate principal balance of the Subsequent
Home Equity Contracts in Sub-Pool HE will increase by an amount equal to the
aggregate principal balance of the Home Equity Contracts so purchased and the
amount in the Sub-Pool HE Pre-Funding Account will decrease accordingly.
Any Sub-Pool HE Pre-Funded Amount remaining after the end of the Funding
Period will be applied on the next Payment Date to prepay principal on the
Class HE: A-1B ARM, Class HE: A-1 and Class HE: A-2 Certificates. Any amounts
remaining which had been allocated to the purchase of Subsequent Adjustable
Rate Home Equity Contracts will be paid to the Class HE: A-1B ARM
Certificateholders, any amounts remaining which had been allocated to the
purchase of Group I
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Subsequent Fixed-Rate Home Equity Contracts will be paid to the Class HE: A-1
Certificateholders and any amounts remaining which had been allocated to the
purchase of Group II Subsequent Fixed-Rate Home Equity Contracts will be paid
to the Class HE: A-2 Certificateholders. Although no assurance can be given,
the Company anticipates that the principal amount of the related Subsequent
Home Equity Contracts purchased by the Trust will require the application of
substantially all of the Sub-Pool HE Pre-Funded Amount and that there should be
no material amount of principal prepaid to the Class HE: A-1B ARM
Certificateholders, the Class HE: A-1 Certificateholders or the Class HE: A-2
Certificateholders from the Sub-Pool HE Pre-Funding Account. However, it is
unlikely that the Company will be able to deliver Subsequent Home Equity
Contracts with an aggregate principal balance identical to the remaining Sub-
Pool HE Pre-Funded Amount.
Any conveyance of Subsequent Home Equity Contracts on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
Subsequent Home Equity Contract must satisfy the representations and warranties
specified in the related subsequent transfer instrument and the Agreement; (b)
the Company may not select Subsequent Home Equity Contracts in a manner that it
believes is adverse to the interests of the Certificateholders; (c) as of the
respective Subsequent Cut-off Date the Subsequent Home Equity Contracts must
satisfy the following criteria: (i) no Subsequent Home Equity Contract may be
more than 59 days contractually delinquent as of the related Subsequent Cut-off
Date; (ii) the remaining stated term to maturity of each Subsequent Home Equity
Contract may not exceed 360 months; (iii) each Subsequent Home Equity Contract
must have been underwritten in accordance with the Company's standard
underwriting criteria; (iv) as a result of the purchase of the Subsequent Home
Equity Contracts, the weighted average loan to value ratio of Sub-Pool HE will
not be more than 200 basis points more than such ratio with respect to the
Initial Home Equity Contracts; (v) as a result of the purchase of the
Subsequent Home Equity Contracts, neither the Class HI: A Certificates nor the
Class HE: A Certificates will receive from Moody's or Fitch a lower credit
rating than the rating assigned at the initial issuance of such Certificates;
and (vi) an independent accountant will provide a letter stating whether or not
the characteristics of the Subsequent Home Equity Contracts conform to the
characteristics described herein.
Grantor Trust
Green Tree Grantor Trust 1999- will be created and established pursuant to
the Grantor Trust Agreement. The Depositor will deposit into the Grantor Trust
without recourse $ of Class HE: A-1 Underlying Certificates issued by the
Trust, and the Grantor Trust will issue the Class HE: A-1 Certificates.
The property of the Grantor Trust will include (a) the Class HE: A-1
Underlying Certificates issued by the Trust and all payments thereon, (b) such
amounts as may be held by the Trustee in a trust account (the "Grantor Trust
Account") held by the Trustee for the benefit of the Class HE: A-1
Certificateholders, (c) the Swap Agreement and all payments received thereunder
and (d) proceeds of all of the foregoing. The Grantor Trust will not acquire
any receivables or assets other than the foregoing and will not have any need
for additional capital resources. To the extent that payments are made on the
Class HE: A-1 Underlying Certificates and payments are received by the Trustee
as required under the Swap Agreement, the Grantor Trust will have sufficient
liquidity to make interest and principal distributions on the Class HE: A-1
Certificates.
On each Payment Date with respect to the Class HE: A-1 Certificates, the
Trustee will pay to the Class HE: A-1 Certificateholders, to the extent of
funds available in the Grantor Trust Account:
(i) interest at a rate equal to the Class HE: A-1 Pass-Through Rate,
less any interest shortfall on the Class HE: A-1 Underlying Certificate
for that period, plus any interest shortfall distributed on the related
Payment Date with respect to the Class HE: A-1 Underlying Certificate;
and
(ii) principal in an amount equal to the principal received by the
Grantor Trust on the related Payment Date with respect to the Class
HE: A-1 Underlying Certificate.
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Payments on Contracts
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
with trust powers organized under the laws of the United States or any state,
the deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corporation (the "FDIC"), whose short-term deposits
have been rated P-1 by Moody's and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by Moody's and Fitch (if rated by Fitch), and which is subject to
supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee, which depository institution or trust company has capital and surplus
of not less than $50,000,000; or (iv) an account that will not cause Moody's or
Fitch to downgrade or withdraw its then-current rating assigned to the
Certificates, as evidenced in writing by Moody's and Fitch. The Servicer may
authorize the Trustee to invest the funds in the Certificate Account in
Eligible Investments (as defined in the Agreement) that will mature not later
than the Business Day preceding the applicable monthly Payment Date. Such
Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least Aa2 by Moody's and AA from Fitch (if rated by Fitch) not in
excess of 10% of amounts in the Certificate Account at the time of such
investment; and commercial paper assigned a rating of at least P-1 by Moody's
and F-1+ by Fitch (if rated by Fitch). Any losses on such investments will be
deducted from other investment earnings or from other funds in the Certificate
Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into the
Certificate Account no later than one Business Day following receipt thereof,
except amounts received as extension fees or assumption fees not allocated to
regular installments due on Contracts, which are retained by the Servicer as
part of its servicing fees and are not paid into the Certificate Account and
except for certain proceeds from Liquidated Contracts which are used to
reimburse the Servicer for customary out-of-pocket liquidation expenses. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses" herein. In addition, all payments under FHA Insurance received by the
Servicer, any Advances by the Servicer or the Trustee as described under
"Description of the Certificates--Advances," and amounts paid by the Company
for Contracts repurchased, or upon substitution for a Contract otherwise
required to be repurchased, as a result of a breach of representations or
warranties under the Agreement, as described under "Description of the
Certificates--Conveyance of Contracts," shall be paid into the Certificate
Account.
On the second Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Sub-Pool HI Amount Available and the
Sub-Pool HE Amount Available in the Certificate Account and the amount of funds
necessary to make all payments to be made on the next Payment Date from the
Certificate Account. Not later than one Business Day after the Determination
Date, the Company will deposit in the Certificate Account the Repurchase Price
of any Contracts required to be repurchased on such Payment Date, or any
amounts required to be deposited upon substitution for any Contract otherwise
required to be repurchased on such Purchase Date, as a result of a breach of
representations and warranties under the Agreement.
On each Payment Date the Trustee will withdraw the Sub-Pool HI Amount
Available (which will consist primarily of amounts received in respect of the
Home Improvement Contracts, but will also
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include that portion of the Sub-Pool HE Amount Available in excess of the
amounts necessary to make the payments described in clauses (i) through (ix) of
the succeeding paragraph) from the Certificate Account and make the following
payments, in the following order of priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Home
Improvement Contracts to the Servicer;
(ii) to pay interest and principal on the Sub-Pool HI Certificates, in the
following order of priority:
(A) interest on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class
HI: B-1 Certificates as follows (including, in each case, any such
interest due on a prior Payment Date but not received):
(I) first, to Class HI: A Certificateholders, interest on the Class
HI: A Principal Balance;
(II) second, to Class HI: M-1 Certificateholders, interest on the
Class HI: M-1 Adjusted Principal Balance;
(III) third, to Class HI: M-2 Certificateholders, interest on the
Class HI: M-2 Adjusted Principal Balance; and
(IV) fourth, to Class HI: B-1 Certificateholders, interest on the
Class HI: B-1 Adjusted Principal Balance;
(B) principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and
Class HI: B-1 Certificates, in the manner and order of priority
described below under "Distributions on Sub-Pool HI Certificates--
Principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class
HI: B-1 Certificates," in respect of the Sub-Pool HI Formula Principal
Distribution Amount;
(C) principal on the Class HI: A, Class HI: M-1 and Class HI: M-2
Certificates, in the manner and order of priority described below under
"Distributions on Sub-Pool HI Certificates-- Principal on the Class HI:
A, Class HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates," in
respect of any Sub-Pool HI Supplementary Principal Distribution Amount;
(D) payments on the Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates in respect of Sub-Pool HI Liquidation Loss Interest
Amounts as follows:
(I) first, to Class HI: M-1 Certificateholders, any unpaid Class
HI: M-1 Liquidation Loss Interest Amount;
(II) second, to Class HI: M-2 Certificateholders, any unpaid Class
HI: M-2 Liquidation Loss Interest Amount; and
(III) third, to Class HI: B-1 Certificateholders, any unpaid Class
HI: B-1 Liquidation Loss Interest Amount; and
(E) interest and principal on the Class HI: B-2 Certificates, in the
manner and order of priority described below under "Distributions on
Sub-Pool HI Certificates--Class HI: B-2 Interest" and "--Class HI: B-2
Principal."
(iii) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Home Improvement Contracts;
(iv) to reimburse the Trustee or any successor Servicer for any payments of
FHA Insurance premiums with respect to the Home Improvement Contracts not
paid by the Company, as Servicer, and for which the Trustee or such
successor Servicer has not been reimbursed by the Company;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Improvement Contracts made
in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vii) to reimburse the Company for any prior unreimbursed Class HI: B-2
Guaranty Payments;
(viii) to pay the Class HI: B-2 Guaranty Fee to the Company; and
(ix) to pay any remaining amounts to the holder of the Class C
Certificate.
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On each Payment Date the Trustee will withdraw the Sub-Pool HE Amount
Available (which will consist primarily of amounts received in respect of the
Home Equity Contracts, but will also include that portion of the Sub-Pool HI
Amount Available in excess of the amounts necessary to make the payments
described in clauses (i) through (viii) of the preceding paragraph) and
withdrawals from the Reserve Account from the Certificate Account and make the
following payments (together with payments in respect of the Reserve Account
loan), in the following order of priority:
(i) if neither the Company nor any wholly owned subsidiary of the Company
is the Servicer, to pay the Monthly Servicing Fee with respect to the Home
Equity Contracts to the Servicer;
(ii) to pay interest and principal on the Sub-Pool HE Certificates, in the
following order of priority:
(A) interest on the Class HE: A Certificates (including the Class
HE: A-1 Underlying Certificate but excluding the Class HE: A-1
Certificates), and the Class HE: M-1 and Class HE: M-2 Certificates as
follows (including, in each case, any such interest due on a prior
Payment Date but not received):
(I) first, to such Class HE: A Certificateholders, interest on the
Class HE: A Principal Balance or, in the case of the Class HE: A-5
IO Certificates, on the Notional Principal Amount;
(II) second, to Class HE: M-1 Certificateholders, interest on the
Class HE: M-1 Adjusted Principal Balance; and
(III) third, to Class HE: M-2 Certificateholders, interest on the
Class HE: M-2 Adjusted Principal Balance;
(B) principal on the Class HE: A Certificates (including the Class
HE: A-1 Underlying Certificate but excluding the Class HE: A-1
Certificates), and the Class HE: M-1 and Class HE: M-2 Certificates, in
the manner and order of priority described below under "Distributions
on Sub-Pool HE Certificates--Principal on the Class HE: A, Class HE: M-
1 and Class HE: M-2 Certificates," in respect of the Sub-Pool HE
Formula Principal Distribution Amount;
(C) payments on the Class HE: M-1 and Class HE: M-2 Certificates in
respect of Sub-Pool HE Liquidation Loss Interest Amounts as follows:
(I) first, to Class HE: M-1 Certificateholders, any unpaid Class
HE: M-1 Liquidation Loss Interest Amount; and
(II) second, to Class HE: M-2 Certificateholders, any unpaid Class
HE: M-2 Liquidation Loss Interest Amount;
(D) interest and principal on the Class HE: B Certificates, in the
manner and order of priority described below under "Distributions on
Sub-Pool HE Certificates--Class HE: B Interest" and "--Class HE: B
Principal;" and
(E) interest (to the extent not paid on a prior Payment Date) on the
Class HE: A-1B ARM Certificates for any Payment Date with respect to
which the Available Funds Pass-Through Rate was less than one-month
LIBOR plus the Pass-Through Margin (or 14.0% if less), calculated on
the Class HE: A-1B ARM Principal Balance for such Payment Date at a
rate equal to such difference, plus interest on such amount accrued
from such Payment Date to the Payment Date on which such amount is
paid.
(iii) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer with respect to
the Home Equity Contracts;
(iv) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Home Equity Contracts made in
respect of current or prior Payment Dates;
(v) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vi) to reimburse the Company for any prior unreimbursed Class HE: B
Guaranty Payments;
(vii) to pay the Class HE: B Guaranty Fee to the Company; and
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(viii) to pay any remaining amounts to the holder of the Class C
Certificate.
The Scheduled Principal Balance of a Contract with respect to any Payment
Date is its principal balance as of the scheduled payment date (the "Due Date")
in the calendar month preceding such Payment Date as specified in its
amortization schedule, after giving effect to any previous partial Principal
Prepayments and to the scheduled payment due on such Due Date, but without
giving effect to any delinquency in payment or adjustments due to bankruptcy or
similar proceedings. The Pool Scheduled Principal Balance, with respect to the
Contract Pool or a given Sub-Pool, as of any Payment Date, is the aggregate of
the Scheduled Principal Balances of Contracts comprising the Contract Pool or
such Sub-Pool, as the case may be, that were outstanding during the preceding
Due Period. A Liquidated Contract is a defaulted Contract as to which all
amounts that the Servicer expects to recover on account of such Contract have
been received.
Distributions on Sub-Pool HI Certificates
On each Payment Date, distributions on the Sub-Pool HI Certificates will be
made to the holders of the Class HI: A Certificates, the Class HI: M
Certificates and the Class HI: B Certificates in the manner described below.
Distributions of interest and principal on the Sub-Pool HI Certificates will be
made primarily from amounts available in respect of the Home Improvement
Contracts comprising Sub-Pool HI, although, under certain circumstances as
described herein, amounts available in respect of the Home Equity Contracts in
Sub-Pool HE may be available to make such distributions.
Sub-Pool HI Certificateholders will be entitled to receive on each Payment
Date commencing in 1999, to the extent that the Sub-Pool HI Amount
Available (as defined herein) in the Certificate Account (together with, in the
case of the Class HI: B-2 Certificates, any Class HI: B-2 Guaranty Payment, as
described below) is sufficient therefor, distributions allocable to interest
and principal, as described herein. The rights of the Class HI: M and Class HI:
B Certificateholders to receive distributions in respect of the Sub-Pool HI
Amount Available are subordinated to the rights of the Class HI: A
Certificateholders; the rights of the Class HI: M-2 and Class HI: B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class HI: M-1 Certificateholders; the rights of the Class HI:
B Certificateholders to receive such distributions are further subordinated to
the rights of the Class HI: M-2 Certificateholders; and the rights of the Class
HI: B-2 Certificateholders to receive such distributions are further
subordinated to the rights of the Class HI: B-1 Certificateholders.
Distributions will be made on each Payment Date commencing in January 1999 to
holders of record on the related Record Date, except that the final
distribution in respect of the Sub-Pool HI Certificates will only be made upon
presentation and surrender of the Sub-Pool HI Certificates at the office or
agency appointed by the Trustee for that purpose in Minneapolis or St. Paul,
Minnesota.
The Sub-Pool HI Amount Available will consist primarily of payments made on
or in respect of the Home Improvement Contracts comprising Sub-Pool HI and will
include amounts payable, subject to the subordination described herein, to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) as the Monthly Servicing Fee with respect to the Home
Improvement Contracts, to the Company as the Class HI: B-2 Guaranty Fee, and to
the Class C Certificateholders.
Interest on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates
Interest will be distributable first to each Class of Class HI: A
Certificates concurrently, then to the Class HI: M-1 Certificates, then to the
Class HI: M-2 Certificates and then to the Class HI: B-1 Certificates. Interest
on the outstanding Class HI: A Principal Balance, Class HI: M-1 Adjusted
Principal Balance, Class HI: M-2 Adjusted Principal Balance and Class HI: B-1
Adjusted Principal Balance, as applicable, will accrue at the related Pass-
Through Rate from December 7, 1998, or from the most recent Payment Date on
which interest has been paid, to but excluding the following Payment Date, and
will be computed on the basis of a 360-day year of twelve 30-day months. The
"Principal Balance" of a Class of Sub-Pool HI Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed on account of principal of such Class. The "Class HI: A
Principal Balance" as of any Payment Date is the sum of the Class HI: A-1
Principal Balance, the Class HI: A-2
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Principal Balance and the Class HI: A-3 Principal Balance. The "Class HI: M
Principal Balance" as of any Payment Date is the sum of the Class HI: M-1
Principal Balance and the Class HI: M-2 Principal Balance. The "Class HI: M-1
Adjusted Principal Balance" as of any Payment Date is the Class HI: M-1
Principal Balance less any Class HI: M-1 Liquidation Loss Amount. The Pass-
Through Rates for the Class HI: A, Class HI: M and Class HI: B-1 Certificates
are set forth on the cover of this Prospectus Supplement. The "Class HI: M-2
Adjusted Principal Balance" as of any Payment Date is the Class HI: M-2
Principal Balance less any Class HI: M-2 Liquidation Loss Amount (described
below under "Losses on Liquidated Home Improvement Contracts"). The "Class HI:
B Principal Balance" as of any Payment Date is the sum of the Class HI: B-1
Principal Balance and the Class HI: B-2 Principal Balance. The "Class HI: B-1
Adjusted Principal Balance" as of any Payment Date is the Class HI: B-1
Principal Balance less any Class HI: B-1 Liquidation Loss Amount (described
below under "Losses on Liquidated Home Improvement Contracts").
The Pass-Through Rates on the Class HI: A, Class HI: M and Class HI: B-1
Certificates are set forth on the cover of this Prospectus Supplement. The
Class HI: B-2 Pass-Through Rate is 8.50%, subject to a maximum rate equal to
the weighted average of the Contract Rates on the Home Improvement Contracts.
In the event that, on a particular Payment Date, the Sub-Pool HI Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of a Class of Class HI: A Certificates,
Class HI: M-1 Certificates, Class HI: M-2 Certificates or Class HI: B-1
Certificates, after payment of interest on each Class of Sub-Pool HI
Certificates that is senior to such Class of Certificates (the Class HI: A
Certificates being treated as a single Class for this purpose), the amount of
interest to be distributed in respect of such Class will be allocated among the
outstanding Certificates of such Class pro rata in accordance with their
respective entitlements to interest, and the amount of the shortfall will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Any such amount so carried forward will bear
interest at the applicable Pass-Through Rate, to the extent legally
permissible.
Principal on the Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1
Certificates.
The Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates
will be entitled to receive on each Payment Date as distributions of principal,
in the order of priority set forth below and to the extent of the Sub-Pool HI
Amount Available in the Certificate Account after payment of all interest then
accrued on the Class HI: A Principal Balance, Class HI: M-1 Adjusted Principal
Balance, Class HI: M-2 Adjusted Principal Balance and Class HI: B-1 Adjusted
Principal Balance, an amount equal to the Sub-Pool HI Senior Percentage (as
defined below) or the Class HI: B Percentage, as applicable, of the "Sub-Pool
HI Formula Principal Distribution Amount," which is the sum of (i) all
scheduled payments of principal due on each outstanding Home Improvement
Contract during the related Due Period, (ii) the Scheduled Principal Balance of
each Home Improvement Contract which, during such Due Period, was purchased by
the Company pursuant to the Agreement on account of certain breaches of its
representations and warranties, (iii) all partial Principal Prepayments applied
and all Principal Prepayments in Full received during such Due Period in
respect of Home Improvement Contracts, (iv) the Scheduled Principal Balance of
each Home Improvement Contract that became a Liquidated Contract during such
Due Period, and (v) any amount described in clauses (i) through (iv) above that
was not previously distributed because of an insufficient amount of funds
available in the Certificate Account if (a) the Payment Date occurs on or after
the Payment Date on which the Class HI: B-2 Principal Balance has been reduced
to zero, or (b) such amount was not covered by a Class HI: B-2 Guaranty Payment
and corresponding reduction in the Class HI: B-2 Principal Balance, less any
Sub-Pool HI Over-Collateralization Adjustment Amount (as described below). In
addition, on each Payment Date occurring in January 2002 or after on which the
Sub-Pool HI Current Realized Loss Test (as described below) has not been met
and the ratio of (i) the Net Liquidation Losses on all FHA-Insured Contracts
that became Liquidated Contracts in any Due Period preceding such Payment Date
to (ii) the aggregate Repurchase Price of all such Liquidated Contracts is 50%
or more, Holders of a Class of Class HI: A or Class HI: M Certificates will be
entitled to receive as payments of principal, in the order of priority set
forth below, the Sub-Pool HI Supplementary Principal Distribution Amount (which
is the balance, if any, of the Sub-Pool HI Amount Available in the Certificate
Account after payment of (1) all interest then accrued on the
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Class HI: A Principal Balance, Class HI: M-1 Adjusted Principal Balance, Class
HI: M-2 Adjusted Principal Balance and Class HI: B-1 Adjusted Principal
Balance, and (2) the Sub-Pool HI Formula Principal Distribution Amount). When
the Principal Balance of a Class of Sub-Pool HI Certificates is reduced to
zero, no further distributions of principal will be made to the holders of such
Class.
The Scheduled Principal Balance of a Contract with respect to any Payment
Date is its principal balance as of the scheduled payment date (the "Due Date")
in the Due Period, after giving effect to any previous partial Principal
Prepayments applied and to the scheduled payment due on such Due Date, and
after giving effect to any adjustments due to bankruptcy or similar
proceedings. The Pool Scheduled Principal Balance, with respect to the Contract
Pool or a given Sub-Pool as of any Payment Date, is the aggregate of the
Scheduled Principal Balances of Contracts comprising the Contract Pool or such
Sub-Pool, as the case may be, that were outstanding during the preceding Due
Period. A Liquidated Contract is a defaulted Contract as to which all amounts
that the Servicer expects to recover on account of such Contract have been
received.
The Sub-Pool HI Over-Collateralization Adjustment Amount for any Payment Date
will be the excess, if any, of the (1) the excess of (x) the Pool Scheduled
Principal Balance of Sub-Pool HI over (y) the sum of the Class HI: A Principal
Balance, the Class HI: M Principal Balance and the Class HI: B Principal
Balance, over (2) 2% of the Pool Scheduled Principal Balance of Sub-Pool HI.
The Sub-Pool HI Senior Percentage of the Sub-Pool HI Formula Principal
Distribution Amount and any Sub-Pool HI Supplementary Principal Distribution
Amount will be distributed, to the extent of the Sub-Pool HI Amount Available,
after payment of all interest then accrued on the Class HI: A Principal
Balance, Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted
Principal Balance and Class HI: B-1 Adjusted Principal Balance, first, to the
Class HI: A-1 Certificateholders until the Class HI: A-1 Principal Balance has
been reduced to zero, then to the Class HI: A-2 Certificateholders until the
Class HI: A-2 Principal Balance has been reduced to zero, then to the Class HI:
A-3 Certificateholders until the Class HI: A-3 Principal Balance has been
reduced to zero, then to the Class HI: M-1 Certificateholders until the Class
HI: M-1 Principal Balance has been reduced to zero and then to the Class HI: M-
2 Certificateholders until the Class HI: M-2 Principal Balance has been reduced
to zero.
The Sub-Pool HI Senior Percentage for any Payment Date prior to the Class HI:
B Cross-over Date (as described below), and for any Payment Date on or after
the Class HI: B Cross-over Date on which each Class HI: B Principal
Distribution Test (as described below) has not been satisfied, will equal 100%.
On each Payment Date on or after the Class HI: B Cross-over Date, if each Class
HI: B Principal Distribution Test has been satisfied on such Payment Date, the
Sub-Pool HI Senior Percentage will equal a fraction, expressed as a percentage,
the numerator of which is the sum of the Class HI: A Principal Balance and the
Class HI: M Principal Balance for such Payment Date and the denominator of
which is the Pool Scheduled Principal Balance of Sub-Pool HI for the
immediately preceding Payment Date.
Payments of principal on the Class HI: B-l Certificates will not commence
until the Class HI: B Cross-over Date, and will be made on that Payment Date
and each Payment Date thereafter only if each Class HI: B Principal
Distribution Test (as defined below) is satisfied on such Payment Date (unless
the Class HI: A Principal Balance and the Class HI: M Principal Balance have
been reduced to zero). The Class HI: B Cross-over Date will be the earlier of
(A) the Payment Date on which the Class HI: M-2 Principal Balance is reduced to
zero and (B) the first Payment Date on or after the Payment Date in January
2002 on which the fraction, expressed as a percentage, the numerator of which
is the Class HI: B Principal Balance as of such Payment Date and the
denominator of which is the Pool Scheduled Principal Balance of Sub-Pool HI as
of the immediately preceding Payment Date, is equal to or greater than 20%.
On each Payment Date on or after the Class HI: B Cross-over Date and prior to
the Payment Date on which the Class HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero, holders of Class HI: B
Certificates will be entitled to distributions of principal only if each of the
following tests (each a "Class HI: B Principal Distribution Test") is satisfied
on such Payment Date: (i) the average of the Sub-Pool HI Sixty-Day Delinquency
Ratio (as defined in the Agreement) as of such Payment Date and the prior two
Payment Dates must not exceed 2.5%; (ii) the average of the Sub-Pool
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HI Thirty-Day Delinquency Ratio (as defined in the Agreement) as of such
Payment Date and the prior two Payment Dates must not exceed 5%; (iii) the Sub-
Pool HI Cumulative Realized Loss Ratio (as defined in the Agreement) as of such
Payment Date must not exceed 10%; (iv) the Sub-Pool HI Current Realized Loss
Ratio (as defined in the Agreement) as of such Payment Date must not exceed
2.5%; and (v) the Class HI: B Principal Balance divided by the Pool Scheduled
Principal Balance of Sub-Pool HI as of the immediately preceding Payment Date
must be equal to or greater than 20%.
On each Payment Date on which the Class HI: B Certificates are eligible to
receive distributions of principal, the Class HI: B Percentage of the Sub-Pool
HI Formula Principal Distribution Amount less the Class HI: B Floor Reduction
Amount (as described below) will be paid to the Class HI: B-1
Certificateholders to the extent of the Sub-Pool HI Amount Available, after
payment of all interest then accrued on the Class HI: A Principal Balance,
Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted Principal
Balance and Class HI: B-1 Adjusted Principal Balance and all principal then due
on the Class HI: A Certificates and Class HI: M Certificates, until the Class
HI: B-l Principal Balance has been reduced to zero. The Class HI: B Floor
Reduction Amount means as to any payment date prior to the Class HI: M-2 Cross-
over Date, the amount, if any, by which the Class HI: B Percentage of the Sub-
Pool HI Formula Principal Distribution Amount exceeds (a) the Class HI: B
Principal Balance prior to the effect of such distribution less (b) $1,250,000,
and after the Class HI: M-2 Cross-over Date the amount will equal zero.
Any Class HI: B Floor Reduction Amount will be distributed to the Class HI:
A-1 Certificates until the balance is reduced to zero, then to Class HI: A-2
Certificates until the balance is reduced to zero, then to Class HI: A-3
Certificates until the balance is reduced to zero, then to Class HI: M-1
Certificates, until the balance is reduced to zero, and then to Class HI: M-2
Certificates until the balance is reduced to zero.
The Class HI: B Percentage for any Payment Date will be equal to 100% minus
the Sub-Pool HI Senior Percentage. The Class HI: B Percentage for each Payment
Date, if any, after the Class HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero will be equal to 100%.
Notwithstanding the foregoing, on any Payment Date as to which there is a
Class HI: A Liquidation Loss Principal Amount (which is the amount, if any, by
which the Pool Scheduled Principal Balance of Sub-Pool HI plus the Sub-Pool HI
Pre-Funded Amount is less than the Class HI: A Principal Balance), the
remaining Sub-Pool HI Amount Available, after payment of all interest then
accrued on the Class HI: A Principal Balance, Class HI: M-1 Adjusted Principal
Balance, Class HI: M-2 Adjusted Principal Balance and Class HI: B-1 Adjusted
Principal Balance, will be distributed pro rata to each Class of Class HI: A
Certificates based on the Principal Balance of each Class (but in no event will
such amount exceed the Principal Balance of any such Class).
Class HI: B-2 Interest.
Interest on the outstanding Class HI: B-2 Principal Balance will accrue from
, 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.
To the extent of (i) the remaining Sub-Pool HI Amount Available, if any, for
a Payment Date after payment of all interest and principal then payable on the
Class HI: A, Class HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates, and
(ii) the Class HI: B-2 Guaranty Payment, if any, for such date, interest will
be paid to the Class HI: B-2 Certificateholders on such Payment Date at the
Class HI: B-2 Pass-Through Rate on the then outstanding Class HI: B-2 Principal
Balance. The Class HI: B-2 Principal Balance is the Original Class HI: B-2
Principal Balance less all amounts previously distributed to the Class HI: B-2
Certificateholders (including any Class HI: B-2 Guaranty Payments) on account
of principal.
In the event that, on a particular Payment Date, the remaining Sub-Pool HI
Amount Available in the Certificate Account plus any amounts actually paid
under the Class HI: B-2 Limited Guaranty are not sufficient to make a full
distribution of interest to the Class HI: B-2 Certificateholders, the amount of
the
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deficiency will be carried forward as an amount that the Class HI: B-2
Certificateholders are entitled to receive on the next Payment Date. Any amount
so carried forward will, to the extent legally permissible, bear interest at
the Class HI: B-2 Pass-Through Rate.
Class HI: B-2 Principal.
Except for payments of the Class HI: B-2 Liquidation Loss Principal Amount,
payments of principal on the Class HI: B-2 Certificates will not commence until
the Payment Date on which the Class HI: B-1 Principal Balance has been reduced
to zero (the "Class HI: B-1 Cross-over Date"), and will be made on that Payment
Date and each Payment Date thereafter only if each Class HI: B Principal
Distribution Test is satisfied on such Payment Date (unless the Class HI: A
Principal Balance and the Class HI: M Principal Balance have been reduced to
zero). On any such Payment Date, the Class HI: B Percentage of the Sub-Pool HI
Formula Principal Distribution Amount less the Class HI: B Floor Reduction
Amount will be distributed, to the extent of the Sub-Pool HI Amount Available,
after payment of all interest and principal then due on the Class HI: A and
Class HI: M Certificates, and any amounts actually paid under the Class HI: B-2
Limited Guaranty, in each case after payment of interest on the Class HI: B-2
Certificates, to the Class HI: B-2 Certificateholders until the Class HI: B-2
Principal Balance has been reduced to zero. The Class HI: B-2 Principal Balance
generally will not be reduced below $1,250,000 until the Class HI: A Principal
Balance, the Class HI: M Principal Balance and the Class HI: B-1 Principal
Balance have been reduced to zero.
On each Payment Date, the Class HI: B-2 Certificateholders will be entitled
to receive, pursuant to the Class HI: B-2 Limited Guaranty, the Class HI: B-2
Liquidation Loss Principal Amount until the Class HI: B-2 Principal Balance has
been reduced to zero.
Distributions on Sub-Pool HE Certificates
On each Payment Date, distributions on the Sub-Pool HE Certificates will be
made to the holders of the Class HE: A Certificates, the Class HE: M
Certificates and the Class HE: B Certificates, in the manner described below.
Distributions of interest and principal on the Sub-Pool HE Certificates will be
made primarily from amounts available in respect of the Home Equity Contracts
comprising Sub-Pool HE, although, under certain circumstances as described
herein, amounts available in respect of the Home Improvement Contracts in Sub-
Pool HI may be available to make such distributions.
Sub-Pool HE Certificateholders will be entitled to receive on each Payment
Date commencing in 1999, to the extent that the Sub-Pool HE Amount
Available plus any Reserve Account Withdrawal Amount (as defined herein) in the
Certificate Account (together with, in the case of the Class HE: B
Certificates, the Class HE: B Guaranty Payment, as described below) is
sufficient therefor, distributions allocable to interest and principal, as
described herein. The rights of the Class HE: M and Class HE: B
Certificateholders to receive distributions in respect of the Sub-Pool HE
Amount Available are subordinated to the rights of the Class HE: A
Certificateholders; the rights of the Class HE: M-2 and Class HE: B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class HE: M-1 Certificateholders; and the rights of the Class
HE: B Certificateholders to receive such distributions are further subordinated
to the rights of the Class HE: M-2 Certificateholders. Distributions will be
made on each Payment Date commencing in 1999 to holders of record on the
related Record Date, except that the final distribution in respect of the Sub-
Pool HE Certificates will only be made upon presentation and surrender of the
Sub-Pool HE Certificates at the office or agency appointed by the Trustee for
that purpose in Minneapolis or St. Paul, Minnesota.
The Class HE: A and Class HE: M Certificateholders will have the benefit of a
reserve account (the "Reserve Account") to cover Liquidation Losses on the Home
Equity Contracts. The Reserve Account will equal $ on the Closing Date.
Withdrawals will be made from the Reserve Account to cover Liquidation Losses
on the Home Equity Contracts, and to repay the loan used to fund the Reserve
Account, as described below. Additions will be made to the Reserve Account from
the Sub-Pool HE Amount Available in an amount equal to those withdrawals from
the Reserve Account that are used to repay the loan upon certain triggering
events described below.
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Reserve Account Loan
The Reserve Account will be fully funded on the closing date by a loan. Loan
fees due on the Reserve Account Loan will be paid on each Payment Date from the
amount available to the Class HE Certificateholders.
Amounts will be released on each Payment Date from the Reserve Account to pay
a portion of the principal on the Reserve Account loan, commencing on or after
the Payment Date in if on that Payment Date, certain tests have been met.
The loan reduction amount on any such Payment Date will be the excess of the
sum of the Class HE: B Adjusted Principal Balance and the Reserve Account
balance over 16% of the Pool Scheduled Principal Balance of Sub-Pool HE as of
that Payment Date. However, if the Class HE: A and Class HE: M Principal
Balances have been reduced to zero, the Reserve Account Balance will also be
zero.
In addition, if on a Payment Date certain triggering events have occurred,
amounts will be released from the reserve account to pay the Reserve Account
loan on that Payment Date, and on each succeeding Payment Date until the
triggering event is cured. In this case, the amount of the repayment on that
date will equal, in general, the Sub-Pool HE Amount Available on that Payment
Date less all amounts which the Class HE: A and Class HE: M Certificateholders
are entitled to receive on that Payment Date. A triggering event will occur if
Liquidation Losses on Contracts included in Sub-Pool HE exceed specified
amounts, if prepayments fall below certain levels, or if the Sub-Pool HE Amount
Available, after payment of interest and principal to Class HE: A and Class HE:
M Certificateholders, is less than a specified amount.
On the earlier of the Payment Date in or the Payment Date on which any
termination event has occurred, a portion of the Sub-Pool HE Amount Available
may be applied to pay the Reserve Account loan on that Payment Date, and on
each succeeding Payment Date, until the Reserve Account loan has been paid in
full. In this case, the amount of each repayment will equal, in general, the
Sub-Pool HE Amount Available on that Payment Date, less all amounts which the
Class HE: A and Class HE: M Certificateholders are entitled to receive on that
Payment Date. Termination events include an event of default under the Reserve
Account loan agreement, the exercise by the Servicer of its right to purchase
the Contracts in the trust created under the Pooling and Servicing Agreement
after the scheduled principal balance of all such Contracts is less than 10% of
the aggregate principal balance of the Certificates on the Closing Date, and
the failure of certain tests related to the performance of the Contracts
included in Sub-Pool HE.
See "Description of the Certificates" for a detailed description of the
amounts on deposit in the Certificate Account that will constitute the Sub-Pool
HE Amount Available on each Payment Date. The Sub-Pool HE Amount Available will
consist primarily of payments made on or in respect of the Home Equity
Contracts comprising Sub-Pool HE and will include amounts payable, subject to
the subordination described herein, to the Servicer (so long as the Company or
any wholly owned subsidiary of the Company is the Servicer) as the related
Monthly Servicing Fee with respect to the Home Equity Contracts, to the Company
as the Class HE: B Guaranty Fee, and to the Class C Certificateholders.
Interest on the Class HE: A, Class HE: M-1 and Class HE: M-2.
Interest will be distributable first to each Class of Class HE: A
Certificates concurrently, then to the Class HE: M-1 Certificates and then to
the Class HE: M-2 Certificates. Interest on the outstanding Class HE: A
Principal Balance (or, in the case of the Class HE: A-5 IO Certificates, on the
Notional Principal Amount), Class HE: M-1 Adjusted Principal Balance and Class
HE: M-2 Adjusted Principal Balance, as applicable, will accrue at the related
Pass-Through Rate from , 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 Class HE: A Certificates, other than the Class HE: A-
1B ARM and Class HE: A-1 Certificates, will be computed on the basis of a 360-
day year of twelve 30-day months. Interest on the Class HE: A-1B ARM and Class
HE: A-1 Certificates will be computed on the basis of actual days elapsed in a
360-day year. The "Principal Balance" of a Class of Sub-Pool HE Certificates
(other than the Class HE: A-5 IO Certificates, which has no Principal Balance)
as of any Payment Date is the
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Original Principal Balance of such Class less all amounts previously
distributed on account of principal of such Class. The "Class HE: A Principal
Balance" as of any Payment Date is the sum of the Class HE: A-1A NAS Principal
Balance, the Class HE: A-1B ARM Principal Balance, the Class HE: A-1 Principal
Balance, the Class HE: A-2 Principal Balance, the Class HE: A-3 Principal
Balance and the Class HE: A-4 Principal Balance. The "Class HE: M Principal
Balance" as of any Payment Date is the sum of the Class HE: M-1 Principal
Balance and the Class HE: M-2 Principal Balance. The "Class HE: M-1 Adjusted
Principal Balance" as of any Payment Date is the Class HE: M-1 Principal
Balance less any Class HE: M-1 Liquidation Loss Amount (described below under
"Losses on Liquidated Home Equity Contracts"). The "Class HE: M-2 Adjusted
Principal Balance" as of any Payment Date is the Class HE: M-2 Principal
Balance less any Class HE: M-2 Liquidation Loss Amount (described below under
"Losses on Liquidated Home Equity Contracts").
The Pass-Through Rates for the Class HE: A (other than the Class HE: A-1B ARM
and Class HE: A-1) and Class HE: M Certificates are set forth on the cover of
this Prospectus Supplement.
The Class HE: A-1B ARM Pass-Through Rate is a floating rate equal to the
lesser of one-month LIBOR plus the Class A-1B ARM Pass-Through Margin or the
Available Funds Pass-Through Rate, but in no case more than 14.0%. The Class A-
1B ARM Pass-Through Margin will equal 0.65% per annum on each Payment Date on
which the Pool Scheduled Principal Balance of the Contract Pool is 10% or more
of the Cut-off Date Pool Principal Balance of the Contract Pool, and 0.90% per
annum on each Payment Date on which the Pool Scheduled Principal Balance of the
Contract Pool is less than 10% of the aggregate principal balance of the
Certificates on the Closing Date. The Available Funds Pass-Through Rate for any
Payment Date will be a rate per annum equal to the weighted average of the
Expense Adjusted Contract Rates on the then outstanding Adjustable Rate Home
Equity Contracts. The Expense Adjusted Contract Rate on any Adjustable Rate
Home Equity Contract is equal to the then applicable Mortgage Rate thereon,
minus the Expense Fee Rate. The Expense Fee Rate is 0.50% per annum.
In addition, if on any Payment Date the Class HE: A-1B ARM Pass-Through Rate
is less than one-month LIBOR plus the Pass-Through Margin (or 14.0% if less)
because of the limit of the Available Funds Pass-Through Rate, supplemental
interest on the Class HE: A-1B ARM Principal Balance at a rate equal to such
difference will be payable on the Class HE: A-1B ARM Certificates, to the
extent the Sub-Pool HE Amount Available is sufficient therefor after payment of
all interest and principal due on the Sub-Pool HE Certificates on, and unpaid
loan fees and certain other amounts payable to the Reserve Account Lenders as
of, such Payment Date. The loan fees are generally calculated at 1.50% per
annum until the seventh anniversary of the Closing Date and thereafter at a
rate of 2.5% per annum.
One-month LIBOR with respect to any monthly interest period will equal the
offered rate for United States dollar deposits for one month that appears on
Telerate Page 3750 as of 11:00 A.M., London time, on the second LIBOR business
day prior to such monthly interest period. For a description of the method used
to calculate one-month LIBOR, see "Description of the Certificates--Calculation
of One-Month LIBOR."
Through the Payment Date in , or as described below in this paragraph,
the Class HE: A-1 Pass-Through Rate will be a floating rate equal to one-month
LIBOR (as defined under the Swap Agreement) plus 0.57%, but in no case more
than 14.0%. On each Payment Date after , the Class HE: A-1 Pass-Through
Rate will equal the Pass-Through Rate on the Class HE: A-1 Underlying
Certificates, which is 6.2375%. On the Payment Date on which the Pool Scheduled
Principal Balance of the Contract Pool is less than 10% of the aggregate
Principal Balance of the Certificates on the Closing Date, the Class HE: A-1
Pass-Through Rate will increase by 0.25%.
Interest will be calculated on the Class HE: A-5 IO Certificates on each
Payment Date based on the Notional Principal Amount, which for the first 24
Payment Dates is equal to $ (or the Class HE: A Principal Balance for such
Payment Date, if less), and will thereafter equal zero. The Notional Principal
Amount provides a basis for calculating interest payments only, and does not
represent the right to receive any distributions of principal.
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In the event that, on a particular Payment Date, the Sub-Pool HE Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the holders of a Class of Class HE: A Certificates,
Class HE: M-1 Certificates or Class HE: M-2 Certificates, after payment of
interest on each Class of Sub-Pool HE Certificates that is senior to such Class
of Certificates (the Class HE: A Certificates being treated as a single Class
for this purpose), the amount of interest to be distributed in respect of such
Class will be allocated among the outstanding Certificates of such Class pro
rata in accordance with their respective entitlements to interest, and the
amount of the shortfall will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. In such event,
the amount of interest to be distributed to the Class HE: A-1 Certificates will
be reduced by the amount of the interest shortfall in respect of the Class
HE: A-1 Underlying Certificates. Any such amount so carried forward will bear
interest at the applicable Pass-Through Rate (and in the case of the Class
HE: A-1 Certificates, at the Pass-Through Rate for the Class HE: A-1 Underlying
Certificates), to the extent legally permissible.
Principal on the Class HE: A, Class HE: M-1 and Class HE: M-2 Certificates.
The Class HE: A (other than the Class HE: A-5 IO Certificates, which will
receive no distributions of principal), Class HE: M-1 and Class HE: M-2
Certificates will be entitled to receive on each Payment Date distributions of
principal in the order of priority set forth and as otherwise described below,
to the extent of the Sub-Pool HE Amount Available in the Certificate Account
after payment of all interest then accrued on the Class HE: A Principal
Balance, Class HE: M-1 Adjusted Principal Balance and Class HE: M-2 Adjusted
Principal Balance and after payment of any unpaid Loan Fees payable to the
Reserve Account Lenders.
Holders of the Class HE: A-1A NAS Certificates will generally be entitled to
receive, as payments of principal, an amount equal to Class HE: A-1A NAS
Percentage of the Class HE: A ARM Portion, until the Class HE: A-1A NAS
Principal Balance is reduced to zero. Holders of the Class HE: A-1B ARM
Certificates will generally be entitled to receive, as payments of principal,
the Class HE: A ARM Portion less an amount equal to the lesser of the
Class A-1A NAS Principal Balance and the Class HE: A-1A NAS Percentage of the
Class HE: A ARM Portion, until the Class HE: A-1B ARM Principal Balance is
reduced to zero.
"Class HE: A-1A NAS Percentage" means, as to any Payment Date, (i) 0% prior
to the Payment Date in (unless the Class HE: A-1B ARM Principal
Balance has been reduced to zero), (ii) 90% on the Payment Date in September
2000 and thereafter (unless the Class HE: A-1B ARM Principal Balance has been
reduced to zero), and (iii) on and after any Payment Date on which the Class
HE: A-1B ARM Principal Balance has been reduced to zero (until the Class HE: A-
1A NAS Principal Balance has been reduced to zero), 100%.
"Class HE: A ARM Portion" means, generally, as to any Payment date,
(a) if such Payment Date is on or prior to the Class HE: A ARM Cross-
over Date, an amount equal to the Sub-Pool HE ARM Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A ARM Cross-
over Date, and after the Class HE: A-1 Underlying and Class HE: A-4 Cross-
over Dates, an amount equal to the Sub-Pool HE Formula Principal
Distribution Amount less the sum of the Class HE: M-1, Class HE: M-2, and
Class HE: B Formula Principal Distribution Amounts;
(c) if such Payment Date is after the Class HE: ARM Cross-over Date, $0.
"Sub-Pool HE: ARM Formula Principal Distribution Amount" means, as to any
Payment Date, the sum of the following amounts with respect to the related Due
Period, in each case computed in accordance with the method specified in the
relevant Adjustable Rate Home Equity Contract:
(a) all scheduled payments of principal due on each outstanding
Adjustable Rate Home Equity Contract during the prior Due Period as
specified in the amortization schedule at the time applicable thereto
(after adjustments for previous Partial Principal Prepayments and any
adjustment to such
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amortization schedule by reason of any bankruptcy of an Obligor or similar
proceeding or any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period in respect of the
Adjustable Rate Home Equity Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Adjustable Rate
Home Equity Contracts that became Liquidated Contracts during the prior Due
Period plus the amount of any reduction in principal balance of any
Adjustable Rate Home Equity Contracts during the prior Due Period pursuant
to bankruptcy proceedings involving the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Adjustable Rate
Home Equity Contracts repurchased, and all amounts deposited in lieu of the
repurchase of any Adjustable Rate Home Equity Contract, during the prior
Due Period, any amount required to be deposited by the Company in the
Certificate Account during the prior Due Period; plus
(e) on the Payment Date which is on or after the last day of the Pre-
Funding Period, the amount (if any) then on deposit in the Sub-Pool HE Pre-
Funding ARM Subaccount.
The Class HE: A-1 Underlying Certificateholders will be entitled to receive,
as payments of principal, the Class HE: A-1 Underlying Portion, until the Class
HE: A-1 Principal Balance is reduced to zero. "Class HE: A-1 Underlying
Portion" means, generally, as to any payment Date,
(a) if such Payment Date is on or prior to the Class HE: A-1 Underlying
and Class HE: A-4 Cross-over Dates, an amount equal to the Sub-Pool HE
Group I Formula Principal Distribution Amount less the product of (i) the
sum of the Class HE: M-1, Class HE: M-2, and Class HE: B Formula Principal
Distribution Amounts times (ii) a fraction, the numerator of which is the
Sub-Pool HE Group I Formula Principal Distribution Amount and the
denominator of which is the Sub-Pool HE: Group I Formula Principal
Distribution Amount plus the Sub-Pool HE: Group II Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A-1 Underlying
Cross-over Date and the Class HE: A ARM Cross-over Date but after the Class
HE: A-4 Cross-over Date, an amount equal to the Sub-Pool HE Fixed Rate
Formula Principal Distribution Amount less the sum of the Class HE: M-1,
Class HE: M-2, and Class HE: B Formula Principal Distribution Amounts;
(c) if such Payment Date is on or prior to the Class HE: A-1 Underlying
Cross-over Date and after the Class HE: A-4 and Class HE: A ARM Cross-over
Dates, an amount equal to the Sub-Pool HE Formula Principal Distribution
Amount less the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Formula Principal Distribution Amounts times;
(d) if such Payment Date is after the Class HE: A-1 Underlying Cross-
over Date, $0.
"Sub-Pool HE: Group I Formula Principal Distribution Amount" means, as to
any Payment Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Group I
Contract during the prior Due Period as specified in the amortization
schedule at the time applicable thereto (after adjustments for previous
Partial Principal Prepayments and after any adjustment to such amortization
schedule by reason of any bankruptcy of an Obligor or similar proceeding or
any moratorium or similar waiver or grace period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Group I Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Group I Contracts
that became Liquidated Contracts during the prior Due Period plus the
amount of any reduction in principal balance of any
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Group I Contract during the prior Due Period pursuant to bankruptcy
proceedings involving the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Group I Contracts
repurchased, and all amounts deposited in lieu of the repurchase of any
Group I Contract, during the prior Due Period, any amount required to be
deposited by the Company in the Certificate Account during the prior Due
Period; plus
(e) any amount described in clauses (a) through (d) above that was not
previously distributed because of an insufficient amount of funds available
in the Certificate Account if (1) the Payment Date occurs on or after the
Payment Date on which the Class HE: B Principal Balance has been reduced to
zero, or (2) such amount was not covered by a Class HE: B Guaranty Payment
and corresponding reduction in the Class HE: B Principal Balance; plus
(f) on the Payment Date on or after the last day of the Pre-Funding
Period, the Sub-Pool HE Pre-Funded Group I Amount.
Holders of the Class HE: A-2, Class HE: A-3 and Class HE: A-4 Certificates
will be entitled to receive, as payments of principal, an amount equal to the
Class HE: A(2, 3, 4) Portion. When the Principal Balance of a Class of Sub-Pool
HE Certificates is reduced to zero, no further distributions of principal will
be made to the holders of such Class.
"Class HE: A (2, 3, 4) Portion" means, generally, as to any Payment Date,
(a) if such Payment Date is on or prior to the Class HE: A-4, Class HE:
A-1 Underlying, and Class HE: A ARM Cross-over Dates, an amount equal to
the Sub-Pool HE Group II Formula Principal Distribution Amount less the
product of (i) the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Formula Principal Distribution Amounts times (ii) a fraction, the numerator
of which is the Sub-Pool HE Group II Formula Principal Distribution Amount
and the denominator of which is the Sub-Pool HE: Group I Formula Principal
Distribution Amount plus the Sub-Pool HE: Group II Formula Principal
Distribution Amount;
(b) if such Payment Date is on or prior to the Class HE: A-4 and Class
HE: A ARM Cross-over Dates but after the Class HE: A-1 Cross-over Date, an
amount equal to the Sub-Pool HE Fixed Rate Formula Principal Distribution
Amount less the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Formula Principal Distribution Amounts;
(c) if such Payment Date is on or prior to the Class HE: A-4 and Class
HE: A-1 Underlying Cross-over Dates but after the Class HE: A ARM Cross-
over Date, an amount equal to the Sub-Pool HE Group II Formula Principal
Distribution Amount plus the Sub-Pool HE ARM Formula Principal Distribution
Amount less the product of (i) the sum of the Class HE: M-1, Class HE: M-2,
and Class HE: B Formula Principal Distribution Amounts times (ii) a
fraction, the numerator of which is the Sub-Pool HE Group II Formula
Principal Distribution Amount and the denominator of which is the Sub-Pool
HE: Group I Formula Principal Distribution Amount plus the Sub-Pool HE:
Group II Formula Principal Distribution Amount;
(d) if such Payment Date is on or prior to the Class HE: A-4 Cross-over
Date and after the Class HE: A-1 Underlying and Class HE: A ARM Cross-over
Dates, an amount equal to the Sub-Pool HE Formula Principal Distribution
Amount less the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Formula Principal Distribution Amounts;
(e) if such Payment Date is after the Class HE: A-4 Cross-over Date, $0.
"Sub-Pool HE Group II Formula Principal Distribution Amount" means, as to
any Payment Date, the sum of:
(a) all scheduled payments of principal due on each outstanding Group II
Contract during the prior Due Period as specified in the amortization
schedule at the time applicable thereto (after
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adjustments for previous Partial Principal Prepayments and after any
adjustment to such amortization schedule by reason of any bankruptcy of an
Obligor or similar proceeding or any moratorium or similar waiver or grace
period); plus
(b) all Partial Principal Prepayments applied and all Principal
Prepayments in Full received during the prior Due Period with respect to
the Group II Contracts; plus
(c) the aggregate Scheduled Principal Balance of all Group II Contracts
that became Liquidated Contracts during the prior Due Period plus the
amount of any reduction in principal balance of any Group II Contract
during the prior Due Period pursuant to bankruptcy proceedings involving
the related Obligor; plus
(d) the aggregate Scheduled Principal Balance of all Group II Contracts
repurchased, and all amounts deposited in lieu of the repurchase of any
Group II Contract, during the prior Due Period, any amount required to be
deposited by the Company in the Certificate Account during the prior Due
Period; plus
(e) any amount described in clauses (a) through (d) above that was not
previously distributed because of an insufficient amount of funds available
in the Certificate Amount if (1) the Payment Date occurs on or after the
Payment Date on which the Class HE: B Principal Balance has been reduced to
zero, or (2) such amount was not covered by a Class HE: B Guaranty Payment
and corresponding reduction in the Class HE: B Principal Balance; plus
(f) on the Payment Date on or after the last day of the Pre-Funding
Period, the Sub-Pool HE Pre-Funded Group II Amount.
The Class HE: A-5 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
The Class HE: M-1 Certificateholders will be entitled to receive, as payments
of principal, the Class HE: M-1 Formula Principal Distribution Amount.
"Class HE: M-1 Formula Principal Distribution Amount" means, as to any
Payment Date,
(a) if such Payment Date is prior to the Payment Date, or if such
Payment Date is on or prior to the Class HE: A Cross-over Date and any
Class HE: Subordinate Principal Distribution Test is not satisfied, $0;
(b) if such Payment Date is on or after the Payment Date and on or
prior to the Class HE: A Cross-over Date and each Class HE: Subordinate
Principal Distribution Test is satisfied, the excess of (i) the difference
between (x) the sum of the Class HE: M-1, Class HE: M-2, and Class HE: B
Adjusted Principal Balances and the Reserve Account Balance and (y) the sum
of the Class HE: M-2 Formula Principal Distribution Amount, the Class HE: B
Formula Principal Distribution Amount, and the net reduction of the Reserve
Account for the Payment Date over (ii) the product of 38% and the Pool
Scheduled Principal Balance of Sub-Pool HE as of such Payment Date; or
(c) if such Payment Date is after the Class HE: A Cross-over Date, the
Sub-Pool HE Formula Principal Distribution Amount less the sum of the Class
HE: M-2 Formula Principal Distribution Amount and the Class HE: B Formula
Principal Distribution Amount.
The Class HE: M-2 Certificateholders will be entitled to receive, as payments
of principal, the Class HE: M-2 Formula Principal Distribution Amount.
"Class HE: Subordinate Principal Distribution Test" means, as to any Payment
Date, each of the Sub-Pool HE Average Sixty-Day Delinquency Ratio Test, the
Sub-Pool HE Average Thirty-Day Delinquency Ratio Test, the Sub-Pool HE
Cumulative Realized Losses Test and the Sub-Pool HE Current Realized Losses
Test.
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"Class HE: M-2 Formula Principal Distribution Amount" means, as to any
Payment Date,
(a) if such Payment Date is prior to the Payment Date, or on or
prior to the Class HE: M-1 Cross-over Date and any Class HE: Subordinate
Principal Distribution Test is not satisfied, $0);
(b) if such Payment Date is on or after the Payment Date and on or
prior to the Class HE: A Cross-over Date or the Class HE: M-1 Cross-over
Date and each Class HE: Subordinated Principal Distribution Test is
satisfied, the excess of (i) the difference between (x) the sum of the
Class HE: M-2 Adjusted Principal Balance, the Class HE: B Adjusted
Principal Balance and the Reserve Account Balance and (y) the sum of the
Class HE: B Formula Principal Distribution Amount and the net reduction of
the Reserve Account for that Payment Date over (ii) the product of 26% and
the Pool Scheduled Principal Balance of Sub-Pool HE as of such Payment
Date; or
(c) if such Payment Date is after Class HE: A Cross-over Date and the
Class M-1 Cross-over Date, the Sub-Pool HE Formula Principal Distribution
Amount less the Class HE: B Formula Principal Distribution Amount.
Class HE: B Interest.
Interest on the outstanding Class HE: B Principal Balance will accrue from
, 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.
To the extent of (i) the remaining Sub-Pool HE Amount Available, if any, for
a Payment Date after payment of all interest and principal then payable on the
Class HE: A, Class HE: M-1 and Class HE: M-2 Certificates and any amounts
payable to the Reserve Account lenders, and (ii) the Class HE: B Guaranty
Payment, if any, for such date, interest will be paid to the Class HE: B
Certificateholders on such Payment Date at the Class HE: B Pass-Through Rate on
the then outstanding Class HE: B Principal Balance. The Class HE: B Principal
Balance is the Original Class HE: B Principal Balance less all amounts
previously distributed to the Class HE: B Certificateholders (including any
Class HE: B Guaranty Payments) on account of principal.
In the event that, on a particular Payment Date, the remaining Sub-Pool HE
Amount Available in the Certificate Account plus any amounts actually paid
under the Class HE: B Limited Guaranty are not sufficient to make a full
distribution of interest to the Class HE: B Certificateholders, the amount of
the deficiency will be carried forward as an amount that the Class HE: B
Certificateholders are entitled to receive on the next Payment Date. Any amount
so carried forward will, to the extent legally permissible, bear interest at
the Class HE: B Pass-Through Rate.
Class HE: B Principal.
Except for payments of the Class HE: B Liquidation Loss Principal Amount,
payments of principal on the Class HE: B Certificates will not commence until
the Payment Date in or after , on which the Reserve Account has been
reduced to zero (the "Class HE: B Cross-over Date"), and will be made on that
Payment Date and each Payment Date thereafter only if the Class HE: Subordinate
Principal Distribution Test is satisfied on such Payment Date (unless the Class
HE: A Principal Balance and the Class HE: M Principal Balance have been reduced
to zero). The Class HE: B Principal Balance will not be reduced below $
until the Class HE: A and Class HE: M Certificates have been retired. On any
such Payment Date, Class HE: B Certificateholders will be entitled to receive
the Class HE: Formula Principal Distribution Amount, to the extent of the Sub-
Pool HE Amount Available, after payment of all interest and principal then due
on the Class HE: A and Class HE: M Certificates, and any amounts actually paid
under the Class HE: B Limited Guaranty, in each case after payment of interest
on the Class HE: B Certificates.
On each Payment Date, the Class HE: B Certificateholders will be entitled to
receive, pursuant to the Class HE: B Limited Guaranty, the Class HE: B
Liquidation Loss Principal Amount until the Class HE: B Principal Balance has
been reduced to zero.
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"Class HE: B Formula Principal Distribution Amount" means, as to any Payment
Date,
(a) if such Payment Date is prior to the Payment Date or on or before
the Class HE: B Cross-over Date or any Class HE: Subordinate Principal
Distribution Test is not satisfied, $0;
(b) if such Payment Date is on or after the Payment Date, after the
Class HE: B Cross-over Date and on or before either the Class HE: A or Class
HE: M-2 Cross-over Dates and each Class HE: Subordinate Principal Distribution
Test is satisfied, the excess of (i) the difference between (x) the sum of the
Class HE: B Adjusted Principal Balance and Reserve Account Balance and (y) the
net reduction of the Reserve Account for that Payment Date over (ii) the
greater of (x) $5,500,000 and (y) the product of 16% and the Pool Scheduled
Principal Balance of Sub-Pool HE as of such Payment Date;
(c) if such Payment Date is after the Class HE: A, Class HE: M-1 and Class
HE: M-2 Cross-over Dates, the Sub-Pool HE Formula Principal Distribution
Amount.
Calculation of One-Month LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date"). "Telerate Page 3750" means the
display page so designated on the Dow Jones Telerate Service (or such other
page as may replace that page on that service, or such other service as may be
designated by the Calculation Agent as the information vendor, for the purpose
of displaying London interbank offered rates of major banks). If such rate
appears on Telerate Page 3750, LIBOR will be such rate. "LIBOR Business Day" as
used herein means a day that is both a business day and a day on which banking
institutions in the City of London, England are not required or authorized by
law to be closed. If on any LIBOR Determination Date the offered rate does not
appear on Telerate Page 3750, the Calculation Agent will request each of the
reference banks (which shall be major banks that are engaged in transactions in
the London interbank market selected by the Calculation Agent) to provide the
Calculation Agent with its offered quotation for United States dollar deposits
for one month to prime banks in the London interbank market as of 11:00 A.M.,
London time, on such date. If at least two reference banks provide the
Calculation Agent with such offered quotations, LIBOR on such date will be the
arithmetic mean, rounded upward, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point rounded upward, of
all such quotations. If on such date fewer than two of the reference banks
provide the Calculation Agent with such offered quotations, LIBOR on such date
will be the arithmetic mean, rounded upward, if necessary, to the nearest
1/100,000 of 1% (.0000001), with five one-millionths of a percentage point
rounded upward, of the offered per annum rates that one or more leading banks
in the City of New York selected by the Calculation Agent are quoting as of
11:00 A.M., New York City time, on such date to leading European banks for
United States dollar deposits for one month; provided, however, that if such
banks are not quoting as described above, LIBOR for such date will be LIBOR
applicable to the monthly interest period immediately preceding such monthly
interest period. Notwithstanding the foregoing, however, LIBOR for a Payment
Date shall not be based on LIBOR for the prior Payment Date for three
consecutive Payment Dates. If, under the priorities described above, LIBOR for
a Payment Date would be based on LIBOR for the previous Payment Date for the
second consecutive Payment Date, the Calculation Agent shall select an
alternative comparable index (over which the Calculation Agent has no control)
used for determining one-month Eurodollar lending rates that is calculated and
published (or otherwise made available) by an independent third party. The
"Calculation Agent" will initially be the Trustee.
Subordination of Class HI: M Certificates and Class HI: B Certificates
The rights of the holders of the Class HI: M Certificates and Class HI: B
Certificates to receive distributions with respect to the Home Improvement
Contracts comprising Sub-Pool HI, as well as any other amounts constituting the
Sub-Pool HI Amount Available, will be subordinated, to the extent described
herein, to such rights of the holders of the Class HI: A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class HI: A Certificates of the
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full amount of their scheduled monthly payments of interest and principal and
to afford such holders protection against losses on Liquidated Home Improvement
Contracts.
A portion of the protection afforded to the holders of the Class HI: A
Certificates by means of the subordination of the Class HI: M and Class HI: B
Certificates will be accomplished by the preferential right of the Class HI: A
Certificateholders to receive on any Payment Date the amount of interest due on
the Class HI: A Certificates, including any interest due on a prior Payment
Date but not received, prior to any distribution being made on a Payment Date
in respect of interest on the Class HI: M and Class HI: B Certificates.
Thereafter, any remaining Sub-Pool HI Amount Available in the Certificate
Account will be applied to the payment of interest due on the Class HI: M-1
Adjusted Principal Balance, then interest due on the Class HI: M-2 Adjusted
Principal Balance and then interest due on the Class HI: B-1 Adjusted Principal
Balance.
After payment of all interest then accrued on the Class HI: A Principal
Balance, Class HI: M-1 Adjusted Principal Balance, Class HI: M-2 Adjusted
Principal Balance and Class HI: B-1 Adjusted Principal Balance as aforesaid,
any remaining Sub-Pool HI Amount Available will be distributed in the following
order of priority: first, the Sub-Pool HI Senior Percentage or the Class HI: B
Percentage, as applicable, of the Sub-Pool HI Formula Principal Distribution
Amount, together with any Sub-Pool HI Supplementary Principal Distribution
Amount, will be distributed to the Class HI: A, Class HI: M and Class HI: B-1
Certificateholders in the order of priority described above under
"Distributions on Sub-Pool HI Certificates--Principal on the Class HI: A, Class
HI: M-1, Class HI: M-2 and Class HI: B-1 Certificates;" thereafter, the
remaining Sub-Pool HI Amount Available, to the extent sufficient therefor, will
be distributed in the following order of priority: first, any unpaid Class HI:
M-1 Liquidation Loss Interest Amount (as described below under "Losses on
Liquidated Home Improvement Contracts") will be distributed to the Class HI: M-
1 Certificateholders; then, any unpaid Class HI: M-2 Liquidation Loss Interest
Amount (as described below under "Losses on Liquidated Home Improvement
Contracts") will be distributed to the Class HI: M-2 Certificateholders; and,
finally, any unpaid Class HI: B-1 Liquidation Loss Interest Amount (as
described below under "Losses on Liquidated Home Improvement Contracts") will
be distributed to the Class HI: B-1 Certificateholders.
The rights of the holders of the Class HI: B-2 Certificates to receive
distributions with respect to the Home Improvement Contracts and other amounts
in the Certificate Account will be subordinated to such rights of the holders
of the Class HI: A Certificates, Class HI: M Certificates and Class HI: B-1
Certificates. Thus, the Class HI: B-2 Certificateholders will be entitled to
distribution of interest and principal on the Class HI: B-2 Certificates only
after distribution of all interest and principal then payable on the Class HI:
A, Class HI: M and Class HI: B-1 Certificates.
If a Class HI: B-2 Liquidation Loss Amount is realized for any Payment Date
and the Company fails to pay such amount pursuant to its Class HI: B-2 Limited
Guaranty, the Class HI: B-2 Certificateholders may incur losses on their
investment in the Class HI: B-2 Certificates to the extent such losses are not
made up from future payments on the Home Improvement Contracts or the Class HI:
B-2 Limited Guaranty.
Losses on Liquidated Home Improvement Contracts
As described above, the distribution of principal to the Class HI: A
Certificateholders is intended to include the Sub-Pool HI Senior Percentage of
the Scheduled Principal Balance of each Home Improvement Contract that became a
Liquidated Contract during the preceding Due Period. If the Net Liquidation
Proceeds from such Liquidated Contract are less than the Scheduled Principal
Balance of such Liquidated Contract plus accrued and unpaid interest thereon,
the deficiency will, in effect, be absorbed by the Class C Certificateholders,
then the Class HI: B-2 Guaranty Fee otherwise payable to the Company, then the
Monthly Servicing Fee otherwise payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company is the Servicer) with respect to
the Home Improvement Contracts, then the Class HI: B-2 Certificateholders, then
the Class HI: B-1 Certificateholders, then the Class HI: M-2 Certificateholders
and then the Class HI: M-1 Certificateholders, since a portion of the Sub-Pool
HI Amount Available equal to such deficiency and otherwise distributable to
them will be paid
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to the Class HI: A Certificateholders. Likewise, to the extent the Class HI: M-
1 Certificateholders, the Class HI: M-2 Certificateholders or the Class HI: B-1
Certificateholders are entitled to receive distributions of principal, similar
deficiencies could result for each Class of Certificates with a lower payment
priority.
If the Sub-Pool HI Amount Available is not sufficient to cover the entire
amount distributable to the Class HI: A Certificateholders, the Class HI: M-1
Certificateholders or the Class HI: M-2 Certificateholders on a particular
Payment Date, then the Sub- Pool HI Senior Percentage on future Payment Dates
may be increased and the Class HI: B Percentage on future Payment Dates may be
reduced as a result of such deficiency.
In the event the Sub-Pool HI Amount Available in the Certificate Account for
any Payment Date is insufficient to distribute the full Sub-Pool HI Formula
Principal Distribution Amount for such Payment Date to the Sub-Pool HI
Certificateholders, the aggregate outstanding Principal Balance of the Sub-Pool
HI Certificates will be greater than the Pool Scheduled Principal Balance of
Sub-Pool HI for such Payment Date. In such event, the amount of such deficiency
(the "Sub-Pool HI Liquidation Loss Amount") would be allocated first to the
Class HI: B-2 Certificates (the "Class HI: B-2 Liquidation Loss Amount"), and
the Company would be obligated to pay the amount of such Class HI: B-2
Liquidation Loss Amount to the Class HI: B-2 Certificateholders pursuant to the
Class HI: B-2 Limited Guaranty. If on any Payment Date the sum of the Class HI:
A Principal Balance, the Class HI: M-1 Principal Balance, the Class HI: M-2
Principal Balance and the Class HI: B-1 Principal Balance were equal to the
Pool Scheduled Principal Balance of Sub-Pool HI, no further Sub-Pool HI
Liquidation Loss Amounts could be allocated to the Class HI: B-2 Certificates
and any further Sub-Pool HI Liquidation Loss Amounts realized would be
allocated to reduce the Class HI: B-1 Adjusted Principal Balance (a "Class HI:
B-1 Liquidation Loss Amount"). If the Class HI: B-1 Adjusted Principal Balance
were reduced to zero, any further Sub-Pool HI Liquidation Loss Amounts realized
would be allocated to reduce the Class HI: M-2 Adjusted Principal Balance (a
"Class HI: M-2 Liquidation Loss Amount"). If the Class HI: M-2 Adjusted
Principal Balance were reduced to zero, any further Sub-Pool HI Liquidation
Loss Amounts realized would be allocated to reduce the Class HI: M-1 Adjusted
Principal Balance (a "Class HI: M-1 Liquidation Loss Amount"). Any such Sub-
Pool HI Liquidation Loss Amounts would be reduced on subsequent Payment Dates
to the extent that the Sub-Pool HI Amount Available in the Certificate Account
on such Payment Dates is sufficient to permit the distribution of principal
due, but not paid, on the Sub-Pool HI Certificates on prior Payment Dates. In
the event the Adjusted Principal Balance of the Class HI: M-1, Class HI: M-2 or
Class HI: B-1 Certificates were reduced by a Sub-Pool HI Liquidation Loss
Amount, interest accruing on such Class would be calculated on the reduced
Adjusted Principal Balance of such Class. The interest accruing on such Class's
Sub-Pool HI Liquidation Loss Amount each month (such Class's "Sub-Pool HI
Liquidation Loss Interest Amount"), plus interest at the applicable Pass-
Through Rate on any Sub-Pool HI Liquidation Loss Interest Amount due on a prior
Payment Date but not paid, would be paid to the Certificateholders of such
Class from the Sub-Pool HI Amount Available, after distributions of principal
on all Class HI: A, Class HI: M and Class HI: B-1 Certificates, in the order of
priority described above under "Subordination of Class HI: M and Class HI: B
Certificates."
But for the effect of the subordination of the Class HI: M-2, Class HI: B and
Class C Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Home Improvement Contracts, the Class HI: M-1
Certificateholders will absorb all losses on each Liquidated Home Improvement
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the effect of the subordination of the Class HI: B and Class C
Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to the Company
and the related Monthly Servicing Fee otherwise payable to the Servicer (so
long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Home Improvement Contracts, the Class HI: M-2
Certificateholders will absorb all losses on each Liquidated Home Improvement
Contract in the amount by which its Net
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Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class HI: B-2 and Class C
Certificates, the Class HI: B-2 Guaranty Fee otherwise payable to the Company
and the related Monthly Servicing Fee otherwise payable to the Servicer (so
long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Home Improvement Contracts, the Class HI: B-1
Certificateholders will absorb all losses on each Liquidated Home Improvement
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the payments under the Class HI: B-2 Limited Guaranty described below
and the subordination of the Class C Certificates, the Class HI: B-2 Guaranty
Fee otherwise payable to the Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with respect to the Home Improvement
Contracts, the Class HI: B-2 Certificateholders will absorb all losses on each
Liquidated Home Improvement Contract in the amount by which its Net Liquidation
Proceeds are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee.
Subordination of Class HE: M Certificates and Class HE: B Certificates
The rights of the holders of the Class HE: M Certificates and Class HE: B
Certificates to receive distributions with respect to the Home Equity Contracts
comprising Sub-Pool HE, as well as any other amounts constituting the Sub-Pool
HE Amount Available, will be subordinated, to the extent described herein, to
such rights of the holders of the Class HE: A Certificates. This subordination
is intended to enhance the likelihood of regular receipt by the holders of the
Class HE: A Certificates of the full amount of their scheduled monthly payments
of interest and principal and to afford such holders protection against losses
on Liquidated Home Equity Contracts.
A portion of the protection afforded to the holders of the Class HE: A
Certificates by means of the subordination of the Class HE: M and Class HE: B
Certificates will be accomplished by the preferential right of the Class HE: A
Certificateholders to receive on any Payment Date the amount of interest due on
the Class HE: A Certificates, including any interest due on a prior Payment
Date but not received, prior to any distribution being made on a Payment Date
in respect of interest on the Class HE: M and Class HE: B Certificates.
Thereafter, any remaining Sub-Pool HE Amount Available in the Certificate
Account will be applied to the payment of interest due on the Class HE: M-1
Adjusted Principal Balance, then interest due on the Class HE: M-2 Adjusted
Principal Balance and then interest due on the Class HE: B Adjusted Principal
Balance.
After payment of all interest then accrued on the Class HE: A Principal
Balance, Class HE: A-5 IO Notional Principal Amount, Class HE: M-1 Adjusted
Principal Balance, Class HE: M-2 Adjusted Principal Balance and Class HE: B
Adjusted Principal Balance, any remaining Sub-Pool HE Amount Available will be
distributed in the following order of priority: first, the Class HE: ARM
Portion will be distributed to the Class HE: A-1A NAS and Class HE: A-1B ARM
Certificateholders; second, the Class HE: A-1 Underlying Portion will be paid
to the Grantor Trust for payment to the Class HE: A-1 Certificateholders;
third, the Class HE: A (2,3,4) Portion will be paid sequentially to the Class
HE: A-2, Class HE: A-3 and Class HE: A-4 Certificateholders; fourth, the Class
HE: M-1 Formula Principal Distribution Amount will be paid to the Class HE: M-1
Certificateholders; and fifth, the Class HE: M-2 Formula Principal Distribution
Amount will be paid to the Class HE: M-2 Certificateholders, as described above
under "Distributions on Sub-Pool HE Certificates--Principal on the Class HE: A,
Class HE: M-1 and Class HE: M-2 Certificates"; thereafter, the remaining Sub-
Pool HE Amount Available, to the extent sufficient therefor, will be
distributed in the following order of priority: first, any unpaid Class HE: M-1
Liquidation Loss Interest Amount (as described below under "Losses on
Liquidated Home Equity Contracts") will be distributed to the Class HE: M-1
Certificateholders; and, finally, any unpaid Class HE: M-2 Liquidation Loss
Interest Amount (as described below under "Losses on Liquidated Home Equity
Contracts") will be distributed to the Class HE: M-2 Certificateholders.
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The rights of the holders of the Class HE: B Certificates to receive
distributions with respect to the Home Equity Contracts and other amounts in
the Certificate Account will be subordinated to such rights of the holders of
the Class HE: A Certificates and Class HE: M Certificates. Thus, the Class HE:
B Certificateholders will be entitled to distributions of interest and
principal on the Class HE: B Certificates only after distributions of all
interest and principal then payable on the Class HE: A and Class HE: M
Certificates.
If a Class HE: B Liquidation Loss Amount is realized for any Payment Date and
the Company fails to pay such amount pursuant to its Class HE: B Limited
Guaranty, the Class HE: B Certificateholders may incur losses on their
investment in the Class HE: B Certificates to the extent such losses are not
made up from future payments on the Home Equity Contracts or the Class HE: B
Limited Guaranty.
Losses on Liquidated Home Equity Contracts
As described above, the distribution of principal to the Class HE: A
Certificateholders is intended to include the Sub-Pool HE Senior Percentage of
the Scheduled Principal Balance of each Home Equity Contract (other than the
Adjustable Rate Contracts) that became a Liquidated Contract during the
preceding Due Period and the Scheduled Principal Balance of each Adjustable
Rate Contract that became a Liquidated Contract during the preceding Due
Period. If the Net Liquidation Proceeds from such Liquidated Contracts are less
than the Scheduled Principal Balance of such Liquidated Contracts plus accrued
and unpaid interest thereon, the deficiency will, in effect, be absorbed by the
Class C Certificateholder, then the Class HE: B Guaranty Fee otherwise payable
to the Company, then the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Home Equity Contracts, then the Class HE:
B Certificateholders, then the Class HE: M-2 Certificateholders and then the
Class HE: M-1 Certificateholders, since a portion of the Sub-Pool HE Amount
Available equal to such deficiency and otherwise distributable to them will be
paid to the Class HE: A Certificateholders. Likewise, to the extent the Class
HE: M-1 Certificateholders or the Class HE: M-2 Certificateholders are entitled
to receive distributions of principal, similar deficiencies could result for
each Class of Sub-Pool HE Certificates with a lower payment priority.
In the event the Sub-Pool HE Amount Available in the Certificate Account for
any Payment Date is insufficient to distribute the full Sub-Pool HE Formula
Principal Distribution Amount for such Payment Date to the Sub-Pool HE
Certificateholders, the aggregate outstanding Principal Balance of the Sub-Pool
HE Certificates will be greater than the Pool Scheduled Principal Balance of
Sub-Pool HE for such Payment Date. In such event, the amount of such deficiency
(the "Sub-Pool HE Liquidation Loss Amount") would be allocated first to the
Class HE: B Certificates (the "Class HE: B Liquidation Loss Amount"), and the
Company would be obligated to pay the amount of such Class HE: B Liquidation
Loss Amount to the Class HE: B Certificateholders pursuant to the Class HE: B
Limited Guaranty. If on any Payment Date the sum of the Class HE: A Principal
Balance, the Class HE: M-1 Principal Balance and the Class HE: M-2 Principal
Balance were equal to the Pool Scheduled Principal Balance of Sub-Pool HE, no
further Sub-Pool HE Liquidation Loss Amounts could be allocated to the Class
HE: B Certificates and any further Sub-Pool HE Liquidation Loss Amounts
realized would be allocated to reduce the Class HE: M-2 Adjusted Principal
Balance (a "Class HE: M-2 Liquidation Loss Amount"). If the Class HE: M-2
Adjusted Principal Balance were reduced to zero, any further Sub-Pool HE
Liquidation Loss Amounts realized would be allocated to reduce the Class HE: M-
1 Adjusted Principal Balance (a "Class HE: M-1 Liquidation Loss Amount"). Any
such Sub-Pool HE Liquidation Loss Amounts would be reduced on subsequent
Payment Dates to the extent that the Sub-Pool HE Amount Available in the
Certificate Account on such Payment Dates is sufficient to permit the
distribution of principal due, but not paid, on the Sub-Pool HE Certificates on
prior Payment Dates. In the event the Adjusted Principal Balance of the Class
HE: M-1 or Class HE: M-2 Certificates were reduced by a Sub-Pool HE Liquidation
Loss Amount, interest accruing on such Class would be calculated on the reduced
Adjusted Principal Balance of such Class. The interest accruing on such Class's
Sub-Pool HE Liquidation Loss Amount each month (such Class's "Sub-Pool HE
Liquidation Loss Interest Amount"), plus interest at the applicable Pass-
Through Rate on any Sub-Pool HE Liquidation Loss Interest Amount due on a prior
Payment Date but not paid, would be paid to the Certificateholders of such
Class from the Sub-Pool
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HE Amount Available, after distributions of principal on all Class HE: A and
Class HE: M Certificates, in the order of priority described above under
"Subordination of Class HE: M and Class HE: B Certificates."
If the Sub-Pool HE Amount Available is not sufficient to cover the entire
amount distributable to the Class HE: A Certificateholders, the Class HE: M-1
Certificateholders or the Class HE: M-2 Certificateholders on a particular
Payment Date, then the Sub-Pool HE Senior Percentage on future Payment Dates
may be increased and the Class HE: B Percentage on future Payment Dates may be
reduced as a result of such deficiency.
But for the effect of the subordination of the Class HE: M-2, Class HE: B and
Class C Certificates, the Class HE: B Guaranty Fee otherwise payable to the
Company and the related Monthly Servicing Fee otherwise payable to the Servicer
(so long as the Company or any wholly owned subsidiary of the Company is the
Servicer) with respect to the Home Equity Contracts, the Class HE: M-1
Certificateholders will absorb all losses on each Liquidated Home Equity
Contract in the amount by which its Net Liquidation Proceeds are less than its
unpaid principal balance plus accrued and unpaid interest thereon less the
related Monthly Servicing Fee.
But for the effect of the subordination of the Class HE: B and Class C
Certificates, the Class HE: B Guaranty Fee otherwise payable to the Company and
the related Monthly Servicing Fee otherwise payable to the Servicer (so long as
the Company or any wholly owned subsidiary of the Company is the Servicer) with
respect to the Home Equity Contracts, the Class HE: M-2 Certificateholders will
absorb all losses on each Liquidated Home Equity Contract in the amount by
which its Net Liquidation Proceeds are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee.
But for the payments under the Class HE: B Limited Guaranty described below
and the subordination of the Class C Certificate, the Class HE: B Guaranty Fee
otherwise payable to the Company and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with respect to the Home Equity
Contracts, the Class HE: B Certificateholders will absorb all losses on each
Liquidated Home Equity Contract in the amount by which its Net Liquidation
Proceeds are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee.
Advances
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a Delinquent Payment on a Contract only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
Reports to Certificateholders
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class
HI: A Certificates allocable to interest (separately identifying any
unpaid interest shortfall included);
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(b) the amount of such distribution to holders of each Class of Class
HI: A Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
(c) the amount, if any, by which the Class HI: A Formula Distribution
Amount exceeds the Class HI: A Distribution Amount for such Payment
Date;
(d) the Principal Balance of each Class of Class HI: A Certificates
after giving effect to the distribution of principal on such Payment
Date;
(e) the Sub-Pool HI Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(g) the Sub-Pool HI Pool Factor (a percentage derived from a fraction
the numerator of which is the sum of the Class HI: A Principal Balance,
the Class HI: M Principal Balance and the Class HI: B Principal Balance
and the denominator of which is the Cut-off Date Pool Principal Balance
of Sub-Pool HI); and
(h) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HI: A Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: M-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HI: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: M-1
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
(c) the amount, if any, by which the Class HI: M-1 Formula Distribution
Amount exceeds the Class HI: M-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: M-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: M-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HI: M-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: M-1 Certificate.
(b) the amount of such distribution to holders of the Class HI: M-2
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments and any Sub-Pool HI
Supplementary Principal Distribution Amount included);
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(c) the amount, if any, by which the Class HI: M-2 Formula Distribution
Amount exceeds the Class HI: M-2 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: M-2 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: M-2 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HI Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HI: M-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: B-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HI: B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HI: B-1
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HI: B-1 Formula Distribution
Amount exceeds the Class HI: B-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HI: B-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HI: B-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Class HI: B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(h) the Sub-Pool HI Pool Factor; and
(i) the number and aggregate principal balance of Sub-Pool HI
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HI: B-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HI: B-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class HI: B-2
Certificates allocable to interest;
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(b) the amount of such distribution to holders of Class HI: B-2
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class HI: B-2 Formula
Distribution Amount and the Class HI: B-2 Liquidation Loss Principal
Amount, if any, exceeds the Class HI: B-2 Distribution Amount for such
Payment Date;
(d) the Class HI: B-2 Liquidation Loss Principal Amount, if any, for
such Payment Date;
(e) the Class HI: B-2 Guaranty Payment, if any, for such Payment Date;
(f) the Class HI: B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class HI: B Percentage for such Payment Date;
(h) the Pool Scheduled Principal Balance of Sub-Pool HI for such
Payment Date;
(i) the Sub-Pool HI Pool Factor; and
(j) the number and aggregate principal balance of Home Improvement
Contracts delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed
as dollar amounts for a Class HI: B-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HI: B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HI: B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: A Certificateholder, statements in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class
HE: A Certificates allocable to interest (separately identifying any
unpaid interest shortfall included) and, in the case of a Class HE: A-1
Certificateholder, the amount, if any, paid by the Swap Counterparty;
(b) the amount of such distribution to holders of each Class of Class
HE: A Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: A Formula Distribution
Amount exceeds the Class HE: A Distribution Amount for such Payment
Date;
(d) the Principal Balance of each Class of Class HE: A Certificates and
the Notional Principal Amount for the Class HE: A-5 IO Certificates
after giving effect to the distribution of principal on such Payment
Date;
(e) the amounts to be paid to and by the Swap Counterparty on the
related Swap Payment Date;
(f) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(g) the Sub-Pool HE Pool Factor (a percentage derived from a fraction
the numerator of which is the sum of the Class HE: A Principal Balance,
the Class HE: M Principal Balance and the Class HE: B Principal Balance
and the denominator of which is the Cut-off Date Pool Principal Balance
of Sub-Pool HE); and
(h) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HE: A Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: A Certificate.
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In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: M-1 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HE: M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: M-1
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: M-1 Formula Distribution
Amount exceeds the Class HE: M-1 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HE: M-1 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HE: M-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HE: M-1 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: M-2 Certificateholder, a statement in respect
of the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class HE: M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class HE: M-2
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class HE: M-2 Formula Distribution
Amount exceeds the Class HE: M-2 Distribution Amount for such Payment
Date;
(d) the Principal Balance of the Class HE: M-2 Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) any unpaid Class HE: M-2 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Sub-Pool HE Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(h) the Sub-Pool HE Pool Factor; and
(i) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
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Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class HE: M-2 Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class HE: B Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class HE: B
Certificates allocable to interest;
(b) the amount of such distribution to holders of Class HE: B
Certificates allocable to principal (separately identifying the
aggregate amount of any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class HE: B Formula
Distribution Amount and the Class HE: B Liquidation Loss Principal
Amount, if any, exceeds the Class HE: B Distribution Amount for such
Payment Date;
(d) the Class HE: B Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) the Class HE: B Guaranty Payment, if any, for such Payment Date;
(f) the Class HE: B Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class HE: B Percentage for such Payment Date;
(h) the Pool Scheduled Principal Balance of Sub-Pool HE for such
Payment Date;
(i) the Sub-Pool HE Pool Factor; and
(j) the number and aggregate principal balance of Home Equity Contracts
delinquent (i) 30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed
as dollar amounts for a Class HE: B Certificate with a 1% Percentage Interest
or per $1,000 denomination of Class HE: B Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class HE: B
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
Repurchase Option
The Agreement provides that at any time that the Pool Scheduled Principal
Balance of the Contract Pool is less than 10% of the aggregate Principal
Balance of the Certificates on the Closing Date, the Servicer will have the
option to repurchase, on 30 days' prior written notice to the Trustee, all
outstanding Contracts (other than any Contract as to which title to the
underlying property has been assigned) at a price sufficient to pay (i) the
Aggregate Certificate Principal Balance, (ii) the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase and (iii) any accrued but unpaid interest thereon, including
interest (to the extent not paid on a prior Payment Date) on the Class HE: A-1B
ARM Certificates for any Payment Date with respect to which the Available Funds
Pass-Through Rate was less than one-month LIBOR plus the Pass-Through Margin
(or 14.0% if less), calculated on the Class HE: A-1B ARM Principal Balance for
such Payment Date at a rate equal to such difference, plus interest on such
amount accrued from such Payment Date to the Payment Date on which such amount
is paid. Such amount will be distributed on such Payment Date.
Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by FHA and
otherwise consistent with the highest degree of skill and
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care that the Servicer exercises with respect to similar contracts (including
manufactured housing contracts) serviced by the Servicer. The Servicer will not
be required to cause to be maintained, or otherwise monitor the maintenance of,
hazard insurance on the improved properties, but is required under FHA
regulations to monitor and ensure the maintenance of flood insurance on
properties securing FHA-insured Home Improvement Contracts located in federally
designated special flood hazard areas. The Company does, however, as a matter
of its own policy, monitor proof of hazard insurance coverage (other than flood
insurance) and require that it be named as an additional loss payee on all
first lien secured contracts and generally on junior lien secured contracts
with amounts financed of over $20,000.
Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Contracts comprising
each Sub-Pool equal to one-twelfth of the product of .50% and the remaining
Pool Scheduled Principal Balance of the Contracts in such Sub-Pool plus the
related Pre-Funded Amount (if any).
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Contract (including FHA Insurance proceeds) for customary out-of-
pocket liquidation expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with the servicing of the Contracts and paid by
the Servicer from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts or foreclosure on
collateral relating thereto (including submission of FHA Insurance claims, if
applicable), payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders.
Evidence as to Compliance
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before May 1 of each year, beginning in 1999, the Servicer will deliver to the
Trustee a report of a nationally recognized accounting firm, stating that such
firm has examined certain documents and records relating to the servicing of
loans serviced by the Servicer and stating that, on the basis of such
examination, such servicing has been conducted in compliance with the
Agreement, except for any exceptions set forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
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Transferability
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
Certain Matters Relating to the Company
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
Events of Termination
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four Business Days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its debts as they become due, or takes any
corporate action in furtherance of the foregoing; (f) the Servicer fails to be
an Eligible Servicer; or (g) the Servicer's seller-servicer contract with GNMA
is terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon an Event of Termination
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Contracts for breach of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement. In addition,
the Trustee will notify FHA of the Servicer's termination as Servicer of the
FHA-insured Home Improvement Contracts and will request that the portion of the
Servicer's FHA Insurance reserves allocable to the FHA-insured Home Improvement
Contracts be transferred to the Trustee or a successor Servicer. See
"Description of FHA Insurance" in the Prospectus. Notwithstanding such
termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Contracts for breaches of representations or
warranties under the Agreement. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, an
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Eligible Servicer to act as successor to the Servicer under the Agreement. The
Trustee and such successor may agree upon the servicing compensation to be paid
(after receiving comparable bids from other Eligible Servicers), which may not
be greater than the Monthly Servicing Fee payable to the Company as Servicer
under the Agreement without the consent of all of the Certificateholders.
Termination of the Agreement
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment Date
on which the Pool Scheduled Principal Balance of the Contract Pool is reduced
to zero; or (b) the Payment Date occurring in the month following the
Servicer's repurchase of the Contracts as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
Amendment; Waiver
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
Moody's and Fitch shall have confirmed that the ratings of the Certificates
will not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Contracts or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
Indemnification
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or any
affiliate thereof of any real estate securing a Contract, (b) for any taxes
which may at any time be asserted with respect to, and as of the date of, the
conveyance of the Contracts to the Trust (but not including any federal, state
or other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Contract.
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Duties and Immunities of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Certificate Account by the Servicer. If no
Event of Termination has occurred, the Trustee will be required to perform only
those duties specifically required of it under the Agreement. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties thereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
The Trustee
[Trustee/Address].
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee. Any successor Trustee must be an FHA Title I approved
lender.
The Grantor Trust Agreement
On the Closing Date, pursuant to the Grantor Trust Agreement, the Company
will transfer, assign, set over and otherwise convey without recourse to the
Grantor Trustee in trust all of its right, title and interest in and to the
Class HE: A-1 Underlying Certificates and to the principal and interest due
thereon.
U.S. Bank Trust National Association serves as the Grantor Trustee under the
Grantor Trust Agreement. The Grantor Trustee may resign from its duties or be
removed under substantially the same circumstances as the Trustee may resign or
be removed under the Agreement. Likewise, the Grantor
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Trust Agreement may be amended under substantially the same circumstances as
the Agreement may be amended. The Grantor Trust Agreement provides that the
Grantor Trust will terminate upon payment to the Class HE: A-1
Certificateholders of all amounts required to be paid to them upon the final
payment of the Class HE: A-1 Underlying Certificates.
Registration of the Certificates
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on behalf
of the CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic book-
entry changes in accounts of Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and interest
on, the Certificates from the Trustee through DTC and Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
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Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust
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companies, clearing corporations and certain other organizations and may
include the Underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DESCRIPTION OF THE SWAP COUNTERPARTY AND THE SWAP AGREEMENT
The Swap Counterparty
The Swap Counterparty, Westdeutsche Landesbank Girozentrale ("WestLB"), which
traces its history to 1832, was created by the merger of two central banks, or
Landesbanks (German State Banks), in the State of North Rhine-Westphalia,
Germany on January 1, 1969. As a German universal bank,
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WestLB provides commercial and investment banking services regionally,
nationally and internationally to public, corporate and bank customers.
The New York Branch of WestLB ("WestLB New York") is licensed and subject to
supervision and regulation by the Superintendent of Banks of the State of New
York. WestLB New York is examined by the New York State Banking Department and
is subject to banking laws and regulations applicable to a foreign bank that
operates a New York branch.
Upon written request, WestLB will provide without charge to each person to
whom this prospectus supplement is delivered a copy of WestLB's most recent
annual report. Written requests for such annual reports or any additional
information concerning WestLB should be directed to Westdeutsche Landesbank
Girozentrale, New York Branch, 1211 Avenue of the Americas, New York, New York
10036, Attention: Branch Management.
The Swap Agreement
The Swap Agreement will provide for payments by (i) the Swap Counterparty to
the Grantor Trust equal to the amount of interest due to the Class HE: A-1
Certificateholders on a Payment Date (calculated based on a floating rate), and
(ii) the Grantor Trust to the Swap Counterparty equal to the amount of interest
received by the Grantor Trust in respect of interest due on the Class HE: A-1
Underlying Certificates on a Payment Date (calculated based on a fixed rate).
All amounts due under the Swap Agreement will be netted thereunder. If the
resulting net amount is due to the Grantor Trust, it will be deposited by the
Trustee into the Grantor Trust Account for distribution to the Class HE: A-1
Certificateholders. If the resulting net amount is due to the Swap Counterparty
it will be paid out of funds on deposit in the Grantor Trust Account. The
Trustee will be the calculation agent for purposes of determining the amounts
due by either party.
In addition to the terms set forth above, it is expected that the Swap
Agreement will have such additional terms and conditions as are necessary to
ensure that the Swap Counterparty does not bear the risk of any shortfall
attributable to defaulted payment obligations on the Group I Fixed-Rate Home
Equity Contracts. The Swap Agreement will not provide credit enhancement for
the Class HE: A-1 Certificates.
The Swap Agreement will be governed by and construed in accordance with the
law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation.
The obligations of the Swap Counterparty are limited to those specifically
set forth in the Swap Agreement.
The Swap Agreement will have a termination date that is the earlier to occur
of (a) January 15, 2014 or (b) the date on which there are no further amounts
due on the Class HE: A-1 Underlying Certificates. An early termination of the
Swap Agreement may occur on such date designated by either the Trustee or the
Swap Counterparty as an early termination date with respect to the Swap
Agreement following a payment default by the Swap Counterparty or the Trustee,
respectively, or the occurrence of certain other customary early termination
events. One such other early termination event would be the withdrawal or
reduction of the senior debt rating of WestLB (presently rated Aa1 by Moody's
and AAA by Fitch) to below a level acceptable to Fitch and Moody's and the
failure of WestLB thereupon to either deposit certain amounts as collateral
pursuant to a collateral security agreement or secure a replacement swap
counterparty acceptable to Fitch and Moody's to maintain the ratings of the
Class HE: A-1 Certificates. In the event of an early termination, a termination
fee may be payable by the Swap Counterparty to the Grantor Trust. Upon the
occurrence of an early termination, even if a collateral deposit is made or a
termination fee is paid, the Class HE: A-1 Certificateholders could incur
interest payment shortfalls and ultimate loss on the Class HE: A-1
Certificates. Upon the termination of the Swap Agreement, holders of the Class
HE: A-1 Certificates would receive only the fixed Pass-Through Rate on the
Class HE: A-1 Underlying Certificates.
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DESCRIPTION OF THE LIMITED GUARANTIES
Class HI: B-2 Limited Guaranty
In order to mitigate the effect of the subordination of the Class HI: B-2
Certificates and liquidation losses and delinquencies on the Home Improvement
Contracts, the Company will provide a guaranty (the "Class HI: B-2 Limited
Guaranty") against losses that would otherwise be borne by the Class HI: B-2
Certificates. Each payment required to be made under the Class HI: B-2 Limited
Guaranty is referred to as a "Class HI: B-2 Guaranty Payment." Prior to the
Class HI: B-1 Cross-over Date, and on any Payment Date on or after the Class
HI: B-1 Cross-over Date on which a Class HI: B Principal Distribution Test is
not satisfied, the Class HI: B-2 Guaranty Payment will equal the amount, if
any, by which (i) the sum of (a) the Class HI: B-2 Formula Distribution Amount
for such Payment Date (which will be equal to accrued and unpaid interest on
the Class HI: B-2 Certificates) and (b) the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (ii) the Class HI: B-2
Distribution Amount for such Payment Date. The Class HI: B-2 Liquidation Loss
Principal Amount for any Payment Date equals the amount, if any, by which the
sum of the Class HI: A Principal Balance, the Class HI: M Principal Balance and
the Class HI: B Principal Balance for such Payment Date exceeds the Pool
Scheduled Principal Balance of Sub-Pool HI for such Payment Date (but in no
event greater than the Class HI: B-2 Principal Balance). The Class HI: B-2
Liquidation Loss Principal Amount is, in substance, the amount of delinquencies
and losses experienced on the Home Improvement Contracts during the related Due
Period that was not absorbed by the Class C Certificate and the related Monthly
Servicing Fee otherwise payable to the Company (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) with respect to the
Home Improvement Contracts. On each Payment Date on or after the Class HI: B-1
Cross-over Date, if each Class HI: B Principal Distribution Test is satisfied
on such Payment Date (or the Class HI: A Principal Balance and the Class HI: M
Principal Balance have been reduced to zero), the Class HI: B-2 Guaranty
Payment will equal the amount, if any, by which (a) the sum of (i) the Class
HI: B-2 Formula Distribution Amount for such Payment Date (which will include
both interest and principal) and (ii) the Class HI: B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (b) the Class HI: B-2
Distribution Amount for such Payment Date.
The Class HI: B-2 Limited Guaranty will be an unsecured general obligation of
the Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class HI: B-2 Limited Guaranty will not benefit in
any way, or result in any payment to, the Class HI: A, Class HI: M or Class HI:
B-1 Certificateholders.
As compensation for providing the Class HI: B-2 Limited Guaranty, the Company
will be entitled to receive a Class HI: B-2 Guaranty Fee on each Payment Date
equal to the lesser of (a) the Sub-Pool HI Amount Available less the Class HI:
A Distribution Amount, the Class HI: M-1 Distribution Amount, the Class HI: M-2
Distribution Amount, the Class HI: B-1 Distribution Amount, the Class HI: B-2
Distribution Amount, the Monthly Servicing Fee and certain other amounts
required to be paid to the Servicer, the Trustee, the Class C Certificateholder
and the Company (see "Description of the Certificates--Payments on Contracts"),
and (b) an amount equal to 1/12th of the product of 3% and the Pool Scheduled
Principal Balance of Sub-Pool HI plus the Sub-Pool HI Pre-Funded Amount for the
immediately preceding Payment Date.
Class HE: B Limited Guaranty
In order to mitigate the effect of the subordination of the Class HE: B
Certificates and liquidation losses and delinquencies on the Home Equity
Contracts, the Company will provide a guaranty (the "Class HE: B Limited
Guaranty") against losses that would otherwise be borne by the Class HE: B
Certificates. Each payment required to be made under the Class HE: B Limited
Guaranty is referred to as a "Class HE: B Guaranty Payment." Prior to the Class
HE: B-1 Cross-over Date, and on any Payment Date on or after the Class HE: B
Cross-over Date on which a Class HE: B Principal Distribution Test is not
satisfied, the Class B Guaranty Payment will equal the amount, if any, by which
(i) the sum of (a) the
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Class HE: B Formula Distribution Amount for such Payment Date (which will be
equal to accrued and unpaid interest on the Class HE: B Certificates) and (b)
the Class HE: B Liquidation Loss Principal Amount, if any, for such Payment
Date exceeds (ii) the Class HE: B Distribution Amount for such Payment Date.
The Class HE: B Liquidation Loss Principal Amount for any Payment Date equals
the amount, if any, by which the sum of the Class HE: A Principal Balance, the
Class HE: M Principal Balance and the Class HE: B Principal Balance for such
Payment Date exceeds the Pool Scheduled Principal Balance of Sub-Pool HE for
such Payment Date (but in no event greater than the Class HE: B Principal
Balance). The Class HE: B Liquidation Loss Principal Amount is, in substance,
the amount of delinquencies and losses experienced on the Home Equity Contracts
during the related Due Period that was not absorbed by the Class C Certificate
and the related Monthly Servicing Fee otherwise payable to the Company (so long
as the Company or any wholly owned subsidiary of the Company is the Servicer)
with respect to the Home Equity Contracts. On each Payment Date on or after the
Class HE: B-1 Cross-over Date, if each Class HE: B Principal Distribution Test
is satisfied on such Payment Date (or the Class HE: A Principal Balance and the
Class HE: M Principal Balance have been reduced to zero), the Class HE: B
Guaranty Payment will equal the amount, if any, by which (a) the sum of (i) the
Class HE: B Formula Distribution Amount for such Payment Date (which will
include both interest and principal) and (ii) the Class HE: B Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (b) the Class HE: B
Distribution Amount for such Payment Date.
The Class HE: B Limited Guaranty will be an unsecured general obligation of
the Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class HE: B Limited Guaranty will not benefit in
any way, or result in any payment to, the Class HE: A or Class HE: M
Certificateholders.
As compensation for providing the Class HE: B Limited Guaranty, the Company
will be entitled to receive a Class HE: B Guaranty Fee on each Payment Date
equal to the lesser of (a) the Sub-Pool HE Amount Available less the Class HE:
A Distribution Amount, the Class HE: M-1 Distribution Amount, the Class HE: M-2
Distribution Amount, the Class HE B-1 Distribution Amount, the Class HE B
Distribution Amount, the Monthly Servicing Fee and certain other amounts
required to be paid to the Servicer, the Trustee, the Class C Certificateholder
and the Company (see "Description of the Certificates--Payments on Contracts"),
and (b) an amount equal to 1/12th of the product of 3% and the Pool Scheduled
Principal Balance of Sub-Pool HE plus the Sub-Pool HE Pre-Funded Amount for the
immediately preceding Payment Date.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
REMIC Election
Upon the issuance of the Certificates, [Company Counsel], counsel to the
Company, will deliver its opinion that, assuming that two separate elections
are made to treat segregated portions of the assets of the Trust as REMICs
(respectively, the "Master REMIC" and the "Subsidiary REMIC"), and further
assuming ongoing compliance with the terms of the Agreement, the Master REMIC
and the Subsidiary REMIC will each qualify as a REMIC, the Subsidiary REMIC
Regular Interests, which are not being offered hereunder, will be treated as
"regular interests" in the Subsidiary REMIC, and each Class of Sub-Pool HI
Certificates and Sub-Pool HE Certificates (other than the Class HE: A-1
Certificates) and the Class HE: A-1 Underlying Certificates will be treated as
"regular interests" in the Master REMIC for federal income tax purposes. The
Class C Subsidiary Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Subsidiary REMIC, and
the Class C Master Certificate, which is not being offered hereby, will
constitute the sole class of "residual interests" in the Master REMIC.
Other than the Class HE: A-5 IO Certificates, it is not anticipated that any
of the Certificates will be issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used to determine
the rate of accrual of original issue discount, market discount and premium, if
any, will be based on the assumption that the Contracts will prepay at a rate
equal to 100% of the applicable Prepayment Assumption as to the Home
Improvement Contracts comprising Sub-Pool HI and 125% of the applicable
Prepayment Assumption as to the Fixed-Rate Home Equity Contracts included in
Sub-Pool HE and 30% CPR as to the Adjustable Rate Contracts included in Sub-
Pool HE.
Although the tax treatment is not entirely certain, the Class HE: A-5 IO
Certificates will be treated as having been issued with original issue discount
for federal income tax purposes equal to the excess of all expected payments of
interest on such Certificates over their issue price. Although unclear, a
holder of a Class HE: A-5 IO Certificate may be entitled to deduct a loss to
the extent that its remaining basis exceeds the maximum amount of future
payments to which such Certificateholder would be entitled if there were no
further prepayments of the Home Equity Contracts.
Certificates (but with respect to the Class HE: A-1 Certificates, only to the
extent of the Class HE: A-1 Underlying Certificates) held by financial
institutions, thrift institutions taxed as domestic building and loan
associations and real estate investment trusts will represent interests in
"loans secured by an interest in real property" and "real estate assets" for
purposes of Sections 7701(a)(19)(C) and 856(c)(4) of the Code, respectively, in
the same proportion that the assets in the Master REMIC consist of qualifying
assets under such sections. Furthermore, interest paid with respect to
Certificates held by a real estate investment trust will be considered to be
"interest on obligations secured by mortgages on real property or on interests
in real property" for purposes of Section 856(c)(3) of the Code to the extent
that such Certificates (but with respect to the Class HE: A-1 Certificates,
only to the extent of the Class HE: A-1 Underlying Certificates) are treated as
"real estate assets" under Section 856(c) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
Grantor Trust
Briggs and Morgan, Professional Association, counsel to the Company, will
deliver its opinion that for federal income tax purposes, assuming compliance
with the terms of the Grantor Trust Agreement, the Grantor Trust created
pursuant to the Grantor Trust Agreement will constitute a grantor trust under
Subpart E, Part I of Subchapter J of the Code, and not an association taxable
as a corporation. A holder of a Class HE: A-1 Certificate issued by the Grantor
Trust will be treated as the owner of an undivided interest in the Class HE: A-
1 Underlying Certificates (which are "regular interests" in a REMIC), the Swap
Agreement and other assets held by the Grantor Trust. See "Certain Federal
Income Tax Consequences--Non-REMIC Series" in the Prospectus.
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A holder of Class HE: A-1 Certificates will be required to allocate the
purchase price between the holder's ownership interest in the various assets of
the Grantor Trust. In general, the allocation would be based on the relative
fair market values of such assets on the date Class HE: A-1 Certificate was
purchased. The Company will make no representation as to such relative fair
market values and a holder of Class HE: A-1 Certificates should consult its tax
adviser concerning the determination of such fair market values and the
taxation of the holder's interest in the Swap Agreement, the tax treatment of
which is generally governed by the provisions of the Code and Treasury
regulations relating to notional principal contracts and straddles.
A holder of a Class HE: A-1 Certificate must report ordinary income equal to
its share of the interest payable with respect to the Class HE: A-1 Underlying
Certificates and a proportionate share of the net amounts payable to the
Grantor Trust under the Swap Agreement, and may deduct the expenses incurred by
the Grantor Trust that are allocable to such Certificate (including net
payments under the Swap Agreement), at the same time and to the same extent as
such items would be reported by such holder if it had purchased and held
directly the assets held by the Grantor Trust and incurred directly its share
of expenses incurred by the Grantor Trust. A holder of a Class HE: A-1
Certificate that is an individual, estate or trust should consult its tax
adviser concerning possible limitations on the deductibility of expenses of the
Grantor Trust. For further information regarding federal income tax
consequences of investing in the Class HE: A-1 Certificates, see "Certain
Federal Income Tax Consequences--Tax Status of Non-REMIC Certificates" in the
Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class HI: A Certificates and the Class HE: A Certificates,
other than the Class HE: A-1 Certificates, without regard to the ERISA
restrictions described above, subject to applicable provisions of other federal
and state laws. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
The U.S. Department of Labor ("DOL") has granted an administrative exemption
to [Underwriter] (Prohibited Transaction Exemption No. ; Exemption
Application No. , Fed. Reg. ( )) (the "Exemption") from certain of
the prohibited transaction rules of ERISA and the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of
certificates representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The receivables covered by the
Exemption include home improvement contracts and home equity loans such as the
Contracts. The Exemption will apply to the acquisition, holding, and resale of
the Class HI: A Certificates and the Class HE: A Certificates, other than the
Class HE: A-1 Certificates, (together, the "Exempted Certificates") by a Plan,
provided that specified conditions (certain of which are described below) are
met.
Among the conditions which must be satisfied for the Exemption to apply to
the Exempted Certificates are the following:
(1) The acquisition of the Exempted Certificates by a Plan is on terms
(including the price for the Exempted Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Exempted Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
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(3) The Exempted Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either Moody's, Fitch, S&P, Duff & Phelps Credit
Rating Co. (the "Exemption Rating Agencies");
(4) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection with the
distribution of the Exempted Certificates represents not more than
reasonable compensation for underwriting the Exempted Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Contracts to the Trust represents not more than
the fair market value of such Contracts. The sum of all payments made to
and retained by the Servicer represents not more than reasonable
compensation for the Servicer's services under the Agreement and
reimbursement of the Servicer's reasonable expenses in connection
therewith; and
(6) The Plan investing in the Exempted Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Exempted Certificates in
connection with the initial issuance, at least 50% of the Exempted Certificates
are acquired by persons independent of the Restricted Group, (ii) the Plan's
investment in Exempted Certificates does not exceed 25% of all of the Exempted
Certificates outstanding at the time of the acquisition and (iii) immediately
after the acquisition, no more than 25% of the assets of the Plan are invested
in certificates representing an interest in one or more trusts containing
assets sold or serviced by the same entity. The Exemption does not apply to
Plans sponsored by the Company, the Underwriters, the Trustee, the Servicer,
any obligor with respect to Contracts included in the Trust constituting more
than 5% of the aggregate unamortized principal balance of the assets in the
Trust or any affiliate of such parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to each Sub-Pool, the amendment
will generally allow related Contracts supporting payments to related
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the related Certificates, to be transferred to the Trust
during the Pre-Funding Period, instead of requiring that all such Contracts be
either identified or transferred on or before the Closing Date. In general, the
relief applies to the purchase, sale and holding of Certificates which
otherwise qualify for the Exemption, provided that the following general
conditions are met:
(1) the ratio of the amount allocated to the related Pre-Funding Account to
the total principal amount of the related Certificates being offered must
be less than or equal to 25%;
(2) all Subsequent Home Equity Contracts and Subsequent Home Improvement
Contracts transferred to the related Sub-Pool after the Closing Date must
meet the same terms and conditions for eligibility as the Initial Home
Equity Contracts or Initial Home Improvement Contracts, as the case may be,
which terms and conditions have been approved by one of the Exemption
Rating Agencies;
(3) the transfer of the Subsequent Home Equity Contracts and Subsequent
Home Improvement Contracts to the Trust during the Pre-Funding Period must
not result in the Certificates to be covered by the Exemption receiving a
lower credit rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for each of
Sub-Pool HE and Sub-Pool HI at the end of the Pre-Funding Period must not
be more than 100 basis points lower than the Average Interest Rate for the
Initial Home Equity Contracts and the Initial Home Improvement Contracts,
respectively;
(5) for transactions occurring on or after May 23, 1997, either:
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<PAGE>
(i) the characteristics of the Subsequent Home Equity Contracts and
Subsequent Home Improvement Contracts must be monitored by an insurer
or other credit support provider which is independent of the Company;
or
(ii) an independent accountant retained by the Company must provide the
Company with a letter (with copies provided to the Exemption Rating
Agency rating the Certificates, the Underwriter and the Trustee)
stating whether or not the characteristics of the Subsequent Home
Equity Contracts and the Subsequent Home Improvement Contracts conform
to the characteristics described in the Prospectus or Prospectus
Supplement and/or the Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Initial Home Equity Contracts and the Initial Home
Improvement Contracts, respectively;
(6) the Funding Period must end no later than three months or 90 days after
the Closing Date or earlier in certain circumstances if the related Pre-
Funding Account falls below the minimum level specified in the Agreement or
an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemption, Rating
Agencies rating the Certificates, and such investments must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof (provided that such obligations are
backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemption Rating
Agencies;
(8) the Prospectus or Prospectus Supplement must describe the duration of
the Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts to provide
trust services) must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemption, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-funding account that was used only to acquire assets that
are specifically identified by the sponsor or originator as of the closing
date, but transferred to the trust after the closing date for administrative or
other reasons. Although the Pre-Funding Accounts may not satisfy the conditions
of the amendment in that each Pre-Funding Account may exceed 25% of the total
principal amount of the related Certificates, funds in the Pre-Funding Accounts
in excess of such 25% threshold will be used by the Trust solely to purchase
Subsequent Home Equity Loans or Subsequent Home Improvement Loans, as
applicable, in accordance with the Agreement from a fixed pool of loans that
will have been specifically identified prior to the Closing Date. It is
expected that all of the loans in such fixed pool, except for those which are
determined not to meet the criteria for purchase set forth in the Agreement,
will be acquired using the related Pre-Funded Account. Accordingly, the Company
believes that the existence of the Pre-Funding Accounts should not cause the
Exemption to be inapplicable.
The Company believes that the Exemption will apply to the acquisition and
holding of the Exempted Certificates sold by the Underwriters and by Plans and
that all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, no obligor with
respect to Contracts included in the Trust constitutes more than 5% of the
aggregate unamortized principal balance of the assets of the Trust. Any Plan
fiduciary who proposes to cause a Plan to purchase
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<PAGE>
the Exempted Certificates should consult with its own counsel with respect to
the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of the Exempted Certificates. Assets of a Plan or individual
retirement account should not be invested in the Exempted Certificates unless
it is clear that the assets of the Trust will not be plan assets or unless it
is clear that the Exemption or a prohibited transaction class exemption will
apply and exempt all potential prohibited transactions. See "ERISA
Considerations" in the Prospectus.
In addition to the Exemption, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, and PTCE 91-38,
which exempts certain transactions involving employee benefit plans and bank
collective investment funds. There also may be other exemptions applicable to a
particular transaction involving the Trust. A Plan that intends to acquire any
class of the Certificates should consult with its own counsel regarding whether
such investment would cause a prohibited transaction to occur and whether the
terms and conditions of an applicable class exemption may be satisfied.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL published
proposed regulations ("Proposed 401(c) Regulations") on December 22, 1997 to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute Plan assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the Proposed 401(c) Regulations become final,
no person will be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute Plan assets, unless (i) as
otherwise provided by the Secretary of Labor in the Proposed 401(c) Regulations
to prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the Proposed 401(c)
Regulations may be treated as Plan assets. In addition, because Section 401(c)
does not relate to insurance company separate accounts, separate account assets
are still treated as Plan assets of any Plan invested in such separate account.
Insurance companies contemplating the investment of general account assets in
the Certificates should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Certificates after the date which is 18 months
after the date on which the Proposed 401(c) Regulations become final.
No transfer of any Class of Certificates other than the Exempted Certificates
will be permitted to be made to a Plan unless such Plan, at its expense,
delivers to the Trustee and the Company an opinion of counsel (in form
satisfactory to the Trustee and the Company) to the effect that the purchase or
holding of any other Class of Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring such a Certificate will be deemed to represent
to the Trustee, the Company and the Servicer either (i) that such person is
neither a Plan, nor acting on behalf of a Plan, subject to ERISA or to Section
4975 of the Code or (ii)
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<PAGE>
that the purchase and holding of the Certificate by such Plan will not result
in the assets of the Trust being deemed to be Plan assets and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement.
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Principal Principal
Amount of Amount of Amount of
Class Class Class
HI: A-1 HI: A-2 HI: A-3
Underwriter Certificates Certificates Certificates
----------- ------------ ------------ ------------
<S> <C> <C> <C>
[Underwriters]........................... $ $ $
....................................
....................................
....................................
....................................
---------- --------- --------
Totals................................. $ $ $
========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of
Class Class Class Class Class Class
HE: A-1A NAS HE: A-1B ARM HE: A-1 HE: A-2 HE: A-3 HE: A-4
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
[Underwriters].......... $ $ $ $ $ $
. .................
...................
...................
...................
-------- --------- --------- --------- --------- ---------
Totals................ $ $ $ $ $ $
======== ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Percentage Principal
Interest of Amount of
Class Class
HE: A-5 IO HE: M-1
Underwriter Certificates Certificates
----------- ------------ ------------
<S> <C> <C>
[Underwrtiers]........................................ % $
.................................................
.................................................
.................................................
.................................................
--- ---------
Totals.............................................. 100% $
=== =========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
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<PAGE>
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of the respective amounts set forth
in the table below (expressed as a percentage of the relative Certificate
Principal Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of the respective amounts set forth in the table below
to certain other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
----- ---------- -----------
<S> <C> <C>
HI:A-1........................................... % %
HI:A-2........................................... % %
HI:A-3........................................... % %
HE:A-1A NAS...................................... % %
HE:A-1B ARM...................................... % %
HE:A-1........................................... % %
HE:A-2........................................... % %
HE:A-3........................................... % %
HE:A-4........................................... % %
HE:A-5 IO........................................ % %
HE:M-1........................................... % %
</TABLE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Certificates. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pegging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Certificates in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract or home equity loan pass-through certificates without the
consent of the Underwriters.
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<PAGE>
Each of the Underwriters (or affiliates thereof) has from time to time
provided or may in the future provide warehouse and other financing to the
Company or its affiliates.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Company Counsel], Minnesota, and
for the Underwriters by Thacher Proffitt & Wood, New York, New York. The
material federal income tax consequences of the Certificates will be passed
upon for the Company by [Company Counsel].
S-117
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Certificates will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Certificates
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
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<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as appropriate,
to deliver the Certificates to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Certificates from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred
in New York). Should the CEDEL Participant or Euroclear Participant have a line
of credit with its clearing system and elect to be in debit in anticipation of
receipts of the sale proceeds in its account, the bank-valuation will
extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade fails),
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that
A-2
<PAGE>
purchase Global Certificates from DTC Participants for delivery to CEDEL
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Certificates holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
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<PAGE>
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a foreign trust within the
meaning of Section 7701 (1)(31) of the Code. To the extent prescribed in
regulations by the Secretary of the Treasury, which regulations have not yet
been issued, a trust which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under Subpart E of Part 1 of Subchapter J
of Chapter 1 of the Code), and which was treated as a United States person on
August 19, 1996, may elect to continue to be treated as a United States person
notwithstanding the previous sentence. This summary does not deal with all
aspects of U.S. federal income tax withholding that may be relevant to foreign
holders of the Global Certificates. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Certificates.
A-4
<PAGE>
Base Prospectus No. 3
Secured Home Improvement and Home Equity Loans
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Improvement and Home Equity Loans
(Issuable In Series)
We are offering certificates for home improvement and home equity loans under
this prospectus and a prospectus supplement. The prospectus supplement will be
prepared separately for each series of certificates offered. We refer to the
certificates for home improvement and home equity loans as "certificates" and
to each separate series of certificates as a "series." 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 equity 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 , 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: (a) this prospectus, which provides general
information, some of which many not apply to a particular series of
certificates, including your series; and (b) the prospectus supplement related
to the particular terms of your series of certificates.
If the terms of your series of certificates described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the certificates of each series certain
monthly and annual reports concerning the certificates and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the certificates--Reports to
Certificateholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), 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.
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<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 and the accompanying prospectus supplement.
Title of Securities.......... We call the securities certificates for home im-
provement and home equity loans.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the certificates. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of certificates. Payments on the
certificates will be made primarily from
payments on the related pool of loans. The terms
of the certificates issued by a trust will be
governed by a Pooling and Servicing Agreement
between Green Tree and the trustee for that
series. We will identify the trustee for a
series of certificates in the related prospectus
supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
certificates. You should read carefully the
section entitled "Risk Factors" beginning on
page of this prospectus.
The Loans.................... The loans underlying a series of certificates
form a loan pool. The loans in a loan pool will
be fixed or variable rate loans. The loans in a
loan pool will be either home improvement loans
or closed-end home equity loans. Each loan will
be secured by the related real estate.
The prospectus supplement for each series will
provide information about the following:
^ the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
^ the weighted average and range of
contractual rates of interest on the loans;
^ the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
^ the average outstanding principal balance
of the loans as of the cut-off date;
^ the range of loan-to-value ratios; and
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<PAGE>
^ the geographic location of improved real
estate underlying the loans.
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
Description of The trust will issue the certificates of the
certificates................ related series of certificates on the terms
specified in the related prospectus supplement.
Each series of certificates will evidence an
interest in the loan pool and other property
held in trust for the benefit of
certificateholders. If we so specify in the
related prospectus supplement, a series of
certificates may include one or more classes
with different rights to payments of principal
and interest, including classes which:
^ are entitled to receive only distributions
of interest,
^ are entitled to receive only distributions
of principal,
^ are entitled to receive principal on a
planned amortization schedule or a targeted
amortization schedule, or
^ are entitled to receive principal only
after other classes have received a
specified amount of principal.
We will issue the certificates in fully
registered form in the authorized denominations
that we specify in the related prospectus
supplement. No government agency or other
insurer will guarantee or insure the
certificates, unless we otherwise specify in the
related prospectus supplement. Similarly, no
government agency or other insurer will
guarantee or insure the loans, except as we
specify in this prospectus and in the related
prospectus supplement.
Subordinated certificates.... We may subordinate one or more classes of any
series of certificates, as specified in the
related prospectus supplement. The rights of
holders of subordinated certificates to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior certificates to the extent
and in the manner we specify in the related
prospectus supplement. If a series of
certificates contains more than one class of
subordinated certificates, distributions and
losses will be allocated among those classes in
the manner specified in the related prospectus
supplement. The rights of holders of
subordinated certificates, to the extent not
subordinated, may be
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<PAGE>
on a parity with holders of senior certificates.
By subordinating a class of certificates, we
intend to:
^ enhance the likelihood of regular receipt
by holders of senior certificates of the
full amount of scheduled monthly payments
of principal and interest due them, and
^ protect holders of senior certificates
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated certificates the benefits of other
forms of credit enhancement that would benefit
only those subordinated certificates.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated certificates, we may provide credit
enhancement with respect to a series of
certificates by pool insurance, letters of
credit, surety bonds, a guarantee of Green Tree
Financial Corporation, cash reserve funds or
other forms of enhancement acceptable to each
nationally recognized rating agency rating a
series of certificates. We will describe any
such credit enhancement in the related
prospectus supplement.
Interest..................... We will pay interest on the certificates on the
dates specified in the related prospectus
supplement, unless we indicate otherwise. The
related prospectus supplement will describe the
pass-through rate, if any, for each class or the
method of determining the pass-through rate.
This rate may be fixed, variable or adjustable,
as specified in the related prospectus
supplement. For a more complete description of
interest payable on the certificates, see "Yield
Considerations" and "Description of the
certificates" in this prospectus. As we specify
in the related prospectus supplement, classes of
a series of certificates may not be entitled to
receive interest or may be entitled to receive
interest which is not proportionate to the
principal allocable to such certificates.
Principal (Including Principal on each loan, including any principal
Prepayments)................ prepayments, will be passed through on each
payment date, except as we otherwise describe in
the related prospectus supplement. For a more
complete description of principal on the
certificates, see "Maturity and Prepayment
Considerations" and "Description of the
certificates" in this prospectus.
Optional Termination......... Unless we specify otherwise in the related
prospectus supplement, Green Tree may repurchase
all the loans relating to a series of
certificates remaining outstanding at the time
and under the circumstances we specify in the
related prospectus supplement. Unless we
otherwise provide in the related prospectus
supplement, the repurchase price will equal the
principal amount of the loans plus accrued and
unpaid interest. For a more complete description
of optional termination of the
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<PAGE>
certificates, see "Description of the
certificates--Termination of the Agreement" in
this prospectus.
Representations and
Warranties of Green Tree
Financial Corporation .......
Green Tree will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to Green Tree's conveyance of any loan pool to
the trust fund. If Green Tree becomes aware of a
breach of any representation or warranty that
materially adversely affects the trust fund's
interest in any loan or receives written notice
of a breach from the trustee or the servicer,
then Green Tree must either cure the breach,
repurchase the affected loan or, if the related
prospectus supplement so provides, substitute
for the affected loan, under the conditions
further described in this prospectus and in the
prospectus supplement. For a more complete
description of the representations and
warranties of Green Tree, see "Description of
the certificates--Conveyance of Loans."
Federal Income Tax We may make an election to treat the trust fund
Considerations.............. represented by a series of certificates or a
segregated portion of them as a real estate
mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended. If we
so choose, the Classes of certificates that we
offer may constitute "regular interest" or
"residual interests" in that REMIC under the
Internal Revenue Code of 1986, as amended, with
the tax consequences described in this
prospectus and in the related prospectus
supplement. If we so specify in the prospectus
supplement, a Class of certificates that we are
offering may represent interests in a "two-tier"
REMIC, but all interest in the first and second
tier REMIC will be created under the Pooling and
Servicing Agreement.
If we do not make a REMIC election with respect
to a series of certificates, the trust fund
represented by those certificates may be treated
as a grantor trust for federal income tax
purposes and not as an association taxable as a
corporation. In such an event, each holder of a
Certificate will be treated as the owner of an
undivided pro rata interest in income and corpus
attributable to the related loan pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the loans included in such loan
pool. If we do not make a REMIC election with
respect to a series of certificates and the
Trust Fund represented by such certificates will
not be treated as a grantor trust, the federal
income tax consequences of owning such
certificates will be described in the related
prospectus supplement. For a more complete
description of the Federal income tax
considerations related to the certificates, see
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<PAGE>
"Certain Federal Income Tax Consequences--Non-
REMIC series."
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in your prospectus
supplement.
Legal Investment............. Unless the related prospectus supplement
indicates otherwise, the certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984, as amended. For a more complete
description of legal considerations regarding
investment in the certificates, see "Legal
Investment Considerations" in this prospectus
and in your prospectus supplement.
Ratings...................... We will not issue the certificates unless one or
more nationally recognized rating agencies have
assigned a rating to the certificates in one of
their four highest rating categories.
The rating of each series of certificates
addresses the likelihood of the timely receipt
of interest and payment of principal on that
series on or before the stated maturity date for
that series. A 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
certificates do not address the likelihood of
payment of principal on any series of
certificates prior to the stated maturity date
or the possibility of the imposition of United
States withholding tax with respect to non-
United States persons. For a more complete
description of the ratings of the certificates,
see "Ratings" in this prospectus and in your
prospectus supplement.
7
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the certificates.
^ Limits on the Availability of FHA Insurance. We will specify in the
prospectus supplement the number and percentage of home improvement
loans in the pool that are insured by FHA pursuant to Title I of the
National Housing Act. 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 we cannot assure you that FHA's
enforcement of its regulations will not become stricter in the future.
We sometimes 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 on the loans in a given pool is limited to
the balance of a reserve amount. This reserve amount as of , 199 ,
was equal to approximately $ , 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 FHA-insured home improvement
loans. 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."
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the certificates will not represent an interest
in or obligation of Green Tree. Neither the government, any underwriter
or its affiliates, the servicer nor any other party will insure or
guarantee any of the certificates of any series (except as we otherwise
specify in the related prospectus supplement).
^ Junior Mortgage Liens; Value of Mortgaged Property. Green Tree expects
that a substantial number of the liens on improved real estate securing
the loans in a given loan pool will be junior to other liens on that
real estate. This subordinates the rights of the trust fund (and
consequently the holders of certificates of the related series), as
beneficiary under a conventional junior deed of trust or as mortgagee
under a conventional junior mortgage, to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to cause the
property securing the loan to be sold upon default of the mortgagor or
trustor. This extinguishes the junior mortgagee's or junior
beneficiary's lien unless the servicer on behalf of the trust fund
asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans.
For a more complete description of the risks associated with junior
mortgage liens, see "Certain Legal Aspects of the Loans--Repurchase
Obligations."
We expect a substantial portion of the loans included in a 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 and of the loan an 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
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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.
^ Limited Liquidity. 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.
^ Non-recordation of Mortgage Assignments. Green Tree 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 creditors of or purchasers from Green Tree or
a trustee in bankruptcy of Green Tree.
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the certificates.
THE TRUST FUND
General
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Home Improvement Contract included in the Contract
Pool), (iv) any letter of credit, guarantee, surety bond, insurance policy,
cash reserve fund or other credit enhancement securing payment of all or part
of a series of certificates, and (v) such other property as may be specified in
the related prospectus Supplement.
Each Certificate will evidence the interest specified in the related
prospectus Supplement in one Trust Fund, containing one Contract Pool comprised
of Contracts having the aggregate principal balance as of the specified day of
the month of the creation of the pool (the "Cut-off Date") specified in the
related prospectus Supplement. Holders of certificates of a series will have
interests only in such Contract Pool and will have no interest in the Contract
Pool created with respect to any other series of certificates, except with
respect to FHA Insurance Reserves. If so specified in the related prospectus
Supplement, the Contract Pool may be divided into two or more sub-pools, in
which event the certificates of certain specified Classes may be payable
primarily from, and in respect of, the Contracts comprising a given sub-pool.
If so specified in the related prospectus Supplement, the Trust Fund may
include a Pre-Funding Account which would be used to purchase additional
Contracts ("Subsequent Contracts") from the Company during the Pre-Funding
Period specified in the related prospectus Supplement. The related prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
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Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in each
Trust Fund will be provided in the related Prospectus Supplement and, to the
extent not contained in the related Prospectus Supplement, in a report on Form
8-K to be filed with the Commission within fifteen days after the initial
issuance of the Certificates. A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
Whenever in this Prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of Certificates.
The Contract Pools
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity loans
(the "Home Equity Contracts" and, together with the Home Improvement Contracts,
collectively the "Contracts"), originated by the Company on an individual basis
in the ordinary course of business. The Home Improvement Contracts may be
conventional home improvement contracts or contracts insured by FHA. All
Contracts will be secured by the related real estate. Except as otherwise
specified in the related Prospectus Supplement, the Contracts will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate
(the "Contract Rate").
For each Series of Certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity referred
to herein as the "Servicer", which term shall include any successor to the
Company in such capacity under the applicable Agreement), will service the
Contracts pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related Prospectus Supplement,
the Contract documents will be held by the Trustee or a custodian on its
behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and the
geographic location of improved real estate securing the Contracts. If the
Trust Fund includes a Pre-Funding Account, the related Prospectus Supplement
will specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the Subsequent
Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that
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materially and adversely affects the interests of the Certificateholders in a
Contract, the Company will be obligated to cure the breach in all material
respects, or to repurchase or substitute for the Contract as described below.
This repurchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of representation or warranty by
the Company. See "Description of the Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement contracts and home equity loans, costs of carrying such contracts
and loans until sale of the related certificates and to pay other expenses
connected with pooling the Contracts and issuing the Certificates.
GREEN TREE FINANCIAL CORPORATION
General
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales contracts for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (612) 293-3400). The Company's quarterly and annual reports are
available from the Company upon written request made to the Company.
Contract Origination
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, the Company arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. The Company's regional sales managers contact home improvement
contractors and explain the Company's available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes to
utilize the Company's available customer financing, the contractor must make an
application for contractor approval. The Company has a contractor approval
process pursuant to which the financial condition, business experience and
qualifications of the contractor are reviewed prior to his or her approval to
sell Contracts to the Company. In addition, the Company has a centralized
compliance group which reviews and updates contractor financial condition and
reviews contractors on an annual basis to determine whether such contractor's
approval will be continued. The Company also reviews monthly contractor trend
reports which show the default and delinquency trends of the particular
contractor with respect to contracts sold to the Company. The Company
occasionally will originate directly a home improvement promissory note
involving a home improvement transaction.
All contracts that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the customer's
credit application and construction contract to the Company's office where an
analysis
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of the creditworthiness of the customer is made using a proprietary credit
scoring system that was implemented by the Company in June 1993. If the
Company determines that the application meets the Company's underwriting
guidelines and applicable FHA regulations (for FHA-insured contracts) and the
credit is approved, the Company purchases the contract from the contractor
when the customer verifies satisfactory completion of the work, or, in the
case of staged funding, the Company follows up with the customer for the
completion certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an FHA-insured home improvement contract
with respect to a single family property currently may not exceed $25,000
without specific FHA approval, with a maximum term of 20 years. FHA will
insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit or a
$48,000 limit for four units of owner-occupied multiple-family homes. Certain
other criteria for home improvement contracts eligible for FHA Insurance are
described under the caption "Description of FHA Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The original
principal amount of a conventional secured home improvement loan may not
exceed $40,000 for the Company's secured "no equity" lien program, and
$100,000 for the Company's secured equity lien program, unless a higher amount
financed is approved by senior management. The original principal amount of a
conventional home improvement loan may not exceed $100,000 for the Company's
secured lien program, unless a higher amount financed is approved by senior
management. The Company requires that any secured home improvement contract be
secured by a recorded lien (which may be a first, second or (with respect to
FHA-insured contracts and some conventional contracts of $30,000 or less)
third lien) on the improved real estate.
The Company's underwriting guidelines and credit scoring process weight
significantly the applicant's creditworthiness and place less weight on the
available equity in the related real estate being improved. While it is the
Company's policy not to exceed 100% in loan-to-value ratio on any Contract, a
substantial portion of the Home Improvement Contracts are expected to have
loan-to-value ratios of 90% or more when considering the estimated value of
the real estate, other liens senior to that of the Home Improvement Contract,
and the improvements being financed. Because the Company does not require
appraisals on most Home Improvement Contracts with loan amounts of less than
$30,000 (which Home Improvement Contracts are expected to comprise a
substantial portion of any Contract Pool), and given the many other factors
that can affect the value of property securing a conventional Home Improvement
Contract, the related Prospectus Supplement will not provide detailed
disclosure of loan-to-value ratios on the Home Improvement Contracts.
Home Equity Contracts. The Company has originated closed-end home equity
loans since January 1996. As of December 31, 1997, the Company had
approximately $3,116,054,406 aggregate principal amount of outstanding closed-
end home equity loans.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity
position, the creditworthiness of the borrower must be stronger (or may be
weaker). The loan-to-value ratio of the requested loan, combined with any
existing loans with a senior lien position, may not exceed 95% without senior
management approval.
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In most circumstances, an appraisal of the property is required. Currently,
loans secured by a first mortgage with an obligor having a superior credit
rating may not exceed $300,000 without senior management approval, and loans
secured by a second mortgage with an obligor having a superior credit rating
may not exceed $250,000 without senior management approval.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each Series of
Certificates will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Contracts. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the Contracts
included in a Contract Pool may significantly affect an investor's actual yield
to maturity, even if the average prepayment rate over time is consistent with
the investor's expectations. In general, the earlier that prepayments on
Contracts occur, the greater the effect on the investor's yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 25 years.
Prepayment Considerations
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Home Improvement Contracts may be prepaid at any time without penalty.
The Company has no significant experience with respect to the rate of principal
prepayments on home improvement contracts or home equity loans. Because the
Contracts have scheduled due dates throughout the calendar month, and because
(unless otherwise specified in the related Prospectus Supplement) all principal
prepayments will be passed through to Certificateholders of the related Series
on the Payment Date following the Due Period in which such principal prepayment
occurred, prepayments on the Contracts would affect the amount of funds
available to make distributions on the Certificates on any Payment Date only if
a substantial portion of the Contracts prepaid prior to their respective due
dates in a particular month (thus paying less than 30 days' interest for that
Due Period) while very few Contracts prepaid after their respective due dates
in that month. In addition, liquidations of defaulted Contracts or the
Servicer's or the Company's exercise of its option to repurchase the entire
remaining pool of Contracts (see "Description of the Certificates--Repurchase
Option") will affect the timing of principal distributions on the Certificates
of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the
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related Prospectus Supplement will specify the prepayment assumptions used to
price any Series of Certificates, there can be no assurance that the Contracts
will prepay at such rate, and it is unlikely that prepayments or liquidations
of the Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description of
the Company's or Servicer's option to repurchase the Contracts comprising part
of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding principal balance of such Contracts as of the related Cut-off Date.
See also "The Trust Fund--The Contract Pools" for a description of the
obligations of the Company to repurchase a Contract in case of a breach of a
representation or warranty relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling and
servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
General
The Certificates may be issued in one or more Classes. If the Certificates of
a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a Series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate trust fund (the "Trust Fund") created pursuant to the related
Agreement. The Trust Fund will be held by the Trustee for the benefit of the
Certificateholders. Each Trust Fund, to the extent specified in the related
Prospectus Supplement, will include (i) Contracts (the "Contract Pool") which
are subject to the Agreement, (ii) the amounts held in the Certificate Account
from time to time, (iii) proceeds from FHA Insurance (with respect to any FHA-
insured Home Improvement Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a Series of
Certificates and (v) such other property as may be specified in the related
Prospectus Supplement. Except as otherwise specified in the related Prospectus
Supplement, the Certificates will be freely transferable and exchangeable at
the corporate trust office of the Trustee at the address set forth in the
related Prospectus Supplement. No service charge will
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be made for any registration of exchange or transfer of Certificates, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each Series of Certificates may include one
or more Classes ("Subordinated Certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated Certificates),
the allocation of losses among the Classes of Subordinated Certificates, the
period or periods of such subordination, the minimum subordinated amount, if
any, and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the preferential
right of such Certificateholders to receive current distributions from the
Contract Pool. If a Series of Certificates contains more than one Class of
Subordinated Certificates, losses will be allocated among such Classes in the
manner described in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of each
Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
Global Certificates
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description
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of the Certificates contained in this Prospectus assumes that the Certificates
will be issued in definitive form. If the Certificates of a Class are issued in
the form of one or more Global Certificates, the term "Certificateholder"
should be understood to refer to the beneficial owners of the Global
Certificates, and the rights of such Certificateholders will be limited as
described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for
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the related Global Certificate or Certificates. In addition, the Company may at
any time and in its sole discretion determine not to have any Certificates of a
Class represented by one or more Global Certificates and, in such event, will
cause to be issued Certificates of such Class in definitive form in exchange
for the related Global Certificate or Certificates. Further, if the Company so
specifies with respect to the Certificates of a Class, an owner of a beneficial
interest in a Global Certificate representing Certificates of such Class may,
on terms acceptable to the Company and the Depositary for such Global
Certificate, receive Certificates of such Class in definitive form. In any such
instance, an owner of a beneficial interest in a Global Certificate will be
entitled to physical delivery in definitive form of Certificates of the Class
represented by such Global Certificate equal in denominations to such
beneficial interest and to have such Certificates registered in its name.
Conveyance of Contracts
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related Series of Certificates, the Trustee, concurrently with such conveyance,
will execute and deliver the Certificates to the order of the Company. The
Contracts will be as described on a list attached to the Agreement. Such list
will include the amount of monthly payments due on each Contract as of the date
of issuance of the Certificates, the Contract Rate on each Contract and the
maturity date of each Contract. Such list will be available for inspection by
any Certificateholder at the principal executive office of the Servicer. Prior
to the conveyance of the Contracts to the Trust Fund, the Company's internal
audit department will complete a review of all of the Contract files confirming
the accuracy of the list of Contracts delivered to the Trustee. Any Contract
discovered not to agree with such list in a manner that is materially adverse
to the interests of the Certificateholders will be repurchased or substituted
for by the Company, or, if the discrepancy relates to the unpaid principal
balance of a Contract, the Company may deposit cash in the separate account
maintained at an Eligible Institution in the name of the Trustee (the
"Certificate Account") in an amount sufficient to offset such discrepancy. If
the Trust Fund includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
the Company to the related Trust Fund would, in the event the Company became a
debtor under the United States Bankruptcy Code, be treated as a true sale and
not as a pledge to secure borrowings. If, however, the transfer of the
Contracts from the Company to the Trust Fund were treated as a pledge to secure
borrowings by the Company, the distribution of proceeds of the Contracts to the
Trust Fund might be subject to the automatic stay provisions of the United
States Bankruptcy Code, which would delay the distribution of such proceeds for
an uncertain period of time. In addition, a bankruptcy trustee would have the
power to sell the Contracts if the proceeds of such sale could satisfy the
amount of the debt deemed owed by the Company, or the bankruptcy trustee could
substitute other collateral in lieu of the Contracts to secure such debt, or
such debt could be subject to adjustment by the bankruptcy trustee if the
Company were to file for reorganization under Chapter 11 of the United States
Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a) as
of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except
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by instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal, valid
and binding obligation of the Obligor and is enforceable in accordance with its
terms (except as may be limited by laws affecting creditors rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (e) each FHA-insured Home Improvement Contract was originated in
accordance with applicable FHA regulations and is insured, without set-off,
surcharge or defense, by FHA Insurance; (f) each Contract was either (i)
entered into by a home improvement contractor in the ordinary course of such
contractor's business and, immediately upon funding, assigned to the Company,
(ii) was originated by a home equity lender in the ordinary course of such
lender's business and assigned to the Company, or (iii) was originated by the
Company directly; (g) no Contract was originated in or is subject to the laws
of any jurisdiction whose laws would make the transfer of the Contract or an
interest therein pursuant to the Agreement or the Certificates unlawful; (h)
each Contract complies with all requirements of law; (i) no Contract has been
satisfied, subordinated to a lower lien ranking than its original position (if
any) or rescinded; (j) each Contract creates a valid and perfected lien on the
related improved real estate; (k) all parties to each Contract had full legal
capacity to execute such Contract; (l) no Contract has been sold, conveyed and
assigned or pledged to any other person and the Company has good and marketable
title to each Contract free and clear of any encumbrance, equity, loan, pledge,
charge, claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (m) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clause (a) above), no event that
with notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (n) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (o) each Contract contains
customary and enforceable provisions such as to render the rights and remedies
of the holder thereof adequate for realization against the collateral; (p) the
description of each Contract set forth in the list delivered to the Trustee is
true and correct; (q) there is only one original of each Contract; and (r) each
Contract was originated or purchased in accordance with the Company's then-
current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Contract or receives written notice of such a breach
from the Trustee or the Servicer, then the Company will be obligated either to
cure such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Contract, in each case under the
conditions further described herein and in the Prospectus Supplement. This
repurchase obligation will constitute the sole remedy available to the Trust
Fund and the Certificateholders for a breach of a representation or warranty
under the Agreement with respect to the Contracts (but not with respect to any
other breach by the Company of its obligations under the Agreement). If a
prohibited transaction tax under the REMIC provisions of the Code is incurred
in connection with such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Payments on Contracts
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national bank,
(iii) in an account or accounts the deposits in which are fully insured by the
FDIC, (iv) in an account or accounts the deposits in
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which are insured by the FDIC (to the limits established by the FDIC), the
uninsured deposits in which are otherwise secured such that, as evidenced by an
opinion of counsel, the Certificateholders have a claim with respect to the
funds in the Certificate Account or a perfected first priority security
interest against any collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the depository
institution with which the Certificate Account is maintained or (v) otherwise
acceptable to the rating agency without reduction or withdrawal of the rating
assigned to the relevant Certificates. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and certain other high-quality investments specified in the
applicable Agreement ("Eligible Investments"). A Certificate Account may be
maintained as an interest-bearing account, or the funds held therein may be
invested pending each succeeding Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Certificate Account on a daily basis all proceeds and
collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
Distributions on Certificates
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of such
Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for a
Payment Date is an amount equal to the aggregate of all amounts on deposit in
the Certificate Account as of the seventh Business Day following the end of the
related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest due
on a date or dates subsequent to the Due Period preceding the Determination
Date; (iv) amounts representing reimbursement for Advances, such reimbursement
being limited, if so specified in the related Prospectus Supplement, to amounts
received on particular Contracts as late collections of principal or interest
as to which the Servicer has made an unreimbursed Advance; and (v) amounts
representing reimbursement for any unpaid Servicing Fee. In the case of a
Series of Certificates which includes only one Class, the Amount Available for
each Payment Date will be distributed pro rata to the holders of such
Certificates. In the case of any other Series of Certificates, the Amount
Available for each Payment Date will be allocated and distributed to holders of
the Certificates of such Series pursuant to the method and in the order of
priority specified in the applicable Prospectus Supplement. The amount of
principal
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and interest specified in the related Prospectus Supplement to be distributed
to Certificateholders is referred to herein as the "Certificate Distribution
Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
Advances
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof. The Servicer will deposit any Advances in the Certificate
Account no later than one Business Day before the following Payment Date. The
Servicer will be entitled to recoup its advances on a Contract from subsequent
payments by or on behalf of the Obligor and from liquidation proceeds
(including FHA Insurance payments, if applicable, or foreclosure resale
proceeds), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by the Company
for breach of representations and warranties. If the Servicer determines in
good faith that an amount previously advanced will not ultimately be
recoverable from payments by or on behalf of the Obligor or from liquidation
proceeds (including FHA Insurance payments, if applicable, or foreclosure
resale proceeds), if any, of the Contract (an "Uncollectible Advance"), the
Servicer will be entitled to reimbursement from payments on other Contracts or
from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not
legally able to make such Advance.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date,
which, together with corresponding interest payments, are not part of the
Contract Pool and will not be passed through to Certificateholders.
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(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is prepaid
in full, interest on the amount prepaid is collected from the Obligor only
to the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
Indemnification
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Contracts) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Contract and (b) for any taxes which may at any time be asserted with respect
to, and as of the date of, the conveyance of the Contracts to the Trust Fund
(but not including any federal, state or other tax arising out of the creation
of the Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Contract while it was the Servicer.
Servicing
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement, in
the same manner as prudent lending institutions of home improvement contracts
and home equity loans of the same type as the Contracts in those jurisdictions
where the related real properties are located or as otherwise specified in the
Agreement. The duties to be performed by the Servicer will include collection
and remittance of principal and interest payments, collection of insurance
claims and, if necessary, foreclosure of Contracts.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to mortgage loans or contracts serviced by it that are
comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the Certificates of such Series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement. On
or before May 1 of each year, the Servicer will deliver to the Trustee a report
of a nationally recognized accounting firm stating that such firm
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has examined certain documents and records relating to the servicing of home
improvement contracts and home equity loans serviced by the Servicer under
pooling and servicing agreements similar to the Agreement and stating that, on
the basis of such procedures, such servicing has been conducted in compliance
with the Agreement, except for any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home
improvement contracts and home equity loans having an aggregate principal
amount of $10 million or more and which are generally regarded as servicers
acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Contracts,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by the Company from its Monthly Servicing Fees include payment of FHA
Insurance premiums, payment of fees and expenses of accountants, payments of
all fees and expenses incurred in connection with the enforcement of Contracts
or foreclosure on collateral relating thereto (including submission of FHA
Insurance claims, if applicable), payment of Trustee's fees, and payment of
expenses incurred in connection with distributions and reports to
Certificateholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of
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its affairs; (e) the Servicer commences a voluntary case under any applicable
bankruptcy, insolvency or similar law, or consents to the entry of an order for
relief in an involuntary case under any such law, or consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian or its creditors, or fails to, or admits in writing its
inability to, pay its debts as they become due, or takes any corporate action
in furtherance of the foregoing; (f) the Servicer fails to be an Eligible
Servicer; or (g) if the Company is the Servicer, the Company's servicing rights
under its master seller-servicer contract with GNMA are terminated. The
Servicer will be required under the Agreement to give the Trustee and the
Certificateholders notice of an Event of Termination promptly upon the
occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
Series shall, terminate all of the rights and obligations of the Servicer under
the related Agreement and in and to the Contracts, and the proceeds thereof,
whereupon (subject to applicable law regarding the Trustee's ability to make
advances) the Trustee or a successor Servicer under the Agreement will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
obligation of the Company to repurchase Contracts for breaches of
representations or warranties, and the Trustee and such successor Servicer will
not be liable for any acts or omissions of the prior Servicer occurring prior
to a transfer of the Servicer's servicing and related functions or for any
breach by such Servicer of any of its obligations contained in the Agreement.
In addition, the Trustee will notify FHA of the Company's termination as
Servicer of the Contracts and will request that the portion of the Company's
FHA Insurance reserves allocable to the FHA-insured Home Improvement Contracts
be transferred to the Trustee or a successor Servicer. See "Description of FHA
Insurance." Notwithstanding such termination, the Servicer shall be entitled to
payment of certain amounts payable to it prior to such termination, for
services rendered prior to such termination. No such termination will affect in
any manner the Company's obligation to repurchase certain Contracts for
breaches of representations or warranties under the Agreement. In the event
that the Trustee would be obligated to succeed the Servicer but is unwilling or
unable so to act, it may appoint, or petition to a court of competent
jurisdiction for the appointment of, a Servicer. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which the Trustee may incur.
Reports to Certificateholders
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly
Principal, specifying the amounts constituting scheduled payments by
Obligors, principal prepayments on the Contracts, and other payments with
respect to the Contracts;
(b) the amount of such distribution which constitutes Monthly
Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
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<PAGE>
(f) the Pool Factor (a percentage derived from a fraction the
numerator of which is the remaining Principal Balance of the Certificates
and the denominator of which is the Initial Principal Amount of the
Certificates) immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i) the principal balance of
the Contracts on the prior Payment Date plus 30 days' accrued interest thereon
at the applicable Pass-Through Rate and any delinquent payments of interest
thereon, plus the fair market value (as determined by the Servicer) of any
acquired properties, (ii) the fair market value of all of the assets of the
Trust Fund, and (iii) an amount equal to the Aggregate Certificate Principal
Balance of the related Certificates plus interest on such Certificates payable
on and prior to the Payment Date occurring in the month following such
repurchase (less amounts on deposit in the Certificate Account and available to
pay such principal and interest). Such price will be paid on the Payment Date
on which such purchase occurs to the Certificateholders of record on the last
Business Day of the immediately preceding Due Period in immediately available
funds against the Trustee's delivery of the Contracts and any acquired
properties to the Servicer. The distribution of such purchase price to
Certificateholders will be in lieu of any other distribution to be made on such
Payment Date with respect to the related Contracts.
Amendment
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment that reduces in any manner the amount of, or delays the timing of,
any payment received on or with respect to Contracts which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
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Termination of the Agreement
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Contract or the disposition of all
property acquired upon foreclosure of any Contract; or (b) the Payment Date on
which the Company or the Servicer repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of the
Agreement.
The Trustee
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has occurred,
the Trustee will be required to perform only those duties specifically required
of it under the Agreement. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the Trustee will
be required to examine them to determine whether they conform as to form to the
requirements of the Agreement. Whether or not an Event of Termination has
occurred, the Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of its duties or the
exercise of its powers if it has reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Contracts may be FHA-insured, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the
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Company, which amount will be increased by an amount equal to 10% of the lesser
of the principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each Series is obligated to pay such premium and is entitled to
be reimbursed by the Company and from collections on the related Home
Improvement Contracts.
As of December 31, 1997, the Company's FHA Insurance reserve amount was equal
to approximately $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement loans,
including the FHA-insured Home Improvement Contracts that may be owned by a
Trust Fund. If an Event of Termination (as defined under "Description of the
Certificates--Events of Termination") occurs, each Trustee will notify FHA of
the Company's termination as Servicer of the related FHA-insured Home
Improvement Contracts and will request that the portion of the Company's FHA
Insurance reserves allocable to the FHA-insured Home Improvement Contracts be
transferred to the Trustee or a successor Servicer. Although each Trustee will
request such a transfer of reserves, FHA is not obligated to comply with such a
request, and may determine that it is not in FHA's interest to permit such
transfer of reserves. In addition, FHA has not specified how insurance reserves
might be allocated in such event, and there can be no assurance that any
reserve amount, if transferred to the Trustee or a successor Servicer, would
not be substantially less than 10% of the outstanding principal amount of the
FHA-insured Home Improvement Contracts. It is likely that the Trustee or any
successor Servicer would be the lender of record on other FHA Title I loans, so
that any reserves that are so permitted to be transferred would become
commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with "earmarking" (segregating such
reserves so that they will not be commingled with the reserves of the
transferee) if it is in FHA's interest to do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months of
the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds must
be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Home Improvement Contract the Servicer
may, subject to certain conditions, either commence foreclosure proceedings
against the improved property securing the loan, if applicable, or submit a
claim to FHA, but may submit a claim to FHA after proceeding against the
improved property only with the prior approval of the Secretary of HUD. The
availability of FHA Insurance following a default on an FHA-insured Home
Improvement Contract is subject to a number of conditions, including strict
compliance by the Company with FHA regulations in originating and servicing the
Home Improvement Contract. Failure to comply with FHA regulations may result in
a denial of or surcharge on the FHA Insurance claim. Prior to declaring an FHA-
insured Home Improvement Contract in default and submitting a claim to FHA, the
Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described
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under "Green Tree Financial Corporation--Contract Origination," the Company
does not purchase a Home Improvement Contract until the customer verifies
satisfactory completion of the work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Home Improvement Contract to the United States. In
general, the claim payment will equal 90% of the sum of (i) the unpaid
principal amount of the Home Improvement Contract at the date of default and
uncollected interest computed at the Contract Rate earned to the date of
default, (ii) accrued and unpaid interest on the unpaid amount of the Home
Improvement Contract from the date of default to the date of submission of the
claim plus 15 calendar days (but in no event more than nine months) computed at
a rate of 7% per annum, (iii) uncollected court costs, (iv) legal fees, not to
exceed $500, and (v) expenses for recording the assignment of the lien to the
United States, if applicable.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Contracts
to a Trust Fund, the Certificateholders of such Series, as the beneficial
owners of the Trust Fund, will succeed collectively to all of the rights
thereunder (including the right to receive payment on the Contracts). The
following discussion contains summaries of certain legal aspects of home
improvement contracts and home equity loans secured by residential properties
which are general in nature. These legal aspects are in addition to the
requirements of FHA regulations described in "Description of FHA Insurance"
with respect to the FHA-insured Home Improvement Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the real estate securing the Contracts may be situated or which may govern any
Contract. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts.
Mortgages and Deeds of Trust
The Contracts will be secured by either mortgages, deeds of trust, security
deeds or deeds to secure debt depending upon the prevailing practice in the
state in which the underlying property is located, and may have first, second
or third priority. In some states, a mortgage creates a lien upon the real
property encumbered by the mortgage or deed of trust. In other states, the
mortgage conveys legal title to the property to the mortgagee subject to a
condition subsequent, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or retail installment contract evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust has three parties: the borrower, or trustor, the lender as beneficiary,
and a third-party grantee called the trustee. Under a deed of trust, the
borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure repayment of the loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by applicable state law, the express provisions
of the deed of trust or mortgage, and, in some cases with respect to deeds of
trust, the directions of the beneficiary. Some states use a security deed or
deed to secure debt which is similar to a deed of trust except that it has only
two parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior to
liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms, the
knowledge of the parties to such instrument in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
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Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Contracts in any Contract Pool are expected to
be second or third mortgages or deeds of trust which are junior to mortgages
or deeds of trust held by other lenders or institutional investors. The rights
of the related Trust Fund (and therefore the Certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Contract to be sold upon default of the
mortgagor or trustor under the senior mortgage or deed of trust, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
Servicer on behalf of the Trust Fund asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted
senior loan or loans. As discussed more fully below, a junior mortgagee or
beneficiary may satisfy a defaulted senior loan in full, or in some states may
cure such default and bring the senior loan current, in either event usually
adding the amounts expended to the balance due on the junior loan. Although
the Company generally does not cure defaults under a senior mortgage or deed
of trust, it is the Company's standard practice to protect its interest by
attending any foreclosure sale and bidding for property only if it is in the
Company's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Company, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first mortgage or deed of trust. Proceeds in
excess of the amount of first mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under
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the mortgage or deed of trust to perform the obligation itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. The bankruptcy of a junior lender may operate to
stay foreclosure or similar proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of
a mortgage is generally accomplished by judicial action. A foreclosure action
is regulated by statutes and rules and subject throughout to the court's
equitable powers. Generally, a mortgagor is bound by the terms of the mortgage
note and the mortgage as made and cannot be relieved from its own default.
However, since a foreclosure action is equitable in nature and is addressed to
a court of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither
willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct
as to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from
an entirely technical default where such default was not willful. Generally,
the action is initiated by the service of legal pleadings upon all parties
having an interest of record in the real property. Delays in completion of the
foreclosure occasionally may result from difficulties in locating necessary
parties defendant. When the mortgagee's right to foreclosure is contested, the
legal proceedings necessary to resolve the issue can be time-consuming. After
the completion of a judicial foreclosure proceeding, the court may issue a
judgment of foreclosure and appoint a referee or other officer to conduct the
sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in
the deed of trust, security deed or deed to secure debt that authorizes the
trustee to sell the property upon any default by the borrower under the terms
of the note, deed of trust, security deed or deed to secure debt. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, prior to a sale,
the trustee must record a notice of default and send a copy to the borrower
trustor and to any person who has recorded a request for a copy of a notice of
default and notice of sale. In addition, prior to such sale, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. Certain states
require that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
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In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from such sale may be
reduced by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Contracts which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Contract,
and any such taxes or fees imposed may reduce liquidation proceeds with respect
to such property, as well as distributions payable to the Certificateholders.
Second or Third Mortgages
The Contracts may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of
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the holder of the senior mortgage, deed of trust, or security deed including
the prior rights of the senior mortgagee or beneficiary to receive and apply
hazard insurance and condemnation proceeds and, upon default of the mortgagor
under the senior mortgage or deed of trust, to cause a foreclosure on the
property. Upon completion of the foreclosure proceedings by the holder of the
senior mortgage or the sale pursuant to the senior deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. Such extinguishment will
eliminate access to the collateral for the Contract. See "--Foreclosure"
herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt or security deed will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage, deed of trust, deed to secure debt
or security deed may have the right to perform the obligation itself.
Generally, all sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A
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deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a mortgage loan on a debtor's residence by paying arrearages and
reinstate the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. In the case of a mortgage
loan not secured by the debtor's principal residence, courts with federal
bankruptcy jurisdiction may also reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
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Consumer Protection Laws with respect to Contracts
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Contracts included in a Contract
Pool may be subject to such provisions. The Home Protection Act applies to
mortgage loans originated on or after the effective date of such regulations.
These laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Contract; however,
the Obligor also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought by the Trust Fund against such
Obligor. The Home Protection Act provides that assignees of certain high-
interest, non-purchase money mortgage loans (which may include some Contracts)
are subject to all claims and defenses that the debtor could assert against the
original creditor, unless the assignee demonstrates that a reasonable person in
the exercise of ordinary due diligence could not have determined that the
mortgage loan was subject to the provisions of the Home Protection Act.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In addition to limitations imposed by FHA regulations with respect
to FHA-insured Home Improvement Contracts, in certain states there are or may
be specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Under the Agreement, late charges (to the
extent permitted by law and not waived by the Company) will be retained by the
Company as additional servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples
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of judicial remedies that may be fashioned include judicial requirements that
the lender undertake affirmative actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required lenders to reinstate
loans or recast payment schedules to accommodate borrowers who are suffering
from temporary financial disability. In some cases, courts have limited the
right of lenders to foreclose if the default under the mortgage instrument is
not monetary, such as the borrower failing to adequately maintain the property
or the borrower executing a junior mortgage or deed of trust affecting the
property. In other cases, some courts have been faced with the issue whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under mortgages or the deeds of trust
receive notices in addition to statutorily-prescribed minimum requirements. For
the most part, these cases have upheld the notice provisions as being
reasonable or have found that the sale by a trustee under a deed of trust or
under a mortgage having a power of sale does not involve sufficient state
action to afford constitutional protection to the borrower.
It is the Company's practice with some of the Home Improvement Contracts to
defer the first payment thereon for up to 90 days, and to charge the home
improvement contractor points to cover the lost interest due to collecting only
30 days' interest on the first payment on these deferred payment contracts.
"Due-on-Sale" Clauses
All of the Contract documents will contain due-on-sale clauses unless the
Prospectus Supplement indicates otherwise. These clauses permit the Servicer to
accelerate the maturity of the loan on notice, which is usually 30 days, if the
borrower sells, transfers or conveys the property without the prior consent of
the mortgagee. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Contracts) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Contract which contains a "due-on-sale" clause upon
transfer of an interest in the mortgaged property. This ability to accelerate
will not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Garn-
St. Germain Act and the regulations thereunder. As a result, a lesser number of
Contracts which contain "due-on-sale" clauses may extend to full maturity than
earlier experience would indicate with respect to single-family mortgage loans.
The extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Contracts bearing
an interest rate below the current market rate being assumed by a new home
buyer rather than being paid off, which may have an impact upon the average
life of the Contracts and the number of Contracts which may be outstanding
until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to
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FHA-insured loans and to first mortgage secured conventional contracts if the
contract is defined as a "federally related mortgage loan," a number of states
have adopted legislation overriding Title V's exemptions, as permitted by Title
V. The Company will represent and warrant in each Agreement that all Contracts
comply with any applicable usury limitations.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust Fund and reduce the amounts otherwise distributable to the holders of
the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company
will not foreclose on related real property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of
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interest on certain of the Contracts. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation, which
would not be recoverable from the related Contracts, would result in a
reduction of the amounts distributable to the Certificateholders. In addition,
the Relief Act imposes limitations that would impair the ability of the
Servicer to foreclose on an affected mortgage, deed of trust, deed to secured
debt or security deed during the mortgagor's period of active duty status, and,
under certain circumstances, during an additional three month period
thereafter. Thus, in the event that the Relief Act or similar legislation
applies to any Contract which goes into default, there may be delays in payment
on the Certificates in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Contracts resulting from similar
legislation or regulations may result in delays in payments or losses to
Certificateholders.
Repurchase Obligations
Under the Agreement, the Company will represent and warrant that each FHA-
insured Home Improvement Contract was originated in compliance with FHA
regulations and is covered by FHA Insurance. In the event FHA were to deny
insurance coverage on an FHA-insured Home Improvement Contract due to a
violation of FHA regulations in originating or servicing such Home Improvement
Contracts, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation of the Company to
repurchase such Home Improvement Contract unless the breach is cured. See
"Description of the Certificates--Conveyance of Contracts."
In addition, the Company will also represent and warrant under each Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust Fund for violation of any law and
such claim materially adversely affects the Trust Fund's interest in a
Contract, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Certificates--
Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
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Plan Asset Regulations
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in Certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the Certificates. Therefore, neither
Plans nor such entities should acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests. The prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
apply to the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the Company
and the Servicer that such person is neither a Plan, nor acting on behalf of a
Plan, nor purchasing with Plan Assets of any Plan.
Consultation With Counsel
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
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responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are subject to change (which
change may be retroactive) or possibly differing interpretations. The
discussion does not purport to deal with federal income tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors to determine the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each series will indicate whether or not an election
to be treated as a REMIC has been or will be made with respect thereto. The
following discussion deals first with Series with respect to which a REMIC
Election is made and then with Series with respect to which a REMIC Election is
not made.
REMIC Series
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel to
the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price contract in effect on the Startup
Day. The REMIC Regulations provide that a Contract is principally secured by an
interest in real property if the fair market value of the real property
securing the Contract is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Contract at the time it was
originated or (ii) 80% of the adjusted issue price (the then-outstanding
principal balance, with certain adjustments) of the Contract at the time it is
contributed to a REMIC. The fair market value of the underlying real property
is to be determined after taking into account other liens encumbering that real
property. Alternatively, a Contract is principally secured by an interest in
real property if substantially all of the proceeds of the Contract were used to
acquire or to improve or protect an interest in real property that, at the
origination date, is the only security
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for the Contract (other than the personal liability of the obligor). A
qualified mortgage also includes a qualified replacement mortgage that is used
to replace any qualified mortgage within three months of the Startup Day or to
replace a defective mortgage within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular Certificates.
In accordance with Section 860G(a)(7) of the Code, a reserve fund must be
"promptly and appropriately" reduced as payments on contracts are received.
Foreclosure property will be a permitted investment only to the extent that
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
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Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item of gross income and as a separate item of expense
to those Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated as
a fixed investment trust under applicable law but for its qualification as a
REMIC, or a REMIC that is substantially similar to an investment trust but is
structured with the principal purpose of avoiding this allocation requirement
imposed by the Temporary Treasury Regulations. Generally, a pass-through
interest holder refers to individuals, trusts and estates, certain other pass-
through entities beneficially owned by one or more individuals, trusts or
estates, and regulated investment companies. Such an individual, estate, trust
or pass-through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds a threshold amount specified in the Code ($196,600 for 1999, in
the case of a joint return) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the specified threshold amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of such an
individual, trust, estate or pass-through entity that is a holder of a Regular
Certificate in such a REMIC, no deduction will be allowed for such holder's
allocable portion of the foregoing expenses, even though an amount equal to the
total of such expenses will be included in such holder's gross income for
alternative minimum tax purposes. Unless otherwise stated in the related
Prospectus Supplement, the foregoing expenses will not be allocated to holders
of a Regular Certificate in a REMIC. If the foregoing limitations apply,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
Regular Certificates in such a "single class-REMIC" may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Such
prospective investors should carefully consult with their own tax advisors
prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code and interest thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code. If less than 95% of the average
adjusted basis of the assets comprising the REMIC are assets qualifying under
any of the foregoing Sections of the Code (including assets described in
Section 7701(a)(19)(C) of the Code), then the Regular Certificates will be
qualifying assets only to the extent that the assets comprising the REMIC are
qualifying assets. Furthermore, interest paid with respect to Certificates held
by a real estate investment trust will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code to the same extent that the
Certificates themselves are treated as real estate assets. Regular Certificates
held by a regulated investment company or a real estate investment trust will
not constitute "Government securities" within the meaning of Sections
851(b)(4)(A)(i) and 856(c)(4)(A) of the Code, respectively. In addition, the
REMIC Regulations provide that
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payments on Contracts held and reinvested pending distribution to
Certificateholders will be considered to be "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. Entities affected by the foregoing
provisions of the Code that are considering the purchase of Certificates should
consult their own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been issued. Nonetheless, the Code requires that a
prepayment assumption be used with respect to the underlying assets of a REMIC
in computing the accrual of original issue discount on Regular Certificates,
and that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or initial interest
rate holiday) includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that Regular Certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest
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that accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
Regular Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable on
Regular Certificates, including rates based upon the weighted average interest
rate of a Contract Pool, may not be treated as qualified stated interest. In
such case, the OID Regulations would treat interest under such rates as
contingent interest which generally must be included in income by the Regular
Certificateholder when the interest becomes fixed, as opposed to when it
accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest as
being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all Contracts will occur
in such a manner that the initial Pass-Through Rate for a Certificate will not
change. Accordingly, interest at the initial Pass-Through Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid
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or compounded with respect to such Regular Certificate, beginning with their
date of issuance and ending with the maturity date. The adjusted issue price of
a Regular Certificate at the beginning of any accrual period is the sum of the
issue price and accrued original issue discount for each prior accrual period
reduced by the amount of payments other than payments of qualified stated
interest made during each prior accrual period. The Code requires the present
value of the remaining payments to be determined on the bases of (a) the
original yield to maturity (determined on the basis of compounding at the close
of each accrual period and properly adjusted for the length of the accrual
period), (b) events, including actual prepayments, which have occurred before
the close of the accrual period, and (c) the assumption that the remaining
payments will be made in accordance with the original Prepayment Assumption.
The effect of this method is to increase the portions of original issue
discount that a Regular Certificateholder must include in income to take into
account prepayments with respect to the Contracts held by the Trust Fund that
occur at a rate that exceeds the Prepayment Assumption and to decrease (but not
below zero for any period) the portions of original issue discount that a
Regular Certificateholder must include in income to take into account
prepayments with respect to the Contracts that occur at a rate that is slower
than the Prepayment Assumption. Although original issue discount will be
reported to Regular Certificateholders based on the Prepayment Assumption, no
representation is made to Regular Certificateholders that the Contracts will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on such a Regular Certificate may be computed and accrued under
the same methodology that applies to Regular Certificates paying qualified
stated interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate Regular Certificates are issued,
the related Prospectus Supplement will describe the manner in which the
original issue discount rules may be applied with respect thereto and the
method to be used in preparing information returns to the holders of such
adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return on
the Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the adjustable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest is
not
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payable in all circumstances. In these situations, as well as others, it is
unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary income
as payments of principal are received on such Regular Certificate or upon the
sale or exchange of the Regular Certificate. In general, the holder of a
Regular Certificate may elect to treat market discount as accruing either (i)
under a constant yield method that is similar to the method for the accrual of
original issue discount or (ii) under a ratable accrual method (pursuant to
which the market discount is treated as accruing in equal daily installments
during the period the Regular Certificate is held by the purchaser), in each
case computed taking into account the Prepayment Assumption. Because the
regulations referred to above have not been issued, it is not possible to
predict what effect, if any, such regulations, when issued, might have on the
tax treatment of a Regular Certificate purchased at a discount in the secondary
market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. It appears that the Prepayment Assumption should be
taken into account in determining the term of a Regular Certificate for this
purpose. Amortizable bond premium with respect to a Regular Certificate will be
treated as an offset to interest income on such Regular Certificate, and a
Certificateholder's deduction for amortizable bond premium will be limited in
each year to the amount of interest income derived with respect to such Regular
Certificate for such year. Any election to deduct amortizable bond premium will
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Certificateholder at the beginning of
the first taxable year to which the election applies or thereafter acquired,
and may be revoked only with the consent of the Service. Bond
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premium on a Regular Certificate held by a Certificateholder who does not elect
to deduct the premium will decrease the gain or increase the loss otherwise
recognized on the disposition of the Regular Certificate. Certificateholders
who pay a premium for a Regular Certificate should consult their tax advisors
concerning such an election and rules for determining the method for amortizing
bond premium.
Realized Losses. Holders of a Regular Certificate acquired in connection with
a trade or business should be allowed to deduct as ordinary losses any losses
sustained during a taxable year in which the Regular Certificates become wholly
or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a Regular Certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until such
holder's certificate becomes wholly worthless, which may not occur until its
outstanding principal balance has been reduced to zero. Any such loss may be
characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a Regular Certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Except as discussed below or with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other taxable disposition of a Regular Certificate will be capital gain if the
Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in the
holder's income if the yield on such Regular Certificate had equaled 110% of
the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the Contracts,
plus any cancellation of
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indebtedness income due to realized losses with respect to Regular Certificates
and income on reinvestment of cash flows and reserve assets, minus deductions,
including interest and original issue discount expense on the Regular
Certificates, bad debt losses with respect to the underlying assets of a REMIC,
servicing fees on the Contracts, other administrative expenses of a REMIC, and
amortization of premium, if any, with respect to the Contracts.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization of
premium with respect to the Contracts, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Contracts
is acquired by a REMIC at a discount, and one or more of such Contracts is
prepaid, the Residual Holder may recognize taxable income without being
entitled to receive a corresponding cash distribution because (i) the
prepayment may be used in whole or in part to make distributions on Regular
Certificates, and (ii) the discount on the Contracts which is includable in a
REMIC's income may exceed its deduction with respect to the distributions on
those Regular Certificates. When there is more than one class of Regular
Certificates that receive payments sequentially (i.e., a fast-pay, slow-pay
structure), this mismatching of income and deductions is particularly likely to
occur in the early years following issuance of the Regular Certificates, when
distributions are being made in respect of earlier classes of Regular
Certificates to the extent that such classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
classes of Regular Certificates are made. Taxable income may also be greater in
earlier years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
Regular Certificates, may increase over time as distributions are made on the
lower yielding classes of Regular Certificates, whereas interest income with
respect to any given Contract will remain constant over time as a percentage of
the outstanding principal amount of that loan (assuming it bears interest at a
fixed rate). Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate as
of the close of the quarter (or time of disposition of the Residual Certificate
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Certificate is
the amount paid for such Residual Certificate. Such adjusted basis will be
increased by the amount of taxable income of the REMIC reportable by the
Residual Holder and decreased (but not below zero) by the amount of loss of the
REMIC reportable by the Residual Holder. A cash distribution from the REMIC
also will reduce such adjusted basis (but not below zero). Any loss that is
disallowed on account of this limitation may be carried over indefinitely by
the Residual Holder for whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC Regulations imply
that residual interests cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC Regulations indicates that, while existing
tax rules do not accommodate such concepts, the Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
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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 Contracts, the Residual
Holder will not recover such excess basis until termination of the REMIC unless
Treasury Regulations yet to be issued provide for periodic adjustments to the
REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
Regular Certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule described therein.
The REMIC will have market discount income in respect of the Contracts if, in
general, the basis of the REMIC in such Contracts is exceeded by their unpaid
principal balances. The REMIC's basis in such Contracts is generally the fair
market value of the Contracts immediately after the transfer thereof to the
REMIC (which will equal the aggregate issue prices of the REMIC Certificates
which are sold to investors and the estimated fair market value of any classes
of Certificates which are retained). In respect of the Contracts that have
market discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Contracts exceeds the unpaid
principal balances thereof, the REMIC will be considered to have acquired such
Contracts at a premium equal to the amount of such excess. As stated above, the
REMIC's basis in the Contracts is the fair market value of the Contracts
immediately after the transfer thereof to the REMIC. Generally, a REMIC that
holds a Contract as a capital asset will elect to amortize premium on the
Contracts under a constant interest method. See the discussion under "REMIC
Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. A portion (or all) of the
REMIC taxable income includable in determining the federal income tax liability
of a Residual Holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for such quarterly period of (i) 120% of the long-term
applicable Federal rate that would have applied to the Residual Certificate (if
it were a debt instrument) on the Startup Day under Section 1274(d) of the
Code, multiplied by (ii) the adjusted issue price of such Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue
price of the Residual Certificate, plus the amount of such daily accruals of
REMIC income described in this paragraph for all prior quarters, decreased by
any distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder is
an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company owns
a Residual Certificate, a portion (allocated under Treasury Regulations yet to
be issued) of dividends paid by such real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders and would constitute unrelated business taxable income for tax-
exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
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Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit, under penalties of perjury, that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may
be waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays such amount of tax as
the Treasury Department may require (presumably, a corporate tax on the excess
inclusion for the period the residual interest is actually held by the
Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false. For taxable years beginning after December 31, 1997,
notwithstanding the preceding sentences, in the case of a REMIC Residual
Certificate held by an "electing large partnership," all interests in such
partnership shall be treated as held by disqualified organizations (without
regard to whether the recordholders of the partnership furnish statements
described in the preceding sentence) and the amount that is subject to tax the
second preceding sentence is excluded from the gross income of the partnership
allocated to the partners (in lieu of allocating to the partners a deduction
for such tax paid by the partnership).
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in
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an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above. The REMIC Regulations explain that a significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of
the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A safe harbor is provided if (i) the transferor conducted, at the time
of the transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the transferee
would not continue to pay its debts as they came due in the future, and (ii)
the transferee represents to the transferor that it understands that, as the
holder of a non-economic residual interest, the transferee may incur tax
liabilities in excess of any cash flows generated by the interest and that the
transferee intends to pay taxes associated with holding the residual interest
as they become due. The Agreement with respect to each series of REMIC
Certificates will require the transferee of a Residual Certificate to certify
to the statements in clause (ii) of the preceding sentence as part of the
affidavit described above under "Restrictions on Transfer of Residual
Certificates."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a Residual Certificate should consult their
tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a Contract occasioned by default or a reasonably foreseeable
default of the Contract, the assumption of the Contract, the waiver of a due-
on-sale clause or the conversion of an interest rate by an Obligor pursuant to
the terms of a convertible adjustable-rate Contract will not be treated as a
disposition of the Contract. In the event
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that a REMIC holds Convertible ARM Loans which are convertible at the option of
the Obligor into fixed-rate, fully amortizing, level payment Contracts, a sale
of such Contracts by the REMIC pursuant to a purchase agreement or other
contract with the Company or other party, if and when the Obligor elects to so
convert the terms of the Contract, will not result in a prohibited transaction
for the REMIC. The Code also imposes a 100% tax on contributions to a REMIC
made after the Startup Day, unless such contributions are payments made to
facilitate a cleanup call or a qualified liquidation of the REMIC, payments in
the nature of a guaranty, contributions during the three-month period beginning
on the Startup Day or contributions to a qualified reserve fund of the REMIC by
a holder of a residual interest in the REMIC. The Code also imposes a tax on a
REMIC at the highest corporate rate on certain net income from foreclosure
property that the REMIC derives from the management, sale, or disposition of
any real property, or any personal property incident thereto, acquired by the
REMIC in connection with the default or imminent default of a loan. Generally,
it is not anticipated that a REMIC will incur a significant amount of such
taxes or any material amount of state or local income or franchise taxes.
However, if any such taxes are imposed on a REMIC they will be paid by the
Company or the Trustee, if due to the breach of the Company's or the Trustee's
obligations, as the case may be, under the related Pooling and Servicing
Agreement or in other cases, such taxes shall be borne by the related Trust
Fund resulting in a reduction in amounts otherwise payable to holders of the
related Regular or Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the income
of which is includible in gross income for United States tax purposes
regardless of its source or (iv) a trust if (A) a court within the United
States is able to exercise primary supervision over the administration of the
trust and (B) one or more United States persons have authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which regulations have not yet been issued, a
trust which was in existence on August 20, 1996 (other than a trust treated as
owned by the grantor under Subpart E of Part I of Subchapter J of Chapter 1 of
the Code), and which was treated as a United States person on August 19, 1996,
may elect to continue to be treated as a United States person notwithstanding
the previous sentence. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder is not subject to federal
income or withholding tax on interest (or original issue discount, if any) on a
Regular Certificate (subject to possible backup withholding of tax, discussed
below). To qualify for this tax exemption, the Foreign Holder will be required
to provide periodically a statement signed under penalties of perjury
certifying that the Foreign Holder meets the requirements for treatment as a
Foreign Holder and providing the Foreign Holder's name and address. The
statement, which may be made on a Form W-8 or substantially similar substitute
form, generally must be provided in the year a payment occurs or in either of
the two preceding years. The statement must be provided, either directly or
through clearing organization or financial institution intermediaries, to the
person that otherwise would withhold tax. This exemption may not apply to a
Foreign Holder that owns both Regular Certificates and Residual Certificates.
If the interest on a Regular Certificate is effectively connected with the
conduct by a Foreign Holder of a trade or business within the United States,
then the Foreign Holder will be subject to tax at regular graduated rates. In
addition, the foregoing rules will not apply to exempt a U.S. shareholder of a
controlled foreign corporation from taxation on such U.S. shareholder's
allocable portion of the interest income received by such controlled foreign
corporation. Foreign
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Holders should consult their own tax advisors regarding the specific tax
consequences of their owning a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii) the
gain is effectively connected with the conduct by the Foreign Holder of a trade
or business within the United States.
It appears that a Regular Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
Certificate. Backup withholding, however, does not apply to payments on a
Certificate made to certain exempt recipients, such as corporations and tax-
exempt organizations, and to certain foreign persons. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
Non-REMIC Series
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Contract Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Contracts and pursuant to which Non-
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REMIC Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of
Chapter 1 of the Code. In such event, each Non-REMIC Certificateholder will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the trust attributable to the Contract Pool in which its
Certificate evidences an ownership interest and will be considered the
equitable owner of a pro rata undivided interest in each of the Contracts
included therein. The following discussion assumes the Trust Fund will be so
classified as a grantor trust.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Contracts under these Code sections and should, in
addition, consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the Contracts comprising such Contract Pool,
including interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Contracts. (For purposes of this discussion, the term
"disposition," when used with respect to the Contracts, includes scheduled or
prepaid collections with respect to the Contracts, as well as the sale or
exchange of a Non-REMIC Certificate.) Subject to the discussion below of
certain limitations on itemized deductions, Non-REMIC Certificateholders will
be entitled under Section 162 or 212 of the Code to deduct their pro rata share
of related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($124,500 for 1998, in the case of a joint return) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. Furthermore, in determining the alternative
minimum taxable income of an individual, trust, estate or pass-through entity
that is a holder of a Non-REMIC Certificate, no deduction will be allowed for
such holder's allocable portion of the foregoing expenses, even though an
amount equal to the total of such expenses will be included in such holder's
gross income for alternative minimum tax purposes. To the extent that a Non-
REMIC Certificateholder is not permitted to deduct servicing fees allocable to
a Non-REMIC Certificate, the taxable income of the Non-REMIC Certificateholder
attributable to that Non-REMIC Certificate will exceed the net cash
distributions related to such income. Non-REMIC Certificateholders may deduct
any loss on disposition of the Contracts to the extent permitted under the
Code.
To the extent that any of the Contracts comprising a Contract Pool were
originated on or after March 2, 1984 and under circumstances giving rise to
original issue discount, Certificateholders will be required to report annually
an amount of additional interest income attributable to such discount in such
Contracts prior to receipt of cash related to such discount. To the extent that
the Non-REMIC Certificates represent an interest in any
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pool of debt instruments the yield on which may be affected by reason of
prepayments, for taxable years beginning after August 5, 1997, a prepayment
assumption must be used with respect to the Contracts comprising the Contract
Pool in computing the accrual of any original issue discount, market discount
or amortizable premiums. See the discussion above under "REMIC Series--Original
Issue Discount." Similarly, Code provisions concerning market discount and
amortizable premium will apply to the Contracts comprising a Contract Pool to
the extent that the loans were originated after July 18, 1984 and September 27,
1985, respectively. See the discussions above under "REMIC Series--Market
Discount" and "REMIC Series--Amortizable Premium." It is unclear whether a
prepayment assumption would be applicable in accruing or amortizing any such
original issue or market discount or premium with respect to Non-REMIC
Certificates that do not represent an interest in any pool of debt instruments
the yield on which may be affected by reason of prepayments, or for taxable
years beginning prior to August 5, 1997.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there has been a separation of ownership of the right to receive some or
all of the principal payments on a Contract from ownership of the right to
receive some or all of the related interest payments. Non-REMIC Certificates
will constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Contracts
comprising a Contract Pool; (iii) if two or more classes of Non-REMIC
Certificates are issued representing the right to non-pro rata percentages of
the interest or principal payments on the Contracts; or (iv) if Non-REMIC
Certificates are issued which represent the right to interest only payments or
principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code,
the issue price of a Stripped Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the original issue discount de minimis rules described above. A purchaser
of a Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Contracts. See "REMIC Series--Market Discount" above.
To the extent the Stripped Certificates represent an interest in any pool of
debt instrument the yield on which may by affected by reason of prepayments,
for taxable years beginning after August 5, 1997, a prepayment assumption must
be used in computing yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made. It is unclear whether a
prepayment assumption would be applicable to the Stripped Certificates that do
not represent an interest in any such pool or for taxable years beginning prior
to August 5, 1997. The Code appears to require that such a prepayment
assumption be used in computing yield with respect to Stripped Certificates
that do not represent an interest in a pool of debt instruments the yield on
which may be affected by reason of prepayments or for taxable years beginning
prior to August 5, 1997. In the absence of authority to the contrary, the
Company intends to base information reports and returns to the Service and the
holders of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of
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Stripped Certificates should refer to the related Prospectus Supplement to
determine whether and in what manner the original issue discount rules will
apply thereto.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the Contracts represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported income or gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported with
respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital gain
or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under "REMIC
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Contracts were originated after
July 18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their
54
<PAGE>
tax returns. Reports will be made annually to the Service and to holders of
record that are not excepted from the reporting requirements regarding
information as may be required with respect to interest and original issue
discount, if any, with respect to the Non-REMIC Certificates.
Other Tax Consequences
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that are
secured by liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the
Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their
jurisdiction from holding securities representing residual interests, including
securities previously purchased. There may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
55
<PAGE>
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Securities Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus supplement for definitive +
+information on any matter contained herein. This preliminary prospectus +
+supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement to Base No. 4
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Improvement Loans
Series 1999-
----------
The certificates will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate Pass-Through Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- ------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
A-1A ARM................ $ (4) % % %
A-1B ARM................ $ (5) % % %
A-1..................... $ % % % %
A-2..................... $ % % % %
A-3..................... $ % % % %
A-4..................... $ % % % %
A-5..................... $ % % % %
A-6 IO.................. (6) % % %(7) %
M-1..................... $ %(8) % % %
M-2..................... $ %(8) % % %
B-1..................... $ %(8) % % %
B-2A.................... $ %(8) % % %
------------ -------------- ---------- --------------
Total................... $ $ $ $
============ ============== ========== ==============
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The lesser of one-month LIBOR plus % or the available funds pass-
through rate, but in no case more than 14%.
(5) The lesser of one-month LIBOR plus % or the available funds pass-
through rate, but in no case more than 14%.
(6) Interest on the Class A-6 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $
(or the pool scheduled principal balance, if less) for the first 24 months
and will equal zero thereafter.
(7) The underwriting discount for the Class A-6 IO Certificate has been
calculated as a percentage of the dollar amount of the price to public for
such Certificate.
(8) Or the weighted average of the rates on the loans, if less.
Investing in the certificates involves certain risks. Prospective investors
should consider carefully the Risk Factors beginning on page S- in this
prospectus supplement and on page in the prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
These certificates will be delivered through the same-day funds settlement
system of the Depository Trust Company on or about , 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- in this prospectus supplement and
on page in the prospectus.
----------
Underwriters
The date of this prospectus supplement is , 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................. S-4
Risk Factors............................................................. S-13
Structure of the Transaction............................................. S-13
Use of Proceeds.......................................................... S-14
The Loans................................................................ S-14
Yield and Prepayment Considerations...................................... S-19
Green Tree Financial Corporation......................................... S-25
Description of the Certificates.......................................... S-26
Description of the Class B-2 Limited Guaranty............................ S-45
Certain Federal Income Tax Consequences.................................. S-46
ERISA Considerations..................................................... S-46
Underwriting............................................................. S-48
Legal Matters............................................................ S-48
Annex I.................................................................. A-1
Prospectus
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 8
The Trust Fund........................................................... 9
Use of Proceeds.......................................................... 11
Green Tree Financial Corporation......................................... 11
Yield Considerations..................................................... 13
Maturity and Prepayment Considerations................................... 13
Description of the Certificates.......................................... 14
Certain Legal Aspects of the Loans; Repurchase Obligations............... 27
ERISA Considerations..................................................... 36
Certain Federal Income Tax Consequences.................................. 37
Legal Investment Considerations.......................................... 54
Ratings.................................................................. 54
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the certificates in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Equity Loan Trust 1999-A since the date hereof.
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home improvement lending business, and about any series of
certificates for home improvement loans that Green Tree may wish to sell. This
prospectus supplement contains more detailed information about this series of
S-2
<PAGE>
certificates. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these certificates has been or will be prepared in
the United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These certificates may not be offered or sold, or re-offered
or re-sold, to persons in the United Kingdom, except (1) to persons whose
ordinary activities involve them in acquiring, holding, managing and disposing
of investments (as principal or agent) for the purpose of their businesses, or
(2) in circumstances that will not constitute or result in an offer to the
public in the United Kingdom within the meaning of the United Kingdom Public
Offers of Securities Regulation 1995. You may not pass this prospectus
supplement and prospectus, or any other document inviting applications or
offers to purchase certificates or offering certificates for purchase, to any
person in the United Kingdom who (1) does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
(2) is not otherwise a person to whom passing this prospectus supplement and
prospectus would be lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the certificates,
read this entire prospectus supplement and the accompanying prospectus.
The 13 classes of certificates for Home Improvement Loans, Series 1999-A
listed on the table below will represent interests in a trust consisting of a
pool of home equity loans.
<TABLE>
<CAPTION>
Pass-Through Approximate S&P Fitch
Class Rate Principal Amount(1) Rating Rating
- ----- ------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
A-1A ARM......................... (2) $
A-1B ARM......................... (3)
A-1.............................. %
A-2.............................. %
A-3.............................. %
A-4.............................. %
A-5.............................. %
A-6 IO........................... % (4)
M-1.............................. %(5)
M-2.............................. %(5)
B-1.............................. %(5)
B-2A............................. %(5)
B-2(6)........................... %(5)
</TABLE>
- -------
(1) May vary plus or minus 5%.
(2) The lesser of one-month LIBOR plus % or the available funds pass-
through rate, but in no case more than 14%.
(3) The lesser of one-month LIBOR plus % or the available funds pass-
through rate, but in no case more than 14%.
(4) Interest on the Class A-6 IO certificates will be based on a notional
principal amount. That notional principal amount will equal $
(or the pool scheduled principal balance, if less) for the first 24 months
and will equal zero thereafter.
(5) Or the weighted average of the rates on the loans, if less.
(6) Green Tree will retain the Class B-2 certificates initially, but may sell
them later pursuant to this prospectus supplement.
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 regular business day, the next regular
business day. The first payment date will be
, .
Record Date................ The business day immediately prior to the payment
date (for example, if the payment date is 15,
the record date would be 14, assuming that
14 is a regular business day).
S-4
<PAGE>
Description of The Class A-1A ARM, Class A-1B ARM, Class A-1,
Certificates............... Class A-2, Class A-3, Class A-4, Class A-5, and
Class A-6 IO certificates are senior
certificates. We call all of these certificates
the "Class A certificates."
The Class M-1 and Class M-2 certificates are
subordinated certificates. We call these
certificates the "Class M certificates."
The Class B-1, Class B-2A and Class B-2
certificates are also subordinated certificates.
We call these certificates the "Class B
certificates."
Distributions on the Distributions on the certificates on any payment
Certificates............ date will be made primarily from amounts
collected during the prior calendar month on the
home improvement loans comprising the pool. This
is the amount available for distribution. On each
payment date, the trustee will apply these
amounts to make distributions of principal and
interest on the certificates in the following
order of priority:
^ payment of the monthly servicing fee, if
Green Tree is no longer the servicer;
^ Class A interest;
^ Class M-1 interest;
^ Class M-2 interest;
^ Class B-1 interest;
^ Class A principal (other than the Class A-6
IO certificates);
^ Class M-1 principal;
^ Class M-2 principal;
^ Class B-1 principal;
^ Class B-2A interest;
^ Class B-2A principal;
^ Class B-2 interest;
^ Class B-2 principal;
^ payment of any additional amounts due on the
Class A-1A ARM and Class A-1B ARM
certificates because of the "available funds
pass-through rate" limitation on their
respective pass-through rates;
^ payment of the monthly servicing fee to
Green Tree; and
^ Class B-2A additional principal.
See "Description of the Certificates--Payments on
Loans" for a detailed description of the amounts
that will constitute the amount available for any
payment due.
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, to the extent of the amount
available. See "Description of the Certificates--
Distributions on Certificates" and "--Losses on
Liquidated Loans" for a more detailed description
of the calculation of interest payable on the
certificates.
B. Principal on the Class
A, Class M and
Class B-1 Certificates
........................
After payment of the interest due on the
certificates described above, the trustee will
then apply any remaining amount available to pay
principal on the Class A (except the Class A-6 IO
certificates, which will receive no principal),
Class M and Class B-1 certificates in the amounts
and order of priority set forth below:
First, the trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the adjustable rate
home equity loans for that payment date, to the
Class A-1A ARM and Class A-1B ARM certificates.
Second, the trustee will distribute a portion of
a formula amount dictated by the amount of
principal due (whether or not collected) on the
fixed-rate home equity loans for that payment
date, to the other Class A and the Class M
certificates. These distributions will be made in
the following order:
^ a specified portion of the formula principal
amount will be payable to the Class A-5
certificates, then
^ 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 A-5 certificates until retired,
then
^ to the Class M-1 certificates until retired,
and then
^ to the Class M-2 certificates until retired.
After paying the amounts of principal due on the
Class A and Class M certificates described above,
the trustee will then apply any remaining amount
available to pay principal on the Class B-1
certificates until retired. Generally, the amount
of principal payable on the Class B-1
certificates will be zero until April 2002, and
thereafter will depend on the satisfaction of
certain tests relating to the performance of the
home equity loans and the amount of principal
previously paid on the Class A and Class M
certificates.
S-6
<PAGE>
See "Description of the Certificates--
Distributions on Certificates" for a more
detailed description of the calculation of
principal payable on the certificates.
C. Class B-2A Interest..... After paying the amount of interest and principal
due on the certificates described above, the
trustee will then apply the remaining amount
available to pay interest on the Class B-2A
certificates. See "Description of the
Certificates--Distributions on Certificates" for
a more detailed description of the calculation of
interest payable on the Class B-2A certificates.
D. Class B-2A Principal.... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply the remaining
amount available to pay a specified portion of
the formula principal amount as principal on the
Class B-2A certificates until retired. See "Yield
and Prepayment Considerations" and "Description
of the certificates--Distributions on
certificates--Class B-2A Principal" for a more
detailed description of the timing and amount of
principal distributions to be paid on the Class
B-2A certificates.
E. Class B-2 Interest...... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply any remaining
amount available to pay interest on the Class B-2
certificates. See "Description of the
certificates--Distributions on certificates" for
a more detailed description of the calculation of
interest payable on the Class B-2 certificates.
F. Class B-2 Principal..... After paying the amounts of interest and
principal due on the certificates described
above, the trustee will then apply the remaining
amount available to pay a specified portion of
the formula principal amount as principal on the
Class B-2 certificates.
G. Class B-2A Additional After paying the amounts of interest and
Principal.................. principal due on the certificates described
above, and after paying the Monthly Servicing Fee
to the Servicer, the trustee will apply 50% of
the remaining amount available, if any, to the
payment of additional principal on the Class B-2A
certificates.
Class B-2 Limited Green Tree will guarantee payment of interest and
Guaranty................... principal on the Class B-2 certificates. The
Class B-2 Limited Guaranty is of no benefit to
any other class of certificates (including the
Class B-2A certificates) and will be an unsecured
general obligation of Green Tree unsupported by
any letter of credit or other credit enhancement.
See "Description of the Class B-2 Limited
Guaranty" for a complete description of Green
Tree's obligation under the Class B-2 Limited
Guaranty.
Capitalized Interest The trustee will establish a capitalized interest
Account.................... account to cover interest payments on the
certificates on the payment dates in , and
1999 in the event that interest
S-7
<PAGE>
collections on the loans are insufficient. Any
funds remaining in the capitalized interest
account will be released to a subsidiary of Green
Tree in 1999 (or after the pre-funding
account described below has been fully used, if
earlier).
Subordination of Class M
and Class B Certificates...
The Class M and Class B-1 certificates will be
subordinate to the Class A certificates, meaning
that the trustee will apply the amount available
to pay all interest then due on the Class A
certificates before paying the interest then due
on the Class M and Class B-1 certificates, and
the trustee will likewise apply the remaining
amount available (after paying interest on the
Class A, Class M and Class B-1 certificates) to
pay all principal then due on the Class A
certificates before paying any principal on the
Class M or Class B-1 certificates. The Class M-2
certificates will be similarly subordinated to
the Class M-1 certificates. In addition, the
Class B-1 certificates are entitled to interest
only after payment of all interest then due on
the Class A and Class M certificates and to
principal distributions only after all the Class
A and Class M certificates are paid in full, or
if certain tests relating to the performance of
the home equity loans are met. This increases the
possibility that the Class A and Class M
certificates would be paid in full but the Class
B-1 certificates would not. The Class B-2A
certificates will be subordinated to the Class A,
Class M and Class B-1 certificates, with interest
and principal payable from the amount available
only after payment of all interest and principal
then due on the Class A, Class M and Class B-1
certificates. The Class B-2 certificates will be
similarly subordinated to the Class B-2A
certificates. See "Description of the
certificates-- Distributions on certificates" for
a more detailed description of the manner and
order of priority of distributions on the
certificates.
In addition, in the event of severe losses and
delinquencies on the home improvement loans
comprising the pool, those losses will first be
imposed on the Class B-2 certificates, then on
the Class B-2A certificates, then on the Class B-
1 certificates, and then on the Class M-2
certificates, and so on through classes of
increasing seniority. See "Description of the
certificates--Losses on Liquidated Loans" for a
more detailed description of the allocation of
losses on the home improvement loans.
Home Improvement Loans..... The pool will include two types of home
improvement loans: fixed-rate home improvement
loans and adjustable rate home improvement loans.
In this summary, we sometimes refer to the home
improvement loans as the "loans." References to
percentages of the loans refer to the percentage
of the aggregate principal balance of the loans
as of the cut-off date.
S-8
<PAGE>
A. Fixed-Rate Home
Improvement Loans.......
This prospectus supplement provides information
regarding a portion of the fixed-rate home
improvement loans, representing about % of
all the fixed-rate home improvement loans. Green
Tree will transfer another portion of the fixed-
rate home equity loans to the trust on the
closing date, and will transfer the remaining
fixed-rate home improvement loans to the trust
within 90 days after the closing date.
With respect to the fixed-rate home improvement
loans (as of the cut-off date):
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ the loan rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average
term to scheduled maturity, as of the cut-
off date, was months;
^ % are balloon loans and the rest
provide for level monthly payments for the
duration of the loan;
^ the weighted average loan rate on the
balloon loans was %;
^ the balloon loans had a weighted average
term to scheduled maturity, as of their
dates of origination, of months, and a
weighted average to maturity as of the cut-
off date of months; and
^ the latest scheduled maturity date was in
, .
See "The Loans--Fixed-Rate Loans" for a more
detailed description of the fixed-rate home
improvement loans and the permissible
characteristics of the second and third portions
of the fixed-rate home improvement loans.
B. Adjustable Rate Home
Improvement Loans.......
This prospectus supplement provides information
regarding a portion of the adjustable rate home
improvement loans, representing about % of
all the adjustable rate home improvement loans.
Green Tree will transfer another portion of the
adjustable rate home improvement loans to the
trust on the closing date, and will transfer the
remaining adjustable rate home improvement loans
to the trust within 90 days after the closing
date.
For purposes of calculating the amount of
principal payable on each payment date on the
Class A-1A ARM and Class A-1B ARM certificates,
the adjustable rate loans have been divided into
two groups, Group I and Group II,
S-9
<PAGE>
respectively. This prospectus supplement provides
information regarding the initial Group I
adjustable rate loans and the initial Group II
adjustable rate loans. See "The Loans--Adjustable
Rate Loans" for a more detailed description of
the adjustable rate home improvement loans and
the permissible characteristics of the second and
third portions of the adjustable rate home
improvement loans.
1. Group I............... With respect to the Group I adjustable rate loans
(as of the cut-off date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ no loan has a principal balance at
origination of more than $ ;
^ each loan accrues interest at a fixed rate
for no more than months, and thereafter
the interest rate adjusts semiannually to
equal the sum of the six-month LIBOR and the
gross margin specified in that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months.
2. Group II ............. With respect to the Group II adjustable rate
loans (as of the cut-off date):
^ all are secured by a lien on the related real
property;
^ the related properties are located in
states and the District of Columbia;
^ there are loans;
^ each loan accrues interest at a fixed rate
for no more than months, and thereafter
the interest rate adjusts semiannually to
equal the sum of the six-month LIBOR and the
gross margin specified in that loan;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months.
Pre-Funding Account........ If the aggregate principal balance of the loans
transferred by Green Tree to the trust on the
closing date is less than the aggregate original
principal balance of the certificates, that
difference (which Green Tree expects will be
approximately $ ) 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 , . If those funds are not
completely used by , , the remaining funds
(if any) will be distributed as principal on the
Class A-1 certificates (to the extent of
remaining funds that had
S-10
<PAGE>
been allocated for the purchase of fixed-rate
loans), and on the Class A-1A ARM and Class A-1B
ARM certificates (to the extent of remaining
funds that had been allocated for the purchase of
adjustable rate loans) on the payment
date.
Advances................... The Servicer is obligated to make advances each
month of any scheduled payments on the loans that
were due but not received during the prior due
period, but it will be entitled to reimbursement
for any advance. See "Description of the
Certificates--Advances" in this prospectus
supplement and in the prospectus for a more
detailed description of the Servicer's obligation
to make advances and its right to be reimbursed
for advances.
Repurchase or Substitution
Obligations................
Green Tree will make representations and
warranties about the loans when it transfers them
to the trust. If a representation or warranty is
breached in a way that materially and adversely
affects the interests of the Certificateholders,
then Green Tree must, within 90 days, either (i)
cure the breach or (ii) repurchase the defective
loans. During the first two years after the
closing date, Green Tree 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 for a more complete description of
Green Tree's representations and warranties about
the loans, its repurchase obligation, and its
right to substitute loans.
Repurchase Options......... After the scheduled principal balance of the
loans is less than 10% of the scheduled principal
balance of the loans as of their applicable cut-
off dates, the 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 for a more detailed description of the
terms of this repurchase option.
Ratings.................... The certificates will not be issued and sold
unless Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("Fitch") have
assigned the ratings specified on page S-4 (or
better) to the certificates.
The ratings on each class of certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each class of certificates by Fitch
addresses the likelihood of the receipt of
Certificateholders of all distributions to which
such Certificateholders are entitled. The ratings
of S&P and Fitch do not address the likelihood of
payment of any interest carried forward and
payable to the Class A-1A ARM and Class A-1B ARM
Certificateholders on future payment dates. A
security rating is not a recommendation to buy,
sell or hold securities and may be
S-11
<PAGE>
subject to revision or withdrawal at any time by
the assigning rating agency.
S&P assigns the additional rating of "r" to
highlight classes of securities that S&P believes
may experience high volatility or high
variability in expected returns due to non-credit
risks.
The ratings of the Class B-2 certificates are
based in part on an assessment of Green Tree's
ability to make payments under the Class B-2
Limited Guaranty. Any reduction in the rating of
Green Tree's debt securities may result in a
similar reduction in the ratings of the Class B-2
certificates.
Green Tree has not requested a rating of the
certificates from any rating agencies other than
S&P and Fitch. You must not assume that another
rating agency will assign a rating to any of
these certificates, nor should you assume what
any such rating, if issued, would be.
Tax Status................. In the opinion of counsel to Green Tree, for
federal income tax purposes the trust will
consist of two segregated asset pools--the
"master REMIC" and the "subsidiary REMIC" and
each will be treated as a separate "real estate
mortgage investment conduit" or "REMIC." Each
class of certificates will constitute "regular
interests" in the Master REMIC and generally will
be treated as debt instruments of the trust for
federal income tax purposes. If you purchase a
Certificate, you will be required to include as
income all interest paid on the certificates
(including any original issue discount), in
accordance with the accrual method of accounting,
even if you usually use the cash method of
accounting. The Class A-6 IO certificates will be
considered to have been issued with original
issue discount. See "Certain Federal Income Tax
Consequences" in this prospectus supplement and
in the prospectus for a more detailed description
of the tax status of the certificates.
ERISA Considerations........ Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
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.
Legal Investment The certificates will not constitute "mortgage
Considerations.............. related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the loans are not secured by
first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the
certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
certificates.
S-12
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase certificates. There are more risk factors that are applicable to any
series of certificates like these. Those risk factors are printed in the
prospectus and you should consider those risk factors also.
Limited Historical Data With Respect to Home Improvement Loans. Green Tree
began purchasing and servicing FHA-insured home improvement loans in April
1989, and conventional home improvement loans in September 1992, and thus has
limited historical experience with respect to the performance, including the
rate of prepayments of home improvement loans. Accordingly, Green Tree's
delinquency experience and loan loss and liquidation experience set forth under
"The Loans" may not be indicative of the performance of the Loans.
STRUCTURE OF THE TRANSACTION
On or about , 1998 (the "Closing Date"), Green Tree Financial
Corporation (the "Company") will establish the trust pursuant to a Pooling and
Servicing Agreement to be dated as of , 1998 (the "Agreement"), between
the Company, as Seller and Servicer, and the trustee.
The Class A-1, Class A-2, Class A-3, Class M-1, Class M-2, Class B-1 and
Class B-2 certificates will be issued by the trust, the corpus of which will
consist primarily of home improvement loans (the "Loans"), including all rights
to receive payments due on such Loans on and after , 1998 (or the date of
origination thereof, if later) (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 (as defined
below), and the Class B-2 Limited Guaranty of the Company for the benefit of
the Class B-2 certificates, as described in "Description of the Class B-2
Limited Guaranty" herein.
Payments and recoveries in respect of principal and interest on the Loans
will be paid into a separate trust account maintained at an Eligible
Institution (initially [trustee], Minneapolis, Minnesota) in the name of the
trust (the "Certificate Account"), no later than one business day after
receipt. Payments deposited in the Certificate Account in respect of each Due
Period, as defined below, will be applied on the fifteenth day of the next
month (or, if such day is not a business day, the next succeeding business day)
(each a "Payment Date") to make the distributions to the Certificateholders as
of the immediately preceding Record Date as described under "Description of the
certificates--Distributions on the certificates" herein and to pay certain
monthly fees to the Servicer as compensation for its servicing of the Loans
(the "Monthly Servicing Fee").
The Servicer will be obligated to advance any scheduled payments on the Loans
("Advances") that were due but not received during the calendar month preceding
the month in which the Payment Date occurs (the "Due Period"). The Servicer
will be entitled to reimbursement of an Advance from funds available therefor
in the Certificate Account. The Servicer will not be required to make any
Advance to the extent that it does not expect to recoup the Advance from
subsequent funds available therefor in the Certificate Account. If the Servicer
fails to make any Advance required under the Agreement, the trustee is
obligated (subject to certain conditions) to make such Advance.
Following the transfer of the Loans from the Company to the trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the certificates--Conveyance of Loans"
herein, (c) certain indemnities, and (d) the Class B-2 Limited Guaranty. The
Company is obligated under the Agreement to repurchase at the Repurchase Price
(as defined herein) any Loan on the first Payment Date which is more than 90
days after the Company becomes aware, or the Company receives written notice
from the trustee, of any breach of any such representation and warranty in the
Agreement that materially adversely affects the Certificateholders' interest in
such Loan if such breach has not been cured prior to such date. The Agreement
also provides that the Company has certain obligations to repurchase Loans and
to indemnify the trustee and Certificateholders with respect to certain other
matters.
S-13
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement loans and promissory notes, providing
warehouse financing for the purchase of loans and other costs of maintaining
such loans until they are pooled and sold to other investors.
THE LOANS
Each Loan is a home improvement loan originated by a Company-approved home
improvement contractor and purchased by the Company, or a home improvement
promissory note originated by the Company directly. Each 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 Company-approved park. Each Loan is
secured by a lien on the related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Loan is fully amortizing with a fixed
contractual rate of interest and provides for level monthly payments over the
term of such loan, computed on the simple interest method, (b) each Loan has
its last scheduled payment due no later than , (c) 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 (d) 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 the Company in
the ordinary course of the Company's business. A detailed listing of the Loans
is appended to the Agreement. See "Description of the Certificates" herein and
in the Prospectus. Approximately % of the Loans, by principal balance as
of the Cut-off Date, are insured by FHA to the extent described in "Description
of FHA Insurance" in the Prospectus. Each of the Loans has a Loan Rate of at
least % per annum and not more than % and the weighted average of the
Loan Rates of the Loans as of the Cut-off Date is %. As of the Cut-off
Date, the Loans had remaining maturities of at least months but not more
than months and original maturities of at least 24 months but not more than
360 months. The Loans had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per Loan as of
the Cut-off Date was $ and the principal balances on the Loans as of
the Cut-off Date ranged from $ to $ . The Loans arise from
loans relating to real property located in states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately % of
the Loans financed improvements to real estate located in California, % in
New York, % in Florida, % in New Jersey, % in Pennsylvania and
% in Texas. No other state represented % 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.
Set forth below is a description of certain additional characteristics of the
Loans.
S-14
<PAGE>
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................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
---- ------ -------------- ------
Total............... 100.00% $ 100.00%
==== ====== ============== ======
</TABLE>
S-15
<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>
...................... $ %
......................
......................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
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........ $ %
Between$ 10,000--
$ 19,999.................
Between$ 20,000--
$ 29,999.................
Between$ 30,000--
$ 39,999.................
Between$ 40,000--
$ 49,999.................
Between$ 50,000--
$ 59,999.................
Between$ 60,000--
$ 69,999.................
Between$ 70,000--
$ 79,999.................
Between$ 80,000--
$ 89,999.................
Between$ 90,000--
$ 99,999.................
Between$100,000--
$109,999.................
Over $110,000.........
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
Loan Rates
<TABLE>
<CAPTION>
% of
Number of Loan Pool by
Loans Aggregate Principal Outstanding Principal
Range of Loans by as of Cut- Balance Outstanding Balance as of
Loan Rate off Date as of Cut-off Date Cut-off Date
----------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
From 0.00000%--
9.00000%................ $ %
From 9.00001%--
10.00000%................
From 10.00001%--
11.00000%................
From 11.00001%--
12.00000%................
From 12.00001%--
13.00000%................
From 13.00001%--
14.00000%................
From 14.00001%--
15.00000%................
From 15.00001%--
16.00000%................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
S-16
<PAGE>
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.............. $ %
31-60.....................
61-90.....................
91-120....................
121-150...................
151-180...................
181-210...................
211-240...................
241-270...................
271-300...................
301-330...................
331-360...................
----- -------------- ------
Total................. $ 100.00%
===== ============== ======
</TABLE>
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
off Date Cut-off Date as of Cut-off Date Cut-off Date
---------- ------------ ------------------- ---------------------
<S> <C> <C> <C> <C>
First........ % $ %
Second.......
Third........
Fourth.......
----- ------- -------------- -------
Total.... 100.00% $ 100.00%
===== ======= ============== =======
</TABLE>
Delinquency, Loan Default and Loss Information
The following tables set forth the delinquency experience for the periods
indicated of the portfolios of conventional and FHA-insured secured home
improvement loans serviced by the Company (other than Loans already in
repossession).
Delinquency Experience--Conventional Loans
<TABLE>
<CAPTION>
At December 31,
---------------------
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Number of Loans Outstanding(1)........................... 56,028 29,788 3,893
Number of Loans Delinquent(2)(3)
30-59 Days............................................. 394 57 5
60-89 Days............................................. 109 10 1
90 Days or More........................................ 126 15 0
------ ------ -----
Total Loans Delinquent................................... 629 82 6
Delinquencies as a Percent of Loans Outstanding(4)....... 1.12% .28% .15%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
S-17
<PAGE>
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month.
(4) By number of loans.
Delinquency Experience--FHA Insured Loans
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Loans
Outstanding(1)......... 25,925 26,885 29,787 25,698 21,337
Number of Loans
Delinquent(2)(3)
30-59 Days............ 462 237 262 355 228
60-89 Days............ 121 95 87 98 84
90 Days or More....... 183 146 164 207 164
----- ----- ------ ------ ------ ------ ------
Total Loans Delinquent.. 766 478 513 660 476
Delinquencies as a
Percent of Loans
Outstanding(4)......... % % 2.95% 1.78% 1.72% 2.57% 2.23%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month.
(4) By number of loans.
The following tables set forth the loan loss and repossession experience for
the periods indicated of the portfolios of conventional and FHA-insured secured
home improvement loans serviced by the Company (other than Loans already in
repossession).
Loan Default and Loss Experience--Conventional Loans
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Principal Balance of Loans
Serviced(1)................... $ $ $824,419 $418,055 $59,281
Loan Defaults(2)............... % % .53% .12% .05%
Net Losses:
Dollars(3)................... $ $ $ 3,424 $ 285 $ 0
Percentage(4)................ % % .42% .07% .00%
</TABLE>
- --------
(1) As of period end. Includes defaulted loans not yet liquidated.
(2) As a percentage of the total number of loans being serviced as of period
end. The Company considers a loan defaulted when the Company has commenced
foreclosure or enforcement proceedings or the loan is 180 days delinquent.
(3) Does not include any estimated losses for defaulted loans not yet
liquidated.
(4) As a percentage of the principal amount of loans being serviced as of
period end.
S-18
<PAGE>
Loan Default and Loss Experience--FHA Insured Loans
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Balance of
Loans Serviced(1)...... $ $ $191,364 $199,286 $235,908 $206,062 $174,146
Loan Defaults(2)........ % % 1.81% 1.88% 1.86% 1.87% 1.09%
Net Losses:
Dollars(3)............ $ $ $ 291 $ 623 $ 737 $ 768 $ 305
Percentage(4)......... % % .15% .31% .31% .37% .18%
</TABLE>
- --------
(1) As of period end. Includes defaulted loans not yet liquidated.
(2) As a percentage of the total number of loans being serviced as of period
end. The Company considers a loan defaulted when the Company has submitted
a claim to FHA, the Company has commenced foreclosure or enforcement
proceedings, or the loan is 180 days delinquent.
(3) Does not include any estimated losses for defaulted loans not yet
liquidated. Includes unpaid interest to the date of FHA claim submission
and all expenses of liquidation, and reflects proceeds of FHA Insurance
claims paid.
(4) As a percentage of the principal amount of loans being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement loans.
The data presented in the foregoing tables are for illustrative purposes only
and there is no assurance that the delinquency, loan default and loss
experience of the Loans will be similar to that set forth above. Moreover,
because the Company began originating and purchasing FHA-insured home
improvement loans in , and secured conventional home improvement loans
in , it is likely that the Company's portfolio is not yet sufficiently
seasoned to show the delinquencies and losses that would be experienced if such
data were collected over a longer period of time. 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.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Loans.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Loan, to reduce the outstanding principal balance on the Loans)
will increase the yield on Certificates purchased at a price less than the
undivided ownership interest in the aggregate principal balance of the Loans
represented by such Certificates and will decrease the yield on Certificates
purchased at a price greater than the undivided ownership interest in the
aggregate principal balance of the Loans represented by such Certificates. The
Company has no significant experience with respect to the rate of Principal
Prepayments on home 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
S-19
<PAGE>
(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 exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option" herein) will affect the timing of principal
distributions on the Certificates. Prepayments on mortgage loans and other
consumer installment obligations are commonly measured relative to a prepayment
standard or model. The Constant Prepayment Rate ("CPR") model assumes that the
outstanding principal balance of a pool of loans prepays each month at a
specified constant annual rate. The Certificates were priced using a prepayment
assumption of % CPR. 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 such Class immediately following the
preceding Payment Date, based on a 360-day year consisting of 12 months of 30
days each. Certificateholders will receive payments in respect of principal on
each Payment Date to the extent that funds available in the Certificate Account
are sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on the Certificates." As required by applicable
state laws, interest paid by Obligors on the 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
.
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 such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the 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). Prepayments on Loans may be
measured by a prepayment standard or model. The model used in this Prospectus
Supplement, the Constant Prepayment Rate model, is described above.
As used in the following tables, "0% CPR" assumes that none of the Loans are
prepaid before maturity, " % CPR" assumes the Loans will prepay at a CPR of
%, and so forth.
There is no assurance, however, that prepayment of the Loans will conform to
any level of the CPR, and no representation is made that the Loans will prepay
at the prepayment rates shown or any other prepayment rate. 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. In the case of home improvement loans secured by real estate,
in general, if prevailing interest rates fall significantly below the interest
rates on such home improvement loans, the home improvement loans are likely to
be subject to higher prepayment rates than if prevailing interest rates
remained at or above the rates borne by such home improvement 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: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments
S-20
<PAGE>
are made at the indicated percentages of the CPR set forth in the table; (ii)
the Servicer exercises its option to repurchase the Loans, as described under
"Description of the Certificates--Repurchase Option"; (iii) the Loans will, as
of the Cut-off Date, be grouped into four pools having the additional
characteristics set forth below under "Assumed Loan Characteristics;" (iv) the
Class A-1 Certificates have an Original Class A-1 Principal Balance of
$ and a Class A-1 Pass-Through Rate of %, the Class A-2
Certificates have an Original Class A-2 Principal Balance of $ and a
Class A-2 Pass-Through Rate of %, the Class A-3 Certificates have an
Original Class A-3 Principal Balance of $ and a Class A-3 Pass-
Through Rate of %, the Class M-1 Certificates have an Original Class M-1
Principal Balance of $ and a Class M-1 Pass-Through Rate of %, the
Class M-2 Certificates have an Original Class M-2 Principal Balance of
$ and a Class M-2 Pass-Through Rate of %, the Class B-1
Certificates have an Original Class B-1 Principal Balance of $ and a
Class B-1 Pass-Through Rate of % and the Class B-2 Certificates have an
Original Class B-2 Principal Balance of $ and a Class B-2 Pass-Through
Rate of %; (v) no interest shortfalls will arise in connection with
prepayments in full of the Loans; (vi) no delinquencies or losses are
experienced on the Loans; (vii) distributions are made on the Certificates on
the 15th day of each month, commencing in ; and (viii) the Certificates
are issued on , . No representation is made that the Loans will not
experience delinquencies or losses.
Assumed Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Weighted Average Average
Date Pool Average Remaining Term Original Term
Principal Loan to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1............................. $ %
2.............................
3.............................
4.............................
</TABLE>
It is not likely that the Loans will prepay at any constant percentage of the
CPR to maturity or that all of the Loans will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
CPR.
Percentage of the Original Principal Balance of the Class A-1
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
March 15, 1997.........................................
March 15, 1998.........................................
March 15, 1999.........................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
S-21
<PAGE>
Percentage of the Original Principal Balance of the Class A-2 Certificates at
the Respective Percentages of the CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
Percentage of the Original Principal Balance of the Class A-3 Certificates at
the Respective Percentages of the CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
.................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
S-22
<PAGE>
Percentage of the Original Principal Balance of the Class M-1
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
Percentage of the Original Principal Balance of the Class M-2 Certificates at
the Respective Percentages of the CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
S-23
<PAGE>
Percentage of the Original Principal Balance of the Class B-1
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
Percentage of the Original Principal Balance of the Class B-2
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Date % % % % %
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
...................................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-24
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales loans for manufactured homes and
other consumer installment sales loans, as well as home equity loans. The
Company is 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, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales loans for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (651) 293-3400). The Company's quarterly and annual reports, which
are incorporated by reference in this Prospectus Supplement and in the
Prospectus, are available from the Company upon written request made to the
Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings to fixed charges for the
past five years ending December 31, 1997. 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>
Year Ended December 31, Months Ended ,
------------------------ -------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 4.81 7.98 7.90 5.44 3.94
</TABLE>
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul, Minnesota,
and its 200 local offices throughout the country. Lawrence M. Coss, Green
Tree's Chairman and Chief Executive Officer, has agreed to continue to manage
Green Tree's business for at least one year. Headquartered in Carmel, Indiana,
Conseco is among the nation's leading providers of supplemental health
insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the alleged
class periods. In addition to Green Tree, certain current and former officers
and directors of Green Tree are named as defendants in one or more of the
lawsuits. Green Tree and the other defendants intend to seek consolidation of
each of the lawsuits in assumptions and performance of certain of Green Tree's
loan portfolios) which allegedly rendered Green Tree's financial statements
false and misleading. Green Tree believes that the lawsuits are without merit
and intends to defend such lawsuits vigorously.
S-25
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
General
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede as the nominee of DTC, and will only be available in the form
of book-entries on the records of DTC and participating members thereof. See
"Description of the Certificates--Registration of the Certificates" herein. The
Trust consists primarily of the Loans and the rights, benefits, obligations and
proceeds arising therefrom or in connection therewith, including liens on the
related real estate, rights under applicable FHA Insurance for FHA-insured Home
Improvement Loans, amounts held in the Certificate Account and the Class HI: B-
2 Limited Guaranty and the Class HE: B-2 Limited Guaranty of the Company for
the benefit of the Class HI: B-2 Certificateholders and the Class HE: B-2
Certificateholders, respectively.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to such
Certificateholder at the address appearing on the Certificate Register (except
that a Certificateholder who holds an aggregate Percentage Interest of at least
5% of a Class of Certificates may request payment in respect of its Percentage
Interest in such Class by wire transfer). Final payments will be made only upon
tender of the Certificates to the Trustee for cancellation.
Conveyance of Loans
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Loans, including all principal and interest
received on or with respect to such Loans (other than receipts of principal and
interest due on such Loans before the Cut-off Date). On behalf of the Trust, as
the issuer of the Certificates offered hereby, the Trustee, concurrently with
such conveyance, will execute and deliver the Certificates to or upon the order
of the Company. The Loans are described on a list delivered to the Trustee and
certified by a duly authorized officer of the Company. Such list includes the
amount of monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
The list will be attached as an exhibit to the Agreement and will be available
for inspection by any Certificateholder at the principal office of the Company.
Prior to the conveyance of the Loans to the Trust, the Company's 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 the Company,
or, if the discrepancy relates to the unpaid principal balance of a Loan, the
Company may deposit cash in the Certificate Account in an amount sufficient to
offset such discrepancy.
The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans to
the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
S-26
<PAGE>
[Dorsey & Whitney LLP], counsel to the Company, will render an opinion to the
Trustee that the transfer of the Loans from the Company to the Trust would, in
the event the Company became a debtor under the United States Bankruptcy Code,
be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Loans from the Company to the Trust were treated
as a pledge to secure borrowings by the Company, the distribution of proceeds
of the Loans to the Trust might be subject to the automatic stay provisions of
the United States Bankruptcy Code, which would delay the distribution of such
proceeds for an uncertain period of time. In addition, a bankruptcy trustee
would have the power to sell the Loans if the proceeds of such sale could
satisfy the amount of the debt deemed owed by the Company, or the bankruptcy
trustee could substitute other collateral in lieu of the Loans to secure such
debt, or such debt could be subject to adjustment by the bankruptcy trustee if
the Company were to file for reorganization under Chapter 11 of the United
States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Loan, including that: (a) as of the Cut-off Date the most
recent scheduled payment was made or was not delinquent more than 59 days; (b)
no provision of a 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; (c) 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);
(d) no Loan is subject to any right of rescission, set-off, counterclaim or
defense; (e) 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; (f) each Loan was originated by a home improvement
contractor in the ordinary course of such contractor's business or was
originated by the Company directly; (g) no Loan was originated in or is subject
to the laws of any jurisdiction whose laws would make the transfer of the Loan
or an interest therein pursuant to the Agreement or the Certificates unlawful;
(h) each Loan complies with all requirements of law; (i) no Loan has been
satisfied, subordinated to a lower lien ranking than its original position (if
any) or rescinded; (j) each Loan creates a valid and perfected lien on the
related improved real estate; (k) all parties to each Loan had full legal
capacity to execute such Loan; (l) no Loan has been sold, conveyed and assigned
or pledged to any other person and the Company has good and marketable title to
each Loan free and clear of any encumbrance, equity, loan, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Loan to the Trustee; (m) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Loan
(except for payment delinquencies permitted by clause (a) above), no event that
with notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such Loan,
and the Company has not waived any of the foregoing; (n) 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; (o) each Loan contains customary and
enforceable provisions such as to render the rights and remedies of the holder
thereof adequate for realization against the collateral; (p) the description of
each Loan set forth in the list delivered to the Trustee is true and correct;
(q) there is only one original of each Loan; and (r) each Loan was originated
or purchased in accordance with the Company's then-current underwriting
guidelines.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) the Cut-off Date Pool
Principal Balance equals at least the Original Series 1998- Principal Balance,
and each Loan has a contractual rate of interest of at least %; (ii) no
Loan had a remaining term to maturity at origination of more than months;
(iii) no more than % of the Loans, by principal balance as of the Cut-off
Date, were secured by properties located in an area with the same zip code;
(iv) no more than % of the Loans, by principal balance as of the Cut-off Date,
were originated by any one contractor; and (v) no adverse selection procedures
were employed in selecting the Loans from the Company's portfolio.
Under the terms of the Agreement, the Company has agreed to repurchase, at
the Repurchase Price, any Loan that is materially and adversely affected by a
breach of a representation and warranty with respect to such Loan made in the
Agreement if such breach has not been cured within 90 days of the day it was or
should have
S-27
<PAGE>
been discovered by the Servicer or the Trustee. This repurchase obligation
constitutes the sole remedy available to the Trust and the Certificateholders
for a breach of a representation or warranty under the Agreement with respect
to the Loans (but not with respect to any other breach by the Company of its
obligations under the Agreement).
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 at the Pass-Through Rate (which will be the weighted
average of the Class A-1, Class A-2, Class A-3, Class M-1, Class M-2, Class B-1
and Class B-2 Pass-Through Rates) on such Loan from the end of the Due Period
with respect to which the Obligor last made a scheduled payment (without giving
effect to any Advances made by the Servicer or the Trustee) through the date of
such repurchase or liquidation.
Pursuant to the Agreement, the Servicer will service and administer the Loans
conveyed and assigned to the Trustee as more fully set forth below.
Payments on Loans
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially [Trustee], , Minnesota) with trust powers organized
under the laws of the United States or any state, the deposits of which are
insured to the full extent permitted by law by the Federal Deposit Insurance
Corporation (the "FDIC"), whose short-term deposits have been rated P-1 by
Moody's and A-1 by S&P or whose unsecured long-term debt has been rated in one
of the two highest rating categories by Moody's and S&P, and which is subject
to supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee, which depository institution or trust company has capital and surplus
of not less than $50,000,000; or (iv) an account that will not cause Moody's or
S&P to downgrade or withdraw its then-current rating assigned to the
Certificates, as evidenced in writing by Moody's and S&P. The Servicer may
authorize the Trustee to invest the funds in the Certificate Account in
Eligible Investments (as defined in the Agreement) that will mature not later
than the Business Day preceding the applicable monthly Payment Date. Such
Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least "Aa2" from Moody's and at least "AA" from S&P not in excess
of 10% of amounts in the Certificate Account at the time of such investment;
and commercial paper assigned a rating of at least P-1 by Moody's and at least
A-1+ by S&P. Any losses on such investments will be deducted from other
investment earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Loans, including
Principal Prepayments and advance payments by Obligors not constituting
Principal Prepayments ("Advance Payments"), shall be paid into the Certificate
Account no later than one Business Day following receipt thereof, except
amounts received as extension fees or assumption fees not allocated to regular
installments due on Loans, which are retained by the Servicer as part of its
servicing fees and are not paid into the Certificate Account and except for
certain proceeds from Liquidated Loans which are used to reimburse the Servicer
for customary out-of-pocket liquidation expenses. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses" herein. In
addition, all payments under FHA Insurance received by the Servicer, any
Advances by
S-28
<PAGE>
the Servicer or the Trustee as described under "Description of the
Certificates--Advances," and amounts paid by the Company for Loans repurchased
as a result of breach of warranties under the Agreement as described under
"Description of the Certificates--Conveyance of Loans," shall be paid into the
Certificate Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and
the amount of funds necessary to make all payments to be made on the next
Payment Date from the Certificate Account. Not later than one Business Day
after the Determination Date, the Company will deposit in the Certificate
Account the Repurchase Price of any Loans required to be repurchased on such
Payment Date as a result of a breach of representations and warranties.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the
Company is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest and principal on the Certificates, in the manner
and the order of priority described below;
(iii) if the Company or any wholly owned subsidiary of the Company is
the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(iv) to reimburse the Trustee or any successor Servicer for any
payments of FHA Insurance premiums not paid by the Company, as Servicer,
and for which the Trustee or such successor Servicer has not been
reimbursed by the Company;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
(vi) to reimburse the holder of the Class C Certificate for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(vii) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments; and
(viii) to pay any remaining amounts to the holder of the Class C
Certificate.
Distributions
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made first to the holders of the Class A
Certificates, then to the holders of the Class M-1 Certificates, then to the
holders of the Class M-2 Certificates, then to the holders of the Class B-1
Certificates and then to the holders of the Class B-2 Certificates, as
described below.
Distributions of interest and principal to holders of a Class of Class A
Certificates will be made on each Payment Date, to the extent that the Amount
Available in the Certificate Account is sufficient therefor, in an amount
equal to the sum of (i) their respective Percentage Interests of the amount of
interest calculated as described under "Class A Interest" below and (ii) their
respective Percentage Interests, distributed to each Class of Class A
Certificates in the order of priority described under "Class A Principal"
below, of the Senior Percentage of the Formula Principal Distribution Amount,
calculated as described under "Class A Principal" below. Distributions on the
Class A Certificates will be applied first to the payment of interest and then
to the payment of principal. The Class A Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class A Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class A Interest" below and (ii) the Senior Percentage of the Formula
Principal Distribution Amount, provided that, if the Class A Formula
Distribution Amount exceeds the Amount Available in the Certificate Account on
such Payment Date, then the Class A Distribution Amount shall instead equal
the Amount Available and the amount of such deficiency will be carried forward
and added to the amount the Class A Certificateholders will be entitled to
receive on the next Payment Date.
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<PAGE>
Distributions of interest and principal to holders of Class M-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-1 Distribution Amount.
Distributions on the Class M-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-1 Interest" below and (ii)
after the Class A Principal Balance has been reduced to zero and until the
Class M-1 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-1
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders on such Payment Date) (the "Class M-1 Remaining Amount
Available") is less than the Class M-1 Formula Distribution Amount, then the
Class M-1 Distribution Amount will equal the Class M-1 Remaining Amount
Available and the amount of such deficiency will be carried forward and added
to the amount such holders will be entitled to receive on the next Payment
Date.
Distributions of interest and principal to holders of Class M-2 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class M-2 Distribution Amount.
Distributions on the Class M-2 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class M-2
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class M-2 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class M-2 Interest" below and (ii)
after the Class M-1 Principal Balance has been reduced to zero and until the
Class M-2 Principal Balance has been reduced to zero, the Senior Percentage of
the Formula Principal Distribution Amount. If the Amount Available in the
Certificate Account available for distribution to the Class M-2
Certificateholders (after giving effect to any distribution made to Class A
Certificateholders and the Class M-1 Certificateholders on such Payment Date)
(the "Class M-2 Remaining Amount Available") is less than the Class M-2 Formula
Distribution Amount, then the Class M-2 Distribution Amount will equal the
Class M-2 Remaining Amount Available and the amount of such deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date.
Distributions of interest and principal to holders of Class B-1 Certificates
will be made on each Payment Date in an amount equal to their respective
Percentage Interests multiplied by the Class B-1 Distribution Amount.
Distributions on the Class B-1 Certificates will be applied first to the
payment of interest and then to the payment of principal. The Class B-1
Distribution Amount for any Payment Date is intended to be equal to the sum
(referred to as the "Class B-1 Formula Distribution Amount") of (i) the amount
of interest calculated as set forth under "Class B-1 Interest" below and (ii)
until the Class B-1 Principal Balance has been reduced to zero, an amount of
principal equal to the Class B Percentage of the Formula Principal Distribution
Amount. If the Amount Available in the Certificate Account available for
distribution to the Class B-1 Certificateholders (after giving effect to any
distribution made to Class A Certificateholders, Class M-1 Certificateholders
and Class M-2 Certificateholders on such Payment Date) (the "Class B-1
Remaining Amount Available") is less than the Class B-1 Formula Distribution
Amount, then the Class B-1 Distribution Amount will equal the Class B-1
Remaining Amount Available and the amount of such deficiency will be carried
forward and added to the amount such holders will be entitled to receive on the
next Payment Date.
Distributions of interest and principal to holders of the Class B-2
Certificates will be made on each Payment Date in an amount equal to their
respective Percentage Interests of the Class B-2 Distribution Amount and any
Class B-2 Guaranty Payment. The Class B-2 Distribution Amount for any Payment
Date is intended to be equal to the sum (referred to as the "Class B-2 Formula
Distribution Amount") of (i) the amount of interest calculated as set forth
under "Class B-2 Interest" below and (ii) after the Class B-1 Principal Balance
has been reduced to zero and until the Class B-2 Principal Balance has been
reduced to zero, the Class B Percentage of the Formula Principal Distribution
Amount. Distributions on the Class B-2 Certificates will be applied first to
the payment of interest and then to the payment of principal. If the Amount
Available in the Certificate Account available for distribution to the Class B-
2 Certificateholders (after giving effect to distributions made to Class A
Certificateholders, Class M Certificateholders and Class B-1 Certificateholders
on such Payment
S-30
<PAGE>
Date) (the "Class B-2 Remaining Amount Available") is not sufficient to make a
full distribution of the Class B-2 Formula Distribution Amount to the Class B-2
Certificateholders, then the Class B-2 Distribution Amount will equal the Class
B-2 Remaining Amount Available and the Company will be obligated to make a
Class B-2 Guaranty Payment into the Certificate Account in respect thereof
pursuant to the Class B-2 Limited Guaranty.
On each Payment Date the Amount Available will be distributed to Class A
Certificateholders, then Class M Certificateholders and then Class B
Certificateholders in the amounts and order of priority set forth below:
Class A Interest
One month's interest (computed on the basis of a 360-day year of twelve 30-
day months) will be paid concurrently to the holders of each Class of Class A
Certificates on each Payment Date, to the extent of the Amount Available in the
Certificate Account on such date, at the related Pass-Through Rate on the then
outstanding Principal Balance of each Class of Class A Certificates. Interest
on each Class of Class A Certificates will accrue from , 1998, or from
the most recent Payment Date on which interest has been paid, to but excluding
the following Payment Date.
The Pass-Through Rates for the Class A-1, Class A-2 and Class A-3
Certificates are set forth on the cover of this Prospectus Supplement, and in
each case will be computed on the basis of a 360-day year of twelve 30-day
months.
The Principal Balance of any Class of Class A Certificates as of any Payment
Date is the Original Principal Balance of such Class less all amounts
previously distributed to holders of such Class on account of principal. The
Class A Principal Balance as of any Payment Date is the sum of the Class A-1
Principal Balance, the Class A-2 Principal Balance and the Class A-3 Principal
Balance.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of each Class of Class A Certificates, the amount of interest to
be distributed in respect of the Class A Certificates will be allocated among
each Class thereof (and within a Class among the Certificates of such Class)
pro rata in accordance with their respective entitlements to interest, and the
amount of the shortfall will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Such a shortfall
could occur, for example, if delinquencies or losses realized on the Loans were
exceptionally high and were concentrated in a particular month. Any such amount
so carried forward will bear interest at the applicable Pass-Through Rate for
each Class of Class A Certificates, to the extent permitted by law.
Class A Principal
Holders of a Class of Class A Certificates will be entitled to receive on
each Payment Date as payments of principal, in the order of priority set forth
below and to the extent of the Amount Available in the Certificate Account on
such date after payment of interest on each Class of Class A Certificates, the
Senior Percentage of the sum (such sum being referred to hereinafter as the
"Formula Principal Distribution Amount") of (i) all scheduled payments of
principal due on each outstanding Loan during the month preceding the month in
which the Payment Date occurs, (ii) the Scheduled Principal Balance of each
Loan which, during the month preceding the month of such Payment Date, was
purchased by the Company pursuant to the Agreement on account of certain
breaches of its representations and warranties, (iii) all partial Principal
Prepayments applied and all Principal Prepayments in Full received during such
preceding month, (iv) the Scheduled Principal Balance of each Loan that became
a Liquidated Loan during such preceding month, and (v) any amount described in
clauses (i) through (iv) above that was not previously distributed because of
an insufficient amount of funds available in the Certificate Account if (a) the
Payment Date occurs on or after the Payment Date on which the Class B-2
Principal Balance has been reduced to zero, or (b) such amount was not covered
by a Class B-2 Guaranty Payment and corresponding reduction in the Class B-2
Principal Balance. When the Principal Balance of a Class of Class A
Certificates is reduced to zero, no further distributions of principal will be
made to the holders of such Class.
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<PAGE>
The Senior Percentage for any Payment Date prior to the Class B Cross-over
Date, and for any Payment Date on or after the Class B Cross-over Date on which
any Class B Principal Distribution Test is not satisfied (each as described
under "Class B-1 Principal" below), will be 100%, and for any Payment Date on
or after the Class B Cross-over Date on which each Class B Principal
Distribution Test is satisfied will equal a fraction, expressed as a
percentage, the numerator of which is the sum of the Class A Principal Balance
and the Class M Principal Balance as of such Payment Date and the denominator
of which is the Pool Scheduled Principal Balance as of the immediately
preceding Payment Date. The Scheduled Principal Balance of a Loan with respect
to any Payment Date is its principal balance as of the scheduled payment date
(the "Due Date") in the calendar month preceding such Payment Date (the "Due
Period") as specified in its amortization schedule, after giving effect to any
previous partial Principal Prepayments and to the scheduled payment due on such
Due Date, but without giving effect to any delinquency in payment or
adjustments due to bankruptcy or similar proceedings. The Pool Scheduled
Principal Balance, as of any Payment Date, is the aggregate of the Scheduled
Principal Balances of Loans 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.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of interest on
each Class of Class A Certificates, first to the Class A-1 Certificateholders
until the Class A-1 Principal Balance has been reduced to zero, then to the
Class A-2 Certificateholders until the Class A-2 Principal Balance has been
reduced to zero and then to the Class A-3 Certificateholders until the Class A-
3 Principal Balance has been reduced to zero.
As hereinafter described, all losses on Liquidated Loans will be absorbed
first by the Class C Certificate, then by the Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer), then by the Class B-2 Certificates, then by
the Class B-1 Certificates, then by the Class M-2 Certificates and then by the
Class M-1 Certificates. If the Amount Available on any Payment Date is less
than the Class A Distribution Amount, the Amount Available will be applied
first to the payment of interest on the Class A Certificates and then to the
payment of principal to the Class of Class A Certificates then entitled
thereto.
Class M-1 Interest
Interest will be paid to the Class M-1 Certificateholders on each Payment
Date, to the extent of the Class M-1 Remaining Amount Available, if any, in an
amount (the "Class M-1 Interest Payment Amount") equal to the product of (a)
the Class M-1 Pass-Through Rate and (b) the then outstanding Class M-1
Principal Balance less the Class M-1 Principal Shortfall Amount, if any. The
"Class M-1 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the aggregate
of the Principal Balances of the Class M-2 Certificates, the Class B-1
Certificates and the Class B-2 Certificates. The "Aggregate Principal Shortfall
Amount" as of any Payment Date will equal the excess, if any, of (i) the
aggregate Principal Balance of the Certificates as of the preceding Payment
Date (after giving effect to distributions of principal thereon) over (ii) the
Pool Scheduled Principal Balance for such preceding Payment Date. Interest on
the outstanding Class M-1 Principal Balance will accrue from , 1998, or
from the most recent Payment Date on which interest has been paid, to but
excluding the following Payment Date, and will be computed on the basis of a
360-day year of twelve 30-day months. The Class M-1 Principal Balance is the
Original Class M-1 Principal Balance less the sum of all amounts previously
distributed to Class M-1 Certificateholders on account of principal. In the
event that, on a particular Payment Date, the Class M-1 Remaining Amount
Available, plus other funds in the Certificate Account available therefor, is
not sufficient to make a full distribution of the Class M-1 Interest Payment
Amount to the Class M-1 Certificateholders, the amount of such interest to be
distributed in respect of the Class M-1 Certificates will be allocated among
the Certificates of such Class pro rata in accordance with their respective
entitlements to interest, and any remaining deficiency will be carried forward
and added to the amount such holders will be entitled to receive on the next
Payment Date. Interest will accrue on the Class M-1 Principal Shortfall Amount,
if any, and will be
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<PAGE>
payable on succeeding Payment Dates to the extent of the Amount Available
remaining after payment of the Class A Distribution Amount, the Class M-1
Distribution Amount, the Class M-2 Distribution Amount, the Class B-1
Distribution Amount and the Class B-2 Distribution Amount. Any interest
amounts carried forward will bear interest at the Class M-1 Pass-Through Rate,
to the extent permitted by law.
The Class M-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class M-1 Principal
On each Payment Date after the Class A Principal Balance has been reduced to
zero, Class M-1 Certificateholders will be entitled to receive, as payments of
principal, the Senior Percentage (as described under "Class A Principal"
above) of the Formula Principal Distribution Amount to the extent of the Class
M-1 Remaining Amount Available in the Certificate Account on such date, after
payment of all interest payable on the Class M-1 Certificates, until the Class
M-1 Principal Balance has been reduced to zero. On each Payment Date on or
after the Class B Cross-over Date on which each Class B Principal Distribution
Test is satisfied, payments of principal will be made to Class B-1 or Class B-
2 Certificateholders, even if Class M-1 Certificateholders are not yet
entitled to receive payments of principal because the Class A Principal
Balance has not been reduced to zero.
Class M-2 Interest
Interest will be paid to the Class M-2 Certificateholders on each Payment
Date, to the extent of the Class M-2 Remaining Amount Available, if any, in an
amount (the "Class M-2 Interest Payment Amount") equal to the product of (a)
the Class M-2 Pass-Through Rate and (b) the then outstanding Class M-2
Principal Balance less the Class M-2 Principal Shortfall Amount, if any. The
"Class M-2 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the aggregate
of the Principal Balances of the Class B-1 Certificates and the Class B-2
Certificates. Interest on the outstanding Class M-2 Principal Balance will
accrue from , 1998, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
M-2 Principal Balance is the Original Class M-2 Principal Balance less the sum
of all amounts previously distributed to Class M-2 Certificateholders on
account of principal. In the event that, on a particular Payment Date, the
Class M-2 Remaining Amount Available, plus other funds in the Certificate
Account available therefor, is not sufficient to make a full distribution of
the Class M-2 Interest Payment Amount to the Class M-2 Certificateholders, the
amount of such interest to be distributed in respect to the Class M-2
Certificates will be allocated among the Certificates of such Class pro rata
in accordance with their respective entitlements to interest, and any
remaining deficiency will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Interest will
accrue on the Class M-2 Principal Shortfall Amount, if any, and will be
payable on succeeding Payment Dates to the extent of the Amount Available
remaining after payment in full of the Class A Distribution Amount, the Class
M-1 Distribution Amount, the Class M-2 Distribution Amount, the Class B-1
Distribution Amount, the Class B-2 Distribution Amount and interest accrued
and unpaid on the Class M-1 Principal Shortfall Amount. Any interest amounts
carried forward will bear interest at the Class M-2 Pass-Through Rate, to the
extent permitted by law.
The Class M-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class M-2 Principal
On each Payment Date after the Class A Principal Balance and the Class M-1
Principal Balance have been reduced to zero, Class M-2 Certificateholders will
be entitled to receive, as payments of principal, the Senior Percentage (as
described under "Class A Principal" above) of the Formula Principal
Distribution Amount to the extent of the Class M-2 Remaining Amount Available
in the Certificate Account on such date, after payment of
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<PAGE>
all interest payable on the Class M-2 Certificates, until the Class M-2
Principal Balance has been reduced to zero. On each Payment Date on or after
the Class B Cross-over Date on which each Class B Principal Distribution Test
is satisfied, payments of principal will be made to Class B-1 or Class B-2
Certificateholders, even if Class M-2 Certificateholders are not yet entitled
to receive payments of principal because the Class A Principal Balance and
Class M-1 Principal Balance have not been reduced to zero.
Class B-1 Interest
Interest will be paid to the Class B-1 Certificateholders on each Payment
Date, to the extent of the Class B-1 Remaining Amount Available, if any, in an
amount (the "Class B-1 Interest Payment Amount") equal to the product of (a)
the Class B-1 Pass-Through Rate and (b) the then outstanding Class B-1
Principal Balance less the Class B-1 Principal Shortfall Amount, if any. The
"Class B-1 Principal Shortfall Amount" as of any Payment Date will equal the
excess, if any, of the Aggregate Principal Shortfall Amount over the Class B-2
Principal Balance. Interest on the outstanding Class B-1 Principal Balance will
accrue from , 1998, or from the most recent Payment Date on which
interest has been paid, to but excluding the following Payment Date, and will
be computed on the basis of a 360-day year of twelve 30-day months. The Class
B-1 Principal Balance is the Original Class B-1 Principal Balance less the sum
of all amounts previously distributed to Class B-1 Certificateholders on
account of principal. In the event that, on a particular Payment Date, the
Class B-1 Remaining Amount Available, plus other funds in the Certificate
Account available therefor, is not sufficient to make a full distribution of
the Class B-1 Interest Payment Amount to the Class B-1 Certificateholders, the
amount of such interest to be distributed in respect of the Class B-1
Certificates will be allocated among the Certificates of such Class pro rata in
accordance with their respective entitlements to interest, and any remaining
deficiency will be carried forward and added to the amount such holders will be
entitled to receive on the next Payment Date. Interest will accrue on the Class
B-1 Principal Shortfall Amount, if any, and will be payable on succeeding
Payment Dates to the extent of the Amount Available remaining after payment in
full of the Class A Distribution Amount, the Class M-1 Distribution Amount, the
Class M-2 Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1 Principal
Shortfall Amount and Class M-2 Principal Shortfall Amount. Any interest amounts
carried forward will bear interest at the Class B-1 Pass-Through Rate, to the
extent permitted by law.
The Class B-1 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class B-1 Principal
Prior to the Class B Cross-over Date, there will be no distributions of
principal on the Class B-1 Certificates. The Class B Cross-over Date will be
the earlier of (A) the Payment Date on which the Class M-2 Principal Balance is
reduced to zero (the "Fifth Cross-over Date"), and (B) the first Payment Date
on or after the Payment Date in on which the fraction, expressed as a
percentage, the numerator of which is the Class B Principal Balance as of such
Payment Date and the denominator of which is the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date, is equal to or greater
than %.
On each Payment Date on or after the Class B Cross-over Date and prior to the
Payment Date on which the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero, holders of Class B Certificates will be
entitled to distributions of principal only if each of the following tests
(each a "Class B Principal Distribution Test") is satisfied on such Payment
Date: (i) the Average Sixty-Day Delinquency Ratio (as defined in the Agreement)
as of such Payment Date must not exceed %; (ii) the Average Thirty-Day
Delinquency Ratio (as defined in the Agreement) as of such Payment Date must
not exceed %; (iii) the Cumulative Realized Losses (as defined in the
Agreement) as of such Payment Date must not exceed a certain specified
percentage of the Cut-off Date Pool Principal Balance, depending on the year in
which such Payment Date occurs; (iv) the Current Realized Loss Ratio (as
defined in the Agreement) as of such Payment Date must not exceed 2.5%; and (v)
the Class B Principal Balance divided by the Pool Scheduled Principal Balance
as of the immediately preceding Payment Date must be equal to or greater than
%.
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<PAGE>
On each Payment Date on or after the Class B Cross-over Date, if each Class B
Principal Distribution Test is satisfied on such Payment Date, Class B-1
Certificateholders will be entitled to receive, as payments of principal, the
Class B Percentage of the Formula Principal Distribution Amount to the extent
of the Class B-1 Remaining Amount Available in the Certificate Account on such
date after payment of all interest payable on the Class B-1 Certificates, until
the Class B-1 Principal Balance has been reduced to zero. The Class B-2
Certificateholders will not be entitled to any distributions of principal from
the Class B-1 Remaining Amount Available until the Class B-1 Principal Balance
has been reduced to zero. The Class B Percentage for any Payment Date will be
equal to 100% minus the Senior Percentage. The Class B Percentage for each
Payment Date, if any, after the Class A Principal Balance and the Class M
Principal Balance have been reduced to zero will be equal to 100%.
Class B-2 Interest
Interest will be paid to the Class B-2 Certificateholders on each Payment
Date, to the extent of (i) the Class B-2 Remaining Amount Available, if any and
(ii) the amount, if any, paid pursuant to the Class B-2 Limited Guarantee, in
an amount (the "Class B-2 Interest Payment Amount") equal to the product of (a)
the Class B-2 Pass-Through Rate and (b) the then outstanding Class B-2
Principal Balance less the Class B-2 Principal Shortfall Amount, if any. The
"Class B-2 Principal Shortfall Amount" as of any Payment Date will equal the
Aggregate Principal Shortfall Amount. Interest on the outstanding Class B-2
Principal Balance will accrue from , 1998, or from the most recent
Payment Date on which interest has been paid, to but excluding the following
Payment Date, and will be computed on the basis of a 360-day year of twelve 30-
day months. The Class B-2 Principal Balance is the Original Class B-2 Principal
Balance less the sum of all amounts previously distributed to Class B-2
Certificateholders on account of principal. In the event that, on a particular
Payment Date, the Class B-2 Remaining Amount Available in the Certificate
Account is not sufficient to make a full distribution of the Class B-2 Interest
Payment Amount to the Class B-2 Certificateholders and the Company fails to pay
such amount under the Class B-2 Limited Guaranty, the amount of such interest
to be distributed in respect of the Class B-2 Certificates will be allocated
among the Certificates of such Class pro rata in accordance with their
respective entitlements to interest, and the amount of such deficiency will be
carried forward and added to the amount such holders will be entitled to
receive on the next Payment Date. Interest will accrue in respect of the Class
B-2 Principal Shortfall Amount, if any, and will be payable on succeeding
Payment Dates to the extent of the Amount Available remaining after payment in
full of the Class A Distribution Amount, the Class M-1 Distribution Amount, the
Class M-2 Distribution Amount, the Class B-1 Distribution Amount, the Class B-2
Distribution Amount and interest accrued and unpaid on the Class M-1 Principal
Shortfall Amount, the Class M-2 Principal Shortfall Amount and the Class B-1
Principal Shortfall Amount. Any interest amounts carried forward will bear
interest at the Class B-2 Pass-Through Rate, to the extent permitted by law.
The Class B-2 Pass-Through Rate is set forth on the cover of this Prospectus
Supplement, and will be computed on the basis of a 360-day year of twelve 30-
day months.
Class B-2 Principal
Except for distributions of any amounts representing a Class B-2 Principal
Liquidation Loss Amount (as described below), payments of principal on the
Class B-2 Certificates will not commence until the Payment Date on which the
Class B-1 Principal Balance has been reduced to zero (the "Sixth Cross-over
Date"), and will be made on that Payment Date and each Payment Date thereafter
only if each Class B Principal Distribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and the Class M Principal Balance
have been reduced to zero). On any such Payment Date, the Class B Percentage of
the Formula Principal Distribution Amount will be distributed, to the extent of
the Class B-2 Remaining Amount Available and any amounts actually paid under
the Class B-2 Limited Guaranty after payment of interest on the Class B-2
Certificates, to the Class B-2 Certificateholders until the Class B-2 Principal
Balance has been reduced to zero.
S-35
<PAGE>
On each Payment Date, the Class B-2 Certificateholders will be entitled to
receive pursuant to the Class B-2 Limited Guaranty the amount (the "Class B-2
Principal Liquidation Loss Amount"), if any, by which the sum Class A
Certificateholders to receive future distributions on the Loans that would
otherwise be payable to the holders of Class M Certificates and Class B
Certificates. On each Payment Date the Class M-1 Certificateholders will be
entitled to receive only amounts described above under "Class M-1 Interest" and
"Class M-1 Principal," the Class M-2 Certificateholders will be entitled to
receive only amounts described under "Class M-2 Interest" and "Class M-2
Principal," the Class B-1 Certificateholders will be entitled to receive only
amounts described above under "Class B-1 Interest" and "Class B-1 Principal,"
and the Class B-2 Certificateholders will be entitled to receive only amounts
described above under "Class B-2 Interest" and "Class B-2 Principal."
In addition, the rights of the holders of the Class M-2 Certificates and
Class B Certificates to receive distributions with respect to the Loans will be
subordinate to such rights of the Class M-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-1 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Loans. The protection afforded to the
Class M-1 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-1 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class M-2 Certificates and the Class B Certificates, the amount of
principal and interest due them on each Payment Date out of the Class M-1
Remaining Amount Available on deposit on such date in the Certificate Account
and by the right of the Class M-1 Certificateholders to receive future
distributions on the Loans that would otherwise be payable to the holders of
Class M-2 Certificates and Class B Certificates.
In addition, the rights of the holders of the Class B-1 Certificates and the
Class B-2 Certificates to receive distributions with respect to the Loans will
be subordinate to such rights of the Class M-2 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class M-2 Certificates of the full amount of their scheduled
monthly payments of principal and interest and to afford such holders
protection against losses on Liquidated Loans. The protection afforded to the
Class M-2 Certificateholders by means of the subordination feature will be
accomplished by the preferential right of the Class M-2 Certificateholders to
receive, prior to any distribution being made on a Payment Date in respect of
the Class B Certificates, the amount of principal and interest due them on each
Payment Date out of the Class M-2 Remaining Amount Available on deposit on such
date in the Certificate Account and by the right of the Class M-2
Certificateholders to receive future distributions of the Loans that would
otherwise be payable to the holders of Class B Certificates.
In addition, the rights of the holders of the Class B-2 Certificates to
receive distributions with respect to the Loans will be subordinate to such
rights of the Class B-1 Certificateholders. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class B-1
Certificates of the full amount of their scheduled monthly payments of
principal and interest and to afford such holders protection against losses on
Liquidated Loans. The protection afforded to the Class B-1 Certificateholders
by means of the subordination feature will be accomplished by the preferential
right of the Class B-1 Certificateholders to receive, prior to any distribution
being made on a Payment Date in respect of the Class B-2 Certificates, the
amount of principal and interest due them on each Payment Date out of the Class
B-1 Remaining Amount Available on deposit on such date in the Certificate
Account and by the right of the Class B-1 Certificateholders to receive future
distributions on the Loans that would otherwise be payable to the holders of
Class B-2 Certificates.
As described above, prior to the time that the Class A Principal Balance is
reduced to zero, the distribution of principal to the Class A
Certificateholders is intended to include the Senior Percentage of the
Scheduled Principal Balance of each Loan that became a Liquidated Loan during
the preceding Due Period. If the Liquidation Proceeds, net of related
Liquidation Expenses, from such Liquidated Loan are less than its Scheduled
Principal Balance plus accrued and unpaid interest thereon, the deficiency
will, in effect, be absorbed by the Class M, the Class B and the Class C
Certificateholders and the Company, since a portion of the Amount Available
equal to such deficiency and otherwise distributable to them will be paid to
the Class A
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or Class M Certificateholders. Likewise, to the extent the Class M-1
Certificateholders or the Class M-2 Certificateholders are entitled to receive
distributions of principal, similar deficiencies could result for each Class of
Certificates with a lower payment priority. If the Amount Available is not
sufficient to cover the amounts distributable to the Class A or Class M
Certificateholders on a particular Payment Date, then the Senior Percentage on
future Payment Dates may be increased and the Class B Percentage on future
Payment Dates may be reduced as a result of such deficiency. But for the effect
of the relative subordination of the Monthly Servicing Fee payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) and amounts otherwise distributable to the Class M-2, Class B
and Class C Certificateholders, the Class M-1 Certificateholders will absorb
all losses on each Liquidated Loan in the amount by which its Liquidation
Proceeds, net of the related Liquidation Expenses, are less than its unpaid
principal balance plus accrued and unpaid interest thereon less the Monthly
Servicing Fee. But for the effect of the relative subordination of the Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) and amounts otherwise
distributable to the Class B and Class C Certificateholders on each Payment
Date, the Class M-2 Certificateholders will absorb all losses on each
Liquidated Loan in the amount by which its Liquidation Proceeds, net of the
related Liquidation Expenses, are less than its unpaid principal balance plus
accrued and unpaid interest thereon less the Monthly Servicing Fee. But for the
effect of the relative subordination of the Monthly Servicing Fee payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) and amounts otherwise distributable to the Class B-2
and Class C Certificateholders, the Class B-1 Certificateholders will absorb
all losses on each Liquidated Loan in the amount by which its Liquidation
Proceeds, net of the related Liquidation Expenses, are less than its unpaid
principal balance plus accrued and unpaid interest thereon less the Monthly
Servicing Fee. But for the effect of the relative subordination of the Monthly
Servicing Fee payable to the Servicer (so long as the Company or any wholly
owned subsidiary of the Company is the Servicer) and amounts otherwise
distributable to the Class C Certificateholder on each Payment Date, and
amounts paid under the Class B-2 Limited Guaranty as described below, the Class
B-2 Certificateholders will absorb all losses on each Liquidated Loan in the
amount by which its Liquidation Proceeds, net of the related Liquidation
Expenses, are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the Monthly Servicing Fee. Class B-2 Certificateholders,
however, will be entitled to receive Class B-2 Guaranty Payments. If the
Company fails to make a payment required under the Class B-2 Limited Guaranty,
the Class B-2 Certificateholders will incur a loss on their investment in the
Class B-2 Certificates.
Advances
To the extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a Delinquent Payment on a Loan only to the extent that
the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
Reports to Certificateholders
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of the
related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class
A Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
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(b) the amount of such distribution to holders of each Class of Class
A Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class A Formula Distribution
Amount exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance of the Loans for such Payment
Date;
(g) the Pool Factor (a percentage derived from a fraction the
numerator of which is the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal Balance and the denominator of
which is the Cut-off Date Pool Principal Balance); and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class M-1 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Loans for such Payment
Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
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(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class M-2 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Loans for such Payment
Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class B-1 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance of the Loans for such Payment
Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2
Certificates allocable to interest;
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(b) the amount of such distribution to holders of Class B-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Principal Liquidation Loss Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Amount, if any, for such Payment
Date;
(e) the Class B-2 unpaid interest shortfall on principal shortfalls,
after giving effect to payments of such interest shortfalls on such Payment
Date;
(f) the Class B-2 Guarantee Payment, if any, for such Payment Date;
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance of the Loans for such Payment
Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) will be expressed as
dollar amounts for a Class B-2 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
Repurchase Option
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Loans (other than any Loan as to which title to
the underlying property has been assigned) at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such price will be distributed on such Payment Date.
Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
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 (including manufactured housing 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. The Company
does, however, as a matter of its own policy, monitor proof of hazard insurance
coverage (other than flood insurance) and require that it be named as an
additional loss payee on all first lien secured loans and generally on junior
lien secured loans with amounts financed of over $ .
Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Pool Scheduled Principal Balance of the 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 (including FHA Insurance proceeds) for customary out-of-pocket
liquidation expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each 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 the
Company from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Loans or foreclosure on
collateral relating thereto (including submission of FHA Insurance claims, if
applicable), payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders.
Evidence as to Compliance
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before of each year, beginning in 1998, the Servicer will deliver
to the Trustee a report of [Accountant], 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 Agreement, except for any exceptions set
forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
Transferability
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
Certain Matters Relating to the Company
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
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Events of Termination
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four Business Days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its debts as they become due, or takes any
corporate action in furtherance of the foregoing; (f) the Servicer fails to be
an Eligible Servicer; or (g) the Servicer's seller-servicer loan with GNMA is
terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon an Event of Termination
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Loans for breach of representations and warranties, and the Trustee
will not be liable for any acts or omissions of the Servicer occurring prior to
a transfer of the Servicer's servicing and related functions or for any breach
by the Servicer of any of its representations and warranties contained in the
Agreement or any related document or agreement. In addition, the Trustee will
notify FHA of the Servicer's termination as Servicer of the FHA-insured 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 the Company's
obligation to repurchase certain Loans for breaches of warranties under the
Agreement. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, an Eligible Servicer to act as successor to the Servicer under the
Agreement. The Trustee and such successor may agree upon the servicing
compensation to be paid (after receiving comparable bids from other Eligible
Servicers), which may not be greater than the Monthly Servicing Fee payable to
the Company as Servicer under the Agreement without the consent of all of the
Certificateholders.
Termination of the Agreement
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment Date
on which the Pool Scheduled Principal Balance is reduced to zero; or (b) the
Payment Date occurring in the month following the Servicer's repurchase of the
Loans as described under "Description of the Certificates--Repurchase Option."
However, the Company's representations, warranties and indemnities will survive
any termination of the Agreement.
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Amendment; Waiver
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
Moody's and S&P shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Loans or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
Indemnification
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or any
affiliate thereof of any real estate securing a Loan, (b) for any taxes which
may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans to the Trust (but not including any federal, state or
other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Loan.
Duties and Immunities of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company in consideration of the conveyance of the Loans, or
deposited into the Certificate Account by the Servicer. If no Event of
Termination has occurred, the Trustee will be required to perform only those
duties specifically required of it under the Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in
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accordance with any provision of the Agreement (including FHA Insurance
premiums not paid by the Servicer and reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad faith;
and (c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the Trust and its duties thereunder, including the costs and expenses of
defending itself against any claim or liability in connection with the exercise
or performance of any of its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
The Trustee
[Trustee] has its corporate trust offices at , Minnesota .
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee. Any successor Trustee must be an FHA Title I approved
lender.
Registration of the Certificates
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and interest
on, the Certificates from the Trustee through DTC and Participants. Certificate
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Certificates, except under the limited
circumstances described below.
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Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Loans, the Company
will provide a guaranty (the "Class B-2 Limited Guaranty") against losses that
would otherwise be borne by the Class B-2 Certificates. Each payment required
to be made under the Class B-2 Limited Guaranty is referred to as a "Class B-2
Guaranty Payment." Prior to the Sixth Cross-over Date, and on any Payment Date
on or after the Sixth Cross-over Date on which a Class B Principal Distribution
Test is not satisfied, the Class B-2 Guaranty Payment will equal the amount, if
any, by which (i) the sum of (a) the Class B-2 Formula Distribution Amount for
such Payment Date (which will be equal to accrued and unpaid interest on the
Class B-2 Certificates) and (b) the Class B-2 Principal Liquidation Loss
Amount, if any, for such Payment Date exceeds (ii) the Class B-2 Distribution
Amount for such Payment Date. The Class B-2 Principal Liquidation Loss Amount
for any Payment Date equals the amount, if any, by which the sum of the Class A
Principal Balance, the Class M Principal Balance and the Class B Principal
Balance for such Payment Date exceeds the Pool Scheduled Principal Balance for
such Payment Date. The Class B-2
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Principal Liquidation Loss Amount is, in substance, the amount of delinquencies
and losses experienced on the Loans during the related Due Period that was not
absorbed by the Class C Certificate and the Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer). On each Payment Date on or after the Sixth
Cross-over Date, if each Class B Principal Distribution Test is satisfied on
such Payment Date (or the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero), the Class B-2 Guaranty Payment will equal
the amount, if any, by which (a) the sum of (i) the Class B-2 Formula
Distribution Amount for such Payment Date (which will include both interest and
principal) and (ii) the Class B-2 Principal Liquidation Loss Amount, if any,
for such Payment Date exceeds (b) the Class B-2 Distribution Amount for such
Payment Date.
The Class B-2 Limited Guaranty will be an unsecured general obligation of the
Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in any
way, or result in any payment to, the Class A-1, Class A-2, Class A-3, Class M-
1, Class M-2 or Class B-1 Certificateholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[Dorsey & Whitney LLP], counsel to the Company, will deliver its opinion
that, assuming ongoing compliance with the terms of the Agreement, upon the
issuance of the Certificates, the Trust will qualify as a REMIC for federal
income tax purposes. The Class A-1, Class A-2, Class A-3, Class M-1, Class M-2,
Class B-1 and Class B-2 Certificates will constitute "regular interests" in the
REMIC. The Class C Certificate, which is not being offered hereunder, will
constitute the sole class of "residual interests" in the REMIC.
It is not anticipated that any of the Certificates will be issued with
original issue discount for federal income tax purposes. The prepayment
assumption that will be used to determine the rate of accrual of market
discount and premium, if any, will be based on the assumption that the Loans
will prepay at a rate equal to % CPR.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "qualifying real property loans," "loans secured by an
interest in real property" and "real estate assets" for purposes of Sections
593(d), 7701(a)(19)(C) or 856(c)(5) of the Code, respectively. Furthermore,
interest paid with respect to Certificates held by a real estate investment
trust will be considered to be "interest on obligations secured by mortgages on
real property or on interests in real property" for purposes of Section
856(c)(3) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A-1, Class A-2 and Class A-3
Certificates without regard to the ERISA restrictions described above, subject
to applicable provisions of other federal and state laws. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code.
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<PAGE>
The U.S. Department of Labor ("DOL") has granted an administrative exemption
to [underwriter] [cite exemption] (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption include
home improvement loans such as the Loans. The Exemption will apply to the
acquisition, holding, and resale of the Class A-1, Class A-2 and Class A-3
Certificates by a Plan, provided that specified conditions (certain of which
are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A-1, Class A-2 and Class A-3 Certificates are the following:
(1) The acquisition of the Class A-1, Class A-2 or Class A-3
Certificates by a Plan is on terms (including the price for the Class A-1,
Class A-2 or Class A-3 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 or
Class A-3 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 or Class A-3 Certificates acquired by the
Plan have received a rating at the time of such acquisition that is in one
of the three highest generic rating categories from either S&P, Moody's,
Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriter in connection with
the distribution of the Class A-1, Class A-2 or Class A-3 Certificates
represents not more than reasonable compensation for underwriting the Class
A-1, Class A-2 or Class A-3 Certificates, as applicable. The sum of all
payments made to and retained by the Company pursuant to the sale of the
Loans to the Trust represents not more than the fair market value of such
Loans. The sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's
services under the Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith; and
(6) The Plan investing in the Class A-1, Class A-2 or Class A-3
Certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1, Class A-2 or
Class A-3 Certificates in connection with the initial issuance, at least fifty
percent (50%) of the Class A-1, Class A-2 or Class A-3 Certificates, as
applicable, are acquired by persons independent of the Restricted Group, (ii)
the Plan's investment in Class A-1, Class A-2 or Class A-3 Certificates does
not exceed twenty-five percent (25%) of all of the Class A-1, Class A-2 or
Class A-3 Certificates, as applicable, outstanding at the time of the
acquisition and (iii) immediately after the acquisition, no more than twenty-
five percent (25%) of the assets of the Plan are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Company, the Underwriter, the Trustee, the Servicer, any obligor with
respect to Loans included in the Trust constituting more than five percent (5%)
of the aggregate unamortized principal balance of the assets in the Trust or
any affiliate of such parties (the "Restricted Group").
The Company believes that the Exemption will apply to the acquisition and
holding of Class A-1, Class A-2 and Class A-3 Certificates sold by the
Underwriter and by Plans and that all conditions of the Exemption other than
those within the control of the investors have been met. In addition, as of the
date hereof, no obligor with respect to Loans included in the Trust constitutes
more than five percent (5%) of the aggregate unamortized principal balance of
the assets of the Trust. Any Plan fiduciary who proposes to cause a Plan to
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<PAGE>
purchase Class A-1, Class A-2 or Class A-3 Certificates should consult with its
own counsel with respect to the potential consequences under ERISA and the Code
of the Plan's acquisition and ownership of the Class A-1, Class A-2 or Class A-
3 Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A-1, Class A-2 or Class A-3 Certificates unless it is
clear that the assets of the Trust will not be plan assets or unless it is
clear that the Exemption or a prohibited transaction class exemption will apply
and exempt all potential prohibited transactions. See "ERISA Considerations" in
the Prospectus.
No transfer of any other Class of Certificates will be permitted to be made
to a Plan unless such Plan, at its expense, delivers to the Trustee and the
Company an opinion of counsel (in form satisfactory to the Trustee and the
Company) to the effect that the purchase or holding of any other Class of
Certificates by such Plan will not result in the assets of the Trust being
deemed to be "plan assets" and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Company or the
Servicer to any obligation or liability in addition to those undertaken in the
Agreement. Unless such opinion is delivered, each person acquiring such a
Certificate will be deemed to represent to the Trustee, the Company and the
Servicer that such person is neither a Plan, nor acting on behalf of a Plan,
subject to ERISA or to Section 4975 of the Code.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase the Certificates at the prices set forth on
the cover page of this Prospectus Supplement.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Underwriter proposes to offer the Certificates in part directly to
purchasers at the initial public offering prices set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
prices less concessions not to exceed % of the Original Class A-1 Principal
Balance, % of the Original Class A-2 Principal Balance, % of the
Original Class A-3 Principal Balance, % of the Original Class M-1 Principal
Balance, % of the Original Class M-2 Principal Balance, % of the Original
Class B-1 Principal Balance, or % of the Original Class B-2 Principal
Balance, as applicable. The Underwriter may allow, and such dealers may
reallow, concessions not to exceed % of Original Class A-1 Principal
Balance, % of the Original Class A-2 Principal Balance, % of Original
Class A-3 Principal Balance, % of the Original Class M-1 Principal Balance,
% of the Original Class M-2 Principal Balance, % of the Original Class B-
1 Principal Balance, or % of the Original Class B-2 Principal Balance, as
applicable, to certain brokers and dealers. After the Certificates are released
for sale to the public, the offering price and other selling terms may be
varied by the Underwriter.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriter
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement loan pass-through certificates without the consent of the
Underwriter.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Dorsey & Whitney LLP,]
Minneapolis, Minnesota, and for the Underwriter by [Thacher Proffitt & Wood,
New York, New York]. The material federal income tax consequences of the
Certificates will be passed upon for the Company by[Dorsey & Whitney LLP].
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Base Prospectus No. 4 Secured Home Improvement Loans
PROSPECTUS
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Improvement Loans
(Issuable In Series)
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. We refer to the
certificates for home improvement loans as "certificates" and to each separate
series of certificates as a "series." 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 , 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: (a) this prospectus, which provides general
information, some of which may not apply to a particular series of
certificates, including your series; and (b) the prospectus supplement related
to the particular terms of your series of certificates.
If the terms of your series of certificates described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the certificates of each series certain
monthly and annual reports concerning the certificates and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the certificates--Reports to
Certificateholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), 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.
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<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 and the accompanying prospectus supplement.
Title of Securities.......... We call the securities certificates for home im-
provement loans.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the certificates. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of certificates. Payments on the
certificates will be made primarily from
payments on the related pool of loans. The terms
of the certificates issued by a trust will be
governed by a Pooling and Servicing Agreement
between Green Tree and the trustee for that
series. We will identify the trustee for a
series of certificates in the related prospectus
supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
certificates. You should read carefully the
section entitled "Risk Factors" beginning on
page of this prospectus.
The Loans.................... The loans underlying a series of certificates
form a loan pool. The loans in a loan pool will
be fixed or variable rate loans. All of the
loans will be closed-end home improvement loans.
Each loan will be secured by the related real
estate.
The prospectus supplement for each series will
provide information about the following:
^ the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
^ the weighted average and range of
contractual rates of interest on the loans;
^ the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
^ the average outstanding principal balance
of the loans as of the cut-off date;
^ the range of loan-to-value ratios; and
^ the geographic location of improved real
estate underlying the loans.
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<PAGE>
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
Description of The trust will issue the certificates of the
Certificates................ related series of certificates on the terms
specified in the related prospectus supplement.
Each series of certificates will evidence an
interest in the loan pool and other property
held in trust for the benefit of
certificateholders. If we so specify in the
related prospectus supplement, a series of
certificates may include one or more classes
with different rights to payments of principal
and interest, including classes which:
^ are entitled to receive only distributions
of interest,
^ are entitled to receive only distributions
of principal,
^ are entitled to receive principal on a
planned amortization schedule or a targeted
amortization schedule, or
^ are entitled to receive principal only
after other classes have received a
specified amount of principal.
We will issue the certificates in fully
registered form in the authorized denominations
that we specify in the related prospectus
supplement. No government agency or other
insurer will guarantee or insure the
certificates, unless we otherwise specify in the
related prospectus supplement. Similarly, no
government agency or other insurer will
guarantee or insure the loans, except as we
specify in this prospectus and in the related
prospectus supplement.
Subordinated Certificates.... We may subordinate one or more classes of any
series of certificates, as specified in the
related prospectus supplement. The rights of
holders of subordinated certificates to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior certificates to the extent
and in the manner we specify in the related
prospectus supplement. If a series of
certificates contains more than one class of
subordinated certificates, distributions and
losses will be allocated among those classes in
the manner specified in the related prospectus
supplement. The rights of holders of
subordinated certificates, to the extent not
subordinated, may be on a parity with holders of
senior certificates. By subordinating a class of
certificates, we intend to:
4
<PAGE>
^ enhance the likelihood of regular receipt
by holders of senior certificates of the
full amount of scheduled monthly payments
of principal and interest due them, and
^ protect holders of senior certificates
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated certificates the benefits of other
forms of credit enhancement that would benefit
only those subordinated certificates.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated certificates, we may provide credit
enhancement with respect to a series of
certificates by pool insurance, letters of
credit, surety bonds, a guarantee of Green Tree,
cash reserve funds or other forms of enhancement
acceptable to each nationally recognized rating
agency rating a series of certificates. We will
describe any such credit enhancement in the
related prospectus supplement.
Interest..................... We will pay interest on the certificates on the
dates specified in the related prospectus
supplement, unless we indicate otherwise. The
related prospectus supplement will describe the
pass-through rate, if any, for each class or the
method of determining the pass-through rate.
This rate may be fixed, variable or adjustable,
as specified in the related prospectus
supplement. For a more complete description of
interest payable on the Certificates, see "Yield
Considerations" and "Description of the
certificates" in this prospectus. As we specify
in the related prospectus supplement, classes of
a series of certificates may not be entitled to
receive interest or may be entitled to receive
interest which is not proportionate to the
principal allocable to such certificates.
Principal (Including Principal on each loan, including any principal
Prepayments)................ prepayments, will be passed through on each
payment date, except as we otherwise describe in
the related prospectus supplement. For a more
complete description of principal on the
certificates, see "Maturity and Prepayment
Considerations" and "Description of the
Certificates" in this prospectus.
Optional Termination......... Unless we specify otherwise in the related
prospectus supplement, Green Tree may repurchase
all the loans relating to a series of
certificates remaining outstanding at the time
and under the circumstances we specify in the
related prospectus supplement. Unless we
otherwise provide in the related prospectus
supplement, the repurchase price will equal the
principal amount of the loans plus accrued and
unpaid interest. For a more complete description
of optional termination of the certificates, see
"Description of the Certificates--Termination of
the Agreement" in this prospectus.
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<PAGE>
Representations and
Warranties of Green Tree
Financial Corporation .......
Green Tree will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to Green Tree's conveyance of any loan pool to
the trust fund. If Green Tree becomes aware of a
breach of any representation or warranty that
materially adversely affects the trust fund's
interest in any loan or receives written notice
of a breach from the trustee or the servicer,
then Green Tree must either cure the breach,
repurchase the affected loan or, if the related
prospectus supplement so provides, substitute
for the affected loan, under the conditions
further described in this prospectus and in the
prospectus supplement. For a more complete
description of the representations and
warranties of Green Tree, see "Description of
the Certificates--Conveyance of Loans."
Federal Income Tax We may make an election to treat the trust fund
Considerations.............. represented by a series of certificates or a
segregated portion of them as a real estate
mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended. If we
so choose, the Classes of certificates that we
offer may constitute "regular interest" or
"residual interests" in that REMIC under the
Internal Revenue Code of 1986, as amended, with
the tax consequences described in this
prospectus and in the related prospectus
supplement. If we so specify in the prospectus
supplement, a Class of certificates that we are
offering may represent interests in a "two-tier"
REMIC, but all interest in the first and second
tier REMIC will be created under the Pooling and
Servicing Agreement.
If we do not make a REMIC election with respect
to a series of certificates, the trust fund
represented by those certificates may be treated
as a grantor trust for federal income tax
purposes and not as an association taxable as a
corporation. In such an event, each holder of a
Certificate will be treated as the owner of an
undivided pro rata interest in income and corpus
attributable to the related loan pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the loans included in such loan
pool. If we do not make a REMIC election with
respect to a series of certificates and the
Trust Fund represented by such certificates will
not be treated as a grantor trust, the federal
income tax consequences of owning such
certificates will be described in the related
prospectus supplement. For a more complete
description of the Federal income tax
considerations related to the certificates, see
"Certain Federal Income Tax Consequences--Non-
REMIC Series."
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended
6
<PAGE>
("ERISA") or the Internal Revenue Code of 1986,
as amended, you should review carefully with
your legal advisors whether the purchase or
holding of certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Internal
Revenue Code of 1986, as amended. For a more
complete description of ERISA considerations,
see "ERISA Considerations" in this prospectus
and in your prospectus supplement.
Legal Investment............. Unless the related prospectus supplement
indicates otherwise, the certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984, as amended. For a more complete
description of legal considerations regarding
investment in the certificates, see "Legal
Investment Considerations" in this prospectus
and in your prospectus supplement.
Ratings...................... We will not issue the certificates unless one or
more nationally recognized rating agencies have
assigned a rating to the certificates in one of
their four highest rating categories.
The rating of each series of certificates
addresses the likelihood of the timely receipt
of interest and payment of principal on that
series on or before the stated maturity date for
that series. A 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
certificates do not address the likelihood of
payment of principal on any series of
certificates prior to the stated maturity date
or the possibility of the imposition of United
States withholding tax with respect to non-
United States persons. For a more complete
description of the ratings of the certificates,
see "Ratings" in this prospectus and in your
prospectus supplement.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the certificates.
^ Limits on the Availability of FHA Insurance. We will specify in the
prospectus supplement the number and percentage of home improvement
loans in the pool that are insured by FHA pursuant to Title I of the
National Housing Act. 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 Green Tree with FHA
regulations in originating and servicing the loan. Although Green Tree
is an FHA-approved lender and we believe that Green Tree has complied
with FHA regulations, these regulations are susceptible to substantial
interpretation. The law does not require Green Tree to obtain approval
from FHA of its origination and servicing practices. If Green Tree
fails to comply with FHA regulations, FHA may deny some insurance
claims and we cannot assure you that FHA's enforcement of its
regulations will not become stricter in the future. Green Tree
sometimes engages 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 on the loans in a given pool is limited to
the balance of a reserve amount. This reserve amount as of , 199 ,
was equal to approximately $ , 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 Green Tree.
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 FHA-insured home improvement
loans. If we were terminated as servicer due to bankruptcy or
otherwise, it is anticipated that a proportionate amount of Green
Tree's 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."
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the certificates will not represent an interest
in or obligation of Green Tree. Neither the government, any underwriter
or its affiliates, the servicer nor any other party will insure or
guarantee any of the certificates of any series (except as we otherwise
specify in the related prospectus supplement).
^ Junior Mortgage Liens; Value of Mortgaged Property. Green Tree expects
that a substantial number of the liens on improved real estate securing
the loans in a given loan pool will be junior to other liens on that
real estate. This subordinates the rights of the trust fund (and
consequently the holders of certificates of the related series), as
beneficiary under a conventional junior deed of trust or as mortgagee
under a conventional junior mortgage, to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to cause the
property securing the loan to be sold upon default of the mortgagor or
trustor. This extinguishes the junior mortgagee's or junior
beneficiary's lien unless the servicer on behalf of the trust fund
asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans.
For a more complete description of the risks associated with junior
mortgage liens, see "Certain Legal Aspects of the Loans--Repurchase
Obligations."
We expect a substantial portion of the loans included in a 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 and of the loan an the one hand, and the value of the home, on
the other. For a more
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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.
^ Limited Liquidity. 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.
^ Non-recordation of Mortgage Assignments. Green Tree 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 creditors of or purchasers from Green Tree or
a trustee in bankruptcy of Green Tree.
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the certificates.
THE TRUST FUND
General
A trust fund (the "Trust Fund") will evidence the interest specified in the
related Prospectus Supplement in the Loan Pool (as defined below) and certain
other property held in trust for the benefit of the Certificateholders (as
defined below). Each Trust Fund will include (i) closed-end home improvement
loans (the "Loans") underlying a series of Certificates (the "Loan Pool"), (ii)
the amounts held from time to time in a trust account (the "Certificate
Account") maintained by the trustee (the "Trustee") pursuant to separate
Pooling and Servicing Agreements (each, an "Agreement"), (iii) proceeds from
FHA Insurance (with respect to any FHA-insured Home Improvement Loan included
in the Loan Pool), (iv) any letter of credit, guarantee, surety bond, insurance
policy, cash reserve fund or other credit enhancement securing payment of all
or part of a Series of Certificates, and (v) such other property as may be
specified in the related Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Loan Pool comprised of
Loans having the aggregate principal balance as of the specified day of the
month of the creation of the pool (the "Cut-off Date") specified in the related
Prospectus Supplement. Holders of Certificates of a Series will have interests
only in such Loan Pool and will have no interest in the Loan Pool created with
respect to any other Series of Certificates, except with respect to FHA
Insurance Reserves. If so specified in the related Prospectus Supplement, the
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 so specified in the
related Prospectus Supplement, the Trust Fund may include a Pre-Funding Account
which would be used to purchase additional Loans ("Subsequent Loans") from the
Company during the pre-funding period specified in the related Prospectus
Supplement (the "Pre-Funding Period"). The related Prospectus Supplement will
specify the
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conditions that must be satisfied prior to 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 the Company in the ordinary course of
its business. Specific information respecting the Loans included in each Trust
Fund will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Certificates. A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Loans relating to such Series
will be attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
Whenever in this Prospectus terms such as "Loan Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Loan Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of Certificates.
The Loan Pools
Except as otherwise specified in the related Prospectus Supplement, the Loan
Pool will consist of (i) home improvement loans and promissory notes (the "Home
Improvement Loans"), and (ii) closed-end home equity loans (the "Home Equity
Loans" and, together with the Home Improvement Loans, collectively the
"Loans"), originated by the Company 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 otherwise specified in the related Prospectus
Supplement, the Loans will be fully amortizing and will bear interest at a
fixed or variable annual percentage rate (the "Loan Rate").
For each Series of Certificates, the Company will assign the Loans
constituting the Loan Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity referred
to herein as the "Servicer", which term shall include any successor to the
Company in such capacity under the applicable Agreement), will service the
Loans pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related 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 otherwise stated in the related
Prospectus Supplement, each registered holder of a Certificate will be entitled
to receive periodic distributions, which will be monthly unless otherwise
specified in the related Prospectus Supplement, of all or a portion of
principal on the underlying Loans or interest on the principal balance of such
Certificate (or on some other principal balance unrelated to that of such
Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Loans contained in the
related Loan Pool, among other things, 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 the geographic location of improved real estate
securing the Loans. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Loans, including the requisite
characteristics of the Subsequent Loans.
The Company 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 certain information furnished
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to the Trustee in respect of each such Loan. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Loan, the Company will be obligated to cure the
breach in all material respects, or to repurchase or substitute for the Loan as
described below. This repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Loans."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement loans and home equity loans, costs of carrying such 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
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales loans for manufactured homes and
other consumer installment sales loans, as well as home equity loans. The
Company is 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, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales loans for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (612) 293-3400). The Company's quarterly and annual reports are
available from the Company upon written request made to the Company.
Loan Origination
Home Improvement Loans. Through its centralized loan processing operations in
St. Paul, Minnesota, the Company arranges to purchase certain loans from home
improvement contractors located throughout the United States. The Company's
regional sales managers contact home improvement contractors and explain the
Company's available financing plans, terms, prevailing rates and credit and
financing policies. If the contractor wishes to utilize the Company's available
customer financing, the contractor must make an application for contractor
approval. The Company has a contractor approval process pursuant to which the
financial condition, business experience and qualifications of the contractor
are reviewed prior to his or her approval to sell Loans to the Company. In
addition, the Company has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. The
Company also reviews monthly contractor trend reports which show the default
and delinquency trends of the particular contractor with respect to loans sold
to the Company. The Company occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
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All loans that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the
customer's credit application and construction loan to the Company's office
where an analysis of the creditworthiness of the customer is made using a
proprietary credit scoring system that was implemented by the Company in June
1993. If the Company determines that the application meets the Company's
underwriting guidelines and applicable FHA regulations (for FHA-insured loans)
and the credit is approved, the Company purchases the loan from the contractor
when the customer verifies satisfactory completion of the work, or, in the
case of staged funding, the Company follows up with the customer for the
completion certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond
the purchase price of the home improvement for the purpose of debt
consolidation.
The original principal amount of an FHA-insured home improvement 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."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The original
principal amount of a conventional secured home improvement loan may not
exceed $40,000 for the Company's secured "no equity" lien program, and
$100,000 for the Company's secured equity lien program, unless a higher amount
financed is approved by senior management. The original principal amount of a
conventional home improvement loan may not exceed $100,000 for the Company's
secured lien program, unless a higher amount financed is approved by senior
management. The Company requires that any secured home improvement 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.
The Company's underwriting guidelines and credit scoring process weight
significantly the applicant's creditworthiness and place less weight on the
available equity in the related real estate being improved. While it is the
Company's policy not to exceed 100% in loan-to-value ratio on any 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 the Company does 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.
Home Equity Loans. The Company has originated closed-end home equity loans
since January 1996. As of December 31, 1997, the Company had approximately
$3,116,054,406 aggregate principal amount of outstanding closed-end home
equity loans.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the
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extent the requested loan would have a less favorable (or more favorable)
equity position, the creditworthiness of the borrower must be stronger (or may
be weaker). The loan-to-value ratio of the requested loan, combined with any
existing loans with a senior lien position, may not exceed 95% without senior
management approval. In most circumstances, an appraisal of the property is
required. Currently, loans secured by a first mortgage with an obligor having a
superior credit rating may not exceed $300,000 without senior management
approval, and loans secured by a second mortgage with an obligor having a
superior credit rating may not exceed $250,000 without senior management
approval.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Loan Rate of the Loans (as of
the related Cut-off Date) relating to each Series of Certificates will be set
forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Loans. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the 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 otherwise described in an applicable Prospectus Supplement, all of the
Loans will have maturities at origination of not more than 25 years.
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. The
Company has no significant experience with respect to 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 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 (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 the
Company's exercise of its option to repurchase the entire remaining pool of
Loans (see "Description of the Certificates--Repurchase Option") will affect
the timing of principal distributions on the Certificates of a Series.
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Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Certificates, there can be no assurance that the Loans will prepay at
such 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
the Company's or Servicer's option to repurchase the Loans comprising part of a
Trust Fund when the aggregate outstanding principal balance of such Loans is
less than a specified percentage of the initial aggregate outstanding principal
balance of such Loans as of the related Cut-off Date. See also "The Trust
Fund--The Loan Pools" for a description of the obligations of the Company to
repurchase a Loan in case of a breach of a representation or warranty relative
to such Loan.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate pooling and
servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
General
The Certificates may be issued in one or more Classes. If the Certificates of
a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a Series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate trust fund (the "Trust Fund") created pursuant to the related
Agreement. The Trust Fund will be held by the Trustee for the benefit of the
Certificateholders. Each Trust Fund, to the extent specified in the related
Prospectus Supplement, will include (i) Loans (the "Loan Pool") which are
subject to the Agreement, (ii) the amounts held in the Certificate Account from
time to time, (iii) proceeds from FHA Insurance (with respect to any FHA-
insured Home Improvement Loan included in the Loan Pool), (iv) any letter of
credit, guarantee, surety bond, insurance policy, cash reserve fund or other
credit enhancement securing payment of all or part of a Series of Certificates
and (v) such other property as may be specified in the related Prospectus
Supplement. Except as otherwise specified in the related
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Prospectus Supplement, the Certificates will be freely transferable and
exchangeable at the corporate trust office of the Trustee at the address set
forth in the related Prospectus Supplement. No service charge will be made for
any registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each 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 ("Subordinated Certificates") which are subordinated in right of
distribution to one or more other Classes ("Senior Certificates"), as provided
in the related Prospectus Supplement. Certificates of a Series which includes
Senior and Subordinated Certificates are referred to herein collectively as
"Senior/Subordinated Certificates." A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. The Prospectus Supplement with respect to a
Series of Senior/Subordinated Certificates will set forth, among other things,
the extent to which the Subordinated Certificates are subordinated (which may
include a formula for determining the subordinated amount or for determining
the allocation of the Amount Available (hereinafter defined) among Senior
Certificates and Subordinated Certificates), the allocation of losses among the
Classes of Subordinated Certificates, the period or periods of such
subordination, the minimum subordinated amount, if any, and any distributions
or payments which will not be affected by such subordination. The protection
afforded to the Senior Certificateholders from the subordination feature
described above will be effected by the preferential right of such
Certificateholders to receive current distributions from the Loan Pool. If a
Series of Certificates contains more than one Class of Subordinated
Certificates, losses will be allocated among such Classes in the manner
described in the Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, Mezzanine Certificates or other Classes of Subordinated
Certificates may be entitled to the benefits of other forms of credit
enhancement and may, if rated in one of the four highest rating categories by a
nationally recognized statistical rating organization, be offered pursuant to
this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Loans evidenced by a single Certificate of each
Class of Certificates of a Series (a "Single Certificate").
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
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Global Certificates
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the Certificates contained in this Prospectus assumes that
the Certificates will be issued in definitive form. If the Certificates of a
Class are issued in the form of one or more Global Certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global Certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
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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 the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for the related Global Certificate or Certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any Certificates of a Class represented by one or more Global
Certificates and, in such event, will cause to be issued Certificates of such
Class in definitive form in exchange for the related Global Certificate or
Certificates. Further, if the Company so specifies with respect to the
Certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing Certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
Certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of Certificates of the Class represented by such
Global Certificate equal in denominations to such beneficial interest and to
have such Certificates registered in its name.
Conveyance of Loans
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Loans, including
all principal and interest received on or with respect to the Loans (other than
receipts of principal and interest due on the Loans before the Cut-off Date).
On behalf of the Trust Fund, as the issuer of the related Series of
Certificates, the Trustee, concurrently with such conveyance, will execute and
deliver the Certificates to the order of the Company. The Loans will be as
described on a list attached to the Agreement. Such list will include the
amount of monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
Such list will be available for inspection by any Certificateholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Loans to the Trust Fund, the Company's 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 such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit cash
in the separate account maintained at an Eligible Institution in the name of
the Trustee (the "Certificate Account") in an amount sufficient to offset such
discrepancy. If the Trust Fund includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent 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 the Company's accounting records and computer systems will also
reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Loans from the
Company to the related Trust Fund would, in the event the Company became a
debtor under the United States Bankruptcy Code, be treated as a true sale and
not as a pledge to secure borrowings. If, however, the transfer of the Loans
from the Company to the Trust Fund were treated as a pledge to secure
borrowings by the Company, the distribution of proceeds of the Loans to the
Trust Fund might be subject to the automatic stay provisions of the United
States Bankruptcy Code, which would delay the distribution of such proceeds for
an uncertain period of time. In addition, a bankruptcy trustee would have the
power to sell the Loans if the proceeds of such sale could satisfy the amount
of the debt deemed owed by the Company, or the bankruptcy trustee could
substitute other collateral in lieu of the Loans to secure such debt, or such
debt could be subject to adjustment by the bankruptcy trustee if the Company
were to file for reorganization under Chapter 11 of the United States
Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Loan as of the related Closing Date,
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<PAGE>
including that: (a) as of the Cut-off Date the most recent scheduled payment
was made or was not delinquent more than 59 days; (b) no provision of a 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; (c) 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); (d) no
Loan is subject to any right of rescission, set-off, counterclaim or defense;
(e) 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; (f) each Loan was either (i) entered into by a home
improvement contractor in the ordinary course of such contractor's business
and, immediately upon funding, assigned to the Company, (ii) was originated by
a home equity lender in the ordinary course of such lender's business and
assigned to the Company, or (iii) was originated by the Company directly; (g)
no Loan was originated in or is subject to the laws of any jurisdiction whose
laws would make the transfer of the Loan or an interest therein pursuant to the
Agreement or the Certificates unlawful; (h) each Loan complies with all
requirements of law; (i) no Loan has been satisfied, subordinated to a lower
lien ranking than its original position (if any) or rescinded; (j) each Loan
creates a valid and perfected lien on the related improved real estate; (k) all
parties to each Loan had full legal capacity to execute such Loan; (l) no Loan
has been sold, conveyed and assigned or pledged to any other person and the
Company has good and marketable title to each Loan free and clear of any
encumbrance, equity, loan, pledge, charge, claim or security interest, and is
the sole owner and has full right to transfer such Loan to the Trustee; (m) as
of the Cut-off Date there was no default, breach, violation or event permitting
acceleration under any Loan (except for payment delinquencies permitted by
clause (a) above), no event that with notice and the expiration of any grace or
cure period would constitute a default, breach, violation or event permitting
acceleration under such Loan, and the Company has not waived any of the
foregoing; (n) each Loan is a fully-amortizing loan with a fixed rate of
interest and provides for level payments over the term of such Loan; (o) each
Loan contains customary and enforceable provisions such as to render the rights
and remedies of the holder thereof adequate for realization against the
collateral; (p) the description of each Loan set forth in the list delivered to
the Trustee is true and correct; (q) there is only one original of each Loan;
and (r) each Loan was originated or purchased in accordance with the Company's
then-current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Loan or receives written notice of such a breach from
the Trustee or the Servicer, then the Company will be obligated either to cure
such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Loan, in each case under the conditions
further described herein and in the Prospectus Supplement. This repurchase
obligation will constitute the sole remedy available to the Trust Fund and the
Certificateholders for a breach of a representation or warranty under the
Agreement with respect to the Loans (but not with respect to any other breach
by the Company of its obligations under the Agreement). If a prohibited
transaction tax under the REMIC provisions of the Code is incurred in
connection with such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Loan at any time means the outstanding principal
amount of such Loan (without giving effect to any Advances made by the Servicer
or the Trustee), plus interest at the applicable Pass-Through Rate on such Loan
from the end of the Due Period with respect to which the Obligor last made a
payment (without giving effect to any Advances made by the Servicer or the
Trustee) through the end of the immediately preceding Due Period.
Payments on 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 (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national bank,
(iii) in an account
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<PAGE>
or accounts the deposits in which are fully insured by the FDIC, (iv) in an
account or accounts the deposits in which are insured by the FDIC (to the
limits established by the FDIC), the uninsured deposits in which are otherwise
secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant Certificates.
The collateral eligible to secure amounts in the Certificate Account is
limited to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest-bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Loans
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Loans;
(ii) all Obligor payments on account of interest on the Loans;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the
liquidation of defaulted Loans, net of liquidation expenses ("Net
Liquidation Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vii) all proceeds of any Loan or property acquired in respect thereof
repurchased by the Servicer or the Company, as described under "Conveyance
of Loans" above or under "Repurchase Option" below.
Distributions on Certificates
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Loans that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Loans as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a Series of Certificates which includes only one Class,
the Amount Available for each Payment Date will be distributed pro rata to the
holders of such Certificates. In the case of any other Series of Certificates,
the Amount Available for each Payment Date will be allocated and distributed
to holders of the Certificates of such Series pursuant to the method and in
the order of priority specified in the applicable Prospectus Supplement. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount."
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Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Loans.
Advances
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Loan or from liquidation proceeds thereof. The
Servicer will deposit any Advances in the Certificate Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Loan from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including FHA Insurance
payments, if applicable, or foreclosure resale proceeds), if any, of the Loan,
and will release its right to reimbursements in conjunction with the purchase
of the Loan by the Company for breach of representations and warranties. If
the Servicer determines in good faith that an amount previously advanced will
not ultimately be recoverable from payments by or on behalf of the Obligor or
from liquidation proceeds (including FHA Insurance payments, if applicable, or
foreclosure resale proceeds), if any, of the Loan (an "Uncollectible
Advance"), the Servicer will be entitled to reimbursement from payments on
other Loans or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Loan or from liquidation proceeds
thereof, if any, or (ii) the Trustee determines that it is not legally able to
make such Advance.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1998 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Loans and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 31........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the 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.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Loan is prepaid in
full, interest on the amount prepaid is collected from the Obligor only to
the date of payment.
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<PAGE>
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
Indemnification
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Loans) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Loan and (b) for any taxes which may at any time be asserted with respect to,
and as of the date of, the conveyance of the Loans to the Trust Fund (but not
including any federal, state or other tax arising out of the creation of the
Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Loans, to defend and indemnify the Trust Fund, the Trustee and
the Certificateholders (which indemnification will survive any removal of the
Servicer as servicer of the Loans) against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Loan while it was the Servicer.
Servicing
Pursuant to the Agreement, the Servicer will service and administer the Loans
assigned to the Trustee as more fully set forth below. The Servicer will
perform diligently all services and duties specified in each Agreement, in the
same manner as prudent lending institutions of home improvement 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 Agreement.
The duties to be performed by the Servicer will include collection and
remittance of principal and interest payments, collection of insurance claims
and, if necessary, foreclosure of Loans.
The Servicer will make reasonable efforts to collect all payments called for
under the Loans and, consistent with the Agreement and any FHA Insurance, will
follow such collection procedures with respect to the Loans as it follows with
respect to mortgage loans or loans serviced by it that are comparable to the
Loans.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Loan Pool and the Certificates of such Series as is
specified in the related Prospectus Supplement. Each such report to the Trustee
will be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before May 1 of each year, the Servicer will deliver to the Trustee a report of
a nationally recognized accounting firm stating that such firm has examined
certain documents and records relating to the servicing of home improvement
loans and home equity loans serviced by the Servicer under pooling and
servicing agreements similar to the Agreement and stating that, on the basis of
such procedures, such servicing has been conducted in compliance with the
Agreement, except for any exceptions set forth in such report.
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Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home
improvement 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 its servicing of the
Loans, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust Fund 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 the
Company from its Monthly Servicing Fees include payment of FHA Insurance
premiums, payment of fees and expenses of accountants, payments of all fees and
expenses incurred in connection with the enforcement of Loans or foreclosure on
collateral relating thereto (including submission of FHA Insurance claims, if
applicable), payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders, except that
the Servicer shall be reimbursed out of the liquidation proceeds of a
liquidated Loan (including FHA Insurance proceeds) for customary out-of-pocket
liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian or its creditors, or
fails to, or admits in writing its inability to, pay its debts as they become
due, or takes any corporate action in
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<PAGE>
furtherance of the foregoing; (f) the Servicer fails to be an Eligible
Servicer; or (g) if the Company is the Servicer, the Company's servicing rights
under its master seller-servicer loan with GNMA are terminated. The Servicer
will be required under the Agreement to give the Trustee and the
Certificateholders notice of an Event of Termination promptly upon the
occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
Series shall, terminate all of the rights and obligations of the Servicer under
the related Agreement and in and to the Loans, and the proceeds thereof,
whereupon (subject to applicable law regarding the Trustee's ability to make
advances) the Trustee or a successor Servicer under the Agreement will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
obligation of the Company to repurchase 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 prior to a transfer
of the Servicer's servicing and related functions or for any breach by such
Servicer of any of its obligations contained in the Agreement. In addition, the
Trustee will notify FHA of the Company's termination as Servicer of the Loans
and will request that the portion of the Company's 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 such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Loans for breaches of
representations or warranties under the Agreement. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
so to act, it may appoint, or petition to a court of competent jurisdiction for
the appointment of, a Servicer. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which the Trustee may incur.
Reports to Certificateholders
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly
Principal, specifying the amounts constituting scheduled payments by
Obligors, principal prepayments on the Loans, and other payments with
respect to the Loans;
(b) the amount of such distribution which constitutes Monthly
Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
(f) the Pool Factor (a percentage derived from a fraction the
numerator of which is the remaining Principal Balance of the Certificates
and the denominator of which is the Initial Principal Amount of the
Certificates) immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Loans delinquent (i)
31-59 days, (ii) 60-89 and (iii) 90 or more days;
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<PAGE>
(h) the number of Loans liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Loans in the related Loan
Pool at a price equal to the greatest of (i) 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 thereon,
plus the fair market value (as determined by the Servicer) of any acquired
properties, (ii) the fair market value of all of the assets of the Trust Fund,
and (iii) an amount equal to the Aggregate Certificate Principal Balance of the
related Certificates plus interest on such Certificates payable on and prior to
the Payment Date occurring in the month following such repurchase (less amounts
on deposit in the Certificate Account and available to pay such principal and
interest). Such price will be paid on the Payment Date on which such purchase
occurs to the Certificateholders of record on the last Business Day of the
immediately preceding Due Period in immediately available funds against the
Trustee's delivery of the Loans and any acquired properties to the Servicer.
The distribution of such purchase price to Certificateholders will be in lieu
of any other distribution to be made on such Payment Date with respect to the
related Loans.
Amendment
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment that reduces in any manner the amount of, or delays the timing of,
any payment received on or with respect to Loans which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
Termination of the Agreement
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Loan or the disposition of all
property acquired upon foreclosure of any Loan; or (b) the Payment Date on
which the Company or the Servicer repurchases the Loans as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of the
Agreement.
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The Trustee
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company, as seller, in consideration of the conveyance of the
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 Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Agreement.
Whether or not an Event of Termination has occurred, the Trustee is not
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of its duties or the exercise of its powers if it
has reasonable grounds to believe that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Loans may be FHA-insured, the payments upon
which, subject to the following discussion, are insured by the FHA under Title
I of the National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each Series is obligated to pay such premium and is entitled to
be reimbursed by the Company and from collections on the related Home
Improvement Loans.
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As of December 31, 1997, the Company's FHA Insurance reserve amount was equal
to approximately $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing loans
and approximately $128,145,000 of FHA-insured home improvement loans, including
the FHA-insured Home Improvement Loans that may be owned by a Trust Fund. If an
Event of Termination (as defined under "Description of the Certificates--Events
of Termination") occurs, each Trustee will notify FHA of the Company's
termination as Servicer of the related FHA-insured Home Improvement Loans and
will request that the portion of the Company's 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 such a transfer of
reserves, FHA is not obligated to comply with such a request, and may determine
that it is not in FHA's interest to permit such transfer of reserves. In
addition, FHA has not specified how insurance reserves might be allocated in
such event, and there can be no assurance that any reserve amount, if
transferred to the Trustee or a successor Servicer, would not be substantially
less than 10% of the outstanding principal amount of the FHA-insured Home
Improvement 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 such reserves so that they will not be
commingled with the reserves of the transferee) if it is in FHA's interest to
do so.
In general, FHA will insure property improvement loans up to $25,000 for a
single-family property, with a maximum term of 20 years. FHA will insure loans
of up to $17,500 for manufactured homes which qualify as real estate under
applicable state law and loans of up to $12,000 per unit for a $48,000 limit
for four units for owner-occupied multiple-family homes. If the loan amount is
$15,000 or more, FHA requires a drive-by appraisal, the current tax assessment
value, or a full Uniform Residential Appraisal Report dated within 12 months of
the closing to verify the property's value. The maximum loan amount on
transactions requiring an appraisal is the amount of equity in the property
shown by the market value determination of the property. The loan proceeds must
be used for the purposes described in the loan application, and those
improvements must substantially protect or improve the basic livability or
utility of the property. The Secretary of HUD from time to time publishes a
list of ineligible items and activities which may not be financed with the
proceeds of an FHA-insured home improvement loan.
Following a default on an FHA-insured Home Improvement Loan the Servicer may,
subject to certain conditions, either commence foreclosure proceedings against
the improved property securing the loan, if applicable, or submit a claim to
FHA, but may submit a claim to FHA after proceeding against the improved
property only with the prior approval of the Secretary of HUD. The availability
of FHA Insurance following a default on an FHA-insured Home Improvement Loan is
subject to a number of conditions, including strict compliance by the Company
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 prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In such event, the Company will seek to obtain payment
by or a judgment against the borrower, and may resubmit the claim to FHA
following such a judgment. As described under "Green Tree Financial
Corporation--Loan Origination," the Company does 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 Fund 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 (i) 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, (ii) 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, (iii)
uncollected
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court costs, (iv) legal fees, not to exceed $500, and (v) expenses for
recording the assignment of the lien to the United States, if applicable.
CERTAIN LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Loans to
a Trust Fund, the Certificateholders of such Series, as the beneficial owners
of the Trust Fund, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the 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 such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the real
estate securing the 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, i.e., the payment of the indebtedness secured thereby.
There are two parties to a mortgage: the mortgagor, who is the borrower, and
the mortgagee, who is the lender. In a mortgage state, the mortgagor delivers
to the mortgagee a note or retail installment 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 with respect to deeds of trust,
the directions of the beneficiary. Some states use a security deed or deed to
secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior
to liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms, the
knowledge of the parties to such instrument in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the 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 Fund (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the 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 Fund asserts its subordinate interest in the property in
foreclosure
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litigation and, possibly, satisfies the defaulted senior loan or loans. As
discussed more fully below, a junior mortgagee or beneficiary may satisfy a
defaulted senior loan in full, or in some states may cure such default and
bring the senior loan current, in either event usually adding the amounts
expended to the balance due on the junior loan. Although the Company generally
does not cure defaults under a senior mortgage or deed of trust, it is the
Company's standard practice to protect its interest by attending any
foreclosure sale and bidding for property only if it is in the Company's best
interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of the Company, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first mortgage or deed of trust. Proceeds in
excess of the amount of first mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or trustor. All sums so expended by a senior
mortgagee or beneficiary generally become part of the indebtedness secured by
the senior mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree
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to an increase in the principal amount of or the interest rate payable on the
senior loan, the senior lender may lose its priority to the extent any existing
junior lender is harmed or the borrower is additionally burdened. Third, if the
borrower defaults on the senior loan and/or any junior loan or loans, the
existence of junior loans and actions taken by junior lenders can impair the
security available to the senior lender and can interfere with or delay the
taking of action by the senior lender. The bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful. Generally, the action is
initiated by the service of legal pleadings upon all parties having an interest
of record in the real property. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a referee or other officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, prior to a sale, the
trustee must record a notice of default and send a copy to the borrower trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, prior to such sale, the trustee must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. Certain states require
that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in
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some states to remain in possession during the redemption period, the lender
will assume the burdens of ownership, including obtaining hazard insurance,
paying taxes and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender commonly will obtain the
services of a real estate broker and pay the broker a commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss resulting from such sale may be reduced by the receipt
of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
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 generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Loan, and
any such taxes or fees imposed may reduce liquidation proceeds with respect to
such property, as well as distributions payable to the Certificateholders.
Second or Third Mortgages
The 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
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the junior mortgage, deed of trust, deed to secure debt or security deed, the
terms of the senior mortgage, deed of trust, deed to secure debt or security
deed will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed may have the right to perform the obligation itself. Generally,
all sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
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Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a mortgage loan on a debtor's residence by paying arrearages and
reinstate the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. In the case of a mortgage
loan not secured by the debtor's principal residence, courts with federal
bankruptcy jurisdiction may also reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Consumer Protection Laws with respect to 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 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Loans included in a Loan Pool may be
subject to such provisions. The Home Protection Act applies to mortgage loans
originated on or after the effective date of such regulations. These laws can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the 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.
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In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit loan
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such loan free of notice of claims
by the debtor thereunder. The effect of this rule is to subject the assignee of
such a 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 Fund against such Obligor. The Home
Protection Act provides that assignees of certain high-interest, non-purchase
money mortgage loans (which may include some 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 limitations imposed by FHA regulations with respect
to FHA-insured Home Improvement Loans, in certain states there are or may be
specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Under the Agreement, late charges (to the
extent permitted by law and not waived by the Company) will be retained by the
Company as additional servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a junior mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under mortgages or the deeds of trust receive notices in
addition to statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protection to the borrower.
It is the Company's practice with some of the Home Improvement Loans to defer
the first payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days'
interest on the first payment on these deferred payment loans.
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"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 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Loans) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any 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 (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a loan for deed), (v) a transfer
by devise, descent or operation of law on the death of a joint tenant or tenant
by the entirety, and (vi) other transfers as set forth in the Garn-St. Germain
Act and the regulations thereunder. As a result, a lesser number of Loans which
contain "due-on-sale" clauses may extend to full maturity than earlier
experience would indicate with respect to single-family mortgage loans. The
extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Loans, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in 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 ("Title V"), provides that, subject to certain
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. The Company will
represent and warrant in each Agreement that all Loans comply with any
applicable usury limitations.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without
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participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. What constitutes
sufficient participation in the management of a property securing a loan or the
business of a borrower to render the exemption unavailable to a lender has been
a matter of interpretation by the courts. CERCLA has been interpreted to impose
liability on a secured party, even absent foreclosure, where the party
participated in the financial management of the borrower's business to a degree
indicating a capacity to influence waste disposal decisions. However, court
interpretations of the secured creditor exemption have been inconsistent. In
addition, when lenders foreclose and thereupon become owners of collateral
property, courts are inconsistent as to whether such ownership renders the
secured creditor exemption unavailable. Other federal and state laws in certain
circumstances may impose liability on a secured party which takes a deed-in-
lieu of foreclosure, purchases a mortgaged property at a foreclosure sale, or
operates a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust Fund and reduce the amounts otherwise distributable to the holders of
the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Loans.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The Company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the Company will not foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the 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 thereafter. Thus, 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 in connection therewith. 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
Under the Agreement, the Company 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
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of a representation and warranty under the Agreement and would create an
obligation of the Company to repurchase such Home Improvement Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
In addition, the Company will also represent and warrant under each Agreement
that each Loan complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust Fund for violation of any law and
such claim materially adversely affects the Trust Fund's interest in a Loan,
such violation would constitute a breach of a representation and warranty under
the Agreement and would create an obligation to repurchase such Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
Plan Asset Regulations
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in Certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the Certificates. Therefore, neither
Plans nor such entities should acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified
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in the DOL Regulations and includes an undivided interest in the underlying
assets of certain entities in which a Plan invests. The prohibited transaction
provisions of Section 406 of ERISA and Section 4975 of the Code may apply to
the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the Company
and the Servicer that such person is neither a Plan, nor acting on behalf of a
Plan, nor purchasing with Plan Assets of any Plan.
Consultation With Counsel
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are
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subject to change (which change may be retroactive) or possibly differing
interpretations. The discussion does not purport to deal with federal income
tax consequences applicable to all categories of investors, some of which may
be subject to special rules. Investors should consult their own tax advisors to
determine the federal, state, local, and any other tax consequences of the
purchase, ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each series will indicate whether or not an election
to be treated as a REMIC has been or will be made with respect thereto. The
following discussion deals first with Series with respect to which a REMIC
Election is made and then with Series with respect to which a REMIC Election is
not made.
REMIC Series
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel to
the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price loan in effect on the Startup Day.
The REMIC Regulations provide that a 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 (i) 80% of the issue price (generally, the
principal balance) of the Loan at the time it was originated or (ii) 80% of the
adjusted issue price (the then-outstanding principal balance, with certain
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 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 (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular
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Certificates. In accordance with Section 860G(a)(7) of the 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
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item of gross income and as a separate item of expense
to those Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated as
a fixed investment trust under
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applicable law but for its qualification as a REMIC, or a REMIC that is
substantially similar to an investment trust but is structured with the
principal purpose of avoiding this allocation requirement imposed by the
Temporary Treasury Regulations. Generally, a pass-through interest holder
refers to individuals, trusts and estates, certain other pass-through entities
beneficially owned by one or more individuals, trusts or estates, and regulated
investment companies. Such an individual, estate, trust or pass-through entity
that holds a Regular Certificate in such a REMIC will be allowed to deduct the
foregoing separate item of expense under Section 212 of the Code only to the
extent that, in the aggregate and combined with certain other itemized
deductions, it exceeds 2% of the adjusted gross income of the holder. In
addition, Section 68 of the Code provides that the amount of itemized
deductions (including those provided for in Section 212 of the Code) otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code ($121,200 for 1997, in the
case of a joint return) will be reduced by the lesser of (i) 3% of the excess
of adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of such an
individual, trust, estate or pass-through entity that is a holder of a Regular
Certificate in such a REMIC, no deduction will be allowed for such holder's
allocable portion of the foregoing expenses, even though an amount equal to the
total of such expenses will be included in such holder's gross income for
alternative minimum tax purposes. Unless otherwise stated in the related
Prospectus Supplement, the foregoing expenses will not be allocated to holders
of a Regular Certificate in a REMIC. If the foregoing limitations apply,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
Regular Certificates in such a "single class-REMIC" may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Such
prospective investors should carefully consult with their own tax advisors
prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code and interest thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code. If less than 95% of the average
adjusted basis of the assets comprising the REMIC are assets qualifying under
any of the foregoing Sections of the Code (including assets described in
Section 7701(a)(19)(C) of the Code), then the Regular Certificates will be
qualifying assets only to the extent that the assets comprising the REMIC are
qualifying assets. Furthermore, interest paid with respect to Certificates held
by a real estate investment trust will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code to the same extent that the
Certificates themselves are treated as real estate assets. Regular Certificates
held by a regulated investment company or a real estate investment trust will
not constitute "Government securities" within the meaning of Sections
851(b)(4)(A)(i) and 856(c)(5)(A) of the Code, respectively. In addition, the
REMIC Regulations provide that payments on 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 Code. Entities
affected by the foregoing provisions of the Code that are considering the
purchase of Certificates should consult their own tax advisors regarding these
provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have
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not yet been issued. Nonetheless, the Code requires that a prepayment
assumption be used with respect to the underlying assets of a REMIC in
computing the accrual of original issue discount on Regular Certificates, and
that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or initial interest
rate holiday) includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that Regular Certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest that
accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the
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Regular Certificates. Until further guidance is issued, however, the REMIC will
treat the interest on Regular Certificates as unconditionally payable under the
OID Regulations. In addition, under the OID Regulations, certain variable
interest rates payable on Regular Certificates, including rates based upon the
weighted average interest rate of a Loan Pool, may not be treated as qualified
stated interest. In such case, the OID Regulations would treat interest under
such rates as contingent interest which generally must be included in income by
the Regular Certificateholder when the interest becomes fixed, as opposed to
when it accrues. Until further guidance is issued concerning the treatment of
such interest payable on Regular Certificates, the REMIC will treat such
interest as being payable at a variable rate tied to a single objective index
of market rates. Prospective investors should consult their tax advisors
regarding the treatment of such interest under the OID Regulations. In the
absence of authority to the contrary and if otherwise appropriate, the Company
expects to determine the stated redemption price at maturity of a Regular
Certificate by assuming that the anticipated rate of prepayment for all 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 Code. In general, the
issue price of a Regular Certificate is the first price at which a substantial
amount of the Regular Certificates of such class are sold for money to the
public (excluding bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers). If a
portion of the initial offering price of a Regular Certificate is allocable to
interest that has accrued prior to its date of issue, the issue price of such a
Regular Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any "accrual period" a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid or compounded with respect to such Regular
Certificate, beginning with their date of issuance and ending with the maturity
date. The adjusted issue price of a Regular Certificate at the beginning of any
accrual period is the sum of the issue price and accrued original issue
discount for each prior accrual period reduced by the amount of payments other
than payments of qualified stated interest made during each prior accrual
period. The Code requires the present value of the remaining payments to be
determined on the bases of (a) the original yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period), (b) events, including actual
prepayments, which have occurred before the close of the accrual period, and
(c) the assumption that the remaining payments will be made in accordance with
the original Prepayment Assumption. The effect of this method is to increase
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the Loans
held by the Trust Fund that occur at a rate that exceeds the Prepayment
Assumption and to decrease (but not below zero for any period) the portions of
original issue discount that a Regular Certificateholder must include in income
to take into account prepayments with respect to the Loans that occur
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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 Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on such a Regular Certificate may be computed and accrued under
the same methodology that applies to Regular Certificates paying qualified
stated interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate Regular Certificates are issued,
the related Prospectus Supplement will describe the manner in which the
original issue discount rules may be applied with respect thereto and the
method to be used in preparing information returns to the holders of such
adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return on
the Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the adjustable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest is
not payable in all circumstances. In these situations, as well as others, it is
unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary income
as payments of principal are received on such Regular Certificate or upon the
sale or exchange of the Regular Certificate. In general, the holder of a
Regular Certificate may elect to treat market discount as accruing either (i)
under a constant yield method that is similar to the method for the accrual of
original issue discount or (ii) under a ratable accrual method (pursuant to
which the market discount is treated as accruing in equal daily installments
during the period the Regular Certificate is held by the purchaser), in each
case computed taking into account the Prepayment
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Assumption. Because the regulations referred to above have not been issued, it
is not possible to predict what effect, if any, such regulations, when issued,
might have on the tax treatment of a Regular Certificate purchased at a
discount in the secondary market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. It appears that the Prepayment Assumption should be
taken into account in determining the term of a Regular Certificate for this
purpose. Amortizable bond premium with respect to a Regular Certificate will be
treated as an offset to interest income on such Regular Certificate, and a
Certificateholder's deduction for amortizable bond premium will be limited in
each year to the amount of interest income derived with respect to such Regular
Certificate for such year. Any election to deduct amortizable bond premium will
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Certificateholder at the beginning of
the first taxable year to which the election applies or thereafter acquired,
and may be revoked only with the consent of the Service. Bond premium on a
Regular Certificate held by a Certificateholder who does not elect to deduct
the premium will decrease the gain or increase the loss otherwise recognized on
the disposition of the Regular Certificate. Certificateholders who pay a
premium for a Regular Certificate should consult their tax advisors concerning
such an election and rules for determining the method for amortizing bond
premium.
Realized Losses. Holders of a Regular Certificate acquired in connection
with a trade or business should be allowed to deduct as ordinary losses any
losses sustained during a taxable year in which the Regular Certificates become
wholly or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a Regular Certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until 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.
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At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a Regular Certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Except as discussed below or with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other taxable disposition of a Regular Certificate will be capital gain if the
Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in the
holder's income if the yield on such Regular Certificate had equaled 110% of
the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the 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 (i) the prepayment may be
used in whole or in part to make distributions on Regular Certificates, and
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(ii) 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 (i.e., a fast-pay, slow-pay structure), this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates, when distributions
are being made in respect of earlier classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses would
be allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of Regular
Certificates, may increase over time as distributions are made on the lower
yielding classes of Regular Certificates, whereas interest income with respect
to any given 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 Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is in excess of the
corresponding portion of the REMIC's basis in the 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 such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
Regular Certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule described therein.
The REMIC will have market discount income in respect of the Loans if, in
general, the basis of the REMIC in such Loans is exceeded by their unpaid
principal balances. The REMIC's basis in such Loans is generally the fair
market value of the Loans immediately after the transfer thereof to the REMIC
(which will
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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
Code Section 1276 applies, the accrued portion of such market discount would be
recognized currently as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "REMIC Series--
Market Discount."
Generally, if the basis of a REMIC in the Loans exceeds the unpaid principal
balances thereof, 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 thereof 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. A portion (or all) of the
REMIC taxable income includable in determining the federal income tax liability
of a Residual Holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for such quarterly period of (i) 120% of the long-term
applicable Federal rate that would have applied to the Residual Certificate (if
it were a debt instrument) on the Startup Day under Section 1274(d) of the
Code, multiplied by (ii) the adjusted issue price of such Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue
price of the Residual Certificate, plus the amount of such daily accruals of
REMIC income described in this paragraph for all prior quarters, decreased by
any distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder is
an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company owns
a Residual Certificate, a portion (allocated under Treasury Regulations yet to
be issued) of dividends paid by such real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders and would constitute unrelated business taxable income for tax-
exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax credits from reducing the taxpayer's income tax to
an amount lower than the tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the
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remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Certificate, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a transfer
if the transferee furnishes to the transferor an affidavit, under penalties of
perjury, that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the residual interest and
the transferor pays such amount of tax as the Treasury Department may require
(presumably, a corporate tax on the excess inclusion for the period the
residual interest is actually held by the Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above. The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, and (ii) the transferee
represents to the transferor that it understands that, as the holder of a non-
economic residual interest, the transferee may incur tax liabilities in excess
of any cash flows generated by the interest and that the transferee intends to
pay taxes associated with holding the residual interest as they become due. The
Agreement with respect to each series of REMIC Certificates will require the
transferee of a Residual Certificate to certify to the statements in clause
(ii) of the preceding sentence as part of the affidavit described above under
"Restrictions on Transfer of Residual Certificates."
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Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a Residual Certificate should consult their
tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a 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. In the event that a REMIC holds Convertible ARM Loans
which are convertible at the option of the Obligor into fixed-rate, fully
amortizing, level payment Loans, a sale of such Loans by the REMIC pursuant to
a purchase agreement or other loan with the Company 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 Code also imposes a 100% tax on
contributions to a REMIC made after the Startup Day, unless such contributions
are payments made to facilitate a cleanup call or a qualified liquidation of
the REMIC, payments in the nature of a guaranty, contributions during the
three-month period beginning on the Startup Day or contributions to a qualified
reserve fund of the REMIC by a holder of a residual interest in the REMIC. The
Code also imposes a tax on a REMIC at the highest corporate rate on certain net
income from foreclosure property that the REMIC derives from the management,
sale, or disposition of any real property, or any personal property incident
thereto, acquired by the REMIC in connection with the default or imminent
default of a loan. Generally, it is not anticipated that a REMIC will incur a
significant amount of such taxes or any material amount of state or local
income or franchise taxes. However, if any such taxes are imposed on a REMIC
they will be paid by the Company or the Trustee, if due to the breach of the
Company's or the Trustee's obligations, as the case may be, under the related
Pooling and
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Servicing Agreement or in other cases, such taxes shall be borne by the related
Trust Fund resulting in a reduction in amounts otherwise payable to holders of
the related Regular or Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (iii) an estate the income of which
is includible in gross income for United States tax purposes regardless of its
source or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one
or more United States 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 (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax home" in the United States, or (ii) the
gain is effectively connected with the conduct by the Foreign Holder of a trade
or business within the United States.
It appears that a Regular Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
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taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
Certificate. Backup withholding, however, does not apply to payments on a
Certificate made to certain exempt recipients, such as corporations and tax-
exempt organizations, and to certain foreign persons. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
Non-REMIC Series
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Loan Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Loans and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the 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 therein. The
following discussion assumes the Trust Fund will be so classified as a grantor
trust.
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Loans under these Code sections and should, in addition,
consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and
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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 the Company, and
any gain upon disposition of such Loans. (For purposes of this discussion, the
term "disposition," when used with respect to the Loans, 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 Code to deduct their pro rata share of
related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($124,500 for 1998, in the case of a joint return) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. Furthermore, in determining the alternative
minimum taxable income of an individual, trust, estate or pass-through entity
that is a holder of a Non-REMIC Certificate, no deduction will be allowed for
such holder's allocable portion of the foregoing expenses, even though an
amount equal to the total of such expenses will be included in such holder's
gross income for alternative minimum tax purposes. To the extent that a Non-
REMIC Certificateholder is not permitted to deduct servicing fees allocable to
a Non-REMIC Certificate, the taxable income of the Non-REMIC Certificateholder
attributable to that Non-REMIC Certificate will exceed the net cash
distributions related to such income. Non-REMIC Certificateholders may deduct
any loss on disposition of the Loans to the extent permitted under the 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 such discount in such Loans prior to
receipt of cash related to such discount. See the discussion above under "REMIC
Series--Original Issue Discount." Similarly, Code provisions concerning market
discount and amortizable premium will apply to the 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 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 Certificates will
constitute Stripped Certificates and will be subject to these rules under
various circumstances, including the following: (i) if any servicing
compensation is deemed to exceed a reasonable amount; (ii) if the Company or
any other party retains a Retained Yield with respect to the Loans comprising a
Loan Pool; (iii) if two or more classes of Non-REMIC Certificates are issued
representing the right to non-pro rata percentages of the interest or principal
payments on the Loans; or (iv) if Non-REMIC Certificates are issued which
represent the right to interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of
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interest and such accrual of income may be in advance of the receipt of any
cash attributable to such income. See "REMIC Series--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder thereof and the stated redemption price at maturity may include
the aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the original issue discount de minimis rules described above. A purchaser
of a Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
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 Fund with
respect to which a REMIC election is not made, the Code appears to require that
such a prepayment assumption be used in computing yield with respect to
Stripped Certificates. In the absence of authority to the contrary, the Company
intends to base information reports and returns to the Service and the holders
of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Loan or (ii) a separate installment obligation for each Loan
representing the Stripped Certificate's pro rata share of principal and/or
interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Loans as exceeding a reasonable fee for the services
being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Loans. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the 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 thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital gain
or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under
53
<PAGE>
"REMIC Series--Taxation of Certain Foreign Investors") will be treated as
"portfolio interest" and therefore will be exempt from the 30% withholding tax.
Such Non-REMIC Certificateholder will be entitled to receive interest payments
and original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the 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
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the Non-REMIC
Certificates.
Other Tax Consequences
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of 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.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
54
<PAGE>
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Securities Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to loans providing for payment and delivery on a future date. Institutions with
which such 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
the Company. The obligation of any purchaser under any such loan will be
subject to the condition that the purchaser of the offered Certificates shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such purchaser is subject from purchasing such Certificates. The
Underwriters and such other agents will not have responsibility in respect of
the validity or performance of such 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.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
55
<PAGE>
LEGAL MATTERS
The legality and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus supplement for definitive +
+information on any matter contained herein. This preliminary prospectus +
+supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement to Base No.5
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Green Tree Home Improvement and Home Equity Loan Trust 1999-
Loan-Backed Notes
----------
The securities will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate Interest Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
A-1 Notes............... $ % % % %
A-2 Notes............... $ % % % %
M-1 Notes............... $ % (4) (4) (4)
M-2 Notes............... $ % (4) (4) (4)
B-1 Notes............... $ % (4) (4) (4)
Total................... $ $ (5) $ (5)
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The Class M-1, Class M-2 and Class B-1 notes will be offered from time to
time in negotiated transactions or otherwise at varying prices to be
determined at the time of the sale. The proceeds to the company from any
sale of such notes will be the purchase price paid by the purchaser, less
any expenses payable by the company and any compensation payable to any
underwriter and dealer.
(5) Class A-1 and Class A-2 notes only.
A note insurance policy, to be issued by Financial Security Assurance Inc.,
will guarantee certain payments on the Class A-1 and Class A-2 notes at the
times and to the extent described in this prospectus supplement.
Investing in the notes involves certain risks. Prospective investors should
consider carefully the Risk Factors beginning on page S-12 in this prospectus
supplement and on page in the prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
The Class A-1 and Class A-2 notes will be delivered through the same-day
funds settlement system of the Depository Trust Company on or about ,
1999.
The underwriters named below will offer the Class A-1 and Class A-2 notes 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-59 in this
prospectus supplement and on page 60 in the prospectus.
----------
[Underwriters]
The date of this prospectus supplement is , 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Notes.......................................... S-4
Risk Factors............................................................... S-12
The Trust.................................................................. S-13
The Trust Property......................................................... S-14
Use of Proceeds............................................................ S-16
The Contracts.............................................................. S-16
Yield and Prepayment Considerations........................................ S-26
Green Tree Financial Corporation........................................... S-32
Description of the Notes................................................... S-33
The Note Insurer........................................................... S-51
The Note Insurance Policy.................................................. S-54
Description of the Limited Guaranty........................................ S-56
Certain Federal and State Income Tax Consequences.......................... S-57
ERISA Considerations....................................................... S-57
Experts.................................................................... S-58
Underwriting............................................................... S-59
Legal Matters.............................................................. S-60
Annex I.................................................................... A-1
Prospectus
Available Information...................................................... 3
Reports to Securityholders................................................. 3
Incorporation of Certain Documents by Reference............................ 3
Prospectus Summary ........................................................ 4
Risk Factors............................................................... 15
The Trusts................................................................. 17
Green Tree Financial Corporation........................................... 19
Yield Considerations....................................................... 21
Maturity and Prepayment Considerations..................................... 21
Pool Factor................................................................ 22
Use of Proceeds............................................................ 23
The Notes.................................................................. 23
The Certificates........................................................... 27
Certain Information Regarding the Securities............................... 29
Description of the Trust Documents......................................... 32
Description of FHA Insurance............................................... 42
Certain Legal Aspects of the Contracts; Repurchase Obligations............. 43
Certain Federal Income Tax Consequences.................................... 52
Certain State Income Tax Considerations.................................... 59
ERISA Considerations....................................................... 59
Legal Investment Considerations............................................ 60
Ratings.................................................................... 60
Underwriting............................................................... 60
Legal Matters.............................................................. 62
Experts.................................................................... 62
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the notes in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Improvement and Home Equity Loan Trust 1999-
since the date hereof.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home equity and home improvement lending business, and about
any series of certificates or notes for home improvement and home equity loans
that Green Tree may wish to sell. This prospectus supplement contains more
detailed information about this series of notes. Since the terms of this series
may differ from the general information provided in the prospectus, you should
rely on the information in this prospectus supplement rather than any different
information in the prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these notes has been or will be prepared in the
United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These notes may not be offered or sold, or re-offered or re-
sold, to persons in the United Kingdom, except (1) to persons whose ordinary
activities involve them in acquiring, holding, managing and disposing of
investments (as principal or agent) for the purpose of their businesses, or (2)
in circumstances that will not constitute or result in an offer to the public
in the United Kingdom within the meaning of the United Kingdom Public Offers of
Securities Regulation 1995. You may not pass this prospectus supplement and
prospectus, or any other document inviting applications or offers to purchase
notes or offering notes for purchase, to any person in the United Kingdom who
(1) does not fall within article 11(3) of the Financial Services Act 1986
(Investment Advisements) (Exemptions) Order 1996 or (2) is not otherwise a
person to whom passing this prospectus supplement and prospectus would be
lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE NOTES
This summary highlights selected information regarding the notes, 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 notes, read this
entire prospectus supplement and the accompanying prospectus.
Green Tree Home Improvement and Home Equity Loan Trust 1999- will issue the
classes of securities listed in the table below.
<TABLE>
<CAPTION>
Interest Approximate Moody's S&P
Class Rate Principal Amount (1) Rating Rating
- ----- -------- -------------------- ------- ------
<S> <C> <C> <C> <C>
A-1 Notes.......................... % $
A-2 Notes..........................
M-1 Notes..........................
M-2 Notes..........................
B-1 Notes..........................
B-2 Notes..........................
Certificates.......................
</TABLE>
- --------
(1) May vary plus or minus 5%.
Only some classes of the notes are being offered pursuant to this prospectus
supplement and the prospectus, and they are identified on the cover page of
this prospectus supplement. If the Class M-1, Class M-2 and Class B-1 notes are
not sold by , 1999, Green Tree will retain such notes until such time as
they are sold. Green Tree (or an affiliate) initially will retain the Class B-2
notes, but may sell any or all of these notes at a later date.
S-4
<PAGE>
Issuer ..................... Green Tree Home Improvement and Home Equity Loan
Trust 1999- , a Delaware business trust.
Seller and Servicer......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Indenture Trustee........... [Indenture Trustee], not in its individual
capacity but solely as trustee under the trust
indenture.
Owner Trustee............... [Owner Trustee], not in its individual capacity
but solely as owner trustee under the trust
agreement.
Payment Date................ The fifteenth day of each month (or, if that
fifteenth day is not a business day, the next
succeeding business day) beginning on 15,
1999.
Record Date................. The business day just before the related payment
date, beginning in 1999.
Note Insurer and Insurance Financial Security Assurance Inc., a New York
Policy................... monoline insurance company, will irrevocably and
unconditionally guarantee certain payments to the
indenture trustee for the benefit of the holders
of the Class A-1 and Class A-2 notes. The
insurance payments, if any, made on a payment
date will equal the amount by which the sum of
(a) the current interest payable on the Class A
notes and (b) the Class A principal deficiency
amount (the amount by which the principal balance
of the Class A notes exceeds the scheduled
principal balance of the contracts) and (c) on
the maturity date, the amount by which the unpaid
principal balance of the Class A notes exceeds
the cash available to pay such amount on that
payment date. Insurance payments will not cover
deficiencies resulting from relief to debtors
under the federal Soldiers' and Sailors' Civil
Relief Act of 1940.
Distributions on Notes...... Distributions on the notes on any payment date
will be made primarily from amounts collected on
the home improvement and home equity contracts
comprising the contract pool during the prior
calendar month. This is the amount available for
distribution. On each payment date, the indenture
trustee will apply the amount available, less
certain fees to the note insurer and servicer (if
other than Green Tree), to make distributions of
principal and interest on the notes in the
following order of priority:
^ Class A-1 and Class A-2 interest;
^ Class M-1 interest;
^ Class M-2 interest;
^ Class B-1 interest;
^ Class A-1 and Class A-2 principal;
^ Class M-1 principal (if due);
^ Class M-2 principal (if due);
^ Class B-1 principal (if due);
S-5
<PAGE>
^ Class B-2 interest; and
^ Class B-2 principal (if due).
See "Description of the notes--Payments on
contracts" for a detailed description of the
amounts that will constitute the amount available
for any payment date.
A. Interest on the Class A,
Class M and Class B-1
Notes....................
After payment to the note insurer of its monthly
premium, interest will be payable first to the
Class A-1 and Class A-2 notes concurrently, then
to the Class M-1 notes, then to the Class M-2
notes and then to the Class B-1 notes, to the
extent of the amount available. See "Description
of the Notes--Distributions on the Notes" and "--
Losses on Liquidated Contracts" for a more
detailed description of the calculation of
interest payable on the notes.
B. Principal on the Class A
and Class M Notes........
After paying interest due on the notes described
above, the indenture trustee will then apply the
remaining amount available to pay principal on
the Class A notes, pay any reimbursement amount
due to the note insurer and then pay principal on
the Class M notes. For purposes of determining
the amount of principal due on the Class A notes,
the contract pool will be divided into Group 1
contracts and Group 2 contracts. A senior
percentage will be calculated on each payment
date for the purpose of determining the amount of
the principal payments, which are payable in the
following priority:
^ Concurrently, to the Class A-1 and Class A-2
notes, until they are retired. The Class A-1
notes will be entitled to receive the senior
percentage of scheduled (whether or not
collected) and unscheduled principal
payments and other recoveries on the Group 1
contracts. The Class A-2 notes will be
entitled to receive the senior percentage of
scheduled (whether or not collected) and
unscheduled principal payments and other
recoveries on the Group 2 contracts. If
either the Class A-1 notes or the Class A-2
notes are retired, the remaining class will
be entitled to receive the senior percentage
of such payments and recoveries on the Group
1 and Group 2 contracts.
^ Following retirement of the Class A notes
and after reimbursements, if any, are made
to the note insurer, to the Class M-1 notes
until retired, the senior percentage of
scheduled (whether or not collected) and
unscheduled principal payments and other
recoveries on the Group 1 and Group 2
contracts.
^ Following retirement of the Class A and
Class M-1 notes, to the Class M-2 notes
until retired, the senior percentage of
scheduled (whether or not collected) and
unscheduled principal payments and other
recoveries on the Group 1 and Group 2
contracts.
S-6
<PAGE>
C. Principal on the Class The indenture trustee will pay principal on the
B-1 Notes................ Class B-1 notes from the amount available
remaining after the payments described above, in
an amount equal to a percentage of the scheduled
(whether or not collected) and unscheduled
principal payments and other recoveries on the
Group 1 and Group 2 contracts. Prior to the
payment date in 2003, the percentage will be
zero. Thereafter, if delinquencies, defaults and
losses on the contracts remain below certain
thresholds and the ratio of the aggregate
outstanding principal balance of the Class B
notes to the total outstanding balance of the
contract pool has become at least 22%, the
percentage will generally equal such ratio. See
"Description of the Notes--Distributions on the
Notes" for a more detailed description of the
calculation of principal payable on the notes.
D. Interest on the Class B- After paying the amounts of interest and
2 Notes .................... principal due on the other notes described above,
the indenture trustee will then apply the
remaining amount available to pay interest on the
Class B-2 notes.
E. Principal on the Class After paying the amounts of interest and
B-2 Notes .................. principal due on the notes described above, the
indenture trustee will then apply the remaining
amount available to pay principal due on the
Class B-2 notes. In general, principal will not
be payable on the Class B-2 notes until the Class
B-1 notes have been retired and if the same
thresholds and ratios applicable to the Class B-1
notes are met. If that has occurred, the Class B-
2 notes will generally be entitled to receive
principal in an amount equal to a percentage of
the scheduled (whether or not collected) and
unscheduled principal payments and other
recoveries on the Group 1 and Group 2 contracts.
The principal balance of the Class B-2 notes will
generally not be reduced below $ until the
Class A, Class M and Class B-1 notes have been
paid in full.
F. Supplementary Principal
Distribution ............
If certain cumulative loss triggers are exceeded,
the Class A-1 and Class A-2 notes will get an
additional payment of principal to the extent of
the amount available remaining after the above
distributions are made and the servicer is paid
its fee.
Class B-2 Limited Green Tree will guarantee payment of interest and
Guaranty.................... principal on the Class B-2 notes. The Class B-2
Limited Guaranty is of no benefit to any other
class of notes and will be an unsecured general
obligation of Green Tree unsupported by any
letter of credit or other credit enhancement. See
"Description of the Class B-2 Limited Guaranty"
for a complete description of Green Tree's
obligation under the Class B-2 Limited Guaranty.
Subordination of Class M
and Class B Notes...........
The Class M notes and Class B notes will be
subordinate to the Class A notes in payment of
both interest and principal:
^ interest on the Class A notes and Class M
notes will be payable before interest on the
Class B notes;
S-7
<PAGE>
^ the Class M notes are entitled to principal
distributions only after all the Class A
notes are paid in full; and
^ The Class B notes are entitled to principal
distributions on or after the payment date
in and if certain tests are met, or
after all the Class A and Class M notes are
paid in full.
This subordination feature increases the
possibility that the Class A notes will be paid
in full but the Class M and Class B notes will
not. See "Description of the Notes--Distributions
on the Notes" for a more detailed description of
the manner and order of priority of distributions
on the notes.
In addition, in the event of severe losses and
delinquencies on the contracts, those losses will
first be imposed on the Class B-2 notes, and then
on the Class B-1 notes, and so on through classes
of increasing seniority. See "Description of the
Notes--Losses on Liquidated Contracts" for a more
detailed description of the allocation of losses
on the contracts.
The Contracts............... The contract pool will include conventional home
improvement contracts and promissory notes and
home equity loans. These contracts will be
divided into two groups, Group 1 and Group 2.
Group 1 will not include any contracts secured by
a first priority lien on the related mortgaged
property with an original principal balance in
excess of $ , or any contracts secured by a
junior priority lien on the related mortgaged
property with an original principal balance in
excess of 50% of the original principal balance
of the related senior liens. Group 2 will include
some contracts with original principal balances
that exceed the foregoing amounts. The contracts
are divided into Group 1 and Group 2 solely for
the purpose of calculating the respective amounts
of principal to which the Class A-1 and Class A-2
notes are entitled. Actual payments received from
both Group 1 and Group 2 will be used to make
payments of interest and principal on each class
of notes.
A. Group 1 Contracts........ With respect to the Group 1 contracts (as of the
cut-off date):
^ all are conventional (not FHA-insured)
contracts;
^ are home improvement contracts and
are home equity loans;
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ the interest rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the cut-off
date, was months; and
^ the latest scheduled maturity date was .
S-8
<PAGE>
See "The Contracts--Group 1 Contracts" for a more
detailed description of the Group 1 Contracts.
B. Group 2 Contracts........ This prospectus supplement provides information
regarding a portion of the Group 2 contracts,
representing about % of all the Group 2
contracts. Green Tree will transfer the remainder
of the Group 2 contracts to the trust on the
Closing Date.
With respect to the initial Group 2 contracts (as
of the Cut-off Date):
^ all are conventional (not FHA-insured)
contracts;
^ are home improvement contracts and
are home equity loans;
^ all are secured by a lien on the related
real property;
^ the related properties are located in
states and the District of Columbia;
^ the interest rates range from % to %,
with a weighted average of %;
^ the weighted average term to scheduled
maturity, as of their dates of origination,
was months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was months; and
^ the latest scheduled maturity date was in
.
See "The Contracts--Group 2 Contracts" for a more
detailed description of the initial Group 2
contracts.
Repurchase Obligations...... Green Tree will make representations and
warranties about the contracts when it transfers
them to the trust. If a representation or
warranty is breached in a way that materially and
adversely affects the interests of the
Noteholders or the note insurer, then Green Tree
must, within 90 days, either (i) cure the breach
or (ii) repurchase the defective contracts. See
"Description of the notes--Conveyance of
contracts" in this prospectus supplement and in
the prospectus for a more complete description of
Green Tree's representations and warranties about
the contracts and its repurchase obligation.
Repurchase Option........... After the scheduled principal balance of the
contracts is less than 10% of the aggregate
principal balance of the contracts as of the Cut-
off Date, Green Tree will have the option to
purchase all of the outstanding contracts,
provided that all amounts owed to the note
insurer are paid in full. The note insurer has a
similar right to purchase the contracts. See
"Description of the notes--Repurchase Option" in
this prospectus supplement and in the prospectus
for a more detailed description of the terms of
this repurchase option.
S-9
<PAGE>
Tax Status.................. In the opinion of counsel to Green Tree, for
federal and Minnesota income tax purposes, the
notes will be characterized as debt, and the
trust will not be characterized as an association
(or a publicly traded partnership) taxable as a
corporation and neither the trust nor any portion
of the trust will constitute a taxable mortgage
pool taxable as a corporation. Each Noteholder,
by the acceptance of a Note, will agree to treat
the notes as debt. See "Certain Federal Income
Tax Consequences" herein and in the prospectus
for a more detailed description of the federal
income tax consequences of an investment in the
notes.
ERISA Considerations........ If the notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States Department
of Labor, the acquisition or holding of notes by
or on behalf of a Benefit Plan will not cause the
assets of the trust to become plan assets,
thereby generally preventing the application of
certain prohibited transaction rules of the
Employee Retirement Income Security Act of 1974,
as amended, and the Internal Revenue Code of
1986, as amended, that otherwise would possibly
be applicable. Green Tree believes that the notes
should be treated as indebtedness without
substantial equity features for purposes of such
regulation. See "ERISA Considerations" in this
prospectus supplement and in the prospectus.
Legal Investment The notes will not constitute "mortgage related
Considerations.............. securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the contracts are not secured
by first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the notes. You
should consult with your own legal advisor to
decide whether and to what extent you may legally
invest in the notes.
Ratings..................... The notes will not be issued and sold unless
Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Rating Services, a division of
the McGraw-Hill Companies, Inc. ("S&P"), have
assigned the ratings specified on page S-4 (or
better) to the notes.
The rating of each class of notes by Moody's and
S&P addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. 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 A-1 and Class A-2 notes
are based primarily on the creditworthiness of
the note insurer. Any reduction in a rating of
the claims-paying ability of the note insurer may
result in a similar reduction in the ratings of
the Class A-1 and Class A-2 notes.
S-10
<PAGE>
The ratings of the Class B-2 notes are based in
part on an assessment of the Company's ability to
make payments under the Class B-2 Limited
Guaranty. Any reduction in the rating of the
Company's debt securities may result in a similar
reduction in the ratings of the Class B-2 notes.
Green Tree's senior debt securities were recently
downgraded by Moody's to "Bal".
Green Tree has not requested a rating of the
notes from any rating agencies other than Moody's
and S&P. You cannot assume that no other rating
agency will assign a rating to any of these
notes, nor can you assume what any such rating,
if issued, would be.
S-11
<PAGE>
RISK FACTORS
Consider the following risk factors in deciding whether to purchase notes.
More risk factors, applicable to any series of notes like these, are printed in
the prospectus, and you should consider those risk factors also.
High Loan-to-Value Ratio Loans. The contracts were originated with a limited
expectation of recovering any amounts from the foreclosure of the related
mortgaged property and were underwritten with an emphasis on the
creditworthiness of the borrowers. If the contracts go into foreclosure and are
liquidated, there may be no amounts recovered from the related mortgaged
property unless the value of the property has increased or the principal amount
of the related senior liens has been reduced to the point where the value of
the property, less any related foreclosure costs, is greater than the principal
amount of the related senior liens. To the extent that any losses are incurred
on any of the contracts that are not covered by the credit enhancement
described herein, the holders of the notes will bear all risk of such losses
resulting from defaults by borrowers.
Servicing High Loan-to-Value Ratio Loans. The servicing of high loan-to-
value ratio loans such as the contracts requires special skill and diligence
and requires more attention to each account and earlier and more frequent
contact with borrowers in default. Green Tree has no historical loss or
delinquency data with respect to high loan-to-value contracts that may be
referred to for estimating the future delinquency and loss experience on the
contracts. Green Tree has not included its historical delinquency and loan loss
and liquidation experience with home improvement contracts and home equity
loans because such information is not a meaningful predictor of the performance
of the pool of contracts.
Truth-in-Lending Considerations. It is likely that some contracts included
in the pool will be subject to the Home Ownership and Equity Protection Act of
1994 (the "Home Protection Act"). The Home Protection Act adds certain
additional provisions to Regulation Z, the implementing regulation of the
Federal Truth-in-Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or up-front fees and charges. A violation of
these provisions of the Home Protection Act can affect the enforceability of
the related loan, and it subjects any assignee of such a loan (such as the
trust) to all the claims and defenses that the consumer could assert against
the creditor, including the right to rescind the loan. The return on your
investment will depend largely on the performance of the home equity loans
contained in the contract pool. If the Company is found to have violated the
provisions of the Home Protection Act with respect to any home equity loan that
is subject to the Home Protection Act, the trust may be unable to collect on
that loan. The Company would, however, be obligated to repurchase that loan
because of the breach of its representation and warranty.
Variations in Contract Characteristics. This prospectus supplement provides
information regarding only a portion of the Group 2 contracts that will be
transferred to the trust. The subsequent Group 2 contracts will have
characteristics that differ somewhat from the Group 2 contracts described
herein. All of the subsequent contracts will be transferred to the trust on the
closing date and must satisfy various criteria specified in the Sale and
Servicing Agreement. If you purchase a Note, you must not assume that the
characteristics of the Contract pool will be identical to the characteristics
of the contracts disclosed in this prospectus supplement. Current Reports on
Form 8-K will be filed following the purchase of contracts by the trust on the
closing date. The report will include the same type of information regarding
the entire contract pool as this prospectus supplement contains with respect to
the first group of contracts.
Risk Associated with the Note Insurer. If the note insurer is unable to meet
its obligations under the note insurance policy, then holders of the Class A-1
and Class A-2 notes could suffer a loss in their investments. In addition, a
reduction in the claims-paying ability of the note insurer may result in a
similar reduction in the ratings of the Class A-1 and Class A-2 notes.
S-12
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Securityholders should consider, in addition to the information
below, the information under "The Trusts" in the accompanying Prospectus.
General
Green Tree Home Improvement and Home Equity Loan Trust 1999- (the "Issuer"
or the "Trust") is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the transactions described in this
Prospectus Supplement. After its formation, the Trust will not engage in any
activity other than (i) acquiring, holding and managing the Contracts and the
other assets of the Trust and proceeds therefrom, (ii) issuing the Notes and
the Certificates, (iii) making payments on the Notes and the Certificates and
(iv) engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
The Trust will be capitalized with the proceeds of the initial sale of the
Notes, which will be used by the Trust to purchase the Contracts from Green
Tree pursuant to the Sale and Servicing Agreement between Green Tree and the
Indenture Trustee (the "Sale and Servicing Agreement").
The Trust's principal offices are in Wilmington, Delaware, at the address
listed below under "--The Owner Trustee."
Capitalization of the Trust
The following table illustrates the capitalization of the Trust as of the
Cut-off Date, as if the issuance and sale of the Notes had taken place on such
date:
<TABLE>
<S> <C>
Class A-1 Notes................................................. $
Class A-2 Notes................................................. $
Class M-1 Notes................................................. $
Class M-2 Notes................................................. $
Class B-1 Notes................................................. $
Class B-2 Notes................................................. $
---------
Total......................................................... $
=========
</TABLE>
The Owner Trustee
[Owner Trustee] is the Owner Trustee under the Trust Agreement. [Owner
Trustee] is a Delaware banking corporation and its principal offices are
located at , , , Delaware . The Owner Trustee will perform
limited administrative functions under the Trust Agreement, including making
distributions from the Certificate Distribution Account. The Owner Trustee's
liability in connection with the issuance and sale of the Certificates and the
Notes is limited solely to the express obligations of the Owner Trustee as set
forth in the Trust Agreement.
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) a pool of
conventional home improvement contracts and promissory notes ("Home Improvement
Contracts") and home equity loans ("Home Equity Contracts", together with the
Home Improvement Contracts, the "Contracts"); (ii) the mortgage, deed of trust
S-13
<PAGE>
or security deed granted by or on behalf of the related obligor with respect
thereto, including the lien on the related real property, (iii) all other
security interests or liens and property subject thereto from time to time
purporting to secure payment of such Contract, whether pursuant to the
agreement giving rise to such Contract or otherwise, together with all
financing statements signed by the obligor describing any collateral securing
such Contract, (iv) all rights the Company may have against the originator of
the Contract if other than the Company, (v) all rights under hazard insurance,
if applicable, on the property described in the Contract, (vi) all rights in
any title insurance policy with respect to a Contract, (vii) all guarantees,
insurance and other agreements or arrangements of whatever character from time
to time supporting or securing payment of such Contract whether pursuant to the
agreement giving rise to such Contract or otherwise, (viii) all records in
respect of such Contract, and (ix) the note insurance policy issued by
Financial Security Assurance Inc. (the "Note Insurer") for the benefit of the
Class A Noteholders. See "The Contracts" and "Description of the Trust
Documents--Collections" in the accompanying Prospectus.
In order to protect the Trust's ownership interest in the Contracts, Green
Tree will file a UCC-1 financing statement in Minnesota to give notice of the
Trust's ownership of the Contracts and the related Trust Property.
Pursuant to the Indenture, the Trust will grant a security interest in favor
of the Indenture Trustee and the Note Insurer in the Trust Property, the rights
of the Trust under the Sale and Servicing Agreement (including the Class B-2
Limited Guaranty of the Company for the benefit of the Class B-2 Noteholders),
and the Collection Account and Note Distribution Account (as defined below).
Any proceeds of such property will be distributed according to the Indenture,
as described below under "Description of the Trust Documents and Indenture--
Distributions."
The Indenture Trustee or its custodian will hold each original Contract, as
well as copies of documents and instruments relating to such Contract and
evidencing the security interest in the real property securing such Contract
(the "Contract Files").
Payments and recoveries in respect of principal and interest on the
Contracts will be paid into a separate trust account maintained at an Eligible
Institution (as defined below) (initially U.S. Bank National Association,
Minneapolis, Minnesota) in the name of the Indenture Trustee (the "Collection
Account"), no later than one business day after receipt. The Indenture Trustee
will, on the fifteenth day of each month (or, if such day is not a business
day, the next succeeding business day) (each a "Payment Date"), deposit funds
from the Collection Account into a distribution account (the "Note Distribution
Account"). Payments on deposit in the Note Distribution Account will be applied
on each Payment Date to make the distributions to the Noteholders as of the
immediately preceding Record Date as described under "Description of the
Notes--Distributions on the Notes" herein and to pay certain monthly fees to
the Servicer as compensation for its servicing of the Contracts (the "Monthly
Servicing Fee" and premiums and other payments to the Note Insurer).
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the Sale
and Servicing Agreement as described under "Description of the Notes--
Conveyance of Contracts" herein, (c) certain indemnities and fees and (d) the
Class B-2 Limited Guaranty. The Company is obligated under the Sale and
Servicing Agreement to repurchase at the Repurchase Price (as defined herein),
any Contract on the first Payment Date which is more than 90 days after the
Company becomes aware, or the Company receives written notice from the
Indenture Trustee or the Note Insurer, of any breach of any such representation
and warranty in the Sale and Servicing Agreement that materially and adversely
affects the Noteholders' or Note Insurer's interest in such Contract if such
breach has not been cured prior to such date. The Sale and Servicing Agreement
also provides that the Company has certain obligations to repurchase Contracts
and to indemnify the Indenture Trustee, Noteholders and the Note Insurer with
respect to certain other matters. The Company is obligated to indemnify the
Note Insurer for certain matters under the Note Insurance Policy. The Company
is also obligated to pay certain fees of the Owner Trustee and Indenture
Trustee.
S-14
<PAGE>
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the Notes
for working capital and general corporate purposes, including building a
portfolio of home improvement contracts and home equity loans, providing
warehouse financing for the purchase of contracts and loans and other costs of
maintaining such contracts and loans until they are pooled and sold to other
investors.
THE CONTRACTS
General
The Contract Pool will consist of Home Improvement Contracts and Home Equity
Contracts, and will be divided into Group 1 and Group 2. Group 1 will not
include any Contracts secured by a first priority lien on the related mortgaged
property with an original principal balance in excess of $ , or any Contracts
secured by a junior lien on the related mortgaged property with an original
principal balance in excess of 50% of the original principal balance of the
related senior liens, as applicable. Group 2 will include some Contracts with
original principal balances that exceed the foregoing amounts. The Contracts
are divided into Group 1 and Group 2 solely for the purpose of calculating the
respective amounts of principal to which the Class A-1 and Class A-2 Notes are
entitled. Actual payments received from both Group 1 and Group 2 will be used
to make payments of interest and principal on each Class of Notes.
Home Improvement Contracts
This Prospectus Supplement contains information regarding certain Home
Improvement Contracts, which will represent approximately % of all Home
Improvement Contracts by aggregate principal balance as of the Cut-off Date,
and which consist of home improvement contracts and promissory notes originated
through (the "Initial Home Improvement Contracts"). The information for
the Initial Home Improvement Contract is as of the Cut-off Date for such
Contracts. The remaining Home Improvement Contracts will be purchased by the
Trust on the Closing Date.
The Initial Home Improvement Contracts have an aggregate principal balance
as of the Cut-off Date of $ . Each Home Improvement Contract is a home
improvement contract originated by a Company-approved home improvement
contractor and purchased by the Company, or a home improvement promissory note
originated by the Company directly. The primary loan purpose of the Initial
Home Improvement Contracts is debt consolidation. Each Home Improvement
Contract is secured by a lien on the related real estate, which consists of a
one- to four-family residential property, an owner-occupied condominium or town
house or a manufactured home which either qualifies as real estate under state
law or is located in a Company-approved park. Substantially all of the liens
are second or third liens.
The Home Improvement Contracts will be originated or acquired by the Company
in the ordinary course of the Company's business. A detailed listing of the
Home Improvement Contracts is appended to the Sale and Servicing Agreement. All
of the Home Improvement Contracts are conventional contracts, meaning they are
not FHA-insured. Each of the Initial Home Improvement Contracts has a Contract
Rate of at least % per annum and not more than % and the weighted average
of the Contract Rates of the Initial Home Improvement Contracts as of the Cut-
off Date is %. As of the Cut-off Date, the Initial Home Improvement Contracts
had remaining maturities of at least months but not more than months and
original maturities of at least months but not more than months. The
Initial Home Improvement Contracts had a weighted average term to scheduled
maturity, as of origination, of months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of months. The average principal
balance per Initial Home Improvement Contract as of the Cut-off Date was $
and the principal balances on the Initial Home Improvement Contracts as of the
Cut-off Date ranged from $ to $ . The Initial Home Improvement Contracts
arise from loans relating to real property located in states and the
District of
S-15
<PAGE>
Columbia. By principal balance as of the Cut-off Date, approximately % of the
Initial Home Improvement Contracts were secured by real property located in
, % in , % in , % in , % in and % in . No
other state represented 5% or more of the aggregate principal balance as of the
Cut-off Date of the Initial Home Improvement Contracts. Substantially none of
the Initial Home Improvement Contracts provide for recourse to the originating
contractor in the event of a default by the obligor.
Home Equity Contracts
The following summary information about the Home Equity Contracts is as of
the Cut-off Date for such Contracts.
The Home Equity Contracts have an aggregate principal balance of $ .
Each Home Equity Contract is a closed-end home equity loan originated by the
Company or by a Company-approved correspondent lender and purchased by the
Company. Approximately % of the Home Equity Contracts by principal balance
are for the primary purpose of debt consolidation. Each Home Equity Contract is
secured by a lien on the related real estate, substantially all of which are
second or third liens.
The Home Equity Contracts will be originated or acquired by the Company in
the ordinary course of the Company's business. All of the Home Equity Contracts
are conventional contracts, meaning they are not FHA-insured. Each of the Home
Equity Contracts has a Contract Rate of at least % per annum and not more
than % and the weighted average of the Contract Rates of the Initial Home
Equity Contracts as of the Cut-off Date is %. As of the Cut-off Date, the
Home Equity Contracts had remaining maturities of at least months but not
more than 360 months and original maturities of at least months but not more
than months. The Home Equity Contracts had a weighted average term to
scheduled maturity, as of origination, of months, and a weighted average
term to scheduled maturity, as of the Cut-off Date, of months. The average
principal balance per Home Equity Contract as of the Cut-off Date was $ and
the principal balances on the Initial Home Equity Contracts as of the Cut-off
Date ranged from $ to $ . The Home Equity Contracts arise from loans
relating to real property located in 48 states and the District of Columbia. By
principal balance as of the Cut-off Date, approximately % of the Home Equity
Contracts were secured by real property located in California, % in Florida
and % in Illinois. No other state represented 5% or more of the Cut-off Date
Pool Principal Balance of the Home Equity Contracts.
Group 1 Contracts
Set forth below is a description of certain characteristics of the Group 1
Contracts. The Group 1 Contracts consist of Home Improvement Contracts and Home
Equity Contracts.
The weighted average of the Contract Rates of the Group 1 Contracts as of
the Cut-off Date is %. As of the Cut-off Date, the Group 1 Contracts had
remaining maturities of at least months but not more than months and
original maturities of at least 24 months but not more than months. The
Group 1 Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per Group 1
Contract as of the Cut-off Date was $ and the principal balances on the
Group 1 Contracts as of the Cut-off Date ranged from $ to $ . The Group 1
Contracts arise from loans relating to real property located in 48 states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Group 1 Contracts were secured by real property
located in , % in , % in , % in and % in . No
other state represented 5% or more of the Cut-off Date Pool Principal Balance
of the Group 1 Contracts.
S-16
<PAGE>
Contract Rates--Group 1 Contracts
<TABLE>
<CAPTION>
Number of % of Group 1 Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Contracts as of Cut- Balance Outstanding Balance as of
by Contract Rate off Date as of Cut-off Date Cut-off Date
------------------ ---------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.001%............ $ %
From 9.001%--10.000%.......
From 10.001%--11.000%.......
From 11.001%--12.000%.......
From 12.001%--13.000%.......
From 13.001%--14.000%.......
From 14.001%--15.000%.......
From 15.001%--16.000%.......
From 16.001%--17.000%.......
Greater than 17.000%........
----- -------------- ------
Total................... $ 100.00%
===== ============== ======
Distribution of Current Balance--Group 1 Contracts
<CAPTION>
% of Group 1
Contracts by
Outstanding Principal
Number of Aggregate Principal Balance as of
Current Balance (in Dollars) Contracts Balance Outstanding Cut-off Date
- ---------------------------- ---------- ------------------- -------------------------
<S> <C> <C> <C>
Less than$ 10,000.00........ $ %
$ 10,000.00--$ 19,999.99....
$ 20,000.00--$ 29,999.99....
$ 30,000.00--$ 39,999.99....
$ 40,000.00--$ 49,999.99....
$ 50,000.00--$ 59,999.99....
Greater than $ 59,999.99....
----- -------------- ------
Total................... $ 100.00%
===== ============== ======
Distribution of Original Contract Amounts--Group 1 Contracts
<CAPTION>
% of Group 1
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
Original Contract as of Cut- Balance Outstanding Balance as of
Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- -------------------------
<S> <C> <C> <C>
Less than$ 10,000.00........ $ %
Between$ 10,000.00--
$ 19,999.99................
Between$ 20,000.00--
$ 29,999.99................
Between$ 30,000.00--
$ 39,999.99................
Between$ 40,000.00--
$ 49,999.99................
Between$ 50,000.00--
$ 59,999.99................
Greater than $59,999.99.....
----- -------------- ------
Total................... $ 100.00%
===== ============== ======
</TABLE>
S-17
<PAGE>
Remaining Months to Maturity--Group 1 Contracts
<TABLE>
<CAPTION>
% of Group 1
Number of Contracts by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1--60................... $ %
61--120..................
121--180..................
181--240..................
241--300..................
301--360..................
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
Months since Origination--Group 1 Contracts
<CAPTION>
% of Group 1
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Months Since Origination off Date as of Cut-off Date Cut-off Date
- ------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 4............... $ %
From 4--6.................
From 7--12................
Greater than 12...........
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
S-18
<PAGE>
Geographical Distribution of Mortgaged Properties--Group 1 Contracts
<TABLE>
<CAPTION>
% of Group 1
% of Group 1 Contracts by
Contracts Aggregate Principal Outstanding
Number of by Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................... 100.00% $320,000,001.00 100.00%
===== ====== =============== ======
</TABLE>
S-19
<PAGE>
Credit Scores--Group 1 Contracts
<TABLE>
<CAPTION>
% of Group 1
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Range of Scores off Date as of Cut-off Date Cut-off Date
- --------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less Than 551............ $ %
From 551--600............
From 601--650............
From 651--700............
From 701--750............
Greater Than 750.........
----- ------------ ------
Total................ $ 100.00%
===== ============ ======
Debt to Income Ratio--Group 1 Contracts
<CAPTION>
% of Group 1
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Debt to Income as of Cut- Balance Outstanding Balance as of
Ratios off Date as of Cut-off Date Cut-off Date
- ----------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less Than 10.01%......... $ %
From 10.01%-15.00%.......
From 15.01%-20.00%.......
From 20.01%-25.00%.......
From 25.01%-30.00%.......
From 30.01%-35.00%.......
From 35.01%-40.00%.......
From 40.01%-45.00%.......
From 45.01%-50.00%.......
Greater than 50.00%......
----- ------------ ------
Total................ $ 100.00%
===== ============ ======
</TABLE>
Group 2 Contracts
The weighted average of the Contract Rates of the Initial Group 2 Contracts
as of the Cut-off Date is %. As of the Cut-off Date, the Initial Group 2
Contracts had remaining maturities of at least months but not more than 300
months and original maturities of at least 36 months but not more than
months. The Initial Group 2 Contracts had a weighted average term to scheduled
maturity, as of origination, of months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of months. The average principal
balance per Initial Group 2 Contract as of the Cut-off Date was $ and the
principal balances on the Initial Group 2 Contracts as of the Cut-off Date
ranged from $ to $ . The Initial Group 2 Contracts arise from loans
relating to real property located in states and the District of Columbia. By
principal balance as of the Cut-off Date, approximately % of the Initial
Group 2 Contracts were secured by real property located in , % in , %
in and % in . No other state represented 5% or more of the Cut-off
Date Pool Principal Balance of the Initial Group 2 Contracts.
Set forth below is a description of certain characteristics of the Group 2
Contracts. The Group 2 Contracts consist of Home Improvement Contracts and Home
Equity Contracts.
S-20
<PAGE>
Contract Rates--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial Group 2
Number of Contracts by
Range of Contracts Aggregate Principal Outstanding Principal
Contracts as of Cut- Balance Outstanding Balance as of
by Contract Rate off Date as of Cut-off Date Cut-off Date
- ---------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 9.001%.......... $ %
From 9.001%--10.000%.....
From 10.001%--11.000%.....
From 11.001%--12.000%.....
From 12.001%--13.000%.....
From 13.001%--14.000%.....
From 14.001%--15.000%.....
From 15.001%--16.000%.....
From 16.001%--17.000%.....
Over 17.000%..............
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
Distribution of Current Balance--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial Group 2
Contracts by
Outstanding
Principal Balance as
Number of Aggregate Principal of
Current Balance (in Dollars) Contracts Balance Outstanding Cut-off Date
- ---------------------------- --------- ------------------- --------------------
<S> <C> <C> <C>
Less than $10,000.00........... $ %
Between $10,000.00--
$19,999.99....................
Between $20,000.00--
$29,999.99....................
Between $30,000.00--
$39,999.99....................
Between $40,000.00--
$49,999.99....................
Between $50,000.00--
$59,999.99....................
Greater than $59,999.99........
----- ------------ ------
Total...................... $ 100.00%
===== ============ ======
</TABLE>
Distribution of Original Contract Amounts--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial
Number of Group 2 Contracts by
Contracts Aggregate Principal Outstanding Principal
Original Contract as of Cut- Balance Outstanding Balance as of
Amount (in Dollars) off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less Than $10,000.00..... $ %
Between$10,000.00--
$19,999.99..............
Between$20,000.00--
$29,999.99..............
Between$30,000.00--
$39,999.99..............
Between$40,000.00--
$49,999.99..............
Between$50,000.00--
$59,999.99..............
Greater than $59,999.99..
----- ------------ ------
Total.................... $ 100.00%
===== ============ ======
</TABLE>
S-21
<PAGE>
Remaining Months to Maturity--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial Group 2
Number of Contracts by
Months Remaining to Contracts Aggregate Principal Outstanding Principal
Scheduled Maturity as of Cut- Balance Outstanding Balance as of
As of Cut-off Date off Date as of Cut-off Date Cut-off Date
------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
1-- 60.................. $ %
61--120..................
121--180..................
181--240..................
241--300..................
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
Months Since Origination--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial
Number of Group 2 Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Months since Origination off Date as of Cut-off Date Cut-off Date
- ------------------------ ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less than 4............... $ %
From 4--6.................
From 7--12................
Greater than 12...........
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
S-22
<PAGE>
Geographical Distribution of Mortgaged Properties--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial
% of Initial Group 2
Group 2 Contracts by
Contracts Aggregate Principal Outstanding
Number of by Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ ------------ ------
Total................... 100.00% $ 100.00%
===== ====== ============ ======
</TABLE>
S-23
<PAGE>
Credit Scores--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial
Group 2
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Range of Scores off Date as of Cut-off Date Cut-off Date
- --------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less Than 551............. $ %
From 551-600..............
From 601-650..............
From 651-700..............
From 701-750..............
Greater Than 750..........
----- ------------ ------
Total................. $ 100.00%
===== ============ ======
</TABLE>
Debt to Income Ratio--Initial Group 2 Contracts
<TABLE>
<CAPTION>
% of Initial
Group 2
Number of Contracts by
Contracts Aggregate Principal Outstanding Principal
Range of Debt to Income as of Cut- Balance Outstanding Balance as of
Ratios off Date as of Cut-off Date Cut-off Date
- ----------------------- ---------- ------------------- ---------------------
<S> <C> <C> <C>
Less Than 10.01%......... $ %
From 10.01%-15.00%.......
From 15.01%-20.00%.......
From 20.01%-25.00%.......
From 25.01%-30.00%.......
From 30.01%-35.00%.......
From 35.01%-40.00%.......
From 40.01%-45.00%.......
From 45.01%-50.00%.......
Greater Than 50.00%......
----- ------------ ------
Total................ $ 100.00%
===== ============ ======
</TABLE>
Delinquency, Loan Default and Loss Information
Because of the Company's limited historical experience with respect to the
performance of home improvement contracts and home equity loans similar to the
Contracts in the pool, no information has been included herein with respect to
the Company's historical loan loss or liquidation experience. The Contracts in
the pool have high loan-to-value ratios and have been issued primarily for debt
consolidation purposes.
S-24
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Note will depend on the price paid by the Noteholder, the
timing of principal payments, and the timing and amount of any liquidation
losses on the related Contracts.
The Company has no significant experience with respect to the rate of
Principal Prepayments on home improvement contracts or home equity loans.
Because the Contracts have scheduled due dates throughout the calendar month,
prepayments on the Contracts would affect the amount of funds available to make
distributions on the Notes on any Payment Date only if a substantial portion of
the Contracts prepaid prior to their respective due dates in the preceding
month (thus paying less than 30 days' interest for that month) while very few
Contracts prepaid after their respective due dates in the preceding month. In
addition, liquidations of defaulted contracts or the Servicer's exercise of its
option to repurchase the entire remaining pool of Contracts (see "Description
of the Notes--Repurchase Option" herein) will affect the timing of principal
distributions on the Notes.
The amount of interest to which the Noteholders of any Class are entitled on
any Payment Date will be the product of the related Interest Rate and (in the
absence of any liquidation loss amount adjustment) the principal balance of
such Class immediately following the preceding Payment Date. Interest on each
Class of will be computed on the basis of a 360-day year of twelve 30-day
months. Noteholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Note Distribution
Account are sufficient therefor, in the priority described under "Description
of the Notes--Distributions on the Notes". As required by applicable state
laws, interest paid by Obligors on the Contracts is computed according to the
simple interest method.
Weighted Average Life of the Notes
The following information is given solely to illustrate the effect of
prepayments of the related Contracts on the weighted average life of each Class
of Notes under the stated assumptions and is not a prediction of the prepayment
rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes will be
influenced by the rate at which principal on the related Contracts is paid.
Principal payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Contracts).
The rate of principal payments on pools of home improvement contracts and
home equity loans is influenced by a variety of economic, geographic, social
and other factors, including the level of interest rates and the rate at which
homeowners sell their homes or default on their contracts or loans. Other
factors affecting prepayment of Contracts include changes in obligors' housing
needs, job transfers, unemployment and obligors' net equity in their homes. In
the case of home improvement contracts and home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such contracts or loans, the contracts or loans are likely to
be subject to higher prepayment rates than if prevailing interest rates
remained at or above the rates borne by such contracts or loans. Conversely, if
prevailing interest rates rise above the interest rates on such home
improvement contracts or home equity loans, the rate of prepayment would be
expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the model as described below set forth in the table;
(ii) the Servicer exercises its option to repurchase the Contracts, as
described under "Description of the Notes--Repurchase Option"; (iii) the
aggregate principal balance of the Initial Contracts as of the Cut-off Date is
approximately $ and such Contracts have the characteristics set forth under
"The Contracts"; (iv) the Contracts will,
S-25
<PAGE>
as of the Cut-off Date, be grouped into pools having the additional
characteristics set forth below under "Assumed Group 1 Contract
Characteristics", "Assumed Initial Group 2 Characteristics" and "Assumed
Subsequent Group 2 Contract Characteristics"; (v) each Class of Notes has an
Original Principal Balance as indicated in "Summary of the Terms of the Notes";
(vi) the subsequent Contracts will have the characteristics set forth in the
table below and have their first scheduled payment date in 1999; (vii) the
Interest Rates for the Notes are as indicated in "Summary of the Terms of the
Notes"; (viii) no interest shortfalls will arise in connection with prepayments
in full of the Contracts; (ix) no delinquencies or losses are experienced on
the Contracts; (x) distributions are made on the Notes on the 15th day of each
month, commencing in 1999; and (xi) the Notes are issued on , 1999. No
representation is made that the Contracts will not experience delinquencies or
losses.
Prepayments on mortgage loans and other consumer installment obligations are
commonly measured relative to a prepayment standard or model (the "Prepayment
Assumption"). The Prepayment Assumption used in this Prospectus Supplement with
respect to the Home Improvement and Home Equity Contracts represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of home improvement and home equity loans for the life of
such home improvement and home equity loans. The "100% Prepayment Assumption"
assumes a constant prepayment of 0% per annum of the then outstanding principal
balance of such loans in the first month of the life of such loans and an
additional 1.14% (precisely, 16/14%) per annum in each month thereafter until
the fifteenth month. Beginning in the fifteenth month and in each month
thereafter during the life of such loans, the 100% Prepayment Assumption
assumes a constant prepayment rate of 16% per annum each month.
It is not likely that the Contracts will prepay at any constant percentage
of the Prepayment Assumption or that all of the Contracts will prepay at the
same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
S-26
<PAGE>
Assumed Group 1 Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Date Weighted Average Average
Pool Average Remaining Term Original Term
Principal Contract to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ------------ -------- -------------- -------------
<S> <C> <C> <C> <C>
1. .......................... $ %
2. ..........................
3. ..........................
4. ..........................
5. ..........................
</TABLE>
Assumed Initial Group 2 Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Weighted Average Average
Date Pool Average Remaining Term Original Term
Principal Contract to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ........................... $ %
2. ...........................
3. ...........................
4. ...........................
</TABLE>
Assumed Subsequent Group 2 Contract Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Cut-off Weighted Average Average
Date Pool Average Remaining Term Original Term
Principal Loan to Maturity to Maturity
Pool Balance Rate (months) (months)
- ---- ---------- -------- -------------- -------------
<S> <C> <C> <C> <C>
1. ............................ $ %
2. ............................
3. ............................
4. ............................
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Notes, and set forth the
percentages of the Original Principal Balance of each Class that would be
outstanding after each of the dates shown, at the indicated percentages of the
CPR.
S-27
<PAGE>
Percentage of the Original Principal Balance of the Class A-1
Notes at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
December 15, 2011...................................
December 15, 2012...................................
Weighted Average Life (1) (years)...................
- --------
(1) The weighted average life of a Class A-1 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class A-1 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
A-1 Note.
Percentage of the Original Principal Balance of the Class A-2
Notes at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
December 15, 2011...................................
December 15, 2012...................................
Weighted Average Life (1) (years)...................
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class A-2 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
A-2 Note.
S-28
<PAGE>
Percentage of the Original Principal Balance of the Class M-1
Notes at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
December 15, 2011...................................
December 15, 2012...................................
December 15, 2013...................................
December 15, 2014...................................
December 15, 2015...................................
Weighted Average Life (1) (years)...................
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class M-1 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
M-1 Note.
Percentage of the Original Principal Balance of the Class M-2 Notes at the
Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
December 15, 2011...................................
December 15, 2012...................................
December 15, 2013...................................
December 15, 2014...................................
Weighted Average Life (1) (years)...................
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class M-2 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
M-2 Note.
S-29
<PAGE>
Percentage of the Original Principal Balance of the Class B-1
Notes at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
Weighted Average Life (1) (years)...................
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class B-1 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
B-1 Note.
Percentage of the Original Principal Balance of the Class B-2 Notes at the
Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date 50% 75% 100% 125% 150%
- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................................. 100% 100% 100% 100% 100%
December 15, 1999...................................
December 15, 2000...................................
December 15, 2001...................................
December 15, 2002...................................
December 15, 2003...................................
December 15, 2004...................................
December 15, 2005...................................
December 15, 2006...................................
December 15, 2007...................................
December 15, 2008...................................
December 15, 2009...................................
December 15, 2010...................................
December 15, 2011...................................
December 15, 2012...................................
December 15, 2013...................................
December 15, 2014...................................
Weighted Average Life (1) (years)...................
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Note is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Note by the number of years from the date of issuance of
such Class B-2 Note to the stated Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial principal balance of such Class
B-2 Note.
S-30
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales contracts for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (651) 293-3400). The Company's quarterly and annual reports, which
are incorporated by reference in this Prospectus Supplement and in the
Prospectus, are available from the Company upon written request made to the
Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings (losses) to fixed
charges for the past five years and the nine months ended September 30, 1998.
For the purposes of compiling these ratios, earnings (losses) consist of
earnings (losses) before both income taxes and fixed charges. Fixed charges
consist of interest expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
Months Ended
Year Ended December 31, ,
------------------------ ------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings (Losses)
to Fixed Charges........... 4.81 7.98 7.90 5.44 3.94
</TABLE>
- --------
[*On July 6, 1998, Conseco, Inc. announced a second-quarter charge of $498
million, net of income taxes, related to the acquisition of Green Tree. The
charges are directly related to (1) $148 million in merger-related costs and
(2) $350 million non-cash supplemental reserve against the valuation of Green
Tree's interest only securities and servicing rights. As a result, the ratio of
earnings (losses) to fixed charges was less than 1.00 for the nine month period
ended September 30, 1998 and earnings were inadequate to cover fixed charges
for such period. The amount of the coverage deficiency for such period was
$251,600,000.]
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
continues to operate from its headquarters in St. Paul, Minnesota, and its 200
local offices throughout the country. Lawrence M. Coss, Green Tree's Chairman
and Chief Executive Officer has announced his retirement from active management
of Green Tree at the end of 1998, but will remain a director of Conseco, Inc.
Headquartered in Carmel, Indiana, Conseco is among the nation's leading
providers of supplemental health insurance, retirement annuities and universal
life insurance.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf
S-31
<PAGE>
of persons or entities who purchased common stock of Green Tree during the
alleged class periods. In addition to Green Tree, certain current and former
officers and directors of Green Tree are named as defendants in one or more of
the lawsuits. Green Tree and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that Green Tree and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of Green Tree (particularly with respect to
prepayment assumptions and performance of certain of Green Tree's loan
portfolios) which allegedly rendered Green Tree's financial statements false
and misleading. Green Tree believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Trust
Documents."
General
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture, as executed, will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission following the issuance of the Securities.
The following summary describes certain terms of the Notes and the Indenture.
The summary does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Notes and the
Indenture. The following summary supplements the description of the general
terms and provisions of the Notes of any given series and the related Indenture
set forth in the accompanying Prospectus, to which description reference is
hereby made. U.S. Bank Trust National Association, a national banking
association headquartered in St. Paul, Minnesota, will be the Indenture
Trustee.
The Notes initially will be represented by certificates registered in the
name of Cede as the nominee of DTC, and will only be available in the form of
book-entries on the records of DTC and participating members thereof. See
"Description of the Notes--Registration of the Notes" herein. The property held
by the Indenture Trustee pursuant to the Indenture consists primarily of the
Contracts and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, including liens on the related real estate, amounts
held in the Collection Account and Note Distribution Account, the Note
Insurance Policy and the Class B-2 Limited Guaranty of the Company for the
benefit of the Class B-2 Noteholders.
Payments on the Notes will be made each month by the paying agent (which
shall initially be the Indenture Trustee) on each Payment Date to persons in
whose names the Notes are registered as of the Business Day immediately
preceding the Payment Date (the "Record Date"). See "Description of the Notes--
Registration of the Notes" herein. The first Payment Date for the Notes will be
in January 1999. Payments will be made by check mailed to such Noteholder at
the address appearing on the Note Register (except that a Noteholder who holds
an aggregate Percentage Interest of at least 5% of a Class of Notes may request
payment in respect of its Percentage Interest in such Class by wire transfer).
Final payments will be made only upon tender of the Notes to the Indenture
Trustee for cancellation.
To the extent not paid in full prior to such date, the outstanding principal
amount of each Class of Notes will be payable on the following "Final Scheduled
Distribution Date" for such Class:
Class A-1:
Class A-2:
Class M-1:
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Class M-2:
Class B-1:
Class B-2:
Payments on Contracts
The Servicer will establish and maintain in the name of the Indenture
Trustee a Collection Account in an "Eligible Account" (as defined below) at a
depository institution (initially [Indenture Trustee], Minnesota) with trust
powers organized under the laws of the United States or any state, the deposits
of which are insured to the full extent permitted by law by the Federal Deposit
Insurance Corporation (the "FDIC"), whose short-term deposits have been rated
P-1 by Moody's and A-1 by S&P or whose unsecured long-term debt has been rated
in one of the two highest rating categories by Moody's and S&P, and which is
subject to supervision and examination by federal or state authorities (an
"Eligible Institution"). "Eligible Account" means, at any time, an account
which is any of the following: (i) an account maintained with an Eligible
Institution; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund or the Savings Association Insurance
Fund of the FDIC; (iii) a segregated trust account maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the Indenture Trustee, which depository institution
or trust company has capital and surplus of not less than $50,000,000; or (iv)
an account that will not cause Moody's or S&P to downgrade or withdraw its
then-current rating assigned to the Notes without regard to the Note Policy, as
evidenced in writing by Moody's and S&P. The Servicer may authorize the
Indenture Trustee to invest the funds in the Collection Account in Eligible
Investments (as defined in the Sale and Servicing Agreement) that will mature
not later than the Business Day preceding the applicable monthly Payment Date.
Such Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least Aa2 by Moody's and AA from S&P (if rated by S&P) not in
excess of 10% of amounts in the Collection Account at the time of such
investment; and commercial paper assigned a rating of at least P-1 by Moody's
and A-1+ by S&P. Any losses on such investments will be deducted from other
investment earnings or from other funds in the Collection Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), will be paid into the
Collection Account no later than one Business Day following receipt thereof,
except amounts received as extension fees or assumption fees not allocated to
regular installments due on Contracts, which are retained by the Servicer as
part of its servicing fees and are not paid into the Collection Account and
except for certain proceeds from Liquidated Contracts which are used to
reimburse the Servicer for customary out-of-pocket liquidation expenses. See
"Description of the Notes--Servicing Compensation and Payment of Expenses"
herein. In addition, any Advances by the Servicer or the Indenture Trustee as
described under "Description of the Notes--Advances," and amounts paid by the
Company for Contracts repurchased as a result of a breach of representations or
warranties under the Agreement, as described under "Description of the Notes--
Conveyance of Contracts," will be paid into the Collection Account.
On a specified Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Amount Available in the Collection
Account and the amount of funds necessary to make all payments to be made on
the next Payment Date from the Collection Account. Not later than one Business
Day after the Determination Date, the Company will deposit in the Collection
Account the Repurchase Price of any Contracts required to be repurchased on
such Payment Date as a result of a breach of representations and warranties
under the Agreement.
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The Amount Available will consist primarily of payments made on or in
respect of the Contracts and will include payments made by the Note Insurer
under the Note Insurance Policy and amounts payable, subject to the
subordination described herein, to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) as the Monthly
Servicing Fee with respect to the Contracts, and to the Certificateholders.
On each Payment Date the Indenture Trustee will withdraw the Amount
Available from the Collection Account and make the following payments, in the
following order of priority:
(i) if neither the Company nor any wholly owned subsidiary of the
Company is the Servicer, to pay the Monthly Servicing Fee with respect to
the Contracts to the Servicer;
(ii) to pay the amount payable monthly to the Note Insurer, in an amount
equal to the premium rate times the sum of the Class A-1 and Class A-2
Principal Balance (the "Premium Amount");
(iii) to pay interest on certain of the Notes, in the following order of
priority:
(A) first, to Class A-1 Noteholders and the Class A-2
Noteholders, interest on the Class A-1 Principal Balance and Class
A-2 Principal Balance, respectively;
(B) second, to Class M-1 Noteholders, interest on the Class M-1
Adjusted Principal Balance;
(C) third, to Class M-2 Noteholders, interest on the Class M-2
Adjusted Principal Balance; and
(D) fourth, to Class B-1 Noteholders, interest on the Class B-1
Adjusted Principal Balance;
(iv) to pay principal on the Class A Notes, in the amount described
below under "Distributions on the Notes--Principal on the Class A, Class M-
1, Class M-2 and Class B-1 Notes," in respect of the Group 1 Formula
Principal Distribution Amount in the case of the Class A-1 Notes, and in
respect of the Group 2 Formula Principal Distribution Amount in the case of
the Class A-2 Notes;
(v) to pay the Note Insurer for any unreimbursed insurance payments and
any other amounts owing to the Note Insurer under the Insurance Agreement,
including any unpaid Premium Amount (together with interest thereon as
specified in the Insurance Agreement) (the "Reimbursement Amount");
(vi) to pay principal and interest on certain of the Notes, in the
following order of priority:
(A) principal on the Class M-1, Class M-2 and Class B-1 Notes, in the
amount described below under "Distributions on the Notes--Principal on
the Class A, Class M-1, Class M-2 and Class B-1 Notes," in respect of
the Class M Principal Distribution Amount and Class B-1 Principal
Distribution Amount, respectively;
(B) payments on the Class M-1, Class M-2 and Class B-1 Notes in
respect of Liquidation Loss Interest Amounts as follows:
(I) first, to Class M-1 Noteholders, any unpaid Class M-1
Liquidation Loss Interest Amount;
(II) second, to Class M-2 Noteholders, any unpaid Class M-2
Liquidation Loss Interest Amount; and
(III) third, to Class B-1 Noteholders, any unpaid Class B-1
Liquidation Loss Interest Amount; and
(C) interest and principal on the Class B-2 Notes, in the manner and
order of priority described below under "Distributions on the Notes--
Class B-2 Interest" and "--Class B-2 Principal."
(vii) if the Company or any wholly owned subsidiary of the Company is
the Servicer, to pay the Monthly Servicing Fee to the Servicer with respect
to the Contracts;
(viii) to pay principal on the Class A Notes, in the manner described
below under "Distributions on Notes--Principal on the Class A, Class M-1,
Class M-2 and Class B-1 Notes," in respect of any
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Supplementary Principal Distribution Amount (which is an amount equal to
the lesser of (1) the Class A Principal Balance or (2) the Amount Available
remaining after the distributions described in (i) through (vii) above; and
(ix) to pay any remaining amounts to the holder of the Certificate.
Distributions on the Notes
On each Payment Date, distributions on the Notes will be made to the holders
of the Class A, the Class M and the Class B Notes in the manner described
below.
Noteholders will be entitled to receive on each Payment Date commencing in
January 1999, to the extent that the Amount Available (as defined herein) in
the Note Distribution Account (together with, in the case of the Class B-2
Notes, any Class B-2 Guaranty Payment, as described below) is sufficient
therefor, distributions allocable to interest and principal, as described
herein. The rights of the Class M and Class B Noteholders to receive
distributions in respect of the Amount Available are subordinated to the rights
of the Class A Noteholders and the Note Insurer's right to the Premium Amount
(as defined below) and the Reimbursement Amount; the rights of the Class M-2
and Class B Noteholders to receive such distributions are further subordinated
to the rights of the Class M-1 Noteholders; the rights of the Class B
Noteholders to receive such distributions are further subordinated to the
rights of the Class M-2 Noteholders; and the rights of the Class B-2
Noteholders to receive such distributions are further subordinated to the
rights of the Class B-1 Noteholders. Distributions will be made on each Payment
Date commencing in 1999 to holders of record on the related Record Date,
except that the final distribution in respect of the Notes will only be made
upon presentation and surrender of the Notes at the office or agency appointed
by the Indenture Trustee for that purpose in Minneapolis or St. Paul,
Minnesota.
Interest on the Class A, Class M-1, Class M-2 and Class B-1 Notes
Interest will be distributable first to each Class of Class A Notes
concurrently, then to the Class M-1 Notes, then to the Class M-2 Notes and then
to the Class B-1 Notes. The Interest Rates for the Class A, Class M and Class
B-1 Notes are set forth in "Summary of the Terms of the Notes." Interest 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,
as applicable, will accrue at the related Interest Rate from , 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. The "Principal Balance" of a Class of Notes as of any
Payment Date is the Original Principal Balance of such Class less all amounts
previously distributed on account of principal of such Class. The "Class A
Principal Balance" as of any Payment Date is the sum of the Class A-1 Principal
Balance and the Class A-2 Principal Balance. The "Class M Principal Balance" as
of any Payment Date is the sum of the Class M-1 Principal Balance and the Class
M-2 Principal Balance. The "Class 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 Amount (described below under "--Losses on Liquidated
Contracts"). 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 Amount (described below under "Losses on Liquidated Contracts"). The
"Class B Principal Balance" as of any Payment Date is the sum of the Class B-1
Principal Balance and the Class B-2 Principal Balance. 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 Amount (described below under
"Losses on Liquidated Contracts").
In the event that, on a particular Payment Date, the Amount Available in the
Note Distribution Account (after payment of certain fees to the Servicer (if
other than the Company) and the Note Insurer) is not sufficient to make a full
distribution of interest to the holders of Class M-1 Notes, Class M-2 Notes or
Class B-1 Notes, after payment of interest on each Class of Notes that is
senior to such Class of Notes, the amount of interest to be distributed in
respect of such Class will be allocated among the outstanding holders of such
Class pro rata in
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<PAGE>
accordance with their respective entitlements to interest, and the amount of
the shortfall will be carried forward and added to the amount such holders will
be entitled to receive on the next Payment Date. Any such amount so carried
forward will bear interest at the applicable Interest Rate, to the extent
legally permissible.
Principal on the Class A, Class M-1, Class M-2 and Class B-1 Notes.
The Class A, Class M-1, Class M-2 and Class B-1 Notes will be entitled to
receive on each Payment Date distributions of principal, in the order of
priority set forth below and to the extent of the Amount Available in the Note
Distribution Account after payment of certain fees to the Servicer (if other
than the Company) and to the Note Insurer and 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.
Principal will be distributable first to each Class of Class A Notes,
concurrently, until retired. The Class A-1 Notes will be entitled to receive an
amount equal to the Senior Percentage (as defined below) of the "Group 1
Formula Principal Distribution Amount," which is the sum of (i) all scheduled
payments of principal due on each outstanding Group 1 Contract during the
related Due Period, (ii) the Scheduled Principal Balance of each Group 1
Contract which, during such Due Period, was purchased by the Company pursuant
to the Agreement on account of certain breaches of its representations and
warranties, (iii) all partial Principal Prepayments applied and all Principal
Prepayments in Full received during such Due Period in respect of Group 1
Contracts, (iv) the Scheduled Principal Balance of each Group 1 Contract that
became a Liquidated Contract during such Due Period, and (v) any amount
described in clauses (i) through (iv) above that was not previously distributed
because of an insufficient amount of funds available in the Note Distribution
Account if (a) the Payment Date occurs on or after the Payment Date on which
the Class B-2 Principal Balance has been reduced to zero, or (b) such amount
was not covered by a Class B-2 Guaranty Payment and corresponding reduction in
the Class B-2 Principal Balance.
The Class A-2 Notes will be entitled to receive an amount equal to the
Senior Percentage (as defined below) of the "Group 2 Formula Principal
Distribution Amount," which is the sum of (i) all scheduled payments of
principal due on each outstanding Group 2 Contract during the related Due
Period, (ii) the Scheduled Principal Balance of each Group 2 Contract which,
during such Due Period, was purchased by the Company pursuant to the Agreement
on account of certain breaches of its representations and warranties, (iii) all
partial Principal Prepayments applied and all Principal Prepayments in Full
received during such Due Period in respect of Group 2 Contracts, (iv) the
Scheduled Principal Balance of each Group 2 Contract that became a Liquidated
Contract during such Due Period, and (v) any amount described in clauses (i)
through (iv) above that was not previously distributed because of an
insufficient amount of funds available in the Note Distribution Account if (a)
the Payment Date occurs on or after the Payment Date on which the Class B-2
Principal Balance has been reduced to zero, or (b) such amount was not covered
by a Class B-2 Guaranty Payment and corresponding reduction in the Class B-2
Principal Balance.
If either the Class A-1 Notes or the Class A-2 Notes are retired, the
remaining Class will be entitled to receive the Senior Percentage of the Group
1 Formula Principal Distribution Amount and Group 2 Formula Principal
Distribution Amount.
In addition, on each Payment Date on which the Supplementary Principal
Distribution Test has not been satisfied, holders of Class A Notes will be
entitled to receive as payments of principal the Supplementary Principal
Distribution Amount. The Supplementary Principal Distribution Test will not be
met if the cumulative losses on the Contracts exceed certain specified
percentages of the principal balance of the Contracts as of the Cut-off Date.
Upon the payment in full of the Class A Notes, the Class M-1 Notes will be
entitled to receive an amount equal to the Senior Percentage (as defined below)
of the Group 1 and Group 2 Formula Principal Distribution Amounts. Upon payment
in full of the Class M-1 Notes, the Class M-2 Notes will be entitled to receive
an amount equal to the Senior Percentage of the Group 1 and Group 2 Formula
Principal Distribution Amounts.
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On each Payment Date, the Class B-1 Notes will be entitled to receive an amount
equal to the Class B Percentage (as defined below) of the Group 1 and Group 2
Formula Principal Distribution Amounts. When the Principal Balance of a Class
of Notes is reduced to zero, no further distributions of principal will be made
to the holders of such Class.
The Scheduled Principal Balance of a Contract with respect to any Payment
Date is its principal balance as of the scheduled payment date (the "Due Date")
in the Due Period, after giving effect to any previous partial Principal
Prepayments applied and to the scheduled payment due on such Due Date, and
after giving effect to any adjustments due to bankruptcy or similar
proceedings. The "Pool Scheduled
Principal Balance," with respect to the Contract Pool as of any Payment Date,
is the aggregate of the Scheduled Principal Balances of Contracts comprising
the Contract Pool that were outstanding during the preceding Due Period. A
"Liquidated Contract" is a defaulted Contract (a) which is 180 days delinquent
or (b) as to which all amounts that the Servicer expects to recover on account
of such Contract have been received.
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 such Payment
Date and the denominator of which is the Pool Scheduled Principal Balance for
the immediately preceding Payment Date.
Payments of principal on the Class B-l Notes will not commence until the
Class B Cross-over Date, and will be made on that Payment Date and each Payment
Date thereafter only if each Class B Principal Distribution Test (as defined
below) is satisfied on such Payment Date (unless the Class A Principal Balance
and the Class M Principal Balance have been reduced to zero). The "Class B
Cross-over Date" will be the earlier of (A) the Payment Date on which the Class
M-2 Principal Balance is reduced to zero and (B) the first Payment Date on or
after the Payment Date in January 2003.
The "Class B Principal Distribution Test" will be satisfied on each Payment
Date that (i) the average of the Sixty-Day Delinquency Ratio (as defined in the
Sale and Servicing Agreement) as of such Payment Date and the prior two Payment
Dates does not exceed %; (ii) the average of the Thirty-Day Delinquency Ratio
(as defined in the Agreement) as of such Payment Date and the prior two Payment
Dates does not exceed %; (iii) the Cumulative Realized Loss Ratio (as defined
in the Sale and Servicing Agreement) as of such Payment Date does not exceed
%; (iv) the Current Realized Loss Ratio (as defined in the Sale and Servicing
Agreement) as of such Payment Date does not exceed %; and (v) the Class B
Principal Balance divided by the Pool Scheduled Principal Balance as of the
immediately preceding Payment Date is equal to or greater than %.
On each Payment Date on which the Class B Notes are eligible to receive
distributions of principal, the Class B Percentage of the Group 1 and Group 2
Formula Principal Distribution Amounts less the Class B Floor Reduction Amount
(as described below) will be paid to the Class B-1 Noteholders to the extent of
the Amount Available, after payment of certain fees to the Servicer (if other
than the Company) and the Note Insurer, 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, all principal then
due on the Class A Notes and Class M Notes and reimbursement to the Note
Insurer and all principal then due on the Class M Notes, until the Class B-l
Principal Balance has been reduced to zero. The Class B Floor Reduction Amount
means as to any Payment Date prior to the Class M-2 Cross-over Date, the
amount, if any, by which the Class B Percentage of the Group 1 and Group 2
Formula Principal Distribution Amounts exceeds (a) the Class B Principal
Balance prior to the effect of such distribution less (b) $2,250,000, and after
the Class M-2 Cross-over Date the Class B Floor Reduction Amount will equal
zero. The "Class M-2 Cross-over Date" is the Payment Date on which the Class M-
2 Principal Balance has been reduced to zero.
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Any Class B Floor Reduction Amount will be distributed to the Class A-1
Notes and Class A-2 Notes concurrently, until the related balances are reduced
to zero, then to the Class M-1 Notes until the balance is reduced to zero, and
then to the Class M-2 Notes until the balance is reduced to zero.
The Class B Percentage for any Payment Date will be equal to 100% minus the
Senior Percentage. The Class B Percentage for each Payment Date, if any, after
the Class A Principal Balance and the Class M Principal Balance have been
reduced to zero will be equal to 100%.
Notwithstanding the foregoing, on any Payment Date as to which there is a
Class A Principal Deficiency Amount (which is the amount, if any, by which the
Pool Scheduled Principal Balance is less than the Class A Principal Balance),
the remaining Amount Available (including any Insured Payments under the Note
Insurance Policy), 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 Notes based on the Principal Balance of each
Class (but in no event will such amount exceed the Principal Balance of any
such Class).
Class B-2 Interest.
Interest on the outstanding Class B-2 Principal Balance will accrue from
December 30, 1998, or from the most recent Payment Date on which interest has
been paid, to but excluding the following Payment Date, and will be computed on
the basis of a 360-day year of twelve 30-day months.
To the extent of (i) the remaining Amount Available, if any, for a Payment
Date after payment of certain fees to the Servicer (if other than the Company)
and the Note Insurer, all interest and principal then payable on the Class A,
Class M-1, Class M-2 and Class B-1 Notes and reimbursement to the Note Insurer,
and (ii) the Class B-2 Guaranty Payment, if any, for such date, interest will
be paid to the Class B-2 Noteholders on such Payment Date at the Class B-2
Interest 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 Noteholders (including any
Class B-2 Guaranty Payments) on account of principal.
In the event that, on a particular Payment Date, the remaining Amount
Available in the Note Distribution Account plus any amounts actually paid under
the Class B-2 Limited Guaranty are not sufficient to make a full distribution
of interest to the Class B-2 Noteholders, the amount of the deficiency will be
carried forward as an amount that the Class B-2 Noteholders 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 Interest 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 Notes will not commence until the
Payment Date on which the Class B-1 Principal Balance has been reduced to zero
(the "Class B-1 Cross-over Date"), and will be made on that Payment Date and
each Payment Date thereafter only if each Class B Principal Distribution Test
is satisfied on such Payment Date (unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to zero). On any such Payment Date,
the Class B Percentage of the Group 1 and Group 2 Formula Principal
Distribution Amounts less the Class B Floor Reduction Amount will be
distributed, to the extent of any amounts actually paid under the Class B-2
Limited Guaranty and the Amount Available, after payment of certain fees to the
Servicer (if other than the Company) and the Note Insurer, all interest and
principal then due on the Class A and Class M and Class B-1 Notes,
reimbursement to the Note Insurer and interest on the Class B-2 Notes, to the
Class B-2 Noteholders until the Class B-2 Principal Balance has been reduced to
zero. The Class B-2 Principal Balance generally will not be reduced below
$2,250,000 until the Class A Principal Balance, the Class M Principal Balance
and the Class B-1 Principal Balance have been reduced to zero.
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On each Payment Date, the Class B-2 Noteholders 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 Notes and Class B Notes
The rights of the holders of the Class M Notes and Class B Notes to receive
distributions with respect to the Contracts, as well as any other amounts
constituting the Amount Available, will be subordinated, to the extent
described herein, to such rights of the holders of the Class A Notes and the
rights of the Note Insurer under the Insurance Agreement. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Notes of the full amount of their scheduled monthly payments of
interest and principal and to afford such holders protection against losses on
Liquidated Contracts.
A portion of the protection afforded to the holders of the Class A Notes by
means of the subordination of the Class M and Class B Notes will be
accomplished by the preferential right of the Class A Noteholders to receive on
any Payment Date the amount of interest due on the Class A Notes, 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 Notes. Thereafter, any remaining Amount Available in the Note
Distribution Account will be applied to the payment of interest due 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. The Class A Notes will also have the benefit of the Note
Insurance Policy.
After payment of certain fees to the Servicer (if other than the Company)
and the Note Insurer, 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 and reimbursement to the Note
Insurer as described above, 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 Amounts will
be distributed to the Class A, Class M and Class B-1 Noteholders in the order
of priority described above under "Distributions on the Notes--Principal on the
Class A, Class M-1, Class M-2 and Class B-1 Notes." Such remaining Amount
Available, to the extent sufficient therefor, will be distributed in the
following order of priority: first, any unpaid Class M-1 Liquidation Loss
Interest Amount (as described below under "Losses on Liquidated Contracts")
will be distributed to the Class M-1 Noteholders; then, any unpaid Class M-2
Liquidation Loss Interest Amount (as described below under "Losses on
Liquidated Contracts") will be distributed to the Class M-2 Noteholders; and,
finally, any unpaid Class B-1 Liquidation Loss Interest Amount (as described
below under "Losses on Liquidated Contracts") will be distributed to the Class
B-1 Noteholders.
The rights of the holders of the Class B-2 Notes to receive distributions
with respect to the Contracts and other amounts in the Note Distribution
Account will be subordinated to such rights of the holders of the Class A
Notes, Class M Notes and Class B-1 Notes and amounts payable to the Note
Insurer. Thus, the Class B-2 Noteholders will be entitled to distribution of
interest and principal on the Class B-2 Notes only after distribution of all
interest and principal then payable on the Class A, Class M and Class B-1
Notes.
If a Class B-2 Liquidation Loss Principal Amount is realized for any Payment
Date and the Company fails to pay such amount pursuant to its Class B-2 Limited
Guaranty, the Class B-2 Noteholders may incur losses on their investment in the
Class B-2 Notes to the extent such losses are not made up from future payments
on the Contracts or the Class B-2 Limited Guaranty.
Losses on Liquidated Contracts
As described above, the distribution of principal to the Class A Noteholders
is intended to include the Senior Percentage of the Scheduled Principal Balance
of each Contract that became a Liquidated Contract during the preceding Due
Period. If the Net Liquidation Proceeds from such Liquidated Contract are less
than the Scheduled Principal Balance of such Liquidated Contract plus accrued
and unpaid interest thereon, the
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deficiency will, in effect, be absorbed by the Certificateholders first, then
the Monthly Servicing Fee otherwise payable to the Servicer (so long as the
Company or any wholly owned subsidiary of the Company is the Servicer) with
respect to the Contracts, then the Class B-2 Noteholders, then the Class B-1
Noteholders, then the Class M-2 Noteholders and then the Class M-1 Noteholders.
Likewise, to the extent the Class M-1 Noteholders, the Class M-2 Noteholders or
the Class B-1 Noteholders are entitled to receive distributions of principal,
similar deficiencies could result for each Class of Notes with a lower payment
priority.
In the event the Amount Available in the Note Distribution Account for any
Payment Date is insufficient to distribute the full Formula Principal
Distribution Amounts for such Payment Date to the
Noteholders, the aggregate outstanding Principal Balance of the Notes will be
greater than the Pool Scheduled Principal Balance for such Payment Date. In
such event, the amount of such deficiency (the "Liquidation Loss Principal
Amount") would be allocated first to the Class B-2 Notes (the "Class B-2
Liquidation Loss Principal Amount"), and the Company would be obligated to pay
the amount of such Class B-2 Liquidation Loss Principal Amount to the Class B-2
Noteholders 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 Principal Balance, the
Class M-2 Principal Balance and the Class B-1 Principal Balance was equal to
the Pool Scheduled Principal Balance, no further Liquidation Loss Principal
Amounts could be allocated to the Class B-2 Notes and any further Liquidation
Loss Principal Amounts realized would be allocated to reduce the Class B-1
Adjusted Principal Balance (a "Class B-1 Liquidation Loss Principal Amount").
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 (a "Class M-2 Liquidation Loss Principal
Amount"). 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 (a "Class M-1 Liquidation Loss
Principal Amount"). Any such Liquidation Loss Principal Amounts would be
reduced on subsequent Payment Dates to the extent that the Amount Available in
the Note Distribution Account on such Payment Dates is sufficient to permit the
distribution of principal due, but not paid, on the Notes on prior Payment
Dates. In the event the Adjusted Principal Balance of the Class M-1, Class M-2
or Class B-1 Notes were reduced by a Liquidation Loss Principal Amount,
interest accruing on such Class would be calculated on the reduced Adjusted
Principal Balance of such Class. The interest accruing on such Class's
Liquidation Loss Principal Amount each month (such Class's "Liquidation Loss
Interest Amount"), plus interest at the applicable Interest Rate on any
Liquidation Loss Interest Amount due on a prior Payment Date but not paid,
would be paid to the Noteholders of such Class from the Amount Available, after
distributions of principal on all Class A, Class M and Class B-1 Notes, in the
order of priority described above under "Subordination of Class M and Class B
Notes."
But for the effect of the subordination of the Class M-2 and Class B Notes
and the Certificates and the related Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer) with respect to the Contracts, the Class M-1
Noteholders will absorb all losses on each Liquidated Contract in the amount by
which its Net Liquidation Proceeds are less than its unpaid principal balance
plus accrued and unpaid interest thereon less the related Monthly Servicing
Fee.
But for the effect of the subordination of the Class B Notes and the
Certificates and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Contracts, the Class M-2 Noteholders will
absorb all losses on each Liquidated Contract in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class B-2 Notes and the
Certificates and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer) with respect to the Contracts, the Class B-1 Noteholders will
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absorb all losses on each Liquidated Contract in the amount by which its Net
Liquidation Proceeds are less than its unpaid principal balance plus accrued
and unpaid interest thereon less the related Monthly Servicing Fee.
But for the payments under the Class B-2 Limited Guaranty described below
and the subordination of the Certificates and the related Monthly Servicing Fee
otherwise payable to the Servicer (so long as the Company or any wholly owned
subsidiary of the Company is the Servicer) with respect to the Contracts, the
Class B-2 Noteholders will absorb all losses on each Liquidated Contract in the
amount by which its Net Liquidation Proceeds are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the related Monthly
Servicing Fee.
Reports to Noteholders
The Servicer will furnish to the Indenture Trustee, and the Indenture
Trustee will include with each distribution to a Class A Noteholder, a
statement in respect of the related Payment Date setting forth, among other
things:
(a) the amount of such distribution to holders of each Class of Class A
Notes allocable to interest;
(b) the amount of such distribution to holders of each Class of Class A
Notes allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments and any Supplementary Principal
Distribution Amount included);
(c) the amount, if any, by which the Class A Formula Distribution
Amount exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Notes after giving
effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance for such Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the numerator
of which is the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal Balance and the denominator
of which is the Cut-off Date Pool Principal Balance;
(h) the number and aggregate principal balance of Contracts
delinquent (i) 30-59 days, (ii) 60-89 days, and (iii) 90 or more days;
(i) the amount of any payment by the Note Insurer under the Note
Insurance Policy and any reimbursement paid to the Note Insurer; and
(j) the number of defaulted Contracts in foreclosure or foreclosed
upon and in the Servicer's inventory.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class A Note with a 1% Percentage Interest or per
$1,000 denomination of Class A Note.
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 Noteholder of
record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (a) and (b) above for such calendar year.
The Servicer will furnish to the Indenture Trustee, and the Indenture
Trustee will include with each distribution to a Class M-1 Noteholder, a
statement in respect of the related Payment Date setting forth, among other
things:
(a) the amount of such distribution to holders of the Class M-1
Notes allocable to interest (separately identifying any unpaid interest
shortfall included);
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(b) the amount of such distribution to holders of the Class M-1
Notes allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Distribution Amount for such Payment Date;
(d) the Principal Balance of the Class M-1 Note after giving effect
to the distribution of principal on such Payment Date;
(e) any unpaid Class M-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor;
(i) the number and aggregate principal balance of Contracts
delinquent (i) 30-59 days, (ii) 60-89 days, and (iii) 90 or more days;
and
(j) the number of defaulted Contracts in foreclosure or foreclosed
upon and in the Servicer's inventory.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class M-1 Note with a 1% Percentage Interest or per
$1,000 denomination of Class M-1 Note.
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 Noteholder
of record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (a) and (b) above for such calendar year.
The Servicer will furnish to the Indenture Trustee, and the Indenture
Trustee will include with each distribution to a Class M-2 Noteholder, a
statement in respect of the related Payment Date setting forth, among other
things:
(a) the amount of such distribution to holders of the Class M-2
Notes allocable to interest (separately identifying any unpaid interest
shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Notes allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Distribution Amount for such Payment Date;
(d) the Principal Balance of the Class M-2 Notes after giving effect
to the distribution of principal on such Payment Date;
(e) any unpaid Class M-2 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor;
(i) the number and aggregate principal balance of Contracts
delinquent (i) 30-59 days, (ii) 60-89 days, and (iii) 90 or more days;
and
(j) the number of defaulted Contracts in foreclosure or foreclosed
upon and in the Servicer's inventory.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class M-2 Note with a 1% Percentage Interest or per
$1,000 denomination of Class M-2 Note.
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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 Noteholder
of record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (a) and (b) above for such calendar year.
The Servicer will furnish to the Indenture Trustee, and the Indenture
Trustee will include with each distribution to a Class B-1 Noteholder, a
statement in respect of the related Payment Date setting forth, among other
things:
(a) the amount of such distribution to holders of the Class B-1
Notes allocable to interest (separately identifying any unpaid interest
shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Notes allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Distribution Amount for such Payment Date;
(d) the Principal Balance of the Class B-1 Notes after giving effect
to the distribution of principal on such Payment Date;
(e) any unpaid Class B-1 Liquidation Loss Interest Amount, after
giving effect to payments of interest on such Payment Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor;
(i) the number and aggregate principal balance of Contracts
delinquent (i) 30-59 days, (ii) 60-89 days, and (iii) 90 or more days;
and
(j) the number of defaulted Contracts in foreclosure or foreclosed
upon and in the Servicer's inventory.
Information furnished pursuant to clauses (a) through (d) will be expressed
as dollar amounts for a Class B-1 Note with a 1% Percentage Interest or per
$1,000 denomination of Class B-1 Note.
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 Noteholder
of record at any time during such calendar year as to the aggregate of amounts
reported pursuant to (a) and (b) above for such calendar year.
The Servicer will furnish to the Indenture Trustee, and the Indenture
Trustee will include with each distribution to a Class B-2 Noteholder, a
statement in respect of the related Payment Date setting forth, among other
things:
(a) the amount of such distribution to holders of Class B-2 Notes
allocable to interest;
(b) the amount of such distribution to holders of Class B-2 Notes
allocable to principal (separately identifying the aggregate amount of
any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Liquidation Loss Principal
Amount, if any, exceeds the Class B-2 Distribution Amount for such
Payment Date;
(d) the Class B-2 Liquidation Loss Principal Amount, if any, for
such Payment Date;
(e) the Class B-2 Guaranty Payment, if any, for such Payment Date;
(f) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(g) the Class B Percentage for such Payment Date;
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(h) the Pool Scheduled Principal Balance for such Payment Date;
(i) the Pool Factor;
(j) the number and aggregate principal balance of Contracts
delinquent (i) 30-59 days, (ii) 60-89 days, and (iii) 90 or more days;
and
(k) the number of defaulted Contracts in foreclosure or foreclosed
upon and in the Servicer's inventory.
Information furnished pursuant to clauses (a) through (c) will be expressed
as dollar amounts for a Class B-2 Note with a 1% Percentage Interest or per
$1,000 denomination of Class B-2 Note.
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 Noteholder
of record at any time during such calendar year as to the aggregate amounts
reported pursuant to (a) and (b) above for such calendar year.
Each of the foregoing statements will also be provided to the Note Insurer,
so long as the Note Insurance Policy is in effect.
Conveyance of Contracts
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Home Improvement Contracts and the Home Equity
Contracts, including all principal and interest received on or with respect to
such Contracts (other than receipts of principal and interest due on such
Contracts before the Cut-off Date). The Trust will pledge each Contract to the
Indenture Trustee for the benefit of the Noteholders and the Note Insurer
pursuant to the Indenture.
The Indenture Trustee, concurrently with each conveyance, will execute and
deliver the Notes to or upon the order of the Company. The Contracts are
described on a list delivered to the Trust and certified by a duly authorized
officer of the Company. Such list includes the amount of monthly payments due
on each Contract as of the date of issuance of the Notes, the interest rate on
each Contract and the maturity date of each Contract. The list will be
available for inspection by any Noteholder at the principal office of the
Company. Prior to the conveyance of the Contracts to the Trust, the Company
will have completed a review of all the Contract files, confirming the accuracy
of each item on the list of Contracts delivered to the Indenture Trustee. Any
Contract discovered not to agree with such list in a manner that is materially
adverse to the interests of the Noteholders will be repurchased by the Company,
or, if the discrepancy relates to the unpaid principal balance of a Contract,
the Company may deposit cash in the Collection Account in an amount sufficient
to offset such discrepancy.
The Indenture Trustee will maintain possession of the Contracts and any
other documents contained in the Contract files. Uniform Commercial Code
financing statements will be filed in Minnesota, reflecting the pledge and
assignment of the Contracts to the Indenture Trustee, and the Company's
accounting records and computer systems will also reflect such pledge and
assignment.
[Company Counsel], counsel to the Company, will render an opinion to the
Indenture Trustee that the transfer of the Contracts from the Company to the
Trust would, in the event the Company became a debtor under the United States
Bankruptcy Code, be treated as a true sale and not as a pledge to secure
borrowings. If, however, the transfer of the Contracts from the Company to the
Trust were treated as a pledge to secure borrowings by the Company, the
distribution of proceeds of the Contracts to the Trust might be subject to the
automatic stay provisions of the United States Bankruptcy Code, which would
delay the distribution of such proceeds for an uncertain period of time. In
addition, a bankruptcy trustee would have the power to sell the Contracts if
the proceeds of such sale could satisfy the amount of the debt deemed owed by
the Company, or
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the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the Sale and
Servicing Agreement with respect to each Contract, including that: (a) for each
Contract as of the applicable Cut-off Date, the most recent scheduled payment
was made or was not delinquent more than 59 days; (b) no provision of a
Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trust; (c) each Contract is a legal, valid
and binding obligation of the Obligor and is enforceable in accordance with its
terms (except as may be limited by laws affecting creditors' rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (e) each Contract was originated by a home improvement contractor or
home equity lender in the ordinary course of its business or was originated by
the Company directly; (f) no Contract was originated in or is subject to the
laws of any jurisdiction whose laws would make the transfer of the Contract or
an interest therein pursuant to the Agreement or the Notes unlawful; (g) each
Contract complies with all requirements of law; (h) no Contract has been
satisfied, subordinated to a lower lien ranking than its original position (if
any) or rescinded; (i) each Contract creates a valid and perfected lien on the
related real estate; (j) all parties to each Contract had full legal capacity
to execute such Contract; (k) no Contract has been sold, conveyed and assigned
or pledged to any other person and the Company has good and marketable title to
each Contract free and clear of any encumbrance, equity, lien, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trust; (l) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clauses (a) and (b) above), no
event that with notice and the expiration of any grace or cure period would
constitute a default, breach, violation or event permitting acceleration under
such Contract, and the Company has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan and provides for level monthly payments
based on its applicable Contract Rate, for the final monthly payment, over the
term of such Contract; (n) each Contract contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for realization against the collateral; (o) the description of each
Contract set forth in the list delivered to the Trust is true and correct; (p)
there is only one original of each Contract; and (q) each Contract was
originated or purchased in accordance with the Company's then-current
underwriting guidelines.
The Company will also make certain representations and warranties with
respect to the Home Improvement Contracts in the aggregate, including that (i)
the aggregate pool of Home Improvement Contracts have a contractual rate of
interest of at least %; (ii) no Home Improvement Contract had a remaining
term to maturity at origination of more than months; (iii) no more than 1%
of the Home Improvement Contracts, by principal balance as of the Cut-off Date,
were secured by properties located in an area with the same zip code; (iv) no
more than 5% of the Home Improvement Contracts, by principal balance as of the
Cut-off Date, were originated by any one contractor or lender; and (v) no
adverse selection procedures were employed in selecting the Home Improvement
Contracts from the Company's portfolio.
Under the terms of the Sale and Servicing Agreement, the Company has agreed
to repurchase, at the Repurchase Price (as defined below), any Contract that is
materially and adversely affected by a breach of a representation and warranty
with respect to such Contract made in the Sale 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 Indenture Trustee. The "Repurchase Price,"
with respect to any Contract to be so repurchased or with respect to a
Liquidated Contract, means the outstanding principal balance of such Contract
plus interest on such Contract at the Interest Rate (which will be the weighted
average of the Interest Rates of the related Classes of Notes) from the end of
the Due Period with respect to which the Obligor last made a scheduled payment
(without giving effect to any Advances made by the Servicer or the Indenture
Trustee) through the date of such repurchase or liquidation. This repurchase
obligation constitutes the sole remedy available to the Trust and the
Noteholders for a breach of a representation or warranty under the Agreement
with respect to the Contracts (but not with respect to any other breach by the
Company of its obligations under the Agreement).
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Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care consistent with the highest
degree of skill and care that the Servicer exercises with respect to similar
contracts (including manufactured housing contracts) serviced by the Servicer.
The Servicer will not be required to cause to be maintained, or otherwise
monitor the maintenance of, hazard insurance on the improved properties. The
Company does, however, as a matter of its own policy, monitor proof of hazard
insurance coverage (other than flood insurance) and require that it be named as
an additional loss payee on all first lien secured contracts and generally on
junior lien secured contracts with amounts financed of over $20,000.
Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Contracts equal to one-
twelfth of the product of .75% and the remaining Pool Scheduled Principal
Balance of the Contracts.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Contract for customary out-of-pocket liquidation expenses incurred
by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Noteholders and providing related data processing and
reporting services for Noteholders and on behalf of the Indenture Trustee.
Expenses incurred in connection with the servicing of the Contracts and paid by
the Servicer from its servicing fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Contracts or foreclosure on collateral relating thereto, payment
of Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Noteholders.
Evidence as to Compliance
The Sale and Servicing Agreement provides for delivery to the Indenture
Trustee of a monthly report by the Servicer no later than one Business Day
following the Determination Date, setting forth the information described under
"Description of the Notes--Reports to the Noteholders." Each report to the
Indenture 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
Sale and Servicing Agreement. On or before May 1 of each year, beginning in
1999, the Servicer will deliver to the Indenture Trustee a report of a
nationally recognized accounting firm, stating that such firm has examined
certain documents and records relating to the servicing of loans serviced by
the Servicer and stating that, on the basis of such examination, such servicing
has been conducted in compliance with the Sale and Servicing Agreement, except
for any exceptions set forth in such report.
The Sale and Servicing Agreement provides that the Servicer shall furnish to
the Indenture Trustee and the Note Insurer such reasonably pertinent underlying
data as can be generated by the Servicer's existing data processing system
without undue modification or expense.
The Sale and Servicing Agreement provides that a Noteholder holding Notes
representing at least 5% of the Aggregate Principal Balance will have the same
rights of inspection as the Indenture Trustee and may upon written request to
the Servicer receive copies of all reports provided to the Indenture Trustee.
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Certain Matters Relating to the Company
The Sale and Servicing Agreement provides that the Company may not resign
from its obligations and duties as Servicer thereunder, except upon a
determination that the Company's performance of such duties is no longer
permissible under the Agreement or applicable law, and prohibits the Company
from extending credit to any Noteholder for the purchase of a Note, purchasing
Notes in any agency or trustee capacity or lending money to the Trust. The
Company can be removed as Servicer only pursuant to an Event of Termination as
discussed below.
Repurchase Option
Green Tree, the Servicer and the Note Insurer each will be permitted, at its
option, to purchase from the Trust, on any Distribution Date immediately
following any Monthly Period as of the last day of which the Pool Scheduled
Principal Balance is equal to or less than 10% of the Cut-off Date Pool
Principal Balance, all remaining Contracts and the other remaining Trust
Property at a price equal to the unpaid principal amount of the Notes and
Certificates, plus accrued and unpaid interest thereon, provided that all
amounts owed to the Note Insurer are paid in full.
Administrator
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
Registration of the Notes
The Notes initially will be represented by certificates registered in the
name of Cede & Co., the nominee of The Depository Trust Company ("DTC"). The
interests of beneficial owners of the Notes will be represented by book entries
on the records of the participating members of DTC. Definitive Notes will be
available only under the limited circumstances described herein. Holders of the
Notes may hold through DTC (in the United States), CEDEL or Euroclear (as
defined herein) (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of
the CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic book-
entry changes in accounts of Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants").
The beneficial owners of Notes ("Note Owners") who are not Participants but
desire to purchase, sell or otherwise transfer ownership of the Notes may do so
only through Participants (unless and until Definitive Notes, as defined below,
are issued). In addition, Note Owners will receive all distributions of
principal of, and
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interest on, the Notes from the Indenture Trustee through DTC and Participants.
Note Owners will not receive or be entitled to receive certificates
representing their respective interests in the Notes, except under the limited
circumstances described below.
Unless and until Definitive Notes (as defined below) are issued, it is
anticipated that the only "Noteholder" of the Notes will be Cede & Co., as
nominee of DTC. Note Owners will not be recognized by the Indenture Trustee as
Noteholders as that term is used in the Agreement. Note Owners are only
permitted to exercise the rights of Noteholders indirectly through Participants
and DTC.
While Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Notes and is
required to receive and transmit distributions of principal of, and interest
on, the Notes. Participants with whom Note Owners have accounts with respect to
Notes are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Note Owners.
Accordingly, although Note Owners will not possess certificates, the Rules
provide a mechanism by which Note Owners will receive distributions and will be
able to transfer their interests.
Notes will be issued in registered form to Note Owners, or their nominees,
rather than to DTC (such Notes being referred to herein as "Definitive Notes"),
only if (i) DTC or the Company advise the Indenture Trustee in writing that DTC
is no longer willing or able to discharge properly its responsibilities as
nominee and depository with respect to the Notes and the Company or the
Indenture Trustee is unable to locate a qualified successor or (ii) the Company
at its sole option advises the Indenture Trustee in writing that it elects to
terminate the book-entry system through DTC. Upon issuance of Definitive Notes
to Note Owners, such Notes will be transferable directly (and not exclusively
on a book-entry basis) and registered holders will deal directly with the
Indenture Trustee with respect to transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Notes are
issued, DTC will take any action permitted to be taken by a Noteholder under
the Sale and Servicing Agreement only at the direction of one or more
Participants to whose DTC accounts the Notes are credited. DTC has advised the
Company that DTC will take such action with respect to any fractional interest
of the Notes only at the direction of and on behalf of such Participants
beneficially owning a corresponding fractional interest of the Notes. DTC may
take actions, at the direction of the Participants, with respect to some Notes
which conflict with actions taken with respect to other Notes.
Issuance of Notes in book-entry form rather than as physical certificates
may adversely affect the liquidity of the Notes in the secondary market and the
ability of Note Owners to pledge them. In addition, since distributions on the
Notes will be made by the Indenture 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 Note Owners, Note Owners may experience delays in the receipt of such
distributions.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
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Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the Underwriters. Indirect access to CEDEL is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
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Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See
"Certain Federal Income Tax Consequences" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures" in Annex I to this
Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
THE NOTE INSURER
The information set forth in this section has been provided by Financial
Security Assurance Inc. ("Financial Security" or the "Note Insurer"). No
representation is made by the Company, the Underwriters or any of their
affiliates as to the accuracy or completeness of such information or any
information related to the Note Insurer incorporated by reference herein.
General
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities--thereby enhancing the credit rating of those securities--
in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in
the primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings,
Inc., MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co.,
Ltd. and EXEL Limited. No shareholder of Holdings is obligated to pay any debt
of Financial Security or any claim under any insurance policy issued by
Financial Security or to make any additional contribution to the capital of
Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, Financial
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Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various treaties and on
a transaction-by-transaction basis. Such reinsurance is utilized by Financial
Security as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit Financial Security's
obligations under any financial guaranty insurance policy.
Ratings
Financial Security's insurance financial strength is rated "Aaa" by Moody's;
Financial Security's insurer financial strength is rated "AAA" by S&P and
Standard & Poor's (Australia) Pty. Ltd.; and Financial Security's claims paying
ability is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment
Information, Inc. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
"Summary of the Terms of the Notes--Ratings" herein.
Capitalization
The following table sets forth the capitalization of Financial Security and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1998, as well as such capitalization as adjusted
to give effect to certain transactions entered into during November 1998:
<TABLE>
<CAPTION>
September 30, 1998
----------------------
(Unaudited)
(In Thousands)
As
Actual Adjusted(1)
---------- -----------
<S> <C> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)................. $ 480,089 $ 480,089
---------- ----------
Surplus Notes.......................................... 50,000 130,000
---------- ----------
Minority Interests..................................... -- 20,000
---------- ----------
Shareholder's Equity:
Common Stock......................................... 15,000 15,000
Additional Paid-In Capital........................... 614,787 684,787
Accumulated Other Comprehensive Income
(net of deferred income taxes)...................... 41,923 41,923
Accumulated Earnings................................. 326,145 326,145
Total Shareholder's Equity............................. 997,855 1,067,855
---------- ----------
Total Deferred Premium Revenue, Surplus Notes, Minority
Interests and Shareholder's Equity.................... $1,527,944 $1,697,944
========== ==========
</TABLE>
- --------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings of
$80 million of surplus notes from the Note Insurer in connection with the
formation of a new indirect Bermuda subsidiary of the Note Insurer, initially
capitalized with $100 million, including a $20 million minority interest owned
by EXEL Limited, and (b) contribution by Holdings to the capital of the Note
Insurer of approximately $70 million, representing a portion of the proceeds
from the sale by Holdings of $100 million of 6.950% Senior Quarterly Income
Debt Securities due 2098.
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security Assurance Inc. and Subsidiaries, and
the notes thereto, incorporated by reference herein. Financial Security's
financial statements are included as exhibits to the Annual Reports on Form 10-
K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange
Commission by Holdings and may be reviewed at the EDGAR website maintained by
the Securities and Exchange Commission and at Holding's
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website, http://www.FSA.com. Copies of the statutory quarterly and annual
statements filed with the State of New York Insurance Department by Financial
Security are available upon request to the State of New York Insurance
Department. Copies of the statutory quarterly and annual statements filed with
the State of New York Insurance Department by Financial Security are available
upon request to the State of New York Insurance Department.
Incorporation of Certain Information by Reference
The financial statements of Financial Security and subsidiaries included in,
or as exhibits to, the following documents, which have been filed with the
Securities and Exchange Commission by Holdings, are hereby incorporated by
reference in the Registration Statement (as defined in the accompanying
Prospectus) of which this Prospectus Supplement and the Prospectus form a part:
(a) Annual Report on Form 10-K for the year ended December 31, 1997; and
(b) Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
All financial statements of Financial Security and subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Notes
shall be deemed to be incorporated by reference into this Prospectus Supplement
and to be a part hereof from the respective dates of the filing of such
documents.
Green Tree will provide without charge to any person to whom this Prospectus
Supplement is delivered, upon oral or written request of such person, a copy of
any or all of the foregoing financial statements incorporated by reference.
Requests for such copies should be directed to the Secretary, Green Tree
Financial Corporation, 1100 Landmark Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102.
The Company on behalf of the Trust will undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Trust's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act and each filing of the financial statements of Financial Security
included in or as an exhibit to the annual report of Holdings filed pursuant to
section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement (as defined in the accompanying
Prospectus) shall be deemed to be a new registration statement relating to the
Notes offered hereby, and the offering of such Notes at that time shall be
deemed to be the initial bona fide offering thereof.
Insurance Regulation
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the
size of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and insurance of liability for
borrowings.
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THE NOTE INSURANCE POLICY
Note Insurance Policy
The following summary of the terms of the Note Insurance Policy does not
purport to be complete and is qualified in its entirety by reference to the
Note Insurance Policy. A form of the Note Insurance Policy may be obtained,
upon request, from Green Tree.
Simultaneously with the issuance of the Notes, the Note Insurer will deliver
the Note Insurance Policy to the Indenture Trustee for the benefit of the Class
A Noteholders. Under the Note Insurance Policy, the Note Insurer will
irrevocably and unconditionally guarantee payment on each Payment Date to the
Indenture Trustee for the benefit of the Class A Noteholders of the Insured
Payments for such Payment Date calculated in accordance with the original terms
of the Class A Notes when issued and without regard to any amendment or
modification of the Class A Notes, the Indenture or the Sale and Servicing
Agreement, except amendments or modifications to which the Note Insurer has
given its prior written consent. An Insured Payment for a Payment Date, if any,
will equal the amount by which the sum of (a) the current interest payable on
the Class A Notes and (b) the Class A Principal Deficiency Amount (the amount
by which the principal balance of the Class A Notes exceeds the scheduled
principal balance of the Contracts) and (c) on the maturity date, the amount by
which the unpaid principal balance of the Class A Notes exceeds the cash
available to pay such amount on that Payment Date (without regard to any
Insured Payment to be made with respect to such Payment Date). Insured Payments
do not cover Realized Losses; provided, however, that the Note Insurer is
permitted at its sole option, but not required, to pay any losses in connection
with the liquidation of a Contract in accordance with the Note Insurance
Policy. Insured Payments do not cover deficiencies resulting from relief to
debtors under the federal Soldiers' and Sailors' Civil Relief Act of 1940.
Nevertheless, the effect of the Note Insurance Policy is to guaranty the timely
payments of interest on, and the ultimate payment of the principal amount of,
the Class A Notes.
Payment of claims under the Note Insurance Policy will be made by the Note
Insurer following Receipt by the Note Insurer of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (b) 12:00
noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Note Insurer pursuant to the
Note Insurance Policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Note Insurer will pay
such amount out of the funds of the Note Insurer on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth Business Day following Receipt by the Note Insurer from
the Indenture Trustee of (A) a certified copy of the order of the court or
other governmental body that exercised jurisdiction to the effect that a
Noteholder is required to return principal or interest distributed with respect
to a Note during the term of the Note Insurance Policy because such
distributions were avoidable preferences under applicable bankruptcy law (the
"Order"), (B) a certificate of the Class A Noteholders(s) that the Order has
been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by the Class A Noteholder(s) in such form as is
reasonably required by the Note Insurer and provided to the Class A
Noteholder(s) by the Note Insurer, irrevocably assigning to the Note Insurer
all rights and claims of the Class A Noteholder(s) relating to or arising under
the Class A Notes against the debtor that made such preference payment or
otherwise with respect to such preference payment, and (ii) the date of Receipt
by the Note Insurer from the Indenture Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Note Insurer shall have Received written notice from the
Indenture Trustee that such items were to be delivered on such date and such
date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Indenture Trustee or any Class A Noteholder directly
(unless a Class A Noteholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be
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disbursed to the Indenture Trustee for distribution to such Noteholder upon
proof of such payment reasonably satisfactory to the Note Insurer).
The terms "Receipt" and "Received," with respect to the Note Insurance
Policy, mean actual delivery to the Note Insurer and to its fiscal agent
appointed by the Note Insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Note Insurance Policy by the Indenture Trustee is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been Received, and the Note Insurer or the fiscal agent shall promptly so
advise the Indenture Trustee and the Indenture Trustee may submit an amended
notice.
Under the Note Insurance Policy, "Business Day" means any day other than (i)
a Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York or the State of New York are authorized or obligated by law or
executive order to be closed. The Note Insurer's obligations under the Note
Insurance Policy to make Insured Payments shall be discharged to the extent
funds are transferred to the Indenture Trustee as provided in the Note
Insurance Policy, whether or not such funds are properly applied by the
Indenture Trustee.
The Note Insurer shall be subrogated to the rights of each Class A
Noteholder to receive payments of principal and interest, as applicable, with
respect to distribution on the Class A Notes to the extent of any payment by
the Note Insurer under the Note Insurance Policy. To the extent the Note
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Indenture Trustee), to the Class A Noteholders, the Note Insurer
will be subrogated to the rights of the Class A Noteholders, as applicable,
with respect to such Insured Payment and shall be deemed to the extent of the
payment so made to be a registered Class A Noteholder for purposes of payment.
Claims under the Note Insurance Policy will rank equally with any other
unsecured debt and unsubordinated obligations of the Note Insurer except for
certain obligations in respect of tax and other payments to which preference is
or may become afforded by statute. Claims against the Note Insurer under the
Note Insurance Policy constitute pari passu claims against the general assets
of the Note Insurer. The terms of the Note Insurance Policy cannot be modified
or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Company. The Note Insurance Policy may not
be canceled or revoked prior to payment in full of the Notes. The Note
Insurance Policy is governed by the laws of the State of New York. The Note
Insurance Policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Note Insurer agrees
under the Note Insurance Policy not to assert, and waives, for the benefit of
each Class A Noteholder, all of its rights (whether by counterclaim, setoff or
otherwise) and defense (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Note Insurer to avoid payment
of its obligations under the Note Insurance Policy in accordance with the
express provisions of the Note Insurance Policy.
Pursuant to the terms of the Sale and Servicing Agreement and the Indenture,
unless a Note Insurer Default exists, the Note Insurer will be deemed to be a
Class A Noteholder for all purposes (other than with respect to payment on the
Class A Notes), will be entitled to exercise all rights of the Class A
Noteholders thereunder, without the consent of such Noteholders, and the Class
A Noteholders may exercise such rights only with the prior written consent of
the Note Insurer. In addition, the Note Insurer will have, as a third party
beneficiary to the Sale and Servicing Agreement, among others, the following
rights: (i) the right to give notices of breach or to terminate the rights and
obligations of the Servicer under the Sale and Servicing Agreement in the event
of a Servicer Termination Event (as defined in the Sale and Servicing
Agreement) and to institute proceedings against the Servicer; (ii) the right to
consent to or direct any waivers of defaults by the
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Servicer; (iii) the right to remove the Indenture Trustee pursuant to the
Indenture; (iv) the right to direct the actions of the Indenture Trustee during
the continuation of a Servicer default; (v) the right to require the Company to
repurchase Contracts for breach of representation and warranty or defect in
documentation; (vi) the right to direct all matters relating to a bankruptcy or
other insolvency proceeding involving the Company; and (vii) the right to
direct the Indenture Trustee to investigate certain matters. The Note Insurer's
consent will be required prior to, among other things, (i) the removal of the
Indenture Trustee, (ii) the appointment of any successor Indenture Trustee or
Servicer or (iii) any amendment to the Sale and Servicing Agreement.
The Company, the Issuer and the Note Insurer will enter into an Insurance
and Indemnity Agreement (the "Insurance Agreement") pursuant to which the
Company will agree to reimburse, with interest, the Note Insurer for amounts
paid pursuant to claims under the Note Insurance Policy. The Company will
further agree to pay the Note Insurer all reasonable charges and expenses that
the Note Insurer may pay or incur relative to any amounts paid under the Note
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Note Insurer against certain liabilities. Except to the extent
provided therein, amounts owing under the Insurance Agreement will be payable
solely from the Trust Estate. An "event of default" by the Company under the
Insurance Agreement will constitute a Servicer Termination Event under the Sale
and Servicing Agreement and allow the Note Insurer, among other things, to
direct the Indenture Trustee to terminate the Company or the Servicer. See
"Administration, Removal and Resignation of the Servicer" herein. An "event of
default" under the Insurance Agreement includes (i) the Company's or the
Issuer's failure to pay when due any amount owed under the Insurance Agreement
or certain other documents, (ii) the inaccuracy or incompleteness in any
material respect of any representation or warranty of the Company or the Issuer
in the Insurance Agreement, the Sale and Servicing Agreement or certain other
documents, (iii) the Company's or the Issuer's failure to perform or to comply
with any covenant or agreement in the Insurance Agreement, the Sale and
Servicing Agreement and certain other documents, (iv) a finding or ruling by a
governmental authority or agency that the Insurance Agreement, the Sale and
Servicing Agreement or certain other documents are not binding on the Company
or the Issuer, (v) the Company's failure to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy with respect to the
Company or the Issuer and (vi) the occurrence of certain "performance test
violations" designed to measure the performance of the Contracts.
DESCRIPTION OF THE LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2 Notes
and liquidation losses and delinquencies on the Contracts, the Company will
provide a guaranty (the "Class B-2 Limited Guaranty") against losses that would
otherwise be borne by the Class B-2 Notes. Each payment required to be made
under the Class B-2 Limited Guaranty is referred to as a "Class B-2 Guaranty
Payment." Prior to the Class B-1 Cross-over Date, and on any Payment Date on or
after the Class B-1 Cross-over Date on which a Class B Principal Distribution
Test is not satisfied, the Class B-2 Guaranty Payment will equal the amount, if
any, by which (i) the sum of (a) the Class B-2 Formula Distribution Amount for
such Payment Date (which will be equal to accrued and unpaid interest on the
Class B-2 Notes) and (b) the Class B-2 Liquidation Loss Principal Amount, if
any, for such Payment Date exceeds (ii) the Class B-2 Distribution Amount for
such Payment Date. The Class B-2 Liquidation Loss Principal Amount for any
Payment Date equals the amount, if any, by which the sum of the Class A
Principal Balance, the Class M Principal Balance and the Class B Principal
Balance for such Payment Date exceeds the Pool Scheduled Principal Balance for
such Payment Date (but in no event greater than the Class B-2 Principal
Balance). The Class B-2 Liquidation Loss Principal Amount is, in substance, the
amount of delinquencies and losses experienced on the Contracts during the
related Due Period that was not absorbed by the Certificate and the related
Monthly Servicing Fee otherwise payable to the Company (so long as the Company
or any wholly owned subsidiary of the Company is the Servicer) with respect to
the Contracts. On each Payment Date on or after the Class B-1 Cross-over Date,
if each Class B Principal Distribution Test is satisfied on such Payment Date
(or the Class A Principal Balance and the Class M Principal Balance have been
reduced to zero), the Class B-2 Guaranty Payment will equal the amount, if any,
by which (a) the sum of (i) the Class B-2 Formula Distribution Amount for such
Payment Date (which will
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include both interest and principal) and (ii) the Class B-2 Liquidation Loss
Principal Amount, if any, for such Payment Date exceeds (b) the Class B-2
Distribution Amount for such Payment Date.
The Class B-2 Limited Guaranty will be an unsecured general obligation of
the Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in any
way, or result in any payment to, the Class A, Class M or Class B-1
Noteholders.
CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income
tax consequences relating to the purchase, ownership and disposition of the
Notes. The discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder, and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. For additional information
regarding federal and state income tax consequences, see "Certain Federal
Income Tax Consequences" and "Certain State Income Tax Consequences" in the
Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes. Prospective investors should note that no rulings
have been or will be sought from the Internal Revenue Service (the "IRS") with
respect to any of the federal income tax consequences discussed herein or in
the accompanying Prospectus, and no assurance can be given that the IRS will
not take contrary positions. Moreover, there are no cases or IRS rulings on
transactions similar to those described herein with respect to the Trust,
involving both debt and equity interests issued by a trust with terms similar
to those of the Notes and the Certificates. Prospective investors are urged to
consult their own tax advisors in determining the federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of the Notes.
In the opinion of [Company Counsel], for Federal and Minnesota income tax
purposes, the Notes will be characterized as debt and the Trust will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation.
The Class A-1 and Class A-2 Notes will not be issued with original issue
discount ("OID"). Depending upon the price at which a substantial portion of a
Class of Notes is sold, the Class M-1, Class M-2 and Class B-1 Notes may be
issued with OID.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be 100% of the Prepayment Assumption. No
representation is made that the Contracts will prepay at that rate or any other
rate.
The Notes will not be treated as assets described in Section 7701(a)(19)(C)
of the Code and "real estate assets" under Section 856(c)(4)(A) of the Code. In
addition, interest on the Notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Notes also will not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in
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certain transactions with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined
under the Plan Assets Regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Green Tree believes that, as of the date of this
prospectus supplement, the Notes should be treated as indebtedness without
substantial equity features for purposes of the Plan Assets Regulation.
However, without regard to whether the Notes are treated as an Equity Interest
for such purposes, the acquisition or holding of Notes by or on behalf of a
Benefit Plan could be considered to give rise to a prohibited transaction if
the Trust, the Owner Trustee or the Indenture Trustee, the owner of collateral,
the Underwriters, or any of their respective affiliates is or becomes a party
in interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of asset invested and the
position of the plan fiduciary making the decision to acquire a Note. Included
among these exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-
1, regarding investments by insurance company pooled separate accounts; PTCE
91-38, regarding investments by bank collective investment funds; PTCE 84-14,
regarding transactions effected by "qualified professional asset managers"; and
PTCE 96-23, regarding transactions effected by "in-house asset managers."
In addition, if the Notes were treated as an Equity Interest in the future,
the assets of the Trust could be treated as plan assets of a Benefit Plan for
the purposes of ERISA and the Code. In view of the investor-specific nature of
the conditions on the exemptive relief available under ERISA and the Code, each
investor should determine whether it is investing plan assets in the Notes and,
if it is, should determine that appropriate exemptive relief from ERISA's
prohibited transaction provisions is available. By acquiring Notes, each
purchaser will be deemed to represent that either (1) it is not acquiring the
Note with the assets of a Benefit Plan; or (2) the acquisition and holding of
the Note will not give rise to a nonexempt prohibited transaction under Section
406(a) of ERISA or Section 4975 of the Code.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ending December 31, 1997, incorporated by
reference in this Prospectus Supplement have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
S-57
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Notes set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Class Class
Underwriter A-1 Notes A-2 Notes
----------- ---------- ----------
<S> <C> <C>
[Underwriters]......................................... $ $
---------- ----------
Totals............................................... $ $
========== ==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Class A-1 and
Class A-2 Notes offered hereby if any such Notes are purchased. In the event of
a default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Notes to the public at the respective offering prices set forth on
the cover page of this Prospectus Supplement and to certain dealers at such
price less a concession not in excess of the respective amounts set forth in
the table below (expressed as a percentage of the relative Principal Balance).
The Underwriters may allow and such dealers may reallow a discount not in
excess of the respective amounts set forth in the table below to certain other
dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
----- ---------- -----------
<S> <C> <C>
A-1................................. % %
A-2................................. % %
</TABLE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A-1 and Class A-2 Notes. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Until the distribution of the Class A-1 and Class A-2 Notes is completed,
rules of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Class A-1 and Class A-2
Notes. As an exception to these rules, the Underwriters are permitted to engage
in certain transactions that stabilize the price of the Notes. Such
transactions consist of bids or purchases for the purposes of pegging, fixing
or maintaining the price of the Class A-1 and Class A-2 Notes.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Class Class A-1 and Class A-2
Notes to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Class A-1 and Class A-2 Notes in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Class A-1 and Class A-2
Notes to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements)
S-58
<PAGE>
(Exemptions) Order 1995 (as amended) or is a person to whom such document may
otherwise lawfully be issued or passed on.
Subject to the terms and conditions set forth in an Underwriting Agreement
relating to the Class M and Class B-1 Notes, the Underwriters have agreed to
offer the Class M and Class B-1 Notes on a best effort basis and the Company
has agreed to sell the Class M and Class B-1 Notes if and when sold by the
Underwriters.
Each Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract or home equity loan pass-through certificates without the
consent of the Underwriters.
Each of the Underwriters (or affiliates thereof) has from time to time
provided or may in the future provide warehouse and other financing to the
Company or its affiliates.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Notes will be passed
upon for the Company and the Trust by [Company Counsel], Minnesota, and for the
Underwriters by Thacher Proffitt & Wood, New York, New York. The material
federal income tax consequences of the Notes will be passed upon for the
Company by [Company Counsel].
S-59
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Certificates will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Certificates
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as appropriate,
to deliver the Certificates to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Certificates from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred
in New York). Should the CEDEL Participant or Euroclear Participant have a line
of credit with its clearing system and elect to be in debit in anticipation of
receipts of the sale proceeds in its account, the bank-valuation will
extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade fails),
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that
A-2
<PAGE>
purchase Global Certificates from DTC Participants for delivery to CEDEL
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global
Certificates sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Certificates holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
A-3
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a foreign trust within the
meaning of Section 7701 (1)(31) of the Code. To the extent prescribed in
regulations by the Secretary of the Treasury, which regulations have not yet
been issued, a trust which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under Subpart E of Part 1 of Subchapter J
of Chapter 1 of the Code), and which was treated as a United States person on
August 19, 1996, may elect to continue to be treated as a United States person
notwithstanding the previous sentence. This summary does not deal with all
aspects of U.S. federal income tax withholding that may be relevant to foreign
holders of the Global Certificates. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Certificates.
A-4
<PAGE>
PROSPECTUS Base Prospectus No. 5
Unsecured Home Improvement Loans
and High-LTV Home Equity Loans--Owner Trust
Green Tree Financial Corporation, Seller and Servicer
Home Improvement and Home Equity Loan Trusts
(Issuable In Series)
We are offering loan-backed notes and loan-backed certificates for home
improvement and home equity loans under this prospectus and a prospectus
supplement. The prospectus supplement will be prepared separately for each
series of securities offered. We refer to the notes and the certificates as
"securities" and to each separate series of securities as a "series." Green
Tree Financial Corporation will form a trust for each series, and the trust
will issue the securities of that series. The securities 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 securities within a series to receive payments may
be senior or subordinate to the rights of one or more of the other classes of
securities. In addition, a series of securities may include one or more classes
which on the one hand are subordinated to one or more classes of securities,
while on the other hand are senior to one or more classes of securities. The
rate of principal and interest payment on the securities of any class will
depend on the priority of payment of that class and the rate and timing of
payments of the related home equity loans.
----------------
The securities 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 securities unless
accompanied by the prospectus supplement relating to that series.
Prospectus dated , 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the securities in two separate documents that progressively
provide more detail: (a) this prospectus, which provides general information,
some of which many not apply to a particular series of securities, including
your series; and (b) the prospectus supplement related to the particular terms
of your series of securities.
If the terms of your series of securities described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
Some persons participating in this offering may engage in transactions that
stabilize, maintain or in some way affect the price of the securities. These
types of transactions may include stabilizing, the purchase of securities 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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the securities of each series certain
monthly and annual reports concerning the securities and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the securities--Reports to
Securityholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), after the date of this prospectus and prior to
the termination of the offering of the securities issued by that trust, will be
incorporated by reference into this prospectus.
2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the securities, 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 and the accompanying prospectus supplement.
Issuer....................... For each series of securities, Green Tree will
form a trust pursuant to a trust agreement. Each
trust will be the Issuer for a series of
securities.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the securities. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of securities. Payments on the securities
will be made primarily from payments on the
related pool of loans. The terms of the
securities issued by a trust will be governed by
a Pooling and Servicing Agreement between Green
Tree and the trustee for that series. We will
identify the trustee for a series of securities
in the related prospectus supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
securities. You should read carefully the
section entitled "Risk Factors" beginning on
page of this prospectus.
Trustee...................... The owner trustee for a trust. We will specify
the owner trustee in the related prospectus
supplement. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee............ We will specify the Indenture trustee, with
respect to any series of securities, in the
related prospectus supplement.
The Loans.................... The loans underlying a series of securities form
a loan pool. The loans in a loan pool will be
fixed or variable rate loans. The loans consist
of
- home improvement loans that will be either
conventional loans or loans insured by the
Federal Housing Administration ("FHA"), and
- closed-end home equity loans.
3
<PAGE>
The home improvement loans will not be secured
by any lien on the related real estate. The home
equity loans may have a loan-to-value ratio
substantially in excess of 100%. If we so
specify in the related prospectus supplement, we
may divide the loan pool into two or more sub-
pools, in which the securities of specified
classes may be paid primarily from the loans
comprising a given sub-pool.
The prospectus supplement for each series will
provide information about the following:
- the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
- the weighted average and range of
contractual rates of interest on the loans;
- the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
- the percentage of loans that are home
improvement loans and home equity loans;
- the average outstanding principal balance
of the loans as of the cut-off date;
- the percentage of the loans that are FHA
insured;
- the range of loan-to-value ratios; and
- the geographic location of improved real
estate underlying the loans.
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
The Notes.................... Each series of securities will include one or
more classes of notes. The notes will be issued
pursuant to an indenture.
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
notes in denominations of $1,000 and in integral
multiples thereof. These notes will be available
in book-entry form only. Unless we specify
otherwise in the related prospectus supplement,
beneficial owners of notes will receive
definitive notes only in the limited
circumstances described in this prospectus or in
the related prospectus supplement. See "Certain
Information Regarding the securities--Book-Entry
Registration."
4
<PAGE>
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the notes
or the underlying loans.
Unless we specify otherwise in the related
prospectus supplement, each class of notes will
have a stated principal amount and will accrue
interest at a specified rate or rates. Each
class of notes may have a different interest
rate, which may be a fixed, variable or
adjustable interest rate or any combination of
these. We will specify in the related prospectus
supplement the interest rate for each class of
notes and the method for determining subsequent
changes to the interest rate.
We may include two or more classes of notes in a
series which may differ as to timing and
priority of payment, seniority, allocations of
loss, interest rate or amount of payment of
principal or interest, or as to which payments
of principal or interest may or may not be made
upon the occurrence of specified events or on
the basis of collections from designated
portions of the underlying pool. In addition, a
series may include one or more classes of notes
entitled to:
- principal payments with disproportionate,
nominal or no interest payments, or
- interest payments with disproportionate,
nominal or no principal payments.
The notes of a series may include one or more
classes which on the one hand are subordinated
to one or more classes of notes, while on the
other hand are senior to one or more classes of
notes.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
notes, if any, of such series as described in
the related prospectus supplement. In addition,
if the related prospectus supplement provides
that the property of a trust will include a pre-
funding account, we will partially redeem the
outstanding notes, if any, on or immediately
following the end of the pre-funding period in
an amount and manner specified in the related
prospectus supplement. In the event that we so
partially redeem, the owners of the notes may be
entitled to receive a prepayment premium from
the trust, in the amount and to the extent
provided in the related prospectus supplement.
The Certificates............. We will issue the certificates of any series of
securities pursuant to the related trust
documents. If we so specify in the related
prospectus supplement, we may include the
certificates of a series of one or more classes
which:
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- are entitled to receive distributions only
in respect of the principal, interest or
any combination of these or in specified
proportions in respect of such payments,
and/or
- are entitled to receive distributions in
respect of principal before or after
specified principal distributions have been
made on one or more other classes of
certificates within that series, or on a
planned amortization schedule or upon the
occurrence of certain other specified
events. See "The Certificates."
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
certificates in denominations of $1,000 and in
integral multiples thereof. These certificates
will be available in book-entry form only.
Unless we specify otherwise in the related
prospectus supplement, beneficial owners of
certificates will receive definitive
certificates only in the limited circumstances
described in this prospectus or in the related
prospectus supplement. See "Certain Information
Regarding the Securities--Book-Entry
Registration."
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the
certificates or the underlying loans.
Unless we specify otherwise in the related
prospectus supplement, each class of
certificates will have a stated certificate
balance and will accrue interest at a specified
rate or rates. Each class of certificates may
have a different pass-through rate, which may be
a fixed, variable or adjustable pass-through
rate, or any combination of these. We will
specify in the related prospectus supplement the
pass-through rate for each class of
certificates, or the initial pass-through rate
and the method for determining subsequent
changes to the pass-through rate.
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.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
certificates, if any, of such series as
described in the related prospectus supplement.
In addition, if the related prospectus
supplement provides that the property of a trust
will include a pre-funding account, we will
partially redeem the outstanding certificates,
if any, on or immediately following the end of
the pre-funding period in an amount and manner
specified in the related prospectus supplement.
In the event that we so partially redeem, the
owners of the certificates may be entitled to
receive a
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prepayment premium from the trust, in the amount
and to the extent provided in the related
prospectus supplement.
Subordinated Securities...... We may subordinate one or more classes of any
series of securities, as specified in the
related prospectus supplement. The rights of
holders of subordinated securities to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior securities to the extent
and in the manner we specify in the related
prospectus supplement. If a series of securities
contains more than one class of subordinated
securities, distributions and losses will be
allocated among those classes in the manner
specified in the related prospectus supplement.
The rights of holders of subordinated
securities, to the extent not subordinated, may
be on a parity with holders of senior
securities. By subordinating a class of
securities, we intend to:
^ enhance the likelihood of regular receipt
by holders of senior securities of the full
amount of scheduled monthly payments of
principal and interest due them, and
^ protect holders of senior securities
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated securities the benefits of other forms
of credit enhancement that would benefit only
those subordinated securities.
Trust Property............... Each note will represent an obligation of its
related trust. Each certificate will represent a
fractional undivided interest in its related
trust. The assets of each trust will include
(among other things):
^ a pool of fixed or variable rate home
improvement loans or promissory notes and
closed-end home equity loans,
^ amounts held in the collection account,
^ proceeds from FHA insurance,
^ 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
securities,
^ certain other rights under the trust
documents, and
^ any other property that we specify in the
related prospectus supplement.
In addition, if we so specify in the related
prospectus supplement, the trust property will
include money on deposit in a pre-funding
account established by the Indenture trustee or
the trustee, which we will use to purchase
subsequent loans from the Seller during the pre-
funding period. See "The Trusts."
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If and to the extent we specify in the related
prospectus supplement, the related trust will be
obligated to purchase from us additional loans
during the pre-funding period. These loans will
have a total principal balance approximately
equal to the amount on deposit in the pre-
funding account on the closing date.
We must repurchase loans if we breach certain
representations and warranties that we make. See
"Description of the trust Documents--Sale and
Assignment of the Contracts" and "Certain Legal
Aspects of the Contracts--Repurchase
Obligations."
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated securities, we may provide credit
enhancement with respect to a series of
securities by pool insurance, letters of credit,
surety bonds, a guarantee of Green Tree, cash
reserve funds or other forms of enhancement
acceptable to each nationally recognized rating
agency rating a series of securities. We will
describe any such credit enhancement in the
related prospectus supplement.
Servicing ................... The servicer will manage, administer, service
and make collections on the loans held by each
trust. Unless we specify otherwise in the
related prospectus supplement, we will pay the
servicer a monthly fee on each distribution date
pursuant to a servicing fee formula. See
"Description of the trust Documents--Servicing."
Advances..................... Unless we specify otherwise in the related
prospectus supplement, the servicer must make
advances each month of any scheduled payments on
the loans that were due but not received during
the prior due period. The servicer will then
receive a reimbursement of an advance from the
amount available for the related trust. The
servicer must make an advance only to the extent
it determines that the advance will be
recoverable from subsequent funds available in
the collection account for the related trust.
Collection Account........... The servicer will establish and maintain one or
more separate accounts for each series of
securities in the name of the Indenture trustee
for the benefit of the owners of the securities.
We refer to this account as a "collection
account." We will deposit all of the payments we
receive from obligors under the loans in the
related collection account no later than one
business day after we receive them. Unless we
specify otherwise in the related prospectus
supplement, we will also deposit all of the
payments we receive from obligors with respect
to liquidated loans no later than one business
day after we receive them. Unless we specify
otherwise in the related prospectus supplement,
the servicer may use any alternative remittance
schedule acceptable to the rating agencies. See
"Description of the trust Documents--
Collections."
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Optional Purchase of Loans... Unless we specify otherwise in the related
prospectus supplement, we may purchase all of
the loans held by a trust on any distribution
date following the first due period when the
total principal balance has declined to 10% or
less of the total principal balance as of the
cut-off date, subject to certain provisions in
the related trust documents. For a more complete
description of optional purchase of the loans,
see "Description of the trust Documents--
Termination" in this prospectus.
Representations and
Warranties of Green Tree
Financial Corporation .......
We will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to our conveyance of any loan pool to a trust.
If we become aware of a breach of any
representation or warranty that materially
adversely affects the trust's interest in any
loan or receive written notice of a breach from
the trustee or the servicer, then we must either
cure the breach, repurchase the affected loan
or, if the related prospectus supplement so
provides, substitute for the affected loan,
under the conditions further described in this
prospectus and in the prospectus supplement. For
a more complete description of our
representations and warranties, see "Description
of the Certificates--Conveyance of Loans."
Federal Income Tax In the opinion of our counsel, for federal and
Considerations.............. Minnesota income tax purposes, the notes will be
characterized as debt and the trust will not be
characterized as an association or a publicly
traded partnership taxable as a corporation.
Each noteholder, by the acceptance of a note,
will agree to treat the notes as debt. Each
certificateholder, by the acceptance of a
certificate, will agree to treat the trust as a
partnership in which the certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the trust, the
notes and the certificates are possible, but
would not result in materially adverse tax
consequences to noteholders or
certificateholders. See "Certain Federal Income
Tax Consequences" and "Certain State Income Tax
Consequences" in this prospectus.
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in the prospectus
supplement.
Legal Investment............. The certificates will not constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984,
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as amended. For a more complete description of
legal considerations regarding investment in the
certificates, see "Legal Investment
Considerations" in this prospectus and in the
prospectus supplement.
Ratings...................... We will not issue the securities unless one or
more nationally recognized rating agencies have
assigned a rating to the securities in one of
their four highest rating categories.
We cannot assure you that the rating initially
assigned to your securities will not be
subsequently lowered or withdrawn by the rating
agency. If a rating agency lowers the rating
initially assigned to any securities, no person
or entity will provide any credit enhancement.
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the securities.
^ Limits on the Availability of FHA Insurance. We will specify in the
prospectus supplement the number and percentage of home improvement
loans in the pool that are insured by FHA pursuant to Title I of the
National Housing Act. 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 we cannot assure you that FHA's
enforcement of its regulations will not become stricter in the future.
We sometimes 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 on the loans in a given pool is limited to
the balance of a reserve amount. This reserve amount as of December 31,
199 , was equal to approximately $ , 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 contracts, 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 FHA-insured home improvement
contracts. 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."
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the certificates will not represent an interest
in or obligation of Green Tree. Neither the government, any underwriter
or its affiliates, the servicer nor any other party will insure or
guarantee any of the securities of any series (except as we otherwise
specify in the related prospectus supplement).
^ Junior Mortgage Liens; Value of Mortgaged Property. Green Tree expects
that a substantial number of the liens on improved real estate securing
the loans in a given loan pool will be junior to other liens on that
real estate. This subordinates the rights of the trust fund (and
consequently the holders of securities of the related series), as
beneficiary under a conventional junior deed of trust or as mortgagee
under a conventional junior mortgage, to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to cause the
property securing the loan to be sold upon default of the mortgagor or
trustor. This extinguishes the junior mortgagee's or junior
beneficiary's lien unless the servicer on behalf of the trust fund
asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior loan or loans.
For a more complete description of the risks associated with junior
mortgage liens, see "Certain Legal Aspects of the Loans--Repurchase
Obligations."
We expect a substantial portion of the loans included in a 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 and of the loan an 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
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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.
^ Unsecured Home Improvement Loans. The obligations of an obligor under
each home improvement loan will not be secured by an interest in the
related real estate. The related trust, as the owner of the home
improvement loan, will be a general unsecured creditor as to those
obligations. Consequently, if an obligor defaults on its home
improvement loan, the related trust will have recourse only against the
obligor's assets generally, along with all other general unsecured
creditors of the obligor. In a bankruptcy or insolvency proceeding
relating to an obligor of a home improvement loan, the obligations of
an obligor under that home improvement loan may be discharged in their
entirety. An obligor on a home improvement loan may not demonstrate
concern over performance of its obligations under the home improvement
loan as in the case where such obligations are secured by the real
estate owned by the obligor.
^ Risks to Investors upon any Insolvency of Green Tree. We intend that
any transfer of loans to the related trust will constitute a sale,
rather than a pledge of the loans to secure our indebtedness. However,
if we were to become a debtor under the federal bankruptcy code or
similar applicable state laws, our creditor or trustee in bankruptcy
might argue that such sale of loans by us was a pledge of the loans
rather than a sale. If this argument were accepted by a court, it would
cause the related trust to experience a delay in or reduction of
collections on the loans.
^ Value of Mortgaged Property. We expect a substantial portion of the
home equity loans included in a 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 deed of trust and of the loans on the one
hand, and the value of the home on the other. See "Green Tree Financial
Corporation--Contract Origination." An overall decline in the
residential real estate market, the general condition of a property
securing a loan or other factors could adversely affect the value of
the property securing a conventional home improvement loan or a home
equity loan such that the remaining balance on the loan, together with
that of any senior liens on the related property, could equal or exceed
the value of the property.
^ Limited Liquidity. We cannot assure to you that a secondary market will
develop for the securities 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 securities.
^ Non-recordation of Mortgage Assignments. Green Tree 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 creditors of or purchasers from Green Tree or
a trustee in bankruptcy of Green Tree.
^ Subordination of Certain Classes of securities; Limited Assets. To the
extent we specify in the related prospectus supplement, we may
subordinate distributions of interest and principal on some or all
classes of securities of a series in priority or payment to interest
and principal due on the notes of such series and/or to distributions
of interest and principal on other classes of securities. In addition,
holders of certain classes of securities of any series may have the
right to take actions that are detrimental to the interests of the
holders of certain other classes of securities. For example, holders of
a class of more senior securities may be entitled to instruct the
trustee to liquidate the property of the trust when it is not in the
interest of holders of more junior classes of securities of that series
to do so. On the other hand, certain actions may require the consent of
a majority of Security owners of all classes of a series, which may
mean that owners of securities of more junior classes can prevent the
owners of more senior classes of that series from taking action.
Moreover, no trust will have any significant assets or sources of funds
other than the loans and, to the extent provided in the related
prospectus supplement, a pre-funding account and any credit enhancement
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specified in the related prospectus supplement. The notes of any series
will represent obligations solely of the related trust. The
certificates, if any, will represent interest solely in the related
trust. Except as we specify in the related prospectus supplement,
neither Green Tree, the servicer, the Owner trustee, the Indenture
trustee nor any other person or entity will insure or guarantee the
notes or certificates of any series. Consequently, holders of the
securities of any series must rely for payment upon payments on the
related loans and, to the extent available, amounts on deposit in a
pre-funding account and any credit enhancement (if any) as we specify
in the related prospectus supplement. If we so specify in the related
prospectus supplement, credit enhancement for a class of securities of
a series may cover one or more other classes of securities of that
series, and accordingly may be exhausted for the benefit of some
classes and thereafter be unavailable for other classes.
^ Yield and Prepayment Considerations. Full or partial prepayments on the
loans will reduce the weighted average life of the securities. Obligors
may prepay their loans without penalty. Prepayments may result from
payments by Obligors, liquidations due to default, the receipt of
proceeds from physical damage or credit insurance, repurchases by us as
a result of certain uncured breaches of the warranties, purchases by
the servicer as a result of certain uncured breaches of the covenants
with respect to the loans made by it in the related Sale and Servicing
Agreement, or us or the servicer exercising our option to purchase all
of the remaining loans.
Unless we specify otherwise in the related prospectus supplement, the
amounts paid to Securityholders in respect of principal on any
distribution date will include all prepayments on the loans during the
corresponding due periods. The owners of notes and the owners of
certificates will bear all reinvestment risk resulting from the timing
of payments of principal on the securities.
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the securities.
THE TRUSTS
With respect to each series of securities, Green Tree will establish a trust
pursuant to the related trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related trust Documents, the trust will
have no assets or obligations. The trust will not engage in any business
activity other than acquiring and holding the trust Property, issuing the Notes
and the certificates, if any, of such series and distributing payments thereon.
Each Note will represent an obligation of, and each Certificate, if any, will
represent a fractional undivided interest in, the related trust. The trust
Property of each trust will include, among other things, (i) a Contract Pool,
(ii) such amounts as from time to time may be held in the Collection Account
(including all investments in the Collection Account and all income from the
investment of funds therein and all proceeds thereof) and certain other
accounts (including the proceeds thereof), (iii) proceeds from FHA Insurance
(with respect to any FHA-insured Home Improvement Contract included in the
Contract Pool), (iv) any letter of credit, guarantee, surety bond, insurance
policy, cash reserve fund or other credit enhancement securing payment of all
or part of a series of securities, (v) certain other rights under the trust
Documents and (vi) such other property as may be specified in the related
prospectus Supplement. See "The Contracts" and "Description of the trust
Documents--Collections." The trust Property will also include, if so specified
in the related prospectus Supplement, monies on deposit in a Pre-Funding
Account to be established with the Indenture trustee or the
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Trustee, which will be used to purchase Subsequent Contracts from Green Tree
from time to time (and as frequently as daily) during the Pre-Funding Period
specified in the related Prospectus Supplement. Any Subsequent Contracts so
purchased will be included in the related Contract Pool forming part of the
Trust Property, subject to the prior rights of the related Indenture Trustee
and the Noteholders therein. In addition, to the extent specified in the
related Prospectus Supplement, a form of credit enhancement may be issued to or
held by the Trustee or the Indenture Trustee for the benefit of holders of one
or more Classes of Securities. Holders of Securities of a Series will have
interests only in such Contract Pool and will have no interest in the Contract
Pool created with respect to any other Series of Securities, except with
respect to FHA Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course of
its business. Specific information respecting the Contracts included in each
Trust will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Securities. A copy of the Sale and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Sale and Servicing Agreement delivered to the
Trustee upon delivery of the Securities.
Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale and
Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used, those
terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
The Contract Pools
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of (i) home improvement contracts and promissory
notes (the "Home Improvement Contracts"), and (ii) closed-end home equity loans
(the "Home Equity Contracts" and, together with the Home Improvement Contracts,
the "Contracts"), originated by Green Tree on an individual basis in the
ordinary course of business. The Home Improvement Contracts may be conventional
home improvement contracts or contracts insured by FHA. The Home Improvement
Contracts will not be secured by any lien on the related real estate, and the
Home Equity Loans may have a loan-to-value ratio substantially in excess of
100%. Except as otherwise specified in the related Prospectus Supplement, the
Contracts will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate (the "Contract Rate").
For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; the range of original
maturities of the Contracts and the last maturity date of any Contract; and the
geographic location of improved real estate securing the Contracts. If the
Trust includes a Pre-Funding Account, the related Prospectus Supplement will
specify the conditions that
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must be satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
The Trustee
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the Securities of such Series will be limited solely to the express obligations
of such Trustee set forth in the related Trust Documents. A Trustee may resign
at any time, in which event the General Partner will be obligated to appoint a
successor trustee. The General Partner may also remove the Trustee if the
Trustee ceases to be eligible to continue as Trustee under the related Trust
Documents or if the Trustee becomes insolvent. In such circumstances, the
General Partner will be obligated to appoint a successor trustee. Any
resignation or removal of a Trustee and appointment of a successor trustee will
be subject to any conditions or approvals specified in the related Prospectus
Supplement and will not become effective until acceptance of the appointment by
the successor trustee.
GREEN TREE FINANCIAL CORPORATION
General
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales contracts
for home improvements, a variety of consumer products and equipment finance,
and home equity loans. Green Tree is the largest servicer of government-insured
manufactured housing contracts and conventional manufactured housing contracts
in the United States. Servicing functions are performed through Green Tree
Financial Servicing Corporation, a wholly owned subsidiary of Green Tree.
Through its principal offices in St. Paul, Minnesota, and service centers
throughout the United States, Green Tree serves all 50 states. Green Tree began
financing FHA-insured home improvement loans in April 1989 and conventional
home improvement loans in September 1992. Green Tree also purchases, pools and
services installment sales contracts for various consumer products. Its
principal executive offices are located at 1100 Landmark Towers, St. Paul,
Minnesota 55102-1639 (telephone (651) 293-3400). Green Tree's Annual Report on
Form 10-K for the year ended December 31, 1997, most recent Proxy Statement
and, when available, subsequent quarterly and annual reports are available from
Green Tree upon written request.
Contract Origination
Home Improvement Contracts. Through its centralized loan processing
operations in St. Paul, Minnesota, Green Tree arranges to purchase certain
contracts from home improvement contractors located throughout the United
States. Green Tree's regional sales managers contact home improvement
contractors and explain Green Tree's available financing plans, terms,
prevailing rates and credit and financing policies. If the contractor wishes to
utilize Green Tree's available customer financing, the contractor must make an
application for contractor approval. Green Tree has a contractor approval
process pursuant to which the financial condition, business experience and
qualifications of the contractor are reviewed prior to his or her approval to
sell
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contracts to Green Tree. In addition, Green Tree has a centralized compliance
group which reviews and updates contractor financial condition and reviews
contractors on an annual basis to determine whether such contractor's approval
will be continued. Green Tree also reviews monthly contractor trend reports
which show the default and delinquency trends of the particular contractor with
respect to contracts sold to Green Tree. Green Tree occasionally will originate
directly a home improvement promissory note involving a home improvement
transaction.
All contracts that Green Tree originates are written on forms provided or
approved by Green Tree and are purchased on an individually approved basis in
accordance with Green Tree's guidelines. The contractor submits the customer's
credit application and construction contract to Green Tree's office where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by Green Tree in June 1993. If Green
Tree determines that the application meets Green Tree's underwriting guidelines
and applicable FHA regulations (for FHA-insured contracts) and the credit is
approved, Green Tree purchases the contract from the contractor when the
customer verifies satisfactory completion of the work, or, in the case of
staged funding, Green Tree follows up with the customer for the completion
certificate 90 days after funding.
The types of home improvements financed by Green Tree include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. Green Tree
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 unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement contracts
eligible for FHA Insurance are described under the caption "Description of FHA
Insurance."
Green Tree began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The unsecured
conventional program allows for an amount financed from $2,500 to $15,000
(except in Massachusetts where the loan limit may be $20,000). The allowable
term of unsecured contracts is 24 to 120 months. Green Tree's underwriting
standards with respect to unsecured home improvement contracts are, in general,
more stringent than its underwriting standards with respect to secured home
improvement contracts with similar terms. Eligible property includes an owner-
occupied single family home, up to four unit multiple-family dwelling, owner-
occupied condominium or town house, or an owner-occupied manufactured home
located in a Green Tree-approved park or attached to the real estate.
Home Equity Contracts. Green Tree has originated closed-end home equity loans
since January 1996. As of December 31, 1997, Green Tree had approximately
$3,116,054,406 aggregate principal amount of outstanding closed-end home equity
loans.
Through a system of regional offices, Green Tree markets its home equity
lending directly to consumers using a variety of marketing techniques. Green
Tree also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
Green Tree's credit approval process analyzes both the equity position of the
requested loan (including both the priority of the lien and the combined loan-
to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity position,
the creditworthiness of the borrower must be stronger (or may be weaker). The
loan-to-value ratio of the requested loan, combined with any existing loans
with a senior lien position, may not exceed 95% without senior management
approval. In most circumstances, an appraisal of the property is required.
Currently, loans secured by a first mortgage with an obligor having a superior
credit rating may not exceed $300,000 without senior management approval,
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and loans secured by a second mortgage with an obligor having a superior credit
rating may not exceed $250,000 without senior management approval.
Loss and Delinquency Information
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home improvement
contracts and home equity loans. However, there can be no assurance that such
experience will be indicative of the performance of the Contracts included in a
particular Contract Pool.
Ratio of Earnings to Fixed Charges for Green Tree
Set forth below are Green Tree's ratios of earnings to fixed charges for the
past five years. 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>
Year Ended December 31,
------------------------
Months
Ended
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.......... 4.81 7.98 7.90 5.44 3.94
</TABLE>
YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract Rate
of the Contracts (as of the related Cut-off Date) relating to each Series of
Securities will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Securities that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Securities that is offered at a premium to its principal amount or without any
principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 25 years.
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Prepayment Considerations
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. Green Tree has no
significant experience with respect to the rate of principal prepayments on
home improvement contracts and home equity loans. Because the Contracts have
scheduled due dates throughout the calendar month, and because (unless
otherwise specified in the related Prospectus Supplement) all principal
prepayments will be passed through to Securityholders of the related Series on
the Payment Date following the Due Period in which such principal prepayment
occurred, prepayments on the Contracts would affect the amount of funds
available to make distributions on the Securities on any Payment Date only if a
substantial portion of the Contracts prepaid prior to their respective due
dates in a particular month (thus paying less than 30 days' interest for that
Due Period) while very few Contracts prepaid after their respective due dates
in that month. In addition, liquidations of defaulted Contracts or the
Servicer's or Green Tree's exercise of its option to repurchase the entire
remaining pool of Contracts (see "Description of the Trust Documents--
Termination") will affect the timing of principal distributions on the
Securities of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Securities, there can be no assurance that the Contracts will prepay
at such rate, and it is unlikely that prepayments or liquidations of the
Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions of
principal on such Distribution Date) as a fraction of the initial outstanding
principal balance of such Class of Notes. Each Certificate Pool Factor and each
Note Pool Factor will initially be 1.00000000; thereafter, the Certificate Pool
Factor and the Note Pool Factor will decline to reflect reductions in the
Certificate Balance of the applicable Class of Certificates or reductions in
the outstanding principal balance of the applicable Class of Notes, as the case
may be. The amount of a Certificateholder's pro rata share of the Certificate
Balance for the related Class of Certificates can be determined by multiplying
the original denomination of the Certificateholder's Certificate by the then
applicable Certificate Pool Factor. The amount of a Noteholder's pro rata share
of the aggregate outstanding principal balance of the applicable Class of Notes
can be determined by multiplying the original denomination of such Noteholder's
Note by the then applicable Note Pool Factor.
With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such
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reports will be sent on behalf of the Trust to the Trustee and the Indenture
Trustee and Cede & Co., as registered holder of the Certificates and the Notes
and the nominee of DTC. Certificate Owners and Note Owners may receive such
reports, upon written request, together with a certification that they are
Certificate Owners or Note Owners and payment of any expenses associated with
the distribution of such reports, from the Trustee and the Indenture Trustee at
the addresses specified in the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Statements to Securityholders."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of Securities
will be used to pay to Green Tree the purchase price for the Contracts and to
make the deposit of the Pre-Funded Amount into the Pre-Funding Account, if any,
to repay warehouse lenders and/or to provide for other forms of credit
enhancement specified in the related Prospectus Supplement. The net proceeds to
be received by Green Tree will be used for its general corporate purposes,
including the origination or acquisition of additional home improvement loan
contracts and home equity loans, costs of carrying such contracts until sale of
the related certificates and to pay other expenses connected with pooling the
Contracts and issuing the Securities.
THE NOTES
General
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. Unless otherwise specified in the related Prospectus Supplement, no Notes
will be issued as a part of any Series. The following summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Notes and the Indenture, and the following
summary will be supplemented in whole or in part by the related Prospectus
Supplement. Where particular provisions of or terms used in the Indenture are
referred to, the actual provisions (including definition of terms) are
incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the related
Prospectus Supplement, Notes will be available for purchase in denominations of
$1,000 and integral multiples thereof. Notes may be transferred or exchanged
without the payment of any service charge other than any tax or governmental
charge payable in connection with such transfer or exchange. Unless otherwise
provided in the related Prospectus Supplement, the Indenture Trustee will
initially be designated as the registrar for the Notes.
Principal and Interest on the Notes
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payment, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each Class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate (and which may be zero for certain Classes of Stripped Notes), or
any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes, or the
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initial Interest Rate and the method for determining the Interest Rate. One or
more Classes of Notes of a Series may be redeemable under the circumstances
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have the
same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Payment Date"), in which case each Class of Noteholders will receive their
ratable share (based upon the aggregate amount of interest due to such Class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all of the Notes of such
Class.
The Indenture
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of the applicable Indenture (without exhibits) upon request to a holder of
Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and
related Indenture Trustee (on behalf of such Trust) may, without consent of the
related Noteholders, enter into one or more supplemental indentures for any of
the following purposes: (i) to correct or amplify the description of the
collateral or add additional collateral; (ii) to provide for the assumption of
the Note and the Indenture obligations by a permitted successor to the Trust;
(iii) to add additional covenants for the benefit of the related Noteholders;
(iv) to convey, transfer, assign, mortgage or pledge any property to or with
the Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify, eliminate or add to the provisions of the
Indenture in order to comply with the Trust Indenture Act of 1939, as amended;
and (viii) to add any provisions to, change in any manner, or eliminate any of
the provisions of, the Indenture or modify in any manner the rights of
Noteholders under such Indenture; provided that any action specified in this
clause (viii) shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any related Noteholder unless
Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the principal
balance of the outstanding related Notes (a "Note Majority"), the Owner Trustee
and the Indenture Trustee may execute a supplemental indenture to add
provisions, to change in any manner or eliminate any provisions of, the related
Indenture, or modify in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price
with respect thereto or change the manner of calculating any such payment, any
place of payment where, or the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with
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certain provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the related
Trust, any other obligor on the Notes, Green Tree or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the holders of which is required to direct the Indenture
Trustee to sell or liquidate the Contracts if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount of the Notes
necessary to amend the Indenture or certain other related agreements; or (vii)
permit the creation of any lien ranking prior to or on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each
Trust, unless otherwise specified in the related Prospectus Supplement, "Events
of Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any such
default or the failure to cure such breach of a representation or warranty for
a period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of at least
25% in principal amount of the Notes then outstanding; or (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Trust. However,
the amount of principal due and payable on any Class of Notes on any Payment
Date (prior to the final scheduled payment date, if any, for such Class) will
generally be determined by amounts available to be deposited in the Note
Distribution Account for such Payment Date. Therefore, unless otherwise
specified in the related Prospectus Supplement, the failure to pay principal on
a Class of Notes generally will not result in the occurrence of an Event of
Default unless such Class of Notes has a final scheduled payment date, and then
not until such final scheduled payment date for such Class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration may,
under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the Notes
of any Series have been declared due and payable following an Event of Default
with respect thereto, the related Indenture Trustee may institute proceedings
to collect amounts due or foreclose on Trust Property, exercise remedies as a
secured party, sell the related Contracts or elect to have the Trust maintain
possession of such Contracts and continue to apply collections on such
Contracts as if there had been no declaration of acceleration. Unless otherwise
specified in the related Prospectus Supplement, the Indenture Trustee, however,
will be prohibited from selling the related Contracts following an Event of
Default, unless (i) the holders of all the outstanding related Notes consent to
such sale; (ii) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding Notes at the date of
such sale; or (iii) the Indenture Trustee determines that the proceeds of the
Contracts would not be sufficient on an ongoing basis to make all payments on
the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate outstanding amount of the Notes. Unless
otherwise specified in the related Prospectus Supplement, following a
declaration upon an Event of Default that the Notes are immediately due and
payable, (i) Note Owners will be entitled to ratable repayment of principal on
the basis of their respective unpaid principal balances and (ii) repayment in
full of
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the accrued interest on and unpaid principal balances of the Notes will be made
prior to any further payment of interest or principal on the Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with respect
to a Series of Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of such Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority in a Series will have the right to
direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and a Note Majority may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all of the
holders of such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee,
(iii) such holder or holders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding, and (v) no direction inconsistent with such written request has
been given to the Indenture Trustee during such 60-day period by the holders of
a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice of
the Event of Default within 90 days after it occurs. Except in the case of a
failure to pay principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by accepting
the related Notes, will covenant that they will not at any time institute
against the Seller or the related Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity, nor
any holder of a Certificate including, without limitation, Green Tree, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the related
Notes or for any agreement or covenant of the related Trust contained in the
Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted by
the Indenture, the Trust Documents or certain related documents for such Trust
(collectively, the "Related Documents"), sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the related
Notes (other than amounts withheld under the
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Code or applicable state law) or assert any claim against any present or former
holder of such Notes because of the payment of taxes levied or assessed upon
the Trust, (iii) dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the related Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to the
related Notes under such Indenture except as may be expressly permitted
thereby, or (v) except as expressly permitted by the Related Documents, permit
any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or proceeds
thereof.
No Trust may engage in any activity other than as specified under the section
of the related Prospectus Supplement entitled "The Trust." No Trust will incur,
assume or guarantee any indebtedness other than indebtedness incurred pursuant
to the related Notes and the related Indenture or otherwise in accordance with
the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required
to mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Indenture
Trustee at the address specified in the related Prospectus Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor trustee. Green Tree
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, Green Tree will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus Supplement
and will not become effective until acceptance of the appointment by a
successor trustee.
THE CERTIFICATES
General
A Series of Securities may include one or more Classes of Certificates issued
pursuant to Trust Documents to be entered into between Green Tree, as Seller
and as Servicer, and the Trustee, forms of which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the material provisions of the Trust
Documents. Where particular provisions of or terms used in the Trust
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Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of this summary.
If the Certificates of a Series are issued in more than one Class, the
Certificates of all or less than all of such Classes may be sold pursuant to
this Prospectus, and there may be separate Prospectus Supplements relating to
one or more of such Classes so sold. Any reference herein to the Prospectus
Supplement relating to a Series comprised of more than one Class should be
understood as a reference to each of the Prospectus Supplements relating to the
Classes sold hereunder. Any reference herein to the Certificates of a Class
should be understood to refer to the Certificates of a Class within a Series or
all of the Certificates of a single-Class Series, as the context may require.
For convenience of description, any reference in this Prospectus to a "Class"
of Certificates includes a reference to any subclasses of such Class.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
Distributions of Interest and Principal
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in the
related Prospectus Supplement, will be made prior to distributions with respect
to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated Certificates),
the allocation of losses among the Classes of Subordinated Certificates, the
period or periods of such subordination, the minimum subordinated amount, if
any, and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the preferential
right of such Certificateholders to receive current distributions from the
Contract Pool. If a Series of Certificates contains more than one Class of
Subordinated Certificates, losses will be allocated among such Classes in the
manner described in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates which (i) are entitled to receive distributions only in
respect of principal ("Principal Only Certificates"), interest
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("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the Pass-Through Rate for each
Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of the
Certificates will be subordinate to payments in respect of the Notes, if any,
as more fully described in the related Prospectus Supplement. Distributions in
respect of principal of any Class of Certificates will be made on a pro rata
basis among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall be
as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and
may include certain other organizations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that the
only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners
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and Note Owners will be permitted to exercise the rights of Certificateholders
or Noteholders, as the case may be, only indirectly through Participants and
DTC.
With respect to any Series of Securities, while the Securities are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although Certificate Owners
and Note Owners will not possess Securities, the Rules provide a mechanism by
which Certificate Owners and Note Owners will receive distributions and will be
able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their nominees,
rather than to DTC (such Certificates and Notes being referred to herein as
"Definitive Certificates" and "Definitive Notes," respectively), only if (i)
DTC, Green Tree or the Servicer advises the Trustee or the Indenture Trustee,
as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and Green Tree, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) Green Tree or the Administrator (if any) at its sole option has
advised the Trustee or the Indenture Trustee, as the case may be, in writing
that it elects to terminate the book-entry system through DTC and (iii) after
the occurrence of a Servicer Termination Event, the holders representing a
majority of the Certificate Balance (a "Certificate Majority") or a Note
Majority advises the Trustee or the Indenture Trustee, as the case may be,
through DTC, that continuation of a book-entry system is no longer in their
best interests. Upon issuance of Definitive Certificates or Definitive Notes to
Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which conflict
with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as physical
certificates or notes may adversely affect the liquidity of Certificates or
Notes in the secondary market and the ability of the Certificate Owners or Note
Owners to pledge them. In addition, since distributions on the Certificates and
the Notes will be made by the Trustee or the Indenture 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 or Note Owners, Certificate Owners and Note
Owners may experience delays in the receipt of such distributions.
Statements to Securityholders
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders on
such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related
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Servicer's Certificate setting forth certain information required under the
Trust Documents (the "Servicer's Certificate"). Unless otherwise specified in
the related Prospectus Supplement, each such statement to be delivered to
Certificateholders will include the following information as to the
Certificates with respect to such Distribution Date or the period since the
previous Distribution Date, as applicable, and each such statement to be
delivered to Noteholders will include the following information as to the Notes
with respect to such Distribution Date or the period since the previous
Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) Green Tree's FHA Insurance reserve amount;
(ix) the number and aggregate principal balance of Contracts
delinquent (i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(x) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(xi) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xii) such other information as may be specified in the related
Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued, such
reports with respect to a Series of Securities will be sent on behalf of the
related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate Owners
or Note Owners, as the case may be, and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Trustee or
the Indenture Trustee, as applicable. See "Reports to Securityholders" and "--
Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the end
of each calendar year during the term of a Trust, the Trustee and the Indenture
Trustee, as applicable, will mail to each holder of a Class of Securities who
at any time during such calendar year has been a Securityholder, and received
any payment thereon, a statement containing certain information for the
purposes of such Securityholder's preparation of federal income tax returns.
DTC will convey such information to its Participants, who in turn will convey
such
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information to their related indirect participants in accordance with
arrangements among DTC and such participants. Certificate Owners and Note
Owners may receive such reports upon written request, together with a
certification that they are Certificate Owners or Note Owners and payment of
reproduction and postage expenses associated with the distribution of such
information, from the Trustee, with respect to Certificate Owners, or from the
Indenture Trustee, with respect to Note Owners, at the addresses specified in
the related Prospectus Supplement. See "Certain Federal Income Tax
Consequences."
Lists of Securityholders
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless otherwise specified in the related Prospectus
Supplement, the Trust Documents will not provide for holding any annual or
other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes have
been issued, the Indenture Trustee will, upon written request by three or more
Noteholders or one or more holders of Notes evidencing not less than 25% of the
aggregate principal balance of the related Notes, within five Business Days
after provision to the Indenture Trustee of a statement of the applicants'
desire to communicate with other Noteholders about their rights under the
related Indenture or the Notes and a copy of the communication that the
applicants propose to transmit, afford such Noteholders access during business
hours to the current list of Noteholders for purposes of communicating with
other Noteholders with respect to their rights under the Indenture. Unless
otherwise specified in the related Prospectus Supplement, the Indenture will
not provide for holding any annual or other meetings of Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust and
the Servicer will agree to service such Contracts on behalf of the Trust, and
pursuant to which such Trust will be created and Certificates will be issued.
Forms of the Trust Documents have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of such agreements (without exhibits) upon request to a holder of Securities
described therein. This summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of the
Trust Documents. Where particular provisions or terms used in the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summary.
Sale and Assignment of the Contracts
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes
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to or upon the order of the Seller, and the Trustee will execute and deliver
the related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Securityholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the
Trustee, Green Tree's internal audit department will complete a review of all
of the Contract files confirming the accuracy of the list of Contracts
delivered to the Trustee. Any Contract discovered not to agree with such list
in a manner that is materially adverse to the interests of the Securityholders
will be repurchased or substituted for by Green Tree, or, if the discrepancy
relates to the unpaid principal balance of a Contract, Green Tree may deposit
cash in the separate account maintained at an Eligible Institution in the name
of the Trustee (the "Collection Account") in an amount sufficient to offset
such discrepancy. If the Trust includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and Green Tree's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as a
pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and Servicing
Agreement with respect to each Contract as of the related Closing Date,
including that: (a) as of the Cut-off Date the most recent scheduled payment
was made or was not delinquent more than 59 days; (b) no provision of a
Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal, valid
and binding obligation of the Obligor and is enforceable in accordance with its
terms (except as may be limited by laws affecting creditors rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (e) each FHA-insured Home Improvement Contract was originated in
accordance with applicable FHA regulations and is insured, without set off,
surcharge or defense, by FHA Insurance; (f) each Contract was either
(i) entered into by a home improvement contractor in the ordinary course of
such contractor's business and, immediately upon funding, assigned to Green
Tree or (ii) was originated by a home equity lender in the ordinary course of
such lender's business and assigned to Green Tree or (iii) was originated by
Green Tree directly; (g) no Contract was originated in or is subject to the
laws of any jurisdiction whose laws would make the transfer of the Contract or
an interest therein pursuant to the Sale and Servicing Agreement or the
Securities unlawful; (h) each Contract complies with all requirements of law;
(i) no Contract has been satisfied, subordinated to a lower lien ranking than
its original position (if any) or rescinded; (j) all parties to each Contract
had full legal capacity to execute such Contract; (k) no Contract has been
sold, conveyed and assigned or pledged to any other person and Green Tree has
good and marketable title to each Contract free and clear of any encumbrance,
equity, loan, pledge, charge, claim or security interest, and is the sole owner
and has full right to transfer such
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Contract to the Trustee; (l) as of the Cut-off Date there was no default,
breach, violation or event permitting acceleration under any Contract (except
for payment delinquencies permitted by clause (a) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and Green Tree has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of each Contract; and (p) each Contract was
originated or purchased in accordance with Green Tree's then-current
underwriting guidelines.
The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust and the Securityholders for a breach of a
representation or warranty under the Sale and Servicing Agreement with respect
to the Contracts (but not with respect to any other breach by Green Tree of
its obligations under the Sale and Servicing Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
Collections
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other
accounts to be established with respect to a Trust will be described in the
related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (ii) an account or accounts the deposits in
which are fully
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insured by either the Bank Insurance Fund or the Savings Association Insurance
Fund of the FDIC; (iii) a "segregated trust account" maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the Trustee, which depository institution or trust
company has capital and surplus (or, if such depository institution or trust
company is a subsidiary of a bank holding company system, the capital and
surplus of the bank holding company) of not less than $50,000,000 and the
securities of such depository institution (or, if such depository institution
is a subsidiary of a bank holding company system and such depository
institution's securities are not rated, the securities of the bank holding
company) has a credit rating from each rating agency rating such Series of
Notes and/or Certificates (a "Rating Agency") in one of its generic credit
rating categories which signifies investment grade; or (iv) an account that
will not cause any Rating Agency to downgrade or withdraw its then-current
rating assigned to the Securities, as confirmed in writing by each Rating
Agency. "Eligible Institution" means any depository institution 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 Bank Insurance Fund (currently
administered by the Federal Deposit Insurance Corporation), whose short-term
deposits have been rated in one of the two highest rating categories or such
other rating category as will not adversely affect the ratings assigned to the
Securities of such Series. On the Closing Date specified in the related
Prospectus Supplement, the Servicer will cause to be deposited in the
Collection Account all payments on the Contracts received by the Servicer after
the Cut-off Date and on or prior to the second Business Day preceding the
Closing Date.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Collection Account on a daily basis all proceeds and
collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or Green Tree, as described under "Sale
and Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating Agency
of the rating(s) then assigned to the Securities. Green Tree will also deposit
into the Collection Account on or before the Deposit Date the Purchase Amount
of each Contract to be purchased by it for breach of a representation or
warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the criteria specified in the related Trust Documents ("Eligible
Investments"). Eligible Investments shall mature no later than the Business Day
preceding the applicable Distribution Date for the Due Period to which such
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amounts relate. Investments in Eligible Investments will be made in the name of
the Trustee or the Indenture Trustee, as the case may be, and such investments
will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar fees
or charges) received during a Due Period and Purchase Amounts deposited with
the Trustee prior to a Distribution Date will be applied first to any
outstanding Advances made by the Servicer with respect to such Contract, and
then to interest and principal on the Contract in accordance with the terms of
the Contract.
Servicing
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer will perform diligently all services and duties specified in each
Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts in
those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing Agreement. The duties to be
performed by the Servicer will include collection and remittance of principal
and interest payments, as well as submission of FHA Insurance claims where
applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement and
any FHA Insurance, will follow such collection procedures with respect to the
Contracts as it follows with respect to loans or contracts serviced by it that
are comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment Date,
setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus Supplement.
Each such report to the Trustee will be accompanied by a statement from an
appropriate officer of the Servicer certifying the accuracy of such report and
stating that the Servicer has not defaulted in the performance of its
obligations under the Sale 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 such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing has
been conducted in compliance with the Sale and Servicing Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under a Sale and Servicing Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Servicer's obligations and duties under
such Sale and Servicing Agreement. The Servicer can only be removed as servicer
upon the occurrence of an Event of Termination as discussed below.
The Servicer shall keep in force throughout the term of the Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and such
fidelity bond shall be in such form and amount as is generally customary among
persons which service a portfolio of home improvement contracts having an
aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Aggregate Principal
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Balance for such Payment Date. As long as Green Tree is the Servicer, the
Trustee will pay Green Tree its Monthly Servicing Fee from any monies remaining
after the Securityholders have received all payments of principal and interest
for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Securityholders and providing related data processing and
reporting services for Securityholders and on behalf of the Trustee. Expenses
incurred in connection with servicing of the Contracts and paid by Green Tree
from its Monthly Servicing Fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts (including submission
of FHA Insurance claims, if applicable) or payment of Trustee's fees, and
payment of expenses incurred in connection with distributions and reports to
Securityholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related Prospectus
Supplement) after the giving of written notice; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Trust Documents that materially and adversely
affects the interests of Securityholders, which, in either case, continues
unremedied for 30 days after the giving of written notice of such failure of
breach; (iii) any assignment or delegation by the Servicer of its duties or
rights under the Trust Documents, except as specifically permitted under the
Trust Documents, or any attempt to make such an assignment or delegation; (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer; (v) the Servicer is
no longer an Eligible Servicer (as defined in the Trust Documents) or (vi) if
Green Tree is the Servicer, Green Tree's receiving rights under its master
seller-servicer contract with GNMA are terminated. Notice as used herein shall
mean notice to the Servicer by the Trustee, the Indenture Trustee, if any, or
Green Tree, or to Green Tree, the Servicer, the Indenture Trustee, if any, and
the Trustee by the holders of Securities representing interests aggregating not
less than 25% of the outstanding principal balance of the Securities issued by
such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the Indenture
Trustee or the holders of at least 25% in aggregate principal balance of the
outstanding Securities issued by such Trust, by notice then given in writing to
the Servicer (and to the Trustee and the Indenture Trustee if given by the
Securityholders) may terminate all of the rights and obligations of the
Servicer under the Trust Documents. Immediately upon the giving of such notice,
and, in the case of a successor Servicer other than the Trustee, the acceptance
by such successor Servicer of its appointment, all authority of the Servicer
will pass to the Trustee or other successor Servicer. The Trustee, the
Indenture Trustee and the successor Servicer may set off and deduct any amounts
owed by the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to the
Servicer and will be subject to all the responsibilities, restrictions, duties
and liabilities of the Servicer under the related Trust Documents; provided,
however, that the successor Servicer shall have no liability with
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respect to any obligation which was required to be performed by the prior
Servicer prior to the date that the successor Servicer becomes the Servicer or
any claim of a third party (including a Securityholder) based on any alleged
action or inaction of the prior Servicer.
In addition, the Trustee will notify FHA of Green Tree's termination as
Servicer of the Contracts and will request that the portion of Green Tree's FHA
Insurance reserves allocable to the FHA-insured Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner Green
Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust Documents. In the event that the
Trustee would be obligated to succeed the Servicer but is unwilling or unable
so to act, it may appoint, or petition to a court of competent jurisdiction for
the appointment of, a Servicer. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the Servicer under the Trust Documents without the
consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred in
connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
Distributions
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest (or,
where applicable, of principal or interest only) on each Class of Securities
entitled thereto will be made by the Trustee or the Indenture Trustee, as
applicable, to the Certificateholders and the Noteholders. The timing,
calculation, allocation, order, source, priorities of and requirements for all
distributions to each Class of Certificateholders and all payments to each
Class of Noteholders will be set forth in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except as
otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be deposited
by Green Tree with respect to Contracts to be repurchased due to a breach of a
representation or warranty, minus (iv) any amounts paid by Obligors in the
related Due Period, but to be applied in respect of a regular monthly payment
due in a subsequent Due Period (an "Advance Payment"), minus (v) any amounts
incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if
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Green Tree is no longer the Servicer, to pay the Monthly Servicing Fee to the
successor Servicer, and second, to reimburse the Servicer (including Green
Tree) for any Advances made with respect to a prior Due Period and subsequently
recovered and for any Advances previously made that the Servicer has determined
are Uncollectible Advances.
Enhancement
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, enhancement may be in the form of a financial guaranty
insurance policy, letter of credit, Green Tree guaranty, cash reserve fund,
derivative product, or other form of enhancement, or any combination thereof,
as may be described in the related Prospectus Supplement. If specified in the
applicable Prospectus Supplement, enhancement for a Class of Securities of a
Series may cover one or more other Classes of Securities in such Series, and
accordingly may be exhausted for the benefit of a particular Class and
thereafter be unavailable to such other Classes. Further information regarding
any provider of enhancement, including financial information when material,
will be included in the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
Advances
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances each month of any scheduled payments on the
Contracts included in a Trust that were due but not received during the prior
Due Period. The Servicer will be entitled to reimbursement of an Advance from
the Amount Available in the Collection Account for the related Trust (i) when
the delinquent payment is recovered by the Trust, or (ii) when the Servicer has
determined that such Advance has become an Uncollectible Advance. The Servicer
will be obligated to make an Advance only to the extent that it determines that
such Advance will be recoverable from subsequent funds available therefor in
the Collection Account for the related Trust. The Servicer will be entitled to
recoup its advances on a Contract from subsequent payments by or on behalf of
the Obligor and from liquidation proceeds (including FHA Insurance payments, if
applicable), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by Green Tree
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 Net
Liquidation Proceeds (including FHA Insurance payments, if applicable), if any,
of the Contract (an "Uncollectible Advance"), the Servicer will be entitled to
reimbursement from payments on other Contracts or from other funds available
therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections
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on the Contract or from liquidation proceeds thereof, if any, or (ii) the
Trustee determines that it is not legally able to make such Advance.
Evidence as to Compliance
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and servicing
agreements or sale and servicing agreements similar to the Trust Documents and
stating that, on the basis of such procedures, such servicing has been
conducted in compliance with the applicable Trust Documents, except for any
exceptions set forth in such report. A copy of such statement may be obtained
by any Certificate Owner or Note Owner upon compliance with the requirements
described above. See "Certain Information Regarding the Securities--Statements
to Securityholders" above.
Indemnification and Limits on Liability
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or willful
misfeasance, bad faith or negligence (including errors in judgment) in the
performance of its duties, or by reason of reckless disregard of obligations
and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business of
servicing consumer receivables. The Servicer may also perform other specific
duties through subcontractors; provided, however, that no such delegation of
such duties by the Servicer shall relieve the Servicer of its responsibility
with respect thereto.
Amendment
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of the
Securityholders. The Trust Documents may also be amended by Green Tree, the
Servicer and the Trustee and the Indenture Trustee, and a Certificate Majority
and a Note Majority, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Trust Documents or of
modifying, in any manner, the rights of the Certificateholders or the
Noteholders. No such amendment may (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments on the
related Contracts or distributions that are required to be made on any related
Certificate or Note or the related Pass-Through Rate or Interest Rate or (ii)
reduce the percentage of the Certificate Balance evidenced by Certificates or
of the aggregate principal amount of Notes then outstanding required to consent
to any such amendment, without the consent of the holders of all Certificates
or all Notes, as the case may be, then outstanding.
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Termination
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later of
the final payment or other liquidation of the last Contract subject thereto and
the disposition of all property acquired upon repossession of any Product and
(ii) the payment to the Securityholders of all amounts held by the Servicer or
the Trustee and required to be paid to the Securityholders pursuant to the
Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any Due
Period as of the last day of which the Aggregate Principal Balance is equal to
or less than 10% (or such other percentage as may be specified in the related
Prospectus Supplement) of the Cut-off Date Principal Balance, all remaining
Contracts in the related Trust and the other remaining Trust Property at a
price equal to the aggregate of the Purchase Amounts therefor and the appraised
value of any other remaining Trust Property. The exercise of this right will
effect an early retirement of the related Certificates and Notes.
If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the affairs
of the related Trust, unless within such 90 days the remaining General Partner,
if any, and holders of a majority of the Certificates of such Series agree in
writing to the continuation of the business of the Trust and to the appointment
of a successor to the former General Partner, and the Owner Trustee is able to
obtain an opinion of counsel to the effect that the Trust will not thereafter
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with respect
to each Series of Securities, the Trustee will give written notice of the final
distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
The Trustee
The Trustee or Owner Trustee, as applicable, for each Trust will be specified
in the related Prospectus Supplement. The Trustee, in its individual capacity
or otherwise, and any of its affiliates may hold Certificates or Notes in their
own names or as pledgee. In addition, for the purpose of meeting the legal
requirements of certain jurisdictions, the Trustee, with the consent of the
Servicer, shall have the power to appoint co-trustees or separate trustees of
all or any part of the related Trust. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the related Trust Documents will be conferred or imposed upon the Trustee and
such separate trustee or co-trustee jointly, or, in any jurisdiction where the
Trustee is incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus
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Supplement (or, if no such General Partner is specified, the Servicer) may also
remove the Trustee, if the Trustee ceases to be eligible to serve, becomes
legally unable to act, is adjudged insolvent or is placed in receivership or
similar proceedings. In such circumstances, the General Partner, if any,
specified in the related Prospectus Supplement or, if no such General Partner
is specified, the Servicer will 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.
Duties of the Trustee
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related documents, and
will not be accountable for the use or application by the Servicer of any funds
paid to the Servicer in respect of the Certificates, the Notes or the Contracts
prior to deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any right
under the Trust Documents to institute any proceeding with respect to such
Trust Documents, unless such holder has given the Trustee written notice of
default and unless the holders of Certificates evidencing not less than 25% of
the Certificate Balance or the holders of Notes evidencing not less than 25% of
the aggregate principal balance of the Notes then outstanding, as the case may
be, have made written request to the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 30 days after the receipt of such notice,
request and offer to indemnify has neglected or refused to institute any such
proceedings.
Administrator
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
DESCRIPTION OF FHA INSURANCE
Certain of the Home Improvement Contracts may be FHA-insured, the payments
upon which, subject to the following discussion, are insured by the FHA under
Title I of the National Housing Act.
The insurance available to any Trust 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 Green Tree,
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 Green Tree. Green Tree's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by Green Tree. In the Sale and Servicing Agreement, Green
Tree will agree to pay all FHA Insurance
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premiums required by FHA Regulations. If Green Tree fails to pay any such
premium, the Trustee or the successor Servicer (if any) with respect to each
Series is obligated to pay such premium and is entitled to be reimbursed by
Green Tree and from collections on the related Home Improvement Contracts.
As of December 31, 1997, Green Tree's FHA Insurance reserve amount was equal
to approximately $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement loans,
including the FHA-insured Contracts that may be owned by a Trust Fund. If an
Event of Termination (as defined under "Description of the Trust Documents--
Termination") occurs, each Trustee will notify FHA of Green Tree's termination
as Servicer of the related FHA-insured Contracts and will request that the
portion of Green Tree's FHA Insurance reserves allocable to the FHA-insured
Contracts be transferred to the Trustee or a successor servicer. Although each
Trustee will request such a transfer of reserves, FHA is not obligated to
comply with such a request, and may determine that it is not in FHA's interest
to permit such transfer of reserves. In addition, FHA has not specified how
insurance reserves might be allocated in such event, and there can be no
assurance that any reserve amount, if transferred to the Trustee or a successor
Servicer, would not be substantially less than 10% of the outstanding principal
amount of the FHA-insured Contracts. It is likely that the Trustee or any
successor Servicer would be the lender of record on other FHA Title I loans, so
that any reserves that are so permitted to be transferred would become
commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with "earmarking" (segregating such
reserves so that they will not be commingled with the reserves of the
transferee) if it is in FHA's interest to do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for the
purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary of HUD from time to time publishes a list of ineligible
items and activities which may not be financed with the proceeds of an FHA-
insured home improvement loan.
Following a default on an FHA-insured Home Improvement Contract the Servicer
may, subject to certain conditions, submit a claim to FHA. The availability of
FHA Insurance following a default on an FHA-insured Contract is subject to a
number of conditions, including strict compliance by the Company with FHA
regulations in originating and servicing the Contract. Failure to comply with
FHA regulations may result in a denial of or surcharge on the FHA Insurance
claim. Prior to declaring an FHA-insured Home Improvement Contract in default
and submitting a claim to FHA, the Servicer must take certain steps to attempt
to cure the default, including personal contact with the borrower either by
telephone or in a meeting and providing the borrower with 30 days' written
notice prior to declaration of default. FHA may deny insurance coverage if the
borrower's nonpayment is related to a valid objection to faulty contractor
performance. In such event, the Company will seek to obtain payment by or a
judgment against the borrower, and may resubmit the claim to FHA following such
a judgment. As described under "Green Tree Financial Corporation--Contract
Origination," Green Tree does not purchase a Contract 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 Contract to the United States. In general, the claim payment
will equal 90% of the sum of (i) the unpaid principal amount of the Home
Improvement Contract at the date of default and uncollected interest computed
at the Contract Rate earned to the data of default, (ii) accrued and unpaid
interest on the unpaid amount of the Contract from the date of default to the
date of submission of the claim plus 15 calendar days (but in no event more
than nine months) computed at a rate of 7% per annum, (iii) uncollected court
costs, and (iv) legal fees, not to exceed $500.
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CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders 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 Contracts). The following
discussion contains summaries of certain legal aspects of home improvement
contracts which are general in nature. These legal aspects are in addition to
the requirements of FHA regulations described in "Description of FHA
Insurance" with respect to the FHA-insured Home Improvement Contracts. Because
such legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
Mortgages and Deeds of Trust
The Home Equity Contracts (but not the Home Improvement Contracts) will be
secured by either mortgages, deeds of trust, security deeds or deeds to secure
debt depending upon the prevailing practice in the state in which the
underlying property is located, and may have first, second or third priority.
In some states, a mortgage creates a lien upon the real property encumbered by
the mortgage or deed of trust. In other states, the mortgage conveys legal
title to the property to the mortgagee subject to a condition subsequent,
i.e., the payment of the indebtedness secured thereby. There are two parties
to a mortgage: the mortgagor, who is the borrower, and the mortgagee, who is
the lender. In a mortgage state, the mortgagor delivers to the mortgagee a
note or retail installment contract evidencing the loan and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties: the borrower, or trustor, the lender as beneficiary, and a third-
party grantee called the trustee. Under a deed of trust, the borrower grants
the property, irrevocably until the debt is paid, in trust, generally with a
power of sale, to the trustee to secure repayment of the loan. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by applicable state law, the express provisions of the deed of
trust or mortgage, and, in some cases with respect to deeds of trust, the
directions of the beneficiary. Some states use a security deed or deed to
secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior
to liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms, the
knowledge of the parties to such instrument in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Home Equity Contracts in any Contract Pool are
expected to be second or third mortgages or deeds of trust which are junior to
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the related Trust (and therefore the Securityholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive hazard insurance and condemnation proceeds
and to cause the property securing the Contract to be sold upon default of the
mortgagor or trustor under the senior mortgage or deed of trust, thereby
extinguishing the junior mortgagee's or junior beneficiary's lien unless the
Servicer on behalf of the Trust asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted
senior loan or loans. As discussed more fully below, a junior mortgagee or
beneficiary may satisfy a defaulted senior loan in full, or in some states may
cure such default and bring the senior loan current, in either event usually
adding the amounts expended to the balance due on the junior loan. Although
Green Tree generally does not cure defaults under a senior mortgage or deed of
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trust, it is Green Tree's standard practice to protect its interest by
attending any foreclosure sale and bidding for property only if it is in Green
Tree's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that of Green Tree, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust, in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the underlying
first mortgage or deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first mortgage or deed of trust. Proceeds in
excess of the amount of first mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or deed of trust.
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the senior mortgagee
or beneficiary had actual knowledge of such intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where the mortgagee
or beneficiary is not obligated to advance additional amounts or, in some
states, has actual knowledge of the intervening junior mortgages or deeds of
trust and other liens, the advance will be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances under
the clause rests, in some states, on state statutes giving priority to all
advances made under the loan agreement to a "credit limit" amount stated in
the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or trustor. All sums so expended by a senior
mortgagee or beneficiary generally become part of the indebtedness secured by
the senior mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with
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or delay the taking of action by the senior lender. The bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful. Generally, the action is
initiated by the service of legal pleadings upon all parties having an interest
of record in the real property. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary parties
defendant. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court may issue a judgment
of foreclosure and appoint a referee or other officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, prior to a sale, the
trustee must record a notice of default and send a copy to the borrower trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, prior to such sale, the trustee must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. Certain states require
that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon
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market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss resulting from such
sale may be reduced by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Contracts which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Contract,
and any such taxes or fees imposed may reduce liquidation proceeds with respect
to such property, as well as distributions payable to the Securityholders.
Second or Third Mortgages
The Home Equity Contracts may be secured by second or third mortgages or
deeds of trust, which are junior to first or second mortgages or deeds of trust
held by other lenders. The rights of the Securityholders as the holders of a
junior deed of trust, junior mortgage, or junior security deed are subordinate
in lien and in payment to those of the holder of the senior mortgage, deed of
trust, or security deed including the prior rights of the senior mortgagee or
beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor under the senior mortgage or deed of trust,
to cause a foreclosure on the property. Upon completion of the foreclosure
proceedings by the holder of the senior mortgage or the sale pursuant to the
senior deed of trust, the junior mortgagee's or junior beneficiary's lien will
be extinguished unless the junior lienholder satisfies the defaulted senior
loan or asserts its subordinate interest in a property in foreclosure
proceedings. Such extinguishment will eliminate access to the collateral for
the Contract. See "--Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt or security deed will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage, deed of trust, deed to secure debt
or security deed may have the right to perform the obligation itself.
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Generally, all sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action.
Those having an equity of redemption must generally be made parties and duly
summoned to the foreclosure action in order for their equity of redemption to
be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
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In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a mortgage loan on a debtor's residence by paying arrearages and
reinstate the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's Chapter 13 petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. In the case of a mortgage
loan not secured by the debtor's principal residence, courts with federal
bankruptcy jurisdiction may also reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Consumer Protection Laws with respect to Contracts
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Contracts included in a Contract
Pool may be subject to such provisions. The Home Protection Act applies to
mortgage loans originated on or after the effective date of such regulations.
These laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
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
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reasonable or have found that the repossession and resale by the creditor does
not involve sufficient state action to afford constitutional protection to
consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Contract; however,
the Obligor also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought by the Trust against such Obligor. The
Home Protection Act provides that assignees of certain high-interest, non-
purchase money mortgage loans (which may include some Contracts) are subject to
all claims and defenses that the debtor could assert against the original
creditor, unless the assignee demonstrates that a reasonable person in the
exercise of ordinary due diligence could not have determined that the mortgage
loan was subject to the provisions of the Home Protection Act.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In addition to limitations imposed by FHA regulations with respect
to FHA-insured Home Improvement Contracts, in certain states there are or may
be specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Under the Sale and Servicing Agreement, late
charges (to the extent permitted by law and not waived by Green Tree) will be
retained by Green Tree 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 Green Tree's practice with some of the Home Improvement Contracts to
defer the first payment thereon for up to 90 days, and to charge the home
improvement contractor points to cover the lost interest due to collecting only
30 days' interest on the first payment on these deferred payment contracts.
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"Due-on-Sale" Clauses
All of the Contract documents will contain due-on-sale clauses unless the
Prospectus Supplement indicates otherwise. These clauses permit the Servicer to
accelerate the maturity of the loan on notice, which is usually 30 days, if the
borrower sells, transfers or conveys the property without the prior consent of
the mortgagee. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Contracts) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Contract which contains a "due-on-sale" clause upon
transfer of an interest in the mortgaged property. This ability to accelerate
will not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Garn-
St. Germain Act and the regulations thereunder. As a result, a lesser number of
Contracts which contain "due-on-sale" clauses may extend to full maturity than
earlier experience would indicate with respect to single-family mortgage loans.
The extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Contracts, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Contracts bearing
an interest rate below the current market rate being assumed by a new home
buyer rather than being paid off, which may have an impact upon the average
life of the Contracts and the number of Contracts which may be outstanding
until maturity.
Although Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to certain
conditions, state usury limitations shall not apply to FHA-insured loans and to
first mortgage secured conventional contracts if the contract is defined as a
"federally related mortgage loan," a number of states have adopted legislation
overriding Title V's exemptions, as permitted by Title V. Green Tree will
represent and warrant in each Sale and Servicing Agreement that all Contracts
comply with any applicable usury limitations.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without
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participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. What constitutes
sufficient participation in the management of a property securing a loan or the
business of a borrower to render the exemption unavailable to a lender has been
a matter of interpretation by the courts. CERCLA has been interpreted to impose
liability on a secured party, even absent foreclosure, where the party
participated in the financial management of the borrower's business to a degree
indicating a capacity to influence waste disposal decisions. However, court
interpretations of the secured creditor exemption have been inconsistent. In
addition, when lenders foreclose and thereupon become owners of collateral
property, courts are inconsistent as to whether such ownership renders the
secured creditor exemption unavailable. Other federal and state laws in certain
circumstances may impose liability on a secured party which takes a deed-in-
lieu of foreclosure, purchases a mortgaged property at a foreclosure sale, or
operates a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust and reduce the amounts otherwise distributable to the holders of the
related Series of Securities in certain circumstances if such cleanup costs
were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, Green Tree has not
made and will not make such evaluations prior to the origination of the
Contracts. Neither Green Tree nor any replacement Servicer will be required by
any Sale and Servicing Agreement to undertake any such evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Green Tree does not
make any representations or warranties or assume any liability with respect to
the absence or effect of contaminants on any related real property or any
casualty resulting from the presence or effect of contaminants. However, Green
Tree will not foreclose on related real property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Securityholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Contracts. Any shortfall in interest collections resulting from
the application of the Relief Act or similar legislation, which would not be
recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Securityholders. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected mortgage, deed of trust, deed to secured debt or security deed
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation applies to any Contract which
goes into default, there may be delays in payment on the Securities in
connection therewith. Any other interest shortfalls, deferrals or forgiveness
of payments on the Contracts resulting from similar legislation or regulations
may result in delays in payments or losses to Securityholders.
Repurchase Obligations
Under the Sale and Servicing Agreement, Green Tree will represent and warrant
that each FHA-insured Home Improvement Contract was originated in compliance
with FHA regulations and is covered by FHA Insurance. In the event FHA were to
deny insurance coverage on an FHA-insured Home Improvement Contract due to a
violation of FHA regulations in originating or servicing such Home Improvement
Contracts, such
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violation would constitute a breach of a representation and warranty under the
Sale and Servicing Agreement and would create an obligation of Green Tree to
repurchase such Home Improvement Contract unless the breach is cured. See
"Description of the Trust Documents--Sale and Assignment of the Contracts."
In addition, Green Tree will also represent and warrant under each Sale and
Servicing Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for violation
of any law and such claim materially adversely affects the Trust's interest in
a Contract, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. The discussion does not
deal with federal income tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors are
encouraged to consult their own tax advisors with respect to the federal,
state, local, and any other tax consequences of the purchase, ownership, and
disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address only
those issues specifically identified below as being covered by such opinion;
however, the opinion of Counsel also will state that the additional discussion
set forth below accurately sets forth Counsel's advice with respect to material
tax issues. No ruling on any of the issues discussed below will be sought from
the Service.
Tax Status of the Trust
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for federal
income tax purposes. As a result, in the opinion of Counsel, the Trust itself
will not be subject to federal income tax but, instead, each Certificateholder
will be required to take into account its distributive share of items of income
and deduction (including deductions for distributions of interest to the
Noteholders) of the Trust as though such items had been realized directly by
the Certificateholder. This opinion will be based on the assumption that the
terms of the Trust Agreement and related documents will be complied with, and
on Counsel's conclusion that the nature of the income of the Trust will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations. There are, however, no cases or Service rulings on transactions
involving a trust issuing both debt and equity interests with terms similar to
those of the Notes and the Certificates. As a result, the Service may disagree
with all or a part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Contracts, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates.
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Tax Consequences to Noteholders
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to be
issued with OID. This deemed OID could arise, for example, if interest payments
on the Notes are not deemed to be "qualified stated interest" because the Notes
do not provide for default remedies ordinarily available to holders of debt
instruments or do not contain terms and conditions that make the likelihood of
late payment or nonpayment a remote contingency. Based upon existing authority,
however, the Trust will treat interest payments on the Notes as qualified
stated interest under the OID regulations. If the Notes are issued or are
deemed to be issued with OID, all or a portion of the taxable income to be
recognized with respect to the Notes would be includible in the income of
Noteholders as OID. Any amount treated as OID would not, however, be includible
again when the amount is actually received. If the yield on a class of Notes
were not materially different from its coupon, this treatment would have no
significant effect on Noteholders using the accrual method of accounting.
However, cash method Noteholders may be required to report income with respect
to the Notes in advance of the receipt of cash attributable to such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in income
in advance of the receipt of cash representing that income. Each Noteholder is
encouraged to consult its own tax advisor regarding the impact of the OID rules
if the Notes are issued with OID.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules provide that if a Noteholder purchases the Note
at a market discount (i.e., a discount from its original issue price plus any
accrued original issue discount) that exceeds a de minimis amount specified in
the Code, and thereafter recognizes gain upon a disposition, the lesser of (i)
such gain or (ii) the accrued market discount will be taxed as ordinary
interest income. Market discount also will be recognized and taxable as
ordinary interest income as payments of principal are received on the Notes to
the extent that the amount of such payments does not exceed the accrued market
discount. Generally, the accrued market discount will be the total market
discount on the Note multiplied by a fraction, the numerator of which is the
number of days the Noteholder held the Note and the denominator of which is the
number of days after the date the Noteholder acquired the Note until and
including its maturity date. The Noteholder may elect, however, to determine
accrued market discount under the constant-yield method, which election shall
not be revoked without the consent of the Service.
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Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross income as it accrues and, if such Noteholder makes such an
election, is exempt from this rule. The adjusted basis of a Note subject to
such election will be increased to reflect market discount included in gross
income, thereby reducing any gain or increasing any loss on a sale or taxable
disposition. Any such election to include market discount in gross income as it
accrues shall apply to all debt instruments held by the Noteholder at the
beginning of the first taxable year to which the election applies or thereafter
acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such Note
for such year. Any election to deduct amortizable bond premium shall apply to
all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain or
increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income, and will be short-term, mid-term or
long-term capital gain or loss depending upon whether the Note was held for
more or less than one year or for more than eighteen months. Capital losses
generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold the
Note in connection with a United States trade or business will be treated as
"portfolio interest" and therefore will be exempt from the 30% withholding tax.
Such a Noteholder will be entitled to receive interest payments on the Notes
free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on gain from the disposition of a Note unless the Noteholder
is an individual who is present in the United States for 183 days or more
during the taxable year in which the disposition takes place and certain other
requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding such information as may be required with
respect to interest and original issue discount, if any, with respect to the
Notes.
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Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign person if the
Noteholder fails to provide the Indenture Trustee or the Noteholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Note. Backup withholding,
however, does not apply to payments on a Note made to certain exempt
recipients, such as corporations and tax-exempt organizations, and to certain
foreign persons. Noteholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a partnership could have adverse tax consequences to
certain holders. For example, income to foreign holders generally would be
subject to federal tax and federal tax return filing and withholding
requirements, income to certain tax-exempt entities (including pension funds)
would be "unrelated business taxable income," and individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses.
Tax Consequences to Certificateholders
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income, with the assets of the partnership being the assets held
by the Trust, the partners of the partnership being the Certificateholders and
the General Partner, and the Notes being debt of the partnership. The proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the General Partner, Green Tree and the Servicer, however, is not
certain because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example, because
the Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the Trust. Any such characterization would not
result in materially adverse tax consequences to Certificateholders as compared
to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Contracts (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of the Contracts. The Trust's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of the
Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Contracts that corresponds to any excess
of the principal amount of the Certificates over their initial issue price;
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(iii) Prepayment Premium payable to the Certificateholders for such month; and
(iv) any other amounts of income payable to the Certificateholders for such
month. Although it is not anticipated that the Certificates will be issued at a
price which exceeds their principal amount, such allocations of Trust income to
the Certificateholders will be reduced by any amortization by the Trust of
premium on Contracts that corresponds to any such excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the General Partner. Based on the economic
arrangement of the parties, this approach for allocating Trust income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the Service would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis, and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
All of the taxable income allocated to a Certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including
an individual retirement account) will constitute "unrelated business taxable
income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. In addition, Section 68 of the Code provides
that the amount of itemized deductions (including those provided for in Section
212 of the Code) otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds a threshold amount determined under the
Code ($124,500 in 1998, in the case of a joint return) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. To the extent that a Certificateholder is not
permitted to deduct servicing fees allocable to a Certificate, the taxable
income of the Certificateholder attributable to that Certificate will exceed
the net cash distributions related to such income. Certificateholders may
deduct any loss on disposition of the Contracts to the extent permitted under
the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire the
Contracts at such a premium or at a market discount, the Trust will elect to
offset any such premium against interest income on the Contracts or to include
any such discount in income currently as it accrues over the life of the
Contracts. The Trust will make this premium or market discount calculation on
an aggregate basis but may be required to recompute it on a Contract-by-
Contract basis. As indicated above, a portion of such premium deduction or
market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before the
distribution. A Certificateholder will recognize loss upon termination of the
Trust or termination of the Certificateholder's interest in the Trust if the
Trust only distributes money to the Certificateholder and the amount
distributed is less than the Certificateholder's adjusted basis in the
Certificates. Any such gain or loss generally will be capital gain or loss if
the Certificates
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are held as capital assets and will be long-term gain or loss if the holding
period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in exchange for
interests in the New Partnership. Such interests would be deemed distributed to
the partners of the Old Partnership in liquidation thereof, which would not
constitute a sale or exchange for United States federal income tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of the
Trust. A Certificateholder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Certificateholder's
share of unrecognized accrued market discount on the Contracts would generally
be treated as ordinary income to the Certificateholder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Certificates that exceeds the aggregate cash
distributions with respect thereto, such excess generally will give rise to a
capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing a
Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods before
the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may be
reallocated among the Certificateholders. The General Partner is authorized to
revise the Trust's method of allocation between transferors and transferees to
conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders may be allocated a greater or lesser amount of Trust
income than would be appropriate based on their own purchase price for
Certificates.
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Administrative Matters. Pursuant to the Administration Agreement, the Trustee
will monitor the performance of the following responsibilities of the Trust by
other service providers. The Trust is required to keep or have kept complete
and accurate books of the Trust. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the Trust
will be the calendar year. The Trust will file a partnership information return
(IRS Form 1065) with the Service for each taxable year of the Trust and will
report each Certificateholder's allocable share of items of Trust income and
expense to Certificateholders and the Service on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with certain required information statements relating to identification of
beneficial owners of Certificates and such nominees will be required to forward
such information to such beneficial owners. Generally, Certificateholders must
file tax returns that are consistent with the information return filed by the
Trust or be subject to penalties unless the Certificateholder notifies the
Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust will be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
It is expected that the Trust will withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign Certificateholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust to change its withholding procedures. In determining a
Certificateholder's nonforeign status, the Trust may rely on Form W-8, Form W-9
or the Certificateholder's certification of nonforeign status signed under
penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the Service
and submit that number to the Trust on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Certificateholder generally will be
entitled to file with the Service a claim for refund with respect to taxes
withheld by the Trust, taking the position that no taxes are due because the
Trust is not engaged in a U.S. trade or business. However, the Service may
assert that additional taxes are due, and no assurance can be given as to the
appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
55
<PAGE>
CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based upon
current statutory provisions and the regulations promulgated thereunder, and
applicable judicial or ruling authority, all of which are subject to change
(which may be retroactive). No ruling on any of the issues discussed below will
be sought from the Minnesota Department of Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of the
Notes. Noteholders already subject to income or franchise taxation in Minnesota
could, however, be required to pay such a tax on all or a portion of the income
generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise taxation
in Minnesota could, however, be required to pay such a tax on all or a portion
of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to the plan. ERISA also
imposes certain duties and certain prohibitions on persons who are fiduciaries
of plans subject to ERISA. Under ERISA, generally any person who exercises any
authority or control with respect to the management or disposition of the
assets of a plan is considered to be a fiduciary of such plan. A violation of
these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets of
a Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquired an "equity interest" in
the Trust and none of the exceptions contained in the Plan Assets Regulation
was applicable. An equity interest is defined under the Plan Assets Regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment of Notes and Certificates will be discussed in the related Prospectus
Supplement.
56
<PAGE>
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Securities offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Contracts that are
secured by liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Securities.
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
Securities or to purchase Securities 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 Securities constitute
legal investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities should
be evaluated independently of similar security ratings assigned to other kinds
of securities.
UNDERWRITING
Green Tree may sell Securities of each Series to or through underwriters (the
"Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Securities directly
to other purchasers or through agents. Green Tree intends that Securities 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 Securities may be made through a combination
of such methods.
The distribution of the Securities 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
Securities, Green Tree or any affiliate thereof may purchase some or all of one
or more Classes of Securities of such Series from the Underwriter or
57
<PAGE>
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Securities so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Securities or
through broker-dealers acting as agent and/or principal. Such offering may be
restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they may
act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities of a Series to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green Tree
and any profit on the resale of the Securities by them may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from Green Tree will be described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled to
indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by Green Tree. The obligation of any purchaser under any such contract
will be subject to the condition that the purchaser of the offered Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have responsibility
in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and the
Notes will be passed upon for Green Tree by the counsel for Green Tree
identified in the applicable Prospectus Supplement. The validity of the
58
<PAGE>
Certificates and the Notes will be passed upon for the underwriters named in
the related Prospectus Supplement by the counsel for the underwriters
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
59
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus supplement for definitive +
+information on any matter contained herein. This preliminary prospectus +
+supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement to Base No. 6
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Improvement Loans
Series 1999-
----------
The certificates will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate Pass-Through Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- ------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Each Certificate........ $ % % %
------------ -------------- ---------- --------------
Total................... $ $ $ $
============ ============== ========== ==============
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
Investing in the certificates involves certain risks. Prospective investors
should consider carefully the Risk Factors beginning on page S- in this
prospectus supplement and on page in the prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
These certificates will be delivered through the same-day funds settlement
system of the Depository Trust Company on or about , 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- in this prospectus supplement and
on page in the prospectus.
----------
Underwriters
The date of this prospectus supplement is , 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................. S-4
Risk Factors............................................................. S-13
Structure of the Transaction............................................. S-13
Use of Proceeds.......................................................... S-14
The Loans................................................................ S-14
Yield and Prepayment Considerations...................................... S-19
Green Tree Financial Corporation......................................... S-25
Description of the Certificates.......................................... S-26
Description of the Class B-2 Limited Guaranty............................ S-45
Certain Federal Income Tax Consequences.................................. S-46
ERISA Considerations..................................................... S-46
Underwriting............................................................. S-48
Legal Matters............................................................ S-48
Annex I.................................................................. A-1
Prospectus
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 8
The Trust Fund........................................................... 9
Use of Proceeds.......................................................... 11
Green Tree Financial Corporation......................................... 11
Yield Considerations..................................................... 13
Maturity and Prepayment Considerations................................... 13
Description of the Certificates.......................................... 14
Certain Legal Aspects of the Loans; Repurchase Obligations............... 27
ERISA Considerations..................................................... 36
Certain Federal Income Tax Consequences.................................. 37
Legal Investment Considerations.......................................... 54
Ratings.................................................................. 54
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the certificates in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Equity Loan Trust 1999-A since the date hereof.
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home improvement lending business, and about any series of
certificates for home improvement loans that Green Tree may wish to sell. This
S-2
<PAGE>
prospectus supplement contains more detailed information about this series of
certificates. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these certificates has been or will be prepared in
the United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These certificates may not be offered or sold, or re-offered
or re-sold, to persons in the United Kingdom, except (1) to persons whose
ordinary activities involve them in acquiring, holding, managing and disposing
of investments (as principal or agent) for the purpose of their businesses, or
(2) in circumstances that will not constitute or result in an offer to the
public in the United Kingdom within the meaning of the United Kingdom Public
Offers of Securities Regulation 1995. You may not pass this prospectus
supplement and prospectus, or any other document inviting applications or
offers to purchase certificates or offering certificates for purchase, to any
person in the United Kingdom who (1) does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
(2) is not otherwise a person to whom passing this prospectus supplement and
prospectus would be lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the certificates,
read this entire prospectus supplement and the accompanying prospectus.
The certificates for home improvement loans, Series 1999-A listed on the
table below will represent interests in a trust consisting of a pool of home
equity loans.
<TABLE>
<CAPTION>
Pass-Through Approximate S&P Fitch
Class Rate Principal Amount(1) Rating Rating
- ----- ------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
Each Certificate................. $
</TABLE>
- --------
(1) May vary plus or minus 5%.
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 regular business day, the next regular
business day. The first payment date will be
, .
Record Date................. The business day immediately prior to the
payment date (for example, if the payment date
is 15, the record date would be 14,
assuming that 14 is a regular business
day).
Description of We will issue a single class of the
Certificates................ certificates that are payable solely from the
property of the trust.
Distributions............... Holders of the certificates will receive on
each payment date distribution of interest and
principal as described in this prospectus
supplement. We will make distributions to
holders of record of the certificates on the
related record date, except that the final
distribution in respect of the certificates
will be made only upon presentation and
surrender of the certificates at the office or
agency appointed by the trustee for that
purpose in Minneapolis or St. Paul, Minnesota.
The amount available for the trust on each
payment date generally includes payments on the
loans due during the previous calendar month
and received on or prior to the determination
date, prepayments and other unscheduled
collections received on the loans during such
due period, any advances made by the servicer
or the trustee with respect to such due period
and any amounts paid by Green Tree to
repurchase a loan due to a breach of
representation or warranty.
S-4
<PAGE>
Distributions on the
Certificates
Interest.................. We will pay interest on the certificates on
each payment date in an amount equal to one
month's interest at the pass-through rate on
the aggregate certificate principal balance
immediately prior to that payment date. In the
case of the first payment date, we will only
pay interest from the closing date to ,
1999. The aggregate certificate principal
balance on any payment date is the original
series 1999- certificate principal balance
minus all distributions previously made on the
certificates. We will compute accrued interest
on the basis of a 360-day year of twelve 30-day
months.
If there is not a sufficient amount available
in the certificate account to make a full
distribution of interest to the
certificateholders, we will allocate the amount
of interest due pro rata to the outstanding
certificates and we will carry forward the
amount of the shortfall and add it to the
amounts due on the next payment date. See
"Description of the certificates."
Principal................. We will pay principal on the certificates on
each payment date, to the extent of the amount
available in the certificate account after
payment of all interest payable on the
certificates, an amount equal to the sum (such
sum being hereinafter referred to as the
"Monthly Principal") of
^ the amount of regular principal payments
on contracts paid or applied during the
prior due period;
^ the amount of principal prepayments
received on loans during the prior due
period;
^ the principal portion of all payments on
loans that were delinquent payments as
of the end of the prior due period;
^ the unpaid principal balance of all
loans that became liquidated loans with
respect to the prior due period;
^ the principal portion of the repurchase
price paid by Green Tree to repurchase
loans for breach of representations and
warranties with respect to the prior due
period, as described in this summary
under "Repurchases or Substitution
Obligations;"
^ the amount of any reduction in the
principal amount deemed owed on any loan
as a result of the obligor's bankruptcy;
and
^ any principal amount described that was
not previously distributed because of an
insufficient amount of funds available
in the certificate account and Green
Tree either was not obligated to or
failed to pay such amount under the
limited guaranty.
S-5
<PAGE>
Limited Guaranty.............. To mitigate the effect of liquidation losses on
the loans, we will entitle the
certificateholders to receive on each
distribution date an amount equal to the
guaranty payment, if any, under Green Tree's
limited guaranty. The guaranty payment for any
payment date will equal the amount, if any, by
which the formula distribution amount exceeds
the amount available in the certificate account
for that payment date.
The limited guaranty will be an unsecured
general obligation of Green Tree and will not
be supported by any letter of credit or other
enhancement arrangement. The rating assigned to
the certificates may be affected by the rating
of Green Tree's debt securities.
Loans......................... The loans consist of conventional and
FHA-insured home improvement contracts and
promissory notes, including all rights to
receive payments due thereunder on and after
the cut-off date. The obligations of the
obligor under each loan are unsecured and such
loans constitute "Unsecured Loans" as described
in the prospectus. The loans arise from loans
relating to the improvement of real estate
located in states and the District of
Columbia. The annual interest rate on the loans
as of the cut-off date ranges from % to
% with a weighted average of %. The
loans had a weighted average term to scheduled
maturity, as of origination, of months, and
a weighted average term to scheduled maturity,
as of the cut-off date, of months. The final
scheduled payment date on the loan with the
latest scheduled maturity is in . See
"The Loans" in this prospectus supplement.
FHA Insurance................. Approximately % of the loans by principal
balance as of the cut-off date are insured by
FHA against obligor defaults pursuant to Title
I of the National Housing Act ("FHA
Insurance"). See "Description of FHA Insurance"
in the prospectus.
Advances...................... The servicer must make advances each month of
any scheduled payments on the loans that were
due but not received during the prior due
period. The servicer will be entitled to
reimbursement of an advance from subsequent
funds available in the certificate account. The
servicer will be obligated to make an advance
only to the extent that it determines that the
advance will be recoverable 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 will be obligated (subject to certain
conditions) to make that advance. See
"Description of the certificates--Advances" in
this prospectus supplement and in the
prospectus.
Repurchase or Substitution Green Tree will repurchase any loan in which
Obligations.................. the trust's or the certificateholders' interest
is materially and adversely affected by a
breach of a representation and warranty with
respect to that 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.
S-6
<PAGE>
Instead of repurchasing a loan, during the 120
day period following the closing date, Green
Tree may, at its option, substitute another
loan for the loan that it is otherwise
obligated to repurchase. See "Description of
the certificates--Conveyance of Loans" in this
prospectus supplement and in the prospectus.
Repurchase Option............. The servicer will have the option to repurchase
all of the outstanding loans on any payment
date on which the pool scheduled principal
balance is less than 10% of the cut-off date
pool principal balance. See "Description of the
certificates--Repurchase Option" in this
prospectus supplement and in the Prospectus.
Monthly Servicing Fee......... The servicer will receive monthly compensation
for servicing the loans equal to 1/12 of the
product of .75% and the pool scheduled
principal balance. See "Description of the
certificates--Servicing Compensation and
Payment of Expenses" and "Rights upon an Event
of Termination" in this prospectus supplement .
Tax Status.................... In the opinion of our counsel, the trust will
be classified as a grantor trust for federal
income tax purposes and not as an association
which is taxable as a corporation. Each
certificateholder will be treated for these
purposes as the owner of an undivided interest
in the loans. Accordingly, each
certificateholder must report on its federal
income tax return its share of the income from
the loans and, subject to limitations on
deductions by individuals, estates and trusts,
may deduct its share of the reasonable fees
paid by the trust, determined in accordance
with a certificateholder's tax accounting
method. See "Certain Federal Income Tax
Consequences" in this prospectus supplement and
in the prospectus.
ERISA Considerations..........
No transfer of any certificates will be
permitted to be made to any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
to the Internal Revenue Code of 1986, as
amended, unless the opinion of counsel
described under "ERISA Considerations" herein
and in the Prospectus is delivered to the
Trustee. See "ERISA Considerations" in this
prospectus supplement and in the prospectus.
The certificates will not be issued and sold
Rating........................ unless Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("Fitch") have
assigned the rating specified on page (or
better) to the certificates.
The ratings on the certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating by Fitch addresses the likelihood of the
receipt of certificateholders of all
distributions to which such certificateholders
are entitled. A security rating is not a
S-7
<PAGE>
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency.
Green Tree has not requested a rating of the
certificates from any rating agencies other
than S&P and Fitch. You must not assume that
another rating agency will assign a rating to
any of these certificates, nor should you
assume what any such rating, if issued, would
be.
Legal Investment The certificates will not constitute "mortgage
Considerations............... related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the loans are not
secured by first liens on the related real
estate, as required by SMMEA. This means that
many institutions that have the legal authority
to invest in "mortgage related securities" may
not be legally authorized to invest in the
certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
certificates.
S-8
<PAGE>
RISK FACTORS
You should consider the following factors in connection with the purchase of
the certificates. There are more risk factors that are applicable to the
certificates. Those risk factors are printed in the prospectus and you should
consider those risk factors also.
Limited Historical Data With Respect to Home Improvement Loans. Green Tree
began purchasing and servicing FHA-insured home improvement loans in April
1989, and conventional home improvement loans in September 1992, and thus has
limited historical experience with respect to the performance, including the
rate of prepayments of home improvement loans. Accordingly, Green Tree's
delinquency experience and loan loss and liquidation experience set forth under
"The Loans" may not be indicative of the performance of the Loans.
Delinquency and Loan Default Rates on Unsecured Home Improvement Loans. Based
on Green Tree's experience, home improvement loans that are not secured by any
lien on the improved real estate have experienced, and are expected to continue
to experience, a higher rate of delinquency and loan default as compared with
Green Tree's servicing portfolio of FHA-insured and other secured home
improvement loans. Based on Green Tree's experience to date, loan defaults on
unsecured home improvement loans typically result in chargeoffs that equal or
exceed 100% of the outstanding principal balance of the loan.
STRUCTURE OF THE TRANSACTION
On or about , 1998 (the "Closing Date"), the Company will establish the
Trust pursuant to a Pooling and Servicing Agreement to be dated as of ,
1998 (the "Agreement"), between the Company, as Seller and Servicer, and the
Trustee.
The Certificates will be issued by the Trust, the corpus of which will
consist primarily of the Contracts, including all rights to receive payments
due on the Contracts on and after , 1998 (or the date of origination
thereof, if later) (the "Cut-off Date"), all rights under FHA Insurance with
respect to the FHA-insured Contracts, amounts held for the Trust in the
Certificate Account (as defined below), and the Limited Guaranty of the Company
described in "Description of the Limited Guaranty" herein.
Payments and recoveries in respect of principal and interest on the Contracts
will be paid into a separate trust account maintained at an Eligible
Institution (initially [Trustee], , Minnesota) in the name of the Trust
(the "Certificate Account"), no later than one Business Day after receipt.
Payments deposited in the Certificate Account in respect of each Due Period
will be applied on the fifteenth day of the next month (or, if such day is not
a business day, the next succeeding business day) (each a "Payment Date") to
make the distributions to the Certificateholders as of the immediately
preceding Record Date as described under "Description of the Certificates--
Distributions on the Certificates" herein, and to pay certain monthly fees to
the Servicer as compensation for its servicing of the Contracts (the "Monthly
Servicing Fee") and to pay any remaining amounts in the Certificate Account to
the Company as compensation for providing the Limited Guaranty (the "Guaranty
Fee").
The Servicer will be obligated to advance any scheduled payments on the
Contracts that were due but not received during the prior Due Period
("Advances"). The Servicer will be entitled to reimbursement of an Advance from
payments on or liquidation proceeds of the related Contract and then from other
funds 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 collections on the Contract or from liquidation proceeds thereof. If
the Servicer fails to make any Advance required under the Agreement, the
Trustee is obligated (subject to certain conditions) to make such Advance.
Following the transfer of the Contracts from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Contracts, (b) certain representations and warranties in the
Agreement as described under "Description of the Certificates--Conveyance of
Contracts" herein, (c) certain indemnities, and (d) the Limited Guaranty. The
Company is obligated under the Agreement to repurchase at the Repurchase Price
(as defined herein), or, at its option, to substitute another contract for, any
Contract on the first Payment Date which is more than 90 days after the Company
becomes aware, or the Company receives written notice from the Trustee, of any
breach of any such representation and warranty in
S-9
<PAGE>
the Agreement that materially adversely affects the Certificateholders'
interest in such Contract if such breach has not been cured prior to such date.
The Agreement also provides that the Company has certain obligations to
repurchase Contracts and to indemnify the Trustee and Certificateholders with
respect to certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home improvement contracts and promissory notes,
providing warehouse financing for the purchase of contracts and other costs of
maintaining such contracts until they are pooled and sold to other investors.
THE CONTRACTS
Each Contract is a home improvement contract originated by a Company-approved
home improvement contractor and purchased by the Company, or a home improvement
promissory note originated by the Company directly. Each Contract finances
improvements to a one- to four-family residential property, an owner-occupied
condominium or town house or a manufactured home which either qualifies as real
estate under state law or is located in a Company-approved park. The Contracts
are not secured by any mortgage or other lien on or security interest in the
related improved real estate or any other real or personal property.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Contract is fully amortizing with a fixed
contractual rate of interest and provides for level payments over the term of
such loan, computed on the simple interest method, (b) each Contract has its
last scheduled payment due no later than and (c) each FHA-insured
Contract was originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense, by FHA Insurance. The Contracts
were originated or acquired by the Company in the ordinary course of the
Company's business. A detailed listing of the Contracts is appended to the
Agreement. See "Description of the Certificates" herein and in the Prospectus.
Each of the Contracts has a Contract Rate of at least % per annum and not
more than % and the weighted average of the Contract Rates of the
Contracts as of the Cut-off Date is %. As of the Cut-off Date, the
Contracts had remaining maturities of at least months but not more than
months and original maturities of at least 24 months but not more than
months. The Contracts had a weighted average term to scheduled maturity, as of
origination, of months, and a weighted average term to scheduled maturity,
as of the Cut-off Date, of months. The average principal balance per
Contract as of the Cut-off Date was $ and the principal balances on the
Contracts as of the Cut-off Date ranged from $ to $ . The Contracts
arise from loans relating to real property located in states and the
District of Columbia. By principal balance as of the Cut-off Date,
approximately % of the Contracts financed improvements to real estate
located in California. No other state represented % or more of the Cut-off
Date Pool Principal Balance. Substantially none of the Contracts provide for
recourse to the originating contractor in the event of a default by the
Obligor.
Set forth below is a description of certain additional characteristics of the
Contracts.
S-10
<PAGE>
Geographical Distribution of Improved Real Estate
<TABLE>
<CAPTION>
% of
Contract Pool by
% of Contract Pool by Aggregate Principal Outstanding
Number of Number of Balance Principal
Contracts as of Contracts as Outstanding as of Balance as of
Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
--------------- --------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Alaska..................
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------- ------------ ------
Total............... 100.00% $ 100.00%
===== ======= ============ ======
</TABLE>
S-11
<PAGE>
Years of Origination of Contracts
<TABLE>
<CAPTION>
% of
Contract Pool by
Aggregate Principal Outstanding Principal
Number of Contracts Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
.................... $ %
....................
....................
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
Distribution of Original Contract Amounts
<CAPTION>
% of
Contract Pool by
Aggregate Principal Outstanding Principal
Original Contract Number of Contracts Balance Outstanding Balance as of
Amount (in Dollars) as of Cut-off Date as of Cut-off Date Cut-off Date
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than $10,000....... $ %
$10,000-$19,999.........
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
Contract Rates
<CAPTION>
% of
Contract Pool by
Aggregate Principal Outstanding Principal
Range of Contracts Number of Contracts Balance Outstanding Balance as of
by Contract Rate as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------ -------------------- ------------------- ----------------------
<S> <C> <C> <C>
9.00001%-10.00000%..... $ %
10.00001%-11.00000%.....
11.00001%-12.00000%.....
12.00001%-13.00000%.....
13.00001%-14.00000%.....
14.00001%-15.00000%.....
15.00001%-16.00000%.....
16.00001%-17.00000%.....
Over 17.00000%..........
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
Remaining Months to Maturity
<CAPTION>
% of
Contract Pool by
Months Remaining to Aggregate Principal Outstanding Principal
Scheduled Maturity Number of Contracts Balance Outstanding Balance as of
As of Cut-off Date as of Cut-off Date as of Cut-off Date Cut-off Date
------------------- -------------------- ------------------- ----------------------
<S> <C> <C> <C>
Less than 31............ $ %
31 to 60................
61 to 90................
91 to 120...............
121 to 150..............
151 to 180..............
181 to 210..............
211 to 240..............
------ ------------ ------
Total............... $ 100.00%
====== ============ ======
</TABLE>
S-12
<PAGE>
Delinquency, Loan Default and Loss Information
The following table sets forth the delinquency experience for the periods
indicated of the portfolio of unsecured home improvement loans serviced by the
Company (other than Contracts already in liquidation).
Delinquency Experience
<TABLE>
<CAPTION>
At December 31,
At , ------------------
1997 1996 1995
------- ---- ---- ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding(1)................ 18,411
Number of Contracts Delinquent(2)(3)
30-59 Days...................................... 115
60-89 Days...................................... 44
90 Days or More................................. 14
---- ---- ---- ------
Total Contracts Delinquent........................ 173
Delinquencies as a Percent of Contracts Outstand-
ing(4)........................................... % % % .94%
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by the Company if any payment of $25
or more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
The following table sets forth the loan default and loss experience for the
periods indicated of the portfolio of unsecured home improvement loans
serviced by the Company.
Loan Default and Loss Experience
(Dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months
Months Ended December 31,
Ended , ----------------------------------
1998 1997 1996 1995
---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Principal Balance of Contracts
Serviced(1).................... $ $ $ $97,544
Contract Defaults(2)............ % % % 1.38%
Net Losses:
Dollars(3).................... $ $ $ $ 1,710
Percentage(4)................. % % % 1.75%
</TABLE>
- --------
(1) As of period end. Includes defaulted contracts not yet liquidated.
(2) As a percentage of the total number of contracts being serviced as of
period end. The Company considers a contract defaulted when the Company
has submitted a claim to FHA (in the case of FHA-insured contracts), the
Company has commenced foreclosure or enforcement proceedings, or the
contract is 180 days delinquent.
(3) Does not include any estimated losses for defaulted contracts not yet
liquidated. The calculation of net loss on FHA-insured contracts includes
unpaid interest to the date of FHA claim submission and all expenses of
liquidation, and reflects proceeds of FHA Insurance claims paid.
(4) As a percentage of the principal amount of contracts being serviced as of
period end.
The Company's management is not aware of any trends or anomalies which have
adversely affected the delinquency, loan default and loss experience of its
portfolio of home improvement contracts.
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency, loan default and loss
experience of the Contracts will be similar to that set forth above. Moreover,
because the Company began originating and purchasing unsecured home
improvement contracts in September 1992, it is likely that the Company's
portfolio is not yet sufficiently seasoned to show the
S-13
<PAGE>
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.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield on any Certificate will depend on the price paid by the
Certificateholder, the timing of principal payments, and the timing and amount
of any liquidation losses on the Contracts.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Contract, to reduce the outstanding principal balance on the
Contracts) will increase the yield on Certificates purchased at a price less
than the undivided ownership interest in the aggregate principal balance of the
Contracts represented by such Certificates and will decrease the yield on
Certificates purchased at a price greater than the undivided ownership interest
in the aggregate principal balance of the Contracts represented by such
Certificates. Because the Contracts have scheduled due dates throughout the
calendar month, and because all Principal Prepayments are passed through to
Certificateholders on the Payment Date following the Due Period in which such
Principal Prepayment occurred, prepayments on the Contracts would affect the
amount of funds available to make distributions on the Certificates on any
Payment Date only if a substantial portion of the Contracts prepaid prior to
their respective due dates in a particular month (thus paying less than 30
days' interest for that Due Period) while very few Contracts prepaid after
their respective due dates in that month. In addition, liquidations of
Defaulted Contracts or the Servicer's exercise of its option to repurchase the
entire remaining pool of Contracts (see "Description of the Certificates--
Repurchase Option" herein) will affect the timing of principal distributions on
the Certificates. Prepayments on mortgage loans and other consumer installment
obligations are commonly measured relative to a prepayment standard or model.
The Constant Prepayment Rate ("CPR") model assumes that the outstanding
principal balance of a pool of loans prepays each month at a specified constant
annual rate. The Certificates were priced using a prepayment assumption of %
CPR. There can be no assurance that the Contracts will prepay at such rate, and
it is unlikely that prepayments or liquidations of the Contracts will occur at
any constant rate.
The amount of interest to which the Certificateholders are entitled on any
Payment Date will be the product of the Pass-Through Rate and the Aggregate
Certificate Principal Balance immediately following the preceding Payment Date,
based on a 360-day year consisting of 12 months of 30 days each.
Certificateholders will receive payments in respect of principal on each
Payment Date to the extent that funds available in the Certificate Account are
sufficient therefor, in the priority described under "Description of the
Certificates--Distributions on the Certificates." As required by applicable
state laws, interest paid by Obligors on the Contracts is computed according to
the simple interest method. Principal and interest payable on the Certificates
will be computed according to the actuarial method.
The final scheduled payment date on the Contract with the latest maturity is
in .
Weighted Average Life of the Certificates
The following information is given solely to illustrate the effect of
prepayments of the Contracts on the weighted average life of the Certificates
under the stated assumptions and is not a prediction of the prepayment rate
that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the Contracts is paid. Principal
payments on Contracts may be in the form of scheduled amortization or
prepayments (for this purpose, the term
S-14
<PAGE>
"prepayment" includes repayments and liquidations due to default or other
dispositions of the Contracts). Prepayments on Contracts may be measured by a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate model, is described above.
As used in the following table, "0% CPR" assumes that none of the Contracts
are prepaid before maturity, " % CPR" assumes the Contracts will prepay at a
CPR of %, and so forth.
There is no assurance, however, that prepayment of the Contracts will conform
to any level of the CPR, and no representation is made that the Contracts will
prepay at the prepayment rates shown or any other prepayment rate. The rate of
principal payments on pools of home improvement contracts is influenced by a
variety of economic, geographic, social and other factors, including the level
of interest rates and the rate at which homeowners sell their homes or default
on their contracts. Other factors affecting prepayment of contracts include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home improvement contracts secured by
real estate, in general, if prevailing interest rates fall significantly below
the interest rates on such home improvement contracts, the home improvement
contracts are likely to be subject to higher prepayment rates than if
prevailing interest rates remained at or above the rates borne by such home
improvement contracts. Conversely, if prevailing interest rates rise above the
interest rates on such home improvement contracts, the rate of prepayment would
be expected to decrease.
The percentages and weighted average lives in the following table were
determined assuming that: (i) scheduled interest and principal payments on the
Contracts are received in a timely manner and prepayments are made at the
indicated percentages of the CPR set forth in the table; (ii) the Servicer
exercises its option to repurchase the Contracts, as described under
"Description of the Certificates--Repurchase Option"; (iii) the Contracts will,
as of the Cut-off Date, be grouped into four pools having the additional
characteristics set forth below under "Assumed Contract Characteristics"; (iv)
the Certificates have an Original Series 1998- Certificate Principal Balance
of $ and a Pass-Through Rate of %; (v) no interest shortfalls will
arise in connection with prepayments in full of the Contracts; (vi) no
delinquencies or losses are experienced on the Contracts; (vii) distributions
are made on the Certificates on the 15th day of each month, commencing in
1998; and (viii) the Certificates are issued on , 1998. No representation
is made that the Contracts will not experience delinquencies or losses.
Assumed Contract Characteristics
<TABLE>
<CAPTION>
Cut-off Date Weighted Average Weighted Average
Pool Remaining Term Original Term
Principal Weighted Average to Maturity to Maturity
Pool Balance Contract Rate (months) (months)
---- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1.............. $ %
2..............
3..............
4..............
</TABLE>
It is not likely that the Contracts will prepay at any constant percentage of
the CPR to maturity or that all of the Contracts will prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of the Certificates and sets forth the
percentages of the Original Series 1996-E Certificate Principal Balance that
would be outstanding after each of the dates shown, at the indicated
percentages of the CPR.
S-15
<PAGE>
Percentage of the Original Series 1996-E Certificate Principal Balance at
theRespective Percentages of the CPR Set Forth Below:
<TABLE>
<CAPTION>
Date 10% 15% 20% 25% 30%
- ---- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100%
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
Weighted Average Life (1) (years)......................
</TABLE>
- --------
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of cash distributions in reduction of the principal balance of
such Certificate by the number of years from the date of issuance of such
Certificate to the stated Payment Date, (ii) adding the results, and (iii)
dividing the sum by the initial principal balance of such Certificate.
S-16
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing FHA-
insured home improvement loans in April 1989, conventional home improvement
loans in September 1992 and home equity loans in January 1996. The Company also
purchases, pools and services installment sales contracts for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (651) 293-3400). The Company's quarterly and annual reports, which
are incorporated by reference in this Prospectus Supplement and in the
Prospectus, are available from the Company upon written request made to the
Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings to fixed charges for the
past five years ending December 31, 1997. 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>
Year Ended December 31, Months Ended ,
------------------------ ----------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 4.81 7.98 7.90 5.44 3.94 3.06
</TABLE>
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Green Tree
will continue to operate from its existing headquarters in St. Paul, Minnesota,
and its 200 local offices throughout the country. Lawrence M. Coss, Green
Tree's Chairman and Chief Executive Officer, has agreed to continue to manage
Green Tree's business for at least one year. Headquartered in Carmel, Indiana,
Conseco is among the nation's leading providers of supplemental health
insurance, retirement annuities and universal life insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
Green Tree has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of Green Tree as purported class actions on behalf of
persons or entities who purchased common stock of Green Tree during the alleged
class periods. In addition to Green Tree, certain current and former officers
and directors of Green Tree are named as defendants in one or more of the
lawsuits. Green Tree and the other defendants intend to seek consolidation of
each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims
S-17
<PAGE>
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In each
case, plaintiffs allege that Green Tree and the other defendants violated
federal securities laws by, among other things, making false and misleading
statements about the current state and future prospects of Green Tree
(particularly with respect to prepayment assumptions and performance of certain
of Green Tree's loan portfolios) which allegedly rendered Green Tree's
financial statements false and misleading. Green Tree believes that the
lawsuits are without merit and intends to defend such lawsuits vigorously.
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
General
The Certificates will be issued in fully registered, certificated form only
in denominations of $1,000 or any integral multiple in excess thereof, except
for one Certificate with a denomination representing the remainder of the
Original Principal Balance. The Certificates initially will be represented by
one or more 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 thereof. See "Description of the Certificates--
Registration of the Certificates" herein. The Trust consists primarily of the
Contracts and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, all rights under FHA Insurance with respect to the
FHA-insured Contracts, amounts held in the Certificate Account and the Limited
Guaranty of the Company.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "Description of the Certificates--
Registration of the Certificates" herein. The first Payment Date for the
Certificates will be in 1998. Payments will be made by check mailed to
such Certificateholder at the address appearing on the Certificate Register
(except that a Certificateholder who holds an aggregate Percentage Interest of
at least 5% of the Trust may request payment by wire transfer). Final payments
will be made only upon tender of the Certificates to the Trustee for
cancellation.
Conveyance of Contracts
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Contracts, including all principal and interest
received on or with respect to such Contracts (other than receipts of principal
and interest due on such Contracts before the Cut-off Date). On behalf of the
Trust, as the issuer of the Certificates offered hereby, the Trustee,
concurrently with such conveyance, will execute and deliver the Certificates to
or upon the order of the Company. The Contracts are described on a list
delivered to the Trustee and certified by a duly authorized officer of the
Company. Such list includes the amount of monthly payments due on each Contract
as of the date of issuance of the Certificates, the Contract Rate on each
Contract and the maturity date of each Contract. The list will be attached as
an exhibit to the Agreement and will be available for inspection by any
Certificateholder at the principal office of the Company. Prior to the
conveyance of the Contracts to the Trust, the Company's internal audit
department will have completed a review of all the Contract files, confirming
the accuracy of
S-18
<PAGE>
each item on the list of Contracts delivered to the Trustee. Any Contract
discovered not to agree with such list in a manner that is materially adverse
to the interests of the Certificateholders will be repurchased by the Company,
or, if the discrepancy relates to the unpaid principal balance of a Contract,
the Company may deposit cash in the Certificate Account in an amount sufficient
to offset such discrepancy.
The Trustee will maintain possession of the Contracts and any other documents
contained in the Contract files. Uniform Commercial Code financing statements
will be filed in Minnesota, reflecting the conveyance and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such conveyance and assignment.
[Dorsey & Whitney LLP], counsel to the Company, will render an opinion to the
Trustee that the transfer of the Contracts from the Company to the Trust would,
in the event the Company became a debtor under the United States Bankruptcy
Code, be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Contracts from the Company to the Trust were
treated as a pledge to secure borrowings by the Company, the distribution of
proceeds of the Contracts to the Trust might be subject to the automatic stay
provisions of the United States Bankruptcy Code, which would delay the
distribution of such proceeds for an uncertain period of time. In addition, a
bankruptcy trustee would have the power to sell the Contracts if the proceeds
of such sale could satisfy the amount of the debt deemed owed by the Company,
or the bankruptcy trustee could substitute other collateral in lieu of the
Contracts to secure such debt, or such debt could be subject to adjustment by
the bankruptcy trustee if the Company were to file for reorganization under
Chapter 11 of the United States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Contract, including that: (a) as of the Cut-off Date the
most recent scheduled payment was made or was not delinquent more than 59 days;
(b) no provision of a Contract has been waived, altered or modified in any
respect, except by instruments or documents included in the Contract file and
reflected on the list of Contracts delivered to the Trustee; (c) each Contract
is a legal, valid and binding obligation of the Obligor and is enforceable in
accordance with its terms (except as may be limited by laws affecting
creditors' rights generally); (d) no Contract is subject to any right of
rescission, set-off, counterclaim or defense; (e) each Contract (if an FHA-
insured contract) was originated in accordance with applicable FHA regulations
and is insured, without set-off, surcharge or defense, by FHA Insurance; (f)
each Contract was originated by a home improvement contractor in the ordinary
course of such contractor's business or was originated by the Company directly;
(g) no Contract was originated in or is subject to the laws of any jurisdiction
whose laws would make the transfer of the Contract or an interest therein
pursuant to the Agreement or the Certificates unlawful; (h) each Contract
complies with all requirements of law; (i) no Contract has been satisfied or
rescinded; (j) all parties to each Contract had full legal capacity to execute
such Contract; (k) no Contract has been sold, conveyed and assigned or pledged
to any other person and the Company has good and marketable title to each
Contract free and clear of any encumbrance, equity, loan, pledge, charge, claim
or security interest, and is the sole owner and has full right to transfer such
Contract to the Trustee; (l) as of the Cut-off Date there was no default,
breach, violation or event permitting acceleration under any Contract (except
for payment delinquencies permitted by clause (a) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level monthly payments over the term of such Contract; (n) the description
of each Contract set forth in the list delivered to the Trustee is true and
correct; (o) there is only one original of each Contract; and (p) each Contract
was originated or purchased in accordance with the Company's then-current
underwriting guidelines.
The Company will also make certain representations and warranties with
respect to the Contracts in the aggregate, including that (i) the Cut-off Date
Pool Principal Balance equals at least the Original Series 1998- Certificate
Principal Balance, and each Contract has a contractual rate of interest of at
least %; (ii) no Contract had a remaining term to maturity at origination
of more than months; (iii) no more than % of the Contracts, by principal
balance as of the Cut-off Date, related to properties located in an area with
the same zip
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code; and (iv) no adverse selection procedures were employed in selecting the
Contracts from the Company's portfolio.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Contract that is materially
and adversely affected by a breach of a representation and warranty with
respect to such Contract made in the Agreement if such breach has not been
cured within 90 days of the day it was or should have been discovered by the
Servicer or the Trustee. The "Repurchase Price," with respect to any Contract
to be so repurchased or with respect to a Liquidated Contract, means the
outstanding principal balance of such Contract (without giving effect to any
Advances made by the Servicer or the Trustee), plus interest on such Contract
at the Pass-Through Rate from the end of the Due Period with respect to which
the Obligor last made a payment (without giving effect to any Advances made by
the Servicer or the Trustee) through the date of such repurchase or
liquidation. This repurchase obligation constitutes the sole remedy available
to the Trust and the Certificateholders for a breach of a representation or
warranty under the Agreement with respect to the Contracts (but not with
respect to any other breach by the Company of its obligations under the
Agreement).
In lieu of purchasing a Contract as specified in the preceding paragraph,
during the 120 day period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Contract (as defined below) for the
Contract that it is otherwise obligated to repurchase (referred to herein as
the "Replaced Contract"). An Eligible Substitute Contract is a Contract that
satisfies, as of the date of its substitution, the representations and
warranties specified in Article III of the Agreement, has a Scheduled Principal
Balance that is not greater than the Scheduled Principal Balance of the
Replaced Contract, has a Contract Rate that is at least equal to the Contract
Rate of the Replaced Contract and has a remaining term to scheduled maturity
that is not greater than the remaining term to scheduled maturity of the
Replaced Contract. The Company will be required to deposit in the Certificate
Account cash in the amount, if any, by which the Scheduled Principal Balance of
the Replaced Contract exceeds the Scheduled Principal Balance of the Contract
being substituted. Such deposit will be deemed to be a Partial Principal
Prepayment.
Pursuant to the Agreement, the Servicer will service and administer the
Contracts conveyed and assigned to the Trustee as more fully set forth below.
Payments on Contracts
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially [Trustee], , Minnesota) with trust powers organized
under the laws of the United States or any state, the deposits of which are
insured to the full extent permitted by law by the Federal Deposit Insurance
Corpora-tion (the "FDIC"), whose short-term deposits have been rated A-1 by S&P
and F-1 by Fitch (if rated by Fitch) or whose unsecured long-term debt has been
rated in one of the two highest rating categories by S&P and Fitch, and which
is subject to supervision and examination by federal or state authorities (an
"Eligible Institution"). "Eligible Account" means, at any time, an account
which is any of the following: (i) an account maintained with an Eligible
Institution; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund or the Savings Association Insurance
Fund of the FDIC; (iii) a segregated trust account maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company with trust powers and acting in its fiduciary
capacity for the benefit of the Trustee, which depository institution or trust
company has capital and surplus of not less than $ ; or (iv) an account
that will not cause S&P or Fitch to downgrade or withdraw its then-current
rating assigned to the Certificates, as evidenced in writing by S&P and Fitch.
The Servicer may authorize the Trustee to invest the funds in the Certificate
Account in Eligible Investments (as defined in the Agreement) that will mature
not later than the business day preceding the applicable monthly Payment Date.
Such Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-
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market funds; certain repurchase agreements of United States government
securities with eligible commercial banks; securities bearing interest or sold
at a discount issued by a corporation which has a credit rating of at least
"AA" from S&P and Fitch (if rated by Fitch) not in excess of 10% of amounts in
the Certificate Account at the time of such investment; and commercial paper
assigned a rating of at least A-1+ by S&P and F-1+ by Fitch (if rated by
Fitch). Any losses on such investments will be deducted from other investment
earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Contracts,
including Principal Prepayments and advance payments by Obligors not
constituting Principal Prepayments ("Advance Payments"), shall be paid into the
Certificate Account no later than one business day following receipt thereof,
except amounts received as extension fees or assumption fees not allocated to
regular installments due on Contracts, which are retained by the Servicer as
part of its servicing fees and are not paid into the Certificate Account and
except for certain proceeds from Liquidated Contracts which are used to
reimburse the Servicer for customary out-of-pocket liquidation expenses. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses" herein. In addition, all payments under FHA Insurance received by the
Servicer, any Advances by the Servicer or the Trustee as described under
"Description of the Certificates--Advances," amounts paid by the Company for
Contracts repurchased as a result of breach of warranties under the Agreement,
and amounts required to be deposited upon substitution of a Contract because of
breach of warranties under the Agreement, as described under "Description of
the Certificates--Conveyance of Contracts," shall be paid into the Certificate
Account.
On the seventh Business Day of each month (the "Determination Date"), the
Servicer will determine the Amount Available in the Certificate Account and the
amount of funds necessary to make all payments to be made on the next Payment
Date from the Certificate Account. Not later than one Business Day after the
Determination Date, the Company will deposit in the Certificate Account the
Repurchase Price of any Contracts required to be repurchased on such Payment
Date and any amounts required to be deposited therein due to the substitution
of a Contract, as a result of a breach of representations and warranties.
Distributions
Holders of the Certificates will be entitled to receive on the Payment Date,
to the extent that the Amount Available (together with any Guaranty Payment, as
described below) in the Certificate Account is sufficient therefor,
distributions allocable to interest and principal, as described herein.
Distributions will be made on each Payment Date to holders of record of the
Certificates on the related Record Date, except that the final distribution in
respect of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency appointed by the Trustee for that
purpose in Minneapolis or St. Paul, Minnesota. The Amount Available on each
Payment Date generally includes scheduled payments on the Contracts due during
the previous calendar month (the "Due Period") and received on or prior to the
related Determination Date, prepayments and other unscheduled collections
received on the Contracts during such Due Period, any Advances (as defined
herein) made by the Servicer or the Trustee with respect to such Due Period and
any amounts paid by the Company to repurchase a Contract due to a breach of
representation or warranty.
Distributions on the Certificates
Interest. Interest on the Certificates will be payable on each Payment Date
in an amount (such amount being hereinafter referred to as the "Monthly
Interest") equal to one month's interest at the Pass-Through Rate on the
Aggregate Certificate Principal Balance immediately prior to such Payment Date;
provided that, in the case of the first Payment Date, such interest will be
payable only for the period from the Closing Date to but excluding , 1998.
The "Aggregate Certificate Principal Balance" with respect to any Payment Date
will equal the Original Series 1998- Certificate Principal Balance minus all
distributions previously made in respect of principal on the Certificates.
Accrued interest will be computed on the basis of a 360-day year of twelve 30-
day months.
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In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account, together with any Guaranty Payment, is not sufficient to
make a full distribution of interest to the Certificateholders, the amount of
interest to be distributed in respect of the Certificates will be allocated
among the outstanding Certificates pro rata in accordance with their respective
entitlements to interest, and the amount of the shortfall will be carried
forward and added to the amount such holders will be entitled to receive on the
next Payment Date. Any such amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible.
Principal. On each Payment Date, the Certificateholders will be entitled to
receive as distributions of principal, to the extent of the Amount Available in
the Certificate Account after payment of all interest payable on the
Certificates, an amount equal to the sum (such sum being hereinafter referred
to as the "Monthly Principal") of (a) the amount of regular principal payments
on the Contracts paid or applied during the prior Due Period; (b) the amount of
Principal Prepayments received on the Contracts during the prior Due Period;
(c) the principal portion of all payments on Contracts that were Delinquent
Payments with respect to the prior Due Period; (d) the unpaid principal balance
of all Contracts that became Liquidated Contracts during the prior Due Period;
(e) the principal portion of the Repurchase Price paid by the Company to
repurchase Contracts for breach of representations and warranties during the
prior Due Period, as described below under "Repurchases by the Company"; (f)
the amount of any reduction in the principal amount deemed owed on any Contract
as a result of the Obligor's bankruptcy; and (g) any principal amount described
in clauses (a) through (f) above that was not previously distributed because of
an insufficient amount of funds available in the Certificate Account and the
Company either was not obligated to or failed to pay such amount under the
Limited Guaranty.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(i) if neither the Company nor any wholly owned subsidiary of the
Company is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(ii) to pay interest on the Certificates;
(iii) to pay principal on the Certificates;
(iv) if the Company or any wholly owned subsidiary of the Company is the
Servicer, to pay the Monthly Servicing Fee to the Servicer;
(v) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances made in respect of current or prior Payment Dates;
and
(vi) to pay the remainder, if any, of the Amount Available to the
Company as the fee for providing the Limited Guaranty.
Advances
To the extent that collections on a Contract in any Due Period are less than
the scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer will
be obligated to advance a Delinquent Payment on a Contract only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent funds available therefor in the Certificate Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
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Reports to Certificateholders
The Servicer will include with each distribution to a Certificateholder a
statement as of such Payment Date setting forth, with respect to the
Certificates and Trust:
(a) the amount of interest being paid to Certificateholders;
(b) the amount of Monthly Principal, specifying the amounts constituting
scheduled payments by Obligors, Principal Prepayments on the Contracts, and
other payments with respect to the Contracts;
(c) the amount of principal being distributed to Certificateholders;
(d) the Aggregate Certificate Principal Balance;
(e) the amount of fees paid out of the Trust;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Aggregate Certificate Principal Balance and the
denominator of which is the Original Series 1998- Certificate Principal
Balance) immediately before and immediately after such Payment Date;
(g) the amount of any Guaranty Payment being distributed on such Payment
Date;
(h) the remaining Guaranty Amount (after giving effect to the
distribution on such Payment Date);
(i) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(j) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(k) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(l) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Contracts at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such price will be distributed on such Payment Date.
The "Scheduled Principal Balance" of a Contract for any month is its
principal balance as specified in its amortization schedule, after giving
effect to any previous Partial Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the "Due Date") in that month, but
without giving effect to any adjustments due to bankruptcy or similar
proceedings. The "Pool Scheduled Principal Balance" with respect to any
Payment Date is the aggregate of the Scheduled Principal Balances of the
Contracts outstanding at the end of the prior calendar month.
Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
Contracts, exercising the degree of skill and care required by the FHA and
otherwise consistent with the highest degree of skill and care that the
Servicer exercises with respect to similar contracts (including manufactured
housing contracts) serviced by the Servicer. The Servicer will not be required
to cause to be maintained, or otherwise monitor the maintenance of, hazard
insurance on the improved properties.
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Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) equal to one-twelfth of the product of
.75% and the remaining Pool Scheduled Principal Balance of the Contracts.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Contract (including FHA Insurance proceeds) for customary out-of-
pocket liquidation expenses incurred by it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Contracts, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Contracts and paid by the
Servicer from its servicing fees include payment of FHA Insurance premiums,
payment of fees and expenses of accountants, payments of all fees and expenses
incurred in connection with the enforcement of Contracts (including submission
of FHA Insurance claims, if applicable), payment of Trustee's fees, and payment
of expenses incurred in connection with distributions and reports to
Certificateholders.
Evidence as to Compliance
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Description of the
Certificates--Reports to Certificateholders." Each report to the Trustee will
be accompanied by a statement from an appropriate officer of the Servicer
certifying the accuracy of such report and stating that the Servicer has not
defaulted in the performance of its obligations under the Agreement. On or
before of each year, beginning in , the Servicer will deliver to the
Trustee a report of [Accountant], or another nationally recognized accounting
firm, stating that such firm has examined certain documents and records
relating to the servicing of loans serviced by the Servicer and stating that,
on the basis of such examination, such servicing has been conducted in
compliance with the Agreement, except for any exceptions set forth in such
report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the interests in the Trust will have the same
rights of inspection as the Trustee and may upon written request to the
Servicer receive copies of all reports provided to the Trustee.
Transferability
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
Certain Matters Relating to the Company
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any
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Certificateholder for the purchase of a Certificate, purchasing Certificates in
any agency or trustee capacity or lending money to the Trust. The Company can
be removed as Servicer only pursuant to an Event of Termination as discussed
below.
Events of Termination
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four Business Days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its debts as they become due, or takes any
corporate action in furtherance of the foregoing; (f) the Servicer fails to be
an Eligible Servicer; or (g) the Servicer's seller-servicer contract with GNMA
is terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon an Event of Termination
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Trust may terminate
all of the Servicer's management, administrative, servicing and collection
functions under the Agreement. Upon such termination, the Trustee or its
designee will succeed to all the responsibilities, duties and liabilities of
the Company as Servicer under the Agreement and will be entitled to similar
compensation arrangements; provided, however, that neither the Trustee nor any
successor Servicer will assume any accrued obligation of the prior servicer or
any obligation of the Company to repurchase Contracts for breach of
representations and warranties, and the Trustee will not be liable for any acts
or omissions of the Servicer occurring prior to a transfer of the Servicer's
servicing and related functions or for any breach by the Servicer of any of its
representations and warranties contained in the Agreement or any related
document or agreement. In addition, the Trustee will notify FHA of the
Servicer's termination as Servicer of the FHA-insured Contracts and will
request that the portion of the Servicer's FHA Insurance reserves allocable to
the FHA-insured Contracts be transferred to the Trustee or a successor
Servicer. See "Description of FHA Insurance" in the Prospectus. Notwithstanding
such termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination of the Company as Servicer will affect in any
manner the Company's obligation to repurchase certain Contracts for breaches of
warranties under the Agreement. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, an Eligible Servicer to act as successor to the
Servicer under the Agreement. The Trustee and such successor may agree upon the
servicing compensation to be paid (after receiving comparable bids from other
Eligible Servicers), which may not be greater than the Monthly Servicing Fee
payable to the Company under the Agreement without the consent of all of the
Certificateholders.
Termination of the Agreement
The Agreement will terminate (after distribution of all principal and
interest then due to Certificateholders) on the earlier of (a) the Payment Date
on which the Aggregate Certificate Principal Balance is reduced to zero; or (b)
the Payment Date occurring in the month following the Servicer's repurchase of
the Contracts as
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described under "Description of the Certificates--Repurchase Option." However,
the Company's representations, warranties and indemnities will survive any
termination of the Agreement.
Amendment; Waiver
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended by agreement of the Trustee, the Servicer
and the Company at any time without the consent of the Certificateholders to
effect the transfer of FHA Insurance reserves to another entity in compliance
with revisions to FHA regulations, provided that prior to any such amendment
S&P and Fitch shall have confirmed that the ratings of the Certificates will
not be lowered or withdrawn following such amendment.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Trust, the Servicer and holders of
Certificates representing 51% or more of the Trust may vote to waive any Event
of Termination, provided that no such amendment or waiver shall (a) reduce in
any manner the amount of, or delay the timing of, collections of payments on
Contracts or distributions which are required to be made on any Certificate, or
(b) reduce the aggregate amount of Certificates required for any amendment of
the Agreement, without unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
Indemnification
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) for any taxes which may at any time be asserted with respect to, and as of
the date of, the conveyance of the Contracts to the Trust (but not including
any federal, state or other tax arising out of the creation of the Trust and
the issuance of the Certificates), and (b) with respect to certain other tax
matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Contract.
Duties and Immunities of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in consideration of the conveyance of
the Contracts, or deposited into the Certificate Account by the Servicer. If no
Event of Termination has occurred, the Trustee will be required to perform only
those duties specifically required of it under the Agreement. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee will be required to examine them to determine
whether they conform as to form to the requirements of the Agreement.
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Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including FHA Insurance premiums not paid by the Servicer and
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (c) to indemnify the Trustee
for, and to hold it harmless against, any loss, liability or expense incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the Trust and its duties thereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers
or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
The Trustee
[Trustee] has its corporate trust offices at [address], Minnesota .
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee. Any successor Trustee must be an FHA Title I approved
lender.
Registration of the Certificates
The Certificates initially will be registered in the name of Cede & Co., the
nominee of DTC. The Certificates may be held by investors only through the
book-entry facilities of DTC. DTC is a limited-purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC accepts securities for deposit from its
participating organizations ("Participants") and facilitates the clearance and
settlement of securities transactions between Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all distributions of principal of, and interest
on, the Certificates from the Trustee through DTC and Participants.
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<PAGE>
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
DESCRIPTION OF THE LIMITED GUARANTY
In order to mitigate the effect of liquidation losses and delinquencies on
the Contracts, the Certificateholders are entitled to receive on each Payment
Date (subject to the limit of the Guaranty Amount) the amount equal to the
Guaranty Payment, if any, under the Limited Guaranty of the Company. The
Guaranty Payment for any Payment Date will equal the amount, if any, by which
the Formula Distribution Amount (equal to one month's interest at the Pass-
Through Rate on the Aggregate Certificate Principal Balance plus the Monthly
Principal for such Payment Date) exceeds the Amount Available in the
Certificate Account for such Payment Date.
The "Guaranty Amount" initially equals $ . Thereafter, on any Payment
Date, the Guaranty Amount will equal the lesser of (i) $ minus all Guaranty
Payments previously made by the Company,
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<PAGE>
or (ii) the Aggregate Certificate Principal Balance as of such Payment Date
plus three months of interest at the Pass-Through Rate on the Aggregate
Certificate Principal Balance as of such Payment Date.
The Limited Guaranty will be an unsecured general obligation of the Company
and will not be supported by any letter of credit or other credit enhancement
arrangement.
As compensation for providing the Limited Guaranty, the Company will be
entitled to receive a Guaranty Fee on each Payment Date equal to the Amount
Available in the Certificate Account less the amounts distributed to the
Certificateholders, the Monthly Servicing Fee and certain amounts required to
reimburse the Trustee or the Servicer, as described under "Description of the
Certificates--Distributions on the Certificates."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[Dorsey & Whitney LLP], counsel to the Company, will deliver its opinion
that, assuming ongoing compliance with the terms of the Agreement, the Trust
will be classified as a grantor trust for federal income tax purposes and not
as an association which is taxable as a corporation. The Company does not
intend to treat the Certificates as Stripped Certificates for federal income
tax reporting purposes. If, however, any fees paid to the Company are deemed
to exceed a reasonable amount, the Certificates may be required to be treated
as Stripped Certificates, which would require any discount at which a
Certificate is purchased to be treated as original issue discount. See
"Certain Federal Income Tax Consequences--Stripped Certificates" in the
Prospectus.
The Certificates held by financial institutions, thrift institutions taxed
as domestic building and loan associations and real estate investment trusts
will not represent interests in "qualifying real property loans," "loans
secured by an interest in real property" or "real estate assets" for purposes
of Sections 593(d), 7701(a)(19)(C) or 856(c)(5) of the Code, respectively.
Furthermore, interest paid with respect to Certificates held by a real estate
investment trust will not be considered to be "interest on obligations secured
by mortgages on real property or on interests in real property" for purposes
of Section 856(c)(3) of the Code.
For purposes of the exemption from United States withholding tax described
in the Prospectus, potential foreign investors are advised that all of the
Contracts were originated after July 18, 1984.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
Non-REMIC Series" in the Prospectus.
ERISA CONSIDERATIONS
No transfer of any Certificates will be permitted to be made to any employee
benefit plan subject to the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Code (a "Plan") unless such Plan,
at its expense, delivers to the Trustee and the Company an opinion of counsel
(in form satisfactory to the Trustee and the Company) to the effect that the
purchase or holding of any Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring a Certificate will be deemed to represent to
the Trustee, the Company and the Servicer that such person is neither a Plan,
nor acting on behalf of a Plan, subject to ERISA or to Section 4975 of the
Code.
S-29
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Amount
Underwriter of Certificates
----------- ----------------
<S> <C>
........................................... $
.............................................. $
----------
Total................................................ $
==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Underwriters propose to offer the Certificates in part directly to
purchasers at the initial public offering price set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
price less concessions not to exceed % of the Original Series 1998-
Certificate Principal Balance. The Underwriters may allow, and such dealers may
reallow, concessions not to exceed % of the Original Series 1998-
Certificate Principal Balance to certain brokers and dealers. After the
Certificates are released for sale to the public, the offering price and other
selling terms may be varied by the Underwriters.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home
improvement contract pass-through certificates without the consent of the
Underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by [Dorsey & Whitney LLP]
Minneapolis, Minnesota, and for the Underwriters by [Thacher Proffitt & Wood,
New York, New York.] The material federal income tax consequences of the
Certificates will be passed upon for the Company by [Dorsey & Whitney LLP].
S-30
<PAGE>
Base Prospectus No. 6 Unsecured Home Improvement Loans --Grantor Trust
PROSPECTUS
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Improvement Loans
(Issuable In Series)
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. We refer to the
certificates for home improvement loans as "certificates" and to each separate
series of certificates as a "series." 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 , 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: (a) this prospectus, which provides general
information, some of which may not apply to a particular series of
certificates, including your series; and (b) the prospectus supplement related
to the particular terms of your series of certificates.
If the terms of your series of certificates described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the certificates of each series certain
monthly and annual reports concerning the certificates and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the Certificates--Reports to
Certificateholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), 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.
2
<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 and the accompanying prospectus supplement.
Title of Securities.......... We call the securities certificates for home im-
provement loans.
Securities Offered .......... Green Tree Financial Corporation will create a
trust and deposit a pool of loans in the trust.
The trust will issue the certificates. This
prospectus describes multiple trusts that Green
Tree will create from time to time. Each trust
will issue a separate series of certificates.
Payments on the certificates will be made
primarily from payments on the related pool of
loans. The terms of the certificates issued by a
trust will be governed by a Pooling and
Servicing Agreement between Green Tree and the
trustee for that series. We will identify the
trustee for a series of certificates in the
related prospectus supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
certificates. You should read carefully the
section entitled "Risk Factors" beginning on
page of this prospectus.
The Loans.................... The loans underlying a series of certificates
form a loan pool. The loans in a loan pool will
be fixed or variable rate loans. All of the
loans will consist of home improvement loans and
promissory notes and will be either conventional
loans or loans insured by the Federal Housing
Administration ("FHA") pursuant to Title I of
the National Housing Act. No loan will be
secured by the related real estate.
The prospectus supplement for each series will
provide information about the following:
^ the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
^ the weighted average and range of
contractual rates of interest on the loans;
^ the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
^ the average outstanding principal balance
of the loans as of the cut-off date;
^ the percentage of the loans that are FHA-
issued;
^ the range of loan-to-value ratios; and
3
<PAGE>
^ the geographic location of improved real
estate underlying the loans.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
Description of The trust will issue the certificates of the
Certificates................ related series of certificates on the terms
specified in the related prospectus supplement.
Each series of certificates will evidence an
interest in the loan pool and other property
held in trust for the benefit of
certificateholders. If we so specify in the
related prospectus supplement, a series of
certificates may include one or more classes
with different rights to payments of principal
and interest, including classes which:
^ are entitled to receive only distributions
of interest,
^ are entitled to receive only distributions
of principal,
^ are entitled to receive principal on a
planned amortization schedule or a targeted
amortization schedule, or
^ are entitled to receive principal only
after other classes have received a
specified amount of principal.
We will issue the certificates in fully
registered form in the authorized denominations
that we specify in the related prospectus
supplement. No government agency or other
insurer will guarantee or insure the
certificates, unless we otherwise specify in the
related prospectus supplement. Similarly, no
government agency or other insurer will
guarantee or insure the loans, except as we
specify in this prospectus and in the related
prospectus supplement.
Subordinated Certificates.... We may subordinate one or more classes of any
series of certificates, as specified in the
related prospectus supplement. The rights of
holders of subordinated certificates to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior certificates to the extent
and in the manner we specify in the related
prospectus supplement. If a series of
certificates contains more than one class of
subordinated certificates, distributions and
losses will be allocated among those classes in
the manner specified in the related prospectus
supplement. The rights of holders of
subordinated certificates, to the extent not
subordinated, may be on a parity with holders of
senior certificates. By subordinating a class of
certificates, we intend to:
^ enhance the likelihood of regular receipt
by holders of senior certificates of the
full amount of scheduled monthly payments
of principal and interest due them, and
^ protect holders of senior certificates
against losses.
4
<PAGE>
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated certificates the benefits of other
forms of credit enhancement that would benefit
only those subordinated certificates.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated certificates, we may provide credit
enhancement with respect to a series of
certificates by pool insurance, letters of
credit, surety bonds, a guarantee of Green Tree,
cash reserve funds or other forms of enhancement
acceptable to each nationally recognized rating
agency rating a series of certificates. We will
describe any such credit enhancement in the
related prospectus supplement.
Interest..................... We will pay interest on the certificates on the
dates specified in the related prospectus
supplement, unless we indicate otherwise. The
related prospectus supplement will describe the
pass-through rate, if any, for each class or the
method of determining the pass-through rate.
This rate may be fixed, variable or adjustable,
as specified in the related prospectus
supplement. For a more complete description of
interest payable on the certificates, see "Yield
Considerations" and "Description of the
Certificates" in this prospectus. As we specify
in the related prospectus supplement, classes of
a series of certificates may not be entitled to
receive interest or may be entitled to receive
interest which is not proportionate to the
principal allocable to such certificates.
Principal (Including Principal on each loan, including any principal
Prepayments)................ prepayments, will be passed through on each
payment date, except as we otherwise describe in
the related prospectus supplement. For a more
complete description of principal on the
certificates, see "Maturity and Prepayment
Considerations" and "Description of the
Certificates" in this prospectus.
Optional Termination......... Unless we specify otherwise in the related
prospectus supplement, Green Tree may repurchase
all the loans relating to a series of
certificates remaining outstanding at the time
and under the circumstances we specify in the
related prospectus supplement. Unless we
otherwise provide in the related prospectus
supplement, the repurchase price will equal the
principal amount of the loans plus accrued and
unpaid interest. For a more complete description
of optional termination of the certificates, see
"Description of the Certificates--Termination of
the Agreement" in this prospectus.
Representations and
Warranties of Green Tree
Financial Corporation .......
Green Tree will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to Green Tree's conveyance of any loan pool to
the trust fund. If Green Tree becomes aware of a
breach of any representation or warranty that
materially adversely affects the
5
<PAGE>
trust fund's interest in any loan or receives
written notice of a breach from the trustee or
the servicer, then Green Tree must either cure
the breach, repurchase the affected loan or, if
the related prospectus supplement so provides,
substitute for the affected loan, under the
conditions further described in this prospectus
and in the prospectus supplement. For a more
complete description of the representations and
warranties of Green Tree, see "Description of
the Certificates--Conveyance of Loans."
Federal Income Tax The trust fund represented by the certificates
Considerations.............. may be treated as a grantor trust for federal
income tax purposes and not as an association
taxable as a corporation. In such an event, each
holder of a Certificate will be treated as the
owner of an undivided pro rata interest in
income and corpus attributable to the related
loan pool and any other assets held by the trust
fund and will be considered the equitable owner
of an undivided interest in the loans included
in such loan pool. If we do not make a REMIC
election with respect to a series of
certificates and the trust fund represented by
those certificates will not be treated as a
grantor trust, the federal income tax
consequences of owning such certificates will be
described in the related prospectus supplement.
For a more complete description of the Federal
income tax considerations related to the
certificates, see "Certain Federal Income Tax
Consequences--Non-REMIC Series."
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in the prospectus
supplement.
Legal Investment............. Unless the related prospectus supplement
indicates otherwise, the certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984, as amended. For a more complete
description of legal considerations regarding
investment in the certificates, see "Legal
Investment Considerations" in this prospectus
and in the prospectus supplement.
Ratings...................... We will not issue the certificates unless one or
more nationally recognized rating agencies have
assigned a rating to the certificates in one of
their four highest rating categories.
The rating of each series of certificates
addresses the likelihood of the timely receipt
of interest and payment of principal on that
6
<PAGE>
series on or before the stated maturity date for
that series. A 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
certificates do not address the likelihood of
payment of principal on any series of
certificates prior to the stated maturity date
or the possibility of the imposition of United
States withholding tax with respect to non-
United States persons. For a more complete
description of the ratings of the certificates,
see "Ratings" in this prospectus and in your
prospectus supplement.
7
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the certificates.
^ Limits on the Availability of FHA Insurance. We will specify in the
prospectus supplement the number and percentage of home improvement
loans in the pool that are insured by FHA pursuant to Title I of the
National Housing Act. 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 Green Tree with FHA
regulations in originating and servicing the loan. Although Green Tree
is an FHA-approved lender and we believe that Green Tree has complied
with FHA regulations, these regulations are susceptible to substantial
interpretation. The law does not require Green Tree to obtain approval
from FHA of its origination and servicing practices. If Green Tree
fails to comply with FHA regulations, FHA may deny some insurance
claims and we cannot assure you that FHA's enforcement of its
regulations will not become stricter in the future. Green Tree
sometimes engages 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 on the loans in a given pool is limited to
the balance of a reserve amount. This reserve amount as of December 31,
1997, was equal to approximately $86,950,000, but will be reduced by
the amount of all FHA insurance claims paid and will be increased by an
amount equal to 10% of the unpaid principal balance of FHA Title I
loans subsequently originated and reported for insurance by Green Tree.
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 FHA-insured home improvement
loans. If we were terminated as Servicer due to bankruptcy or
otherwise, it is anticipated that a proportionate amount of Green
Tree's 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."
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the certificates will not represent an interest
in or obligation of Green Tree. Neither the government, any underwriter
or its affiliates, the Servicer nor any other party will insure or
guarantee any of the certificates of any series (except as we otherwise
specify in the related prospectus supplement).
^ Unsecured Home Improvement Loans. The obligations of an obligor under
each home improvement loan will not be secured by an interest in the
related real estate. The related trust, as the owner of the home
improvement loan, will be a general unsecured creditor as to those
obligations. Consequently, if an obligor defaults on its home
improvement loan, the related trust will have recourse only against the
obligor's assets generally, along with all other general unsecured
creditors of the obligor. In a bankruptcy or insolvency proceeding
relating to an obligor of a home improvement loan, the obligations of
an obligor under that home improvement loan may be discharged in their
entirety. An obligor on a home improvement loan may not demonstrate
concern over performance of its obligations under the home improvement
loan as in the case where such obligations are secured by the real
estate owned by the obligor.
^ Limited Liquidity. 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.
8
<PAGE>
^ Certain Matters Relating to Insolvency. Green Tree intends that each
transfer of loans to the related trust fund will constitute a sale,
rather than a pledge of the loans to secure indebtedness of Green Tree.
However, if Green Tree were to become a debtor under the federal
bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree, or Green Tree as debtor-in-possession, may
argue that the sale of the loans by Green Tree was a pledge of the
loans rather than a sale. This position, if presented to or accepted by
a court, could result in a delay in or reduction of distributions to
the holders of the certificates.
THE TRUST FUND
General
Each Trust Fund will include (i) a Contract Pool, (ii) the amounts held from
time to time in a trust account (the "Certificate Account") maintained by the
Trustee pursuant to the Agreement, (iii) proceeds from FHA Insurance (with
respect to any FHA-insured Contract included in the Contract Pool), (iv) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a series of
certificates, and (v) such other property as may be specified in the related
Prospectus Supplement.
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Contract Pool comprised
of Contracts having the aggregate principal balance as of the specified day of
the month of the creation of the pool (the "Cut-off Date") specified in the
related Prospectus Supplement. Holders of certificates of a series will have
interests only in such Contract Pool and will have no interest in the Contract
Pool created with respect to any other series of certificates, except with
respect to FHA Insurance reserves. If so specified in the related Prospectus
Supplement, the Trust Fund may include a Pre-Funding Account which would be
used to purchase additional Contracts ("Subsequent Contracts") from the Company
during the Pre-Funding Period specified in the related Prospectus Supplement.
The related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Contracts, including the
requisite characteristics of the Subsequent Contracts.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by the Company in the ordinary course
of its business. Specific information respecting the Contracts included in each
Trust Fund will be provided in the related Prospectus Supplement and, to the
extent not contained in the related Prospectus Supplement, in a report on Form
8-K to be filed with the Commission within fifteen days after the initial
issuance of the certificates. A copy of the Agreement with respect to each
series of certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
series will be attached to the Agreement delivered to the Trustee upon delivery
of the certificates.
Whenever in this prospectus terms such as "Contract Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Contract Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of certificates.
The Contract Pools
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by the Company on an individual
basis in the ordinary course of business. The Contracts will be conventional
home improvement contracts or contracts insured by FHA. No Contract will be
secured by an interest in the related real estate. Except as otherwise
specified in the related Prospectus Supplement, the Contracts will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate
(the "Contract Rate").
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For each series of certificates, the Company will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). The Company, as Servicer (in such capacity referred
to herein as the "Servicer", which term shall include any successor to the
Company in such capacity under the applicable Agreement), will service the
Contracts pursuant to the Agreement. See "Description of the Certificates--
Servicing." Unless otherwise specified in the related Prospectus Supplement,
the Contract documents will be held by the Trustee or a custodian on its
behalf.
Each Contract Pool will be composed of Contracts bearing interest at the
Contract Rates specified in the Prospectus Supplement. Unless otherwise stated
in the related Prospectus Supplement, each registered holder of a Certificate
will be entitled to receive periodic distributions, which will be monthly
unless otherwise specified in the related Prospectus Supplement, of all or a
portion of principal on the underlying Contracts or interest on the principal
balance of such Certificate (or on some other principal balance unrelated to
that of such Certificate) at the Pass-Through Rate, or both.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; and the range of
original maturities of the Contracts and the last maturity date of any
Contract. If the Trust Fund includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Contracts, including the requisite
characteristics of the Subsequent Contracts.
The Company will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Certificateholders in a Contract, the Company will be obligated to cure
the breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Contracts."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
series of certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home
improvement loan contracts, costs of carrying such contracts until sale of the
related certificates and to pay other expenses connected with pooling the
Contracts and issuing the certificates.
GREEN TREE FINANCIAL CORPORATION
General
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The
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Company began financing FHA-insured home improvement loans in April 1989 and
conventional home improvement loans in September 1992. The Company also
purchases, pools and services installment sales contracts for various consumer
products. The Company's principal executive offices are located at 1100
Landmark Towers, 345 St. Peter Street, St. Paul, Minnesota 55102-1639
(telephone (651) 293-3400). The Company's quarterly and annual reports are
available from the Company upon written request made to the Company.
Contract Origination
Through its centralized loan processing operations in St. Paul, Minnesota,
the Company arranges to purchase certain contracts from home improvement
contractors located throughout the United States. The Company's regional sales
managers contact home improvement contractors and explain the Company's
available financing plans, terms, prevailing rates and credit and financing
policies. If the contractor wishes to utilize the Company's available customer
financing, the contractor must make an application for contractor approval. The
Company has a contractor approval process pursuant to which the financial
condition, business experience and qualifications of the contractor are
reviewed prior to his or her approval to sell Contracts to the Company. In
addition, the Company has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. The
Company also reviews monthly contractor trend reports which show the default
and delinquency trends of the particular contractor with respect to contracts
sold to the Company. The Company occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that the Company originates are written on forms provided or
approved by the Company and are purchased on an individually approved basis in
accordance with the Company's guidelines. The contractor submits the customer's
credit application and construction contract to the Company's office where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by the Company in June 1993. If the
Company determines that the application meets the Company's underwriting
guidelines and applicable FHA regulations (for FHA-insured contracts) and the
credit is approved, the Company purchases the contract from the contractor when
the customer verifies satisfactory completion of the work, or, in the case of
staged funding, the Company follows up with the customer for the completion
certificate 90 days after funding.
The types of home improvements financed by the Company include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. The Company
may also, under certain limited conditions, extend additional credit beyond the
purchase price of the home improvement for the purpose of debt consolidation.
The original principal amount of an unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement contracts
eligible for FHA Insurance are described under the caption "Description of FHA
Insurance."
The Company began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The unsecured
conventional program allows for an amount financed from $2,500 to $15,000
(except in Massachusetts where the loan limit may be $20,000). The allowable
term of unsecured contracts is 24 to 120 months. The Company's underwriting
standards with respect to unsecured home improvement contracts are, in general,
more stringent than its underwriting standards with respect to secured home
improvement contracts with similar terms. Eligible property includes an owner-
occupied single family home, up to four unit multiple-family dwelling, owner-
occupied condominium or town house, or an owner-occupied manufactured home
located in a Company-approved park or attached to the real estate.
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YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average Contract Rate of the
Contracts (as of the related Cut-off Date) relating to each series of
certificates will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of certificates which may be offered hereby, such as
Interest Only certificates, Principal Only certificates, and Fast Pay/Slow Pay
certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Contracts. If so stated in the related
Prospectus Supplement, the yield on some types of certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the Contracts
included in a Contract Pool may significantly affect an investor's actual yield
to maturity, even if the average prepayment rate over time is consistent with
the investor's expectations. In general, the earlier that prepayments on
Contracts occur, the greater the effect on the investor's yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 25 years.
Prepayment Considerations
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. The Company has
no significant experience with respect to the rate of principal prepayments on
home improvement contracts. Because the Contracts have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed through
to Certificateholders of the related series on the Payment Date following the
Due Period in which such principal prepayment occurred, prepayments on the
Contracts would affect the amount of funds available to make distributions on
the certificates on any Payment Date only if a substantial portion of the
Contracts prepaid prior to their respective due dates in a particular month
(thus paying less than 30 days' interest for that Due Period) while very few
Contracts prepaid after their respective due dates in that month. In addition,
liquidations of defaulted Contracts or the Servicer's or the Company's exercise
of its option to repurchase the entire remaining pool of Contracts (see
"Description of the Certificates--Repurchase Option") will affect the timing of
principal distributions on the certificates of a series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a series of certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
series of certificates, there can be no assurance that the Contracts will
prepay at such rate, and it is unlikely that prepayments or liquidations of the
Contracts will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description of
the Company's or Servicer's option to repurchase the Contracts comprising part
of a Trust Fund when the aggregate outstanding principal balance of such
Contracts is less than a specified percentage of the initial aggregate
outstanding
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principal balance of such Contracts as of the related Cut-off Date. See also
"The Trust Fund--The Contract Pools" for a description of the obligations of
the Company to repurchase a Contract in case of a breach of a representation or
warranty relative to such Contract.
DESCRIPTION OF THE CERTIFICATES
Each series of certificates will be issued pursuant to a separate pooling and
servicing agreement (each, an "Agreement") to be entered into among the
Company, as seller and Servicer, and the trustee named in the related
Prospectus Supplement (the "Trustee"), and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each series of certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
General
The certificates may be issued in one or more Classes. If the certificates of
a series are issued in more than one Class, the certificates of all or less
than all of such Classes may be sold pursuant to this prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
reference herein to the certificates of a Class should be understood to refer
to the certificates of a Class within a series or all of the certificates of a
single-Class series, as the context may require. For convenience of
description, any reference in this prospectus to a "Class" of certificates
includes a reference to any subclasses of such Class.
The certificates of each series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate trust fund (the "Trust Fund") created pursuant to the related
Agreement. The Trust Fund will be held by the Trustee for the benefit of the
Certificateholders. Each Trust Fund, to the extent specified in the related
Prospectus Supplement, will include (i) Contracts (the "Contract Pool") which
are subject to the Agreement, (ii) the amounts held in the Certificate Account
from time to time, (iii) proceeds from FHA Insurance (with respect to any FHA-
insured Contract included in the Contract Pool), (iv) any letter of credit,
guarantee, surety bond, insurance policy, cash reserve fund or other credit
enhancement securing payment of all or part of a series of certificates and (v)
such other property as may be specified in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
certificates will be freely transferable and exchangeable at the corporate
trust office of the Trustee at the address set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge.
Ownership of each Contract Pool may be evidenced by one or more Classes of
certificates, each representing the interest in the Contract Pool specified in
the related Prospectus Supplement. Each series of certificates may include one
or more Classes ("Subordinated certificates") which are subordinated in right
of distribution to one or more other Classes ("Senior certificates"), as
provided in the related Prospectus
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Supplement. Certificates of a series which includes Senior and Subordinated
certificates are referred to herein collectively as "Senior/Subordinated
certificates." A series of Senior/Subordinated certificates may include one or
more Classes ("Mezzanine certificates") which are subordinated to one or more
Classes of certificates and are senior to one or more Classes of certificates.
The Prospectus Supplement with respect to a series of Senior/Subordinated
certificates will set forth, among other things, the extent to which the
Subordinated certificates are subordinated (which may include a formula for
determining the subordinated amount or for determining the allocation of the
Amount Available (hereinafter defined) among Senior certificates and
Subordinated certificates), the allocation of losses among the Classes of
Subordinated certificates, the period or periods of such subordination, the
minimum subordinated amount, if any, and any distributions or payments which
will not be affected by such subordination. The protection afforded to the
Senior Certificateholders from the subordination feature described above will
be effected by the preferential right of such Certificateholders to receive
current distributions from the Contract Pool. If a series of certificates
contains more than one Class of Subordinated certificates, losses will be
allocated among such Classes in the manner described in the Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, Mezzanine
certificates or other Classes of Subordinated certificates may be entitled to
the benefits of other forms of credit enhancement and may, if rated in one of
the four highest rating categories by a nationally recognized statistical
rating organization, be offered pursuant to this prospectus and such Prospectus
Supplement.
If so specified in a Prospectus Supplement, a series of certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only certificates"), interest
("Interest Only certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such series
("Fast Pay/Slow Pay certificates"), or on a planned amortization schedule ("PAC
certificates") or targeted amortization schedule ("TAC certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Contracts evidenced by a single Certificate of each
Class of certificates of a series (a "Single Certificate").
Distributions of principal and interest on the certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of certificates will be made only upon presentation and surrender of the
certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
Global Certificates
The certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the certificates contained in this prospectus assumes that
the certificates will be issued in definitive form. If the certificates of a
Class are issued in the form of one or more Global certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the
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Depositary for such Global Certificate to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary.
The specific terms of the depositary arrangement with respect to any
certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have certificates of
the series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of certificates of
such series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such certificates.
Distributions or payments on certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a Global Certificate or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued certificates of such Class in definitive
form in exchange for the related Global Certificate or certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any certificates of a Class represented by one or more Global
certificates and, in such event, will cause to be issued certificates of such
Class in definitive form in exchange for the related Global Certificate or
certificates. Further, if the Company so specifies with respect to the
certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to
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physical delivery in definitive form of certificates of the Class represented
by such Global Certificate equal in denominations to such beneficial interest
and to have such certificates registered in its name.
Conveyance of Contracts
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Contracts,
including all principal and interest received on or with respect to the
Contracts (other than receipts of principal and interest due on the Contracts
before the Cut-off Date). On behalf of the Trust Fund, as the issuer of the
related series of certificates, the Trustee, concurrently with such conveyance,
will execute and deliver the certificates to the order of the Company. The
Contracts will be as described on a list attached to the Agreement. Such list
will include the amount of monthly payments due on each Contract as of the date
of issuance of the certificates, the Contract Rate on each Contract and the
maturity date of each Contract. Such list will be available for inspection by
any Certificateholder at the principal executive office of the Servicer. Prior
to the conveyance of the Contracts to the Trust Fund, the Company's internal
audit department will complete a review of all of the Contract files confirming
the accuracy of the list of Contracts delivered to the Trustee. Any Contract
discovered not to agree with such list in a manner that is materially adverse
to the interests of the Certificateholders will be repurchased or substituted
for by the Company, or, if the discrepancy relates to the unpaid principal
balance of a Contract, the Company may deposit cash in the separate account
maintained at an Eligible Institution in the name of the Trustee (the
"Certificate Account") in an amount sufficient to offset such discrepancy. If
the Trust Fund includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and the Company's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
the Company to the related Trust Fund would, in the event the Company became a
debtor under the United States Bankruptcy Code, be treated as a true sale and
not as a pledge to secure borrowings. If, however, the transfer of the
Contracts from the Company to the Trust Fund were treated as a pledge to secure
borrowings by the Company, the distribution of proceeds of the Contracts to the
Trust Fund might be subject to the automatic stay provisions of the United
States Bankruptcy Code, which would delay the distribution of such proceeds for
an uncertain period of time. In addition, a bankruptcy trustee would have the
power to sell the Contracts if the proceeds of such sale could satisfy the
amount of the debt deemed owed by the Company, or the bankruptcy trustee could
substitute other collateral in lieu of the Contracts to secure such debt, or
such debt could be subject to adjustment by the bankruptcy trustee if the
Company were to file for reorganization under Chapter 11 of the United States
Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Contract as of the related Closing Date, including that: (a) as
of the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Contract has been waived,
altered or modified in any respect, except by instruments or documents included
in the Contract file and reflected on the list of Contracts delivered to the
Trustee; (c) each Contract is a legal, valid and binding obligation of the
Obligor and is enforceable in accordance with its terms (except as may be
limited by laws affecting creditors rights generally); (d) no Contract is
subject to any right of rescission, set-off, counterclaim or defense; (e) each
FHA-insured Contract was originated in accordance with applicable FHA
regulations and is insured, without set off, surcharge or defense, by FHA
Insurance; (f) each Contract was either (i) entered into by a home improvement
contractor in the ordinary course of such contractor's business and,
immediately upon funding, assigned to the Company or (ii) was originated by the
Company directly; (g) no Contract was originated in or is subject to the laws
of any
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jurisdiction whose laws would make the transfer of the Contract or an interest
therein pursuant to the Agreement or the certificates unlawful; (h) each
Contract complies with all requirements of law; (i) no Contract has been
satisfied or rescinded; (j) all parties to each Contract had full legal
capacity to execute such Contract; (k) no Contract has been sold, conveyed and
assigned or pledged to any other person and the Company has good and marketable
title to each Contract free and clear of any encumbrance, equity, loan, pledge,
charge, claim or security interest, and is the sole owner and has full right to
transfer such Contract to the Trustee; (l) as of the Cut-off Date there was no
default, breach, violation or event permitting acceleration under any Contract
(except for payment delinquencies permitted by clause (a) above), no event that
with notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such
Contract, and the Company has not waived any of the foregoing; (m) each
Contract is a fully-amortizing loan with a fixed rate of interest and provides
for level payments over the term of such Contract; (n) the description of each
Contract set forth in the list delivered to the Trustee is true and correct;
(o) there is only one original of each Contract; and (p) each Contract was
originated or purchased in accordance with the Company's then-current
underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Contract or receives written notice of such a breach
from the Trustee or the Servicer, then the Company will be obligated either to
cure such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Contract, in each case under the
conditions further described herein and in the Prospectus Supplement. This
repurchase obligation will constitute the sole remedy available to the Trust
Fund and the Certificateholders for a breach of a representation or warranty
under the Agreement with respect to the Contracts (but not with respect to any
other breach by the Company of its obligations under the Agreement).
The "Repurchase Price" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Pass-Through
Rate on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Payments on Contracts
Each Certificate Account will be a trust account established by the Servicer
as to each series of certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the certificates, by each rating agency rating the
certificates of such series, (ii) with the trust department of a national bank,
(iii) in an account or accounts the deposits in which are fully insured by the
FDIC, (iv) in an account or accounts the deposits in which are insured by the
FDIC (to the limits established by the FDIC), the uninsured deposits in which
are otherwise secured such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in the Certificate
Account or a perfected first priority security interest against any collateral
securing such funds that is superior to the claims of any other depositors or
general creditors of the depository institution with which the Certificate
Account is maintained or (v) otherwise acceptable to the rating agency without
reduction or withdrawal of the rating assigned to the relevant certificates.
The collateral eligible to secure amounts in the Certificate Account is limited
to United States government securities and certain other high-quality
investments specified in the applicable Agreement ("Eligible Investments"). A
Certificate Account may be maintained as an interest-bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Certificate Account on a daily basis all proceeds and
collections received or made by it with respect to the
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related Contracts subsequent to the Cut-off Date (including scheduled payments
of principal and interest due after the Cut-off Date but received by the
Servicer on or before the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(vi) all amounts received from any credit enhancement provided with
respect to a series of certificates; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or the Company, as described under
"Conveyance of Contracts" above or under "Repurchase Option" below.
Distributions on Certificates
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a series of certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Contracts that were due on or before the Cut-off Date; (ii) all payments
or collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited, if so specified in the related Prospectus
Supplement, to amounts received on particular Contracts as late collections of
principal or interest as to which the Servicer has made an unreimbursed
Advance; and (v) amounts representing reimbursement for any unpaid Servicing
Fee. In the case of a series of certificates which includes only one Class,
the Amount Available for each Payment Date will be distributed pro rata to the
holders of such certificates. In the case of any other series of certificates,
the Amount Available for each Payment Date will be allocated and distributed
to holders of the certificates of such series pursuant to the method and in
the order of priority specified in the applicable Prospectus Supplement. The
amount of principal and interest specified in the related Prospectus
Supplement to be distributed to Certificateholders is referred to herein as
the "Certificate Distribution Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Contracts.
Advances
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Contract in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Contract only to the
extent that the Servicer, in its sole discretion, expects to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof. The
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Servicer will deposit any Advances in the Certificate Account no later than one
Business Day before the following Payment Date. The Servicer will be entitled
to recoup its advances on a Contract from subsequent payments by or on behalf
of the Obligor and from liquidation proceeds (including FHA Insurance payments,
if applicable), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by the Company
for breach of representations and warranties. If the Servicer determines in
good faith that an amount previously advanced will not ultimately be
recoverable from payments by or on behalf of the Obligor or from liquidation
proceeds (including FHA Insurance payments, if applicable), if any, of the
Contract (an "Uncollectible Advance"), the Servicer will be entitled to
reimbursement from payments on other Contracts or from other funds available
therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Contract or from liquidation
proceeds thereof, if any, or (ii) the Trustee determines that it is not legally
able to make such Advance.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical series of certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Contracts and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any series of certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Contract Pool will be the aggregate
principal balance of the Contracts at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date, which,
together with corresponding interest payments, are not part of the Contract
Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Contract is prepaid
in full, interest on the amount prepaid is collected from the Obligor only
to the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior certificates
and the Subordinated certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
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Indemnification
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Contracts) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation for any taxes which may at any time be asserted with respect to, and
as of the date of, the conveyance of the Contracts to the Trust Fund (but not
including any federal, state or other tax arising out of the creation of the
Trust Fund and the issuance of the certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Contracts, to defend and indemnify the Trust Fund, the Trustee
and the Certificateholders (which indemnification will survive any removal of
the Servicer as servicer of the Contracts) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Contract while it was the Servicer.
Servicing
Pursuant to the Agreement, the Servicer will service and administer the
Contracts assigned to the Trustee as more fully set forth below. The Servicer
will perform diligently all services and duties specified in each Agreement, in
the same manner as prudent lending institutions of home improvement contracts
of the same type as the Contracts in those jurisdictions where the related real
properties are located or as otherwise specified in the Agreement. The duties
to be performed by the Servicer will include collection and remittance of
principal and interest payments, as well as submission of FHA Insurance claims
where applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Agreement and any FHA Insurance,
will follow such collection procedures with respect to the Contracts as it
follows with respect to loans or contracts serviced by it that are comparable
to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date, setting forth certain
information regarding the Contract Pool and the certificates of such series as
is specified in the related Prospectus Supplement. Each such report to the
Trustee will be accompanied by a statement from an appropriate officer of the
Servicer certifying the accuracy of such report and stating that the Servicer
has not defaulted in the performance of its obligations under the Agreement. On
or before May 1 of each year, the Servicer will deliver to the Trustee a report
of a nationally recognized accounting firm stating that such firm has examined
certain documents and records relating to the servicing of home improvement
contracts serviced by the Servicer under pooling and servicing agreements
similar to the Agreement and stating that, on the basis of such procedures,
such servicing has been conducted in compliance with the Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home
improvement contracts having an aggregate principal amount of $10 million or
more and which are generally regarded as servicers acceptable to institutional
investors.
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Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Contract. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Contracts,
calculating distributions to Certificateholders and providing related data
processing and reporting services for Certificateholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by the Company from its Monthly
Servicing Fees include payment of FHA Insurance premiums, payment of fees and
expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Contracts (including submission of FHA
Insurance claims, if applicable) or payment of Trustee's fees, and payment of
expenses incurred in connection with distributions and reports to
Certificateholders, except that the Servicer shall be reimbursed out of the
liquidation proceeds of a liquidated Contract (including FHA Insurance
proceeds) for customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in respect of the Servicer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appoints a receiver, liquidator, assignee, custodian, trustee, or sequestrator
(or similar official) of the Servicer, as the case may be, or enters a decree
or order for any substantial liquidation of its affairs; (e) the Servicer
commences a voluntary case under any applicable bankruptcy, insolvency or
similar law, or consents to the entry of an order for relief in an involuntary
case under any such law, or consents to the appointment of or taking possession
by a receiver, liquidator, assignee, trustee, custodian or its creditors, or
fails to, or admits in writing its inability to, pay its debts as they become
due, or takes any corporate action in furtherance of the foregoing; (f) the
Servicer fails to be an Eligible Servicer; or (g) if the Company is the
Servicer, the Company's receiving rights under its master seller-servicer
contract with GNMA are terminated. The Servicer will be required under the
Agreement to give the Trustee and the Certificateholders notice of an Event of
Termination promptly upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
series shall, terminate all of the rights and obligations of the Servicer under
the related Agreement and in and to the Contracts, and the proceeds thereof,
whereupon (subject to applicable law regarding the Trustee's ability to make
advances) the Trustee or a successor Servicer under the Agreement will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
obligation of the Company to repurchase Contracts for breaches of
representations or warranties, and the
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<PAGE>
Trustee and such successor Servicer will not be liable for any acts or
omissions of the prior Servicer occurring prior to a transfer of the Servicer's
servicing and related functions or for any breach by such Servicer of any of
its obligations contained in the Agreement. In addition, the Trustee will
notify FHA of the Company's termination as Servicer of the Contracts and will
request that the portion of the Company's FHA Insurance reserves allocable to
the FHA-insured Contracts be transferred to the Trustee or a successor
Servicer. See "Description of FHA Insurance." Notwithstanding such termination,
the Servicer shall be entitled to payment of certain amounts payable to it
prior to such termination, for services rendered prior to such termination. No
such termination will affect in any manner the Company's obligation to
repurchase certain Contracts for breaches of representations or warranties
under the Agreement. In the event that the Trustee would be obligated to
succeed the Servicer but is unwilling or unable so to act, it may appoint, or
petition to a court of competent jurisdiction for the appointment of, a
Servicer. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Servicer under the Agreement without the consent of all of the
Certificateholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of certificates, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which the Trustee may incur.
Reports to Certificateholders
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly Principal,
specifying the amounts constituting scheduled payments by Obligors,
principal prepayments on the Contracts, and other payments with respect to
the Contracts;
(b) the amount of such distribution which constitutes Monthly Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the Company's FHA Insurance reserve amount;
(e) the amount of fees payable out of the Trust Fund;
(f) the Pool Factor (a percentage derived from a fraction the numerator
of which is the remaining Principal Balance of the certificates and the
denominator of which is the Initial Principal Amount of the certificates)
immediately before and immediately after such Payment Date;
(g) the number and aggregate principal balance of Contracts delinquent
(i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(h) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(i) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(j) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Contracts in the related
Contract Pool at a price equal to the greatest of (i)
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<PAGE>
the principal balance of the Contracts on the prior Payment Date plus 30 days'
accrued interest thereon at the applicable Pass-Through Rate and any delinquent
payments of interest thereon, plus the fair market value (as determined by the
Servicer) of any acquired properties, (ii) the fair market value of all of the
assets of the Trust Fund, and (iii) an amount equal to the Aggregate
Certificate Principal Balance of the related certificates plus interest on such
certificates payable on and prior to the Payment Date occurring in the month
following such repurchase (less amounts on deposit in the Certificate Account
and available to pay such principal and interest). Such price will be paid on
the Payment Date on which such purchase occurs to the Certificateholders of
record on the last Business Day of the immediately preceding Due Period in
immediately available funds against the Trustee's delivery of the Contracts and
any acquired properties to the Servicer. The distribution of such purchase
price to Certificateholders will be in lieu of any other distribution to be
made on such Payment Date with respect to the related Contracts.
Amendment
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein or (iii) to make any other provisions with respect to
matters or questions arising under such Agreement that are not inconsistent
with the provisions thereof, provided that such action will not adversely
affect in any material respect the interests of the Certificateholders of the
related series. Unless otherwise specified in the related Prospectus
Supplement, the Agreement may also be amended by the Company, the Servicer and
the Trustee with the consent of the Certificateholders (other than holders of
Residual certificates) representing 66 2/3% or more of the Aggregate
Certificate Principal Balance of a series for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment that reduces in
any manner the amount of, or delays the timing of, any payment received on or
with respect to Contracts which are required to be distributed on any
Certificate may be effective without the consent of the Holders of each such
Certificate.
Termination of the Agreement
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the final payment or
other liquidation of the last Contract or (b) the Payment Date on which the
Company or the Servicer repurchases the Contracts as described under
"Description of the Certificates--Repurchase Option." However, the Company's
representations, warranties and indemnities will survive any termination of the
Agreement.
The Trustee
The Prospectus Supplement for a series of certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the certificates or any Contract, Contract file or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company, as seller, in consideration of the
conveyance of the Contracts, or deposited into or withdrawn from the
Certificate Account by the Servicer. If no Event of Termination has
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<PAGE>
occurred, the Trustee will be required to perform only those duties
specifically required of it under the Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee will be required to examine them to determine whether they
conform as to form to the requirements of the Agreement. Whether or not an
Event of Termination has occurred, the Trustee is not required to expend or
risk its own funds or otherwise incur any financial liability in the
performance of its duties or the exercise of its powers if it has reasonable
grounds to believe that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including FHA Insurance premiums not paid by the Servicer and reasonable
compensation and the expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to the
Trustee's negligence or bad faith. The Company has agreed to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the Trust Fund and the
Trustee's duties thereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of the Trustee's powers or duties thereunder.
DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which, subject
to the following discussion, are insured by the FHA under Title I of the
National Housing Act.
The insurance available to any Trust Fund will be subject to the limit of a
reserve amount equal to 10% of the principal balance of all Title I insured
loans originated or purchased and reported for FHA Insurance by the Company,
which amount will be increased by an amount equal to 10% of the lesser of the
principal balance or the purchase price of insured loans subsequently
originated or purchased of record by the Company. The Company's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by the Company. In the Agreement, the Company will agree
to pay all FHA Insurance premiums required by FHA Regulations. If the Company
fails to pay any such premium, the Trustee or the successor Servicer (if any)
with respect to each series is obligated to pay such premium and is entitled to
be reimbursed by the Company and from collections on the related Contracts.
As of December 31, 1997, the Company's FHA Insurance reserve amount was equal
to approximately $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement loans,
including the FHA-insured Contracts that may be owned by a Trust Fund. If an
Event of Termination (as defined under "Description of the Certificates--Events
of Termination") occurs, each Trustee will notify FHA of the Company's
termination as Servicer of the related FHA-insured Contracts and will request
that the portion of the Company's FHA Insurance reserves allocable to the FHA-
insured Contracts be transferred to the Trustee or a successor servicer.
Although each Trustee will request such a transfer of reserves, FHA is not
obligated to comply with such a request, and may determine that it is not in
FHA's interest to permit such transfer of reserves. In addition, FHA has not
specified how insurance reserves might be allocated in such event, and there
can be no assurance that any reserve amount, if transferred to the Trustee or a
successor Servicer, would not be substantially less than 10% of the outstanding
principal amount of the FHA-insured Contracts. It is likely that the Trustee or
any successor Servicer would be the lender of record on other FHA Title I
loans, so that any reserves that are so permitted to be transferred would
become commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with
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<PAGE>
"earmarking" (segregating such reserves so that they will not be commingled
with the reserves of the transferee) if it is in FHA's interest to do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for the
purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary of HUD from time to time publishes a list of ineligible
items and activities which may not be financed with the proceeds of an FHA-
insured home improvement loan.
Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, submit a claim to FHA. The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Failure to comply with FHA regulations
may result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Contract in default and submitting a claim to FHA, the
Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described under
"Green Tree Financial Corporation--Contract Origination," the Company does not
purchase a Contract until the customer verifies satisfactory completion of the
work.
Upon submission of a claim to FHA, the related Trust Fund must assign its
entire interest in the Contract to the United States. In general, the claim
payment will equal 90% of the sum of (i) the unpaid principal amount of the
Contract at the date of default and uncollected interest computed at the
Contract Rate earned to the data of default, (ii) accrued and unpaid interest
on the unpaid amount of the Contract from the date of default to the date of
submission of the claim plus 15 calendar days (but in no event more than nine
months) computed at a rate of 7% per annum, (iii) uncollected court costs, and
(iv) legal fees, not to exceed $500.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Contracts
to a Trust Fund, the Certificateholders of such series, as the beneficial
owners of the Trust Fund, will succeed collectively to all of the rights
thereunder (including the right to receive payment on the Contracts). The
following discussion contains summaries of certain legal aspects of home
improvement contracts which are general in nature. These legal aspects are in
addition to the requirements of FHA regulations described in "Description of
FHA Insurance" with respect to the FHA-insured Contracts. Because such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the improved real estate is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Contracts.
Consumer Protection Laws with respect to Contracts
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the
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transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of a Contract to all claims and defenses which
the debtor could assert against the home improvement contractor. Liability
under this rule is limited to amounts paid under a Contract; however, the
Obligor also may be able to assert the rule to set off remaining amounts due as
a defense against a claim brought by the Trust Fund against such Obligor.
The obligations of the Obligor under each Contract are not secured by an
interest in the related real estate or otherwise, and the related Trust Fund,
as the owner of a Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a Contract, the
related Trust Fund will have recourse only against the Obligor's assets
generally, along with all other general unsecured creditors of the Obligor. In
a bankruptcy or insolvency proceeding relating to an Obligor on a Contract, the
obligations of the Obligor under such Contract may be discharged in their
entirety, notwithstanding the fact that the portion of such Obligor's assets
made available to the Trust Fund as a general unsecured creditor to pay amounts
due and owing thereunder are insufficient to pay all such amounts.
Enforceability of Certain Provisions
The standard form of note generally contains provisions obligating the
borrower to pay a late charge if payments are not timely made. In addition to
limitations imposed by FHA regulations with respect to FHA- insured Contracts,
in certain states there are or may be specific limitations upon late charges
which a lender may collect from a borrower for delinquent payments. Under the
Agreement, late charges (to the extent permitted by law and not waived by the
Company) will be retained by the Company as additional servicing compensation.
The standard form of note also includes 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 accelerate when an acceleration of the indebtedness would be inequitable or
unjust and the circumstances would render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a junior mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under mortgages or the deeds of trust receive notices in
addition to statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protection to the borrower.
It is the Company's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days'
interest on the first payment on these deferred payment contracts.
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Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Contracts. Any shortfall in interest collections resulting from
the application of the Relief Act or similar legislation, which would not be
recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Certificateholders. In the event that the Relief
Act or similar legislation applies to any Contract which goes into default,
there may be delays in payment on the certificates in connection therewith. Any
other interest shortfalls, deferrals or forgiveness of payments on the
Contracts resulting from similar legislation or regulations may result in
delays in payments or losses to Certificateholders.
The Company will represent and warrant under each Agreement that each
Contract complies with all requirements of law. Accordingly, if any Obligor has
a claim against the related Trust Fund for violation of any law and such claim
materially adversely affects the Trust Fund's interest in a Contract, such
violation would constitute a breach of a representation and warranty under the
Agreement and would create an obligation to repurchase such Contract unless the
breach is cured. See "Description of the Certificates--Conveyance of
Contracts."
Repurchase Obligations
Under the Agreement, the Company will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating or
servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Agreement and would create an obligation
of the Company to repurchase such Contract unless the breach is cured. See
"Description of the Certificates--Conveyance of Contracts."
In addition, the Company will also represent and warrant under each Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust Fund for violation of any law and
such claim materially adversely affects the Trust Fund's interest in a
Contract, such violation would constitute a breach of a representation and
warranty under the Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Certificates--
Conveyance of Contracts."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions
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involving the "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("Parties in Interest" under ERISA or "Disqualified
Persons" under the Code) who have certain specified relationships to the Plans,
unless a statutory or administrative exemption is available. Certain Parties in
Interest (or Disqualified Persons) that participate in a prohibited transaction
may be subject to a penalty (or an excise tax) imposed pursuant to Section
502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available.
Plan Asset Regulations
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the certificates. Therefore, neither
Plans nor such entities should acquire or hold certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests. The prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
apply to the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA
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and the Code and will not subject the Trustee, the Trust Fund, the Company or
the Servicer to any obligation or liability in addition to those undertaken in
the Agreement. Unless such opinion is delivered, each person acquiring a
Certificate will be deemed to represent to the Trustee, the Company and the
Servicer that such person is neither a Plan, nor acting on behalf of a Plan,
nor purchasing with Plan Assets of any Plan.
Consultation With Counsel
Any fiduciary or other Plan investor that proposes to acquire or hold
certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, all of which are subject to change (which change may
be retroactive) or possibly differing interpretations. The discussion does not
purport to deal with federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors to determine the federal,
state, local, and any other tax consequences of the purchase, ownership, and
disposition of the certificates.
Tax Status of the Trust Fund. Counsel will, unless otherwise specified in the
related Prospectus Supplement, have advised the Company that, in their opinion,
each Contract Pool and the arrangement to be administered by the Company under
which the Trustee will hold and the Company will be obligated to service the
Contracts and pursuant to which certificates will be issued to
Certificateholders will not be classified as an association taxable as a
corporation or a "taxable mortgage pool," within the meaning of Section 7701(i)
of the Internal Revenue Code of 1986, as amended (the "Code"), but rather will
be classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Certificateholder will be treated as the owner of a
pro rata undivided interest in the ordinary income and corpus portions of the
trust attributable to the Contract Pool in which its Certificate evidences an
ownership interest and will be considered the equitable owner of a pro rata
undivided interest in each of the Contracts included therein. The following
discussion assumes the Trust Fund will be so classified as a grantor trust.
Tax Status of Certificates. In general, (i) certificates held by a "domestic
building and loan association" within the meaning of Section 7701(a)(19) of the
Code will not be considered to represent "loans secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code and (ii)
certificates held by a real estate investment trust will not constitute "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code and
interest thereon will not be considered "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. Investors affected by the foregoing provisions of the Code should consult
with their own tax advisors with respect to these matters.
Tax Treatment of Certificates. Subject to the discussion below of the
"stripped bond" rules of the Code, Certificateholders will be required to
report on their federal income tax returns, and in a manner consistent with
their respective methods of accounting, their pro rata share of the entire
income arising from the Contracts comprising such Contract Pool, including
interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Contracts. (For purposes of this discussion, the term
"disposition," when used with respect to the Contracts, includes scheduled or
prepaid collections with respect to the Contracts, as well as the sale or
exchange of a Certificate.) Subject to the discussion below of certain
limitations on itemized deductions, Certificateholders will be entitled under
Section 162 or 212 of the Code to deduct their pro rata share of related
servicing fees,
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administrative and other non-interest expenses, including assumption fees and
late payment charges retained by the Company. An individual, an estate, or a
trust that holds a Certificate either directly or through a pass-through entity
will be allowed to deduct such expenses under Section 212 of the Code only to
the extent that, in the aggregate and combined with certain other itemized
deductions, they exceed 2% of the adjusted gross income of the holder. In
addition, Section 68 of the Code provides that the amount of itemized
deductions (including those provided for in Section 212 of the Code) otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code ($124,500 for 1998, in the
case of a joint return) will be reduced by the lesser of (i) 3% of the excess
of adjusted gross income over the specified threshold amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of an
individual, trust, estate or pass-through entity that is a holder of a
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 Certificateholder is not permitted to deduct
servicing fees allocable to a Certificate, the taxable income of the
Certificateholder attributable to that Certificate will exceed the net cash
distributions related to such income. Certificateholders may deduct any loss on
disposition of the Contracts to the extent permitted under the Code.
A Certificateholder will be treated as purchasing an interest in each
Contract comprising the Contract Pool at a price determined by allocating the
purchase price paid for the Certificate among all such Contracts in proportion
to their fair market values at the time of purchase of the Certificate. To the
extent that the portion of the purchase price of a Certificate allocated to a
Contract is greater than or less than the portion of the principal balance of
the Contract allocable to the Certificate, that interest in the Contract will
be deemed to have been acquired with premium or discount, respectively.
Market Discount. A Certificateholder generally will be treated as having
acquired an interest in a Contract at a market discount if, at the time the
Certificate is acquired, the unpaid principal balance on such Contract
allocable to the Certificate exceeds the portion of the price paid for the
Certificate by such Certificateholder that is allocated to that Contract. A
Certificateholder who acquires an interest in a Contract at a market discount
will be required to recognize accrued market discount as ordinary income as
payments of principal are received on such Contract or upon the sale or
exchange of the Certificate. Section 1276(b)(3) of the Code authorizes the
issuance of regulations providing for the method for accruing market discount
on debt instruments, the principal of which is payable in more than one
installment, such as a Contract. Until such regulations are issued, the
legislative history associated with this provision indicates certain methods
which are to be used. In general, the holder of a Certificate may elect to
treat market discount as accruing either (i) under a constant yield method that
is similar to the method for the accrual of original issue discount or (ii)
under a ratable accrual method (pursuant to which the market discount is
treated as accruing in equal daily installments during the period the
Certificate is held by the purchaser), in each case computed taking into
account the prepayment assumption used in pricing the initial offering of such
Certificate (the "Prepayment Assumption"). Because the regulations referred to
above have not been issued, it is not possible to predict what effect, if any,
such regulations, when issued, might have on the tax treatment of an interest
in a Contract purchased at a discount.
The Code provides that the market discount in respect of a Contract will be
considered to be zero if the amount of discount allocable to the Contract is
less than 0.25% of the Contract'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 payment representing the stated redemption price of such Contract and
that portion of the discount allocable to such payment would be reported as
income when such payment occurs or is due.
The Code further provides that any principal payment with respect to a
Contract acquired with market discount or any gain on disposition of such a
Contract shall be treated as ordinary income to the extent it does not exceed
the accrued market discount at the time of such payment. The amount of accrued
market discount
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for purposes of determining the amount of ordinary income to be recognized with
respect to subsequent payments on such a Contract is to be reduced by the
amount previously treated as ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income may require a holder of an interest in a
Contract having market discount to defer a portion of the interest deductions
attributable to any indebtedness incurred or continued to purchase or carry
such Contract. Alternatively, a holder of an interest in a Contract 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 Certificate
subject to such election will be increased to reflect market discount included
in gross income, thereby reducing any gain or increasing any loss on a sale or
taxable disposition.
The treatment of any discount will depend upon whether the discount
represents market discount or original issue discount. It is not anticipated
that the Contracts will have original issue discount, unless they are subject
to the "stripped bond" rules of the Code described below. If the Contracts are
subject to the stripped bond rules of the Code, the market discount rules
discussed above may not apply.
Amortizable Premium. A holder of a Certificate who holds the Certificate as a
capital asset and who is treated as having purchased an interest in a Contract
at a cost greater than its stated redemption price at maturity will be
considered to have purchased the interest in the Contract at a premium. In
general, the Certificateholder may elect to deduct the amortizable bond premium
as it accrues under a constant yield method. A Certificateholder's tax basis in
the 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 Contract for this purpose. Amortizable
bond premium with respect to an interest in a Contract will be treated as an
offset to interest income on such Contract, 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 Contract for such year. Any
election to deduct amortizable bond premium will apply to all debt instruments
(other than instruments the interest on which is excludable from gross income)
held by the Certificateholder at the beginning of the first taxable year to
which the election applies or thereafter acquired, and may be revoked only with
the consent of the Service. Bond premium on an interest in a Contract 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
Certificate. Certificateholders who pay a premium for a Certificate should
consult their tax advisors concerning such an election and rules for
determining the method for amortizing bond premium.
Stripped Certificates. Certain classes of certificates may be subject to the
stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Contract from ownership of the right to receive some or
all of the related interest payments. Certificates will constitute Stripped
certificates and will be subject to these rules under various circumstances,
including the following: (i) if any servicing compensation is deemed to exceed
a reasonable amount; (ii) if the Company or any other party retains a portion
of the payments to be made under the Contracts comprising a Contract Pool;
(iii) if two or more classes of certificates are issued representing the right
to non-pro rata percentages of the interest or principal payments on the
Contracts; or (iv) if certificates are issued which represent the right to
interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Rules governing original issue
discount are set forth in Sections 1271-1273 and 1275 of the Code and the
Treasury Regulations issued thereunder (the "OID Regulations"). In general, in
the hands of the original holder of a Stripped Certificate, original issue
discount, if any, is the difference between the "stated redemption price at
maturity" of the Certificate and its "issue price." For purposes of applying
the original issue discount provisions of the Code, the issue price of a
Stripped Certificate will be the purchase price paid by each holder thereof and
the stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with
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respect to a Stripped Certificate may be treated as zero under the original
issue discount de minimis rules if it is less than .25% of the principal amount
of the Certificate multiplied by the weighted average maturity of the
Certificate as defined in the OID Regulations. A purchaser of a Stripped
Certificate may be required to account for any discount on the certificate as
market discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the certificate was treated as zero
under the original issue discount de minimis rule when the certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off of the Contracts.
See "Market Discount" above.
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 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
Stripped Certificateholder's ordinary gross income in any taxable year will be
computed in accordance with Section 1272(a) of the code and the OID
Regulations. Under such Section and the OID Regulations, original issue
discount accrues on a daily basis under a constant yield method that takes into
account the compounding of interest. Although the OID Regulations suggest that
a prepayment assumption is not to be used in computing the yield on the
underlying assets of a Trust Fund, the Code appears to require that such a
prepayment assumption be used in computing yield with respect to Stripped
certificates. In the absence of authority to the contrary, the Company intends
to base information reports and returns to the Service and the holders of
Stripped certificates taking into account an appropriate prepayment assumption.
Holders of Stripped certificates should refer to the related Prospectus
Supplement to determine whether and in what manner the original issue discount
rules will apply thereto.
When an investor purchases more than one class of Stripped certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Contract or (ii) a separate installment obligation for each
Contract representing the Stripped Certificate's pro rata share of principal
and/or interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain certificates or Contracts as exceeding a reasonable fee for the
services being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Contracts. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
Gain or Loss on Disposition. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized in the sale and its aggregate adjusted basis in the
Contracts represented by the Certificate. Generally, the aggregate adjusted
basis will equal the Certificateholder's cost for the Certificate increased by
the amount of any previously reported income or gain with respect to the
Certificate and decreased by the amount of any losses previously reported with
respect to the Certificate and the amount of any distributions received
thereon. Except as provided above with respect to the original issue discount
and market discount rules, any such gain or loss would be capital gain or loss
if the Certificate was held as a capital asset.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Certificate and who is not
(i) a citizen or resident of the United States, (ii) a
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corporation, partnership, or other entity organized in or under the laws of the
United States or a political subdivision thereof, (iii) an estate the income of
which is includible in gross income for United States tax purposes regardless
of its source or (iv) a trust if (A) a court within the United States is able
to execute 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 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
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. If the interest on a 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
Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Certificate generally will not be subject to United
States federal income tax unless either (i) the Foreign Holder is a nonresident
alien individual who holds the Certificate as a capital asset and who is
present in the United States for 183 days or more in the taxable year of the
disposition and either the gain is attributable to an office or other fixed
place of business maintained in the U.S. by the individual or the individual
has a "tax home" in the United States, or (ii) the gain is effectively
connected with the conduct by the Foreign Holder of a trade or business within
the United States.
It appears that a 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.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. Backup withholding may apply to
a 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 Certificateholder who is a foreign person if the
Certificateholder fails to provide the Trustee or the Certificateholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the 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. 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.
Tax Administration and Reporting. The Company will furnish to each
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Certificateholder who was a Certificateholder at any time during
such year, information regarding the amount of servicing compensation received
by the Company and any sub-servicer and such other customary factual
information as the Company deems necessary or desirable to enable
Certificateholders to prepare their tax returns. Reports will be made annually
to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the certificates.
33
<PAGE>
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
No certificates offered hereby will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because none of the Contracts will be secured 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.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the certificates constitute legal
investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of certificates sold
under this prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any series of certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
UNDERWRITING
The Company may sell certificates of each series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place certificates
directly to other purchasers or through agents. The Company intends that
certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular series of certificates may be made through
a combination of such methods.
The distribution of the certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a series of
certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of certificates of such series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this prospectus,
some or all of such certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the certificates, Underwriters may receive
compensation from the Company or from purchasers of certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the certificates of a series to or through dealers and
such dealers may
34
<PAGE>
receive compensation in the form of discounts, concessions or commissions from
the Underwriters and/or commissions from the purchasers for whom they may act
as agents. Underwriters, dealers and agents that participate in the
distribution of the certificates of a series may be deemed to be Underwriters,
and any discounts or commissions received by them from the Company and any
profit on the resale of the certificates by them may be deemed to be
underwriting discounts and commissions, under the Securities Act of 1933, as
amended (the "Securities Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
35
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+This preliminary prospectus supplement and the information contained herein +
+are subject to completion or amendment and prospective purchasers are +
+referred to the related final prospectus supplement for definitive +
+information on any matter contained herein. This preliminary Prospectus +
+Supplement shall not constitute an offer to sell or the solicitation of an +
+offer to buy nor shall there be any sale of these securities in any +
+jurisdiction in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+jurisdiction. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus Supplement to Base No. 7
PROSPECTUS SUPPLEMENT
(To prospectus dated , 1999)
$ (Approximate)
GREEN TREE
Seller and Servicer
Green Tree Home Improvement Trust 1999-
Loan-Backed Notes and Certificates
----------
The securities will consist of classes, but we are offering only the
following classes now:
<TABLE>
<CAPTION>
Approximate Interest Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- -------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
A-1 Notes............... $ % % % %
A-2 Notes............... $ % % % %
A-3 Notes............... $ % (4) (4) (4)
A-4 Notes............... $ % (4) (4) (4)
Total................... $ $ (5) $ (5)
</TABLE>
- -----
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on , 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
Investing in the notes and the certificates involves certain risks.
Prospective investors should consider carefully the Risk Factors beginning on
page S-12 in this prospectus supplement and on page in the prospectus.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
The notes will be delivered through the same-day funds settlement system of
the Depository Trust Company on or about , 1999.
The underwriters named below will offer the notes 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- in this prospectus supplement and
on page in the prospectus.
----------
[Underwriters]
The date of this prospectus supplement is , 1999
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Notes........................................ S-4
Risk Factors............................................................. S-12
The Trust................................................................ S-13
The Trust Property....................................................... S-14
The Contract Pool........................................................ S-15
Green Tree Financial Corporation......................................... S-20
Yield and Prepayment Considerations...................................... S-23
Description of the Notes................................................. S-25
Description of the Counterparty.......................................... S-33
Description of the Certificates.......................................... S-33
Description of the Trust Documents and Indenture......................... S-35
Certain Federal and State Income Tax Consequences........................ S-42
ERISA Considerations..................................................... S-42
Underwriting............................................................. S-44
Legal Matters............................................................ S-45
Annex I.................................................................. A-1
Prospectus
Important Notice About Information Presented in This Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 11
The Trusts............................................................... 13
Green Tree Financial Corporation......................................... 14
Yield Considerations..................................................... 16
Maturity and Prepayment Considerations................................... 16
Pool Factor.............................................................. 17
Use of Proceeds.......................................................... 18
The Notes................................................................ 18
The Certificates......................................................... 22
Certain Information Regarding the Securities............................. 24
Description of the Trust Documents....................................... 27
Description of FHA Insurance............................................. 37
Certain Legal Aspects of the Contracts; Repurchase Obligations........... 38
Certain Federal Income Tax Consequences.................................. 40
Certain State Income Tax Considerations.................................. 47
ERISA Considerations..................................................... 47
Legal Investment Considerations.......................................... 48
Ratings.................................................................. 48
Underwriting............................................................. 48
Legal Matters............................................................ 50
Experts.................................................................. 50
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the notes in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Improvement and Home Equity Loan Trust 1999-
since the date hereof.
S-2
<PAGE>
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation,
about Green Tree's home improvement lending business, and about any series of
certificates or notes for home improvement loans that Green Tree may wish to
sell. This prospectus supplement contains more detailed information about this
series of notes. Since the terms of this series may differ from the general
information provided in the prospectus, you should rely on the information in
this prospectus supplement rather than any different information in the
prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these notes has been or will be prepared in the
United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These notes may not be offered or sold, or re-offered or re-
sold, to persons in the United Kingdom, except (1) to persons whose ordinary
activities involve them in acquiring, holding, managing and disposing of
investments (as principal or agent) for the purpose of their businesses, or (2)
in circumstances that will not constitute or result in an offer to the public
in the United Kingdom within the meaning of the United Kingdom Public Offers of
Securities Regulation 1995. You may not pass this prospectus supplement and
prospectus, or any other document inviting applications or offers to purchase
notes or offering notes for purchase, to any person in the United Kingdom who
(1) does not fall within article 11(3) of the Financial Services Act 1986
(Investment Advisements) (Exemptions) Order 1996 or (2) is not otherwise a
person to whom passing this prospectus supplement and prospectus would be
lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE NOTES
This summary highlights selected information regarding the notes, 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 notes, read this
entire prospectus supplement and the accompanying prospectus.
Green Tree Home Improvement Trust 1999- will issue the classes of securities
listed in the table below.
<TABLE>
<CAPTION>
Interest Approximate Moody's S&P
Class Rate Principal Amount (1) Rating Rating
- ----- -------- -------------------- ------- ------
<S> <C> <C> <C> <C>
A-1 Notes.......................... % $
A-2 Notes..........................
A-3 Notes..........................
A-4 Notes..........................
</TABLE>
- --------
(1) May vary plus or minus 5%.
Issuer ..................... Green Tree Home Improvement and Home Equity Loan
Trust 1999- , a Delaware business trust.
Seller and Servicer......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Indenture Trustee........... [Indenture trustee], not in its individual
capacity but solely as trustee under the trust
indenture.
Owner Trustee............... [Owner trustee], not in its individual capacity
but solely as owner trustee under the trust
agreement.
Payment Date................ The fifteenth day of each month (or, if that
fifteenth day is not a business day, the next
succeeding business day) beginning on 15,
1999.
Record Date................. The business day just before the related payment
date, beginning in 1999.
Distributions on Notes...... Distributions on the notes on any payment date
will be made primarily from amounts collected on
the home improvement loans comprising the loan
pool during the prior calendar month. This is the
amount available for distribution. On each
payment date, the indenture trustee will apply
the amount available, less certain fees to the
note insurer and servicer (if other than Green
Tree), to make distributions of principal and
interest on the notes in the following order of
priority:
^ The Class A-1 interest;
^ The Class A-1 principal;
S-4
<PAGE>
^ The Class A-2 interest;
^ The Class A-2 principal;
^ The Class A-3 interest;
^ The Class A-3 principal;
^ The Class A-4 interest; and
^ The Class A-4 principal;
See "Description of the Notes--Payments on
Contracts" for a detailed description of the
amounts that will constitute the amount available
for any payment date.
A. Class A-1 Interest ...... We will pay interest on the Class A-1 notes that
has accrued from the previous distribution date.
If there are not enough funds available to pay
interest on the Class A-1 notes, we will carry
the shortfall forward and add it to the amount of
interest payable on the next distribution date.
B. Class A-1 Principal...... We will pay the Class A-1 noteholders principal
on each distribution date, to the extent
available in an amount equal to % (approximate)
of a formula principal distribution amount plus
any unpaid shortfall of principal, if any, from a
previous distribution date. For more information
on how we calculate the amount of principal we
pay each month on the notes, see "Description of
the Trust Documents and Indenture--
Distributions."
C. Class A-2 Interest....... We will pay interest on the Class A-2 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-2 notes from
funds available after we pay interest on the
previous class of notes. If there are not enough
funds available to pay interest on the Class A-2
notes, we will carry the shortfall forward and
add it to the amount of interest payable on the
next distribution date.
D. Class A-2 Principal...... We will pay the Class A-2 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the Trust Documents
and Indenture--Distributions."
E. Class A-3 Interest....... We will pay interest on the Class A-3 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-3 notes from
funds available after we pay interest on the
previous class of notes. If there are not enough
funds available to
S-5
<PAGE>
pay interest on the Class A-3 notes, we will
carry the shortfall forward and add it to the
amount of interest payable on the next
distribution date.
F. Class A-3 Principal ..... We will pay the Class A-3 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the trust Documents
and Indenture--Distributions."
G. Class A-4 Interest....... We will pay interest on the Class A-4 notes that
has accrued from the previous distribution date.
We will pay interest on the Class A-4 notes from
funds available after we pay interest on the
previous class of notes. If there are not enough
funds available to pay interest on the Class A-4
notes, we will carry the shortfall forward and
add it to the amount of interest payable on the
next distribution date.
H. Class A-4 Principal...... We will pay the Class A-4 noteholders principal
on each distribution date, to the extent
available after paying interest and principal on
the previous classes of notes, in an amount equal
to % (approximate) of a formula principal
distribution amount plus any unpaid shortfall of
principal, if any, from a previous distribution
date. For more information on how we calculate
the amount of principal we pay each month on the
notes, see "Description of the trust Documents
and Indenture--Distributions."
Interest Rate Cap The Class A-1 noteholders will have the benefit
Agreement................... of an Interest Rate Cap Agreement, dated ,
1999 between the trust and [counterparty]. Under
the Interest Rate Cap Agreement, [counterparty]
will make a payment to the trust on each
distribution date, to the extent that the Class
A-1 rate exceeds 10%, pursuant to a pre-set
formula. For more information about calculations
under the Interest Rate Cap Agreement, see
"Description of the Notes--Interest Rate Cap
Agreement" and "Description of the Counterparty."
Spread Account.............. The Class A-2, Class A-3 and Class A-4
noteholders will have the benefit of a separate
sub-account for each Class contained in a spread
account. The indenture trustee will hold the
spread account. On any distribution date, if
there are not enough funds to distribute interest
on the Class A-2, Class A-3 or Class A-4 notes,
the
S-6
<PAGE>
indenture trustee will withdraw the amount of the
deficiency from the applicable sub-account for
distribution to the applicable class of notes.
On the closing date, the amount on deposit in the
Class A-2, Class A-3 and Class A-4 sub-accounts
will be zero. On each distribution date, the
indenture trustee will deposit all funds
remaining in the collection account, after
distribution of all interest and principal on the
notes first to the Class A-2 sub-account, then to
the Class A-3 sub-account and then to the Class
A-4 sub account, until the amount on deposit in
each of the sub-accounts equals $ , $
and $ . If the indenture trustee
withdraws funds from any sub-account, that sub-
account will be replenished as provided in the
Sale and Servicing Agreement and the Indenture.
The spread account will be included in the
property of the trust. For more information about
calculation of the amounts in the spread account,
see "Description of the Notes--The Spread
Account."
Reserve Account............. Noteholders will have the benefit of a reserve
account. The indenture trustee will hold the
reserve account. On any distribution date, if the
funds in the note distribution account are
insufficient to make full payment of interest or
principal payable on a class of notes, the
indenture trustee will withdraw the amount of the
deficiency from the reserve account and deposit
that amount in the note distribution account for
distribution to the applicable class of notes.
On the closing date, the amount on deposit in the
reserve account will be zero. On each
distribution date, the indenture trustee will
deposit into the reserve account all funds
remaining in the collection account, after
distribution of all interest and principal
payable on the notes, all interest payable on the
certificates and all deposits in the spread
account, until the amount in the reserve account
equals % of the pool scheduled principal
balance. If the reserve account is drawn upon, it
will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture.
The reserve account will be included in the trust
property. See "Description of the notes--The
Reserve Account."
Terms of the Certificates... Below are the principal terms of the
certificates:
A. Distributions............ certificateholders will be entitled to receive on
each distribution date commencing in 1999,
to the extend the amount available in the
collection account including the guaranty payment
is sufficient, their distributable amount. For a
description of the certificateholders'
distributable amount, see "Description of the
trust Documents and Indenture."
S-7
<PAGE>
B. Pass-Through Rate........ % per year payable monthly at one-twelfth
the annual rate calculated on the basis of a 360-
day year consisting of twelve 30-day months.
C. Interest................. On each distribution date, the Owner trustee will
distribute to the certificateholders accrued
interest at the pass-through rate on the
outstanding certificate principal balance.
Interest will accrue from , 1999 or from the
most recent distribution date up to but excluding
the following distribution date. The certificate
principal balance on any distribution date will
be the original certificate principal balance
minus all amounts previously distributed to the
certificateholders in respect of principal and
minus any unreimbursed liquidation losses
absorbed by the certificates.
We will pay interest on the certificates to the
extent of funds available on each distribution
date after payment of all interest and principal
then payable on the notes. If there are not
enough funds available to make a full
distribution of interest on the certificates, the
amount of the shortfall will be carried forward
and added to the amount of interest payable on
the next distribution date. Any amount carried
forward will bear interest at the pass-through
rate, to the extent legally permissible. For a
more detailed description of how interest will be
paid on the certificates, see "Description of the
Certificates."
D. Principal................ We will not pay principal on the certificates
until we have paid off all of the notes in full.
On each distribution date after we have paid off
the notes, we will pay principal on the
certificates in an amount equal to the formula
principal distribution amount for that
distribution date, plus any unpaid shortfall from
prior distribution dates.
E. Limited Guarantee........ To mitigate the effect of the subordination of
the certificates and the effect of liquidation
losses on the loans, we will entitle the
certificateholders to receive on each
distribution date an amount equal to the guaranty
payment, if any, under Green Tree's limited
guaranty. The guaranty payment for any
distribution date will equal the difference
between the certificateholders' distributable
amount and the remaining funds available in the
collection account after payment of all interest
and principal on the notes and the deposit in any
sub-account of the spread account or the reserve
account of any amounts previously withdrawn and
not previously replenished. The
certificateholders' distributable amount equals
the unpaid and accrued interest on the
certificates, plus on each distribution date
after the notes are paid off, principal in an
amount equal to the formula principal
distribution amount for that distribution date
plus any unpaid Certificate principal shortfall
for that distribution date and plus any
unreimbursed certificate principal liquidation
loss.
S-8
<PAGE>
The limited guaranty will be an unsecured general
obligation of Green Tree and will not be
supported by any letter of credit or other
enhancement arrangement. The rating assigned to
the certificates may be affected by the rating of
Green Tree's debt securities.
F. Optional Prepayment...... If we exercise our option to purchase the loans
under the Sale and Servicing Agreement, the
certificateholders will receive an amount equal
to the principal amount together with accrued
interest and the certificates will be retired.
For more information about the process of
optional prepayment, see "Description of the
Certificates--Optional Prepayment."
Collection Account;
Priority of Payments........
Except under certain conditions described in this
prospectus or as otherwise acceptable to the
rating agencies, the servicer will be required to
remit payments received on the loans within one
business day to an account in the name of the
indenture trustee. This account is the collection
account. On each distribution date, the servicer
will instruct the indenture trustee to withdraw
funds on deposit in the collection account and to
apply those funds as follows:
^ if Green Tree is not the servicer, the
monthly servicing fee,
^ reimbursement of any advance made that were
recovered during the prior monthly period,
^ the noteholders' interest and principal and
any amounts previously withdrawn from any
sub-account of the spread account or the
reserve account,
^ the certificateholders' interest and
principal after the notes have been paid in
full,
^ amounts necessary to fully fund the Class A-
2, Class A-3 and Class A-4 sub-accounts of
the spread account,
^ the amount necessary to fully fund the
reserve account and
^ any remaining amount to Green Tree as the
monthly servicing and guaranty fee.
Pre-Funding Account......... On the closing date, Green Tree will deposit
money in the pre-funding account to provide the
trust with sufficient funds to purchase the
subsequent loans. The pre-funded amount will
initially equal the difference between $
and the aggregate principal balance as of the
cutoff date of the initial loans. The pre-funding
account will be included in the trust's property.
Any reimbursement income earned on amounts on
deposit in the pre-funding account will be
taxable to Green Tree. For more detailed
information about the pre-funding account, see
"Yield and Prepayment Considerations" and
"Description of the trust Documents and
Indenture--Accounts."
S-9
<PAGE>
Tax Status.................. In the opinion of counsel to Green Tree, for
federal and Minnesota income tax purposes, the
notes will be characterized as debt, and the
trust will not be characterized as an association
(or a publicly traded partnership) taxable as a
corporation and neither the trust nor any portion
of the trust will constitute a taxable mortgage
pool taxable as a corporation. Each Noteholder,
by the acceptance of a Note, will agree to treat
the notes as debt. Each certificateholder, by the
acceptance of a Certificate, will agree to treat
the trust as a partnership in which the
certificateholders are partners for federal
income tax purposes. See "Certain Federal Income
Tax Consequences" in this prospectus supplement
and in the prospectus for a more detailed
description of the federal income tax
consequences of an investment in the notes and
the certificates.
ERISA Considerations........ If the notes are considered to be indebtedness
without substantial equity features under a
regulation issued by the United States Department
of Labor, the acquisition or holding of notes by
or on behalf of a benefit plan will not cause the
assets of the trust to become plan assets,
thereby generally preventing the application of
certain prohibited transaction rules of the
Employee Retirement Income Security Act of 1974,
as amended, and the Internal Revenue Code of
1986, as amended, that otherwise would possibly
be applicable. Green Tree believes that the notes
should be treated as indebtedness without
substantial equity features for purposes of such
regulation. You may not acquire the certificates
if you are an employee benefit plan, individual
retirement account or Keogh Plan subject to
either Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the Internal
Revenue Code of 1986, as amended. See "ERISA
Considerations" in this prospectus supplement and
in the prospectus.
Ratings..................... The notes will not be issued and sold unless
Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Rating Services, a division of
the McGraw-Hill Companies, Inc. ("S&P"), have
assigned the ratings specified on page S- (or
better) to the notes.
The rating of each class of notes by Moody's and
S&P addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. 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.
Green Tree's senior debt securities were recently
downgraded by Moody's to "Bal".
Green Tree has not requested a rating of the
notes from any rating agencies other than Moody's
and S&P. You cannot assume that no other rating
agency will assign a rating to any of these
notes, nor can you assume what any such rating,
if issued, would be.
S-10
<PAGE>
RISK FACTORS
Consider the following risk factors in deciding whether to purchase notes.
More risk factors, applicable to any series of notes like these, are printed in
the prospectus, and you should consider those risk factors also.
The Class A-2, Class A-3 and Class A-4 notes will be subordinate.
Each class of notes will be subordinate for payment of interest and principal
to the holders of the class of notes with a prior numeric designation. The
certificates will be subordinate in priority of payment of interest and
principal to the notes. We will not pay principal on the certificates until the
outstanding principal amounts of all of the notes have been paid.
You must rely upon payments on the loans for payment of your interest and
principal. The trust will not have any significant assets or sources of funds
other than the loans, the spread account, the reserve account, the interest
rate cap payments and the limited guaranty of Green Tree.
We have limited delinquency, loan loss and repossession experience.
We have limited underwriting and servicing experience with home improvement
loans similar to the loans under this transaction. Although we have calculated
our delinquency and net loss experience with respect to our servicing portfolio
of home improvement loans, we cannot assure you that the information presented
will reflect actual experience with respect to the loans. In addition, we
cannot assure you that the future delinquency, loan loss or repossession
experience of the trust will be better or worse than our own experience. For
more information about delinquency, loan loss and repossession experience, see
"The Loan Pool--Delinquency, Loan Loss and Repossession Information."
The real estate securing the loans may be inadequate security.
As of the cutoff date, approximately % of the cutoff date principal
balance represented loans which were either unsecured or secured by subordinate
liens on the applicable real estate. As a result, the real estate securing a
loan is not likely to provide adequate security if it becomes necessary to
realize upon the collateral. Even if the real estate securing a given loan
provides adequate security, we could encounter substantial delays in connection
with the liquidation of that loan. This would result in current shortfalls in
distributions to the holders of the certificates. In addition, liquidation
expenses relating to the any liquidated loan will reduce the proceeds otherwise
available for payment to the holders of the certificates. In the event that any
real estate securing a loan fails to provide adequate security, any losses in
connection with that loan will be borne by the holders of the certificates.
The loans are located primarily in .
As of the cutoff date, obligors on approximately % of the initial loans
were located in . Accordingly, adverse economic conditions or other
factors particularly affecting this state could adversely affect the
delinquency, loan loss or repossession experience of the trust with respect to
the loans.
S-11
<PAGE>
THE TRUST
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying
Prospectus. Prospective Securityholders should consider, in addition to the
information below, the information under "The Trusts" in the accompanying
Prospectus.
General
Green Tree Home Improvement Loan Trust 1998-E is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for
the transactions described in this Prospectus Supplement. After its formation,
the Trust will not engage in any activity other than (i) acquiring, holding
and managing the Contracts and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes and the Certificates, (iii) making payments
on the Notes and the Certificates and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Trust will initially be capitalized with equity equal to $
(approximate) from the sale of the Certificates to third party investors that
are expected to be unaffiliated with Green Tree or its affiliates. The equity
of the Trust, together with the proceeds of the initial sale of the Notes,
will be used by the Trust to purchase the Contracts from Green Tree pursuant
to the Sale and Servicing Agreement.
The Trust's principal offices are in , Delaware, at the address listed
below under "--The Owner Trustee."
Capitalization of the Trust
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Notes and Certificates had
taken place on such date:
<TABLE>
<S> <C>
Class A-1 Notes.............................................. $
Class A-2 Notes..............................................
Class A-3 Notes..............................................
Class A-4 Notes..............................................
Certificates.................................................
------------
Total...................................................... $
============
</TABLE>
The Owner Trustee
[Owner Trustee name] is the Owner Trustee under the Trust Agreement. [Owner
Trustee] is a Delaware banking corporation and its principal offices are
located at , Delaware . The Owner Trustee will perform
limited administrative functions under the Trust Agreement, including making
distributions from the Certificate Distribution Account. The Owner Trustee's
liability in connection with the issuance and sale of the Certificates and the
Notes is limited solely to the express obligations of the Owner Trustee as set
forth in the Trust Agreement.
S-12
<PAGE>
THE TRUST PROPERTY
The Trust Property will include, among other things, (i) the Contracts; (ii)
all rights to receive payments due thereon on or after the Cutoff Date
(excluding certain insurance premiums, late fees and other servicing charges);
(iii) such amounts as from time to time may be held in the Collection Account,
the Spread Account, the Reserve Account, the Pre-Funding Account and certain
other accounts established and maintained by the Servicer pursuant to the Sale
and Servicing Agreement, as described below (including all investments in the
Collection Account, the Spread Account, the Reserve Account and such other
accounts and all income from the investment of funds therein and all proceeds
thereof); (iv) an assignment of the mortgages on the real estate securing the
certain Contracts; and (v) certain other rights under the Trust Documents. See
"The Contracts" and "Description of the Trust Documents--Collections" in the
accompanying Prospectus.
Each Certificate will represent a fractional undivided interest in the Trust
Property. Pursuant to the Indenture the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders. Any proceeds of such security interest in the Trust Property would
be distributed according to the Indenture, as described below under
"Description of the Trust Documents and Indenture--Distributions."
Green Tree, as [Indenture Trustee] or custodian on its behalf, will hold each
original Contract, as well as copies of documents and instruments relating to
such Contract and evidencing the lien on the real estate securing such Contract
(the "Contract Files"). In order to protect the Trust's ownership interest in
the Contracts, Green Tree will file a UCC-1 financing statement in Minnesota
and Delaware to give notice of the Trust's ownership of the Contracts and the
related Trust Property.
S-13
<PAGE>
THE CONTRACT POOL
General
This Prospectus Supplement contains information regarding the Initial
Contracts, which were originated through and will be transferred to
the Trust on the Closing Date. The information for each Initial Contract is as
of the Cutoff Date for such Contract. The Initial Contracts had an aggregate
principal balance as of the Cutoff Date of $ . The Sale and Servicing
Agreement provides that the Initial Contracts will be purchased by the Trust on
the Closing Date and that subsequent Contracts will be purchased by the Trust
from time to time during the Pre-Funding Period.
All of the Contracts will be purchased by Green Tree from dealers, home
improvement contractors and correspondent lenders who regularly originate and
sell such contracts to Green Tree, or will be originated by Green Tree
directly. Green Tree believes that the underwriting standards employed by such
independent financing company are similar to the standards used by Green Tree.
Certain Other Characteristics
The Initial Contracts (i) had a remaining maturity, as of the Cutoff Date, of
at least months, but not more than months, (ii) had an original maturity
of at least months, but not more than months, (iii) had an original
principal balance of at least $ and not more than $ , (iv) had a
remaining principal balance as of the Cutoff Date of at least $ and not
more than . Neither Green Tree nor the Servicer may substitute other
contracts for the Home Improvement Contracts at any time at any time during the
term of the Pooling and Servicing Agreement.
The Initial Contracts have an aggregate principal balance as of the Cutoff
Date of approximately $ (the "Cutoff Date Principal Balance"). The
Initial Contracts were originated between and . A significant
portion of the Initial Contracts were purchased by Green Tree from an
independent financing company. Green Tree believes that the underwriting
standards employed by such independent financing company are similar to the
standards used by Green Tree.
Characteristics of Initial Contracts
<TABLE>
<CAPTION>
Weighted
% of Average Weighted
% of Scheduled Scheduled Average Weight Original Average
Number of Initial Principal Principal Principal Average Scheduled Remaining
Asset Type Contracts Contracts Balance Balance Balance Rate Term Term (1)
- ------------------------ --------- --------- ------------- ---------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unsecured Home
Improvement............ % % %
Debt Consolidation Home
Improvement............ % % %
----- ------- ------------- ------- ------- ------ --- ---
Total ................ 100.00% $ 100.00% $ %
===== ======= ============= ======= ======= ====== === ===
</TABLE>
- --------
(1) Based on scheduled payments due after the Cutoff Date and assuming no
prepayments on the Contracts.
S-14
<PAGE>
Geographic Concentration of Initial Contracts
<TABLE>
<CAPTION>
Number of
Contracts as of Percent of Number Principal Balance Percent of Cutoff Date
State (1) Cutoff Date of Contracts as of Cutoff Date Principal Balance
--------- --------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Alabama................. % $ %
Arizona.................
Arkansas................
California..............
Colorado................
Connecticut.............
Delaware................
District of Columbia....
Florida.................
Georgia.................
Idaho...................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Maryland................
Massachusetts...........
Michigan................
Minnesota...............
Mississippi.............
Missouri................
Montana.................
Nebraska................
Nevada..................
New Hampshire...........
New Jersey..............
New Mexico..............
New York................
North Carolina..........
North Dakota............
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
Rhode Island............
South Carolina..........
South Dakota............
Tennessee...............
Texas...................
Utah....................
Vermont.................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Wyoming.................
----- ------ --------------- ------
Total................. 100.00% $ 100.00%
===== ====== =============== ======
</TABLE>
- --------
(1) Based on the address of the Obligor set forth in Green Tree's records.
S-15
<PAGE>
Distribution of Original Contract Amounts of Initial Contracts
<TABLE>
<CAPTION>
Aggregate
Principal % of
Balance Contract Pool
Number of Outstanding by Outstanding
Contracts as of Cutoff Principal Balance
Original Contract Amount as of Cutoff Date Date as of Cutoff Date
------------------------ ----------------- --------------- -----------------
<S> <C> <C> <C>
Less than $10,000......... $ %
Between $10,000 and
$19,999..................
Between $20,000 and
$29,999..................
Between $30,000 and
$39,999..................
Between $40,000 and
$49,999..................
Between $50,000 and
$59,999..................
Between $60,000 and
$69,999..................
Between $70,000 and
$79,999..................
Between $80,000 and
$89,999..................
Between $90,000 and
$99,999..................
Between $100,000 and
$109,999.................
Between $110,000 and
$119,999.................
Between $120,000 and
$129,999.................
Between $130,000 and
$139,999.................
Between $140,000 and
$149,999.................
Between $150,000 and
$159,999.................
Between $160,000 and
$169,999.................
Between $170,000 and
$179,999.................
Between $180,000 and
$189,999.................
Between $190,000 and
$199,999.................
Between $200,000 and
$249,999.................
Between $250,000 and
$299,999.................
Over $300,000.............
----- --------------- ------
Total................... $ 100.00%
===== =============== ======
</TABLE>
Year of Origination of Initial Contracts
<TABLE>
<CAPTION>
% of
Aggregate Contract Pool
Number of Principal Balance by Outstanding
Year of Contracts Outstanding Principal Balance
Oiginationr as of Cutoff Date as of Cutoff Date as of Cutoff Date
- ----------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
1989.................... $ %
1990....................
1991....................
1992....................
1993....................
1994....................
1995....................
1996....................
1997....................
------ ------------- ------
Total................. $ 100.00%
====== ============= ======
</TABLE>
S-16
<PAGE>
Initial Contract Rates
<TABLE>
<CAPTION>
Aggregate Principal % of Contract Pool by
Number of Contracts Balance Outstanding Outstanding Principal
Contract Rate as of Cutoff Date as of Cutoff Date Balance as of Cutoff Date
------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Less than 9.00%......... $ %
9.01% to 10.00%........
10.01% to 11.00%........
11.01% to 12.00%........
12.01% to 13.00%........
13.01% to 14.00%........
14.01% to 15.00%........
15.01% to 16.00%........
16.01% to 17.00%........
Over 17.00%.............
----- ------------- ------
Total................. $ 100.00%
===== ============= ======
</TABLE>
S-17
<PAGE>
Remaining Months to Maturity of Initial Contracts
<TABLE>
<CAPTION>
Aggregate Principal % of Contract Pool by
Number of Contracts Balance Outstanding Outstanding Principal
Remaining Months to Maturity as of Cutoff Date as of Cutoff Date Balance as of Cutoff Date
- ---------------------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C>
Fewer than 31............. $ %
31 to 60................
61 to 90................
91 to 120................
121 to 150................
151 to 180................
181 to 210................
211 to 240................
241-270...................
271-300...................
301-330...................
331-360...................
----- ------------- ------
Total................... $ 100.00%
===== ============= ======
</TABLE>
Lien Position of Initial Contracts
<TABLE>
<CAPTION>
Number of % of
Contracts Contracts % of
as of as of Aggregate Principal Cutoff Date
Cut-off Cut-off Balance Outstanding Principal
Lien Position Date Date as of Cut-off Date Balance
------------- --------- --------- ------------------- -----------
<S> <C> <C> <C> <C>
First....................... % $ %
Second......................
Third.......................
Fourth......................
----- ------ ------------- ------
Total..................... 100.00% $ 100.00%
===== ====== ============= ======
</TABLE>
- --------
(1) Excludes unsecured Home Improvement Contracts.
S-18
<PAGE>
GREEN TREE FINANCIAL CORPORATION
The following information supplements the information in the Prospectus under
the heading "Green Tree Financial Corporation."
Delinquency, Loan Loss and Repossession Information for the Home Improvement
Contracts
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession information for each period indicated
with respect to all unsecured home improvement contracts and all debt-
consolidation home improvement contracts it has purchased and continues to
service.
Delinquency Experience--Unsecured and Debt Consolidation Home Improvement
Contracts
<TABLE>
<CAPTION>
At December 31,
------------------------------
1994 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of Contracts Outstanding (1)............. 10,397 18,411 25,104 25,077
Number of Contracts Delinquent (2)
30-59 Days.................................... 50 115 198 221
60-89 Days.................................... 18 44 68 90
90 Days or More............................... 4 14 38 140
------ ------ ------ ------
Total Contracts Delinquent...................... 72 173 304 451
====== ====== ====== ======
Delinquencies as a Percentage of Contracts
Outstanding (3)................................ 0.69% 0.94% 1.21% 1.80%
</TABLE>
- --------
(1) Excludes contracts already in repossession.
(2) The period of delinquency is based on the number of days payments are
contractually past due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(3) By number of contracts.
S-19
<PAGE>
Loan Loss/Repossession Experience--Unsecured and Debt Consolidation Home
Improvement Contracts
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Number of Contracts Serviced (1)..... 10,412 18,412 25,145 25,117
Principal Balance of Contracts (1)... $59,329 $97,544 $122,372 $113,405
Contract Liquidations:
Units.............................. 93 254 519 603
Percentage (2)..................... 0.89% 1.38% 2.06% 2.40%
Net Losses:
Dollars (3)........................ $ 578 $ 1,710 $ 2,863 $ 3,056
Percentage (4)..................... 0.97% 1.75% 2.34% 2.69%
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
There can be no assurance that the delinquency, loan loss or repossession
experience of the Trust with respect to the unsecured Home Improvement
Contracts will be better than, worse than or comparable to the experience set
forth above. See "Risk Factors--Delinquency, Loan Loss and Repossession
Experience" herein.
Delinquency Information for Secured Home Improvement Contracts
The following tables set forth information relating to Green Tree's
delinquency, loan loss and repossession experience for each period indicated
with respect to all secured home improvement contracts serviced by Green Tree.
Because of the rapid growth of Green Tree's portfolio of secured Home
Improvement Contracts, the experience shown in more recent periods may not be
indicative of the experience to be expected of a more seasoned portfolio.
Delinquency Experience--Secured Home Improvement Contracts
<TABLE>
<CAPTION>
At December 31, As of
------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Number of Contracts Outstanding
(1)................................ 56,673 81,953 96,022
Number of Contracts Delinquent
(2)(3)
30-59 Days........................ 294 856 1,115
60-89 Days........................ 105 230 364
90 Days or More................... 161 309 477
Total Contracts Delinquent.......... 560 1,395 1,956
Delinquencies as a Percent of
Contracts Outstanding (4).......... 0.99% 1.70% 2.04% % %
</TABLE>
- --------
(1) Excludes defaulted contracts not yet liquidated.
(2) A contract is considered delinquent by Green Tree if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a contract
due on the first day of a month is not 30 days delinquent until the first
day of the next month.
(4) By number of contracts.
S-20
<PAGE>
Loan Loss/Repossession Experience--Secured Home Improvement Contracts
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, As of
------------------------------------------ March 30,
1994 1995 1996 1997 1998
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Number of Contracts
Serviced (1)........... 56,710 109,030 96,230
Principal Balance of
Contracts (1).......... $617,341 $1,015,783 $1,308,549 $ $
Contract Liquidations:
Units................. 541 766 1,564
Percentage (2)........ 0.95% 0.70% 1.63% % %
Net Losses:
Dollars (3)........... $ 908 $ 3,715 $ 11,646 $ $
Percentage (4)........ 0.15% 0.37% 0.89% % %
</TABLE>
- --------
(1) As of period end. Includes contracts already in repossession.
(2) As a percentage of the total number of contracts being serviced as of
period end.
(3) The calculation of net loss includes unpaid interest to the date of
repossession and all expenses of repossession and liquidation.
(4) As a percentage of the principal balance of contracts being serviced as of
period end.
There can be no assurance that the delinquency, loan loss and repossession
experience of the Trust with respect to the Home Improvement Contracts will be
better than, worse than or comparable to the experience set forth above. See
"Risk Factors--Delinquency, Loan Loss and Repossession Experience" herein.
Recent Developments
On June 30, 1998, Green Tree became a wholly owned subsidiary of Conseco,
Inc., pursuant to a Merger Agreement announced on April 7, 1998. Headquartered
in Carmel, Indiana, Conseco is among the nation's leading providers of
supplemental health insurance, retirement annuities and universal life
insurance.
On July 6, 1998, Conseco announced a second-quarter charge of $498 million,
net of income taxes, related to the acquisition of Green Tree. The charges are
directly related to (1) $148 million in merger-related costs, and (2) a $350
million non-cash supplemental reserve against the valuation of Green Tree's
interest-only securities and servicing rights.
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-21
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The following information supplements the information in the Prospectus under
the heading "Yield and Prepayment Considerations."
The Servicer and Green Tree each has the option to purchase from the Trust
all remaining Contracts, and thereby effect early redemption of the Notes and
early retirement of the Certificates, on any Distribution Date when the Pool
Scheduled Principal Balance is 10% or less of the Cutoff Date Pool Principal
Balance. See "Description of the Trust Documents--Termination" in the
Prospectus.
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in the
Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
Principal prepayments on the Contracts will result in accelerating principal
payments on the Notes. The rate of principal payments on pools of home equity
loans and home improvement contracts is influenced by a variety of economic,
geographic, social and other factors, including the level of interest rates and
the rate at which homeowners sell their homes or default on their loans. Other
factors affecting prepayment of home improvement contacts include changes in
obligors' housing needs, job transfers, unemployment and obligors' net equity
in their homes. Since home improvement contracts are not generally viewed by
borrowers as permanent financing, Contracts may experience a higher rate of
prepayments than traditional mortgage loans. In addition, if prevailing
interest rates fall significantly below the interest rates on such loans, the
loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above the rates borne by such loans. Conversely, if
prevailing interest rates rise above the interest rates on such loans, the rate
of prepayment would be expected to decrease.
Green Tree has no significant experience with respect to the rate of
principal prepayments on home improvement contracts. In addition, liquidations
of defaulted Contracts or the exercise by Green Tree or the Servicer of the
option to purchase the remaining pool of Contracts will affect the timing of
principal distributions on the Securities.
Weighted Average Life of the Notes and the Certificates
The following information is given solely to illustrate the effect of
prepayments on the Contracts on the weighted average life of the Notes and the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Contracts.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes and the
Certificates will be influenced by the rate at which principal on the Contracts
is paid. Principal payments on the Contracts may be in the form of scheduled
amortization or prepayments (including, for this purpose, liquidations due to
default).
The Base Case prepayment model is Green Tree management's best estimate of
the prepayment rates that may be experienced on the Contracts. Because Green
Tree began originating and servicing home improvement contracts only recently,
such estimate is based in part on industry experience with similar loans and
contracts rather than Green Tree's experience. There can be no assurance that
the Contracts will experience prepayments at such projected rates or in the
manner assumed by the prepayment model used for that type of Contract, or
S-22
<PAGE>
that the Contracts in the aggregate will experience prepayments similar to the
overall prepayment rate or in the manner projected in the Base Case.
<TABLE>
<CAPTION>
Base Case
Product Prepayment Rate
------- ---------------
<S> <C>
Home Improvement (unsecured).............................. % CPR
Home Improvement (secured)................................ % CPR
</TABLE>
The model used in this Prospectus Supplement is the Constant Prepayment Rate
("CPR"). The CPR represents an assumed constant rate of prepayment each month,
expressed as a per annum percentage of the outstanding principal balance of the
Contracts.
As used in the following tables, the columns headed 80%, 90%, 100%, 110% and
120% assume that prepayments on the Contracts are made at Base Case Prepayment
Rates of 80%, 90%, 100%, 110% and 120%, respectively. For example, Home
Improvement Contracts (unsecured) have been assumed to have a prepayment rate
equal to % CPR and % CPR, respectively; and Home Improvement Contracts
(secured) have been assumed to have a prepayment rate equal to % CPR and
% CPR, respectively; CPR DOES NOT PURPORT TO BE AN HISTORICAL DESCRIPTION
OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF CONTRACTS, INCLUDING THE CONTRACTS.
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<PAGE>
DESCRIPTION OF THE NOTES
The following information supplements and, to the extent inconsistent
therewith, supersedes the information contained in the accompanying Prospectus.
Prospective Noteholders should consider, in addition to the information below,
the information in the accompanying Prospectus under "The Notes," "Certain
Information Regarding the Securities," and "Description of the Trust
Documents."
General
The Notes will be issued pursuant to the terms of the Indenture, a form of
which has been filed as an exhibit to the Registration Statement. A copy of the
Indenture, as executed, will be filed with the Commission following the
issuance of the Securities. The following summary describes certain terms of
the Notes and the Indenture. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all the
provisions of the Notes and the Indenture. The following summary supplements
the description of the general terms and provisions of the Notes of any given
series and the related Indenture set forth in the accompanying Prospectus, to
which description reference is hereby made. [Indenture Trustee], a national
banking association headquartered in , will be the Indenture Trustee.
Distributions
Noteholders will be entitled to receive on each Distribution Date commencing
in 1998, to the extent that funds available are sufficient therefor, the
Noteholders' Distributable Amount. Distributions on the Notes will be made from
funds available first to the holders of the Class A-1 Notes, then to the
holders of the Class A-2 Notes, then to the holders of the Class A-3 Notes and
then to the holders of the Class A-4 Notes, in the manner and order of priority
described below.
Class A-1 Interest
Interest on the outstanding Class A-1 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-1 Rate for such monthly interest
period. The "Class A-1 Principal Balance" as of any Distribution Date will be
the Original Class A-1 Principal Balance minus all amounts previously
distributed to the Class A-1 Noteholders in respect of principal.
Interest will be paid on the Class A-1 Notes to the extent of funds available
on such Distribution Date. In the event the funds available are not sufficient
to make a full distribution of interest on the Class A-1 Notes, the amount of
the shortfall will be carried forward and added to the amount of interest
payable on the next Distribution Date. Any amount so carried forward will bear
interest at the Class A-1 Rate, respectively, to the extent legally
permissible.
Class A-1 Principal
To the extent of funds available after payment of all interest payable on the
Class A-1 Notes, the Class A-1 Noteholders will be entitled to receive on each
Distribution Date as payment of principal an amount equal to the sum of %
(approximate) of the Formula Principal Distribution Amount for such
Distribution Date plus the Unpaid Class A-1 Principal Shortfall, if any, for
such Distribution Date.
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Consumer Product Contract during the related Monthly Period, (ii) all Partial
Principal Prepayments applied and all Principal Prepayments in Full received
during the related Monthly Period in respect of each Contract, (iii) the
Scheduled Principal Balance of each
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<PAGE>
Contract that became a Liquidated Contract during the related Monthly Period,
(iv) the Scheduled Principal Balance of each Contract which, during the related
Monthly Period, was purchased by Green Tree as a result of a breach of a
representation as warranty or by the Servicer as a result of an uncured breach
of a covenant under the Sale and Servicing Agreement, and (v) with respect to
the Distribution Date in 1998, any remaining amounts on deposit in the Pre-
Funding Account. The Formula Principal Distribution Amount for the Distribution
Date in , will be the sum of the Note Principal Balance and the
Certificate Principal Balance. The "Unpaid Class A-1 Principal Shortfall" for
any Distribution Date will equal any amount required to be paid in respect of
principal on the Class A-1 Notes on any prior Distribution Date but not paid on
any intervening Distribution Date.
A "Monthly Period" with respect to a Distribution Date is the calendar month
immediately preceding the month in which such Distribution Date occurs. The
"Scheduled Principal Balance" of a Contract for any Monthly Period is its
principal balance as specified in its amortization schedule, after giving
effect to any previous Partial Principal Prepayments and to the scheduled
payment due on its scheduled payment date (the "Due Date") in that month, but
without giving effect to any adjustments due to bankruptcy or similar
proceedings. A "Liquidated Contract" means any defaulted Contract as to which
the Servicer has determined that all amounts which it expects to recover from
or on account of such Contract through the date of disposition of the related
real property have been recovered or any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and the
proceeds of such disposition have been received.
Class A-2 Interest
Interest on the outstanding Class A-2 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-2 Rate for such monthly interest
period. The "Class A-2 Principal Balance" as of any Distribution Date will be
the Original Class A-2 Principal Balance minus all amounts previously
distributed to the Class A-2 Noteholders in respect of principal, and minus any
unreimbursed Class A-2 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-2 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-1 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-2 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-2 Rate, to the extent legally permissible.
Class A-2 Principal
Class A-2 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-1 Notes and after payment of all
interest payable on the Class A-2 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-2 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-2 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-2
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-2 Principal Liquidation Loss.
Class A-3 Interest
Interest on the outstanding Class A-3 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-3 Rate for such monthly interest
period. The "Class A-3 Principal Balance" as of any Distribution Date will be
the Original Class A-3 Principal Balance minus all amounts previously
distributed to the Class A-3 Noteholders in respect
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<PAGE>
of principal, and minus any unreimbursed Class A-3 Principal Liquidation Loss
(described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Class A-3 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-2 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-3 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-3 Rate, to the extent legally permissible.
Class A-3 Principal
Class A-3 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-2 Notes and after payment of all
interest payable on the Class A-3 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-3 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-3 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-3
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-3 Principal Liquidation Loss.
Class A-4 Interest
Interest on the outstanding Class A-4 Principal Balance will accrue from
, , or from the most recent Distribution Date, to but excluding the
following Distribution Date, at the Class A-4 Rate for such monthly interest
period. The "Class A-4 Principal Balance" as of any Distribution Date will be
the Original Class A-4 Principal Balance minus all amounts previously
distributed to the Class A-4 Noteholders in respect of principal, and minus any
unreimbursed Class A-4 Principal Liquidation Loss (described below under "--
Losses on Liquidated Contracts").
Interest will be paid on the Class A-4 Notes to the extent of funds available
on such Distribution Date, after payment of all interest and principal then
payable on the Class A-3 Notes. In the event such remaining funds available are
not sufficient to make a full distribution of interest on the Class A-4 Notes,
the amount of the shortfall will be carried forward and added to the amount of
interest payable on the next Distribution Date. Any amount so carried forward
will bear interest at the Class A-4 Rate, to the extent legally permissible.
Class A-4 Principal
Class A-4 Noteholders will be entitled to receive on each Distribution Date
as payment of principal, to the extent of funds available after payment of all
interest and principal payable on the Class A-3 Notes and after payment of all
interest payable on the Class A-4 Notes, the sum of % (approximate) of the
Formula Principal Distribution Amount for such Distribution Date, plus any
Unpaid Class A-4 Principal Shortfall (as defined below) for such Distribution
Date.
The "Unpaid Class A-4 Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the Class A-4
Notes on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Class A-4 Principal Liquidation Loss.
Optional Redemption
The Notes will be redeemed in whole, but not in part, on any Distribution
Date on which Green Tree exercises its option to purchase the Contracts. Green
Tree may purchase the Contracts when the Pool Scheduled Principal Balance has
declined to 10% or less of the Cutoff Date Pool Principal Balance, as described
in the
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<PAGE>
accompanying Prospectus under "Description of the Trust Documents--
Termination." The "Pool Scheduled Principal Balance" is the aggregate Scheduled
Principal Balance of all outstanding Contracts during a Monthly Period. Such
redemption will effect early retirement of the Notes. The redemption price will
be equal to the unpaid principal amount of the Notes redeemed plus accrued and
unpaid interest thereon.
Mandatory Prepayments
The Class A-1, Class A-2, Class A-3 and Class A-4 Notes will be prepaid in
part on the first Distribution Date after the Pre-Funding Period (in no event
later than , 1998) to the extent of any Pre-Funded Amount remaining in
the Pre-Funding Account on such Distribution Date. Green Tree believes that
substantially all of the Pre-Funded Amount will be used to acquire the
Subsequent Contracts. It is unlikely, however, that the aggregate principal
amount of Subsequent Contracts purchased by the Trust will be identical to the
Pre-Funded Amount, and that consequently, Class A-1, Class A-2, Class A-3 and
Class A-4 Noteholders will receive a prepayment of principal, in accordance
with their applicable percentage of the Formula Principal Distribution Amount.
The Interest Rate Cap Agreement
Class A-1 Noteholders will have the benefit of the Interest Rate Cap
Agreement between the Trust and the Counterparty. Pursuant to the Interest Rate
Cap Agreement, the Counterparty will make a payment (the "Interest Rate Cap
Payment") to the Trust on each Distribution Date to the extent that the Class
A-1 Rate exceeds %, in an amount equal to the amount obtained by multiplying
the Class A-1 Principal Balance by the product of (i) the maximum of (x) the
excess of the Class A-1 Rate over 10% or (y) 0% and (ii) the number of days in
the monthly interest period divided by 360. Payments received by the Indenture
Trustee pursuant to the Interest Rate Cap Agreement will be deposited in the
Collection Account. See "Description of the Counterparty."
The Spread Account
Class A-2, Class A-3 and Class A-4 Noteholders will have the benefit of a
separate sub-account for each Class contained in the Spread Account to be held
by the Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) is insufficient to distribute all interest
then payable on the Class A-2, Class A-3 or Class A-4 Notes, the Indenture
Trustee will withdraw the amount of the deficiency from the applicable sub-
account (or the amount on deposit in the applicable sub-account, if less) and
deposit such amount in the Note Distribution Account for distribution to the
applicable Class. On any Distribution Date, the amount of funds in the Spread
Account will not be available to cover a shortfall in principal distributable
on any Class of Notes, but would only be available to cover a shortfall in
interest distributable on the Class A-2, Class A-3 and Class A-4 Notes.
On the Closing Date, the amount on deposit in the Class A-2, Class A-3 and
Class A-4 sub-accounts will be zero. On each Distribution Date, the Indenture
Trustee will deposit all funds remaining in the Collection Account, after
distribution of all interest and principal then payable on the Notes and all
interest then payable on the Certificates, first to the Class A-2 sub-account,
then to the Class A-3 sub-account and then to the Class A-4 sub-account, until
the amount on deposit in such sub-accounts equals $ , $ and
$ , respectively (subject to reduction as provided in, and to the other
terms and conditions contained in, the Sale and Servicing Agreement). If any
sub-account is drawn upon, it will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture. The Spread Account is included
in the Trust Property. Any amount remaining in the Spread Account upon
termination of the Trust will be distributed to Green Tree.
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<PAGE>
The Reserve Account
Noteholders will have the benefit of the Reserve Account to be held by the
Indenture Trustee. On any Distribution Date, if the funds in the Note
Distribution Account (after making all distributions on each Class of Notes
with a prior numeric designation) are insufficient to make full payment in
respect of interest or principal payable on a Class of Notes (after making
appropriate draws upon the Spread Account), the Indenture Trustee will
withdraw the amount of the deficiency from the Reserve Account (or the amount
on deposit in the Reserve Account, if less) and deposit such amount in the
Note Distribution Account for distribution to the applicable Class.
On the Closing Date, the amount on deposit in the Reserve Account will be
zero. On each Distribution Date, the Indenture Trustee will deposit all funds
remaining in the Collection Account, after distribution of all interest and
principal then payable on the Notes, all interest then payable on the
Certificates and all deposits in the Spread Account, until the amount on
deposit in the Reserve Account equals % of the Pool Scheduled Principal
Balance (subject to reduction as provided in, and to other terms and
conditions contained in, the Sale and Servicing Agreement). If the Reserve
Account is drawn upon, it will be replenished to the extent provided in the
Sale and Servicing Agreement and the Indenture. The Reserve Account is
included in the Trust Property. Any amount remaining in the Reserve Account
upon termination of the Trust will be distributed to Green Tree.
Losses on Liquidated Contracts
As described above, the distribution of principal to each Class of Notes is
intended to equal the applicable percentage of the Formula Principal
Distribution Amount. On each Distribution Date, each such amount includes the
Scheduled Principal Balance of each Contract that became a Liquidated Contract
during the Monthly Period related to such Distribution Date. If the Net
Liquidation Proceeds from such Liquidated Contract are less than the Scheduled
Principal Balance of such Liquidated Contract, the deficiency will, in effect,
be absorbed first by the Monthly Servicing and Guaranty Fee otherwise payable
to Green Tree, then by the Certificateholders (although Green Tree will be
obligated to make a Guaranty Payment equal to any shortfall in the
distribution to the Certificateholders), and then by each Class of Notes in
inverse numeric order (although funds on deposit in the Reserve Account will
be available to pay any shortfall in the distribution of interest and
principal to any Class of Notes).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to more senior Classes of Notes, are
insufficient to make a full distribution of interest and/or principal to a
Class of Notes or the Certificates, such deficiency will be carried forward
and added to the amount to be distributed to such Class of Notes or the
Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding principal balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-
Through Rate) accrued from the date such Certificate Principal Liquidation
Loss was incurred, and the amount of such Certificate Principal Liquidation
Loss.
Similarly, if the Certificate Principal Balance were reduced to zero (which
would be caused only by Certificate Principal Liquidation Losses, whether or
not Green Tree makes any required payments under the Limited Guaranty) and the
Pool Scheduled Principal Balance on any Distribution Date were less than the
aggregate outstanding principal balance of the Notes after giving effect to
distributions of principal on such Distribution Date, then the Class A-4
Principal Balance would be reduced by the amount of such deficiency (a "Class
A-4 Principal Liquidation Loss"). The funds on deposit in the Reserve Account
will be available to pay
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<PAGE>
the amount of any such Class A-4 Principal Liquidation Loss. If the funds
available in the Reserve Account are insufficient to pay such amount, however,
the amount distributable on the Class A-4 Notes on future Distribution Dates
would include interest on any such Class A-4 Principal Liquidation Loss at the
Class A-4 Rate (and, to the extent legally permissible, interest on such
unpaid interest at the Class A-4 Rate) accrued from the date such Class A-4
Principal Liquidation Loss was incurred, and the amount of such Class A-4
Principal Liquidation Loss. Each more senior Class of Notes would similarly be
subject to reduction in its outstanding principal balance if the aggregate
outstanding principal balance of all more junior Classes of Notes were reduced
to zero and the Pool Scheduled Principal Balance were less than the aggregate
outstanding principal balance of the Notes, and would similarly be entitled on
future Distribution Dates to receive interest on any such Principal
Liquidation Loss at the applicable Interest Rate, and the amount of such
Principal Liquidation Loss. The applicable percentage of the Formula Principal
Distribution Amount distributable to each Class of Notes on each Distribution
Date will not be affected by any Principal Liquidation Loss experienced by a
Class of Notes. Accordingly, even if a Class of Notes has experienced a
Principal Liquidation Loss, such Class will continue to be entitled to receive
applicable percentage of the Formula Principal Distribution Amount (or, if the
Amount Available in the Collection Account is insufficient to make such
distribution, such Class will be entitled to receive the amount of such
deficiency on subsequent Distribution Dates as an Unpaid Principal Shortfall).
Book-Entry Registration
Holders of the Notes or the Certificates may hold through DTC (in the United
States) or, solely in the case of the Notes, CEDEL or Euroclear (in Europe) if
they are participants of such systems, or indirectly through organizations
that are participants in such systems. The Certificates may not be held,
directly or indirectly, through CEDEL or Euroclear.
Cede & Co., as nominee for DTC, will hold the Notes and the Certificates.
CEDEL and Euroclear will hold omnibus positions in the Notes on behalf of the
CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books
of their respective depositaries (collectively, the "Depositaries"), which in
turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
Transfers between DTC's participating organizations (the "Participants")
will occur in accordance with DTC rules. Transfers between CEDEL Participants
and Euroclear Participants will occur in the ordinary way in accordance with
their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear Participant to a Participant will
be received with value on the DTC settlement date but will be
S-29
<PAGE>
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
For a description of transfers between persons holding directly or indirectly
through DTC, see "Certain Information Regarding the Securities--Book-Entry
Registration" in the Prospectus.
Cedel Bank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the
clearance and settlement of securities transactions between CEDEL Participants
through electronic book-entry changes in accounts of CEDEL Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in CEDEL in any of 28 currencies, including United
States dollars. CEDEL provides to its CEDEL Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary
Institute. CEDEL Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the Underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL Participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures,
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<PAGE>
to the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement. CEDEL or the Euroclear Operator, as the case may
be, will take any other action permitted to be taken by a Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
S-31
<PAGE>
DESCRIPTION OF THE COUNTERPARTY
[description of counterparty]
The description of the Counterparty set out above has been provided by the
Counterparty. The Counterparty has not, however, been involved in the
preparation of, and does not accept responsibility for, this Prospectus
Supplement as a whole.
DESCRIPTION OF THE CERTIFICATES
The following information supplements the information contained in the
accompanying Prospectus. Prospective Certificateholders should consider, in
addition to the information below, the information in the accompanying
Prospectus under "The Certificates," "Certain Information Regarding the
Securities," and "Description of the Trust Documents."
General
The Certificates will be issued pursuant to the terms of the Trust Agreement,
a form of which has been filed as an exhibit to the Registration Statement. A
copy of the Trust Agreement, as executed, will be filed with the Commission
following the issuance of the Securities. The following summary describes
certain terms of the Certificates and the Trust Agreement. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Certificates and the Trust Agreement.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the
Certificates of any given series and the related Trust Agreement set forth in
the Prospectus, to which description reference is hereby made.
Distributions
Certificateholders will be entitled to receive on each Distribution Date
commencing in , to the extent that funds available together with the
Guaranty Payment described below are sufficient therefor, the
Certificateholders' Distributable Amount.
Interest
On each Distribution Date, the Owner Trustee will distribute pro rata to
Certificateholders accrued interest at the Pass-Through Rate on the outstanding
Certificate Principal Balance. Interest in respect of a Distribution Date will
accrue from , 1998, or from the most recent Distribution Date to but
excluding the following Distribution Date. The "Certificate Principal Balance"
as of any Distribution Date will be the Original Certificate Principal Balance,
reduced by all amounts allocable to principal previously distributed to
Certificateholders minus any unreimbursed Certificate Principal Liquidation
Loss (described below under "--Losses on Liquidated Contracts").
Interest will be paid on the Certificates to the extent of funds available on
such Distribution Date, after payment of all interest and principal then
payable on the Notes and any amounts previously withdrawn from
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any sub-account of the Spread Account or the Reserve Account and not previously
replenished. In the event such funds available are not sufficient to make a
full distribution of interest on the Certificates, the amount of the shortfall
will be carried forward and added to the amount of interest payable on the next
Distribution Date. Any amount so carried forward will bear interest at the
Pass-Through Rate, to the extent legally permissible. See "Description of the
Certificates."
Principal
No distributions of principal on the Certificates will be payable until all
of the Notes have been paid in full. On each Distribution Date commencing on
the Distribution Date on which the Notes are paid in full, principal on the
Certificates will be payable in an amount equal to the Formula Principal
Distribution Amount for such Distribution Date (less, on the Distribution Date
on which the Notes are paid in full, the portion thereof payable on the Notes),
plus the Unpaid Certificate Principal Shortfall, if any, from prior
Distribution Dates.
The "Unpaid Certificate Principal Shortfall" for any Distribution Date will
equal any amount required to be paid in respect of principal on the
Certificates on any prior Distribution Date but not paid on any intervening
Distribution Date, less any unreimbursed Certificate Principal Liquidation
Loss.
Optional Prepayment
If Green Tree exercises its option to purchase the Contracts when the Pool
Scheduled Principal Balance declines to 10% or less of the Cutoff Date Pool
Principal Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the outstanding principal amount together with accrued
interest at the Pass-Through Rate, which distribution will effect early
retirement of the Certificates. See "Description of the Trust Documents--
Termination" in the accompanying Prospectus.
Limited Guaranty
In order to mitigate the effect of the subordination of the Certificates and
the effect of liquidation losses and delinquencies on the Contracts, the
Certificateholders are entitled to receive on each Distribution Date the amount
equal to the Guaranty Payment, if any, under Green Tree's Limited Guaranty. The
Guaranty Payment for any Distribution Date will equal the difference, if any,
between the Certificateholders' Distributable Amount and the remaining funds
available in the Collection Account after payment of all interest and principal
on the Notes and the deposit in any sub-account of the Spread Account or the
Reserve Account of any amounts previously withdrawn therefrom and not
previously replenished. The "Certificateholders' Distributable Amount" equals
the unpaid and accrued interest on the Certificates, plus on each Distribution
Date commencing on the Distribution Date on which the Notes are paid in full,
principal in an amount equal to the Formula Principal Distribution Amount for
such Distribution Date (less, on the Distribution Date on which the Notes are
paid in full, the portion thereof payable on the Notes), plus any Unpaid
Certificate Principal Shortfall for such Distribution Date, and plus any
unreimbursed Certificate Principal Liquidation Loss.
The Limited Guaranty will be an unsecured general obligation of Green Tree
and will not be supported by any letter of credit or other enhancement
arrangement. The ratings assigned to the Certificates may be affected by the
ratings of Green Tree's debt securities. Green Tree's senior debt securities
were recently downgraded by S&P from "A-" to "BBB+" and by Fitch from "A" to
"A-", which has been reflected in the ratings assigned to the Certificates. See
"Summary of Terms--Ratings."
The Limited Guaranty will not benefit in any way, or result in any payment
to, the Class A-1:HI, Class A-1, Class A-2, Class A-3 or Class A-4 Noteholders.
As compensation for servicing the Contracts and providing the Limited
Guaranty, Green Tree will be entitled to receive the Monthly Servicing and
Guaranty Fee on each Distribution Date, which will be equal to
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the Amount Available remaining after payment of the Certificateholders'
Distributable Amount and any deposits into the Spread Account or the Reserve
Account required on that Distribution Date.
Transfers of Certificates
Certificateholders, other than individuals or entities holding Certificates
through a broker who reports sales of securities on Form 1099-B, are required
under the Trust Agreement to notify the Owner Trustee of any transfer of their
Certificates in a taxable sale or exchange within 30 days of such transfer.
Losses on Liquidated Contracts
As described above, the distribution of principal to the Certificates is
intended to equal the Class A-1:HI Formula Principal Distribution Amount. Such
amount includes the Scheduled Principal Balance of each Contract that became a
Liquidated Contract during the Monthly Period preceding such Distribution Date.
If the Net Liquidation Proceeds from such Liquidated Contract are less than the
Scheduled Principal Balance of such Liquidated Contract, the deficiency will,
in effect, be absorbed first by the Monthly Servicing and Guaranty Fee
otherwise payable to Green Tree and then by the Certificateholders (although
Green Tree will be obligated to make a Guaranty Payment equal to any shortfall
in the distribution to the Certificateholders).
If the funds available for any Distribution Date, after making all required
distributions of interest and principal to the Notes, are insufficient to make
a full distribution of interest and/or principal to the Certificates, such
deficiency will be carried forward and added to the amount to be distributed to
the Certificates on the following Distribution Date.
If the Pool Scheduled Principal Balance for any Distribution Date is less
than the sum of the aggregate outstanding Principal Balance of the Notes and
the Certificate Principal Balance after giving effect to all distributions of
principal on such Distribution Date, then the Certificate Principal Balance
will be reduced by the amount of such deficiency (a "Certificate Principal
Liquidation Loss"). Green Tree will be obligated to pay the amount of any such
Certificate Principal Liquidation Loss under the Limited Guaranty. If Green
Tree should fail to pay such amount, however, the amount distributable on the
Certificates on future Distribution Dates would include interest on any such
Certificate Principal Liquidation Loss at the Pass-Through Rate (and, to the
extent legally permissible, interest on any unpaid interest at the Pass-Through
Rate) accrued from the date such Certificate Principal Liquidation Loss was
incurred, and the amount of such Certificate Principal Liquidation Loss.
DESCRIPTION OF THE TRUST DOCUMENTS AND INDENTURE
The following summary describes certain terms of the Sale and Servicing
Agreement and the Trust Agreement (together, the "Trust Documents") and the
Indenture. Forms of the Trust Documents and Indenture, as executed, have been
filed as exhibits to the Registration Statement. A copy of each of the Trust
Documents and Indenture will be filed with the Commission following the
issuance of the Securities. The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions
of the Trust Documents and Indenture. The following summary supplements, the
description of the general terms and provisions of the Trust Documents and
Indenture (as such terms are used in the accompanying Prospectus) set forth in
the accompanying Prospectus, to which description reference is hereby made.
Accounts
The Servicer will establish and maintain one or more accounts, in the name of
the Indenture Trustee on behalf of the Noteholders and the Certificateholders,
into which all payments made on or with respect to the Contracts will be
deposited (the "Collection Account"). The Servicer will establish and maintain
the Spread
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Account, which will include sub-accounts for the Class A-2, Class A-3 and Class
A-4 Noteholders, in the name of the Indenture Trustee on behalf of the
Noteholders, in which amounts will be deposited to cover shortfalls in interest
distributable on the Class A-2, Class A-3 and Class A-4 Notes. In addition, the
Servicer will establish and maintain the Reserve Account in the name of the
Indenture Trustee on behalf of the Noteholders, in which amounts will be
deposited to cover shortfalls in interest or principal distributable on the
Notes. The Servicer will establish and maintain an account, in the name of the
Indenture Trustee on behalf of the Noteholders, in which amounts released from
the Collection Account, the Spread Account and the Reserve Account for
distribution to Noteholders will be deposited and from which all distributions
to Noteholders will be made (the "Note Distribution Account"). The Servicer
will also establish and maintain an account, in the name of the Owner Trustee
on behalf of the Certificateholders, in which amounts released from the
Collection Account for distribution to Certificateholders will be deposited and
from which all distributions to Certificateholders will be made (the
"Certificate Distribution Account"). See "Description of the Trust Documents--
Collections" in the accompanying Prospectus.
An account (the "Pre-Funding Account") will be established by the Indenture
Trustee and funded by Green Tree on the Closing Date to provide the Trust with
sufficient funds to purchase Subsequent Contracts. The amount deposited in the
Pre-Funding Account (as reduced from time-to-time, the "Pre-Funded Amount")
will initially equal the difference between $ and the aggregate
principal balance as of the Cutoff Date of the Initial Contracts and Additional
Contracts. The Pre-Funding Account will be used to purchase Subsequent
Contracts during the period from the Closing Date until the earliest of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000, (ii) , 1998 or (iii) the date on which an Event of Termination
occurs under the Sale and Servicing Agreement (the "Pre-Funding Period"). The
Pre-Funded Amount will be reduced during the Pre-Funding Period by the amount
used to purchase Subsequent Contracts in accordance with the Sale and Servicing
Agreement.
Under the Sale and Servicing Agreement, following the initial issuance of the
Securities, the Trust will be obligated to purchase Subsequent Contracts from
Green Tree during the Pre-Funding Period, subject to the availability thereof.
Each Subsequent Contract will have been underwritten in accordance with Green
Tree's standard underwriting criteria. Subsequent Contracts will be transferred
to the Trust pursuant to subsequent transfer instruments between Green Tree and
the Trust. In connection with the purchase of Subsequent Contracts on such
dates of transfer (the "Subsequent Transfer Dates"), the Trust will be required
to pay to Green Tree from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. Green Tree will
designate the Subsequent Transfer Date as the Cutoff Date with respect to the
related Subsequent Contracts purchased on such date. The amount paid from the
Pre-Funding Account on each Subsequent Transfer Date will not include accrued
interest on the related Subsequent Contracts. Following each Subsequent
Transfer Date, the aggregate principal balance of the Subsequent Contracts in
the Trust will increase by an amount equal to the aggregate principal balance
of the Contracts so purchased and the amount in the Pre-Funding Account will
decrease accordingly. Any Pre-Funded Amount remaining after the purchase of
Subsequent Contracts will be applied on the first Distribution Date on or after
the last day of the Pre-Funding Period to prepay principal on the Class A-1
Class A-2, Class A-3 and Class A-4 Notes.
Any conveyance of Subsequent Contracts on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each
Subsequent Contract must satisfy the representations and warranties specified
in the related subsequent transfer instrument and the Sale and Servicing
Agreement; (b) Green Tree will not select Subsequent Contracts in a manner that
it believes is adverse to the interests of the Securityholders; (c) as of its
respective Cutoff Date, each Subsequent Contract will satisfy the following
criteria: (i) no Subsequent Contract may be more than 59 days contractually
delinquent; (ii) the remaining stated term to maturity of each Subsequent
Contract will not exceed 240 months; (iii) each Subsequent Contract will be
underwritten in accordance with Green Tree's standard underwriting criteria;
and (iv) no Subsequent Contract will have a loan-to-value ratio greater than
100%.
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Distributions
On each Distribution Date, the Servicer shall instruct the Indenture Trustee
to distribute from the Collection Account the Amount Available in the following
order of priority:
1. If Green Tree or an affiliate is no longer the Servicer, then to the
Servicer, the Servicing Fee for the related Monthly Period.
2. To the Servicer, reimbursement for advances made with respect to
delinquent payments that were recovered during the prior Monthly Period.
3. To the Note Distribution Account, the Noteholders' Distributable
Amount and any amounts previously withdrawn from any sub-account of the
Spread Account or the Reserve Account and not previously replenished.
4. To the Certificate Distribution Account, the Certificateholders'
Interest Distributable Amount and, after the Notes have been paid in full,
the Certificateholders' Principal Distributable Amount.
5. To the Indenture Trustee for deposit in the Spread Account, to fund
the initial amounts required in the Class A-2, Class A-3 and Class A-4 sub-
accounts.
6. To the Indenture Trustee for deposit in the Reserve Account, to fund
the initial amount required therein.
7. To Green Tree, the Monthly Servicing and Guaranty Fee.
On each Distribution Date, the Indenture Trustee will distribute all amounts
on deposit in the Note Distribution Account in the following order of priority:
(i) to the Class A-1 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods;
(ii) to the Class A-2 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(iii) to the Class A-2 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-2 Notes and have not previously been replenished;
(iv) to the Class A-3 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(v) to the Class A-3 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-3 Notes and have not previously been replenished;
(vi) to the Class A-4 Noteholders, interest, principal, interest and
principal shortfalls from prior payment periods, and interest and principal
in respect of Principal Liquidation Losses;
(vii) to the Class A-4 sub-account of the Spread Account to the extent
amounts have previously been withdrawn therefrom to pay interest on the
Class A-4 Notes and have not previously been replenished; and
(viii) to the Reserve Account to the extent amounts have previously been
withdrawn therefrom to pay interest or principal on any Class of Notes and
have not previously been replenished.
On each Distribution Date, the Owner Trustee or its Paying Agent will
distribute all amounts on deposit in the Certificate Distribution Account to
the Certificateholders.
For the purposes hereof, the following terms shall have the following
meanings:
"Amount Available" with respect to any Distribution Date, means generally the
sum of payments on the Contracts due and received during the preceding month,
prepayments and other unscheduled collections received during the preceding
month, any amounts deposited in respect of Purchased Contracts, any Interest
Rate Cap Payment, any Guaranty Payment, and all earnings from the investment of
funds in the Collection Account, minus, with respect to all Distribution Dates
other than the Distribution Date in 1998, all
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collections of principal on the Consumer Product Contracts received during the
preceding month up to and including the third Business Day prior to the
preceding Distribution Date (but in no event later than the 10th day of the
prior month).
The "Formula Principal Distribution Amount" with respect to any Distribution
Date (but subject to the last sentence of this definition) will generally be
equal to the sum of the following amounts with respect to the related Monthly
Period, in each case computed in accordance with the method specified in each
Contract: (i) all scheduled payments of principal due on each outstanding
Contract during the related Monthly Period, (ii) all Partial Principal
Prepayments applied and all Principal Prepayments in Full received during the
related Monthly Period in respect of each Contract, (iii) the Scheduled
Principal Balance of each Contract that became a Liquidated Contract during the
related Monthly Period, (iv) the Scheduled Principal Balance of each Contract
which, during the related Monthly Period, was purchased by Green Tree as a
result of a breach of a representation or warranty or by the Servicer as a
result of an uncured breach of a covenant under the Sale and Servicing
Agreement, and (v) with respect to the Distribution Date in 1998, any
remaining amounts on deposit in the Pre-Funding Account. The Formula Principal
Distribution Amount for the Distribution Date in 2029, will be the sum of
the Note Principal Balance and the Certificate Principal Balance.
"Liquidated Contract" means any defaulted Contract as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Contract through the date of disposition of the related real property
have been recovered; provided that any defaulted Contract in respect of which
the related real property has been realized upon and disposed of and proceeds
of such disposition have been received shall be deemed to be a Liquidated
Contract.
"Purchased Contract" means a Contract (i) that Green Tree has become
obligated to repurchase (or, under certain circumstances, has elected to
repurchase) as a result of an uncured breach by Green Tree of a representation
or warranty made by Green Tree with respect to such Contract or (ii) that the
Servicer has become obligated to repurchase (or, under certain circumstances,
has elected to repurchase) as a result of an uncured breach of the covenants
made by it with respect to such Contract.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distributable Amount and the
Noteholders' Principal Distributable Amount.
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carryover
Shortfall for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect to
any Distribution Date, interest accrued for the related monthly interest period
on each Class of Notes at the respective Interest Rate for such Class on (i)
the outstanding Principal Balance of the Notes of such Class and (ii) the
aggregate unreimbursed Principal Liquidation Losses of such Class on each prior
Distribution Date, in each case after giving effect to all payments of
principal to the Noteholders of such Class on the immediately preceding
Distribution Date.
"Principal Liquidation Loss" means, with respect to any Distribution Date and
any Class of Notes, the amount by which the aggregate Principal Balance of such
Class and each junior Class and the Certificate Principal Balance (after giving
effect to any Principal Liquidation Losses imposed on such junior Classes and
Certificates) exceeds the Pool Scheduled Principal Balance, after giving effect
to all distributions of principal on such Distribution Date.
"Principal Balance" means, with respect to any Determination Date and any
Class of Notes, the Original Principal Balance of such Class minus all amounts
previously distributed in respect of principal of such Class and minus any
unreimbursed Principal Liquidation Losses of such Class.
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"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Noteholders' Interest Carryover Shortfall on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date, plus interest on the
amount of interest due but not paid to Noteholders on the preceding
Distribution Date, to the extent permitted by law, at the respective Interest
Rate for each Class of Notes for the applicable monthly interest period.
"Noteholder's Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Unpaid Principal
Shortfall as of the close of the preceding Distribution Date; provided,
however, that the Noteholders' Principal Distributable Amount shall not exceed
the outstanding principal balance of the Notes, and provided further, that the
Noteholders' Principal Distributable Amount on the Final Scheduled Distribution
Date shall not be less than the amount that is necessary (after giving effect
to other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding
principal balances (including all unreimbursed Principal Liquidation Losses) of
all Classes of Notes to zero.
"Noteholders' Monthly Principal Distributable Amount" means, with respect to
any Distribution Date, the Noteholders' Percentage of the Formula Principal
Distribution Amount plus the aggregate unreimbursed Principal Liquidation
Losses of each Class of Notes.
"Noteholders' Percentage" means, 100% until and including the Distribution
Date on which the aggregate Principal Balance of the Notes are paid in full and
0% thereafter.
"Noteholders' Unpaid Principal Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Unpaid Principal
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account on such
Distribution Date.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Interest Distributable
Amount and the Certificateholders' Principal Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, interest accrued at the Pass-Through Rate on
(i) the Certificate Principal Balance and (ii) the aggregate unreimbursed
Certificate Principal Liquidation Losses on each prior Distribution Date, in
each case after giving effect to all payments of principal to the
Certificateholders on the immediately preceding Distribution Date.
"Certificate Principal Liquidation Loss" means, with respect to any
Distribution Date, the amount by which the aggregate Principal Balance of the
Notes and the Certificate Principal Balance exceeds the Pool Scheduled
Principal Balance, after giving effect to all distributions of principal on
such Distribution Date.
"Certificate Principal Balance" equals, initially, $ (approximate)
and, thereafter, equals the Original Certificate Principal Balance, reduced by
all amounts allocable to principal previously distributed to Certificateholders
minus any unreimbursed Certificate Principal Liquidation Losses.
"Certificateholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution
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Account on such preceding Distribution Date, plus interest on such excess, to
the extent permitted by law, at the Pass-Through Rate from such preceding
Distribution Date to but excluding the current Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Certificateholders'
Unpaid Principal Shortfall as of the close of the preceding Distribution Date;
provided, however, that the Certificateholders' Principal Distributable Amount
shall not exceed the Certificate Principal Balance plus any unreimbursed
Certificate Principal Liquidation Losses. In addition, on the Final Scheduled
Distribution Date, the principal required to be deposited into the Certificate
Distribution Account shall not be less than the amount that is necessary (after
giving effect to the other amounts to be deposited in the Certificate
Distribution Account on such Distribution Date and allocable to principal) to
reduce to zero the Certificate Principal Balance plus the unreimbursed
Certificate Principal Liquidation Losses.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date prior to the Distribution Date on which the
Notes are paid in full, zero; and with respect to any Distribution Date
commencing on the Distribution Date on which the Notes are paid in full, the
Formula Principal Distribution Amount (less, on the Distribution Date on which
the Notes are paid in full, the portion thereof payable on the Notes).
"Certificateholders' Unpaid Principal Shortfall" means, as of the close of
any Distribution Date, the excess of the Certificateholders' Monthly Principal
Distributable Amount and any outstanding Certificateholders' Unpaid Principal
Shortfall from the preceding Distribution Date, over the amount in respect of
principal that is actually deposited in the Certificate Distribution Account.
Statements to Securityholders
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Indenture Trustee a statement to be delivered to the Noteholders and to
the Owner Trustee a statement to be delivered to the Certificateholders on such
Distribution Date. Such statements will be based on the information in the
related Servicer's Certificate setting forth certain information required under
the Trust Documents. Each such statement to be delivered to Noteholders will
include the following information as to the Notes, and each such statement to
be delivered to Certificateholders will include the following information as to
the Certificates, with respect to such Distribution Date or the period since
the previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Notes and to the Certificates;
(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Notes and to the Certificates;
(iii) the aggregate outstanding principal balance and the Note Pool
Factor for the Notes and the Certificate Principal Balance and the
Certificate Pool Factor for the Certificates after giving effect to all
payments reported under (ii) above on such date;
(iv) the Noteholders' Interest Shortfall, the Noteholders' Principal
Shortfall, the Certificateholders' Interest Shortfall and the
Certificateholders' Principal Shortfall, if any, and the change in such
amounts from the preceding statement;
(v) the amount, if any, of Principal Liquidation Losses, aggregate
unreimbursed Principal Liquidation Losses since the Closing Date and the
amount of the distribution allocable to such losses for the Notes and
Certificates;
(vi) the amount, if any, deposited or withdrawn from each sub-account of
the Spread Account and the amount on deposit in each sub-account of the
Spread Account after giving effect to all withdrawals and deposits on such
Distribution Date;
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(vii) the amount, if any, deposited or withdrawn from the Reserve Account
and the amount on deposit in the Reserve Account after giving effect to all
withdrawals and deposits on such Distribution Date;
(viii) the amount, if any, of the Interest Rate Cap Payment and the
Guaranty Payment;
(ix) the amount of the Monthly Servicing and Guaranty Fee paid to the
Servicer;
(x) the number and aggregate principal balances of delinquent Contracts,
the number of Products repossessed and repossessed and remaining in
inventory, the number of foreclosures and the number of Contracts that
became Liquidated Contracts with respect to the immediately preceding
Monthly Period; and
(xi) the aggregate amount of Servicer Advances made by the Servicer with
respect to such Distribution Date, and the aggregate amount paid to the
Servicer as reimbursement of Servicer Advances made on prior Distribution
Dates.
Each amount set forth pursuant to subclauses (i) through (vi) with respect to
Certificates or Notes will be expressed as a dollar amount per $1,000 of the
initial principal amount of the Notes or the initial Certificate Principal
Balance, as applicable.
Unless and until Definitive Notes or Definitive Certificates are issued, such
reports will be sent on behalf of the Trust to Cede & Co., as registered holder
of the Notes and the Certificates and the nominee of DTC. Note Owners and
Certificate Owners may receive copies of such reports upon written request,
together with a certification that they are Note Owners or Certificate Owners,
as the case may be, and payment of any expenses associated with the
distribution of such reports, from the Indenture Trustee or Owner Trustee. See
"Reports to Securityholders" herein and "Reports to Securityholders" and
"Certain Information Regarding the Securities" in the accompanying Prospectus.
Within the required period of time after the end of each calendar year, the
Indenture Trustee and the Owner Trustee, as applicable, will furnish to each
person who at any time during such calendar year was a Noteholder or
Certificateholder, a statement as to the aggregate amounts of interest and
principal paid to such Noteholder or Certificateholder, information regarding
the amount of servicing compensation received by the Servicer and such other
information as Green Tree deems necessary to enable such Noteholder or
Certificateholder to prepare its tax returns. See "Certain Federal Income Tax
Consequences" herein.
Administrator
Green Tree Financial Servicing Corporation, a Delaware corporation (the
"Administrator"), will provide the notices and perform other administrative
obligations required by the Indenture and the Trust Agreement. The
Administrator, a subsidiary of Green Tree, will enter into an Administration
Agreement with the Trust and the Indenture Trustee relating to its duties and
obligations as Administrator.
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CERTAIN FEDERAL AND STATE INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal and state income tax
consequences relating to the purchase, ownership, and disposition of the Notes
and the Certificates. The discussion is based upon the current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder, and judicial or ruling authority, all of
which are subject to change, which change may be retroactive. For additional
information regarding federal and state income tax consequences, see "Certain
Federal Income Tax Consequences--Owner Trust Series" and "Certain State Income
Tax Consequences" in the Prospectus.
Prospective investors should consult their own tax advisors to determine the
federal, state, local and other tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Prospective investors should
note that no rulings have been or will be sought from the Internal Revenue
Service (the "IRS") with respect to any of the federal income tax consequences
discussed herein or in the accompanying Prospectus, and no assurance can be
given that the IRS will not take contrary positions. Moreover, there are no
cases or IRS rulings on transactions similar to those described herein with
respect to the Trust, involving both debt and equity interests issued by a
trust with terms similar to those of the Notes and the Certificates.
Prospective investors are urged to consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences
to them of the purchase, ownership and disposition of the Securities.
In the opinion of [Dorsey & Whitney LLP], for federal and Minnesota income
tax purposes, the Notes will be characterized as debt and the Trust will not be
characterized as an association (or a publicly traded partnership) taxable as a
corporation and neither the Trust nor any portion of the Trust will constitute
a taxable mortgage pool taxable as a corporation. Each Certificateholder, by
the acceptance of a Certificate, agrees to treat the Trust as a partnership in
which the Certificateholders are partners for federal income tax purposes. The
Notes will not be issued with original issue discount ("OID"). The Class A-1
Notes provide for stated interest at a floating rate based on LIBOR. Under
Treasury regulations, stated interest payable at a variable rate is not treated
as OID or contingent interest if the variable rate is a qualified floating rate
or a qualified objective rate. The stated interest on the Class A-1 Notes
represents interest payable at a qualified floating rate and will be taxable to
holders of such Notes as interest and not as OID or contingent interest. The
Class A-2, Class A-3 and Class A-4 Notes will not be issued with OID or
contingent interest because interest will be payable at a single fixed rate at
least annually.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and or Section 4975 of the Code, prohibit a pension, profit-
sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan") from engaging
in certain transactions with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax
or other penalties and liabilities under ERISA and the Code for such persons.
Title I of ERISA also requires that fiduciaries of a Benefit Plan subject to
ERISA make investments that are prudent, diversified (except if prudent not to
do so) and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Securities might be deemed to constitute prohibited transactions under ERISA
and the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined
under the Plan Assets Regulation as an interest other than an instrument which
is treated as indebtedness under applicable local law and which has no
substantial equity features. Green Tree believes that the Notes should be
treated as
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indebtedness without substantial equity features for purposes of the Plan
Assets Regulation. However, without regard to whether the Notes are treated as
an Equity Interest for such purposes, the acquisition or holding of Notes by or
on behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Owner Trustee or the Indenture Trustee, the owner
of collateral, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Benefit Plan. In such
case, certain exemptions from the prohibited transaction rules could be
applicable depending on the type and circumstances of the plan fiduciary making
the decision to acquire a Note. Included among these exemptions are: Prohibited
Transaction Class Exemption ("PTCE") 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38 regarding investments by bank
collective investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers."
The Certificates may not be acquired by (a) an employee benefit plan (as
defined in Section 3(3) of ERISA) that is subject to the provisions of Title I
of ERISA, (b) a plan described in Section 4975(e)(1) of the Code or (c) any
entity whose underlying assets include plan assets by reason of a plan's
investment in the entity. By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not subject to the foregoing limitation. In this regard, purchasers that are
insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Savings Bank (decided December 13, 1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to make
purchases of the Certificates. In particular, such an insurance company should
consider the exemptive relief granted by the Department of Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995). The Small
Business Job Protection Act of 1996 (the "1996 Act") became effective on August
20, 1996. The 1996 Act amends ERISA to require the Department of Labor to issue
regulations to clarify, retroactively, the application of ERISA and the
prohibited transaction provisions of the Code to insurance company general
accounts. For additional information regarding treatment of the Certificates
under ERISA, see "ERISA Considerations" in the Prospectus.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Such plans may, however, be subject to
the provisions of other applicable federal and state laws, including, for any
such governmental or church plan qualified under Section 401(a) of the Code and
exempt from taxation under Section 501(a) of the Code, the prohibited
transaction rules set forth in Section 503 of the Code.
A plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
S-42
<PAGE>
UNDERWRITING
[Underwriters] (the "Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from Green Tree the
respective principal amounts of Notes and Certificates set forth below:
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4
Notes Notes Notes Notes Certificates
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$ $ $ $ $
</TABLE>
The Underwriting Agreement provides that the Underwriter is obligated to
purchase all of the Notes and Certificates offered hereby, if any of such Notes
and Certificates are purchased.
Green Tree has been advised by the Underwriter that it proposes initially to
offer the Notes and Certificates to the public at the public offering prices
set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession not in excess of % of the Class A-1
Principal Balance, % of the Class A-2 Principal Balance, % of the Class
A-3 Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, and that the Underwriter and such dealers may
reallow a discount of not in excess of % of the Class A-1 Principal
Balance, % of the Class A-2 Principal Balance, % of the Class A-3
Principal Balance, % of the Class A-4 Principal Balance and % of the
Certificate Principal Balance, to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriter after
the initial public offering of the Notes and Certificates offered hereby.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the Underwriter and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the Underwriter is permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If the Underwriter creates a short position in the Securities in connection
with the offering, i.e., if they sell more securities than are set forth on the
cover page of this Prospectus Supplement, the Underwriter may reduce that short
position by purchasing Securities in the open market.
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 in the absence of such purchases.
Neither Green Tree nor the Underwriter 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 Securities. In addition, neither Green Tree
nor the Underwriter makes any representation that the Underwriter will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Securities to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Securities in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
S-43
<PAGE>
The Notes have not been and will not be registered under the Securities and
Exchange Law of Japan (the "Securities and Exchange Law") and the Underwriter
has agreed that it will not offer or sell any of the Notes, directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan (which
term as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan), except pursuant
to an exemption from the registration requirements of, and otherwise in
compliance with, the Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Green Tree has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Green Tree does not intend to apply for listing of the Notes and Certificates
on a national securities exchange, but has been advised by the Underwriter that
the Underwriter currently intends to make a market in the Securities as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in the Securities and any such market may be
discontinued at any time at the sole discretion of the Underwriter.
Accordingly, no assurance can be given as to the liquidity of, or trading
markets for, the Securities.
LEGAL MATTERS
Certain matters with respect to the legality of the Notes and Certificates
and with respect to the federal and Minnesota income tax matters discussed
under "Certain Federal and State Income Tax Consequences" will be passed upon
for Green Tree by , Minnesota. The validity of the Notes and
Certificates will be passed upon for the Underwriter by , New York, New
York.
S-44
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be available only in
book-entry form (the "Global Notes"). Investors in the Global Notes may hold
such Global Notes through any of DTC, CEDEL or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Notes through CEDEL
and Euroclear will be conducted in the ordinary way in accordance with their
normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Notes through DTC
will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of CEDEL and Euroclear (in such capacity)
and DTC Participants.
Non-U.S. holders (as described below) of Global Notes will be subject to U.S.
withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their participants.
Initial Settlement
All Global Notes will be held in book-entry form by DTC in the name of Cede &
Co. as nominee of DTC. Investors' interests in the Global Notes will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Notes through DTC will follow the
settlement practices applicable to United States corporate debt obligations.
Investors securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Notes through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no "lock-
up" or restricted period. Global Notes will be credited to the securities
custody accounts on the settlement date against payments in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Notes are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will
A-1
<PAGE>
instruct its Depositary to receive the Global Notes against payment. Payment
will include interest accrued on the Global Notes from and including the last
coupon payment date to and excluding the settlement date. Payment will then be
made by such Depositary to the DTC Participant's account against delivery of
the Global Notes. After settlement has been completed, the Global Notes will be
credited to the applicable clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Notes credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Notes will accrue from, the value date (which would be the preceding
day when settlement occurred in New York). If settlement is not completed on
the intended value date (i.e., the trade fails), the CEDEL or Euroclear cash
debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Notes would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Notes were credited to their
accounts. However, interest on the Global Notes would accrue from the value
date. Therefore, in many cases the investment income on the Global Notes earned
during that one-day period may substantially reduce or offset the amount of
such overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Notes to the
respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Notes are to
be transferred by the respective clearing systems, through their respective
Depositaries, to a DTC Participant. The seller will send instructions to CEDEL
or Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases, CEDEL or Euroclear will
instruct their respective Depositaries, as appropriate, to deliver the Notes to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Notes from and including the last coupon payment date to
and excluding the settlement date. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day,
and receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the bank-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date. Finally, day traders that use CEDEL or
Euroclear and that purchase Global Notes from DTC Participants for delivery to
CEDEL Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
A-2
<PAGE>
(b) borrowing the Global Notes in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Notes
sufficient time to be reflected in their CEDEL or Euroclear account in
order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Notes holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of Notes
that are non-U.S. Persons generally can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 864(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10 percent shareholder (within the meaning
of Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Person with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the beneficial owner of Notes or such owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, such
owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, or (iii) an estate or trust the
income of which is includible in gross income for United States tax purposes,
regardless of its source. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
Global Notes. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global Notes.
A-3
<PAGE>
PROSPECTUS Base Prospectus No. 7
Unsecured Home Improvement Loans
--Owner Trust
Green Tree Financial Corporation, Seller and Servicer
Home Improvement Trusts
(Issuable In Series)
We are offering loan-backed notes and loan-backed certificates for home
improvement loans under this prospectus and a prospectus supplement. The
prospectus supplement will be prepared separately for each series of securities
offered. We refer to the notes and the certificates as "securities" and to each
separate series of securities as a "series." Green Tree Financial Corporation
will form a trust for each series, and the trust will issue the securities of
that series. The securities 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 securities within a series to receive payments may
be senior or subordinate to the rights of one or more of the other classes of
securities. In addition, a series of securities may include one or more classes
which on the one hand are subordinated to one or more classes of securities,
while on the other hand are senior to one or more classes of securities. The
rate of principal and interest payment on the securities of any class will
depend on the priority of payment of that class and the rate and timing of
payments of the related home equity loans.
----------------
The securities 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 securities unless
accompanied by the prospectus supplement relating to that series.
Prospectus dated , 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the securities in two separate documents that progressively
provide more detail: (a) this prospectus, which provides general information,
some of which many not apply to a particular series of securities, including
your series; and (b) the prospectus supplement related to the particular terms
of your series of securities.
If the terms of your series of securities described in the prospectus
supplement varies from this prospectus, you should rely on the information in
your prospectus supplement.
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. The information in this document
may only be accurate on the date of this document.
Some persons participating in this offering may engage in transactions that
stabilize, maintain or in some way affect the price of the securities. These
types of transactions may include stabilizing, the purchase of securities 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 your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the securities of each series certain
monthly and annual reports concerning the securities and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the securities--Reports to
Securityholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, 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 such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
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.
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.
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, as
amended (the "Exchange Act"), after the date of this prospectus and prior to
the termination of the offering of the securities issued by that trust, will be
incorporated by reference into this prospectus.
2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the securities, 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 and the accompanying prospectus supplement.
Issuer....................... For each series of securities, Green Tree will
form a trust pursuant to a trust agreement. Each
trust will be the Issuer for a series of
securities.
Securities Offered .......... Green Tree will create a trust and deposit a
pool of loans in the trust. The trust will issue
the securities. This prospectus describes
multiple trusts that Green Tree will create from
time to time. Each trust will issue a separate
series of securities. Payments on the securities
will be made primarily from payments on the
related pool of loans. The terms of the
securities issued by a trust will be governed by
a Pooling and Servicing Agreement between Green
Tree and the trustee for that series. We will
identify the trustee for a series of securities
in the related prospectus supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
securities. You should read carefully the
section entitled "Risk Factors" beginning on
page 6 of this prospectus.
Trustee...................... The owner trustee for a trust. We will specify
the owner trustee in the related prospectus
supplement. See "Description of the Trust
Documents--The Trustee."
Indenture Trustee............ We will specify the indenture trustee, with
respect to any series of securities, in the
related prospectus supplement.
The Loans.................... The loans underlying a series of securities form
a loan pool. The loans in a loan pool will be
fixed or variable rate loans. The loans consist
of
- home improvement loans that will be either
conventional loans or loans insured by the
Federal Housing Administration ("FHA"), and
- closed-end home equity loans.
3
<PAGE>
The home improvement loans will not be secured
by any lien on the related real estate. If we so
specify in the related prospectus supplement, we
may divide the loan pool into two or more sub-
pools, in which the securities of specified
classes may be paid primarily from the loans
comprising a given sub-pool.
The prospectus supplement for each series will
provide information about the following:
- the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
- the weighted average and range of
contractual rates of interest on the loans;
- the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
- the average outstanding principal balance
of the loans as of the cut-off date;
- the percentage of the loans that are FHA-O
insured;
- the range of loan-to-value ratios; and
- the geographic location of improved real
estate underlying the loans.
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree additional loans after the date of issuance
of that series from funds on deposit in a pre-
funding account.
The loans will have been originated by Green
Tree on an individual basis in the ordinary
course of its business, unless we specify
otherwise in the related prospectus supplement.
The Notes.................... Each series of securities will include one or
more classes of notes. The notes will be issued
pursuant to an indenture.
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
notes in denominations of $1,000 and in integral
multiples thereof. These notes will be available
in book-entry form only. Unless we specify
otherwise in the related prospectus supplement,
beneficial owners of notes will receive
definitive notes only in the limited
circumstances described in this prospectus or in
the related prospectus supplement. See "Certain
Information Regarding the Securities--Book-Entry
Registration."
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the notes
or the underlying loans.
4
<PAGE>
Unless we specify otherwise in the related
prospectus supplement, each class of notes will
have a stated principal amount and will accrue
interest at a specified rate or rates. Each
class of notes may have a different interest
rate, which may be a fixed, variable or
adjustable interest rate or any combination of
these. We will specify in the related prospectus
supplement the interest rate for each class of
notes and the method for determining subsequent
changes to the interest rate.
We may include two or more classes of notes in a
series which may differ as to timing and
priority of payment, seniority, allocations of
loss, interest rate or amount of payment of
principal or interest, or as to which payments
of principal or interest may or may not be made
upon the occurrence of specified events or on
the basis of collections from designated
portions of the underlying pool. In addition, a
series may include one or more classes of notes
entitled to:
- principal payments with disproportionate,
nominal or no interest payments, or
- interest payments with disproportionate,
nominal or no principal payments.
The notes of a series may include one or more
classes which on the one hand are subordinated
to one or more classes of notes, while on the
other hand are senior to one or more classes of
notes.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
notes, if any, of that series as described in
the related prospectus supplement. In addition,
if the related prospectus supplement provides
that the property of a trust will include a pre-
funding account, we will partially redeem the
outstanding notes, if any, on or immediately
following the end of the pre-funding period in
an amount and manner specified in the related
prospectus supplement. In the event that we so
partially redeem, the owners of the notes may be
entitled to receive a prepayment premium from
the trust, in the amount and to the extent
provided in the related prospectus supplement.
The Certificates............. We will issue the certificates of any series of
securities pursuant to the related trust
documents. If we so specify in the related
prospectus supplement, we may include the
certificates of a series of one or more classes
which:
- are entitled to receive distributions only
in respect of the principal, interest or
any combination of these or in specified
proportions in respect of such payments,
and/or
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<PAGE>
- are entitled to receive distributions in
respect of principal before or after
specified principal distributions have been
made on one or more other classes of
certificates within that series, or on a
planned amortization schedule or upon the
occurrence of certain other specified
events. See "The Certificates."
Unless we specify otherwise in the related
prospectus supplement, you may purchase the
certificates in denominations of $1,000 and in
integral multiples thereof. These certificates
will be available in book-entry form only.
Unless we specify otherwise in the related
prospectus supplement, beneficial owners of
certificates will receive definitive
certificates only in the limited circumstances
described in this prospectus or in the related
prospectus supplement. See "Certain Information
Regarding the Securities--Book-Entry
Registration."
Unless we specify otherwise in the related
prospectus supplement, no government agency or
other insurer will guarantee or insure the
Certificates or the underlying loans.
Unless we specify otherwise in the related
prospectus supplement, each class of
certificates will have a stated certificate
balance and will accrue interest at a specified
rate or rates. Each class of certificates may
have a different pass-through rate, which may be
a fixed, variable or adjustable pass-through
rate, or any combination of these. We will
specify in the related prospectus supplement the
pass-through rate for each class of
certificates, or the initial pass-through rate
and the method for determining subsequent
changes to the pass-through rate.
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.
If we exercise our option to purchase the loans
of a trust on the terms and conditions described
under "Description of the trust Documents--
Termination," we will redeem the outstanding
certificates, if any, of such series as
described in the related prospectus supplement.
In addition, if the related prospectus
supplement provides that the property of a trust
will include a pre-funding account, we will
partially redeem the outstanding certificates,
if any, on or immediately following the end of
the pre-funding period in an amount and manner
specified in the related prospectus supplement.
In the event that we so partially redeem, the
owners of the certificates may be entitled to
receive a prepayment premium from the trust, in
the amount and to the extent provided in the
related prospectus supplement.
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Subordinated Securities...... We may subordinate one or more classes of any
series of securities, as specified in the
related prospectus supplement. The rights of
holders of subordinated securities to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior securities to the extent
and in the manner we specify in the related
prospectus supplement. If a series of securities
contains more than one class of subordinated
securities, distributions and losses will be
allocated among those classes in the manner
specified in the related prospectus supplement.
The rights of holders of subordinated
securities, to the extent not subordinated, may
be on a parity with holders of senior
securities. By subordinating a class of
securities, we intend to:
^ enhance the likelihood of regular receipt
by holders of senior securities of the full
amount of scheduled monthly payments of
principal and interest due them, and
^ protect holders of senior securities
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated securities the benefits of other forms
of credit enhancement that would benefit only
those subordinated securities.
Trust Property............... Each note will represent an obligation of its
related trust. Each certificate will represent a
fractional undivided interest in its related
trust. The assets of each trust will include
(among other things):
^ a pool of fixed or variable rate home
improvement loans or promissory notes,
^ amounts held in the collection account,
^ proceeds from FHA insurance,
^ 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
securities,
^ certain other rights under the trust
documents, and
^ any other property that we specify in the
related prospectus supplement.
In addition, if we so specify in the related
prospectus supplement, the trust property will
include money on deposit in a pre-funding
account established by the indenture trustee or
the trustee, which we will use to purchase
subsequent loans from the Seller during the pre-
funding period. See "The Trusts."
If and to the extent we specify in the related
prospectus supplement, the related trust will be
obligated to purchase from us additional loans
during the pre-funding period. These loans
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<PAGE>
will have a total principal balance
approximately equal to the amount on deposit in
the pre-funding account on the closing date.
We must repurchase loans if we breach certain
representations and warranties that we make. See
"Description of the trust Documents--Sale and
Assignment of the Contracts" and "Certain Legal
Aspects of the Contracts--Repurchase
Obligations."
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated securities, we may provide credit
enhancement with respect to a series of
securities by pool insurance, letters of credit,
surety bonds, a guarantee of Green Tree, cash
reserve funds or other forms of enhancement
acceptable to each nationally recognized rating
agency rating a series of securities. We will
describe any such credit enhancement in the
related prospectus supplement.
Servicing ................... The servicer will manage, administer, service
and make collections on the loans held by each
trust. Unless we specify otherwise in the
related prospectus supplement, we will pay the
servicer a monthly fee on each distribution date
pursuant to a servicing fee formula. See
"Description of the trust Documents--Servicing."
Advances..................... Unless we specify otherwise in the related
prospectus supplement, the servicer must make
advances each month of any scheduled payments on
the loans that were due but not received during
the prior due period. The servicer will then
receive a reimbursement of an advance from the
amount available for the related trust. The
servicer must make an advance only to the extent
it determines that the advance will be
recoverable from subsequent funds available in
the Collection Account for the related trust.
Collection Account........... The servicer will establish and maintain one or
more separate accounts for each series of
securities in the name of the indenture trustee
for the benefit of the owners of the securities.
We refer to such an account as a "collection
account." We will deposit all of the payments we
receive from obligors under the loans in the
related collection account no later than one
business day after we receive them. Unless we
specify otherwise in the related prospectus
supplement, we will also deposit all of the
payments we receive from obligors with respect
to liquidated loans no later than one business
day after we receive them. Unless we specify
otherwise in the related prospectus supplement,
the servicer may use any alternative remittance
schedule acceptable to the rating agencies. See
"Description of the trust Documents--
Collections."
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<PAGE>
Optional Purchase of Loans... Unless we specify otherwise in the related
prospectus supplement, we may purchase all of
the loans held by a trust on any distribution
date following the first due period when the
total principal balance has declined to 10% or
less of the total principal balance as of the
cut-off date, subject to certain provisions in
the related trust documents. For a more complete
description of optional purchase of the loans,
see "Description of the Trust Documents--
Termination" in this prospectus.
Representations and
Warranties of Green Tree
Financial Corporation .......
We will make certain representations and
warranties regarding the loans. These
representations and warranties are a condition
to our conveyance of any loan pool to a trust.
If we become aware of a breach of any
representation or warranty that materially
adversely affects the trust's interest in any
loan or receive written notice of a breach from
the trustee or the servicer, then we must either
cure the breach, repurchase the affected loan
or, if the related prospectus supplement so
provides, substitute for the affected loan,
under the conditions further described in this
prospectus and in the prospectus supplement. For
a more complete description of our
representations and warranties, see "Description
of the Certificates--Conveyance of Loans."
Federal Income Tax In the opinion of our counsel, for federal and
Considerations.............. Minnesota income tax purposes, the notes will be
characterized as debt and the trust will not be
characterized as an association or a publicly
traded partnership taxable as a corporation.
Each noteholder, by the acceptance of a note,
will agree to treat the notes as debt. Each
certificateholder, by the acceptance of a
certificate, will agree to treat the trust as a
partnership in which the certificateholders are
partners for federal income tax purposes.
Alternative characterizations of the trust, the
notes and the certificates are possible, but
would not result in materially adverse tax
consequences to noteholders or
certificateholders. See "Certain Federal Income
Tax Consequences" and "Certain State Income Tax
Consequences" in this prospectus.
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this prospectus and in your prospectus
supplement.
Legal Investment............. The Certificates will not constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984, as amended. For
a more complete description of legal
9
<PAGE>
considerations regarding investment in the
Certificates, see "Legal Investment
Considerations" in this prospectus and in your
prospectus supplement.
Ratings...................... We will not issue the securitites unless one or
more nationally recognized rating agencies have
assigned a rating to the securities in one of
their four highest rating categories.
We cannot assure you that the rating initially
assigned to your securities will not be
subsequently lowered or withdrawn by the rating
agency. If a rating agency lowers the rating
initially assigned to any securities, no person
or entity will provide any credit enhancement.
10
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the securities.
^ Limits on the Availability of FHA Insurance. We will specify in the
prospectus supplement the number and percentage of home improvement
loans in the pool that are insured by FHA pursuant to Title I of the
National Housing Act. 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 we cannot assure you that FHA's
enforcement of its regulations will not become stricter in the future.
We sometimes 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 on the loans in a given pool is limited to
the balance of a reserve amount. This reserve amount as of December 31,
1997, was equal to approximately $86,950,000, but will be reduced by
the amount of all FHA insurance claims paid and will be increased by an
amount equal to 10% of the unpaid principal balance of FHA Title I
loans subsequently originated and reported for insurance by us. Severe
losses on our FHA-insured manufactured housing contracts, 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 FHA-insured home improvement
contracts. 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."
^ Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the securities will not represent an interest in
or obligation of Green Tree. Neither the government, any underwriter or
its affiliates, the servicer nor any other party will insure or
guarantee any of the securities of any series (except as we otherwise
specify in the related prospectus supplement).
^ Unsecured Home Improvement Loans. The obligations of an obligor under
each home improvement loan will not be secured by an interest in the
related real estate. The related trust, as the owner of the home
improvement loan, will be a general unsecured creditor as to those
obligations. Consequently, if an obligor defaults on its home
improvement loan, the related trust will have recourse only against the
obligor's assets generally, along with all other general unsecured
creditors of the obligor. In a bankruptcy or insolvency proceeding
relating to an obligor of a home improvement loan, the obligations of
an obligor under that home improvement loan may be discharged in their
entirety. An obligor on a home improvement loan may not demonstrate
concern over performance of its obligations under the home improvement
loan as in the case where such obligations are secured by the real
estate owned by the obligor.
^ Risks to Investors upon any Insolvency of Green Tree. We intend that
any transfer of loans to the related trust will constitute a sale,
rather than a pledge of the loans to secure our indebtedness. However,
if we were to become a debtor under the federal bankruptcy code or
similar applicable state laws, our creditor or trustee in bankruptcy
might argue that such sale of loans by us was a pledge of the loans
rather than a sale. If this argument were accepted by a court, it would
cause the related trust to experience a delay in or reduction of
collections on the loans.
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<PAGE>
^ Limited Liquidity. We cannot assure to you that a secondary market will
develop for the securities 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 securities.
^ Subordination of Certain Classes of securities; Limited Assets. To the
extent we specify in the related prospectus supplement, we may
subordinate distributions of interest and principal on some or all
classes of securities of a series in priority or payment to interest
and principal due on the notes of such series and/or to distributions
of interest and principal on other classes of securities. In addition,
holders of certain classes of securities of any series may have the
right to take actions that are detrimental to the interests of the
holders of certain other classes of securities. For example, holders of
a class of more senior securities may be entitled to instruct the
trustee to liquidate the property of the trust when it is not in the
interest of holders of more junior classes of securities of that series
to do so. On the other hand, certain actions may require the consent of
a majority of Security owners of all classes of a series, which may
mean that owners of securities of more junior classes can prevent the
owners of more senior classes of that series from taking action.
Moreover, no trust will have any significant assets or sources of funds
other than the loans and, to the extent provided in the related
prospectus supplement, a pre-funding account and any credit enhancement
specified in the related prospectus supplement. The notes of any series
will represent obligations solely of the related trust. The
certificates, if any, will represent interest solely in the related
trust. Except as we specify in the related prospectus supplement,
neither Green Tree, the servicer, the owner trustee, the indenture
trustee nor any other person or entity will insure or guarantee the
notes or certificates of any series. Consequently, holders of the
securities of any series must rely for payment upon payments on the
related loans and, to the extent available, amounts on deposit in a
pre-funding account and any credit enhancement (if any) as we specify
in the related prospectus supplement. If we so specify in the related
prospectus supplement, credit enhancement for a class of securities of
a series may cover one or more other classes of securities of that
series, and accordingly may be exhausted for the benefit of some
classes and thereafter be unavailable for other classes.
^ Yield and Prepayment Considerations. Full or partial prepayments on the
loans will reduce the weighted average life of the securities. Obligors
may prepay their loans without penalty. Prepayments may result from
payments by Obligors, liquidations due to default, the receipt of
proceeds from physical damage or credit insurance, repurchases by us as
a result of certain uncured breaches of the warranties, purchases by
the servicer as a result of certain uncured breaches of the covenants
with respect to the loans made by it in the related Sale and Servicing
Agreement, or us or the servicer exercising our option to purchase all
of the remaining loans.
Unless we specify otherwise in the related prospectus supplement, the
amounts paid to Securityholders in respect of principal on any
distribution date will include all prepayments on the loans during the
corresponding due periods. The owners of notes and the owners of
certificates will bear all reinvestment risk resulting from the timing
of payments of principal on the securities.
^ Certain Matters Relating to Insolvency. Green Tree Financial
Corporation intends that each transfer of loans to the related trust
fund will constitute a sale, rather than a pledge of the loans to
secure indebtedness of Green Tree Financial Corporation. However, if
Green Tree Financial Corporation were to become a debtor under the
federal bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree Financial Corporation, or Green Tree Financial
Corporation as debtor-in-possession, may argue that the sale of the
loans by Green Tree Financial Corporation was a pledge of the loans
rather than a sale. This position, if presented to or accepted by a
court, could result in a delay in or reduction of distributions to the
holders of the Certificates.
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THE TRUSTS
With respect to each Series of Securities, Green Tree will establish a Trust
pursuant to the related Trust Documents. Prior to the sale and assignment of
the related Contracts pursuant to the related Trust Documents, the Trust will
have no assets or obligations. The Trust will not engage in any business
activity other than acquiring and holding the Trust Property, issuing the Notes
and the Certificates, if any, of such Series and distributing payments thereon.
Each Note will represent an obligation of, and each Certificate, if any, will
represent a fractional undivided interest in, the related Trust. The Trust
Property of each Trust will include, among other things, (i) a Contract Pool,
(ii) such amounts as from time to time may be held in the Collection Account
(including all investments in the Collection Account and all income from the
investment of funds therein and all proceeds thereof) and certain other
accounts (including the proceeds thereof), (iii) proceeds from FHA Insurance
(with respect to any FHA-insured Contract included in the Contract Pool), (iv)
any letter of credit, guarantee, surety bond, insurance policy, cash reserve
fund or other credit enhancement securing payment of all or part of a Series of
Securities, (v) certain other rights under the Trust Documents and (vi) such
other property as may be specified in the related Prospectus Supplement. See
"The Contracts" and "Description of the Trust Documents--Collections." The
Trust Property will also include, if so specified in the related Prospectus
Supplement, monies on deposit in a Pre-Funding Account to be established with
the Indenture Trustee or the Trustee, which will be used to purchase Subsequent
Contracts from Green Tree from time to time (and as frequently as daily) during
the Pre-Funding Period specified in the related Prospectus Supplement. Any
Subsequent Contracts so purchased will be included in the related Contract Pool
forming part of the Trust Property, subject to the prior rights of the related
Indenture Trustee and the Noteholders therein. In addition, to the extent
specified in the related Prospectus Supplement, a form of credit enhancement
may be issued to or held by the Trustee or the Indenture Trustee for the
benefit of holders of one or more Classes of Securities. Holders of Securities
of a Series will have interests only in such Contract Pool and will have no
interest in the Contract Pool created with respect to any other Series of
Securities, except with respect to FHA Insurance reserves.
Except as otherwise specified in the related Prospectus Supplement, all of
the Contracts will have been originated by Green Tree in the ordinary course of
its business. Specific information respecting the Contracts included in each
Trust will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Securities. A copy of the Sale and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Contracts relating to such
Series will be attached to the Sale and Servicing Agreement delivered to the
Trustee upon delivery of the Securities.
Whenever in this Prospectus terms such as "Contract Pool," "Trust," "Sale and
Servicing Agreement," "Interest Rate or "Pass-Through Rate" are used, those
terms respectively apply, unless the context otherwise indicates, to one
specific Contract Pool and Trust, each Sale and Servicing Agreement, each
Interest Rate applicable to the related Class of Notes and each Pass-Through
Rate applicable to the related Class of Certificates.
The Contract Pools
Except as otherwise specified in the related Prospectus Supplement, the
Contract Pool will consist of home improvement contracts and promissory notes
(collectively, the "Contracts") originated by Green Tree on an individual basis
in the ordinary course of business. The Contracts will be conventional home
improvement contracts or contracts insured by FHA. No Contract will be secured
by an interest in the related real estate. Except as otherwise specified in the
related Prospectus Supplement, the Contracts will be fully amortizing and will
bear interest at a fixed or variable annual percentage rate (the "Contract
Rate").
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For each Series of Securities, Green Tree will assign the Contracts
constituting the Contract Pool to the trustee named in the related Prospectus
Supplement (the "Trustee"). Green Tree, as Servicer (in such capacity referred
to herein as the "Servicer," which term shall include any successor to Green
Tree in such capacity under the applicable Sale and Servicing Agreement), will
service the Contracts pursuant to the Sale and Servicing Agreement. See
"Description of the Trust Documents--Servicing." Unless otherwise specified in
the related Prospectus Supplement, the Contract documents will be held by the
Trustee or a custodian on its behalf.
The related Prospectus Supplement will specify for the Contracts contained in
the related Contract Pool, among other things, the range of the dates of
origination of the Contracts; the range of the Contract Rates and the weighted
average Contract Rate; the minimum and maximum outstanding principal balances
and the average outstanding principal balance as of the Cut-off Date; the
aggregate principal balance of the Contracts included in the Contract Pool as
of the Cut-off Date; the weighted average and range of scheduled terms to
maturity as of origination and as of the Cut-off Date; and the range of
original maturities of the Contracts and the last maturity date of any
Contract. If the Trust includes a Pre-Funding Account, the related Prospectus
Supplement will specify the conditions that must be satisfied prior to any
transfer of Subsequent Contracts, including the requisite characteristics of
the Subsequent Contracts.
Green Tree will make representations and warranties as to the types and
geographical distribution of the Contracts included in a Contract Pool and as
to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Contract, Green Tree will be obligated to cure the
breach in all material respects, or to repurchase or substitute for
the Contract as described below. This repurchase obligation constitutes the
sole remedy available to the Securityholders or the Trustee for a breach of
representation or warranty by Green Tree. See "Description of the Trust
Documents--Sale and Assignment of the Contracts."
The Trustee
The Trustee for each Trust will be specified in the related Prospectus
Supplement. The Trustee's liability in connection with the issuance and sale of
the Securities of such Series will be limited solely to the express obligations
of such Trustee set forth in the related Trust Documents. A Trustee may resign
at any time, in which event the General Partner will be obligated to appoint a
successor trustee. The General Partner may also remove the Trustee if the
Trustee ceases to be eligible to continue as Trustee under the related Trust
Documents or if the Trustee becomes insolvent. In such circumstances, the
General Partner will be obligated to appoint a successor trustee. Any
resignation or removal of a Trustee and appointment of a successor trustee will
be subject to any conditions or approvals specified in the related Prospectus
Supplement and will not become effective until acceptance of the appointment by
the successor trustee.
GREEN TREE FINANCIAL CORPORATION
General
Green Tree is a Delaware corporation that, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. Through its various
divisions, Green Tree purchases, pools, sells and services retail conditional
sales contracts for manufactured housing and retail installment sales contracts
for home improvements, a variety of consumer products and equipment finance,
and provides credit to manufactured housing dealers for purposes of purchasing
manufactured home inventory from manufacturers. Green Tree is the largest
servicer of government-insured manufactured housing contracts and conventional
manufactured housing contracts in the United States. Servicing functions are
performed through Green Tree Financial Servicing Corporation, a wholly owned
subsidiary of Green Tree. Through its principal offices in St. Paul, Minnesota,
and service centers throughout the United States, Green Tree serves all 50
states. Green Tree began financing FHA-insured home improvement loans in April
1989 and conventional home improvement loans in
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September 1992. Green Tree also purchases, pools and services installment sales
contracts for various consumer products. Its principal executive offices are
located at 1100 Landmark Towers, St. Paul, Minnesota 55102-1639 (telephone
(651) 293-3400). Green Tree's Annual Report on Form 10-K for the year ended
December 31, 1997, most recent Proxy Statement and, when available, subsequent
quarterly and annual reports are available from Green Tree upon written
request.
Contract Origination
Through its centralized loan processing operations in St. Paul, Minnesota,
Green Tree arranges to purchase certain contracts from home improvement
contractors located throughout the United States. Green Tree's regional sales
managers contact home improvement contractors and explain Green Tree's
available financing plans, terms, prevailing rates and credit and financing
policies. If the contractor wishes to utilize Green Tree's available customer
financing, the contractor must make an application for contractor approval.
Green Tree has a contractor approval process pursuant to which the financial
condition, business experience and qualifications of the contractor are
reviewed prior to his or her approval to sell contracts to Green Tree. In
addition, Green Tree has a centralized compliance group which reviews and
updates contractor financial condition and reviews contractors on an annual
basis to determine whether such contractor's approval will be continued. Green
Tree also reviews monthly contractor trend reports which show the default and
delinquency trends of the particular contractor with respect to contracts sold
to Green Tree. Green Tree occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that Green Tree originates are written on forms provided or
approved by Green Tree and are purchased on an individually approved basis in
accordance with Green Tree's guidelines. The contractor submits the customer's
credit application and construction contract to Green Tree's office where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system that was implemented by Green Tree in June 1993. If Green
Tree determines that the application meets Green Tree's underwriting guidelines
and applicable FHA regulations (for FHA-insured contracts) and the credit is
approved, Green Tree purchases the contract from the contractor when the
customer verifies satisfactory completion of the work, or, in the case of
staged funding, Green Tree follows up with the customer for the completion
certificate 90 days after funding.
The types of home improvements financed by Green Tree include (i) exterior
renovations, including windows, siding and roofing, (ii) pools and spas, (iii)
kitchen and bath remodeling, and (iv) room additions and garages. Green Tree
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 unsecured FHA-insured home improvement
contract currently may not exceed $7,500 without specific FHA approval, with a
maximum term of 20 years. Certain other criteria for home improvement contracts
eligible for FHA Insurance are described under the caption "Description of FHA
Insurance."
Green Tree began financing conventional home improvement loans in September
1992. Conventional home improvement loans are not insured by FHA. The unsecured
conventional program allows for an amount financed from $2,500 to $15,000
(except in Massachusetts where the loan limit may be $20,000). The allowable
term of unsecured contracts is 24 to 120 months. Green Tree's underwriting
standards with respect to unsecured home improvement contracts are, in general,
more stringent than its underwriting standards with respect to secured home
improvement contracts with similar terms. Eligible property includes an owner-
occupied single family home, up to four unit multiple-family dwelling, owner-
occupied condominium or town house, or an owner-occupied manufactured home
located in a Green Tree-approved park or attached to the real estate.
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Loss and Delinquency Information
Each Prospectus Supplement will include Green Tree's loss and delinquency
experience with respect to its entire servicing portfolio of home improvement
contracts. However, there can be no assurance that such experience will be
indicative of the performance of the Contracts included in a particular
Contract Pool.
Ratio of Earnings to Fixed Charges for Green Tree
Set forth below are Green Tree's ratios of earnings to fixed charges for the
past five years. 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>
Year Ended December 31,
------------------------
Months
Ended
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.......... 4.81 7.98 7.90 5.44 3.94
</TABLE>
YIELD CONSIDERATIONS
The Interest Rates, Pass-Through Rates and the weighted average Contract Rate
of the Contracts (as of the related Cut-off Date) relating to each Series of
Securities will be set forth in the related Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Securities that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Securities that is offered at a premium to its principal amount or without any
principal amount.
The yield on some types of Securities which may be offered hereby, such as
Stripped Notes, Interest Only Certificates, Principal Only Certificates and
Fast Pay/Slow Pay Certificates, may be particularly sensitive to prepayment
rates, and to changes in prepayment rates, on the underlying Contracts. If so
stated in the related Prospectus Supplement, the yield on some types of
Securities which may be offered hereby could change and may be negative under
certain prepayment rate scenarios. Accordingly, some types of Securities may
not be legal or appropriate investments for certain financial institutions,
pension funds or others. See "ERISA Considerations" and "Legal Investment
Considerations." In addition, the timing of changes in the rate of prepayment
on the Contracts included in a Contract Pool may significantly affect an
investor's actual yield to maturity, even if the average prepayment rate over
time is consistent with the investor's expectations. In general, the earlier
that prepayments on Contracts occur, the greater the effect on the investor's
yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Contracts will have maturities at origination of not more than 25 years.
Prepayment Considerations
Contracts generally may be prepaid in full or in part without penalty. FHA-
insured Contracts may be prepaid at any time without penalty. Green Tree has no
significant experience with respect to the rate of principal prepayments on
home improvement contracts. Because the Contracts have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement)
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all principal prepayments will be passed through to Securityholders of the
related Series on the Payment Date following the Due Period in which such
principal prepayment occurred, prepayments on the Contracts would affect the
amount of funds available to make distributions on the Securities on any
Payment Date only if a substantial portion of the Contracts prepaid prior to
their respective due dates in a particular month (thus paying less than 30
days' interest for that Due Period) while very few Contracts prepaid after
their respective due dates in that month. In addition, liquidations of
defaulted Contracts or the Servicer's or Green Tree's exercise of its option to
repurchase the entire remaining pool of Contracts (see "Description of the
Trust Documents--Termination") will affect the timing of principal
distributions on the Securities of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Securities. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Securities, there can be no assurance that the Contracts will prepay
at such rate, and it is unlikely that prepayments or liquidations of the
Contracts will occur at any constant rate.
See "Description of the Trust Documents--Termination" for a description of
Green Tree's or the Servicer's option to repurchase the Contracts comprising
part of a Trust when the Aggregate Principal Balance of such Contracts as of
the related Cut-off Date is less than a specified percentage of the Cut-off
Date Principal Balance of such Contracts. See also "The Trusts--The Contract
Pools" for a description of the obligations of Green Tree to repurchase a
Contract in case of a breach of a representation or warranty relative to such
Contract.
POOL FACTOR
The "Certificate Pool Factor" for each Class of Certificates will be an
eight-digit decimal which the Servicer will compute indicating the outstanding
balance (the "Certificate Balance") with respect to such Certificates as of
each Distribution Date (after giving effect to all distributions of principal
made on such Distribution Date), as a fraction of the original Certificate
Balance of such Certificates. The "Note Pool Factor" for each Class of Notes,
if any, will be an eight-digit decimal which the Servicer will compute
indicating the remaining outstanding principal balance with respect to such
Notes as of each Distribution Date (after giving effect to all distributions of
principal on such Distribution Date) as a fraction of the initial outstanding
principal balance of such Class of Notes. Each Certificate Pool Factor and each
Note Pool Factor will initially be 1.00000000; thereafter, the Certificate Pool
Factor and the Note Pool Factor will decline to reflect reductions in the
Certificate Balance of the applicable Class of Certificates or reductions in
the outstanding principal balance of the applicable Class of Notes, as the case
may be. The amount of a Certificateholder's pro rata share of the Certificate
Balance for the related Class of Certificates can be determined by multiplying
the original denomination of the Certificateholder's Certificate by the then
applicable Certificate Pool Factor. The amount of a Noteholder's pro rata share
of the aggregate outstanding principal balance of the applicable Class of Notes
can be determined by multiplying the original denomination of such Noteholder's
Note by the then applicable Note Pool Factor.
With respect to each Trust and pursuant to the related Trust Documents, on
each Distribution Date or Payment Date, as the case may be, the related
Certificateholders and Noteholders will receive periodic reports from the
Trustee stating the Certificate Pool Factor or the Note Pool Factor, as the
case may be, and containing various other items of information. Unless and
until Definitive Certificates or Definitive Notes are issued, such reports will
be sent on behalf of the Trust to the Trustee and the Indenture Trustee and
Cede & Co., as registered holder of the Certificates and the Notes and the
nominee of DTC. Certificate Owners and Note Owners may receive such reports,
upon written request, together with a certification that they are Certificate
Owners or Note Owners and payment of any expenses associated with the
distribution of such reports, from the Trustee and the Indenture Trustee at the
addresses specified in the related Prospectus Supplement. See "Certain
Information Regarding the Securities--Statements to Securityholders."
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USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement, the net
proceeds to be received by the Trust from the sale of each Series of Securities
will be used to pay to Green Tree the purchase price for the Contracts and to
make the deposit of the Pre-Funded Amount into the Pre-Funding Account, if any,
to repay warehouse lenders and/or to provide for other forms of credit
enhancement specified in the related Prospectus Supplement. The net proceeds to
be received by Green Tree will be used for its general corporate purposes,
including the origination or acquisition of additional home improvement loan
contracts, costs of carrying such contracts until sale of the related
certificates and to pay other expenses connected with pooling the Contracts and
issuing the Securities.
THE NOTES
General
With respect to each Series of Securities, one or more Classes of Notes will
be issued pursuant to the terms of an Indenture, a form of which has been filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part. Unless otherwise specified in the related Prospectus Supplement, no Notes
will be issued as a part of any Series. The following summary does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of the Notes and the Indenture, and the following
summary will be supplemented in whole or in part by the related Prospectus
Supplement. Where particular provisions of or terms used in the Indenture are
referred to, the actual provisions (including definition of terms) are
incorporated by reference as part of this summary.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Notes will initially be represented by a single Note registered in the name
of the nominee of the Depository. See "Certain Information Regarding the
Securities--Book-Entry Registration." Unless otherwise specified in the related
Prospectus Supplement, Notes will be available for purchase in denominations of
$1,000 and integral multiples thereof. Notes may be transferred or exchanged
without the payment of any service charge other than any tax or governmental
charge payable in connection with such transfer or exchange. Unless otherwise
provided in the related Prospectus Supplement, the Indenture Trustee will
initially be designated as the registrar for the Notes.
Principal and Interest on the Notes
The timing and priority of payment, seniority, allocations of loss, Interest
Rate and amount of or method of determining payments of principal and interest
on the Notes will be described in the related Prospectus Supplement. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of any Class or Classes
of Notes of such Series, or any Class of Certificates, as described in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Notes will be made prior to
payments of principal thereon. A Series may include one or more Classes of
Stripped Notes entitled to (i) principal payments with disproportionate,
nominal or no interest payment, or (ii) interest payments with
disproportionate, nominal or no principal payments. Each Class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate (and which may be zero for certain Classes of Stripped Notes), or
any combination of the foregoing. The related Prospectus Supplement will
specify the Interest Rate for each Class of Notes, or the initial Interest Rate
and the method for determining the Interest Rate. One or more Classes of Notes
of a Series may be redeemable under the circumstances specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, payments in
respect of interest to Noteholders of all Classes within a Series will have the
same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Payment Date"), in which case each
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Class of Noteholders will receive their ratable share (based upon the aggregate
amount of interest due to such Class of Noteholders) of the aggregate amount
available to be distributed in respect of interest on the Notes.
In the case of a Series of Securities which includes two or more Classes of
Notes, the timing, sequential order and priority of payment in respect of
principal and interest, and any schedule or formula or other provisions
applicable to the determination thereof, of each such Class will be set forth
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, payments in respect of principal and interest of any
Class of Notes will be made on a pro rata basis among all of the Notes of such
Class.
The Indenture
A form of Indenture has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of the applicable Indenture (without exhibits) upon request to a holder of
Notes issued thereunder.
Modification of Indenture Without Noteholder Consent. Each Trust and related
Indenture Trustee (on behalf of such Trust) may, without consent of the related
Noteholders, enter into one or more supplemental indentures for any of the
following purposes: (i) to correct or amplify the description of the collateral
or add additional collateral; (ii) to provide for the assumption of the Note
and the Indenture obligations by a permitted successor to the Trust; (iii) to
add additional covenants for the benefit of the related Noteholders; (iv) to
convey, transfer, assign, mortgage or pledge any property to or with the
Indenture Trustee; (v) to cure any ambiguity or correct or supplement any
provision in the Indenture or in any supplemental indenture; (vi) to provide
for the acceptance of the appointment of a successor Indenture Trustee or to
add to or change any of the provisions of the Indenture or any supplemental
indenture which may be inconsistent with any other provision of the Indenture
as shall be necessary and permitted to facilitate the administration by more
than one trustee; (vii) to modify, eliminate or add to the provisions of the
Indenture in order to comply with the Trust Indenture Act of 1939, as amended;
and (viii) to add any provisions to, change in any manner, or eliminate any of
the provisions of, the Indenture or modify in any manner the rights of
Noteholders under such Indenture; provided that any action specified in this
clause (viii) shall not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any related Noteholder unless
Noteholder consent is otherwise obtained as described below.
Modifications of Indenture With Noteholder Consent. With respect to each
Trust, with the consent of the holders representing a majority of the principal
balance of the outstanding related Notes (a "Note Majority"), the Owner Trustee
and the Indenture Trustee may execute a supplemental indenture to add
provisions, to change in any manner or eliminate any provisions of, the related
Indenture, or modify in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding related Note affected
thereby, however, no supplemental indenture may: (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price
with respect thereto or change the manner of calculating any such payment, any
place of payment where, or the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder and
their consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the related
Trust, any other obligor on the Notes, Green Tree or an affiliate of any of
them; (v) reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the holders of which is required to direct the Indenture
Trustee to sell or liquidate the Contracts if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid interest on
the outstanding Notes; (vi) decrease the percentage of the aggregate principal
amount of the Notes required to amend the sections of the Indenture
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which specify the applicable percentage of aggregate principal amount of the
Notes necessary to amend the Indenture or certain other related agreements; or
(vii) permit the creation of any lien ranking prior to or on a parity with the
lien of the Indenture with respect to any of the collateral for the Notes or,
except as otherwise permitted or contemplated in the Indenture, terminate the
lien of the Indenture on any such collateral or deprive the holder of any Note
of the security afforded by the lien of the Indenture.
Events of Default; Rights Upon Event of Default. With respect to each
Trust, unless otherwise specified in the related Prospectus Supplement, "Events
of Default" under the Indenture will consist of: (i) a default for five days or
more in the payment of any interest on any Note; (ii) a default in the payment
of the principal of or any installment of the principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
in any material respect of any covenant or agreement of the Trust made in the
Indenture, or any representation or warranty made by the Trust in the Indenture
or in any certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any such
default or the failure to cure such breach of a representation or warranty for
a period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of at least
25% in principal amount of the Notes then outstanding; or (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Trust. However,
the amount of principal due and payable on any Class of Notes on any Payment
Date (prior to the final scheduled payment date, if any, for such Class) will
generally be determined by amounts available to be deposited in the Note
Distribution Account for such Payment Date. Therefore, unless otherwise
specified in the related Prospectus Supplement, the failure to pay principal on
a Class of Notes generally will not result in the occurrence of an Event of
Default unless such Class of Notes has a final scheduled payment date, and then
not until such final scheduled payment date for such Class of Notes.
Unless otherwise specified in the related Prospectus Supplement, if an Event
of Default should occur and be continuing with respect to the Notes of any
Series, the related Indenture Trustee or a Note Majority may declare the
principal of the Notes to be immediately due and payable. Such declaration may,
under certain circumstances, be rescinded by a Note Majority.
Unless otherwise specified in the related Prospectus Supplement, if the Notes
of any Series have been declared due and payable following an Event of Default
with respect thereto, the related Indenture Trustee may institute proceedings
to collect amounts due or foreclose on Trust Property, exercise remedies as a
secured party, sell the related Contracts or elect to have the Trust maintain
possession of such Contracts and continue to apply collections on such
Contracts as if there had been no declaration of acceleration. Unless otherwise
specified in the related Prospectus Supplement, the Indenture Trustee, however,
will be prohibited from selling the related Contracts following an Event of
Default, unless (i) the holders of all the outstanding related Notes consent to
such sale; (ii) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding Notes at the date of
such sale; or (iii) the Indenture Trustee determines that the proceeds of the
Contracts would not be sufficient on an ongoing basis to make all payments on
the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate outstanding amount of the Notes. Unless
otherwise specified in the related Prospectus Supplement, following a
declaration upon an Event of Default that the Notes are immediately due and
payable, (i) Note Owners will be entitled to ratable repayment of principal on
the basis of their respective unpaid principal balances and (ii) repayment in
full of the accrued interest on and unpaid principal balances of the Notes will
be made prior to any further payment of interest or principal on the
Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default occurs and is continuing with respect
to a Series of Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of such Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, a Note Majority in a Series
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will have the right to direct the time, method and place of conducting any
proceeding or any remedy available to the Indenture Trustee, and a Note
Majority may, in certain cases, waive any default with respect thereto, except
a default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all of the holders of such outstanding Notes.
No holder of a Note of any Series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the Indenture Trustee written notice of a continuing
Event of Default, (ii) the holders of not less than 25% in principal amount of
the outstanding Notes of such Series have made written request of the Indenture
Trustee to institute such proceeding in its own name as Indenture Trustee,
(iii) such holder or holders have offered the Indenture Trustee reasonable
indemnity, (iv) the Indenture Trustee has for 60 days failed to institute such
proceeding, and (v) no direction inconsistent with such written request has
been given to the Indenture Trustee during such 60-day period by the holders of
a majority in principal amount of such outstanding Notes.
If an Event of Default occurs and is continuing and if it is known to the
Indenture Trustee, the Indenture Trustee will mail to each Noteholder notice of
the Event of Default within 90 days after it occurs. Except in the case of a
failure to pay principal of or interest on any Note, the Indenture Trustee may
withhold the notice if and so long as it determines in good faith that
withholding the notice is in the interests of the Noteholders.
In addition, each Indenture Trustee and the related Noteholders, by accepting
the related Notes, will covenant that they will not at any time institute
against the Seller or the related Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the Indenture Trustee nor the Trustee in its individual capacity, nor
any holder of a Certificate including, without limitation, Green Tree, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the related
Notes or for any agreement or covenant of the related Trust contained in the
Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States or any state, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of every agreement and covenant of the Trust under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trustee has been
advised that the then current rating of the related Notes or Certificates then
in effect would not be reduced or withdrawn by the Rating Agencies as a result
of such merger or consolidation, (v) the Trustee has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse tax consequence to the Trust or to any related Note Owner or
Certificate Owner.
Each Trust will not, among other things, (i) except as expressly permitted by
the Indenture, the Trust Documents or certain related documents for such Trust
(collectively, the "Related Documents"), sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the related
Notes (other than amounts withheld under the Code or applicable state law) or
assert any claim against any present or former holder of such Notes because of
the payment of taxes levied or assessed upon the Trust, (iii) dissolve or
liquidate in whole or in part, (iv) permit the validity or effectiveness of the
related Indenture to be impaired or permit any person to be released from any
covenants or obligations with respect to the related Notes under such Indenture
except as may be expressly permitted thereby, or (v) except as expressly
permitted by the Related Documents, permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Trust or any part thereof,
or any interest therein or proceeds thereof.
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No Trust may engage in any activity other than as specified under the section
of the related Prospectus Supplement entitled "The Trust." No Trust will incur,
assume or guarantee any indebtedness other than indebtedness incurred pursuant
to the related Notes and the related Indenture or otherwise in accordance with
the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the related Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
Note Owners may receive such reports upon written request, together with a
certification that they are Note Owners and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Indenture
Trustee at the address specified in the related Prospectus Supplement.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with the Indenture Trustee of funds
sufficient for the payment in full of all of such Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the related
Prospectus Supplement. The Indenture Trustee may resign at any time, in which
event the Seller will be obligated to appoint a successor trustee. Green Tree
may also remove the Indenture Trustee if the Indenture Trustee ceases to be
eligible to continue as such under the Indenture or if the Indenture Trustee
becomes insolvent. In such circumstances, Green Tree will be obligated to
appoint a successor trustee. Any resignation or removal of the Indenture
Trustee and appointment of a successor trustee will be subject to any
conditions or approvals, if any, specified in the related Prospectus Supplement
and will not become effective until acceptance of the appointment by a
successor trustee.
THE CERTIFICATES
General
A Series of Securities may include one or more Classes of Certificates issued
pursuant to Trust Documents to be entered into between Green Tree, as Seller
and as Servicer, and the Trustee, forms of which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. The following
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the material provisions of the Trust
Documents. Where particular provisions of or terms used in the Trust Documents
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of this summary.
If the Certificates of a Series are issued in more than one Class, the
Certificates of all or less than all of such Classes may be sold pursuant to
this Prospectus, and there may be separate Prospectus Supplements relating to
one or more of such Classes so sold. Any reference herein to the Prospectus
Supplement relating to a Series comprised of more than one Class should be
understood as a reference to each of the Prospectus Supplements relating to the
Classes sold hereunder. Any reference herein to the Certificates of a Class
should be understood to refer to the Certificates of a Class within a Series or
all of the Certificates of a single-Class
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Series, as the context may require. For convenience of description, any
reference in this Prospectus to a "Class" of Certificates includes a reference
to any subclasses of such Class.
Unless otherwise specified in the related Prospectus Supplement, each Class
of Certificates will initially be represented by a single Certificate
registered in the name of the nominee of DTC (together with any successor
depository selected by Green Tree, the "Depository"). See "Certain Information
Regarding the Securities--Book-Entry Registration." Unless otherwise specified
in the related Prospectus Supplement, the Certificates evidencing interests in
a Trust will be available for purchase in denominations of $1,000 initial
principal amount and integral multiples thereof, except that one Certificate
evidencing an interest in such Trust may be issued in a denomination that is
less than $1,000 initial principal amount. Certificates may be transferred or
exchanged without the payment of any service charge other than any tax or
governmental charge payable in connection with such transfer or exchange.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will initially be designated as the registrar for the Certificates.
Distributions of Interest and Principal
The timing and priority of distributions, seniority, allocations of loss,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest (or, where applicable, with respect to
principal only or interest only) on the Certificates of any Series will be
described in the related Prospectus Supplement. Distributions of interest on
the Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and, unless otherwise specified in the
related Prospectus Supplement, will be made prior to distributions with respect
to principal. A Series may include one or more Classes of Certificates
("Subordinated Certificates") which are subordinated in right of distribution
to one or more other Classes of Certificates ("Senior Certificates"), as
provided in the related Prospectus Supplement. Certificates of a Series which
includes Senior and Subordinated Certificates are referred to herein
collectively as "Senior/Subordinated Certificates." A Series of
Senior/Subordinated Certificates may include one or more Classes ("Mezzanine
Certificates") which are subordinated to one or more Classes of Certificates
and are senior to one or more Classes of Certificates. The Prospectus
Supplement with respect to a Series of Senior/Subordinated Certificates will
set forth, among other things, the extent to which the Subordinated
Certificates are subordinated (which may include a formula for determining the
subordinated amount or for determining the allocation of the Amount Available
(hereinafter defined) among Senior Certificates and Subordinated Certificates),
the allocation of losses among the Classes of Subordinated Certificates, the
period or periods of such subordination, the minimum subordinated amount, if
any, and any distributions or payments which will not be affected by such
subordination. The protection afforded to the Senior Certificateholders from
the subordination feature described above will be effected by the preferential
right of such Certificateholders to receive current distributions from the
Contract Pool. If a Series of Certificates contains more than one Class of
Subordinated Certificates, losses will be allocated among such Classes in the
manner described in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, Mezzanine Certificates or other Classes of
Subordinated Certificates may be entitled to the benefits of other forms of
credit enhancement and may, if rated in one of the four highest rating
categories by a nationally recognized statistical rating organization, be
offered pursuant to this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series may include one or more
Classes of Certificates which (i) are entitled to receive distributions only in
respect of principal ("Principal Only Certificates"), interest ("Interest Only
Certificates") or any combination thereof, or in specified proportions in
respect of such payments, and/or (ii) are entitled to receive distributions in
respect of principal before or after specified principal distributions have
been made on one or more other Classes within such Series ("Fast Pay/Slow Pay
Certificates"), or on a planned amortization schedule ("PAC Certificates") or
targeted amortization schedule ("TAC Certificates") or upon the occurrence of
other specified events. The Prospectus Supplement will set forth the rate at
which interest will be paid to Certificateholders of each Class of a given
Series (the "Pass-Through Rate"). Such Pass-Through Rate may be fixed, variable
or adjustable, as specified in the related Prospectus Supplement.
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The related Prospectus Supplement will specify the Pass-Through Rate for each
Class of Certificate, or the initial Pass-Through Rate and the method for
determining the Pass-Through Rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months. Unless otherwise
specified in the related Prospectus Supplement, distributions in respect of the
Certificates will be subordinate to payments in respect of the Notes, if any,
as more fully described in the related Prospectus Supplement. Distributions in
respect of principal of any Class of Certificates will be made on a pro rata
basis among all of the Certificateholders of such Class.
In the case of a Series of Certificates which includes two or more Classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof, of each such Class shall be
as set forth in the related Prospectus Supplement.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
Unless otherwise provided in the related Prospectus Supplement, the
Securities of each Series will be registered in the name of Cede & Co., the
nominee of DTC. DTC is a limited-purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and
may include certain other organizations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("indirect participants").
Certificate Owners and Note Owners who are not Participants but desire to
purchase, sell or otherwise transfer ownership of Securities may do so only
through Participants (unless and until Definitive Certificates or Definitive
Notes, each as defined below, are issued). In addition, Certificate Owners and
Note Owners will receive all distributions of principal of, and interest on,
the Securities from the Trustee or the Indenture Trustee, as applicable,
through DTC and Participants. Certificate Owners and Note Owners will not
receive or be entitled to receive certificates representing their respective
interests in the Securities, except under the limited circumstances described
below and such other circumstances, if any, as may be specified in the related
Prospectus Supplement.
Unless and until Definitive Securities are issued, it is anticipated that the
only Certificateholder of the Certificates and the only Noteholder of the
Notes, if any, will be Cede & Co., as nominee of DTC. Certificate Owners and
Note Owners will not be recognized by the Trustee as Certificateholders or by
the Indenture Trustee as Noteholders as those terms are used in the related
Trust Documents or Indenture. Certificate Owners and Note Owners will be
permitted to exercise the rights of Certificateholders or Noteholders, as the
case may be, only indirectly through Participants and DTC.
With respect to any Series of Securities, while the Securities are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions of principal of, and interest on, the Securities.
Participants with whom Certificate Owners or Note Owners have accounts with
respect to Securities are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective
Certificate Owners and Note Owners. Accordingly, although
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Certificate Owners and Note Owners will not possess Securities, the Rules
provide a mechanism by which Certificate Owners and Note Owners will receive
distributions and will be able to transfer their interests.
With respect to any series of Securities, unless otherwise specified in the
related Prospectus Supplement, Certificates (if any) and Notes will be issued
in registered form to Certificate Owners and Note Owners, or their nominees,
rather than to DTC (such Certificates and Notes being referred to herein as
"Definitive Certificates" and "Definitive Notes," respectively), only if (i)
DTC, Green Tree or the Servicer advises the Trustee or the Indenture Trustee,
as the case may be, in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Certificates or the Notes, and Green Tree, the Servicer, the Trustee or
the Indenture Trustee, as the case may be, is unable to locate a qualified
successor, (ii) Green Tree or the Administrator (if any) at its sole option has
advised the Trustee or the Indenture Trustee, as the case may be, in writing
that it elects to terminate the book-entry system through DTC and (iii) after
the occurrence of a Servicer Termination Event, the holders representing a
majority of the Certificate Balance (a "Certificate Majority") or a Note
Majority advises the Trustee or the Indenture Trustee, as the case may be,
through DTC, that continuation of a book-entry system is no longer in their
best interests. Upon issuance of Definitive Certificates or Definitive Notes to
Certificate Owners or Note Owners, such Certificates or Notes will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee or the Indenture
Trustee, as the case may be, with respect to transfers, notices and
distributions.
DTC has advised Green Tree that, unless and until Definitive Certificates or
Definitive Notes are issued, DTC will take any action permitted to be taken by
a Certificateholder or a Noteholder under the related Trust Documents or
Indenture only at the direction of one or more Participants to whose DTC
accounts the Certificates or Notes are credited. DTC has advised Green Tree
that DTC will take such action with respect to any fractional interest of the
Certificates or the Notes only at the direction of and on behalf of such
Participants beneficially owning a corresponding fractional interest of the
Certificates or the Notes. DTC may take actions, at the direction of the
related Participants, with respect to some Certificates or Notes which conflict
with actions taken with respect to other Certificates or Notes.
Issuance of Certificates and Notes in book-entry form rather than as physical
certificates or notes may adversely affect the liquidity of Certificates or
Notes in the secondary market and the ability of the Certificate Owners or Note
Owners to pledge them. In addition, since distributions on the Certificates and
the Notes will be made by the Trustee or the Indenture 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 or Note Owners, Certificate Owners and Note
Owners may experience delays in the receipt of such distributions.
Statements to Securityholders
On or prior to each Distribution Date, the Servicer will prepare and provide
to the Trustee a statement to be delivered to the related Certificateholders on
such Distribution Date. On or prior to each Distribution Date, the Servicer
will prepare and provide to the Indenture Trustee a statement to be delivered
to the related Noteholders on such Distribution Date. Such statements will be
based on the information in the related Servicer's Certificate setting forth
certain information required under the Trust Documents (the "Servicer's
Certificate"). Unless otherwise specified in the related Prospectus Supplement,
each such statement to be delivered to Certificateholders will include the
following information as to the Certificates with respect to such Distribution
Date or the period since the previous Distribution Date, as applicable, and
each such statement to be delivered to Noteholders will include the following
information as to the Notes with respect to such Distribution Date or the
period since the previous Distribution Date, as applicable:
(i) the amount of the distribution allocable to interest on or with
respect to each Class of Securities;
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(ii) the amount of the distribution allocable to principal on or with
respect to each Class of Securities;
(iii) the Certificate Balance and the Certificate Pool Factor for each
Class of Certificates and the aggregate outstanding principal balance and
the Note Pool Factor for each Class of Notes, after giving effect to all
payments reported under (ii) above on such date;
(iv) the amount of the Monthly Servicing Fee paid to the Servicer with
respect to the related Due Period or Periods, as the case may be;
(v) the Pass-Through Rate or Interest Rate for the next period for any
Class of Certificates or Notes with variable or adjustable rates;
(vi) the amount of Advances made by the Servicer with respect to such
Distribution Date, and the amount paid to the Servicer on such Distribution
Date as reimbursement of Advances made on previous Distribution Dates;
(vii) the amount, if any, distributed to Certificateholders and
Noteholders applicable to payments under the related form of credit
enhancement, if any;
(viii) Green Tree's FHA Insurance reserve amount;
(ix) the number and aggregate principal balance of Contracts
delinquent (i) 31-59 days, (ii) 60-89 and (iii) 90 or more days;
(x) the number of Contracts liquidated during the Due Period ending
immediately before such Payment Date;
(xi) such customary factual information as is necessary to enable
Securityholders to prepare their tax returns; and
(xii) such other information as may be specified in the related
Prospectus Supplement.
Each amount set forth pursuant to subclauses (i), (ii), (iv) and (vi) with
respect to Certificates or Notes will be expressed as a dollar amount per
$1,000 of the initial Certificate Balance or the initial principal balance of
the Notes, as applicable.
Unless and until Definitive Certificates or Definitive Notes are issued, such
reports with respect to a Series of Securities will be sent on behalf of the
related Trust to the Trustee, the Indenture Trustee and Cede & Co., as
registered holder of the Certificates and the Notes and the nominee of DTC.
Certificate Owners and Note Owners may receive copies of such reports upon
written request, together with a certification that they are Certificate Owners
or Note Owners, as the case may be, and payment of reproduction and postage
expenses associated with the distribution of such reports, from the Trustee or
the Indenture Trustee, as applicable. See "Reports to Securityholders" and "--
Book-Entry Registration" above.
Within the prescribed period of time for tax reporting purposes after the end
of each calendar year during the term of a Trust, the Trustee and the Indenture
Trustee, as applicable, will mail to each holder of a Class of Securities who
at any time during such calendar year has been a Securityholder, and received
any payment thereon, a statement containing certain information for the
purposes of such Securityholder's preparation of federal income tax returns.
DTC will convey such information to its Participants, who in turn will convey
such information to their related indirect participants in accordance with
arrangements among DTC and such participants. Certificate Owners and Note
Owners may receive such reports upon written request, together with a
certification that they are Certificate Owners or Note Owners and payment of
reproduction and postage expenses associated with the distribution of such
information, from the Trustee, with respect to Certificate Owners, or from the
Indenture Trustee, with respect to Note Owners, at the addresses specified in
the related Prospectus Supplement. See "Certain Federal Income Tax
Consequences."
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Lists of Securityholders
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Certificates, at such time, if any, as Definitive
Certificates have been issued, the Trustee will, upon written request by three
or more Certificateholders or one or more holders of Certificates evidencing
not less than 25% of the Certificate Balance, within five Business Days after
provision to the Trustee of a statement of the applicants' desire to
communicate with other Certificateholders about their rights under the related
Trust Documents or the Certificates and a copy of the communication that the
applicants propose to transmit, afford such Certificateholders access during
business hours to the current list of Certificateholders for purposes of
communicating with other Certificateholders with respect to their rights under
the Trust Documents. Unless otherwise specified in the related Prospectus
Supplement, the Trust Documents will not provide for holding any annual or
other meetings of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Notes, if any, at such time, if any, as Definitive Notes have
been issued, the Indenture Trustee will, upon written request by three or more
Noteholders or one or more holders of Notes evidencing not less than 25% of the
aggregate principal balance of the related Notes, within five Business Days
after provision to the Indenture Trustee of a statement of the applicants'
desire to communicate with other Noteholders about their rights under the
related Indenture or the Notes and a copy of the communication that the
applicants propose to transmit, afford such Noteholders access during business
hours to the current list of Noteholders for purposes of communicating with
other Noteholders with respect to their rights under the Indenture. Unless
otherwise specified in the related Prospectus Supplement, the Indenture will
not provide for holding any annual or other meetings of Noteholders.
DESCRIPTION OF THE TRUST DOCUMENTS
Except as otherwise specified in the related Prospectus Supplement, the
following summary describes certain terms of the Sale and Servicing Agreements
and the Trust Agreements (collectively referred to as the "Trust Documents")
pursuant to which Green Tree will sell and assign such Contracts to a Trust and
the Servicer will agree to service such Contracts on behalf of the Trust, and
pursuant to which such Trust will be created and Certificates will be issued.
Forms of the Trust Documents have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Green Tree will provide a copy
of such agreements (without exhibits) upon request to a holder of Securities
described therein. This summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all of the provisions of the
Trust Documents. Where particular provisions or terms used in the Trust
Documents are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summary.
Sale and Assignment of the Contracts
On the Closing Date (as defined in the Prospectus Supplement), Green Tree
will sell and assign to the Trust, without recourse, Green Tree's entire
interest in the related Contracts, including all principal and interest
received on or with respect to the Contracts (other than receipts of principal
and interest due on the Contracts before the Cut-off Date). Each Contract
transferred by Green Tree to the Trust will be identified in a schedule
appearing as an exhibit to the related Trust Documents (the "Schedule of
Contracts"). Concurrently with such sale and assignment, the Trustee will
execute and the Indenture Trustee will authenticate and deliver the Notes to or
upon the order of the Seller, and the Trustee will execute and deliver the
related certificates representing the Certificates, if any, to or upon the
order of Green Tree.
The Schedule of Contracts will include the amount of monthly payments due on
each Contract as of the date of issuance of the Securities, the Contract Rate
on each Contract and the maturity date of each Contract. Such list will be
available for inspection by any Securityholder at the principal executive
office of the Servicer. Prior to the conveyance of the Contracts to the
Trustee, Green Tree's internal audit department will complete a review of all
of the Contract files confirming the accuracy of the list of Contracts
delivered to the Trustee. Any
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Contract discovered not to agree with such list in a manner that is materially
adverse to the interests of the Securityholders will be repurchased or
substituted for by Green Tree, or, if the discrepancy relates to the unpaid
principal balance of a Contract, Green Tree may deposit cash in the separate
account maintained at an Eligible Institution in the name of the Trustee (the
"Collection Account") in an amount sufficient to offset such discrepancy. If
the Trust includes a Pre-Funding Account, the related Prospectus Supplement
will specify the conditions that must be satisfied prior to any transfer of
Subsequent Contracts, including the requisite characteristics of the Subsequent
Contracts.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Contracts and any other
documents contained in the Contract files. Uniform Commercial Code financing
statements will be filed in Minnesota reflecting the sale and assignment of the
Contracts to the Trustee, and Green Tree's accounting records and computer
systems will also reflect such sale and assignment.
The counsel to Green Tree identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Contracts from
Green Tree to the related Trust would, in the event Green Tree became a debtor
under the United States Bankruptcy Code, be treated as a true sale and not as a
pledge to secure borrowings. If, however, the transfer of the Contracts from
Green Tree to the Trust were treated as a pledge to secure borrowings by Green
Tree, the distribution of proceeds of the Contracts to the Trust might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the
Contracts if the proceeds of such sale could satisfy the amount of the debt
deemed owed by Green Tree, or the bankruptcy trustee could substitute other
collateral in lieu of the Contracts to secure such debt, or such debt could be
subject to adjustment by the bankruptcy trustee if Green Tree were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, Green
Tree will make certain representations and warranties in the Sale and Servicing
Agreement with respect to each Contract as of the related Closing Date,
including that: (a) as of the Cut-off Date the most recent scheduled payment
was made or was not delinquent more than 59 days; (b) no provision of a
Contract has been waived, altered or modified in any respect, except by
instruments or documents included in the Contract file and reflected on the
list of Contracts delivered to the Trustee; (c) each Contract is a legal, valid
and binding obligation of the Obligor and is enforceable in accordance with its
terms (except as may be limited by laws affecting creditors rights generally);
(d) no Contract is subject to any right of rescission, set-off, counterclaim or
defense; (e) each FHA-insured Contract was originated in accordance with
applicable FHA regulations and is insured, without set off, surcharge or
defense, by FHA Insurance; (f) each Contract was either (i) entered into by a
home improvement contractor in the ordinary course of such contractor's
business and, immediately upon funding, assigned to Green Tree or (ii) was
originated by Green Tree directly; (g) no Contract was originated in or is
subject to the laws of any jurisdiction whose laws would make the transfer of
the Contract or an interest therein pursuant to the Sale and Servicing
Agreement or the Securities unlawful; (h) each Contract complies with all
requirements of law; (i) no Contract has been satisfied or rescinded; (j) all
parties to each Contract had full legal capacity to execute such Contract; (k)
no Contract has been sold, conveyed and assigned or pledged to any other person
and Green Tree has good and marketable title to each Contract free and clear of
any encumbrance, equity, loan, pledge, charge, claim or security interest, and
is the sole owner and has full right to transfer such Contract to the Trustee;
(l) as of the Cut-off Date there was no default, breach, violation or event
permitting acceleration under any Contract (except for payment delinquencies
permitted by clause (a) above), no event that with notice and the expiration of
any grace or cure period would constitute a default, breach, violation or event
permitting acceleration under such Contract, and Green Tree has not waived any
of the foregoing; (m) each Contract is a fully-amortizing loan with a fixed
rate of interest and provides for level payments over the term of such
Contract; (n) the description of each Contract set forth in the list delivered
to the Trustee is true and correct; (o) there is only one original of each
Contract; and (p) each Contract was originated or purchased in accordance with
Green Tree's then-current underwriting guidelines.
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The warranties of Green Tree will be made as of the execution and delivery
of the related Trust Documents and will survive the sale, transfer and
assignment of the related Contracts and other Trust Property to the Trust but
will speak only as of the date made.
Under the terms of the Sale and Servicing Agreement, if Green Tree becomes
aware of a breach of any such representation or warranty that materially
adversely affects the interests of the Note Owners, the Certificate Owners, if
any, or the related Trust in any Contract or receives written notice of such a
breach from the Trustee or the Servicer, then Green Tree will be obligated
either to cure such breach or to repurchase or, if so provided in the related
Prospectus Supplement, substitute for the affected Contract, in each case
under the conditions further described herein and in the Prospectus
Supplement. This repurchase obligation will constitute the sole remedy
available to the Trust and the Securityholders for a breach of a
representation or warranty under the Sale and Servicing Agreement with respect
to the Contracts (but not with respect to any other breach by Green Tree of
its obligations under the Sale and Servicing Agreement).
The "Purchase Amount" of a Contract at any time means the outstanding
principal amount of such Contract (without giving effect to any Advances made
by the Servicer or the Trustee), plus interest at the applicable Contract Rate
on such Contract from the end of the Due Period with respect to which the
Obligor last made a payment (without giving effect to any Advances made by the
Servicer or the Trustee) through the end of the immediately preceding Due
Period.
Upon the purchase by Green Tree of a Contract due to a breach of a
representation or warranty, the Trustee will convey such Contract and the
related Trust Property to Green Tree.
Collections
With respect to each Trust, the Servicer will establish one or more
Collection Accounts in the name of the Indenture Trustee for the benefit of
the related Securityholders. If so specified in the related Prospectus
Supplement, the Indenture Trustee will establish and maintain for each Series
an account, in the name of the Indenture Trustee on behalf of the related
Noteholders, in which amounts released from the Collection Account and any
Pre-Funding Account and any amounts received from any source of credit
enhancement for payment to such Noteholders will be deposited and from which
all distributions to such Noteholders will be made (the "Note Distribution
Account"). With respect to any Series including one or more Classes of
Certificates, the Trustee will establish and maintain for each Series an
account, in the name of the Trustee on behalf of the related
Certificateholders, in which amounts released from the Collection Account and
any Pre-Funding Account and any amounts received from any source of credit
enhancement for distribution to such Certificateholders will be deposited and
from which all distributions to such Certificateholders will be made (the
"Certificate Distribution Account"). The Collection Account, the Certificate
Distribution Account (if any), and the Note Distribution Account (if any), are
referred to herein collectively as the "Designated Accounts." Any other
accounts to be established with respect to a Trust will be described in the
related Prospectus Supplement.
Each Designated Account will be an Eligible Account maintained with the
Trustee, the Indenture Trustee and/or other depository institutions. "Eligible
Account" means any account which is (i) an account maintained with an Eligible
Institution (as defined below); (ii) an account or accounts the deposits in
which are fully insured by either the Bank Insurance Fund or the Savings
Association Insurance Fund of the FDIC; (iii) a "segregated trust account"
maintained with the corporate trust department of a federal or state chartered
depository institution or trust company with trust powers and acting in its
fiduciary capacity for the benefit of the Trustee, which depository
institution or trust company has capital and surplus (or, if such depository
institution or trust company is a subsidiary of a bank holding company system,
the capital and surplus of the bank holding company) of not less than
$50,000,000 and the securities of such depository institution (or, if such
depository institution is a subsidiary of a bank holding company system and
such depository institution's securities are not rated, the securities of the
bank holding company) has a credit rating from each rating agency rating such
Series of Notes and/or Certificates (a "Rating Agency") in one of its generic
credit rating
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categories which signifies investment grade; or (iv) an account that will not
cause any Rating Agency to downgrade or withdraw its then-current rating
assigned to the Securities, as confirmed in writing by each Rating Agency.
"Eligible Institution" means any depository institution 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 Bank Insurance Fund (currently
administered by the Federal Deposit Insurance Corporation), whose short-term
deposits have been rated in one of the two highest rating categories or such
other rating category as will not adversely affect the ratings assigned to the
Securities of such Series. On the Closing Date specified in the related
Prospectus Supplement, the Servicer will cause to be deposited in the
Collection Account all payments on the Contracts received by the Servicer after
the Cut-off Date and on or prior to the second Business Day preceding the
Closing Date.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit in the Collection Account on a daily basis all proceeds and
collections received or made by it with respect to the related Contracts
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts;
(iii) all FHA Insurance payments received by the Servicer;
(iv) all amounts received and retained in connection with the
liquidation of defaulted Contracts, net of liquidation expenses ("Net
Liquidation Proceeds");
(v) any Advances made as described under "Advances" below and certain
other amounts required under the Sale and Servicing Agreement to be
deposited in the Collection Account;
(vi) all amounts received from any credit enhancement provided with
respect to a Series of Securities; and
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Servicer or Green Tree, as described under "Sale
and Assignment of the Contracts" above or under "Repurchase Option" below.
Notwithstanding the foregoing and unless otherwise provided in the related
Prospectus Supplement, the Servicer may utilize an alternative remittance
schedule, if the Servicer provides to the Trustee and the Indenture Trustee
written confirmation from each Rating Agency that such alternative remittance
schedule will not result in the downgrading or withdrawal by such Rating Agency
of the rating(s) then assigned to the Securities. Green Tree will also deposit
into the Collection Account on or before the Deposit Date the Purchase Amount
of each Contract to be purchased by it for breach of a representation or
warranty.
For any Series of Securities, funds in the Designated Accounts and any other
accounts identified in the related Prospectus Supplement will be invested, as
provided in the related Trust Documents, at the direction of the Servicer in
United States government securities and certain other high-quality investments
meeting the criteria specified in the related Trust Documents ("Eligible
Investments"). Eligible Investments shall mature no later than the Business Day
preceding the applicable Distribution Date for the Due Period to which such
amounts relate. Investments in Eligible Investments will be made in the name of
the Trustee or the Indenture Trustee, as the case may be, and such investments
will not be sold or disposed of prior to their maturity.
Unless otherwise specified in the related Prospectus Supplement, collections
or recoveries on a Contract (other than late fees or certain other similar fees
or charges) received during a Due Period and Purchase Amounts deposited with
the Trustee prior to a Distribution Date will be applied first to any
outstanding Advances made by the Servicer with respect to such Contract, and
then to interest and principal on the Contract in accordance with the terms of
the Contract.
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Servicing
Pursuant to the Sale and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth below.
The Servicer will perform diligently all services and duties specified in each
Sale and Servicing Agreement, in the same manner as prudent lending
institutions of home improvement contracts of the same type as the Contracts in
those jurisdictions where the related real properties are located or as
otherwise specified in the Sale and Servicing Agreement. The duties to be
performed by the Servicer will include collection and remittance of principal
and interest payments, as well as submission of FHA Insurance claims where
applicable.
The Servicer will make reasonable efforts to collect all payments called for
under the Contracts and, consistent with the Sale and Servicing Agreement and
any FHA Insurance, will follow such collection procedures with respect to the
Contracts as it follows with respect to loans or contracts serviced by it that
are comparable to the Contracts.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Sale and Servicing Agreement will require the
Servicer to deliver to the Trustee a monthly report prior to each Payment Date,
setting forth certain information regarding the Contract Pool and the
Securities of such Series as is specified in the related Prospectus Supplement.
Each such report to the Trustee will be accompanied by a statement from an
appropriate officer of the Servicer certifying the accuracy of such report and
stating that the Servicer has not defaulted in the performance of its
obligations under the Sale 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 such firm has examined certain
documents and records relating to the servicing of home improvement contracts
serviced by the Servicer under agreements similar to the Sale and Servicing
Agreement and stating that, on the basis of such procedures, such servicing has
been conducted in compliance with the Sale and Servicing Agreement, except for
any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under a Sale and Servicing Agreement except upon a
determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Servicer's obligations and duties under
such Sale and Servicing Agreement. The Servicer can only be removed as servicer
upon the occurrence of an Event of Termination as discussed below.
The Servicer shall keep in force throughout the term of the Sale and
Servicing Agreement (i) a policy or policies of insurance covering errors and
omissions for failure to maintain insurance as required by the Sale and
Servicing Agreement, and (ii) a fidelity bond. Such policy or policies and such
fidelity bond shall be in such form and amount as is generally customary among
persons which service a portfolio of home improvement contracts having an
aggregate principal amount of $10 million or more and which are generally
regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Contracts, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which Green Tree may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Aggregate Principal Balance for such Payment Date. As long
as Green Tree is the Servicer, the Trustee will pay Green Tree its Monthly
Servicing Fee from any monies remaining after the Securityholders have received
all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, 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
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records with respect to each Contract. Administrative services performed by the
Servicer on behalf of the Trust include selecting and packaging the Contracts,
calculating distributions to Securityholders and providing related data
processing and reporting services for Securityholders and on behalf of the
Trustee. Expenses incurred in connection with servicing of the Contracts and
paid by Green Tree from its Monthly Servicing Fees include payment of FHA
Insurance premiums, payment of fees and expenses of accountants, payments of
all fees and expenses incurred in connection with the enforcement of Contracts
(including submission of FHA Insurance claims, if applicable) or payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Securityholders, except that the Servicer shall be
reimbursed out of the liquidation proceeds of a liquidated Contract (including
FHA Insurance proceeds) for customary out-of-pocket liquidation expenses
incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Sale and Servicing
Agreement will occur if (i) any failure by the Servicer to deliver to the
Indenture Trustee for distribution to the Noteholders or to the Trustee for
distribution to the Certificateholders any required payment which continues
unremedied for 5 days (or such other period specified in the related Prospectus
Supplement) after the giving of written notice; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Trust Documents that materially and adversely
affects the interests of Securityholders, which, in either case, continues
unremedied for 30 days after the giving of written notice of such failure of
breach; (iii) any assignment or delegation by the Servicer of its duties or
rights under the Trust Documents, except as specifically permitted under the
Trust Documents, or any attempt to make such an assignment or delegation; (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer; (v) the Servicer is
no longer an Eligible Servicer (as defined in the Trust Documents) or (vi) if
Green Tree is the Servicer, Green Tree's receiving rights under its master
seller-servicer contract with GNMA are terminated. Notice as used herein shall
mean notice to the Servicer by the Trustee, the Indenture Trustee, if any, or
Green Tree, or to Green Tree, the Servicer, the Indenture Trustee, if any, and
the Trustee by the holders of Securities representing interests aggregating not
less than 25% of the outstanding principal balance of the Securities issued by
such Trust.
Unless otherwise specified in the related Prospectus Supplement, if a
Servicer Termination Event occurs and is continuing, the Trustee, the Indenture
Trustee or the holders of at least 25% in aggregate principal balance of the
outstanding Securities issued by such Trust, by notice then given in writing to
the Servicer (and to the Trustee and the Indenture Trustee if given by the
Securityholders) may terminate all of the rights and obligations of the
Servicer under the Trust Documents. Immediately upon the giving of such notice,
and, in the case of a successor Servicer other than the Trustee, the acceptance
by such successor Servicer of its appointment, all authority of the Servicer
will pass to the Trustee or other successor Servicer. The Trustee, the
Indenture Trustee and the successor Servicer may set off and deduct any amounts
owed by the Servicer from any amounts payable to the outgoing Servicer.
On and after the time the Servicer receives a notice of termination, the
Trustee or other successor Servicer specified in the related Prospectus
Supplement (the "Backup Servicer") will be the successor in all respects to the
Servicer and will be subject to all the responsibilities, restrictions, duties
and liabilities of the Servicer under the related Trust Documents; provided,
however, that the successor Servicer shall have no liability with respect to
any obligation which was required to be performed by the prior Servicer prior
to the date that the successor Servicer becomes the Servicer or any claim of a
third party (including a Securityholder) based on any alleged action or
inaction of the prior Servicer.
In addition, the Trustee will notify FHA of Green Tree's termination as
Servicer of the Contracts and will request that the portion of Green Tree's FHA
Insurance reserves allocable to the FHA-insured Contracts be transferred to the
Trustee or a successor Servicer. See "Description of FHA Insurance."
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner Green
Tree's obligation to repurchase certain Contracts for breaches of
representations or warranties under the Trust
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Documents. In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition to a
court of competent jurisdiction for the appointment of, a Servicer. Pending
such appointment, the Trustee is obligated to act in such capacity. The Trustee
and such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation to the Servicer under the
Trust Documents without the consent of all of the Securityholders.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Sale and Servicing Agreement at the
request, order or direction of any of the Holders of Securities, unless such
Securityholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which the Trustee may incur.
Green Tree, as Servicer, will be required to pay all expenses incurred by it
in connection with its servicing activities (including fees, expenses and
disbursements of the Trustee, the Indenture Trustee, the Custodian and
independent accountants, taxes imposed on the Servicer and expenses incurred in
connection with distributions and reports to Certificateholders and
Noteholders), except certain expenses incurred in connection with realizing
upon the Contracts.
Upon any termination of, or appointment of a successor to, the Servicer, the
Trustee and the Indenture Trustee will each give prompt written notice thereof
to Certificateholders and Noteholders, respectively, at their respective
addresses appearing in the Certificate Register or the Note Register and to
each Rating Agency.
Distributions
With respect to each Trust, beginning on the Distribution Date specified in
the related Prospectus Supplement, distributions of principal and interest (or,
where applicable, of principal or interest only) on each Class of Securities
entitled thereto will be made by the Trustee or the Indenture Trustee, as
applicable, to the Certificateholders and the Noteholders. The timing,
calculation, allocation, order, source, priorities of and requirements for all
distributions to each Class of Certificateholders and all payments to each
Class of Noteholders will be set forth in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, on the
third Business Day prior to each Distribution Date (the "Determination Date"),
the Servicer will determine the Amount Available and the amounts to be
distributed on the Notes and Certificates for such Distribution Date. Except as
otherwise specified in the related Prospectus Supplement, the "Amount
Available" for any Distribution Date will be equal to (i) the funds on deposit
in the Collection Account at the close of business on the last day of the
related Due Period, plus (ii) any Advances to be made by the Servicer with
respect to delinquent payments, plus (iii) any Purchase Amounts to be deposited
by Green Tree with respect to Contracts to be repurchased due to a breach of a
representation or warranty, minus (iv) any amounts paid by Obligors in the
related Due Period, but to be applied in respect of a regular monthly payment
due in a subsequent Due Period (an "Advance Payment"), minus (v) any amounts
incorrectly deposited in the Collection Account.
Except as otherwise specified in the related Prospectus Supplement, on each
Distribution Date, prior to making distributions in respect of the Notes and
Certificates, the Amount Available will be applied, first, if Green Tree is no
longer the Servicer, to pay the Monthly Servicing Fee to the successor
Servicer, and second, to reimburse the Servicer (including Green Tree) for any
Advances made with respect to a prior Due Period and subsequently recovered and
for any Advances previously made that the Servicer has determined are
Uncollectible Advances.
Enhancement
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to each Class of Securities will be set forth in
the related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, enhancement may be in the form of a financial guaranty
insurance policy,
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letter of credit, Green Tree guaranty, cash reserve fund, derivative product,
or other form of enhancement, or any combination thereof, as may be described
in the related Prospectus Supplement. If specified in the applicable Prospectus
Supplement, enhancement for a Class of Securities of a Series may cover one or
more other Classes of Securities in such Series, and accordingly may be
exhausted for the benefit of a particular Class and thereafter be unavailable
to such other Classes. Further information regarding any provider of
enhancement, including financial information when material, will be included in
the related Prospectus Supplement.
The presence of enhancement may be intended to enhance the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the enhancement for a Class of Securities will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal and interest thereon. If losses occur which exceed the amount
covered by any enhancement or which are not covered by any enhancement,
Securityholders will bear their allocable share of deficiencies. In addition,
if a form of enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
enhancement will be exhausted by the claims of Securityholders of other
Classes.
Advances
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances each month of any scheduled payments on the
Contracts included in a Trust that were due but not received during the prior
Due Period. The Servicer will be entitled to reimbursement of an Advance from
the Amount Available in the Collection Account for the related Trust (i) when
the delinquent payment is recovered by the Trust, or (ii) when the Servicer has
determined that such Advance has become an Uncollectible Advance. The Servicer
will be obligated to make an Advance only to the extent that it determines that
such Advance will be recoverable from subsequent funds available therefor in
the Collection Account for the related Trust. The Servicer will be entitled to
recoup its advances on a Contract from subsequent payments by or on behalf of
the Obligor and from liquidation proceeds (including FHA Insurance payments, if
applicable), if any, of the Contract, and will release its right to
reimbursements in conjunction with the purchase of the Contract by Green Tree
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 Net
Liquidation Proceeds (including FHA Insurance payments, if applicable), if any,
of the Contract (an "Uncollectible Advance"), the Servicer will be entitled to
reimbursement from payments on other Contracts or from other funds available
therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Sale and Servicing
Agreement, the Trustee will be obligated to deposit the amount of such Advance
in the Collection Account on the Payment Date. The Trustee will not, however,
be obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent collections on the Contract or from
liquidation proceeds thereof, if any, or (ii) the Trustee determines that it is
not legally able to make such Advance.
Evidence as to Compliance
On or before March 31 of each year the Servicer will deliver to each Trustee
and each Indenture Trustee a report of a nationally recognized accounting firm
stating that such firm has examined certain documents and records relating to
the servicing of Contracts serviced by the Servicer under pooling and servicing
agreements or sale and servicing agreements similar to the Trust Documents and
stating that, on the basis of such procedures, such servicing has been
conducted in compliance with the applicable Trust Documents, except for any
exceptions set forth in such report. A copy of such statement may be obtained
by any Certificate Owner or
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Note Owner upon compliance with the requirements described above. See "Certain
Information Regarding the Securities--Statements to Securityholders" above.
Indemnification and Limits on Liability
Unless otherwise specified in the related Prospectus Supplement, the Trust
Documents will provide that the Servicer will be liable only to the extent of
the obligations specifically undertaken by it under the Trust Documents and
will have no other obligations or liabilities thereunder. The Trust Documents
will further provide that neither the Servicer nor any of its directors,
officers, employees and agents will have any liability to the Trust, the
Certificateholders or the Noteholders, except as provided in the Trust
Documents, for any action taken or for refraining from taking any action
pursuant to the Trust Documents, other than any liability that would otherwise
be imposed by reason of the Servicer's breach of the Trust Documents or willful
misfeasance, bad faith or negligence (including errors in judgment) in the
performance of its duties, or by reason of reckless disregard of obligations
and duties under the Trust Documents or any violation of law.
The Servicer may, with the prior consent of the Trustee and the Indenture
Trustee, if any, delegate duties under the related Trust Documents to any of
its affiliates. In addition, the Servicer may at any time perform the specific
duty of repossessing Products through subcontractors who are in the business of
servicing consumer receivables. The Servicer may also perform other specific
duties through subcontractors; provided, however, that no such delegation of
such duties by the Servicer shall relieve the Servicer of its responsibility
with respect thereto.
Amendment
Unless otherwise provided in the related Prospectus Supplement, the Trust
Documents may be amended by the Seller, the Servicer, the Trustee and the
Indenture Trustee, but without the consent of any of the Securityholders, to
cure any ambiguity or to correct or supplement any provision therein, provided
that such action will not, in the opinion of counsel (which may be internal
counsel to Green Tree or the Servicer) reasonably satisfactory to the Trustee
and the Indenture Trustee, materially and adversely affect the interests of the
Securityholders. The Trust Documents may also be amended by Green Tree, the
Servicer and the Trustee and the Indenture Trustee, and a Certificate Majority
and a Note Majority, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Trust Documents or of
modifying, in any manner, the rights of the Certificateholders or the
Noteholders. No such amendment may (i) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments on the
related Contracts or distributions that are required to be made on any related
Certificate or Note or the related Pass-Through Rate or Interest Rate or (ii)
reduce the percentage of the Certificate Balance evidenced by Certificates or
of the aggregate principal amount of Notes then outstanding required to consent
to any such amendment, without the consent of the holders of all Certificates
or all Notes, as the case may be, then outstanding.
Termination
The obligations created by the Trust Documents will terminate upon the date
calculated as specified in the Trust Documents, generally upon (i) the later of
the final payment or other liquidation of the last Contract subject thereto and
the disposition of all property acquired upon repossession of any Product and
(ii) the payment to the Securityholders of all amounts held by the Servicer or
the Trustee and required to be paid to the Securityholders pursuant to the
Trust Documents.
Unless otherwise provided in the related Prospectus Supplement, with respect
to each Series of Securities, in order to avoid excessive administrative
expense, Green Tree and the Servicer each will be permitted, at its option, to
purchase from the Trust, on any Distribution Date immediately following any Due
Period as of the last day of which the Aggregate Principal Balance is equal to
or less than 10% (or such other percentage as may be specified in the related
Prospectus Supplement) of the Cut-off Date Principal Balance, all remaining
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Contracts in the related Trust and the other remaining Trust Property at a
price equal to the aggregate of the Purchase Amounts therefor and the appraised
value of any other remaining Trust Property. The exercise of this right will
effect an early retirement of the related Certificates and Notes.
If a General Partner is named in the related Prospectus Supplement, unless
otherwise specified in the related Prospectus Supplement, the Trust Agreement
will provide that, in the event that the General Partner becomes insolvent,
withdraws or is expelled as a General Partner or is terminated or dissolved,
the Trust will terminate in 90 days and effect redemption of the Notes and
prepayment of the Certificates (if any) following the winding-up of the affairs
of the related Trust, unless within such 90 days the remaining General Partner,
if any, and holders of a majority of the Certificates of such Series agree in
writing to the continuation of the business of the Trust and to the appointment
of a successor to the former General Partner, and the Owner Trustee is able to
obtain an opinion of counsel to the effect that the Trust will not thereafter
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
Unless otherwise specified in the related Prospectus Supplement, with respect
to each Series of Securities, the Trustee will give written notice of the final
distribution with respect to the Certificates (if any), to each
Certificateholder of record and the Indenture Trustee will give written notice
of the final payment with respect to the Notes to each Noteholder of record.
The final distribution to any Certificateholder and the final payment to any
Noteholder will be made only upon surrender and cancellation of such holder's
Certificate or Note at the office or agency of the Trustee, with respect to
Certificates, or of the Indenture Trustee, with respect to Notes, specified in
the notice of termination. Any funds remaining in the Trust, after the Trustee
or the Indenture Trustee has taken certain measures to locate a
Certificateholder or Noteholder, as the case may be, and such measures have
failed, will be distributed to The United Way, and the Certificateholders and
Noteholders, by acceptance of their Certificates and Notes, will waive any
rights with respect to such funds.
The Trustee
The Trustee or Owner Trustee, as applicable, for each Trust will be specified
in the related Prospectus Supplement. The Trustee, in its individual capacity
or otherwise, and any of its affiliates may hold Certificates or Notes in their
own names or as pledgee. In addition, for the purpose of meeting the legal
requirements of certain jurisdictions, the Trustee, with the consent of the
Servicer, shall have the power to appoint co-trustees or separate trustees of
all or any part of the related Trust. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee by
the related Trust Documents will be conferred or imposed upon the Trustee and
such separate trustee or co-trustee jointly, or, in any jurisdiction where the
Trustee is incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee of any Trust may resign at any time, in which event the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer or its successor will be obligated
to appoint a successor trustee. The General Partner, if any, specified in the
related Prospectus Supplement (or, if no such General Partner is specified, the
Servicer) may also remove the Trustee, if the Trustee ceases to be eligible to
serve, becomes legally unable to act, is adjudged insolvent or is placed in
receivership or similar proceedings. In such circumstances, the General
Partner, if any, specified in the related Prospectus Supplement or, if no such
General Partner is specified, the Servicer will 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.
Duties of the Trustee
The Trustee will make no representation as to the validity or sufficiency of
any Trust Document, the Certificates or the Notes (other than its execution of
the Certificates and the Notes), the Contracts or any related documents, and
will not be accountable for the use or application by the Servicer of any funds
paid to the
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Servicer in respect of the Certificates, the Notes or the Contracts prior to
deposit in the related Collection Account.
The Trustee will be required to perform only those duties specifically
required of it under the Trust Documents. Generally, those duties will be
limited to the receipt of the various certificates, reports or other
instruments required to be furnished by the Servicer to the Trustee under the
Trust Documents, in which case it will only be required to examine such
certificates, reports or instruments to determine whether they conform
substantially to the requirements of the Trust Documents.
The Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Trust Documents or to institute, conduct, or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders or Noteholders, unless such
Certificateholders or Noteholders have offered the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby. No Certificateholder nor any Noteholder will have any right
under the Trust Documents to institute any proceeding with respect to such
Trust Documents, unless such holder has given the Trustee written notice of
default and unless the holders of Certificates evidencing not less than 25% of
the Certificate Balance or the holders of Notes evidencing not less than 25% of
the aggregate principal balance of the Notes then outstanding, as the case may
be, have made written request to the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 30 days after the receipt of such notice,
request and offer to indemnify has neglected or refused to institute any such
proceedings.
Administrator
If an Administrator is specified in the related Prospectus Supplement, such
Administrator will enter into an agreement (the "Administration Agreement")
pursuant to which such Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture and the Trust
Agreement.
DESCRIPTION OF FHA INSURANCE
Certain of the Contracts may be FHA-insured, the payments upon which, subject
to the following discussion, are insured by the FHA under Title I of the
National Housing Act.
The insurance available to any Trust 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 Green Tree,
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 Green Tree. Green Tree's reserve amount
may be reduced by 10% of the principal balance of any loans reported to FHA as
sold without recourse by Green Tree. In the Sale and Servicing Agreement, Green
Tree will agree to pay all FHA Insurance premiums required by FHA Regulations.
If Green Tree fails to pay any such premium, the Trustee or the successor
Servicer (if any) with respect to each Series is obligated to pay such premium
and is entitled to be reimbursed by Green Tree and from collections on the
related Contracts.
As of December 31, 1997, Green Tree's FHA Insurance reserve amount was equal
to approximately $86,950,000. These insurance reserves were available to cover
losses on approximately $883,889,000 of FHA-insured manufactured housing
contracts and approximately $128,145,000 of FHA-insured home improvement loans,
including the FHA-insured Contracts that may be owned by a Trust Fund. If an
Event of Termination (as defined under "Description of the Trust Documents--
Termination") occurs, each Trustee will notify FHA of Green Tree's termination
as Servicer of the related FHA-insured Contracts and will request that the
portion of Green Tree's FHA Insurance reserves allocable to the FHA-insured
Contracts be transferred to the Trustee or a successor servicer. Although each
Trustee will request such a transfer of reserves, FHA is not obligated to
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comply with such a request, and may determine that it is not in FHA's interest
to permit such transfer of reserves. In addition, FHA has not specified how
insurance reserves might be allocated in such event, and there can be no
assurance that any reserve amount, if transferred to the Trustee or a successor
Servicer, would not be substantially less than 10% of the outstanding principal
amount of the FHA-insured Contracts. It is likely that the Trustee or any
successor Servicer would be the lender of record on other FHA Title I loans, so
that any reserves that are so permitted to be transferred would become
commingled with reserves available for other FHA Title I loans. FHA also
reserves the right to transfer reserves with "earmarking" (segregating such
reserves so that they will not be commingled with the reserves of the
transferee) if it is in FHA's interest to do so.
In general, FHA will insure unsecured property improvement loans up to
$7,500, with a maximum term of 20 years. The loan proceeds must be used for the
purposes described in the loan application, and those improvements must
substantially protect or improve the basic livability or utility of the
property. The Secretary of HUD from time to time publishes a list of ineligible
items and activities which may not be financed with the proceeds of an FHA-
insured home improvement loan.
Following a default on an FHA-insured Contract the Servicer may, subject to
certain conditions, submit a claim to FHA. The availability of FHA Insurance
following a default on an FHA-insured Contract is subject to a number of
conditions, including strict compliance by the Company with FHA regulations in
originating and servicing the Contract. Failure to comply with FHA regulations
may result in a denial of or surcharge on the FHA Insurance claim. Prior to
declaring an FHA-insured Contract in default and submitting a claim to FHA, the
Servicer must take certain steps to attempt to cure the default, including
personal contact with the borrower either by telephone or in a meeting and
providing the borrower with 30 days' written notice prior to declaration of
default. FHA may deny insurance coverage if the borrower's nonpayment is
related to a valid objection to faulty contractor performance. In such event,
the Company will seek to obtain payment by or a judgment against the borrower,
and may resubmit the claim to FHA following such a judgment. As described under
"Green Tree Financial Corporation--Contract Origination," Green Tree does not
purchase a Contract 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 Contract to the United States. In general, the claim payment
will equal 90% of the sum of (i) the unpaid principal amount of the Contract at
the date of default and uncollected interest computed at the Contract Rate
earned to the data of default, (ii) accrued and unpaid interest on the unpaid
amount of the Contract from the date of default to the date of submission of
the claim plus 15 calendar days (but in no event more than nine months)
computed at a rate of 7% per annum, (iii) uncollected court costs, and (iv)
legal fees, not to exceed $500.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS; REPURCHASE OBLIGATIONS
As a result of Green Tree's conveyance and assignment of a pool of Contracts
to a Trust, the Securityholders 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 Contracts). The following discussion contains
summaries of certain legal aspects of home improvement contracts which are
general in nature. These legal aspects are in addition to the requirements of
FHA regulations described in "Description of FHA Insurance" with respect to the
FHA-insured Contracts. Because such legal aspects are governed by applicable
state law (which laws may differ substantially), the summaries do not purport
to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the improved real estate is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Contracts.
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Consumer Protection Laws with Respect to Contracts
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. These
laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of a Contract to all claims and defenses which the debtor could assert
against the home improvement contractor. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the Trust against such Obligor.
The obligations of the Obligor under each Contract are not secured by an
interest in the related real estate or otherwise, and the related Trust, as the
owner of a Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under a Contract, the
related Trust will have recourse only against the Obligor's assets generally,
along with all other general unsecured creditors of the Obligor. In a
bankruptcy or insolvency proceeding relating to an Obligor on a Contract, the
obligations of the Obligor under such Contract may be discharged in their
entirety, notwithstanding the fact that the portion of such Obligor's assets
made available to the Trust as a general unsecured creditor to pay amounts due
and owing thereunder are insufficient to pay all such amounts.
Enforceability of Certain Provisions
The standard form of note generally contains provisions obligating the
borrower to pay a late charge if payments are not timely made. In addition to
limitations imposed by FHA regulations with respect to FHA- insured Contracts,
in certain states there are or may be specific limitations upon late charges
which a lender may collect from a borrower for delinquent payments. Under the
Sale and Servicing Agreement, late charges (to the extent permitted by law and
not waived by Green Tree) will be retained by Green Tree as additional
servicing compensation.
The standard form of note also includes 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 accelerate when an acceleration of the indebtedness would be inequitable or
unjust and the circumstances would render the acceleration unconscionable.
It is Green Tree's practice with some of the Contracts to defer the first
payment thereon for up to 90 days, and to charge the home improvement
contractor points to cover the lost interest due to collecting only 30 days'
interest on the first payment on these deferred payment contracts.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Contracts. Any shortfall in interest collections resulting from
the application of the Relief Act or similar legislation, which would not be
recoverable from the related Contracts, would result in a reduction of the
amounts distributable to the Securityholders. In the event that the Relief Act
or similar legislation applies to any Contract which goes into default, there
may be delays in payment on the Securities in
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connection therewith. Any other interest shortfalls, deferrals or forgiveness
of payments on the Contracts resulting from similar legislation or regulations
may result in delays in payments or losses to Securityholders.
Green Tree will represent and warrant under each Sale and Servicing Agreement
that each Contract complies with all requirements of law. Accordingly, if any
Obligor has a claim against the related Trust for violation of any law and such
claim materially adversely affects the Trust's interest in a Contract, such
violation would constitute a breach of a representation and warranty under the
Sale and Servicing Agreement and would create an obligation to repurchase such
Contract unless the breach is cured. See "Description of the Trust Documents--
Sale and Assignment of the Contracts."
Repurchase Obligations
Under the Agreement, Green Tree will represent and warrant that each FHA-
insured Contract was originated in compliance with FHA regulations and is
covered by FHA Insurance. In the event FHA were to deny insurance coverage on
an FHA-insured Contract due to a violation of FHA regulations in originating or
servicing such Contracts, such violation would constitute a breach of a
representation and warranty under the Sale and Servicing Agreement and would
create an obligation of the Company to repurchase such Contract unless the
breach is cured. See "Description of the Trust Documents--Sale and Assignment
of the Contracts."
In addition, Green Tree will also represent and warrant under each Sale and
Servicing Agreement that each Contract complies with all requirements of law.
Accordingly, if any Obligor has a claim against the related Trust for violation
of any law and such claim materially adversely affects the Trust's interest in
a Contract, such violation would constitute a breach of a representation and
warranty under the Sale and Servicing Agreement and would create an obligation
to repurchase such Contract unless the breach is cured. See "Description of the
Trust Documents--Sale and Assignment of the Contracts."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences relating to the purchase, ownership, and disposition of the
Securities. The discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. The discussion does not
deal with federal income tax consequences applicable to all categories of
investors, some of which may be subject to special rules. Investors are
encouraged to consult their own tax advisors with respect to the federal,
state, local, and any other tax consequences of the purchase, ownership, and
disposition of the Securities.
Dorsey & Whitney LLP, counsel to Green Tree, has delivered an opinion
regarding certain federal income tax matters discussed below. Counsel to Green
Tree identified in the related Prospectus Supplement ("Counsel") will deliver
an opinion regarding tax matters applicable to each Series of Securities. Such
an opinion, however, is not binding on the Internal Revenue Service (the
"Service") or the courts. The opinion of Counsel will specifically address only
those issues specifically identified below as being covered by such opinion;
however, the opinion of Counsel also will state that the additional discussion
set forth below accurately sets forth Counsel's advice with respect to material
tax issues. No ruling on any of the issues discussed below will be sought from
the Service.
Tax Status of the Trust
With respect to each Series of Securities which includes both Notes and
Certificates, Counsel will deliver its opinion that the Trust will not be an
association or publicly traded partnership taxable as a corporation for federal
income tax purposes. As a result, in the opinion of Counsel, the Trust itself
will not be subject to
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federal income tax but, instead, each Certificateholder will be required to
take into account its distributive share of items of income and deduction
(including deductions for distributions of interest to the Noteholders) of the
Trust as though such items had been realized directly by the Certificateholder.
This opinion will be based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on Counsel's
conclusion that the nature of the income of the Trust will exempt it from the
rule that certain publicly traded partnerships are taxable as corporations.
There are, however, no cases or Service rulings on transactions involving a
trust issuing both debt and equity interests with terms similar to those of the
Notes and the Certificates. As a result, the Service may disagree with all or a
part of this discussion.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Contracts, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates.
Tax Consequences to Noteholders
Treatment of the Notes as Indebtedness. The Owner Trustee, on behalf of the
Trust, will agree, and the Noteholders will agree by their purchase of Notes,
to treat the Notes as debt for federal income tax purposes. Counsel will
deliver its opinion that the Notes will be classified as debt for federal
income tax purposes. The discussion below assumes this characterization of the
Notes is correct.
Interest Income on the Notes. Interest on the Notes will be taxable as
ordinary interest income when received by Noteholders utilizing the cash-basis
method of accounting and when accrued by Noteholders utilizing the accrual
method of accounting. Under the applicable regulations, the Notes would be
considered issued with original issue discount ("OID") if the "stated
redemption price at maturity" of a Note (generally equal to its principal
amount as of the date of issuance plus all interest other than "qualified
stated interest" payable prior to or at maturity) exceeds the original issue
price (in this case, the initial offering price at which a substantial amount
of the Notes are sold to the public). Any OID would be considered de minimis
under the OID regulations if it does not exceed 1/4% of the stated redemption
price at maturity of a Note multiplied by the number of full years until its
maturity date. It is anticipated that the Notes will not be considered issued
with more than de minimis OID. Under the OID regulations, an owner of a Note
issued with a de minimis amount of OID must include such OID in income, on a
pro rata basis, as principal payments are made on the Note.
While it is not anticipated that the Notes will be issued with more than de
minimis OID, it is possible that they will be so issued or will be deemed to be
issued with OID. This deemed OID could arise, for example, if interest payments
on the Notes are not deemed to be "qualified stated interest" because the Notes
do not provide for default remedies ordinarily available to holders of debt
instruments or do not contain terms and conditions that make the likelihood of
late payment or nonpayment a remote contingency. Based upon existing authority,
however, the Trust will treat interest payments on the Notes as qualified
stated interest under the OID regulations. If the Notes are issued or are
deemed to be issued with OID, all or a portion of the taxable income to be
recognized with respect to the Notes would be includible in the income of
Noteholders as OID. Any amount treated as OID would not, however, be includible
again when the amount is actually received. If the yield on a class of Notes
were not materially different from its coupon, this treatment would have no
significant effect on Noteholders using the accrual method of accounting.
However, cash method Noteholders may be required to report income with respect
to the Notes in advance of the receipt of cash attributable to such income.
A Noteholder must include OID in income as interest over the term of the
Notes under a constant yield method. In general, OID must be included in income
in advance of the receipt of cash representing that income. Each Noteholder is
encouraged to consult its own tax advisor regarding the impact of the OID rules
if the Notes are issued with OID.
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Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules provide that if a Noteholder purchases the Note
at a market discount (i.e., a discount from its original issue price plus any
accrued original issue discount) that exceeds a de minimis amount specified in
the Code, and thereafter recognizes gain upon a disposition, the lesser of (i)
such gain or (ii) the accrued market discount will be taxed as ordinary
interest income. Market discount also will be recognized and taxable as
ordinary interest income as payments of principal are received on the Notes to
the extent that the amount of such payments does not exceed the accrued market
discount. Generally, the accrued market discount will be the total market
discount on the Note multiplied by a fraction, the numerator of which is the
number of days the Noteholder held the Note and the denominator of which is the
number of days after the date the Noteholder acquired the Note until and
including its maturity date. The Noteholder may elect, however, to determine
accrued market discount under the constant-yield method, which election shall
not be revoked without the consent of the Service.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Noteholder may elect to include market
discount in gross income as it accrues and, if such Noteholder makes such an
election, is exempt from this rule. The adjusted basis of a Note subject to
such election will be increased to reflect market discount included in gross
income, thereby reducing any gain or increasing any loss on a sale or taxable
disposition. Any such election to include market discount in gross income as it
accrues shall apply to all debt instruments held by the Noteholder at the
beginning of the first taxable year to which the election applies or thereafter
acquired and is irrevocable without the consent of the Service.
Amortizable Bond Premium. In general, if a Noteholder purchases a Note at a
premium (i.e., an amount in excess of the amount payable upon the maturity
thereof), such Noteholder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Noteholder
may elect to deduct the amortizable bond premium as it accrues under a
constant-yield method over the remaining term of the Note. Such Noteholder's
tax basis in the Note will be reduced by the amount of the amortizable bond
premium deducted. Amortizable bond premium with respect to a Note will be
treated as an offset to interest income on such Note, and a Noteholder's
deduction for amortizable bond premium with respect to a Note will be limited
in each year to the amount of interest income derived with respect to such Note
for such year. Any election to deduct amortizable bond premium shall apply to
all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Noteholder at the beginning of the
first taxable year to which the election applies or thereafter acquired and is
irrevocable without the consent of the Service. Bond premium on a Note held by
a Noteholder who does not elect to deduct the premium will decrease the gain or
increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. If a Noteholder sells a Note, the Noteholder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the Noteholder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder generally will equal
the Noteholder's cost for the Note, increased by any market discount, OID and
gain previously included by such Noteholder in income with respect to the Note
and decreased by principal payments previously received by such Noteholder and
the amount of bond premium previously amortized with respect to the Note. Any
such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income, and will be short-term, mid-term or
long-term capital gain or loss depending upon whether the Note was held for
more or less than one year or for more than eighteen months. Capital losses
generally may be used only to offset capital gains.
Foreign Holders. Generally, interest paid to a Noteholder who is a
nonresident alien individual or a foreign corporation and who does not hold the
Note in connection with a United States trade or business will be treated as
"portfolio interest" and therefore will be exempt from the 30% withholding tax.
Such a Noteholder will be entitled to receive interest payments on the Notes
free of United States federal income tax provided that such Noteholder
periodically provides the Indenture Trustee (or other person who would
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otherwise be required to withhold tax) with a statement certifying under
penalty of perjury that such Noteholder is not a United States person and
providing the name and address of such Noteholder and will not be subject to
federal income tax on gain from the disposition of a Note unless the Noteholder
is an individual who is present in the United States for 183 days or more
during the taxable year in which the disposition takes place and certain other
requirements are met.
Tax Administration and Reporting. The Indenture Trustee will furnish to each
Noteholder with each distribution a statement setting forth the amount of such
distribution allocable to principal and to interest. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding such information as may be required with
respect to interest and original issue discount, if any, with respect to the
Notes.
Backup Withholding. Under certain circumstances, a Noteholder may be subject
to "backup withholding" at a 31% rate. Backup withholding may apply to a
Noteholder 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 Indenture Trustee. Backup withholding may apply,
under certain circumstances, to a Noteholder who is a foreign person if the
Noteholder fails to provide the Indenture Trustee or the Noteholder's
securities broker with the statement necessary to establish the exemption from
federal income and withholding tax on interest on the Note. Backup withholding,
however, does not apply to payments on a Note made to certain exempt
recipients, such as corporations and tax-exempt organizations, and to certain
foreign persons. Noteholders should consult their tax advisors for additional
information concerning the potential application of backup withholding to
payments received by them with respect to a Note.
Possible Alternative Treatment of the Notes. If, contrary to the opinion of
Counsel, the Service successfully asserted that the Notes did not represent
debt for federal income tax purposes, the Notes might be treated as equity
interests in the Trust. If so treated, the Trust would be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
meet certain qualifying income tests. Nonetheless, treatment of the Notes as
equity interests in such a partnership could have adverse tax consequences to
certain holders. For example, income to foreign holders generally would be
subject to federal tax and federal tax return filing and withholding
requirements, income to certain tax-exempt entities (including pension funds)
would be "unrelated business taxable income," and individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses.
Tax Consequences to Certificateholders
Treatment of the Trust as a Partnership. Green Tree, the General Partner and
the Owner Trustee will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income, with the assets of the partnership being the assets held
by the Trust, the partners of the partnership being the Certificateholders and
the General Partner, and the Notes being debt of the partnership. The proper
characterization of the arrangement involving the Trust, the Certificates, the
Notes, the General Partner, Green Tree and the Servicer, however, is not
certain because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example, because
the Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the Trust. Any such characterization would not
result in materially adverse tax consequences to Certificateholders as compared
to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance
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charges earned on the Contracts (including appropriate adjustments for market
discount, OID and bond premium) and any gain upon collection or disposition of
the Contracts. The Trust's deductions will consist primarily of interest
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of the Contracts.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Contracts that corresponds to any excess
of the principal amount of the Certificates over their initial issue price;
(iii) Prepayment Premium payable to the Certificateholders for such month; and
(iv) any other amounts of income payable to the Certificateholders for such
month. Although it is not anticipated that the Certificates will be issued at a
price which exceeds their principal amount, such allocations of Trust income to
the Certificateholders will be reduced by any amortization by the Trust of
premium on Contracts that corresponds to any such excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the General Partner. Based on the economic
arrangement of the parties, this approach for allocating Trust income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the Service would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
Pass-Through Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis, and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
All of the taxable income allocated to a Certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including
an individual retirement account) will constitute "unrelated business taxable
income" generally taxable to such a holder under the Code.
A Certificateholder's share of expenses of the Trust (including fees to the
Servicer but not interest expense) will be miscellaneous itemized deductions.
An individual, an estate, or a trust that holds a Certificate either directly
or through a pass-through entity will be allowed to deduct such expenses under
Section 212 of the Code only to the extent that, in the aggregate and combined
with certain other itemized deductions, they exceed 2% of the adjusted gross
income of the Certificateholder. In addition, Section 68 of the Code provides
that the amount of itemized deductions (including those provided for in Section
212 of the Code) otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds a threshold amount determined under the
Code ($124,500 in 1998, in the case of a joint return) will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. To the extent that a Certificateholder is not
permitted to deduct servicing fees allocable to a Certificate, the taxable
income of the Certificateholder attributable to that Certificate will exceed
the net cash distributions related to such income. Certificateholders may
deduct any loss on disposition of the Contracts to the extent permitted under
the Code.
Discount and Premium. It is believed that the Contracts were not issued with
OID, and, therefore, the Trust should not have OID income. The purchase price
paid by the Trust for the Contracts may exceed the remaining principal balance
of the Contracts at the time of purchase. If the Trust is deemed to acquire the
Contracts at such a premium or at a market discount, the Trust will elect to
offset any such premium against interest income on the Contracts or to include
any such discount in income currently as it accrues over the life
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of the Contracts. The Trust will make this premium or market discount
calculation on an aggregate basis but may be required to recompute it on a
Contract-by-Contract basis. As indicated above, a portion of such premium
deduction or market discount income may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in its Certificates
(as described below under "Disposition of Certificates") immediately before the
distribution. A Certificateholder will recognize loss upon termination of the
Trust or termination of the Certificateholder's interest in the Trust if the
Trust only distributes money to the Certificateholder and the amount
distributed is less than the Certificateholder's adjusted basis in the
Certificates. Any such gain or loss generally will be capital gain or loss if
the Certificates are held as capital assets and will be long-term gain or loss
if the holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a 12-
month period. Under Treasury regulations, if such a termination occurs, the
Trust will be considered to have contributed the assets of the Trust (the "Old
Partnership") to a new partnership (the "New Partnership") in exchange for
interests in the New Partnership. Such interests would be deemed distributed to
the partners of the Old Partnership in liquidation thereof, which would not
constitute a sale or exchange for United States federal income tax purposes.
Disposition of Certificates. If a Certificateholder sells a Certificate, the
Certificateholder generally will recognize capital gain or loss in an amount
equal to the difference between the amount realized on the sale and the
seller's tax basis in the Certificate. A Certificateholder's tax basis in a
Certificate generally will equal the Certificateholder's cost increased by the
Certificateholder's share of Trust income and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificate and the amount realized on a sale of a Certificate would
include the Certificateholder's share of the Notes and other liabilities of the
Trust. A Certificateholder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintain a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Certificateholder's
share of unrecognized accrued market discount on the Contracts would generally
be treated as ordinary income to the Certificateholder and would give rise to
special tax reporting requirements. The Trust does not expect to have any other
assets that would give rise to such special reporting requirements. Thus, to
avoid those special reporting requirements, the Trust will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Certificates that exceeds the aggregate cash
distributions with respect thereto, such excess generally will give rise to a
capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly, and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the related Record Date. As a result, a Certificateholder purchasing a
Certificate may be allocated tax items (which will affect the
Certificateholder's tax liability and tax basis) attributable to periods before
the Certificateholder actually owns the Certificate. The use of such a
convention may not be permitted by existing regulations. If a monthly
convention is not permitted (or only applies to transfers of less than all of
the Certificateholder's interest), taxable income or losses of the Trust may be
reallocated among the Certificateholders. The General
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Partner is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future
regulations.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit or loss, the purchasing Certificateholder will have a
higher or lower basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher or lower basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders may be allocated a greater or lesser amount of Trust
income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. Pursuant to the Administration Agreement, the Trustee
will monitor the performance of the following responsibilities of the Trust by
other service providers. The Trust is required to keep or have kept complete
and accurate books of the Trust. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the Trust
will be the calendar year. The Trust will file a partnership information return
(IRS Form 1065) with the Service for each taxable year of the Trust and will
report each Certificateholder's allocable share of items of Trust income and
expense to Certificateholders and the Service on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with certain required information statements relating to identification of
beneficial owners of Certificates and such nominees will be required to forward
such information to such beneficial owners. Generally, Certificateholders must
file tax returns that are consistent with the information return filed by the
Trust or be subject to penalties unless the Certificateholder notifies the
Service of all such inconsistencies.
Green Tree or a subsidiary identified in the related Prospectus Supplement
will be designated as the tax matters partner in the Trust Agreement and, as
such, will be responsible for representing the Certificateholders in any
dispute with the Service. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return
is filed. Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of
the returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust will be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust will be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
It is expected that the Trust will withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign Certificateholders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust to change its withholding procedures. In determining a
Certificateholder's nonforeign status, the Trust may rely on Form W-8, Form W-9
or the Certificateholder's certification of nonforeign status signed under
penalties of perjury.
Each foreign Certificateholder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign
Certificateholder must obtain a taxpayer identification number from the Service
and submit that number to the Trust on Form W-8 in order to assure appropriate
crediting of the taxes withheld. A foreign Certificateholder
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generally will be entitled to file with the Service a claim for refund with
respect to taxes withheld by the Trust, taking the position that no taxes are
due because the Trust is not engaged in a U.S. trade or business. However, the
Service may assert that additional taxes are due, and no assurance can be given
as to the appropriate amount of tax liability.
Backup Withholding. Under certain circumstances, a Certificateholder may be
subject to "backup withholding" at a 31% rate. See the discussion above under
"--Tax Consequences to Noteholders--Backup Withholding."
CERTAIN STATE INCOME TAX CONSEQUENCES
The activities to be undertaken by the Servicer in servicing and collecting
the Contracts will take place in Minnesota. The State of Minnesota imposes an
income tax on individuals, trusts and estates and a franchise tax measured by
net income on corporations. This discussion of Minnesota taxation is based upon
current statutory provisions and the regulations promulgated thereunder, and
applicable judicial or ruling authority, all of which are subject to change
(which may be retroactive). No ruling on any of the issues discussed below will
be sought from the Minnesota Department of Revenue.
If the Notes are treated as debt for federal income tax purposes, in the
opinion of Counsel this treatment will also apply for Minnesota tax purposes.
Noteholders not otherwise subject to Minnesota income or franchise taxation
would not become subject to such a tax solely because of their ownership of the
Notes. Noteholders already subject to income or franchise taxation in Minnesota
could, however, be required to pay such a tax on all or a portion of the income
generated from ownership of the Notes.
If the Trust is treated as a partnership (not taxable as a corporation) for
federal income tax purposes, in the opinion of Counsel the Trust would also be
treated as a partnership for Minnesota income tax purposes. The partnership
therefore would not be subject to Minnesota taxation. Certificateholders that
are not otherwise subject to Minnesota income or franchise taxation would not
become subject to such a tax solely because of their interests in the
partnership. Certificateholders already subject to income or franchise taxation
in Minnesota could, however, be required to pay such a tax on all or a portion
of the income from the partnership.
If the Certificates are treated as ownership interests in an association or
publicly traded partnership taxable as a corporation for federal income tax
purposes, in the opinion of Counsel this treatment would also apply for
Minnesota income and franchise tax purposes. Pursuant to this treatment, the
Trust would be subject to the Minnesota franchise tax measured by net income
(which could result in reduced distributions to Certificateholders).
Certificateholders that are not otherwise subject to Minnesota income or
franchise taxation would not become subject to such a tax solely because of
their interests in the constructive corporation. Certificateholders already
subject to income or franchise taxation in Minnesota could, however, be
required to pay such a tax on all or a portion of the income from the
constructive corporation.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan from engaging in certain transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to the plan. ERISA also
imposes certain duties and certain prohibitions on persons who are fiduciaries
of plans subject to ERISA. Under ERISA, generally any person who exercises any
authority or control with respect to the management or disposition of the
assets of a plan is considered to be a fiduciary of such plan. A violation of
these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for such persons.
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Certain transactions involving the related Trust might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust were
deemed to be assets of the Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets of
a Trust would be treated as plan assets of a Benefit Plan for the purposes of
ERISA and the Code only if the Benefit Plan acquired an "equity interest" in
the Trust and none of the exceptions contained in the Plan Assets Regulation
was applicable. An equity interest is defined under the Plan Assets Regulation
as an interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment of Notes and Certificates will be discussed in the related Prospectus
Supplement.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT CONSIDERATIONS
No Securities offered hereby will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
because none of the Contracts will be secured 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 Securities.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities 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 Securities constitute legal investments for such
investors.
RATINGS
It is a condition precedent to the issuance of any Class of Securities sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Securities should
be evaluated independently of similar security ratings assigned to other kinds
of securities.
UNDERWRITING
Green Tree may sell Securities of each Series to or through underwriters (the
"Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Securities directly
to other purchasers or through agents. Green Tree intends that Securities 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 Securities may be made through a combination
of such methods.
The distribution of the Securities 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.
48
<PAGE>
If so specified in the Prospectus Supplement relating to a Series of
Securities, Green Tree or any affiliate thereof may purchase some or all of one
or more Classes of Securities of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Securities so purchased directly, through one
or more Underwriters to be designated at the time of the offering of such
Securities or through broker-dealers acting as agent and/or principal. Such
offering may be restricted in the manner specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices.
In connection with the sale of the Securities, Underwriters may receive
compensation from Green Tree or from purchasers of Securities for whom they may
act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Securities of a Series to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Securities of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from Green Tree
and any profit on the resale of the Securities by them may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
Underwriters or agents will be identified, and any such compensation received
from Green Tree will be described, in the Prospectus Supplement.
Under agreements which may be entered into by Green Tree, Underwriters and
agents who participate in the distribution of the Securities may be entitled to
indemnification by Green Tree against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, Green Tree will authorize
Underwriters or other persons acting as Green Tree's agents to solicit offers
by certain institutions to purchase the Securities from Green Tree pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by Green Tree. The obligation of any purchaser under any such contract
will be subject to the condition that the purchaser of the offered Securities
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject from purchasing such
Securities. The Underwriters and such other agents will not have responsibility
in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Securities, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for Green Tree in the ordinary course of business.
The Indenture Trustee, if any, may, from time to time, invest the funds in
the Designated Accounts in Eligible Investments acquired from the underwriters.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
49
<PAGE>
LEGAL MATTERS
Certain matters with respect to the validity of the Certificates and the
Notes will be passed upon for Green Tree by the counsel for Green Tree
identified in the applicable Prospectus Supplement. The validity of the
Certificates and the Notes will be passed upon for the underwriters named in
the related Prospectus Supplement by the counsel for the underwriters
identified in the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1998
and for the year ended December 31, 1998, incorporated by reference herein have
been audited by PricewaterhouseCoopers LLP, independent accountants, as stated
in their opinion given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the two-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
SEC registration fee.............................................. $1,112,000
Blue Sky fees and expenses........................................ 10,000
Accountant's fee and expenses..................................... 40,000
Attorneys' fees and expenses...................................... 160,000
Trustee's fees and expenses....................................... 20,000
Printing and engraving expenses................................... 100,000
Rating Agency fee................................................. 180,000
Miscellaneous..................................................... 40,000
----------
Total......................................................... $1,162,000
==========
</TABLE>
Item 15. Indemnification of Directors and Officers
Green Tree Financial Corporation is incorporated under the laws of Delaware.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are, or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation,
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise). The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, for criminal proceedings, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where and officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
The Certificate of Incorporation and Bylaws of Green Tree Financial
Corporation provide, in effect, that, subject to certain limited exceptions,
such corporation will indemnify its officers and directors to the extent
permitted by the Delaware General Corporation Law.
Green Tree Financial Corporation maintains a directors' and officers'
insurance policy.
Pursuant to the form of Underwriting Agreement, a copy of which is
incorporated by reference as Exhibit 1.1 hereto, the Underwriters will agree,
subject to certain conditions, to indemnify the Company, its directors, certain
of its officers and persons who control the Company within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
liabilities.
Item 16. Exhibits
<TABLE>
<C> <S>
1.1 Proposed form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of Green Tree Financial Corporation (2)
3.2 Restated By-Laws of Green Tree Financial Corporation (2)
4.1 Form of Pooling and Servicing Agreement (REMIC) (3)
4.2 Form of Sale and Servicing Agreement (4)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
4.3 Form of Trust Agreement (4)
4.4 Form of Indenture between the Trust and the Indenture Trustee, including form of Note (4)
4.5 Form of Pooling and Servicing Agreement (Grantor Trust) (5)
*5.1 Opinion and consent of Dorsey & Whitney LLP with respect to legality
*8.1 Opinion of Dorsey & Whitney with respect to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (6)
**23.1 Consent of KPMG Peat Marwick LLP
**23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Dorsey & Whitney LLP (included as part of Exhibit 5.1)
23.4 Consent of Dorsey & Whitney LLP (included as part of Exhibit 8.1)
24.1 Power of attorney from officers and directors of the Registrant signed by an attorney-in-fact
(included on page II-5)
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture Trustee
(7)
</TABLE>
- --------
* Filed herewith
** To be filed by amendment
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-3 (File No. 33-55853), as amended, which became effective on November
10, 1994.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement No. 333-
52233.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K
dated March 18, 1999.
(4) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Registration Statement No. 333-46457.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Report on Form 8-K dated
September 30, 1996.
(6) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the period ended December 31, 1998.
(7) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended.
II-2
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change to such information in the
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change in the information set forth in the registration
statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Saint Paul, State of Minnesota, on the 29th day of
March, 1999.
Green Tree Financial Corporation
/s/ Rollin M. Dick
By __________________________________
Rollin M. Dick
Executive Vice President and Chief
Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated. Each person whose signature to this Registration Statement
appears below hereby constitutes and appoints Joel H. Gottesman and Scott T.
Young and each of them, as his true and lawful attorney-in-fact and agent, with
full power of substitution, to sign on his behalf individually and in the
capacity stated below and to perform any acts necessary to be done in order to
file all amendments and post-effective amendments to this Registration
Statement, and any and all instruments or documents filed as part of or in
connection with this Registration Statement or the amendments thereto and each
of the undersigned does hereby ratify and conform all that said attorney-in-
fact and agent, or his substitutes, shall do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Thomas J. Kilian Director and March 29, 1999
- ------------------------------------- President
Thomas J. Kilian
/s/ Rollin M. Dick Director/Executive March 29, 1999
- ------------------------------------- Vice President and
Rollin M. Dick Chief Financial
Officer (Principal
Financial Officer)
/s/ James S. Adams Senior Vice March 29, 1999
- ------------------------------------- President and Chief
James S. Adams Accounting Officer
(Principal
Accounting Officer)
/s/ Stephen C. Hilbert Director March 29, 1999
- -------------------------------------
Stephen C. Hilbert
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of Green Tree (2)
3.2 Restated By-Laws of Green Tree (2)
4.1 Form of Pooling and Servicing Agreement (REMIC) (3)
4.2 Form of Sale and Servicing Agreement (4)
4.3 Form of Trust Agreement (4)
4.4 Form of Indenture between the Trust and the Indenture Trustee,
including form of
Note (4)
4.5 Form of Pooling and Servicing Agreement (Grantor Trust) (5)
*5.1 Opinion and consent of Dorsey & Whitney LLP with respect to
legality
*8.1 Opinion of Dorsey & Whitney with respect to tax matters
12.1 Computation of Ratio of Earnings to Fixed Charges (5)
**23.1 Consent of KPMG Peat Marwick LLP
**23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Dorsey & Whitney LLP (included as part of Exhibit
5.1)
23.4 Consent of Dorsey & Whitney LLP (included as part of Exhibit
8.1)
24.1 Power of attorney from officers and directors of the Registrant
signed by an
attorney-in-fact (included on page II-4)
25.1 Form of T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of the
Indenture Trustee (6)
</TABLE>
- -------
*Filed herewith.
**To be filed by amendment.
(1) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement on Form
S-3 (File No. 33-55853), as amended, which became effective on November
10, 1994.
(2) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Registration Statement No. 333-
52233.
(3) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Current Report on Form 8-K dated
March 18, 1999.
(4) Incorporated by reference to the similarly numbered exhibit to the
Registrant's Registration Statement No. 333-46457.
(5) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Report on Form 8-K dated
September 30, 1996.
(6) Incorporated by reference to the similarly numbered exhibit (unless
otherwise indicated) to the Registrant's Annual Report on Form 10-K for
the period ended December 31, 1998.
(7) To be filed subsequently pursuant to Section 305(b)(2) of the Trust
Indenture Act of 1939, as amended
<PAGE>
D O R S E Y & W H I T N E Y L L P
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 340-2600
Fax: (612) 340-2868
Exhibit 5.1
Green Tree Financial Corporation
1100 Landmark Towers
345 St. Peter Street
St. Paul, MN 55102-1639
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Green Tree Financial Corporation, a Delaware
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-3 filed by the Company with the Securities and
Exchange Commission on April 2 , 1999 (the "Registration Statement"), relating
to the registration by the Company of $4,000,000,000 of Certificates for Home
Improvement and Home Equity Loans (the "Certificates") and Loan-Backed Notes
(the "Notes"). The Certificates and Notes are collectively referred to herein as
the "Securities." The Certificates may be issued from time to time by trusts
(each, a "Trust") to be established by the Company as Seller pursuant to either
(a) a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement"),
substantially in the form filed as an exhibit to the Registration Statement, to
be entered into among the Company, as seller and servicer, and the Trustee (the
"Trustee") for any such Trust specified in a prospectus supplement to the
prospectus forming part of the Registration Statement; or (b) a Trust Agreement
(the "Trust Agreement"), substantially in the form filed as an exhibit to the
Registration Statement, to be entered into between the Company and the Owner
Trustee (the "Owner Trustee") for any such Trust, and a Sale and Servicing
Agreement (the "Sale and Servicing Agreement") to be entered into between the
Company and the Trust, each as specified in a prospectus supplement to the
prospectus forming part of the Registration Statement.
The Notes may be issued from time to time by one or more of the Trusts
pursuant to an Indenture (the "Indenture"), substantially in the form filed as
an exhibit to the Registration Statement, to be entered into between the related
Trust and the Indenture Trustee for any such series specified in a prospectus
supplement to the prospectus forming part of the Registration Statement.
The Company may provide a Limited Guaranty (the "Limited Guaranty") with
respect to one or more classes of any series of Securities.
We have examined the Registration Statement, the forms of agreements
filed as exhibits thereto, and such other documents, and have reviewed such
questions of law, as we have considered necessary and appropriate for the
purposes of this opinion. Based on the foregoing, we are of the opinion that:
1. Each Pooling and Servicing Agreement, when it has been duly
authorized by the Board of Directors of the Company and duly executed and
delivered by the Company and the Trustee, will constitute the valid and binding
obligation of the Company, and the Limited Guaranty of the Company, if any,
provided for therein will constitute the valid and binding obligation of the
Company.
2. Each series of Certificates, when duly executed and delivered in
accordance with the terms of the relating Pooling and Servicing Agreement or
Trust Agreement, will be legally issued, fully paid and non-assessable, and the
holders of such Certificates will be entitled to the benefits of related Pooling
and Servicing Agreement or Trust Agreement, as the case may be.
<PAGE>
Green Tree Financial Corporation
April 2, 1999
Page 2
3. Each Sale and Servicing Agreement, when it has been duly authorized
by the Board of Directors of the Company and duly executed and delivered by the
Company and the Owner Trustee, will constitute the valid and binding obligation
of the Company, and the Limited Guaranty of the Company, if any, provided for
therein will constitute the valid and binding obligation of the Company.
4. Each Series of Notes, when duly authorized, executed and delivered in
accordance with the terms of the related Indenture, will be legally issued and
will constitute valid and binding obligations of the Trust, and the holders of
such Notes will be entitled to the benefits of the Indenture.
The opinions set forth above are subject to the following qualifications
and exceptions:
(a) In rendering the opinions set forth above, we have assumed
that, at the time of the execution of the applicable Agreements and the
execution and delivery of the related series of Securities, there will
not have occurred any change in the law affecting the authorization,
execution, delivery, validity or enforceability of the Securities or any
Limited Guaranty, the Registration Statement will have been declared
effective by the Commission and will continue to be effective, the
Securities and the Limited Guaranty will be issued and sold as described
in the Registration Statement, none of the particular terms of a series
of Securities will violate any applicable law and neither the issuance
and sale thereof nor the compliance by the Company with the terms
thereof will result in a violation of any agreement or instrument then
binding upon the Company or any order of any court or governmental body
having jurisdiction over the Company.
(a) Our opinions in paragraphs 1, 3 and 4 above are subject to
the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or other similar law of general application affecting
creditors' rights.
(c) Our opinion in paragraphs 1, 3 and 4 above are subject to
the effect of general principles of equity, including (without
limitation) concepts of materiality, reasonableness, good faith and fair
dealing, and other similar doctrines affecting the enforceability of
agreements generally (regardless of whether considered in a proceeding
in equity or at law).
(d) Minnesota Statutes ss. 290.371, Subd. 4, provides that any
corporation required to file a Notice of Business Activities Report does
not have a cause of action upon which it may bring suit under Minnesota
law unless the corporation has filed a Notice of Business Activities
Report and provides that the use of the courts of the State of Minnesota
for all contracts executed and all causes of action that arose before
the end of any period for which a corporation failed to file a required
report is precluded. Insofar as our opinion may relate to the valid,
binding and enforceable character of any agreement under Minnesota law
or in a Minnesota court, we have assumed that any party seeking to
enforce such agreement has at all times been, and will continue at all
times to be, exempt from the requirement of filing a Notice of Business
Activities Report or, if not exempt, has duly filed, and will continue
to duly file, all Notice of Business Activities Reports.
Our opinions expressed above are limited to the laws of the State of
Minnesota, the Delaware General Corporation Law and Delaware Business Trust Act.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm under the heading
"Legal Matters" in the Prospectus comprising part of the Registration Statement.
Dated: April 2, 1999
Very truly yours,
CFS
<PAGE>
D O R S E Y & W H I T N E Y L L P
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 340-2600
Fax: (612) 340-2868
Exhibit 8.1
Green Tree Financial Corporation
1100 Landmark Towers
345 St. Peter Street
St. Paul, MN 55102-1639
Re: Federal Income Tax Consequences of Loan-Backed Notes and Certificates
for Home Improvement and Home Equity Loans
Ladies and Gentlemen:
We have acted as counsel to Green Tree Financial Corporation, a Delaware
corporation (the "Company") in connection with the proposed registration under
the Securities Act of 1933, as amended, by the Company of $4,000,000,000 of
Loan-Backed Notes and Certificates for Home Improvement Contracts and Home
Equity Loans (the "Securities"), and the related preparation and filing of a
registration statement on Form S-3 filed by the Company with the Securities and
Exchange Commission on April 2, 1999 (the "Registration Statement"). The
Securities will be issued from time to time in series by Trusts to be formed by
the Company from time to time:
(i) with respect to Certificates issued by a Trust characterized
for federal income tax purposes as a real estate mortgage investment
conduit ("REMIC"), under a separate Pooling and Servicing Agreement in
substantially the form filed (or incorporated by reference) as Exhibit
4.1 to the Registration Statement (each such agreement, a "Pooling and
Servicing Agreement"), between the Company, as seller and servicer, and
a bank or trust company as trustee (the "Trustee"); or
(ii) with respect to Certificates issued by a Trust
characterized for tax purposes as a grantor trust, under a separate
Pooling and Servicing Agreement in substantially the form filed (or
incorporated by reference) as Exhibit 4.5 to the Registration Statement,
between the Company, as seller and servicer, and a bank or trust
company, as Trustee; or
(iii) with respect to Securities issued by a Trust characterized
as an owner trust treated as a partnership for tax purposes, under a
combination of (a) a separate Trust Agreement in substantially the form
filed (or incorporated by reference) as Exhibit 4.3 to the Registration
Statement (each such Agreement, a "Trust Agreement"), (b) a separate
Sale and Servicing Agreement in substantially the form filed (or
incorporated by reference) as Exhibit 4.2 to the Registration Statement
(each such Agreement, a "Sale and Servicing Agreement"), and, if such
Trust issues Notes, a separate Indenture in substantially the form filed
(or incorporated by reference) as Exhibit 4.4 to the Registration
Statement (each such Indenture, an "Indenture").
The Securities are described in the prospectus constituting Part I of
the Registration Statement (the "Prospectus"). Each series of Securities will be
more particularly described in a supplement to the Prospectus (each, a
"Supplement").
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Green Tree Financial Corporation
April 2, 1999
Page 2
You have requested our opinion with respect to certain federal income
tax consequences of the purchase, ownership and disposition of the Securities.
For purposes of rendering our opinion we have examined the Registration
Statement. Each Supplement and Pooling and Servicing Agreement or Trust
Agreement pertaining to a specific series is to be completed subsequent to the
date of this opinion. Accordingly, we have not examined any Supplement or
Pooling and Servicing Agreement, Trust Agreement or Indenture relating to any
specific series to be issued, and our opinion does not address the contents of
any such Supplement, Pooling and Servicing Agreement or Trust Agreement except
as and to the extent that the provisions of same may be described in the
Prospectus. We understand that each Supplement will contain a discussion of any
material federal income tax consequences pertaining to the series to be offered
thereunder which are not addressed in the Prospectus.
As set forth in the Prospectus, for federal income tax purposes each
series of Securities will be issued by either a grantor trust ("Grantor Trust"),
a real estate mortgage investment conduit ("REMIC"), or an owner trust treated
as a partnership ("Owner Trust"). Each series' status as a Grantor Trust, a
REMIC, or an Owner Trust under the Internal Revenue Code of 1986, as amended
(the "Code") is to be set forth in the Supplement related thereto.
Our opinion is based upon existing law and currently applicable Treasury
Department regulations, current published administrative positions of the
Internal Revenue Service contained in revenue rulings and revenue procedures,
and judicial decisions, all of which are subject to change, either prospectively
or retroactively, and to possibly differing interpretations. Our opinion is also
based on the representations and warranties set forth in the applicable Pooling
and Servicing Agreement or Trust Agreement and the assumptions that the Company
and the Trustee will at all times comply with the requirements of the applicable
Agreement, including without limitation, in the case of each REMIC series of
Certificates, the requirement that a proper election to be taxed as a REMIC is
made in accordance with the applicable Pooling and Servicing Agreement and the
Code and that the certificates of such series will be issued as described in the
related Supplement and any other prospectus relating to the other classes of
certificates of such series. Based upon the foregoing, as of the date hereof it
is our opinion that:
(1) With respect to each Grantor Trust series of Securities,
each pool of home improvement contracts and home equity loans and the
arrangement to be administered by the Company under which the Trustee
will hold and the Company will be obligated to service the home
improvement contracts and home equity loans and pursuant to which
Certificates will be issued to certificateholders, all as described in
the Prospectus, will not be classified as an association taxable as a
corporation or a "taxable mortgage pool," within the meaning of Section
7701(i) of the Code, but rather will be classified as a grantor trust
under Subpart E, Part I of Subchapter J of the Code. Each holder of a
Certificate will be treated as the owner of an undivided interest in the
contracts and other property of the Trust.
(2) With respect to each Grantor Trust series of Certificates,
under Section 671 of the Code, each holder of a Security will be treated
as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the trust attributable to the pool of home
improvement contracts and home equity loans in which such Certificate
evidences an ownership interest and will be considered the equitable
owner of a pro rata undivided interest in each of the home improvement
contracts and home equity loans comprising that pool.
(3) With respect to each REMIC series of Securities, those
assets constituting the trust fund created pursuant to the related
Pooling and Servicing Agreement and designated as comprising the "real
estate mortgage investment conduit" thereunder will qualify as a REMIC
under the Code.
(4) With respect to each Owner Trust series of Certificates,
each pool of home improvement contracts and home equity loans and the
arrangement to be administered by the Company under which the
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Green Tree Financial Corporation
April 2, 1999
Page 3
Trustee will hold and the Company will be obligated to service the
contracts and loans and pursuant to which Certificates will be issued to
certificateholders, all as described in the Prospectus, will not be
characterized as an association or a publicly-traded partnership taxable
as a corporation or a "taxable mortgage pool" within the meaning of
Section 7701(i) of the Code. As a result, the Trust itself will not be
subject to federal income tax but, instead, each holder of a Certificate
will be required to take into account its distributive share of items of
income and deduction of the Trust as though such items had been realized
directly by such holder. If such Trust issues Notes pursuant to an
Indenture as described in the Prospectus, the Notes will be classified
as debt for federal income tax purposes.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Certain
Federal Income Tax Consequences" in the Prospectus, and we hereby confirm that,
insofar as they constitute statements of law or legal conclusions as to the
likely outcome of material issues under the federal income tax laws, the
discussion under such heading accurately sets forth our advice.
Dated: April 2, 1999
Very truly yours,
/s/ Dorsey & Whitney LLP
CFS
