AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1997
REGISTRATION NO. 333-24351
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DEUTSCHE FINANCIAL CAPITAL
SECURITIZATION LLC
(Registrant)
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2018645
(State of Organization) (I.R.S. Employer I.D. No.)
7800 MCCLOUD ROAD
GREENSBORO, NORTH CAROLINA 27409-9634
(910) 644-2400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DOUGLAS R. MUIR COPY TO:
7800 MCCLOUD ROAD JACK A. MOLENKAMP
GREENSBORO, NORTH CAROLINA 27409-9634 HUNTON & WILLIAMS
(910) 664-2400 RIVERFRONT PLAZA, EAST TOWER
(910) 664-3224 FAX 951 EAST BYRD STREET
(Name, address, including zip code and RICHMOND, VIRGINIA 23219-4074
telephone number, including area code, of (804) 788-8655
agent for service) (804) 788-8218 FAX
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
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. [ ]
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.
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 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. [ ]
PROSPECTUS
DEUTSCHE FINANCIAL CAPITAL SECURITIZATION LLC, DEPOSITOR
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The Pass-Through Certificates (the "Certificates") offered hereby and by
the related Prospectus Supplements will be offered from time to time in one or
more series (each, a "Series"). Capitalized terms used herein and not defined
herein shall have the respective meanings assigned to them in the Glossary on
page 88.
The Certificates of each Series will evidence specified interests in
separate pools ("Asset Pools") comprised of manufactured housing installment
sales contracts ("Contracts") and/or mortgage loans secured by first liens on
one- to four-family residential real properties ("Mortgage Loans"). The Asset
Pool underlying a Series of Certificates (collectively, the "Trust Estate") will
be conveyed by Deutsche Financial Capital Securitization LLC ("DFCS" or the
"Company") to the trust (the "Trust") that issues such Series. The Contracts and
Mortgage Loans included in any Asset Pool will be described in the related
Prospectus Supplement. The Asset Pool is expected to be acquired by the Company
from Deutsche Financial Capital Limited Liability Company ("DFC"), an affiliate
of the Company, or another Seller. The seller of Contracts or Mortgage Loans to
the Company, whether it be DFC or another entity, is sometimes referred to
herein as the "Seller." The Assets in a Trust Estate will be serviced by one or
more servicers (each, a "Servicer"), which is expected to be Oakwood Acceptance
Corporation ("Oakwood"). In addition to the related Asset Pool, if so specified
in the related Prospectus Supplement, the Trust Estate will include monies on
deposit in a trust account to be established with the Trustee (a "Pre-Funding
Account"), which will be used by the Trust to purchase additional Assets beyond
those delivered on the related Closing Date ("Pre-Funded Assets") from the
Company from time to time during a Pre-Funding Period specified in the related
Prospectus Supplement. In addition, if so specified in the related Prospectus
Supplement, a pool insurance policy, letter of credit, cash reserve fund, surety
bond, guarantee, or other forms of credit enhancement, or any combination of the
foregoing, may be provided with respect to a Series of Certificates or certain
Classes of Certificates of a Series and may be included in the related Trust
Estate.
The Certificates of a Series are obligations of the related Trust only, and
holders of Certificates of a Series may look only to the assets of the related
Trust for distributions on such Certificates. The only obligations of the
Company with respect to the Certificates will be pursuant to certain limited
representations and warranties, as described further herein. The Servicer's
obligations with respect to the Certificates are limited to its contractual
servicing and certificate administration obligations. The Seller of Assets to
the Company will make certain representations, warranties and covenants to the
Company concerning such Assets, and the Company will assign its rights to
enforce such representations, warranties and covenants to the related Trust. See
"Description of the Certificates" herein.
The effective yield to Certificateholders will be lower than the yield
otherwise produced by the applicable Pass-Through Rates and purchase prices of
the Certificates because, although interest will accrue on the Certificates from
the first day of each month, the distribution of such interest will not be made
until the Distribution Date in the month following the month of such accrual. In
addition, the effective yield on the Certificates will be reduced by any
Shortfalls and Realized Losses allocated to such Certificates.
CERTAIN RISK FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF ANY
CERTIFICATES OFFERED HEREBY. SEE "RISK FACTORS" HEREIN AT PAGE 10 AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS
ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
THE CERTIFICATES WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR BY ANY OTHER PERSON OR ENTITY, INCLUDING THE COMPANY, THE SERVICER OR
ANY OF THEIR AFFILIATES, EXCEPT TO THE LIMITED EXTENT DESCRIBED HEREIN WITH
RESPECT TO ONE OR MORE PARTICULAR CLASSES OF THE CERTIFICATES. SEE "RISK
FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE
PURCHASING THE CERTIFICATES OF ANY SERIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 18, 1997.
Each Series of Certificates will consist of one or more Classes of
Certificates, which may include one or more senior Classes of Certificates (the
"Senior Certificates") and one or more subordinate Classes of Certificates (the
"Subordinated Certificates"). The related Prospectus Supplement will specify the
Classes of each Series being offered thereby. Such Classes may represent
interests in specified percentages of distributions of principal or interest, or
both, on the Asset Pool relating to such Series, as specified in the related
Prospectus Supplement. Each Prospectus Supplement will describe the Series and
Classes of Certificates offered thereby.
The Company may elect to cause the Trust Estate relating to a Series of
Certificates (or one or more segregated Asset Pools thereof) to be treated as
one or more "real estate mortgage investment conduits" ("REMICs") for federal
income tax purposes. See "Federal Income Tax Consequences" herein.
The Prospectus Supplement relating to a Series of Certificates will set
forth, among other things, the following information if applicable to such
Series: (1) the allocations and order of application of principal and interest
collections on the Asset Pool held by the related Trust to the respective
Classes of such Certificates; (2) certain information as to the nature of the
Contracts or Mortgage Loans and any other assets assigned or pledged to the
related Trust; (3) the dates on which periodic distributions will be made on the
Certificates of such Series; (4) the aggregate principal amount or notional
amount and the Pass-Through Rate (or the manner of determining the Pass-Through
Rate) for each Class of the Certificates of such Series; (5) the optional
redemption or termination features pertaining to such Certificates; (6) certain
information regarding the subordination of certain Classes' rights to receive
distributions to the rights of other Classes; and (7) additional information
concerning the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended, and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center New York, New York 10048; and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission at
its principal office in Washington, D.C., at prescribed rates. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission at http://www.sec.gov.
This Prospectus does not contain all the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
relating thereto which the Company has filed with the Commission in Washington,
D.C. Copies of the information and the exhibits are on file at the offices of
the Commission and may be obtained, upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
Copies of the Pooling and Servicing Agreement for a Series will be filed by the
Company with the Commission (without exhibits) on a Current Report on Form 8-K
within 15 days after the applicable Closing Date.
Each Trust will file periodic reports with the Commission in compliance
with the requirements of the Exchange Act.
The Company and the Servicer are not obligated with respect to the
Certificates. Accordingly, the Company has determined that financial statements
of the Company and the Servicer are not material to the offering made hereby.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
With respect to any Class of Certificates that is supported by a guarantee
of Oakwood Homes Corporation ("Oakwood Homes"), a North Carolina corporation or
one of its affiliates, the following documents have been filed by Oakwood Homes
with the Commission pursuant to the Exchange Act and are incorporated herein by
reference and made a part of this Prospectus and any Prospectus Supplement: (a)
the Oakwood Homes Corporation Quarterly Report on 10-Q for the quarter ended
March 31, 1997 and (b) the Oakwood Homes' Annual Report on Form 10-K for the
fiscal year ended September 30, 1996.
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All documents filed by the Company or Oakwood Homes Corporation pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this Prospectus and prior to the termination of the
offering of the Certificates shall be deemed, in the case of the Company, to be
incorporated by reference into this Prospectus and, in the case of Oakwood Homes
Corporation, to be incorporated by reference into this Prospectus and the
Prospectus Supplement relating to a Class of Certificates that is supported by a
guarantee of Oakwood Homes Corporation or one of its affiliates, in each case to
be a part thereof from the respective dates of filing of such documents. Any
statement contained herein or in a document all or any portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus and the related
Prospectus Supplement to the extent that a statement contained herein or therein
or in any other subsequently filed document which also is or deemed to be
incorporated by reference herein or therein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus and the
related Prospectus Supplement.
The Company will provide without charge to each person to whom this
Prospectus and any Prospectus Supplement are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to the
Company in writing at 7800 McCloud Road, Greensboro, North Carolina 27409-9634,
or by telephone at (910) 664-2400.
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TABLE OF CONTENTS
AVAILABLE INFORMATION................................................................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................................................................... ii
SUMMARY OF TERMS........................................................................................................ 1
RISK FACTORS............................................................................................................ 10
DESCRIPTION OF THE CERTIFICATES......................................................................................... 14
General............................................................................................................... 14
Book-Entry Procedures................................................................................................. 15
Allocation of Collections from the Assets............................................................................. 17
Optional Redemption or Termination.................................................................................... 18
MATURITY AND PREPAYMENT CONSIDERATIONS.................................................................................. 19
Maturity.............................................................................................................. 19
Prepayment Considerations............................................................................................. 19
YIELD CONSIDERATIONS.................................................................................................... 19
THE TRUSTS.............................................................................................................. 20
General............................................................................................................... 20
The Assets............................................................................................................ 20
Substitution of Contracts or Mortgage Loans........................................................................... 24
Pre-Funding........................................................................................................... 24
Distribution Account.................................................................................................. 25
Reserve Funds or Liquidity Accounts................................................................................... 25
Insurance............................................................................................................. 26
Delivery of Additional Assets......................................................................................... 32
Investment of Funds................................................................................................... 32
Certificate Guarantee Insurance....................................................................................... 33
Oakwood Homes Guarantee............................................................................................... 33
Alternate Credit Enhancement.......................................................................................... 33
UNDERWRITING POLICIES................................................................................................... 34
Contract Underwriting Guidelines...................................................................................... 34
General Underwriting Standards for Mortgage Loans..................................................................... 35
SALE AND SERVICING OF CONTRACTS AND MORTGAGE LOANS...................................................................... 35
Assignment of Contracts and Mortgage Loans............................................................................ 35
Representations and Warranties........................................................................................ 37
Servicing............................................................................................................. 38
Advances.............................................................................................................. 41
Compensating Interest................................................................................................. 41
Maintenance of Insurance Policies and Other Servicing Procedures...................................................... 41
THE POOLING AND SERVICING AGREEMENTS.................................................................................... 44
The Servicer.......................................................................................................... 44
The Trustee........................................................................................................... 44
Reports to Certificateholders......................................................................................... 44
Events of Default..................................................................................................... 45
Certificateholder Rights.............................................................................................. 46
Amendment............................................................................................................. 46
Termination........................................................................................................... 46
CERTAIN LEGAL ASPECTS OF CONTRACTS AND MORTGAGE LOANS................................................................... 47
The Contracts......................................................................................................... 47
The Mortgage Loans.................................................................................................... 51
Environmental Considerations.......................................................................................... 54
Enforceability of Certain Provisions.................................................................................. 55
USE OF PROCEEDS......................................................................................................... 56
THE COMPANY............................................................................................................. 56
THE SERVICER............................................................................................................ 56
FEDERAL INCOME TAX CONSEQUENCES......................................................................................... 57
General............................................................................................................... 57
REMIC Certificates.................................................................................................... 57
Taxation of Certain Foreign Holders of REMIC Certificates............................................................. 77
Reporting and Tax Administration...................................................................................... 78
Non-REMIC Certificates................................................................................................ 79
STATE TAX CONSIDERATIONS................................................................................................ 84
ERISA CONSIDERATIONS.................................................................................................... 84
PLAN OF DISTRIBUTION.................................................................................................... 85
LEGAL INVESTMENT CONSIDERATIONS......................................................................................... 86
EXPERTS................................................................................................................. 86
LEGAL MATTERS........................................................................................................... 87
GLOSSARY................................................................................................................ 88
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement. Capitalized terms used herein shall have the respective
meanings assigned them in the "Glossary" herein on page 88.
SECURITIES OFFERED........................... Pass-Through Certificates (the "Certificates") evidencing interests in
separate pools of Contracts and/or Mortgage Loans (each as defined below) may
be issued from time to time in one or more Series (each, a "Series") pursuant
to separate Pooling and Servicing Agreements (each, an "Agreement") among
Deutsche Financial Capital Securitization LLC (the "Company"), Oakwood
Acceptance Corporation ("Oakwood" or the "Servicer"), and the Trustee (the
"Trustee") specified in the Prospectus Supplement for such Series of
Certificates.
DEPOSITOR.................................... The Company is a limited purpose subsidiary of Deutsche Financial Capital I
Corp. (the "Manager") and Deutsche Financial Capital Limited Liability Company
("DFC"), each of which is owned in equal shares by Oakwood Acceptance
Corporation and Deutsche Financial Services Corporation. The Manager manages
the business operations of the Company, and each of the Manager's officers are
also officers of either Oakwood Acceptance Corporation or Deutsche Financial
Services Corporation.
SERVICER..................................... Oakwood Acceptance Corporation, an affiliate of the Company, will service the
Contracts and Mortgage Loans and administer the Certificates.
THE ASSET POOLS.............................. The Asset Pools supporting the Certificates will consist of Contracts and
Mortgage Loans (collectively, the "Assets").
The Contracts supporting a Series of Certificates will consist of manufactured
housing installment sales contracts. Each Contract may be secured by a new,
used or repossessed Manufactured Home or by a Manufactured Home that has been
transferred from a previous owner to a new Obligor. The Contracts may be fixed
or adjustable rate Contracts and may be conventional Contracts or Contracts
insured by the FHA or partially guaranteed by the VA.
The Mortgage Loans supporting a Series of Certificates, as specified in the
related Prospectus Supplement, will be first mortgage loans secured by one-to
four-family residential properties (each a "Mortgaged Property"). The Mortgage
Loans may be fixed or adjustable rate Mortgage Loans. The Mortgage Loans may
be conventional Mortgage Loans ("Conventional Mortgage Loans") or Mortgage
Loans insured by the FHA ("FHA Mortgage Loans") or partially guaranteed by the
VA ("VA Mortgage Loans"). Mortgage Loans generally will have a 15- to 30-year
term to maturity at origination and a loan-to-value ratio at origination (as
defined herein, the "Mortgage Loan-to-Value Ratio") not to exceed 95%.
Mortgage Loans generally will not be covered by a Primary Mortgage Insurance
Policy. See "The Trusts -- Insurance -- Credit Insurance" herein.
The adjustable rate Contracts and Mortgage Loans (together, the "Adjustable
Rate Assets") will, as described in the related Prospectus Supplement, permit
or require periodic changes in the interest rates borne by the Mortgage Loans,
and in the Monthly Payments made on such Assets. The Assets included in a
Trust Estate may be subject to various types of payment provisions, and may
include Level Payment Loans, Buy-Down Loans, GPM Loans, Step-up Rate Loans,
Interest Reduction Loans, GEM Loans, Balloon Payment Loans, Convertible Loans,
Bi-Weekly Loans, Level Payment Buy-Down Loans, Increasing Payment Loans or
other types of Assets specified and described in the related Prospectus
Supplement. See "The Trusts -- General" herein.
1
The Prospectus Supplement for each Series will provide information with
respect to (1) the approximate aggregate principal balance of the Assets
comprising the Asset Pool, as of the date specified in the Prospectus
Supplement (the "Cut-off Date") and the percentage of the Assets (by principal
balance as of the Cut-off Date) comprised of Contracts and Mortgage Loans,
respectively; (2) the weighted average Contract Rate on the Contracts, the
weighted average Mortgage Rate on the Mortgage Loans, the weighted average
Asset Rate on the Assets (each based on outstanding principal balances as of
the Cut-off Date) and the range of Contract Rates, Mortgage Rates and Asset
Rates as of the Cut-off Date and, in the case of Adjustable Rate Assets, the
method to be used to determine the Contract Rates, Mortgage Rates and Asset
Rates on the Assets; (3) the weighted average term to scheduled maturity of
the Assets as of origination (based on outstanding principal balances as of
the Cut-off Date); (4) the weighted average remaining term to scheduled
maturity of the Assets as of the Cut-off Date (based on outstanding principal
balances as of the Cut-off Date) and the range of remaining terms to maturity
of the Assets; (5) the percentages of the Contracts included in the Asset Pool
(by principal balance as of the Cut-off Date) secured by new Manufactured
Homes, used Manufactured Homes, repossessed Manufactured Homes, and
Manufactured Homes that were transferred to an assignee of the original
Obligor, respectively; (6) the types of Mortgaged Properties securing any
Mortgage Loans included in the Asset Pool (E.G., second homes, investor-owned,
manufactured homes); (7) the average outstanding principal balance of the
Contracts, the Mortgage Loans and the Assets as an entirety as of the Cut-off
Date; (8) the weighted average (based on outstanding principal balances as of
the Cut-off Date) and range of Contract Loan-to-Value Ratios of the Contracts
and Mortgage Loan-to-Value Ratios of the Mortgage Loans; (9) the aggregate
outstanding principal balance, if any, of Conventional Contracts and
Conventional Mortgage Loans, FHA Contracts and FHA Mortgage Loans, VA
Contracts and VA Mortgage Loans, Level Payment Loans, Adjustable Rate Assets,
Buy-Down Loans, GPM Loans, Step-up Rate Loans, Interest Reduction Loans, GEM
Loans, Balloon Payment Loans, Convertible Loans, Bi-Weekly Loans, Level
Payment Buy-Down Loans, Increasing Payment Loans and any other type of Assets
included in the related Asset Pool as of the Cut-off Date; (10) the amount of
any hazard insurance required to be maintained with respect to each
Manufactured Home and each Mortgaged Property; (11) the amount of any Pool
Insurance Policy, Special Hazard Insurance Policy and Obligor Bankruptcy
Insurance (each as hereinafter described) to be maintained with respect to all
or any portion of the Asset Pool; (12) the amount and terms of any form of
credit enhancement to be provided with respect to the related Series, if any;
and (13) the geographic location of the Manufactured Homes and Mortgaged
Properties securing the Contracts and the Mortgage Loans.
The Company will acquire the Contracts and the Mortgage Loans from DFC or
another Seller, which may have originated the Contracts or may have acquired
them in the open market or in privately negotiated transactions.
DESCRIPTION OF CERTIFICATES.................. Each Series of Certificates may consist of one or more Classes, one or more of
which may be Senior Certificates and one or more of which may be Subordinated
Certificates. Each such Class will evidence the right to receive a specified
portion of collections of principal or interest, or both, on the underlying
Assets and certain other property held in trust for the benefit of the
Certificateholders (the "Trust Estate"). Each Class of a Series may be
assigned a principal balance (the "Certificate Principal Balance") and a fixed
or adjustable stated annual interest rate (the "Pass-Through Rate"), and may
2
represent entitlement to receive distributions in reduction of its Certificate
Principal Balance to the extent of funds available therefor in the manner,
priority and amounts specified in the related Prospectus Supplement. A Class
of Certificates may be a "Compound Interest Class," which consists of
Certificates on which interest will accrue, but on which interest will not be
paid for the period set forth in the related Prospectus Supplement. The
Certificates may be Book-Entry Certificates or Definitive Certificates
issuable in fully registered form, in either case in the authorized
denominations specified in the related Prospectus Supplement. See "Description
of the Certificates" herein. Certain Series or Classes of Certificates may be
enhanced by pool insurance, letters of credit, surety bonds, guarantees, or
any combination thereof, or other forms of credit enhancement including the
subordination of Subordinated Certificates, if any.
THE CERTIFICATES WILL NOT BE GUARANTEED OR INSURED BY ANY GOVERNMENT AGENCY.
NEITHER THE CONTRACTS NOR THE MORTGAGE LOANS COMPRISING ANY RELATED ASSET POOL
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENT AGENCY OR ANY OTHER INSURER
EXCEPT TO THE LIMITED EXTENT OF ANY LIMITED GUARANTEE.
SUBORDINATED CERTIFICATES
AND RESERVE FUNDS.......................... One or more Classes of any Series of Certificates may be Subordinated
Certificates, as specified in the related Prospectus Supplement. The rights of
the Subordinated Certificateholders to receive any or a specified portion of
distributions with respect to the Assets will be subordinated to the rights of
Senior Certificateholders to the extent and in the manner specified in the
related Prospectus Supplement. In addition, Realized Losses and/or Shortfalls
may be allocated on each Distribution Date to Subordinated Certificates before
being allocated to Senior Certificates, in any event to the extent and in the
manner described in the related Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular receipt by Senior
Certificateholders of the full amount of scheduled monthly distributions of
principal and interest due them and to protect the Senior Certificateholders
against losses. If a Series of Certificates contains more than one Class of
Subordinated Certificates, distributions and losses will be allocated among
such Classes in the manner specified in the related Pooling and Servicing
Agreement and described, as to those Classes offered hereby, in the related
Prospectus Supplement.
Certain Classes of Certificates may be granted preferential rights over the
rights of other Classes of Certificates to receive current distributions from
the related Asset Pool or as to the allocation of Realized Losses and/or
Shortfalls to the extent specified in the related Prospectus Supplement.
Protection also may be afforded certain Classes of Certificates by the
establishment of a reserve fund (a "Reserve Fund"). A Reserve Fund may be
funded, to the extent specified in the related Prospectus Supplement, by an
initial cash deposit, the retention of specified periodic distributions of
principal or interest or both otherwise payable to holders of Subordinated or
Residual Certificates, or the provision of a letter of credit, guarantee,
insurance policy or other form of credit enhancement, or any combination of
any of the aforementioned methods.
3
INSURANCE AND CREDIT
ENHANCEMENT................................ As an alternative, or in addition, to the credit enhancement afforded by
subordination of Subordinated Certificates and/or the establishment of a
Reserve Fund, credit enhancement with respect to a Series of Certificates may
be provided by contract pool insurance and/or mortgage pool insurance, a
guarantee of Oakwood Homes Corporation or one of its affiliates with respect
to the Assets, or other forms of credit enhancement or liquidity enhancement
acceptable to a nationally recognized rating agency rating one or more Classes
of a Series of Certificates. Credit enhancement through hazard insurance or
credit insurance is summarized below. See "The Trusts -- Insurance" below.
STANDARD HAZARD INSURANCE AND SPECIAL
HAZARD INSURANCE........................ All of the Manufactured Homes and Mortgaged Properties will be covered by
Standard Hazard Insurance Policies insuring against losses due to various
causes, including fire, lightning and windstorm. Certain other physical risks
that are not otherwise insured against (such as earthquake, flood, nuclear
accident or war) may be covered by a Special Hazard Insurance Policy or
Policies, as specified in the related Prospectus Supplement. Each Special
Hazard Insurance Policy will be limited in scope and will cover losses in an
initial amount equal to a set percentage of the aggregate principal balance of
the covered Mortgage Loans and/or Contracts as of the Cut-off Date or other
maximum coverage, as set forth in the related Prospectus Supplement. Any
hazard losses not covered by insurance or other credit enhancement will be
borne by the related Certificateholders. See "The Trusts -- Insurance --
Hazard Insurance" herein.
POOL INSURANCE............................. A Pool Insurance Policy or Policies may be obtained with respect to all or
part of an Asset Pool. Any Pool Insurance Policy will be limited in scope,
covering defaults on the related Contracts and/or Mortgage Loans in an initial
amount of not less than a specified percentage of the aggregate principal
balance thereof as of the related Cut-off Date as set forth in the related
Prospectus Supplement. See "The Trusts -- Insurance -- Credit Insurance --
Pool Insurance" herein.
OBLIGOR BANKRUPTCY INSURANCE............... As specified in the related Prospectus Supplement, Obligor Bankruptcy
Insurance may be obtained to cover certain losses resulting from action which
may be taken by a bankruptcy court in connection with a Mortgage Loan or
Contract. The level of coverage of such insurance, if any, will be specified
in the applicable Prospectus Supplement. See "The Trusts -- Insurance --
Credit Insurance -- Obligor Bankruptcy Insurance" herein.
FHA INSURANCE AND VA GUARANTEES............ To the extent specified in the related Prospectus Supplement, all or a portion
of the Contracts or Mortgage Loans may be subject to FHA insurance and all or
a portion of the Contracts or Mortgage Loans may be partially guaranteed by
the VA. See "The Trusts -- Insurance -- Credit Insurance -- FHA Insurance and
VA Guarantees on Contracts" herein.
CERTIFICATE GUARANTEE INSURANCE............ If so specified in the related Prospectus Supplement, credit enhancement for a
Series may be provided by an insurance policy (the "Certificate Guarantee
Insurance") issued by one or more insurers. Such Certificate Guarantee
Insurance may guarantee timely distributions of interest and full
distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the
related Prospectus Supplement. See "The Trusts -- Certificate Guarantee
Insurance" herein.
OAKWOOD HOMES GUARANTEE.................... If so specified in the related Prospectus Supplement, some or all of the
collections of principal of and interest on the Asset Pool of a Series may be
guaranteed by Oakwood Homes or one of its affiliates. The terms of and
4
limitations on any such guarantee will be described in the related Prospectus
Supplement. See "The Trusts -- Oakwood Homes Guarantee" herein.
ALTERNATE CREDIT ENHANCEMENT............... To the extent specified in the related Prospectus Supplement, the Company may
provide for alternative credit enhancement for all or part of the related
Trust Estate or Asset Pool, in the form of a letter of credit, guarantee,
surety bond or insurance policy, or any combination thereof, in each case
satisfactory to a rating agency rating the Series of Certificates. See "The
Trusts -- Delivery of Additional Assets" herein.
Certain insurance policies or other forms of credit enhancement obtained for
any particular Series of Certificates may previously have been pledged to
secure other Series of Certificates or other pass-through securities or
collateralized mortgage or manufactured housing contract obligations to the
extent described in the related Prospectus Supplement. In addition, any such
insurance policies or other forms of credit enhancement provided for a Series
may be further pledged to secure other securities or obligations after the
issuance of such Series to the extent so provided in the related Prospectus
Supplement and to the extent such further pledge will not result in a
downgrading of any rating assigned to Certificates of such Series by a
nationally recognized rating agency identified in the related Prospectus
Supplement.
With respect to any Series of Certificates secured by insurance policies or
other forms of credit enhancement, the Company will have the right to
substitute comparable coverage from another insurer or to provide equivalent
protection for any of such insurance policies or other forms of credit
enhancement so long as such substitution will not result in the downgrading of
any rating assigned to Certificates of such Series by a nationally recognized
rating agency identified in the related Prospectus Supplement.
ADVANCES..................................... The Servicer will make advances of delinquent payments of principal and
interest ("P&I Advances"), as well as advances of delinquent payments of
taxes, insurance premiums and escrowed items, as well as liquidation-related
expenses ("Servicing Advances" and, together with P&I Advances, "Advances"),
with respect to the Contracts and Mortgage Loans unless (i) the Servicer
concludes that the advance cannot be recovered out of the Liquidation Proceeds
of the related Asset or (ii) the Advance would exceed a limit specified by the
applicable Rating Agencies.
COMPENSATING INTEREST........................ If a Contract or Mortgage Loan is prepaid in full or liquidated other than on
a Due Date, the Obligor generally is only required to pay interest to the date
of prepayment or liquidation. In such event, for so long as Oakwood is the
Servicer of the related Asset, the Servicer is obligated to pay interest from
the last day for which interest was due from the Obligor to the next
succeeding Due Date, so long as such amount does not exceed the Servicer's
servicing compensation for such month ("Compensating Interest").
POOLING AND SERVICING AGREEMENT.............. Each Series of Certificates will be issued pursuant to one or more Pooling and
Servicing Agreements among the Company, the Servicer and the Trustee
identified in the related Prospectus Supplement. Pursuant to the Pooling and
Servicing Agreement, the Company will sell and assign the Asset Pool and other
assets comprising the related Trust Estate to the trustee named in the related
Prospectus Supplement (the "Trustee") in exchange for a Series of
Certificates. Following the closing for a Series, payments of principal,
including prepayments, and interest on the Contracts and Mortgage Loans with
respect to the Series (together with payments from any Reserve Fund or other
funds for such Series) and, if applicable, reinvestment income thereon, will
be passed through to the Trust as specified in the Prospectus Supplement.
5
The Trustee will periodically allocate such amounts, to the extent actually
collected, advanced or received during the applicable Collection Period or
Prepayment Period (as appropriate), net of various fees, premiums and expenses
(the "Available Distribution") among the Classes of Certificates of the
related Series in the proportion and order of application set forth in the
related Pooling and Servicing Agreement and described in the related
Prospectus Supplement. The Available Distribution may be allocated so that
amounts paid as interest on the Contracts and Mortgage Loans may be
distributed as principal on the Certificates and amounts paid as principal on
the Contracts and Mortgage Loans may be distributed as interest on the
Certificates.
DISTRIBUTIONS OF INTEREST.................... Interest will be distributed periodically by the Trustee on each Class of
Certificates entitled to interest distributions on the dates specified in the
related Prospectus Supplement (each, a "Distribution Date"). Interest will
accrue on each Class of the Certificates entitled to interest distributions at
the applicable Pass-Through Rate on the outstanding actual or notional
principal amount of such Certificates or in accordance with such other formula
as may be specified in the related Prospectus Supplement. Each periodic
distribution of interest on the Certificates of a particular Class will be
distributed among holders of such Class pro rata in accordance with their
respective percentage ownership interests in the outstanding Certificates of
such Class. Each such distribution of interest will include all interest
accrued through the Accounting Date immediately preceding the applicable
Distribution Date or to another date specified in the related Prospectus
Supplement, provided that distributions of interest on the Certificates of a
Series may be reduced as a result of delinquencies or losses on Contracts and
Mortgage Loans in the related Trust.
DISTRIBUTIONS OF PRINCIPAL................... Principal will be distributed periodically by the Trustee on the Distribution
Dates specified in the related Prospectus Supplement. Each periodic
distribution of principal on the Certificates of a particular Class will be
distributed among holders of such Class pro rata in accordance with their
respective percentage ownership interests in the outstanding Certificates of
such Class, or in such other manner specified in the related Prospectus
Supplement. Distributions of principal on the Certificates of a Series may be
reduced to the extent of delinquencies or losses on the Contracts and Mortgage
Loans in the related Trust.
The Final Scheduled Distribution Date for each Class of a Series is the date
after which no Certificates of such Class will remain outstanding, assuming
timely payments are made on the Contracts and Mortgage Loans in the related
Trust in accordance with their terms, and that no Contracts or Mortgage Loans
are prepaid in whole or in part. The Final Scheduled Distribution Date for a
Class will be determined by reference to the maturity date of the Contract or
Mortgage Loan in the related Trust which has the latest stated maturity or
will be determined on the basis of the assumptions set forth in the related
Prospectus Supplement. The actual maturity date of the Certificates of a
Series will depend primarily upon the level of prepayments and defaults with
respect to the Contracts and Mortgage Loans comprising the related Asset Pool.
The actual maturity of any Certificate is likely to occur earlier and may
occur substantially earlier than its Final Scheduled Distribution Date as a
result of the application of prepayments to the reduction of the principal
amounts of the Certificates. See "Maturity and Prepayment Considerations" and
"Yield Considerations" herein.
6
ALLOCATION OF LOSSES AND SHORTFALLS.......... With respect to any defaulted Contract or Mortgage Loan that is finally
liquidated for cash (a "Liquidated Loan") through repossession and resale of
the underlying Manufactured Home or through foreclosure sale or other
liquidation of the underlying Mortgaged Property, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, or otherwise,
the amount of loss realized, if any (a "Realized Loss"), will equal the sum of
(a) (1) the Unpaid Principal Balance of the Liquidated Loan, plus (2) amounts
reimbursable to the Servicer or Trustee for related previously unreimbursed
costs, expenses and advances, plus (3) amounts attributable to interest
accrued but not paid on such Liquidated Loan, minus (b) Liquidation Proceeds
with respect to the Liquidated Loan. Liquidation Proceeds will be allocated
first to reimburse the Servicer for previously unreimbursed Advances it made
in respect of the related Asset, second to reduce accrued and unpaid interest
on such Asset, and finally to reduce the Unpaid Principal Balance of such
Asset.
Realized Losses also include Obligor Bankruptcy Losses, Special Hazard Losses
and Fraud Losses. Obligor Bankruptcy Losses result when the Unpaid Principal
Balance of a Contract or Mortgage Loan is reduced in connection with
bankruptcy proceedings concerning the Obligor. Special Hazard Losses are
losses attributable to physical damage to Mortgaged Properties or Manufactured
Homes of a type which is not covered by standard hazard insurance policies,
but do not include losses caused by war, nuclear reaction, nuclear or atomic
weapons, insurrection or normal wear and tear. Fraud Losses are losses on
Contracts or Mortgage Loans as to which there was fraud in connection with the
origination of the Contract or Mortgage Loan or fraud, dishonesty or
misrepresentation in connection with the application for any insurance
obtained as to such Contract or Mortgage Loan.
In the event that P&I Advances are not made or are insufficient to cover
delinquencies in principal and interest payments on the related Asset Pool,
such delinquencies may result in reduced principal and interest distributions
on the Certificates. A shortfall of interest may also result (1) from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, which caps
the interest rate payable by certain Obligors who enter military service after
entering into their Contracts or Mortgage Loans ("Soldiers' and Sailors'
Shortfall"); (2) from the receipt of Liquidation Proceeds and Insurance
Proceeds in an amount insufficient to pay accrued and unpaid interest on a
liquidated Contract or Mortgage Loan ("Realized Interest Losses"); (3) from
the prepayment in full or liquidation of a Contract or Mortgage Loan to the
extent such shortfall is not covered by a Compensating Interest payment by the
Servicer as described above ("Due Date Interest Shortfall") and (4) from a
shortfall in interest collected on an Asset that accompanies a Special Hazard
Loss, Obligor Bankruptcy Loss or Fraud Loss.
A Series may include one or more Classes of Certificates as to which the right
to receive distributions with respect to the Asset Pool will be subordinate to
the rights of holders of more Senior Certificates of such Series. Such
subordination may only be to the extent of a specific amount specified in the
related Prospectus Supplement (the "Subordination Amount") or may require
allocation of all Realized Losses or Shortfalls to a Subordinated Class of
Certificates until its Certificate Principal Balance has been reduced to zero.
If so provided in the related Prospectus Supplement, certain types of Realized
Losses or Shortfalls may be allocated differently than other Realized Losses
or Shortfalls. Any allocation of a Realized Loss to a Class of Certificates
generally will be made by reducing the Certificate Principal Balance thereof
7
as of the applicable Distribution Date by an amount equal to the amount of
such Realized Loss.
OPTIONAL REDEMPTION OR TERMINATION........... To the extent specified in the related Prospectus Supplement, the Certificates
of a Series may be redeemed or otherwise retired early by the party specified
therein under certain circumstances. See "Description of the Certificates --
Termination" herein.
FEDERAL INCOME TAX CONSIDERATIONS............ If an election is made to treat all or a portion of the Trust Estate relating
to a Series of Certificates as a real estate mortgage investment conduit (a
"REMIC"), each Class of Certificates of such Series will constitute "regular
interests" in a REMIC or "residual interests" in a REMIC, as specified in the
related Prospectus Supplement. If no election is made to treat all or any
portion of the Trust Estate relating to a Series of Certificates as a REMIC,
the Trust Estate will be classified as a grantor trust and not as an
association taxable as a corporation for federal income tax purposes, and
therefore holders of Certificates will be treated as the owners of undivided
pro rata interests in the Asset Pool and any other assets held by the Trust.
See "Federal Income Tax Consequences" herein.
YIELD CONSIDERATIONS......................... The Prospectus Supplement for a Series may specify certain weighted average
life calculations, based upon an assumed rate of prepayment or a range of
prepayment assumptions on the related Asset Pool. A higher level of principal
prepayments on the Contracts and Mortgage Loans than anticipated is likely to
have an adverse effect on the yield on any Certificate that has a purchase
price greater than its principal amount ("Premium Certificates") and a lower
level of principal prepayments on the Contracts and Mortgage Loans than
anticipated is likely to have an adverse effect on the yield on any
Certificate that has a purchase price less than its principal amount
("Discount Certificates"). It is possible under certain circumstances for
holders of Premium Certificates not only to suffer a lower than anticipated
yield but, in extreme cases, to fail to recoup fully their initial investment.
PRE-FUNDING.................................. If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") to be established with the Trustee, which will be used to acquire
additional Mortgage Loans or Contracts from time to time during the period
specified in the related Prospectus Supplement (the "Pre-Funding Period").
Prior to the investment of the Pre-Funded Amount in additional Mortgage Loans
or Contracts, such Pre-Funded Amount may be invested in one or more Eligible
Investments. Any Eligible Investment must mature no later than the Business
Day prior to the next Distribution Date. See "The Trusts -- Pre-Funding"
herein.
During any Pre-Funding Period, the Company will be obligated (subject only to
the availability thereof) to transfer to the related Trust additional Mortgage
Loans or Contracts from time to time during such Pre-Funding Period. Such
additional Mortgage Loans or Contracts will be required to satisfy certain
eligibility criteria more fully set forth in the related Prospectus
Supplement, which eligibility criteria will be consistent with the eligibility
criteria of the Mortgage Loans or Contracts included in the Trust as of the
Closing Date, subject to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Certificates will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
three months from the related Closing Date, (b) the additional Mortgage
8
Loans or Contracts to be acquired during the Pre-Funding Period will be
subject to the same representations and warranties as the Mortgage Loans or
Contracts included in the related Trust on the Closing Date (although
additional criteria may also be required to be satisfied, as described in the
related Prospectus Supplement) and (c) the Pre-Funded Amount will not exceed
25% of the principal amount of the Certificates issued pursuant to a
particular offering.
ERISA CONSIDERATIONS......................... A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code, should review
carefully with its legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited under ERISA or the
Code. See "ERISA Considerations" herein.
LEGAL INVESTMENT CONSIDERATIONS.............. If so specified in the Prospectus Supplement relating to a Series of
Certificates, one or more Classes within such Series will constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") if and for so long as they are rated in one of the two highest
rating categories by the Rating Agency or Agencies identified in the related
Prospectus Supplement. Certificates that are "mortgage related securities" for
SMMEA purposes would be "legal investments" for certain types of institutional
investors to the extent provided in SMMEA, subject to state laws overriding
SMMEA. A number of states have enacted legislation overriding the state
securities registration and/or legal investment provisions of SMMEA.
Some Classes of Certificates offered hereby may not be rated in one of the two
highest rating categories by the appropriate Rating Agency or Agencies, and
thus would not constitute "mortgage related securities" under SMMEA.
Certificates may not qualify as "mortgage related securities" for other
reasons as well. Certificates that do not constitute "mortgage-related
securities" under SMMEA may require registration, qualification or an
exemption under applicable state securities laws and may not be "legal
investments" to the same extent as "mortgage related securities." See "Legal
Investment Considerations" herein.
USE OF PROCEEDS.............................. Substantially all of the net proceeds from the sale of a Series of
Certificates offered hereby and by the related Prospectus Supplement will be
applied to the simultaneous purchase of the Contracts and Mortgage Loans
underlying such Series of Certificates or to reimburse the amounts previously
used to effect the purchase of the Contracts and Mortgage Loans underlying the
Certificates, the costs of carrying the Contracts and Mortgage Loans until
sale of the Certificates and to pay other expenses connected with pooling the
Contracts and Mortgage Loans and issuing the Certificates. Any excess will be
used by the Company for its general corporate purposes. See "Use of Proceeds"
herein.
RATING....................................... It is a condition to the issuance of the Certificates to be offered hereunder
that they be rated in one of the four highest rating categories (without
regard to modifiers) by at least one nationally recognized statistical rating
organization, such as Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Investors
Service, Inc. or Duff & Phelps Credit Rating Co.
9
RISK FACTORS
Prospective Certificateholders should consider the following factors, among
others, in connection with the purchase of the Certificates.
1. VALUE OF CONTRACTS AND MORTGAGE LOANS IN WHICH CERTIFICATEHOLDERS HAVE
INVESTED IS DEPENDENT ON CONDITIONS BEYOND THE COMPANY'S CONTROL.
VALUE OF CONTRACTS SENSITIVE TO AMBIENT ECONOMIC CONDITIONS AND LIKELY WILL
DECREASE OVER TIME. An investment in Certificates evidencing interests in
Contracts may be affected by, among other things, downturns in regional or local
economic conditions. Regional or local economic conditions are often volatile,
and historically have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts. Holders of the
Certificates of a Series will bear all risk of loss resulting from defaults by
Obligors on the underlying Contracts and will have to look primarily to the
value of the related Manufactured Homes for recovery of the outstanding
principal and unpaid interest of the defaulted Contracts to the extent that
losses on the Contracts underlying such Series are not absorbed by other
Certificates, if any, that are subordinated to such Holders' Certificates, by
applicable insurance policies, if any, or by any other credit enhancement. The
value of Manufactured Homes typically declines over time, and the amount
recoverable upon repossession and resale of a Manufactured Home may not be
sufficient to pay all principal and interest due on the defaulted Contract it
secured. See "The Trusts -- The Assets -- The Contracts" herein.
Contracts differ from Mortgage Loans in certain material respects. In
general, Contracts may experience a higher level of delinquencies than Mortgage
Loans, because the credit underwriting standards applied to borrowers under
manufactured housing installment sales contracts generally are not as stringent
as those applied to borrowers under many conventional residential first-lien
mortgage loans. See "Underwriting Policies -- Contract Underwriting Guidelines"
herein. As noted above, Manufactured Homes generally decline in value over time,
which may not necessarily be the case with respect to Mortgaged Properties
underlying Mortgage Loans. Consequently, the losses incurred upon repossession
of or foreclosure on Manufactured Homes securing the Contracts generally may be
expected to be more severe than the losses that would be incurred upon
foreclosure on Mortgaged Properties securing Mortgage Loans (in each case
measured as a percentage of the outstanding principal balances of the related
Assets). The servicing of manufactured housing installment sales contracts is
generally similar to the servicing of conventional residential mortgage loans,
except that, in general, servicers of manufactured housing installment sales
contracts place greater emphasis on making prompt telephone contact with
delinquent borrowers than is generally customary in the case of the servicing of
conventional residential mortgage loans. See "Sale and Servicing of Contracts
and Mortgage Loans -- Servicing" herein. Realization on defaulted Contracts is
generally accomplished through repossession and subsequent resale of the
underlying Manufactured Homes by or on behalf of the Servicer, whereas
realization on defaulted Mortgage Loans is generally accomplished through
foreclosure on the underlying Mortgaged Properties or similar proceedings.
Realization on defaulted Land Secured Contracts may involve a combination of
repossession and foreclosure-related procedures. See "Certain Legal Aspects of
Contracts and Mortgage Loans" herein. Certificates evidencing interests in
Contracts may also be subject to other risks that are not present in the case of
Certificates evidencing interests in Mortgage Loans. See " -- 3.
Certificateholders May Realize Losses If the Servicer Is Unable to Realize on
Assets Because of Provisions of Applicable State Law," and " -- 4. Compliance
with Federal And State Lender Regulations May Cause Certain Credit and
Prepayment Risks to Certificateholders" below and "Certain Legal Aspects of
Contracts and Mortgage Loans" herein.
VALUE OF MORTGAGE LOANS SENSITIVE TO CHANGES IN RESIDENTIAL REAL ESTATE
MARKETS. An investment in Certificates evidencing interests in mortgage loans
may be affected, among other things, by declines in real estate values or
downturns in regional or local economic conditions. If the residential real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans underlying a Series, together
with any secondary financing on the related Mortgaged Properties, become equal
to or greater than the value of the related Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses on such Mortgage Loans could be
higher than those now generally experienced in the mortgage lending industry.
Holders of the Certificates evidencing interests in such Mortgage Loans will
bear all risk of loss resulting from default by the related mortgagors and will
have to look primarily to the value of the related Mortgaged Properties for
recovery of the outstanding principal of and unpaid interest on the defaulted
Mortgage Loans to the extent that such losses are not covered by other
Certificates, if any, that are subordinated to such Holders' Certificates, by
applicable insurance policies, if any, or by any other credit enhancement. See
"The Trusts -- The Assets -- The Mortgage Loans" herein.
VALUE OF ASSETS TRANSFERRED TO THE TRUST ESTATE MAY DECREASE. If the assets
assigned to a Trust were to be sold, there can be no assurance that the proceeds
of any such sale would be sufficient to distribute in full the outstanding
principal amount of
10
the related Certificates and all accrued interest due thereon. The market value
of the Assets included in any Trust Estate generally will fluctuate with changes
in prevailing rates of interest, among other factors. Consequently, the items
included in the Trust Estate for a Series may be liquidated at a discount from
their par value or from their purchase price, in which case the proceeds of such
liquidation might be less than the aggregate outstanding principal amount of the
Certificates of that Series, plus interest at the Pass-Through Rate allocated to
each Class of such Certificates. In such event, any shortfalls in the amounts
necessary to make required distributions on the Certificates would be borne by
the Certificateholders.
2. PREPAYMENTS, YIELD AND CREDIT RISKS TO CERTIFICATEHOLDERS FROM
OWNERSHIP OF FIXED POOL OF CONTRACTS AND MORTGAGE LOANS.
PREPAYMENT TIMING AND FREQUENCY MAY ADVERSELY AFFECT YIELD OF
CERTIFICATEHOLDER. Yields realized by holders of certain Classes of Certificates
entitled to disproportionate allocations of principal or interest on the
underlying Asset Pool will be extremely sensitive to levels of prepayments
(including for this purpose, payments resulting from refinancings, liquidations
due to defaults, casualties, condemnations and purchases by or on behalf of the
Company or the Seller) on the Assets in the related Trust. In general, yields on
Premium Certificates will be adversely affected by higher than anticipated
levels of prepayments on the Assets and enhanced by lower than anticipated
levels of prepayments. Conversely, yields on Discount Certificates are likely to
be enhanced by higher than expected levels of prepayments and adversely affected
by lower than anticipated levels of prepayments. The level of sensitivity of a
Class to prepayment levels will be magnified as the disproportion of the
allocation of principal and interest payments on the Assets to such Class
increases. Holders of certain Classes of Certificates could fail to recover
their initial investments.
The rate of principal payments on the Contracts and Mortgage Loans will be
affected by the amortization schedules of such Contracts and Mortgage Loans and
the rate of principal prepayments thereon (including for this purpose payments
resulting from refinancings, liquidations due to defaults, casualties,
condemnations and purchases by or on behalf of the Company or the Seller). The
rate of principal prepayments on pools of Contracts and Mortgage Loans is
influenced by a variety of economic, geographic, social, tax, legal and other
factors. In general, however, if the Contracts and Mortgage Loans are not
subject to prepayment penalties and if prevailing interest rates fall
significantly below the interest rates on the Contracts and Mortgage Loans, such
Contracts and Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Contracts and Mortgage Loans. This is because, in a declining interest rate
environment, the Obligors may be able to secure alternative financing of their
Manufactured Homes or Mortgaged Properties with lower interest rates and lower
Monthly Payments than those borne by their current Contracts or Mortgage Loans.
Conversely, an Obligor is less likely to prepay his Contract or Mortgage Loan
when market interest rates are higher than those in effect when the Contract or
Mortgage Loan was originated. This general causal relationship may be more
pronounced in the case of Mortgage Loans than in the case of Contracts, because
Contracts typically have smaller principal balances than Mortgage Loans and,
consequently, the effect of interest rate changes on Monthly Payments due on
Contracts may be less dramatic than the effect of such changes on Monthly
Payments due on Mortgage Loans.
The holder of a Contract or Mortgage Loan (I.E., the Trustee, and through
it, the Certificateholders) generally does not want the Contract or Mortgage
Loan to be prepaid when prevailing interest rates are lower than they were at
the time of the holder's investment in the related Certificates and generally
does want the Contract or Mortgage Loan to be prepaid when prevailing interest
rates are higher than they were at the time of the holder's investment in the
related Certificates. This conflict between the Obligor and the holder of the
Contract or Mortgage Loan exposes the holder to reinvestment risk when
prevailing interest rates are lower than at the time of the holder's investment
(it can only reinvest the proceeds of prepayment of a Contract or Mortgage Loan
in investments bearing a lower rate of interest than that borne by the
Certificate backed by the prepaid Contract or Mortgage Loan) and the loss of
reinvestment opportunity when prevailing interest rates are higher than at the
time of the holder's investment (it cannot reinvest its funds in higher yielding
instruments).
YIELD TO CERTIFICATEHOLDERS WILL BE ADVERSELY AFFECTED BY ACCRUAL PERIODS,
SHORTFALLS AND REALIZED LOSSES. The effective yield to Certificateholders will
be lower than the yield otherwise produced by the applicable Pass-Through Rates
and purchase prices of the Certificates because, although interest will accrue
on the Certificates from the first day of each month, the distribution of such
interest will not be made until the Distribution Date in the month following the
month of such accrual. In addition, the effective yield on the Certificates will
be reduced by any Shortfalls and Realized Losses allocated to such Certificates.
CREDIT RATINGS PROVIDED BY RATING AGENCIES DO NOT ADDRESS ALL RISKS IN AN
INVESTMENT IN THE OFFERED CERTIFICATES. Each Class of Certificates of a Series
offered hereby and by means of the related Prospectus Supplement will be rated
in not less than the fourth highest rating category by the Rating Agency or
Agencies identified in such Prospectus Supplement. Any such rating does not
constitute a recommendation to buy, sell or hold the rated Certificates and is
subject to revision or
11
withdrawal at any time by the Rating Agency that issued the rating. An investor
may obtain further details with respect to any rating on the Certificates from
the Rating Agency that issued the rating. In addition, any such rating will be
based, among other things, on the credit quality of the underlying Asset Pool
only and will represent only an assessment of the likelihood of receipt by
Certificateholders of payments with respect to such Asset Pool. Such rating will
not represent any assessment of the likelihood that prepayment experience may
differ from prepayment assumptions and, accordingly, will not constitute any
assessment of the possibility that holders of Premium Certificates will fail to
recoup their initial investment if a high rate of principal prepayments is
experienced on the related Assets. Security ratings assigned to Classes of
Certificates representing a disproportionate entitlement to principal or
interest collections on the underlying Assets should be evaluated independently
of similar security ratings assigned to other kinds of securities.
3. CERTIFICATEHOLDERS MAY REALIZE LOSSES IF THE SERVICER IS UNABLE TO
REALIZE ON ASSETS BECAUSE OF PROVISIONS OF APPLICABLE STATE LAW. Each Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in Manufactured Homes are subject to a number of state laws,
including, in some states, the Uniform Commercial Code (the "UCC") as adopted in
such states and, in other states, such states' motor vehicle titling statutes.
In some states, perfection of security interests in Manufactured Homes is
governed both by the applicable UCC and by motor vehicle titling statutes. The
steps necessary to perfect a security interest in a Manufactured Home will vary
from state to state. Because of the expense and administrative inconvenience
involved, neither the Seller nor the Company will amend any certificates of
title to change the lienholder specified therein from DFC or Oakwood, as
Servicer and agent for DFC, as the case may be, (or any other Seller) to the
Trustee or take any other steps to effect re-registration of any Manufactured
Home in the Trustee's name with the appropriate state motor vehicle authority.
In addition, neither the Seller nor the Company will deliver any certificate of
title to the Trustee or note thereon the Trustee's interest or file any UCC-3
financing statements or other instruments evidencing the assignment to the
Trustee of the Seller's security interest in any Manufactured Home. In some
states, in the absence of such an amendment to the certificate of title or such
a filing under the applicable UCC, it is unclear whether the assignment to the
Trustee of the security interest created by a Contract in the underlying
Manufactured Home will be effective or whether the Trustee's security interest
in the Manufactured Home will be perfected. In addition, in the absence of
notation of the Trustee's interest in a Manufactured Home on the related
certificate of title or re-registration of the Manufactured Home in the
Trustee's name with the appropriate state motor vehicle authority or delivery of
the certificate of title to the Trustee or filing of an appropriate transfer
instrument under the applicable UCC, it is unclear whether the assignment to the
Trustee of the security interest created by a Contract in the underlying
Manufactured Home will be effective against creditors of the Seller or a trustee
in bankruptcy of the Seller. The Seller will make certain warranties relating to
the validity, perfection and priority of the security interest created by each
Contract in the underlying Manufactured Home in favor of the Contract's
originator. A breach of any such warranty that materially and adversely affects
the Trust's interest in any Contract or Mortgage Loan would create an obligation
on the part of the Seller to repurchase or substitute for such Contract or
Mortgage Loan unless such breach is cured within 90 days after the Seller's
discovery of or receipt of notice of such breach.
4. COMPLIANCE WITH FEDERAL AND STATE LENDER REGULATIONS MAY CAUSE CERTAIN
CREDIT AND PREPAYMENT RISKS TO CERTIFICATEHOLDERS. Numerous federal and state
consumer protection laws impose requirements on lending under mortgage loans or
retail installment sales contracts such as the Contracts, and the failure by the
lender or seller of goods to comply with such requirements could give rise to
liabilities on the part of such lender's assignees to the Obligors for amounts
due under such mortgage loans or contracts or to an Obligor's right of set-off
against claims by such assignees as a result of such lender's or seller's
noncompliance. To the extent these laws affect the Contracts or the Mortgage
Loans, these laws would apply to the Trustee as assignee of the Contracts and
the Mortgage Loans. The Seller will warrant that the origination of each
Contract and Mortgage Loan complied with all requirements of law and that there
exists no right of rescission, set-off, counterclaim or defense in favor of the
Obligor under any Contract and that each Asset is enforceable against the
related Obligor in accordance with its terms, subject to applicable bankruptcy
and similar laws, laws affecting creditors' rights generally and general
principles of equity. A breach of any such warranty that materially and
adversely affects the Trust's interest in any Contract or Mortgage Loan would
create an obligation on the part of the Seller to repurchase or substitute for
such Contract or Mortgage Loan unless such breach is cured within 90 days after
the Seller's discovery of such breach or after notice of such breach is provided
to the Seller. If the credit support provided by any Subordinated Certificates,
any insurance or any other credit enhancement is exhausted, application of these
consumer protection laws could limit the ability of the Certificateholders to
realize upon Manufactured Homes or Mortgaged Properties securing defaulted
Contracts and Mortgage Loans or could limit the amount collected on such
defaulted Contracts and Mortgage Loans to less than the amount due thereunder.
See "Certain Legal Aspects of the Contracts and Mortgage Loans -- The
Contracts -- Enforcement of Security Interests in Manufactured Homes" and
" -- Consumer Protection Laws" herein and "Certain Legal Aspects of the
Contracts and Mortgage Loans -- The Mortgage Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
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5. CERTIFICATEHOLDERS MUST LOOK SOLELY TO THE TRUST ESTATE FOR
DISTRIBUTIONS OF PRINCIPAL AND INTEREST. The Certificates of a Series are
obligations of the related Trust only, and holders of Certificates of a Series
may look only to the assets of the related Trust for distributions on such
Certificates. The Certificates will not represent an interest in or obligation
of the Company, the Servicer or any Underwriter, or any affiliates of the
Company, the Servicer or any Underwriter, except to the extent described herein.
See "The Trusts -- Certificate Guarantee Insurance", " -- Oakwood Homes
Guarantee" and " -- Alternate Credit Enhancement". The Certificates will not be
insured or guaranteed by any government agency or instrumentality, the Company,
or any Underwriter or any of their affiliates, or the Servicer, except described
herein. See "The Trusts -- Certificate Guarantee Insurance", " -- Oakwood Homes
Guarantee" and " -- Alternate Credit Enhancement".
6. THERE WILL BE A LIMITED MARKET FOR THE OFFERED CERTIFICATES. There can
be no assurance that a secondary market will develop for the Certificates of any
Series or, if it does develop, that it will provide the holders of such
Certificates with liquidity of investment or that any such liquidity will
continue to exist for the term of such Certificates. Certificates issued in
book-entry form may be less liquid than Certificates issued in fully-registered
certificated form. See "Description of the Certificates -- Book-Entry
Procedures" herein.
7. AVAILABILITY OF EXTERNAL CREDIT ENHANCEMENT DOES NOT ELIMINATE RISKS OF
REALIZED LOSSES ON THE OFFERED CERTIFICATES. If insurance policies or other
credit enhancement are provided with respect to a Series of Certificates, the
insurance policies (including FHA insurance and any VA guarantees) or other
credit enhancement on the Contracts or the Mortgage Loans or any other part of
the related Trust Estate will not provide protection against all contingencies
and will cover certain contingencies only to a limited extent. See "The
Trusts -- Insurance" herein.
8. CERTIFICATEHOLDERS SUBJECT TO LOSS IF RATE OF DELINQUENCIES AND AMOUNT
OF REALIZED LOSSES EXCEED CERTAIN LEVELS. With respect to Certificates of a
Series that includes a Class of Subordinated Certificates, while the
subordination feature is intended to enhance the likelihood of timely payment of
principal and interest to Senior Certificateholders, the available subordination
may be limited, as specified in the related Prospectus Supplement. In addition,
with respect to Certificates of a Series supported by a Reserve Fund, the
Reserve Fund could be depleted under certain circumstances. In either case,
shortfalls could result for both the Senior Certificates and the Subordinated
Certificates of such Series. Prospective purchasers of a Class of Certificates
should carefully review the credit risks entailed in such Class resulting from
its subordination or from the timing of the distributions intended to be made on
such Class.
9. CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM FROM THEIR PARITY PRICE
ARE SUBJECT TO PARTICULAR TAX RISKS. Discount Certificates generally will be
treated as issued with original issue discount for federal income tax purposes.
In addition, certain classes of Premium Certificates (E.G., interest-only
securities) may be treated by the Trustee under applicable provisions of the
Code as stripped coupons issued with original issue discount. The Trustee will
report original issue discount with respect to such Discount and Premium
Certificates on an accrual basis, which may be prior to the receipt of cash
associated with such income. See "Federal Income Tax Consequences" herein.
10. REMIC RESIDUAL CERTIFICATES SUBJECT TO PARTICULAR TAX RISKS. Residual
Certificates are subject to certain special tax considerations that differ from
those applicable to REMIC Regular Certificates and to Certificates in a Series
for which no REMIC election is made. See "Federal Income Tax Consequences"
herein.
11. RECHARACTERIZATION OF THE TRANSACTION IN BANKRUPTCY CASES COULD RESULT
IN DELAYS OR ACCELERATION OF DISTRIBUTIONS ON THE OFFERED CERTIFICATES. The
Seller and the Company intend that the transfer of an Asset Pool to the related
Trust constitute a sale rather than a pledge of such Asset Pool to secure
indebtedness of the Seller. However, if the Seller were to become a debtor under
the federal bankruptcy code, it is possible that a creditor, a bankruptcy
trustee of the Seller, or the Seller itself as debtor-in-possession may argue
that the sale of the Asset Pool by the Seller is a pledge of the Asset Pool
rather than a sale. This position, if argued before or accepted by a court,
could result in a delay in or reduction of distributions to the related
Certificateholders. In addition, if an affiliate of the Seller were to become
insolvent, a creditor, a bankruptcy trustee of such affiliate, or such affiliate
itself as debtor-in-possession may argue that the Seller's assets should be
substantively consolidated into such affiliate's estate. This position, if
argued before or accepted by a court, could similarly result in a delay in or
reduction of distributions to the related Certificateholders.
A case (OCTAGON GAS SYSTEMS, INC. V. RIMMER, 995 F.2D 948 (10TH CIR.),
CERT. DENIED 114 S. Ct. 554 (1993)) decided by the United States Court of
Appeals for the Tenth Circuit contains language to the effect that accounts sold
by a debtor under Article 9 of the UCC would remain property of the debtor's
bankruptcy estate. Although the Contracts constitute chattel paper under the UCC
rather than accounts, sales of chattel paper are similarly governed by Article 9
of the UCC. If, following a bankruptcy of DFC, a court were to follow the
reasoning of the Tenth Circuit and apply such reasoning to chattel paper, then
delays or reductions in payments of collections on or in respect of the
Contracts could occur.
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12. THE RATE OF PAYMENTS ON THE CERTIFICATES IS DEPENDENT ON THE PAYMENT
PROVISIONS OF THE ASSETS AND THE ASSETS MAY CONTAIN A VARIETY OF PAYMENT
PROVISIONS. The Assets included in the Trust for a Series may be subject to
various types of payment provisions. As more fully described herein under "The
Trusts -- The Assets," such Assets may consist of Level Payment Loans,
Adjustable Rate Assets, Buy-Down Loans, Interest Reduction Loans, GEM Loans, GPM
Loans, Step-up Rate Loans, Balloon Payment Loans, Convertible Loans, Bi-Weekly
Loans, Level Payment Buy-Down Loans, Increasing Payment Loans, and such other
types of Assets as are specified and described in the related Prospectus
Supplement.
In general, Buy-Down Loans, Level Payment Buy-Down Loans, Increasing
Payment Loans, GEM Loans, GPM Loans and Step-up Rate Loans involve lower Monthly
Payment obligations for some period following their origination, followed by
higher Monthly Payment obligations thereafter. Obligors on these types of Assets
may be more likely to default on their obligations to make Monthly Payments than
Obligors on Level Payment Loans, particularly as their Monthly Payments
increase. The Monthly Payments payable by Obligors on Balloon Payment Loans are
not sufficient to provide for complete amortization of their loans by their
stated maturity dates, and, on the stated maturity date for a Balloon Payment
Loan, the related Obligor is required to make a "balloon" payment in excess, and
likely substantially in excess, of the Monthly Payments required from such
Obligor during preceding months. Obligors on Balloon Payment Loans are generally
more likely to default on their final "balloon" payments than are Obligors on
Level Payment Loans to default in making their Monthly Payments. As a result,
the rate of repossession of and foreclosure on Manufactured Homes and Mortgaged
Properties securing Buy-Down Loans, Level Payment Buy-Down Loans, Increasing
Payment Loans, GEM Loans, GPM Loans, Step-up Rate Loans and Balloon Payment
Loans may be higher than the rate of repossession of and foreclosure on
Manufactured Homes and Mortgaged Properties securing Level Payment Loans, and
the likelihood that Realized Losses will be allocated to Certificates may be
higher than would otherwise be the case to the extent the related Trust Estate
includes Buy-Down Loans, Level Payment Buy-Down Loans, Increasing Payment Loans,
GEM Loans, GPM Loans, Step-up Rate Loans and/or Balloon Payment Loans in
addition to or instead of Level Payment Loans.
The interest rates on Adjustable Rate Assets will adjust periodically to
equal the sum of the applicable Index and Gross Margin. As the Index applicable
to an Adjustable Rate Asset increases, the amount of the related Obligor's
Monthly Payments will be increased, subject to certain limitations. As a result,
Obligors on Adjustable Rate Assets may be more likely to default on their
obligations to make Monthly Payments than Obligors on Assets bearing interest at
fixed rates in rising interest rate environments. In addition, the Seller of any
Convertible Loan, to the extent provided in the related Prospectus Supplement,
may be required to repurchase such Asset if the related Obligor elects to
convert the related Asset Rate from an adjustable rate to a fixed rate of
interest. Any such repurchase of a Convertible Loan included in an Asset Pool
will have the same effect on the holders of the Certificates of the related
Series as a prepayment in full of such Asset. Certificates may be subject to a
higher rate of prepayments of the underlying Assets than would otherwise be the
case to the extent the related Trust Estate includes Convertible Loans and to
the extent the related Seller has such a repurchase obligation.
13. DEUTSCHE FINANCIAL CAPITAL LIMITED LIABILITY COMPANY HAS A LIMITED
OPERATING HISTORY AND LIMITED LOAN LOSS OR DELINQUENCY EXPERIENCE. DFC commenced
funding and underwriting manufactured housing installment sales contracts and
mortgage loans in August, 1996. Because DFC's experience is limited, the loan
underwriting is performed by a dedicated DFC underwriting staff at Oakwood on
behalf of DFC. However, the loan underwriting guidelines applied are those of
DFC, and DFC's experience with those guidelines is limited. Consequently, the
loan loss and delinquency experience of Oakwood's servicing portfolio (as set
forth in the Prospectus Supplement) may not be representative of the loan loss
and delinquency experience of loans in any Series underwritten to DFC's
guidelines.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Series Agreement") among the Company, as seller of the
Certificates, Oakwood, as the Servicer (or another Servicer if one is named in
the related Prospectus Supplement) and the Trustee named in the related
Prospectus Supplement. A copy of the form of the Series Agreement, together with
standard terms thereto (the "Standard Terms," and, together with the applicable
Series Agreement, the "Agreement") is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Prospectus Supplement for each
Series will describe any provisions of the Series Agreement relating to such
Series which differ materially from the form of the Agreement filed as an
exhibit to the Registration Statement.
The Company may sell to investors one or more Classes of a Series of
Certificates in transactions not requiring registration under the Securities Act
of 1933, as amended.
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The Offered Certificates of each Series of Certificates will be rated upon
issuance as specified in the related Prospectus Supplement by the Rating Agency
or Agencies identified therein. The following summaries describe certain
provisions common to each Series of Certificates. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the particular Agreement relating to the Series
of Certificates. When particular provisions or terms used in the Agreement are
referred to, the actual provisions thereof (including definitions of terms
therein) are incorporated by reference.
The Certificates of each Series will represent interests in a separate
Trust created pursuant to the related Agreement, as specified in the related
Prospectus Supplement. The Trust Estate for a Series will be held by the related
Trustee for the benefit of the related Certificateholders. Each Trust Estate, to
the extent specified in the related Prospectus Supplement, will include: (1) the
Assets which are subject to the related Agreement from time to time; (2) such
assets as from time to time are identified as deposited in any account held for
the benefit of the Certificateholders (including the Certificate Account and the
Distribution Account maintained pursuant to the related Agreement); (3) with
respect to a Series of Certificates evidencing interests in Contracts,
underlying Manufactured Homes and Real Properties acquired by the Trust through
repossession, foreclosure or otherwise; (4) with respect to a Series of
Certificates evidencing interests in Mortgage Loans, property which secured a
Mortgage Loan and which was acquired by foreclosure or deed in lieu of
foreclosure; (5) (a) the Standard Hazard Insurance Policies maintained with
respect to the underlying Manufactured Homes and Mortgaged Properties, (b) the
related Pool Insurance Policy, if any, (c) the related Special Hazard Insurance
Policy, if any, (d) the related Obligor Bankruptcy Insurance, if any, (e) any
Primary Mortgage Insurance Policies, FHA insurance and VA guarantees and (f) the
Buy-Down Fund and GPM Fund, if any; (6) the Reserve Fund, if any; (7) any letter
of credit, guarantee or surety bond, insurance policy or other credit
enhancement securing payment of all or part of the related Series of
Certificates; (8) if specified in the related Prospectus Supplement, any related
Pre-Funding Account; (9) such other property as may be specified in the related
Prospectus Supplement; and (10) proceeds of any of the foregoing.
The Agreement for a Series will generally provide that Certificates may be
issued thereunder up to the aggregate principal amount authorized by the
Company. Each Series will consist of one or more Classes of Certificates and may
include: (1) one or more Classes of Senior Certificates entitled to certain
preferential rights to distributions of principal and interest; (2) one or more
Classes of Subordinated Certificates; (3) one or more Classes of Certificates
representing an interest only in a specified portion of interest payments on the
Assets in the related Trust and that may have no principal balance, a nominal
principal balance or a Notional Principal Amount ("Strip Classes"); (4) one or
more Classes of Certificates representing an interest only in specified payments
of principal on the Assets ("Principal Only Classes"); (5) one or more Classes
of Certificates upon which interest will accrue but will not be distributed
until certain other Classes of Certificates of the same Series have received
their final distributions ("Compound Interest Classes" and "Capital Appreciation
Classes" and, collectively, "Accretion Classes"); and (6) one or more Classes of
Certificates entitled to fixed principal payments under certain conditions ("PAC
Classes") and companion classes thereto ("Companion Classes"). Each Series as to
which a REMIC election has been or is to be made will consist of one or more
Classes of REMIC Regular Certificates (which may consist of Certificates of the
types specified in the preceding sentence) and one Class of Residual
Certificates for each related REMIC.
The Certificates of each Series will be issued in fully-registered
certificated or book-entry form in authorized denominations for each related
Class as specified in the related Prospectus Supplement. The Certificates of
each Series issued in certificated form may be transferred or exchanged at the
corporate trust office of the Trustee without the payment of any service charge,
other than any tax or other governmental charge payable in connection with a
transfer. The Trustee will make distributions of principal and interest on each
certificated Certificate by check or wire transfer to each person in whose name
such Certificate is registered as of the close of business on the Record Date
for such distribution (as specified in the related Prospectus Supplement) at the
address appearing in the Certificate Register, except that the final
distributions in retirement of each certificated Certificate will be made only
upon presentation and surrender of such Certificate at the corporate trust
office of the Trustee. The Trustee will make distributions with respect to
Book-Entry Certificates as set forth below.
BOOK-ENTRY PROCEDURES
The Prospectus Supplement for a Series may specify that certain Classes of
Certificates initially will be issued as Book-Entry Certificates in the
authorized denominations specified in such Prospectus Supplement. Each such
Class will be represented by a single certificate registered in the Certificate
Register in the name of a nominee of the depository, which is expected to be The
Depository Trust Company ("DTC" and, together with any successor or other
depository (which must be a Clearing Agency) selected by the Company, the
"Depository"). No person acquiring a Book-Entry Certificate (a "Beneficial
Owner") will be entitled to receive a definitive certificate representing its
Certificate.
DTC performs services for its Participants, some of whom (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates,
15
whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book- Entry Certificates will be subject to the rules,
regulations and procedures governing the Depository and Depository Participants
as in effect from time to time.
A Beneficial Owner's ownership of a Book-Entry Certificate will be
reflected in the records of the brokerage firm, bank, thrift institution or
other financial intermediary (any of the foregoing, a "Financial Intermediary")
that maintains such Beneficial Owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
reflected in the records of the Depository (or of a participating firm that acts
as agent for the Financial Intermediary whose interest in turn will be reflected
in the records of the Depository, if the Beneficial Owner's Financial
Intermediary is not a direct Depository Participant). Therefore, the Beneficial
Owner must rely on the procedures of its Financial Intermediary or
Intermediaries and of the Depository in order to evidence its beneficial
ownership of a Book-Entry Certificate, and beneficial ownership of a Book-Entry
Certificate may only be transferred by compliance with the procedures of such
Financial Intermediaries and Depository participants.
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
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Depository Participants") and facilitates
the clearance and settlement of securities transactions between Depository
Participants in such securities through electronic book-entry changes in
accounts of Depository Participants, thereby eliminating the need for physical
movement of certificates. Depository 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 Depository Participant, either
directly or indirectly ("indirect participants").
Distributions of principal and interest on the Book-Entry Certificates will
be made on each Distribution Date to the Depository. The Depository will be
responsible for crediting the amount of such distributions to the accounts of
the applicable Depository Participants in accordance with the Depository's
normal procedures. Each Depository Participant will be responsible for
disbursing such payments to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing funds
to the Beneficial Owners of the Book-Entry Certificates that it represents. As a
result of the foregoing procedures, Beneficial Owners of the Book Entry
Certificates may experience some delay in their receipt of payments.
While the Offered Certificates are outstanding (except if the Offered
Certificates are subsequently issued in certificated, fully-registered form,
which can only occur under the limited 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 Offered Certificates and is required
to receive and transmit distributions of principal of, and interest on, the
Offered Certificates. Unless and until the Offered Certificates are issued in
certificated form, Beneficial Owners who are not Participants may transfer
ownership of the Offered Certificates only through Participants by instructing
such Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with such purchasers' respective Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership of
the Offered Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Because
transactions in Book-Entry Certificates can be effected only through the
Depository, participating organizations, indirect participants and certain
banks, the ability of a Beneficial Owner of a Book-Entry Certificate to pledge
such Certificate to persons or entities that are not Depository Participants, or
otherwise to take actions in respect of such Certificate, may be limited due to
the lack of a physical certificate representing such Certificate. Issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary trading market because investors may be unwilling
to purchase Book-Entry Certificates for which they cannot obtain physical
certificates.
The Book-Entry Certificates will be issued in fully-registered,
certificated form to Beneficial Owners of such Book-Entry Certificates or their
nominees, rather than to the Depository or its nominee, only if (1) the Company
advises the Trustee in writing that the Depository is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Book-Entry Certificates and the Company is unable to locate a qualified
successor within 30 days or (2) the Company, at its option, elects to terminate
the book-entry system maintained through the Depository. Upon the occurrence of
either event described in the preceding sentence, the Trustee is required to
notify the Depository, which in turn will notify all Beneficial Owners of
Book-Entry Certificates through Depository participants, of the availability of
certificated Certificates. Upon surrender of the Depository of the certificates
representing the Book-Entry Certificates and receipt of instructions for
re-registration, the Trustee will reissue the Book-Entry Certificates as
certificated Certificates to the Beneficial Owners of the
16
Book-Entry Certificates. Upon issuance of certificated Certificates to
Beneficial 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 and the Trustee that, unless and until the
Offered Certificates are issued in certificated, fully-registered form under the
circumstances described above, 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
Percentage Interests of the Offered Certificates only at the direction of and on
behalf of such Participants with respect to such Percentage Interests of the
Offered Certificates. DTC may take action, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Neither the Company, Oakwood, the Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Certificates held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
ALLOCATION OF COLLECTIONS FROM THE ASSETS
The Prospectus Supplement for a Series will specify the Available
Distribution for such Series, which in general will be equal to the amount of
principal and interest actually collected, advanced or otherwise received with
respect to the related Asset Pool during the applicable Collection Period or
Prepayment Period, net of applicable servicing, administrative, guarantee and
other fees, insurance premiums, the costs of any other credit enhancement and
amounts required to reimburse any unreimbursed advances. The Available
Distribution will be allocated among the Classes of Certificates of the related
Series in the proportion and order of application set forth in the related
Agreement and described in the related Prospectus Supplement. The Available
Distribution may be allocated so that amounts paid as interest on the Assets may
be distributed as principal on the Certificates and amounts paid as principal on
the Assets may be distributed as interest on the Certificates.
A Class of Certificates entitled to distributions of interest may receive
such interest at a specified rate (a "Pass-Through Rate"), which may be fixed or
adjustable. The Classes of Certificates within a Series may have the same or
different Pass-Through Rates. The related Prospectus Supplement will specify the
Pass-Through Rate, or the method for determining the Pass-Through Rate, for each
applicable Class, and the method of determining the amount to be distributed on
any Strip Classes on each Distribution Date. Residual Certificates offered
hereby may or may not have a Pass-Through Rate. In addition to representing
entitlement to regular distributions of principal and interest, if any, that are
allocated to the Residual Certificates, Residual Certificates also generally
will represent entitlement to receive amounts remaining in the Distribution
Account on any Distribution Date after allocation of scheduled distributions to
all other outstanding Classes of Certificates of that Series and after all
required deposits have been made into any related Reserve Funds. Certain Classes
of Certificates may have a Notional Principal Amount. A "Notional Principal
Amount" of a Certificate is used solely for purposes of determining the amount
of interest distributions and certain other rights and obligations of the holder
of such Certificate and does not represent any beneficial interest in principal
payments on the Assets in the related Trust. Interest distributions on the
Certificates generally will include interest accrued through the Accounting Date
preceding the applicable Distribution Date or through another date specified in
the related Prospectus Supplement. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months or on the basis of actual
elapsed days, as specified in the related Prospectus Supplement.
With respect to a Series that includes one or more Classes of Subordinated
Certificates, the Senior Certificates will generally not bear any Realized
Losses on the related Contracts or Mortgage Loans, until the Subordinated
Certificates of that Series have borne Realized Losses up to a specified
Subordination Amount or loss limit or until the principal amount of the
Subordinated Certificates has been reduced to zero, either through the
allocation of Realized Losses, distributions of principal, or both.
Distributions of interest may be reduced to the extent of Shortfalls on
Contracts or Mortgage Loans comprising the Assets of the related Trust. With
respect to a Series that includes a Class of Subordinated Certificates, any
Shortfall may result in a reallocation of amounts otherwise distributable to
less senior Certificates for distribution to more senior Certificates.
Principal and interest distributable on a Class of Certificates may be
distributed among the Certificates of such Class pro rata in the proportion that
the outstanding principal or notional amount of each Certificate of such Class
(or each Certificate's designated "percentage interest," in the case of
Certificates with no Certificate Principal Balance or notional principal amount)
bears to the aggregate outstanding principal or notional amount of all
Certificates of such Class (or to a "percentage interest" of 100%, in the case
of Certificates with no Certificate Principal Balance or notional principal
amount), or in such other manner as may be detailed in the related Prospectus
Supplement. Interest distributable on a Class of Certificates may be allocated
among the Certificates of such Class pro rata in the proportion that the
outstanding principal or notional amount of each Certificate of such Class (or
each Certificate's designated "percentage interest," in the case of Certificates
with no Certificate Principal Balance or notional principal amount) bears to the
aggregate outstanding principal or notional amount of
17
all Certificates of such Class (or to a "percentage interest" of 100%, in the
case of Certificates with no Certificate Principal Balance or notional principal
amount), or in such other manner as may be detailed in the related Prospectus
Supplement.
The Final Scheduled Distribution Date for each Class of Certificates will
be the date on which the last distribution of the principal thereof is scheduled
to occur, assuming no prepayments of principal with respect to the Assets
included in the Trust for that Series.
OPTIONAL REDEMPTION OR TERMINATION
To the extent and under the circumstances specified in the related
Prospectus Supplement, the Certificates of a Series may be redeemed prior to
their Final Scheduled Distribution Date at the option of the Company, the
Servicer or such other party as may be specified in the related Prospectus
Supplement by purchase of the outstanding Certificates of such Series. The right
so to redeem the Certificates of a Series will be conditioned upon (1) the
passage of a certain date specified in the Prospectus Supplement and/or (2) (a)
the decline of the aggregate Scheduled Principal Balance of the Assets in the
Trust to less than a percentage (specified in the related Prospectus Supplement)
of the aggregate Scheduled Principal Balance of the Assets in the Trust at the
related Cut-off Date or (b) the decline of the aggregate Certificate Principal
Balance of a specified Class or Classes of Certificates to less than a
percentage (specified in the related Prospectus Supplement) of the aggregate
Certificate Principal Balance of the applicable Class or Classes of Certificates
at the Closing Date for the Series. The percentage balances of the aggregate
Scheduled Principal Balance of the Assets and the aggregate Certificate
Principal Balance of a Class referred to in (2)(a) and (2)(b), respectively,
above, may range from 5% to 25%. In the event the option to redeem the
Certificates is exercised, the purchase price distributed with respect to each
Certificate offered hereby and by the related Prospectus Supplement will equal
100% of its then outstanding principal amount, plus accrued and unpaid interest
thereon at the applicable Pass-Through Rate, less any unreimbursed Advances and
unrealized losses allocable to such Certificate. Notice of the redemption of the
Certificates will be given to Certificateholders as provided in the related
Agreement.
In addition, the Company or the Servicer or the holders of a majority in
interest of any Class of Residual Certificates of the related Series may at
their respective options repurchase all related Contracts and Mortgage Loans
remaining outstanding at a time specified in the related Prospectus Supplement,
which will be when the aggregate Scheduled Principal Balance of such Contracts
or Mortgage Loans is less than a percentage (specified in the related Prospectus
Supplement, but may range from 5% to 25%) of the aggregate Scheduled Principal
Balance of the Contracts or Mortgage Loans on the Cut-off Date, or when the
aggregate Certificate Principal Balance of a specified Class or Classes of
Certificates is less than a percentage (specified in the related Prospectus
Supplement, but may range from 5% to 25%) of the aggregate Certificate Principal
Balance of such Class or Classes at the Closing Date. The termination price for
a Trust will be specified in the related Agreement, and will generally equal the
sum of (1) any Liquidation Expenses incurred by the Servicer in respect of any
Contract or Mortgage Loan that has not yet been liquidated; (2) all amounts
required to be reimbursed or paid to the Servicer in respect of previously
unreimbursed Servicing Advances; and (3) the greater of (a) the sum of (i) the
aggregate Unpaid Principal Balance of the related Contracts and Mortgage Loans,
plus accrued and unpaid interest thereon through the preceding Accounting Date
for the date of repurchase at the Asset Rates borne by such Contracts and
Mortgage Loans, plus (ii) the lesser of (A) the aggregate Unpaid Principal
Balance of each Contract and Mortgage Loan that had been secured by any Repo
Property or REO Property remaining in the Trust, plus accrued interest thereon
at the Asset Rates borne by such Contracts and Mortgage Loans through the
Accounting Date preceding such purchase, and (B) the current appraised value of
any such Repo Property or REO Property (net of Liquidation Expenses to be
incurred in connection with the disposition of such property estimated in good
faith by the Servicer), such appraisal to be conducted by an appraiser mutually
agreed upon by the Servicer and the Trustee, plus all previously unreimbursed
P&I Advances made in respect of such Repo Property or REO Property, and (b) the
aggregate fair market value of the assets of the related Trust (as reasonably
determined by the Servicer as described in the related Agreement) plus all
previously unreimbursed P&I Advances made with respect to the related Assets.
The fair market value of the assets of a Trust as determined for purposes of a
terminating purchase shall be deemed to include accrued interest through the
Accounting Date preceding the date of such purchase at the applicable Asset Rate
on the Unpaid Principal Balance of each Contract and Mortgage Loan (including
any Contract that has become a Repo Property and any Mortgage Loan that has
become a REO Property, which Repo Property or REO Property has not yet been
disposed of by the Servicer). The basis for any such valuation shall be
furnished by the Servicer to the Certificateholders upon request.
On the date set for termination of a Trust, the termination price shall be
distributed (1) first to the Servicer to reimburse it for all previously
unreimbursed Liquidation Expenses paid and Advances made by the Servicer with
respect to the related Assets and (2) second to the Certificateholders in
accordance with the payment priorities that apply on each Distribution Date as
described in the related Prospectus Supplement. This will result in the
distribution with respect to each Certificate offered hereby and by the related
Prospectus Supplement of an amount equal to 100% of its then outstanding
principal amount, plus accrued and unpaid interest thereon at the applicable
Pass-Through Rate, less any unreimbursed Advances and unrealized losses
allocable to such Certificate.
18
MATURITY AND PREPAYMENT CONSIDERATIONS
MATURITY
No more than 1% of the Contracts and Mortgage Loans securing a Series will
have maturities at origination of more than 30 years.
PREPAYMENT CONSIDERATIONS
The prepayment experience on an Asset Pool will affect (1) the average life
of the related Certificates and each Class thereof issued by the related Trust;
(2) the timing of the final distribution for each Class (and whether such final
distribution occurs prior to its Final Scheduled Distribution Date); and (3) the
effective yield on each Class of such Certificates. Because prepayments will be
passed through to the holders of Certificates of each Series as distributions of
principal, it is likely that in the event of such prepayments, the final
distribution on each Class of Certificates of a Series will occur prior to its
Final Scheduled Distribution Date.
Contracts and Mortgage Loans generally may be prepaid in full or in part
without penalty. FHA Contracts and Mortgage Loans and VA Contracts and Mortgage
Loans may be prepaid at any time without penalty. The Company anticipates that a
significant number of the Contracts and Mortgage Loans will be paid in full
prior to their maturity. A number of factors, including homeowner mobility,
national and local economic conditions, age of the Contracts and Mortgage Loans,
interest rates and the availability of alternative financing may affect the
prepayment experience of a particular Asset Pool.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing market
interest rates fall significantly below the interest rates borne by particular
Contracts or Mortgage Loans, the Contracts and Mortgage Loans are likely to be
subject to higher prepayment rates than if prevailing interest rates remain at
or above the interest rates borne by such Contracts and Mortgage Loans. However,
the rate of principal prepayments on Contracts and Mortgage Loans is influenced
by a variety of economic, geographic, social, tax, legal and other factors.
Accordingly, there can be no assurance that any Contracts or Mortgage Loans
included in an Asset Pool will conform to past prepayment experience or any
assumed rate of prepayment.
It is customary in the mortgage industry in quoting yields (1) on a pool of
30-year fixed-rate, level payment mortgages, to compute the yield as if the pool
were a single loan that is amortized according to a 30-year schedule and is then
prepaid in full at the end of the 12th year and (2) on a pool of 15-year
fixed-rate, level payment mortgages, to compute the yield as if the pool were a
single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Information regarding the prepayment model utilized in preparing any
Prospectus Supplement will be set forth in the Prospectus Supplement with
respect to a Series of Certificates.
See "Description of the Certificates -- Optional Redemption or Termination"
for a description of the Company's or other party's option to repurchase the
Contracts or Mortgage Loans comprising part of a Trust Estate when certain
triggering events occur. See also "The Trusts -- The Contracts" and " -- The
Mortgage Loans" and "Sale and Servicing of Contracts and Mortgage
Loans -- Representations and Warranties" herein for a description of the
obligations of the Company, the Servicer or another party, as specified in the
related Prospectus Supplement, to repurchase a Contract or Mortgage Loan in case
of a breach of a representation or warranty relative to such Contract or
Mortgage Loan. Any such repurchase will have the effect of a full prepayment of
the outstanding principal balance of the related Contract or Mortgage Loan. See
also "Yield Considerations" herein.
YIELD CONSIDERATIONS
Distributions of interest on the Certificates generally will include
interest accrued through the Accounting Date for the applicable Distribution
Date. Because distributions to the Certificateholders generally will not be made
until the Distribution Date following the preceding Accounting Date, the
effective yield to the holder of a Certificate will be lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price for
the Certificate.
The yield to maturity of any Certificate will be affected by the rate and
timing of payment of principal of the underlying Contracts and Mortgage Loans.
If the purchaser of a Certificate offered at a discount from its Parity Price
(as defined below) calculates the anticipated yield to maturity of such
Certificate based on an assumed rate of payment of principal that is faster than
that actually received on the underlying Contracts and Mortgage Loans, the
actual yield to maturity will be lower than that so calculated. Similarly, if
the purchaser of a Certificate offered at a premium over its Parity Price
calculates the anticipated yield to maturity of such Certificate based on an
assumed rate of payment of principal that is slower than that actually
19
received on the underlying Contracts and Mortgage Loans, the actual yield to
maturity will be lower than that so calculated. "Parity Price" is the price at
which a Certificate will yield its coupon, after giving effect to any payment
delay.
The timing of changes in the rate of prepayments on the Contracts and
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. In general, the earlier a prepayment
of principal on an Asset, the greater will be the effect on a related investor's
yield to maturity. As a result, the effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments. Because the rate of principal
payments on the underlying Assets affects the weighted average life and other
characteristics of any Class of Certificates, prospective investors are urged to
consider their own estimates as to the anticipated rate of future prepayments on
the underlying Contracts and Mortgage Loans and the suitability of the
applicable Certificates to their investment objectives. For a discussion of
factors affecting principal prepayments on the Contracts and Mortgage Loans
underlying a Series of Certificates, see "Maturity and Prepayment
Considerations" above.
The yield on each Class of Certificates also will be affected by Realized
Losses or Shortfalls allocated to such Class.
THE TRUSTS
GENERAL
A Trust Estate may include Contracts and/or Mortgage Loans. Each Trust
Estate also may include (1) such assets as from time to time are identified as
deposited in any account held for the benefit of the Certificateholders
(including the Certificate Account and the Distribution Account) maintained
pursuant to the related Agreement; (2) any Manufactured Home or Real Property
which initially secured a related Contract and which is acquired by
repossession, foreclosure or otherwise; (3) any property which initially secured
a related Mortgage Loan and which is acquired by foreclosure or deed in lieu of
foreclosure or otherwise; (4) if so specified in the related Prospectus
Supplement, any related Reserve Fund; (5) if specified in the related Prospectus
Supplement, any related Pre-Funding Account; (6) any insurance policies,
guarantees and any other credit enhancement maintained with respect to the
related Certificates, the related Contracts, the related Mortgage Loans or all
or any part of such Trust Estate that is required to be maintained pursuant to
the related Agreement; and (7) such other property as is specified in the
related Prospectus Supplement.
THE ASSETS
GENERAL
Each Certificate will evidence an interest in one Trust Estate, containing
one or more Asset Pools comprised of Contracts and/or Mortgage Loans having the
aggregate principal balance as of the Cut-off Date specified in the related
Prospectus Supplement. Holders of Certificates of a Series will have interests
only in the related Asset Pool(s) and will have no interest in any Asset Pools
created with respect to any other Series of Certificates.
The Company will acquire the underlying Contracts and Mortgage Loans from
DFC or another Seller, which may have originated the Contracts and Mortgage
Loans or may have acquired them in the open market or in privately negotiated
transactions. A brief description of the Contracts and Mortgage Loans expected
to be included in the Trust Estates is set forth under " -- The Contracts" and
" -- The Mortgage Loans" below. Specific information respecting the Contracts
and Mortgage Loans included in a particular Trust Estate will be provided in the
related Prospectus Supplement and, to the extent such information is not fully
provided in the related Prospectus Supplement, in a Current Report on Form 8-K
to be filed with the Securities and Exchange Commission within fifteen days
after the initial issuance of such Certificates. A copy of the Pooling and
Servicing Agreement with respect to each Series of Certificates will be attached
to the related Current Report on Form 8-K and will be available for inspection
at the corporate trust office of the Trustee (the location of which will be
specified in the related Prospectus Supplement).
Whenever in this Prospectus terms such as "Asset Pool," "Trust Estate,"
"Agreement" or "Pass-Through Rate" are used, those terms apply, unless the
context otherwise indicates, to one specific Asset Pool, Trust Estate, Agreement
and the Pass-Through Rates applicable to the related Series of Certificates.
For each Series of Certificates, the Company will cause the Contracts and
Mortgage Loans included in the related Asset Pool to be assigned to the trustee
named in the related Prospectus Supplement (the "Trustee"). The Contracts and
Mortgage Loans will be serviced, and Certificates administered, by Oakwood
Acceptance Corporation (in such capacity, the "Servicer"), a wholly owned
subsidiary of Oakwood Homes Corporation and an affiliate of the Company, or
another Servicer. The Servicer may perform such activities directly or through
other servicing institutions ("Sub-servicers"). See "Sale and
20
Servicing of the Contracts and Mortgage Loans -- Servicing" herein. With respect
to those Contracts and Mortgage Loans serviced by the Servicer through a
Sub-servicer, the Servicer will remain liable for its servicing obligations
under the Agreement as if the Servicer alone were servicing such Contracts and
Mortgage Loans. The Servicer may delegate certain computational, data
processing, collection and foreclosure (including repossession) duties under any
Agreement without appointing a Sub-servicer and without any notice to or consent
from the Company or the Trustee, provided that the Servicer remains fully
responsible for the performance of such duties.
TYPES OF ASSETS
The Assets included in the Trust for a Series may be subject to various
types of payment provisions. Such Assets may consist of (1) "Level Payment
Loans," which may provide for the payment of interest and full repayment of
principal in level Monthly Payments with a fixed rate of interest computed on
their declining principal balances; (2) "Adjustable Rate Assets," which may
provide for periodic adjustments to their rates of interest to equal the sum
(which may be rounded) of a fixed margin and an index; (3) "Buy-Down Loans,"
which are Assets for which funds have been provided by someone other than the
related Obligors to reduce the Obligors' Monthly Payments during the early
period after origination of such Assets; (4) "Level Payment Buy-Down Loans," as
described below; (5) "Increasing Payment Loans," as described below; (6)
"Interest Reduction Loans," which provide for the one-time reduction of the
interest rate payable thereon; (7) "GEM Loans," which provide for (a) Monthly
Payments during the first year after origination that are at least sufficient to
pay interest due thereon, and (b) an increase in such Monthly Payments in
subsequent years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of such Assets; (8) "GPM
Loans," which allow for payments during a portion of their terms which are or
may be less than the amount of interest due on the Unpaid Principal Balances
thereof, and which unpaid interest will be added to the principal balances of
such Assets and will be paid, together with interest thereon, in later years;
(9) "Step-up Rate Loans," which provide for Asset Rates that increase over time;
(10) "Balloon Payment Loans," which include Assets on which only interest is
payable until maturity, as well as Assets that provide for the full amortization
of principal over a certain amortization period, but require all remaining
principal to be paid at the end of a shorter period; (11) "Convertible Loans,"
which are Adjustable Rate Assets subject to provisions pursuant to which,
subject to certain limitations, the related Obligors may exercise an option to
convert the adjustable Asset Rate to a fixed Asset Rate; and (12) "Bi-Weekly
Loans," which provide for Obligor payments to be made on a bi-weekly basis. The
Assets included in a Trust also may include Level Payment Buy-Down Loans and
Increasing Payment Loans, which are described below.
A Level Payment Buy-Down Loan is an Asset that provides for a reduction in
the Obligor's Monthly Payments thereunder for a period of up to the first four
years after origination of such Asset and as to which funds have been provided
by someone other than the Obligor to cover such reductions during those years.
Accordingly, payments due on Level Payment Buy-Down Loans will be the same as
payments due on Level Payment Loans without buy-down provisions, except that the
former will include amounts to be collected from the related Servicers pursuant
to either buy-down or subsidy agreements in addition to amounts to be collected
from the related Obligors.
An Increasing Payment Loan is an Asset that provides for Obligor Monthly
Payments that are fixed for an initial period of six, 12 or 24 months, and which
increase thereafter (at a predetermined rate expressed as a percentage of the
Obligor's Monthly Payment during the preceding payment period, subject to any
caps on the amount of any single Monthly Payment increase) for a period not to
exceed nine years from the date of origination, after which the Obligor's
Monthly Payment is fixed at a level-payment amount so as to fully amortize the
Asset over its remaining term to maturity. The scheduled Monthly Payment with
respect to an Increasing Payment Loan is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the Obligor's
Monthly Payments referred to in the preceding sentence and (2) in the case of
certain Increasing Payment Loans, payments made by the respective Servicers
pursuant to buy-down or subsidy agreements. The Obligor's initial Monthly
Payments for each Increasing Payment Loan are set at the level-payment amount
that would apply to an otherwise identical Level Payment Loan having an Asset
Rate a certain number of percentage points below the Asset Rate of such
Increasing Payment Loan. The Obligor's Monthly Payments on each Increasing
Payment Loan, together with any payments made thereon by the related Servicers
pursuant to buy-down or subsidy agreements, will in all cases be sufficient to
allow payment of accrued interest on such Increasing Payment Loan at the related
Asset Rate, without negative amortization. An Obligor's Monthly Payments on such
an Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may be
increased.
"DUE-ON-SALE" CLAUSES
A Contract or the Mortgage Note or Mortgage used in originating a
conventional Mortgage Loan may contain a "due-on-sale" provision permitting the
holder of the Contract or Mortgage Loan to accelerate the maturity of the
Contract or Mortgage Loan upon the Obligor's conveyance of the underlying
Manufactured Home or Mortgaged Property. See " -- The Contracts -- Transfers of
Manufactured Homes; Enforceability of "Due-on-Sale' Clauses" and " -- The
Mortgage Loans --
21
"Due-On-Sale' Clauses," in each case under the heading "Certain Legal Aspects of
Contracts and Mortgage Loans" herein. The Prospectus Supplement for a Series
will specify the approximate percentages of the underlying Contracts and
Mortgage Loans, respectively, that contain "due-on-sale" provisions. Enforcement
of a "due-on-sale" clause applicable to a Contract or Mortgage Loan will have
the same effect on Certificates backed by such Contract or Mortgage Loan as a
prepayment in full of such Contract or Mortgage Loan. The weighted average lives
of Certificates of a Series will be decreased to the extent that sales of
Manufactured Homes and Mortgaged Properties result in prepayments of the Assets
underlying such Certificates. See "Maturity and Prepayment Considerations" and
"Yield Considerations" herein for a discussion of the effect of Asset
prepayments on the weighted average lives of and yields to maturity on the
related Certificates.
To the extent the Assets underlying a Series do not contain "due-on-sale"
clauses, or to the extent the Servicer does not enforce "due-on-sale" clauses,
the weighted average lives of the Certificates of such Series may be expected to
be longer than would have been the case had such Assets been subject to
"due-on-sale" clauses and had the Servicer enforced such clauses, because the
assumption of a Contract or Mortgage Loan by the buyer of the underlying
Manufactured Home or Mortgaged Property would have the effect of avoiding a
prepayment of the assumed Contract or Mortgage Loan. While it is expected that
most Contracts will contain "due-on-sale" provisions, the Servicer will be
permitted to allow proposed assumptions of Contracts in accordance with the
guidelines described below. To the extent the Servicer has knowledge of any
conveyance or prospective conveyance by any Mortgagor of any property securing a
Mortgage Loan, the Servicer will be required to exercise the right to accelerate
the maturity of such Mortgage Loan under any applicable "due-on-sale" clause to
the extent, under the circumstances, and in the manner in which the Servicer
enforces such clauses with respect to other Mortgage Loans held in its own
portfolio. The Servicer will not be permitted to allow assumptions of Assets if
prohibited by law from doing so or if the exercise of such rights would affect
adversely or jeopardize any coverage under any applicable insurance policy, and
the Servicer will only be permitted to allow the assumption of an Asset if the
Servicer has reasonably determined that the assumption will not increase
materially the risk of nonpayment of amounts due under the Asset.
If the Servicer determines not to enforce such "due-on-sale" clause, the
Servicer will be required to enter into an assumption and/or modification
agreement with the person to whom such property has been conveyed or is proposed
to be conveyed, pursuant to which such person becomes liable under the Asset and
pursuant to which, to the extent permitted by applicable law and deemed
appropriate in the Servicer's reasonable judgment, the original obligor remains
liable thereon. FHA Contracts, FHA Mortgage Loans, VA Contracts and VA Mortgage
Loans are not permitted to contain "due-on-sale" clauses, and so are freely
assumable. The rate of prepayments of FHA Contracts, FHA Mortgage Loans, VA
Contracts and VA Mortgage Loans therefore may be lower than the rate of
prepayments of Conventional Mortgage Loans bearing interest at comparable rates.
Prepayments on manufactured housing installment sales contracts and
mortgage loans are commonly measured relative to a prepayment standard or model
(a "Prepayment Model"), which represents an assumed rate of prepayment of Assets
in an Asset Pool relative to the aggregate outstanding principal balance of such
Asset Pool from time to time. The Prospectus Supplement for a Series of
Certificates may contain a table setting forth percentages of the original
Certificate Principal Balances of certain Classes of Certificates of such Series
anticipated to be outstanding on certain dates specified in the table assuming
that prepayments of the underlying Assets occur in accordance with the
applicable Prepayment Model and at different rates determined by applying
different percentages to the rates of prepayment assumed under the Prepayment
Model. It is unlikely that the prepayment of the Assets of any Trust will
conform to any of the percentages of the rates assumed under the applicable
Prepayment Model set forth in any such table.
The FHA has compiled prepayment statistics relating to one- to four-family,
level payment mortgage loans insured by the FHA under the National Housing Act
of 1934, as amended, at various interest rates, all of which permit assumption
by a new buyer of the mortgaged property. Such statistics indicate that while
some of such mortgage loans remain outstanding until their scheduled maturities,
a substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage loan
prepayments at the rates experienced by FHA on FHA mortgage loans, set forth the
percentages of the original number of FHA mortgage loans included in pools of
Level Payment Mortgage Loans with varying maturities that will remain
outstanding on each anniversary of the origination date of such mortgage loans
(assuming they all have the same origination date) (such tables being referred
to as the "FHA Prepayment Experience").
REPRESENTATIONS AND WARRANTIES
The Seller will make certain representations and warranties concerning the
Contracts and Mortgage Loans included in an Asset Pool, in order to ensure the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each Contract and Mortgage Loan included in such Asset
Pool. Upon a breach of any representation that materially and adversely affects
the interests of the Certificateholders in a Contract or Mortgage Loan, the
Seller will be obligated to
22
cure the breach in all material respects within 90 days after the Seller's
discovery of or receipt of written notice of such breach or, in the alternative,
either to repurchase the Contract or Mortgage Loan from the Trust, or to
substitute another Contract or Mortgage Loan as described below. In addition,
each Seller will be required to indemnify the Company and its assignees
(including the Trust) against losses and damages they incur as a result of
breaches of the Seller's representations and warranties. The Seller's
obligations to repurchase or substitute for an Asset affected by a breach of a
representation or warranty and to indemnify the Company and its assignees for
losses and damages caused by such a breach constitute the sole remedies
available to the Certificateholders or the Trustee for a breach of
representation by the Seller. See "Sale and Servicing of the Contracts and
Mortgage Loans -- Representations and Warranties" herein.
THE CONTRACTS
The Contracts supporting a Series of Certificates will consist of
manufactured housing installment sales contracts originated by DFC (which may
have been originated in the name of a manufactured housing dealer with funds
provided by DFC) or originated by other originators not affiliated with DFC, in
any case in the ordinary course of the originator's business. The Contracts may
be conventional manufactured housing contracts or contracts insured by the FHA
or partially guaranteed by the VA. Each Contract is secured by a Manufactured
Home. The Contracts will be fully amortizing and will bear interest at a fixed
or adjustable annual percentage rate ("Contract Rate") or at a Contract Rate
which steps up on a particular date (a "Step-up Rate").
The Seller will represent that the Manufactured Homes securing the
Contracts consist of manufactured homes within the meaning of 42 United States
Code, Section 5402(6), which defines a "manufactured home" as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is built
on a permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air-conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of [this] paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under [Chapter 70 under Title 42 of the United States Code]."
Each Contract will bear interest at a fixed or adjustable Contract Rate or
at a Step-up Rate, as specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Monthly Payments
for Contracts bearing interest at an interest rate that increases over time
(sometimes referred to herein as "Step-up Rate Contracts") will increase on the
dates on which the Contract Rates are stepped up.
With respect to the Contracts expected to be contained in an Asset Pool,
the related Prospectus Supplement will specify, to the extent known, (1) the
range of dates of origination of the Contracts; (2) the range of Contract Rates
on the Contracts and the weighted average Contract Rate as of the Cut-off Date;
(3) the range of Contract Loan-to-Value Ratios; (4) the minimum and maximum
outstanding principal balances of the Contracts as of the Cut-off Date and the
weighted average outstanding principal balance of the Contracts as of the
Cut-off Date; (5) the range of original terms to maturity of the Contracts, the
range of remaining terms to maturity of the Contracts and the last maturity date
of any of the Contracts; (6) the geographic distribution of the underlying
Manufactured Homes; and (7) the range of original principal balances of the
Contracts.
THE MORTGAGE LOANS
The Mortgage Loans supporting a Series of Certificates will consist of
conventional mortgage loans, FHA-insured mortgage loans or VA-guaranteed
mortgage loans evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments ("Mortgages")
creating first liens on one-to four-family residential properties (the
"Mortgaged Properties"). To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include investment properties, vacation
and second homes, or land upon which a residence is to be built. The Company
expects that the Mortgage Loans will have been originated by FHA-approved
mortgagees or FNMA/FHLMC-approved seller/servicers in the ordinary course of
their real estate lending activities.
Each Mortgage Loan will bear interest at a fixed or adjustable annual rate
of interest ("Mortgage Rate") or at a Mortgage Rate which steps up on a
particular date (a "Step-up Rate"), as specified in the Prospectus Supplement.
Each registered holder of a Certificate will be entitled to receive periodic
distributions of all or a portion of the payments of principal and/or interest
collected on the underlying Mortgage Loans.
With respect to the Mortgage Loans expected to be contained in an Asset
Pool, the related Prospectus Supplement will specify, to the extent known, (1)
the range of dates of origination of the Mortgage Loans; (2) the range of
Mortgage Rates, and in the case of Adjustable Rate Assets, the range of initial
adjustable mortgage rates, the Index, if any, used to determine
23
the adjustable mortgage rate and the range of maximum permitted adjustable
mortgage rates, if any, and the range of then-current adjustable mortgage rates;
(3) the range of Mortgage Loan-to-Value Ratios; (4) the minimum and maximum
outstanding principal balances of the Mortgage Loans as of the Cut-off Date and
the average outstanding principal balance of the Mortgage Loans as of the
Cut-off Date; (5) the range of outstanding principal balances of the
Conventional Mortgage Loans, FHA Mortgage Loans and VA Mortgage Loans (in each
case to the extent such Mortgage Loans are included in such Asset Pool) included
in the Asset Pool; (6) the range of original maturities of the Mortgage Loans
and the last maturity date of any of the Mortgage Loans; (7) the geographic
distribution of the underlying Mortgaged Properties; and (8) the range of
original principal balances of the Mortgage Loans.
SUBSTITUTION OF CONTRACTS OR MORTGAGE LOANS
The Company or the Seller may, within three months after the Closing Date,
deliver to the Trustee other Assets in substitution for any one or more Assets
initially included in the Trust Estate for such Series. In addition, if there is
a breach of any representation or warranty made as to an Asset by the Company or
the Seller (or in certain cases where an incomplete or defective Contract File
or Trustee Mortgage Loan File is delivered by the Seller), which breach, defect
or incompleteness is not cured within 90 days after the breaching party's
receipt of notice of such breach, defect or incompleteness, the breaching party
generally must repurchase the affected Asset for its Repurchase Price, but may,
as an alternative to such a repurchase, substitute one or more new Assets for
the affected Asset (but only if the substitution is to take place no later than
two years after the related Closing Date). In general, any substitute Asset
must, on the date of such substitution (1) have an Unpaid Principal Balance not
greater than (and not more than $10,000 less than) the Unpaid Principal Balance
of the replaced Asset; (2) have an Asset Rate not less than (and not more than
one percentage point in excess of) the Asset Rate of the replaced Asset; (3)
have a Net Rate equal to the Net Rate of the replaced Asset; (4) have a
remaining term to maturity not greater than (and not more than one year less
than) that of the replaced Asset; and (5) comply with each representation and
warranty relating to the replaced Asset and, if the Seller is effecting the
substitution, comply with each representation and warranty set forth in the
Sales Agreement pursuant to which the Seller conveyed the replaced Asset(s) to
the Company. If Contracts or Mortgage Loans are being substituted, the
substitute Contract or Mortgage Loan must have a Loan-to-Value Ratio as of the
first day of the month in which the substitution occurs equal to or less than
the Loan-to-Value Ratio of the replaced Contract or Mortgage Loan as of such
date (in each case, using the value of the underlying Manufactured Home or
Mortgaged Property at origination, and after taking into account the payments
due on the substituted Asset and the replaced Asset on such date). Further, no
Adjustable Rate Asset may be substituted for any Asset in a Trust Estate unless
the deleted Asset is also an Adjustable Rate Asset. A substituted Adjustable
Rate Asset must (1) have a minimum lifetime Mortgage Rate that is not less than
the minimum lifetime Mortgage Rate on the replaced Adjustable Rate Asset; (2)
have a maximum lifetime Mortgage Rate that is not less than the maximum lifetime
Mortgage Rate on the replaced Adjustable Rate Asset; (3) provide for a lowest
possible Net Rate that is not lower than the lowest possible Net Rate for the
replaced Adjustable Rate Asset and a highest possible Net Rate that is not lower
than the highest possible Net Rate for the replaced Adjustable Rate Asset; (4)
have a Gross Margin not less than the Gross Margin of the replaced Adjustable
Rate Asset; (5) have a Periodic Rate Cap equal to the Periodic Rate Cap on the
replaced Adjustable Rate Asset; (6) have a next Interest Adjustment Date that is
the same as the next Interest Adjustment Date for the replaced Adjustable Rate
Asset or occurs not more than two months prior to the next Interest Adjustment
Date for the replaced Adjustable Rate Asset; and (7) not have an interest rate
that is convertible from an adjustable rate to a fixed rate unless the Asset
Rate on the replaced Adjustable Rate Asset is so convertible. In the event that
more than one Asset is substituted for one or more replaced Assets, one or more
of the foregoing characteristics may be applied on a weighted average basis as
described in the Pooling and Servicing Agreement.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the Trustee, which will be used to acquire additional
Contracts or Mortgage Loans from time to time during the time period specified
in the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Contracts or Mortgage Loans,
such Pre-Funded Amount may be invested in one or more Eligible Investments. Any
Eligible Investment must mature no later than the Business Day prior to the next
Distribution Date.
During any Pre-Funding Period, the Company will be obligated (subject only
to the availability thereof) to transfer to the related Trust additional
Contracts or Mortgage Loans from time to time during such Pre-Funding Period.
Such additional Contracts or Mortgage Loans will be required to satisfy certain
eligibility criteria more fully set forth in the related Prospectus Supplement,
which eligibility criteria will be consistent with the eligibility criteria of
the Contracts or Mortgage Loans included in the Trust as of the Closing Date,
subject to such exceptions as are expressly stated in such Prospectus
Supplement.
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Use of a Pre-Funding Account with respect to any issuance of Certificates
will be subject to the following general conditions: (a) the Pre-Funding Period
will not exceed three months from the related Closing Date, (b) the additional
Assets to be acquired during the Pre-Funding Period will be subject to the same
underwriting standards, representations and warranties as the Contracts or
Mortgage Loans included in the related Trust on the Closing Date (although
additional criteria may also be required to be satisfied, as described in the
related Prospectus Supplement), (c) the Pre-Funded Amount will not exceed 25% of
the principal amount of the Certificates issued pursuant to a particular
offering, (d) the Pre-Funded Amount will not exceed 25% of the Scheduled
Principal Balance of the Assets (inclusive of the related Pre-Funding Account)
as of the Cut-off Date, and (e) the Pre-Funded Amount shall be invested in
Eligible Investments.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of additional Contracts or Mortgage Loans by
the end of the Pre-Funding Period, the Certificateholders of the related Series
of Certificates then entitled to receive distributions of principal will receive
a prepayment of principal in an amount equal to the related Pre-Funded Amount
remaining in the Pre-Funding Account on the first Distribution Date following
the end of the Pre-Funding Period. Any such prepayment of principal would have
an adverse effect on the yield to maturity of Certificates purchased at a
premium, and would expose Certificateholders to the risk that alternative
investments of equivalent value may not be available at such later time.
A maximum of 5% of the Assets (including Assets acquired after Closing with
Pre-Funded Amounts) included in the Trust Estate will deviate from the
characteristics of the Assets described in the related Prospectus Supplement.
Further, information regarding additional Assets acquired by a Trust Estate
during the Pre-Funding Period comparable to the disclosure regarding the Assets
in the related Prospectus Supplement will be filed on a Current Report in Form
8-K (in addition to any other reporting requirements of the Trust under the
Exchange Act) within fifteen days following the end of the Pre-Funding Period.
DISTRIBUTION ACCOUNT
Payments on the Contracts and Mortgage Loans included in the Trust for a
Series will be remitted to the Certificate Account and then to the Distribution
Account for such Series. Such deposits may be made net of amounts required to
pay servicing fees and any amounts which are to be included in any Reserve Fund
as set forth in the related Prospectus Supplement. All or a portion of the
amounts in such Distribution Account, together with reinvestment income thereon
if payable to the Certificateholders, will be available, to the extent specified
in the related Prospectus Supplement, for the payment of previously unpaid
servicing and administrative fees and distributions of principal and interest on
each Class of the Certificates of such Series in the manner described in the
related Prospectus Supplement.
RESERVE FUNDS OR LIQUIDITY ACCOUNTS
If so stated in the Prospectus Supplement for a Series, the Company will
establish one or more Reserve Funds or Liquidity Accounts, which may be used by
the Trustee to make any required distributions of principal or interest on the
Certificates of the Series to the extent funds are not otherwise available. The
Company may fund a Reserve Fund by depositing cash, certificates of deposit
and/or letters of credit therein at the Closing Date, or a Reserve Fund may be
funded by the Trustee's deposit therein of Available Distribution amounts not
required to pay servicing or administrative fees or to make distributions on the
Certificates on each Distribution Date until amounts on deposit in the Reserve
Fund equal an initial required amount. The method of funding any Reserve Fund
will be described in the related Prospectus Supplement. Any Reserve Fund will be
maintained in trust but may or may not constitute a part of the Trust Estate for
the related Series. The Company may have certain rights on any Distribution Date
to cause the Trustee to make withdrawals from the Reserve Fund for a Series and
to pay such amounts in accordance with the instructions of the Company to the
extent that such funds are no longer required to be maintained for the
Certificateholders.
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INSURANCE
To the extent specified in the related Prospectus Supplement, the
Certificates of a Series or all or any part of the related Trust Estate may be
supported by insurance policies or alternate forms of credit enhancement
described below.
The insurers under Standard Hazard Insurance Policies are selected by the
related Obligors and are generally not required to meet any credit rating
criteria. Any other type of insurance supporting a Series of Certificates will
not in and of itself be subject to any specific credit rating requirements.
However, any such insurance obtained with respect to a Series will be considered
a part of the aggregate credit enhancement provided for such Series, and the
total credit enhancement obtained to support any Series must be in sufficient
quantity and of sufficient quality for the Classes of the Certificates of such
Series to merit the ratings assigned to such Classes by each applicable Rating
Agency, as described in the related Prospectus Supplement. The acceptability of
the insurers to the applicable Rating Agencies is the only criterion used in the
selection of any insurers other than insurers under Standard Hazard Insurance
Policies.
HAZARD INSURANCE
The following descriptions are general and do not purport to be complete.
Such descriptions are qualified in their entirety by reference to the
description of any material variances from such description contained in the
related Prospectus Supplement. In general, coverage under Standard Hazard
Insurance Policies and Special Hazard Insurance Policies varies among insurers.
STANDARD HAZARD INSURANCE POLICIES. The terms of an Agreement may require
the Servicer to cause to be maintained with respect to each Contract and
Mortgage Loan one or more Standard Hazard Insurance Policies. With respect to
Contracts, each such policy will provide, at a minimum, the same coverage as
that provided by a standard fire and extended coverage insurance policy that is
customary for manufactured housing and issued by a company authorized to issue
such policies in the state in which the related Manufactured Home is located.
The Standard Hazard Insurance Policies maintained for Mortgage Loans will
provide coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage. In general, the standard form of fire
and extended coverage policy will cover physical damage to, or destruction of,
the improvements on the related Manufactured Home or Mortgaged Property caused
by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specific to each policy.
Because the Standard Hazard Insurance Policies relating to the Contracts and
Mortgage Loans will be underwritten by different insurers and will cover
Manufactured Homes and Mortgaged Properties located in various states, such
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides, and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. When a Manufactured Home or Mortgaged Property is located (at the
time of origination of the related Contract or Mortgage Loan) in a flood area
identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the Servicer will cause to be maintained flood insurance providing
coverage in the same amount as that provided by the related Standard Hazard
Insurance Policy with respect to such Manufactured Home or Mortgaged Property,
to the extent such coverage is available.
Each Standard Hazard Insurance Policy must provide coverage in an amount at
least equal to the lesser of (1) the maximum insurable value of the Manufactured
Home or Mortgage Property or (2) the principal balance due from the Obligor on
the related Contract or Mortgage Loan; PROVIDED, HOWEVER, that the amount of
coverage provided by each Standard Hazard Insurance Policy must in any event be
sufficient to avoid the application of any co-insurance clause contained in the
policy.(1)
Each Standard Hazard Insurance Policy caused to be maintained by the
Servicer shall contain a standard loss payee clause in favor of the Servicer and
its successors and assigns. If any Obligor is in default in the payment of
premiums on its Standard Hazard Insurance Policy or Policies, the Servicer shall
pay such premiums out of its own funds, and may add such
(1)Each Standard Hazard Insurance Policy may contain a "coinsurance" clause
which, in effect, will require the insured at all times to carry insurance of a
specified percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the related Manufactured Home or
Mortgaged Property in order to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, such clause will
provide that the insurer's liability in the event of partial loss will not
exceed the lesser of (1) the actual cash value (the replacement cost less
physical depreciation) of the dwellings, structures and other improvements
damaged or destroyed or (2) such proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such dwellings, structures and other
improvements.
26
premium to the Obligor's obligation as provided by the Contract or Mortgage
Loan, but may not add such premium to the remaining principal balance of the
Contract or Mortgage Loan. All amounts collected by the Servicer under any
Standard Hazard Insurance Policy maintained with respect to a Mortgage Loan
(less amounts to be applied to the restoration or repair of the Mortgaged
Property and other amounts necessary to reimburse the Servicer for previously
incurred advances or approved expenses, which may be retained by the Servicer)
will be deposited to the applicable Certificate Account.
To the extent a Standard Hazard Insurance Policy is not maintained with
respect to a Manufactured Home or Mortgaged Property, the related Contract or
Mortgage Loan will be covered by one or more blanket insurance policies
maintained by the Servicer to insure against losses on the Contracts and
Mortgage Loans resulting from the absence or insufficiency of individual
Standard Hazard Insurance Policies. The Servicer shall pay the premium for such
blanket policy and shall pay any deductible amount with respect to claims under
such blanket policy.
If the Servicer repossesses a Manufactured Home or forecloses on a
Mortgaged Property on behalf of the Trustee, the Servicer shall either (1)
maintain at its expense hazard insurance with respect to such Manufactured Home
or Mortgaged Property, or (2) indemnify the Trustee against any damage to such
Manufactured Home or Mortgaged Property prior to resale, foreclosure sale, or
other disposition thereof.
Any losses incurred with respect to Contracts or Mortgage Loans due to
uninsured risks (including earthquakes, mudflows and floods) or insufficient
hazard insurance proceeds may, to the extent such losses are not covered by the
Special Hazard Insurance Policy for a Series, affect payments to holders of
Certificates of such Series.
SPECIAL HAZARD INSURANCE POLICY. To the extent provided in the related
Prospectus Supplement, a special hazard insurance policy ("Special Hazard
Insurance Policy") will be obtained from the insurer or insurers (the "Special
Hazard Insurer") specified in the related Prospectus Supplement. Subject to the
limitations described below, a Special Hazard Insurance Policy will insure
against (1) loss by reason of damage to Manufactured Homes or Mortgaged
Properties underlying defaulted Contracts or Mortgage Loans caused by certain
hazards (including vandalism and earthquakes and, except where the related
Obligor is required to obtain flood insurance, floods and mudflows) not covered
by the Standard Hazard Insurance Policies covering such Contracts or Mortgage
Loans and (2) loss from partial damage to the Manufactured Homes or Mortgaged
Properties securing such defaulted Contracts or Mortgage Loans caused by reason
of the application of the coinsurance clause contained in the applicable
Standard Hazard Insurance Policies. The Special Hazard Insurance Policy for a
Series, however, will not cover losses occasioned by war, certain governmental
actions, nuclear reaction and certain other perils. The amount of coverage, if
any, under the Special Hazard Insurance Policy with respect to a Series will be
specified in the related Prospectus Supplement.
Subject to the foregoing limitations, the Special Hazard Insurance Policy
with respect to a Series will provide that, when there has been damage to the
Manufactured Home or Mortgaged Property securing a defaulted Contract or
Mortgage Loan and such damage is not covered by the Standard Hazard Insurance
Policy maintained by the related Obligor or the Servicer, the Special Hazard
Insurer will pay the lesser of (a) the cost of repair of such property or (b)
upon transfer of such property to the Special Hazard Insurer, the unpaid
principal amount of such Contract or Mortgage Loan at the time of the
acquisition of such property, plus accrued interest to the date of claim
settlement (excluding late charges and penalty interest) and certain expenses
incurred in respect of such property. No claim may be validly presented under a
Special Hazard Insurance Policy unless (1) the Standard Hazard Insurance Policy
covering the Manufactured Home or Mortgaged Property securing the Contract or
Mortgage Loan has been kept in force and other reimbursable protection,
preservation and foreclosure expenses have been paid (all of which must be
approved in advance as necessary by the Special Hazard Insurer) and (2) the
insured has acquired title to the Manufactured Home or Mortgaged Property as a
result of default by the related Obligor. If the sum of the unpaid principal
amount plus accrued interest on a Contract or Mortgage Loan, plus certain
related expenses, is paid by the Special Hazard Insurer, the amount of further
coverage under the Special Hazard Insurance Policy will be reduced by the amount
of such payment less any net proceeds from the sale of the Manufactured Home or
Mortgaged Property. Any amount paid as the cost of repair of the Manufactured
Home or Mortgaged Property will reduce coverage by such amount.
The Agreement with respect to a Series will require the Servicer to
maintain any Special Hazard Insurance Policy for such Series in full force and
effect, subject to certain conditions. See "Sale and Servicing of the Mortgage
Loans -- Maintenance of Insurance Policies and Other Servicing Procedures"
herein. The Servicer also must present claims, on behalf of the
Certificateholders and the Trustee, for all losses not otherwise covered by the
applicable Standard Hazard Insurance Policies and take all reasonable steps
necessary to permit recoveries on such claims. See "Sale and Servicing of the
Mortgage Loans -- Maintenance of Insurance Policies and Other Servicing
Procedures -- Presentation of Claims" herein.
To the extent provided in the related Prospectus Supplement, in lieu
(partially or wholly) of maintaining a Special Hazard Insurance Policy with
respect to a Series, a deposit of cash, a certificate of deposit, a letter of
credit or any other instrument acceptable to each Rating Agency rating the
Series as described in the related Prospectus Supplement may be
27
provided in an amount and for a term acceptable to each such Rating Agency. Such
a deposit will be credited to a Special Hazard or similar fund and the Trustee
or Servicer will be permitted to draw on the fund to recover losses that would
otherwise be covered by a Special Hazard Insurance Policy ("Special Hazard
Losses"). Special Hazard Losses may also be allocated to the Certificates of a
Series on the terms and subject to the conditions and limitations set forth in
the related Prospectus Supplement. The Company may also elect to insure against
Special Hazard Losses by the delivery of Additional Assets to the Trust rather
than through a Special Hazard Insurance Policy or special hazard fund.
A Special Hazard Insurance Policy, if any, securing a Series may insure
against losses on Contracts or Mortgage Loans assigned to Trusts for other
Series of Certificates or that secure other pass-through securities or
collateralized mortgage or manufactured housing contract obligations issued by
the Company or one of its affiliates; PROVIDED, HOWEVER, that the extension of
coverage (and corresponding assignment of the Special Hazard Insurance Policy)
to secure any other Series or such other securities or obligations will not be
permitted if it would result in the downgrading of the credit rating of any
outstanding Certificates of any Series offered hereby assigned by any Rating
Agency identified in the related Prospectus Supplement.
CREDIT INSURANCE
Any credit insurance relating to the Contracts or Mortgage Loans underlying
a Series of Certificates will be described in the Prospectus Supplement.
Mortgage Loans underlying a Series of Certificates will, to the extent
described in the related Prospectus Supplement, be covered by primary mortgage
insurance policies ("Primary Mortgage Insurance Policies"). Contracts and
Mortgage Loans underlying a Series may, to the extent described in the related
Prospectus Supplement, be supported by FHA insurance, VA guarantees or one or
more pool insurance policies (each a "Pool Insurance Policy") or any combination
thereof (collectively, and together with any related Primary Mortgage Insurance
Policies, FHA insurance or VA guarantees, the "Credit Insurance" for such
Series).
No Mortgage Loan will be covered by a Primary Mortgage Insurance Policy. To
the extent so specified in the related Prospectus Supplement, the Servicer will
maintain a Primary Mortgage Insurance Policy on any Conventional Mortgage Loan
with an initial Mortgage Loan-to-Value Ratio of greater than 80%. Any Primary
Mortgage Insurance Policy that is so maintained will provide coverage on at
least the principal amount of the covered Mortgage Loan in excess of 75% of the
original appraised value of the related Mortgaged Property, which coverage will
remain in force until the principal balance of such Mortgage Loan is reduced to
80% of such original appraised value. A Primary Mortgage Insurance Policy also
may be canceled, with the consent of the Servicer and any applicable Pool
Insurer, after the policy has been in effect for more than two years if the
Mortgage Loan-to-Value Ratio of such Mortgage Loan has declined to 80% or less
based upon the current fair market value of the related Mortgaged Property.
Certain other Mortgage Loans may also be covered by Primary Mortgage
Insurance Policies. Certain Primary Mortgage Insurance Policies may, to the
extent required by the related Prospectus Supplement, and subject to their
provisions and to certain conditions and exclusions described below, provide
full coverage against any loss sustained by reason of nonpayments by the related
Mortgagor (a "Full Coverage Insurance Policy").
The Pool Insurance Policy or Policies for a Series, if any, will be
designed to provide coverage for all Conventional Mortgage Loans which are not
covered by Full Coverage Insurance Policies. However, neither the Primary
Mortgage Insurance Policies nor the Pool Insurance Policies will insure against
certain losses sustained in the event of a personal bankruptcy of the Mortgagor
under a Mortgage Loan. See "Certain Legal Aspects of Contracts and Mortgage
Loans -- The Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations
on Lenders" herein. Such losses may be covered to the extent provided by the
Obligor Bankruptcy Insurance, if any, described below for such Series.
The Credit Insurance policies will not provide coverage against hazard
losses. Certain hazard risks will be covered by Standard Hazard Insurance
Policies or Special Hazard Insurance Policies, but other hazard risks will not
be insured and thus may affect payments to holders of related Certificates. See
" -- Hazard Insurance" above.
To the extent that Primary Mortgage Insurance Policies, FHA insurance or VA
guarantees do not cover all losses on a defaulted or foreclosed Contract or
Mortgage Loan, and to the extent such losses are not covered by the Pool
Insurance Policy for the related Series of Certificates, if any, such losses
would affect payments to holders of related Certificates.
The following descriptions of Credit Insurance policies and the coverage
thereunder are provided for general informational purposes only, and do not
purport to be complete. There can be no assurance that the actual policies and
coverage with respect to a specific Series will comply with these descriptions.
PRIMARY MORTGAGE INSURANCE. Any Primary Mortgage Insurance Policy covering
Mortgage Loans will be issued by the related Mortgage Insurer pursuant to the
Mortgage Insurer's applicable master policy. The Company and the Trustee as
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assignee of the Mortgage Loans will be the insureds or assignees of record (the
"Insured"), as their interests may appear, under each such Primary Mortgage
Insurance Policy. The Agreement with respect to such Series will require the
Servicer to cause a Primary Mortgage Insurance Policy to be maintained in full
force and effect with respect to each Mortgage Loan covered by the Agreement (to
the extent such insurance is required by such Agreement) and to act on behalf of
the Insured with respect to all actions required to be taken by the Insured
under each such Primary Mortgage Insurance Policy.
The amount of a claim for benefits (the "Loss") under a Primary Mortgage
Insurance Policy covering a Mortgage Loan will generally consist of the insured
portion of the unpaid principal balance of the covered Mortgage Loan (as
described herein) and accrued and unpaid interest thereon and reimbursement of
certain expenses, less (1) all rents or other payments collected or received by
the Insured (other than the proceeds of hazard insurance) that are derived from
or in any way related to the related Mortgaged Property; (2) hazard insurance
proceeds in excess of the amount required to restore the related Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan;
(3) amounts expended but not approved by the Mortgage Insurer; (4) claim
payments previously made by the Mortgage Insurer; and (5) unpaid premiums.
As conditions precedent to the filing of or payment of a claim under a
Primary Mortgage Insurance Policy covering a Mortgage Loan, the Insured will
generally be required to (1) pay (a) all hazard insurance premiums and (b) as
necessary and approved in advance by the Mortgage Insurer, (i) real estate
property taxes, (ii) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (iii)
property sales expenses, (iv) any outstanding liens (as defined in such Primary
Mortgage Insurance Policy) on the Mortgaged Property and (v) foreclosure costs,
including court costs and reasonable attorneys' fees; (2) in the event of any
physical loss or damage to the related Mortgaged Property, restore and repair
the Mortgaged Property to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (3) tender to the Mortgage Insurer good and merchantable title to
and possession of the related Mortgaged Property. A Primary Mortgage Insurance
Policy may not reimburse the Insured for attorneys' fees in respect of a
foreclosed Mortgage Loan in excess of 3% of the unpaid principal balance plus
accrued and unpaid interest on such Mortgage Loan. As a result, legal expenses
in excess of such reimbursement limitation may be charged as a loss on the
related Certificates.
Other provisions and conditions of each Primary Mortgage Insurance Policy
covering a Mortgage Loan generally will provide that: (1) no change may be made
in the terms of such Mortgage Loan without the consent of the Mortgage Insurer;
(2) written notice must be given to the Mortgage Insurer within 10 days after
the Insured becomes aware that a Mortgagor is delinquent in the payment of a sum
equal to the aggregate of two Monthly Payments due under such Mortgage Loan or
that any proceedings affecting the mortgagor's interest in the Mortgaged
Property securing such Mortgage Loan have been commenced, and thereafter the
Insured must report monthly to the Mortgage Insurer the status of any such
Mortgage Loan until such Mortgage Loan is brought current, such proceedings are
terminated or a claim is filed; (3) the Mortgage Insurer will have the right to
purchase such Mortgage Loan, at any time after the 10 days' notice described in
clause (2) above and prior to the commencement of foreclosure proceedings, at a
price equal to the unpaid principal amount of the Mortgage Loan plus (a) accrued
and unpaid interest thereon and (b) reimbursable amounts expended by the Insured
for the real estate taxes and fire and extended coverage insurance on the
related Mortgaged Property for a period not exceeding 12 months, less the sum of
any claim previously paid under the policy with respect to such Mortgage Loan
and any due and unpaid premium with respect to such policy; (4) the Insured must
commence proceedings at certain times specified in the policy and diligently
proceed to obtain good and merchantable title to and possession of the related
Mortgaged Property; (5) the Insured must (a) notify the Mortgage Insurer of any
proceedings described in clause (4) above and provide the Mortgage Insurer with
copies of documents relating thereto, (b) notify the Mortgage Insurer of the
price amounts specified in clause (3) above at least 15 days prior to the sale
of the related Mortgaged Property by foreclosure, and (c) bid such amount unless
the Mortgage Insurer specifies a lower or higher amount; (6) the Insured may
accept a conveyance of the related Mortgaged Property in lieu of foreclosure
with written approval of the Mortgage Insurer provided the ability of the
Insured to assign specified rights to the Mortgage Insurer are not thereby
impaired or the specified rights of the Mortgage Insurer are not thereby
adversely affected by such conveyance; (7) the Insured agrees that the Mortgage
Insurer has issued the policy in reliance upon the correctness and completeness
of the statements contained in the application for the policy and in the
appraisal, plans and specifications and other exhibits and documentation
submitted therewith or at any time thereafter; (8) under certain policies, the
Mortgage Insurer will not pay claims involving or arising out of
misrepresentation or dishonest, fraudulent, criminal or knowingly wrongful acts
(including errors or omissions) by certain persons, or claims involving or
arising out of the negligence of certain persons if such negligence is material
either to the acceptance of the risk or to the hazard assumed by the Mortgage
Insurer; and (9) the Insured must comply with other notice provisions in the
policy.
The Mortgage Insurer will generally be required to pay to the Insured
either: (1) the insured percentage of the Loss; or (2) at its option under
certain of the Primary Mortgage Insurance Policies, the sum of the delinquent
monthly payments plus
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any advances made by the Insured, each to the date of the claim payment, and
thereafter, monthly payments in the amount that would have become due under the
Mortgage Loan if it had not been discharged plus any advances made by the
Insured until the earlier of (A) the date the Mortgage Loan would have been
discharged in full if the default had not occurred, or (B) an Approved Sale (as
defined below under " -- Pool Insurance"). Any rents or other payments collected
or received by the Insured which are derived from or are in any way related to
the related Mortgaged Property will be deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES ON CONTRACTS. Certain of the Contracts may
be FHA-insured or VA-guaranteed. The nature of any such FHA insurance or VA
guarantees is described generally below.
The regulations governing FHA manufactured home contract insurance provide
that insurance benefits are payable upon the repossession and resale of the
collateral and assignment of the contract to HUD. With respect to a defaulted
FHA contract, the servicer must follow applicable regulations before initiating
repossession procedures as a prerequisite to payment. These regulations include
requirements that the lender arrange a face-to-face meeting with the borrower,
initiate a modification or repayment plan, if feasible, and give the borrower 30
days' notice of default prior to any repossession. The insurance claim is paid
in cash by HUD. For manufactured housing contracts, the amount of insurance
benefits generally paid by the FHA currently is equal to 90% of the sum of (1)
the unpaid principal amount of the contract at the date of default and
uncollected interest earned to the date of default computed at the applicable
contract interest rate, after deducting the best price obtainable for the
collateral (based in part on a HUD-approved appraisal) and all amounts retained
or collected by the lender from other sources with respect to the contract; (2)
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 7.00% per annum; (3) costs
paid to a dealer or other third party to repossess or preserve the related
manufactured home; (4) the amount of any sales commission paid to a dealer or
other third party for the resale of the property; (5) with respect to any Land
Secured Contract, property taxes, special assessments and other similar charges
and hazard insurance premiums, prorated to the date of disposition of the
property; (6) uncollected court costs; (7) legal fees, not to exceed $1,000; and
(8) expenses for recording the assignment of the lien on the collateral to the
United States, in each case subject to applicable caps as set by regulations
governing the FHA from time to time.
The insurance available to a lender under FHA Title I insurance is subject
to the limit of a reserve amount equal to 10% of the original principal balance
of all Title I insured loans originated by the lender, which amount is reduced
by all claims paid to the lender and by an annual reduction in the reserve
amount of 10% of the reserve amount, and which is increased by an amount equal
to 10% of the original principal balance of insured loans subsequently
originated by the lender. The obligation to pay insurance premiums to the FHA is
the obligation of Oakwood, as the servicer of the FHA-insured Contracts.
The maximum guarantee that may be issued by the VA for a VA-guaranteed
contract is the lesser of (a) the lesser of $20,000 and 40% of the principal
amount of the contract and (b) the maximum amount of guaranty entitlement
available to the obligor veteran (which may range from $20,000 to zero). The
amount payable under any VA guarantee will be a percentage of the VA contract
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations, interest accrued on the
unpaid balance of the loan to the appropriate date of computation and limited
expenses of the contract holder, but in each case only to the extent that such
amounts have not been recovered through resale of the manufactured home. The
amount payable under the guarantee may in no event exceed the original
guaranteed amount.
POOL INSURANCE. The Company may obtain a Pool Insurance Policy to cover any
loss (subject to the limitations described below) incurred by reason of default
by the Obligors on the Contracts and/or Mortgage Loans (in the case of Mortgage
Loans, to the extent such loss is not covered by any Primary Mortgage Insurance
Policy). The amount of the Pool Insurance Policy (or Policies) for a Series, if
any, will be specified in the related Prospectus Supplement. A Pool Insurance
Policy for a Series, however, will not be a blanket policy against loss, because
claims thereunder may only be made for particular defaulted Contracts or
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below.
The Servicer will be required to maintain any Pool Insurance Policies for
each Series and to present or cause the Sub-servicers, if any, to present claims
to the Pool Insurer on behalf of the Trustee and the Certificateholders. As set
forth in the related Prospectus Supplement, any Pool Insurance Policy for a
Series will provide that as a condition precedent to the payment of any claim
the insured will be required (1) to advance hazard premiums on the Manufactured
Home or Mortgaged Property securing the defaulted Contract or Mortgage Loan; (2)
to advance, as necessary and approved in advance by the related insurer, (a)
real estate or personal property taxes, (b) all expenses required to preserve
and repair the Manufactured Home or Mortgaged Property, to protect the
Manufactured Home or Mortgaged Property from waste, so that the Manufactured
Home or Mortgaged Property is in at least as good a condition as it was in on
the date upon which coverage under the Pool Insurance Policy with respect to
such Manufactured Home or Mortgaged Property first became effective, ordinary
wear
30
and tear excepted, (c) property sales expenses, (d) any outstanding liens on the
Manufactured Home or Mortgaged Property, and (e) foreclosure costs, including
court costs and reasonable attorneys' fees; and (3) if there has been physical
loss or damage to the Manufactured Home or Mortgaged Property, to restore the
Manufactured Home or Mortgaged Property to its condition (ordinary wear and tear
excepted) as of the issue date of the Pool Insurance Policy. It also will be a
condition precedent to the payment of any claim relating to a Mortgage Loan
under a Pool Insurance Policy that the Insured maintain a Primary Mortgage
Insurance Policy that is acceptable to the Pool Insurer on all Mortgage Loans
covered by the Pool Insurance Policy that have Mortgage Loan-to-Value Ratios at
the time of origination in excess of 80%. Assuming satisfaction of these
conditions, the Pool Insurer will pay to the Insured the amount of the "loss"
which will generally be (1) the amount of the unpaid principal balance of the
Contract or Mortgage Loan immediately prior to an Approved Sale of the related
Manufactured Home or Mortgaged Property, plus (2) the amount of the accumulated
unpaid interest on such Contract or Mortgage Loan to the date of claim
settlement at the contractual rate of interest, plus (3) advances made by the
Insured as described above, less certain payments (including the proceeds of any
prior Approved Sale and any Primary Mortgage Insurance Policies). An "Approved
Sale" is (1) a sale of the related Manufactured Home or Mortgaged Property
acquired by the Insured because of a default by the Obligor if the Pool Insurer
has given prior approval to such sale; (2) a foreclosure or trustee's sale of
the related Manufactured Home or Mortgaged Property at a price exceeding the
minimum amount specified by the Pool Insurer; (3) the acquisition of the
Mortgaged Property under the Primary Mortgage Insurance Policy by the Mortgage
Insurer; or (4) the acquisition of the related Manufactured Home or Mortgaged
Property by the Pool Insurer. As a condition precedent to the payment of any
"loss" on any covered Contract or Mortgage Loan, the Insured must provide the
Pool Insurer with good and merchantable title to the related Manufactured Home
or Mortgaged Property if the Pool Insurer elects to take title to such
Manufactured Home or Mortgaged Property. If any property securing a defaulted
Contract or Mortgage Loan covered by a Pool Insurance Policy is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Servicer will not be required to expend its own funds to
restore the damaged Manufactured Home or Mortgaged Property unless it determines
(A) that such restoration will increase the proceeds on liquidation of the
Contract or Mortgage Loan after reimbursement of the Servicer for its expenses
and (B) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many Primary
Mortgage Insurance Policies may not insure) against losses sustained by reason
of defaults arising from, among other things, (1) fraud or negligence in the
origination or servicing of a Contract or Mortgage Loan, including
misrepresentation by the Obligor or the originator; (2) failure to construct
Manufactured Homes or Mortgaged Properties in accordance with plans and
specifications; and (3) a claim in respect of a defaulted Mortgage Loan
occurring when the Servicer, at the time of default or thereafter, was not
approved by the Mortgage Insurer.
The original amount of coverage under any Pool Insurance Policy securing a
Series will be reduced over the life of the Certificates of such Series by the
aggregate dollar amount of claims paid under such policy, less the aggregate of
net amounts realized by the Pool Insurer upon disposition of all repossessed or
foreclosed Manufactured Home or Mortgaged Properties covered thereby. The amount
of claims paid includes certain expenses incurred by the Servicer as well as
accrued interest on delinquent Contracts or Mortgage Loans to the date of
payment of the claim. The net amounts realized by a Pool Insurer in respect of a
Contract or Mortgage Loan will depend primarily on the market value of the
Manufactured Home or Mortgaged Property securing the defaulted Contract or
Mortgage Loan. The market value of a Manufactured Home or Mortgaged Property
will be determined by a variety of economic, geographic, social, environmental
and other factors and may be affected by matters that were unknown and could not
reasonably be anticipated at the time the original loan was made.
If aggregate net claims paid under a Pool Insurance Policy securing a
Series reach the original policy limit, coverage under the Pool Insurance Policy
will lapse and any further losses will be borne by the related Trust, and thus
may affect adversely payments to the Certificateholders of such Series. In
addition, unless the Servicer can determine that a P&I Advance in respect of a
delinquent Contract or Mortgage Loan would be recoverable from the proceeds of
the liquidation of such Contract or Mortgage Loan or any other source, the
Servicer will not be obligated to make a P&I Advance with respect to such
delinquency. See "Sale and Servicing of Contracts and Mortgage
Loans -- Advances" herein. The original amount of coverage under any Pool
Insurance Policy assigned to the Trust for a Series may also be reduced or
canceled to the extent each Rating Agency rating the Series confirms that such
reduction will not result in the lowering of the rating of the Certificates of
such Series.
A Pool Insurance Policy for a Series may insure against losses on the
Contracts or Mortgage Loans assigned to Trusts for other Series of Certificates
or that secure other pass-through securities or collateralized mortgage or
manufactured housing contract obligations issued by the Company or one of its
affiliates; PROVIDED, HOWEVER, that the extension of coverage (and corresponding
assignment of the Pool Insurance Policy) to secure any other Series or such
other securities or obligations will
31
not be permitted if it would result in the downgrading of the credit rating of
any outstanding Certificates of any Series offered hereby assigned by any Rating
Agency identified in the related Prospectus Supplement.
OBLIGOR BANKRUPTCY INSURANCE
In the event of a personal bankruptcy of an Obligor, the bankruptcy court
may establish the value of the related Manufactured Home or Mortgaged Property
at an amount less than the then Unpaid Principal Balance of the Contract or
Mortgage Loan secured by such Manufactured Home or Mortgaged Property. The
amount of the secured debt could be reduced to the value of the collateral
property, and the holder of the Contract or Mortgage Loan thus would become an
unsecured creditor to the extent the outstanding principal balance of such
Contract or Mortgage Loan exceeds the value assigned to the underlying
Manufactured Home or Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Contract or Mortgage Loan can
result from a bankruptcy proceeding. See " -- The Contracts -- Enforcement of
Security Interests in Manufactured Homes" and " -- The Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders," each
under the heading "Certain Legal Aspects of Contracts and Mortgage Loans"
herein. Losses resulting from a bankruptcy proceeding affecting Contracts or
Mortgage Loans will, to the extent specified in the related Prospectus
Supplement, be covered by obligor bankruptcy insurance for the related Series
(the "Obligor Bankruptcy Insurance"). The amount and term of any Obligor
Bankruptcy Insurance for a Series must be acceptable to each Rating Agency
rating the Series. Subject to the terms of any Obligor Bankruptcy Insurance, the
insurer may have the right to purchase any Contract or Mortgage Loan with
respect to which a payment has been made or may be made, for an amount equal to
the Unpaid Principal Balance of such Contract or Mortgage Loan plus accrued and
unpaid interest thereon. To the extent Obligor Bankruptcy Insurance is required
by a Prospectus Supplement, the Company may, partially or entirely in lieu of
Obligor Bankruptcy Insurance, deposit or cause to be deposited cash, a
certificate of deposit, a letter of credit or any other instrument acceptable to
each Rating Agency rating the related Series as described in the related
Prospectus Supplement. Such a deposit will be credited to a Obligor Bankruptcy
or similar fund and the Trustee or Servicer will be able to draw on the fund to
recover losses that otherwise would be insured against by Obligor Bankruptcy
Insurance. The amount of any Obligor Bankruptcy Insurance for a Series or any
deposit in lieu thereof may be reduced as long as any such reduction will not
result in a reduction of the then applicable rating of the Series by any Rating
Agency rating the Series as described in the related Prospectus Supplement. Any
Obligor Bankruptcy Insurance or any obligor bankruptcy fund maintained with
respect to a Series may insure against losses on Contracts or Mortgage Loans
assigned to Trusts for other Series of Certificates or that secure other
pass-through securities or collateralized mortgage or manufactured contract
obligations issued by the Company or one of its affiliates; PROVIDED, HOWEVER,
that the extension of coverage (and corresponding assignment of an Obligor
Bankruptcy Insurance policy or obligor bankruptcy fund) to secure any other
Series or such other securities or obligations will not be permitted if it would
result in the downgrading of the credit rating of any outstanding Certificates
of any Series offered hereby assigned by a Rating Agency identified in the
related Prospectus Supplement. The Company may elect to deposit Additional
Assets to the Trust in lieu of obtaining any required Obligor Bankruptcy
Insurance or establishing a obligor bankruptcy fund.
The foregoing description does not purport to be complete and is qualified
in its entirety by reference to any description of Obligator Bankruptcy
Insurance contained in the related Prospectus Supplement.
DELIVERY OF ADDITIONAL ASSETS
To the extent provided in the related Prospectus Supplement, in lieu of or
in addition to providing Pool Insurance, Special Hazard Insurance, Obligor
Bankruptcy Insurance or other insurance, the Company may assign to the Trust for
a Series of Certificates non-recourse guaranties of the timely payment of
principal and interest on Contracts and Mortgage Loans included in the Trust
secured by other assets satisfactory to each Rating Agency rating the Series.
The Company may also assign or undertake to deliver such other assets to any
Trust by such other means as may be specified in the related Prospectus
Supplement. Such other assets may consist of additional Contracts or Mortgage
Loans, letters of credit or other Eligible Investments ("Additional Assets").
INVESTMENT OF FUNDS
Funds deposited in or remitted to the Certificate Account, the Distribution
Account, any Reserve Fund and any other funds and accounts for a Series are to
be invested by the Trustee, as directed by the Servicer, in certain eligible
investments ("Eligible Investments"), which include (1) obligations of the
United States or any agency thereof provided such obligations are backed by the
full faith and credit of the United States; (2) within certain limitations,
securities bearing interest or sold at a discount issued by any corporation,
which securities are rated in the rating category required to support the then
applicable ratings assigned to that Series; (3) commercial paper which is then
rated in the commercial paper rating category required to support the then
applicable ratings assigned to that Series; (4) demand and time deposits,
certificates of deposit, bankers' acceptances and federal funds sold by any
depository institution or trust company incorporated under the laws of the
United
32
States or of any state thereof, provided that either the senior debt obligations
or commercial paper of such depository institution or trust company (or provided
that either the senior debt obligations or commercial paper of the parent
company of such depository institution or trust company) are then rated in the
security rating category required to support the then applicable ratings
assigned to that Series; (5) demand and time deposits and certificates of
deposit issued by any bank or trust company or savings and loan association and
fully insured by the Federal Deposit Insurance Corporation (the "FDIC"); (6)
guaranteed reinvestment agreements issued by any insurance company, corporation
or other entity acceptable to each Rating Agency rating that Series at the time
of issuance of the Series; (7) certain repurchase agreements relating to United
States government securities; and (8) certain money market mutual funds
investing primarily in the obligations of the United States; PROVIDED, such
mutual funds are rated in a rating category sufficient to support the initial
ratings assigned to that Series.
Eligible Investments with respect to a Series will include only obligations
or securities that mature on or before the date on which the invested funds are
required or may be anticipated to be required to be applied for the benefit of
the holders of such Series. Any income, gain or loss from such investments for a
Series will be credited or charged to the appropriate fund or account for such
Series. Reinvestment Income from Eligible Investments may be payable to the
Servicer as additional servicing compensation and, in that event, will not
accrue for the benefit of the Certificateholders of that Series.
If a reinvestment agreement is obtained with respect to a Series, the
related Agreement will require the Trustee to invest funds deposited in the
Certificate Account, the Distribution Account and the Reserve Fund, if any, for
that Series pursuant to the terms of the reinvestment agreement.
CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, Certificate Guarantee
Insurance, if any, with respect to a Series of Certificates may be provided by
one or more insurers. Such Certificate Guarantee Insurance may guarantee, with
respect to one or more Classes of Certificates of the related Series, timely
distributions of interest and full distributions of principal on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. A copy of the Certificate
Guarantee Insurance documentation for a Series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K within 15 days of
issuance of the Certificates of the related Series.
OAKWOOD HOMES GUARANTEE
If so specified in the related Prospectus Supplement, some or all of the
collections of principal of and interest on the Asset Pool of a Series may be
guaranteed by Oakwood Homes or one of its affiliates. The terms of and
limitations on any such guarantee will be described in the related Prospectus
Supplement. The Prospectus Supplement for any Series containing a guarantee of
Oakwood Homes will contain summary financial information for Oakwood Homes. In
addition, Oakwood Homes' reports under the Securities Exchange Act of 1934 will
be incorporated therein by reference. A copy of the guaranty agreement under
which Oakwood Homes provides a guarantee for the Asset Pool of a Series will be
filed with the Commission as an exhibit to a Current Report on Form 8-K within
15 days of issuance of such Certificates.
ALTERNATE CREDIT ENHANCEMENT
From time to time with respect to a Series of Certificates, the Company or
the Servicer may obtain or cause to be obtained further or other liquidity
enchancement, insurance policies, guarantees, letters of credit, or surety bonds
(or make deposits in lieu thereof or in addition thereto) to provide for the
enhancement of the credit rating of such Certificates. To the extent any such
other enhancements are obtained or provided for with respect to a Series of
Certificates, or deposits are made in lieu thereof or in addition thereto, a
description thereof will be set forth in the related Prospectus Supplement.
33
UNDERWRITING POLICIES
CONTRACT UNDERWRITING GUIDELINES
Oakwood employs underwriting standards established pursuant to DFC's
guidelines when originating Contracts for DFC.
Contracts included in an Asset Pool will have been underwritten by Oakwood.
DFC pays Oakwood a loan origination fee with respect to its underwriting
activities on DFC's behalf. These Contracts may have been originated in the name
of DFC, or by a third party manufactured housing broker or dealer, in either
case, with funds provided by DFC. The following is a description of the
underwriting practices generally followed by Oakwood in connection with the
origination of Contracts funded by DFC.
A customer desiring to obtain financing for the purchase of a manufactured
home through DFC must complete a loan application form at a participating sales
center. Loan applications are forwarded electronically or by facsimile by sales
centers to Oakwood's credit department for consideration.
Upon receipt of a loan application, Oakwood evaluates the ability of the
loan applicant to make the prospective required monthly payments and to pay
related charges. Oakwood utilizes a credit scoring system to evaluate credit
applicants. Oakwood's underwriting guidelines require that each applicant's
credit history, residence history, employment history and debt-to-income ratios
be examined. Oakwood's credit officers review the information relating to these
factors provided by the applicant on his or her loan application and obtain
credit reports and contact employers and other references to verify credit,
residence and employment-related information. Oakwood's automated loan
origination system computes debt-to-income ratios and assigns each applicant an
overall credit score based upon information contained in the application and in
the credit bureau report obtained with respect to such applicant. An applicant's
overall credit score is the sum of his or her credit scores in various areas of
the credit review. Each credit officer is authorized to approve certain
applicants within his or her lending authority (1) who are assigned overall
credit scores and credit report scores above a specified minimum score, (2) who
have acceptable debt-to-income ratios and (3) who have applied for credit not in
excess of the credit officer's authority. In order for a prospective borrower to
be approved for a loan, (1) his or her total monthly fixed debt obligations
(including the monthly payment on the contract applied for, rental fees charged
for land generally, monthly installment payments to acquire the land on which
the home is located and hazard insurance premiums relating to the home
(collectively, the "Home Payments")) should not exceed 47% of his or her gross
monthly income and (2) the proposed Home Payments should not exceed 33% of his
or her gross monthly income, however, more stringent standards generally apply
to prospective borrowers with relatively lower incomes and/or relatively higher
loan to value ratios. The Company believes that these debt-to-income ratios are
generally consistent, with those employed by other lenders under manufactured
housing installment sales contracts. These ratios are generally higher than the
comparable debt-to-income ratios employed by lenders under many types of
residential first-lien mortgage loans. To the extent the credit underwriting
criteria applied to borrowers under Contracts are less stringent than those
applied to borrowers under conventional types of residential first-lien mortgage
loans, the level of delinquencies experienced with respect to a pool of
Contracts may be expected to be higher than the level of delinquencies that
would be experienced with respect to a pool of conventional, residential
first-lien mortgage loans. Such a higher level of delinquencies could result in
a higher level of losses incurred on a pool of Contracts as compared to a pool
of conventional, residential first-lien mortgage loans.
Loan applicants who do not meet the objective criteria above may be
approved, on a case-by-case basis, by higher-level management in Oakwood's
credit department. Generally, applicants whose credit scores are less than the
minimums established for credit officer approval are approved only if other
favorable objective underwriting factors are present which are outside the scope
of the scoring systems. In addition, even if an applicant obtains an acceptable
credit score and has acceptable debt-to-income ratios, a credit officer or
manager retains the discretion to reject a credit application if the credit
officer or manager discerns objective factors outside the scope of the scoring
systems that indicate a lack of creditworthiness.
With respect to those customers deemed to be creditworthy, DFC requires a
down payment in the form of cash, the trade-in equity in a previously owned
manufactured home, and/or the borrower's equity in any real property pledged as
additional collateral for the loan. The value of any real property pledged as
additional collateral is estimated by a duly licensed independent appraiser, and
the borrower's equity in real property for down payment purposes is limited to
75% of such estimated value. Generally, DFC requires a minimum down payment of
5% of the purchase price of the home for purchases of new homes, 10% of the
purchase price of the home for purchases of used homes (other than repossessed
homes), $1,000 for purchases of repossessed single-section homes, $2,000 for
purchases of repossessed multi-sectional homes, and the lesser of $1,000 or 5%
of the transfer price for homes transferred by a borrower to a new borrower. In
34
addition, if a borrower uses equity in real property as all or part of his or
her down payment, the total down payment must be at least equal to 5% of the
purchase price of the purchased home. The level of down payment offered by a
prospective purchaser of a new home will affect his or her overall credit score,
so 40 that higher down payments are required from applicants with relatively
lower credit scores in areas other than down payment levels. The purchase price
of a manufactured home for purposes of determining a down payment amount
generally includes the stated cash sale price of the manufactured home
(including the stated cash sale price of any accessories sold with the home,
which may include appliances, furniture, skirting, steps, porches and related
items), sales and any other state and local taxes.
The balance of the purchase price is financed by an installment sale
contract providing for a purchase money security interest in the manufactured
home and a mortgage on any real property pledged as additional collateral.
Normally, each contract provides for level monthly payments over the stated term
of the contract, which is generally 15 to 20 years (or 20 to 30 years in the
case of sales of multi-sectional homes and larger single-section homes), at a
fixed rate of interest (which may include a step-up rate). DFC believes the
typical manufactured home purchaser is primarily sensitive to the amount of the
monthly payment required by his or her contract, and not to the interest rate
charged thereunder.
GENERAL UNDERWRITING STANDARDS FOR MORTGAGE LOANS
Oakwood employs underwriting standards established pursuant to DFC's
guidelines when originating Mortgage Loans for DFC.
Mortgage Loans underwritten by Oakwood for DFC generally will be
underwritten substantially according to DFC's underwriting guidelines that
Oakwood uses to underwrite Contracts for DFC. See " -- Contract Underwriting
Guidelines" above. Any different underwriting standards that applied to the
Mortgage Loans included in any particular Asset Pool will be described in the
related Prospectus Supplement.
With respect to any Mortgage Loans underwritten by an entity other than
Oakwood, the Company expects that the originator will have underwritten and
originated such Mortgage Loans in compliance with underwriting standards which
are intended to evaluate the Obligor's credit standing and repayment ability and
the value and adequacy of the related Mortgaged Properties as collateral in
accordance with standard procedures complying with the applicable federal and
state laws and regulations. FHA Mortgage Loans and VA Mortgage Loans will comply
with the underwriting policies of FHA and VA, respectively. Conventional
Mortgage Loans will comply with the underwriting policies of the originator,
which will be described in the related Prospectus Supplement. Each Mortgage Loan
included in the Trust for a Series will have been originated by a savings and
loan association, savings bank, commercial bank, credit union, insurance
company, or similar institution which is supervised and examined by a federal or
state authority, or by a mortgagee approved by HUD.
The adequacy of a Mortgaged Property as security for a Mortgage Loan will
be determined by an appraisal performed by an appraiser who, at the time the
appraisal was made was duly licensed. The appraiser must personally inspect the
property and will prepare a report which customarily includes a market data
analysis based on recent sales of comparable homes and, when deemed applicable,
a replacement cost analysis based on the current cost of constructing a similar
home.
The Company will obtain representations and warranties from the Seller that
each related Mortgage Loan was originated in accordance with the underwriting
guidelines described above and in the applicable Prospectus Supplement. Any
Mortgage Loan that does not comply with such standards after inclusion in an
Asset Pool must be repurchased or substituted for by its Seller, unless such
Mortgage Loan is otherwise demonstrated to be includible in the Asset Pool, to
the satisfaction of the Company. See "Description of the
Certificates -- Representations and Warranties" herein.
SALE AND SERVICING OF CONTRACTS AND MORTGAGE LOANS
ASSIGNMENT OF CONTRACTS AND MORTGAGE LOANS
Pursuant to the applicable Pooling and Servicing Agreement, the Company
will cause the Contracts and Mortgage Loans and all other assets comprising the
related Trust Estate to be sold, assigned and transferred to the related
Trustee, together with all principal and interest payments due on such Contracts
and Mortgage Loans after the date specified in the related Prospectus Supplement
(the "Cut-off Date") and all prepayments of principal collected on or after such
Cut-off Date. In exchange for the Contracts and Mortgage Loans assigned to the
Trustee, the Trustee will deliver Certificates of the related Series in
authorized denominations, registered in such names as the Company may request,
representing the beneficial ownership interest in the related Trust Estate, to
the Company or its designee. Each Contract and Mortgage Loan included in a Trust
Estate will be identified in a schedule appearing as an exhibit to the related
Pooling and Servicing Agreement. Such schedule will contain information as to
the Cut-off Date Principal Balance of each Contract or Mortgage Loan and the
Asset
35
Rate, original principal balance and certain other information concerning each
such Contract and Mortgage Loan. Such schedule is referred to herein as the
"Contract Schedule" to the extent it identifies Contracts, the "Mortgage Loan
Schedule" to the extent it identifies Mortgage Loans, and is referred to in its
entirety as the "Asset Schedule."
CONVEYANCE OF CONTRACTS. Prior to the conveyance of the Contracts to the
Trustee, the Servicer's operations department will complete a review of all of
the Contract Files, including the certificates of title to, or other evidence of
a perfected security interest in, the related Manufactured Homes, confirming the
accuracy of the related Contract Schedule delivered to the Trustee. With respect
to any Land Secured Contract, the Servicer will also review the Mortgage and any
necessary assignments thereof evidencing the Seller's interest in the related
Real Property. Any Contract discovered not to agree with such Contract Schedule,
or any Contract for which any required Contract Document is discovered to be
missing or defective, in either case in a manner that is materially adverse to
the interests of the Certificateholders, will be required to be repurchased by
the Seller at the related Repurchase Price or replaced with another Contract as
described herein if such discrepancy, incompleteness or defect is not cured
within 90 days after notice of such discrepancy, incompleteness or defect is
delivered to the Seller, except that in the case of a discrepancy between the
terms of a Contract and the Contract Schedule relating to the Unpaid Principal
Balance of a Contract, the Seller may deposit cash in the Certificate Account in
an amount sufficient to offset such discrepancy.
The Servicer will hold the original Contracts and copies of all material
documents and instruments relating to each Contract and evidencing the security
interest created by each Contract in the related Manufactured Home or real
estate as custodian on behalf of the Certificateholders in accordance with the
related Pooling and Servicing Agreement. In order to give notice of the
Trustee's right, title and interest in and to the Contracts, UCC-1 financing
statements identifying the Trustee or a co-trustee as the secured party or
purchaser and identifying all the Contracts as collateral will be filed in the
appropriate offices in the appropriate state. If a subsequent purchaser were
able to take physical possession of the Contracts without notice of the
assignment of the Contracts to the Trustee, the Trustee's interest in the
Contracts could be defeated. To provide some protection against this
possibility, in addition to filing UCC-1 financing statements, within one week
after the initial delivery of the Certificates, the Contracts will be stamped or
otherwise marked by the Servicer to reflect their assignment to the Trustee. See
"Certain Legal Aspects of Contracts and Mortgage Loans -- The Contracts" herein.
CONVEYANCE OF MORTGAGE LOANS. On or prior to the date of conveyance of the
Mortgage Loans to the Trustee, the Company will, as to each Mortgage Loan,
deliver or cause to be delivered to the Trustee or a custodian acting on behalf
of the Trustee (a "Custodian") the related mortgage note (a "Mortgage Note")
endorsed in blank or to the order of the Trustee, an original or a certified
copy of the related Mortgage, with evidence of recordation of the Mortgage noted
thereon or attached thereto, an assignment of the related Mortgage in recordable
form naming the Trustee as assignee (together with originals or certified copies
of all recorded assignments necessary to show an unbroken chain of assignment of
the related Mortgage from the original mortgagee thereunder to the Trustee), and
certain other original documents evidencing or relating to the Mortgage Loan.
Within one year after the Closing Date for a Series, the Company will cause
assignments of each related Mortgage to be recorded in the appropriate public
recording offices for real property records wherever necessary to protect the
Trustee's interest in the related Mortgage Loans. In lieu of recording
assignments of Mortgages in a particular 42 jurisdiction, the Company may
deliver or cause to be delivered to the Trustee an opinion of local counsel to
the effect that such recording is not necessary to protect the right, title and
interest of the Trustee in the related Mortgage Loans. In addition, the Seller
of a Mortgage Loan is required to submit to the Trustee with each Trustee
Mortgage Loan File a mortgagee title insurance policy, title insurance binder,
preliminary title report, or satisfactory evidence of title insurance for the
jurisdiction in which the related Mortgaged Property is located. If a
preliminary title report is delivered initially, the Seller is required to
deliver a final title insurance policy or other satisfactory evidence of the
existence of adequate title insurance. The Trustee or a Custodian will hold the
Trustee Mortgage Loan Files for the related Mortgage Loans, except to the extent
that any of the documents contained in such files are released to the Servicer
or a Sub-servicer for servicing purposes in accordance with the terms of the
related Agreement.
The Trustee or the Custodian (the latter if so specified in the related
Prospectus Supplement) will review any Trustee Mortgage Loan Files relating to a
Series. If any Mortgage Loan Document required to be included in a Trustee
Mortgage Loan File is missing or is found to be defective in any material
respect, and the Seller does not cure such defect within 90 days after its
receipt of notice of such missing document or document defect, the Seller will
be required to repurchase the Mortgage Loan at the related Repurchase Price or
replace such Mortgage Loan with a substitute Mortgage Loan as described under
"The Trusts -- Substitution of Contracts or Mortgage Loans" herein. This
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholder or the Trustee for a missing or defective Mortgage Loan
Document.
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REPRESENTATIONS AND WARRANTIES
The Company will make certain representations and warranties for each
Series in the related Agreement with respect to the related Contracts and
Mortgage Loans, including representations that it either is the owner of such
Contracts and Mortgage Loans or has a perfected first priority security interest
in the Contracts and Mortgage Loans. In addition, the Seller will make
representations and warranties with respect to the Contracts and Mortgage Loans
in the sales agreement pursuant to which the Contracts and Mortgage Loans were
transferred to the Company, including representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Company and the Trustee in respect of each Contract and Mortgage Loan.
The Seller will have represented, among other things, that (1) immediately
prior to the transfer and assignment of the Contracts and Mortgage Loans to the
Company, the Seller had good title to, and was the sole owner of, each Contract
and Mortgage Loan and there had been no other sale or assignment thereof from
the Seller; (2) as of the date of such transfer, the Contracts and Mortgage
Loans are subject to no offsets, defenses or counterclaims; (3) each Contract
and Mortgage Loan at the time it was made complied in all material respects with
applicable state and federal laws, including usury, equal credit opportunity and
disclosure laws; (4) as of the date of such transfer, each Contract creates a
valid first lien on the related Manufactured Home and such Manufactured Home is
free of material damage and is in good repair; (5) as of the date of such
transfer, no Contract or Mortgage Loan is more than the number of days
delinquent in payment set forth in the Prospectus Supplement and there are no
delinquent tax or assessment liens against the related Manufactured Home or
Mortgaged Property; (6) the Manufactured Home or Mortgaged Property securing
each Contract or Mortgage Loan is covered by a Standard Hazard Insurance Policy
providing coverage in the amount required by the related Agreement and that all
premiums now due on such insurance have been paid in full; (7) a lender's policy
of title insurance was issued on the date of the origination of each Mortgage
Loan and each such policy is valid and remains in full force and effect; (8) as
of the date of such transfer, each Mortgage subject to the Agreement evidences a
valid first lien on the related Mortgaged Property (subject only to (a) the lien
of current real property taxes and assessments, (b) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
and either being acceptable to mortgage lending institutions generally or
specifically reflected in the appraisal made in connection with the origination
of the related Mortgage Loan and (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage) and such property is free of
material damage and is in good repair; (9) with respect to each Contract and
Mortgage Loan, if the related Manufactured Home or Mortgaged Property is located
in an area identified by the Federal Emergency Management Agency as having
special flood hazards and subject in certain circumstances to the 43
availability of flood insurance under the National Flood Insurance Act of 1968,
as amended, such Manufactured Home or Mortgaged Property is covered by flood
insurance, if applicable regulations at the time such Contract or Mortgage Loan
was originated required that such flood insurance coverage be obtained; (10) for
any Trust for which a REMIC election is to be made, each related Asset is a
Qualified Mortgage; and (11) any FHA Contract, FHA Mortgage Loan, VA Contract or
VA Mortgage Loan has been serviced in compliance with applicable FHA or VA
regulations, and the FHA insurance or VA guarantee with respect to any such
Asset is in full force and effect.
The Company's right to enforce a Seller's representations and warranties
with respect to an Asset Pool will be assigned to the Trustee under the related
Agreement. To the extent that a Seller makes representations and warranties
regarding the characteristics of certain Contracts and Mortgage Loans, the
Company generally will not make such representations and warranties as to such
Contracts and Mortgage Loans. In the event that the representations and
warranties of the Seller are breached, and such breach or breaches materially
and adversely affect the interests of the Certificateholders in the related
Contracts and Mortgage Loans, the Seller will be required to cure such breach
or, if such cure is not effected within 90 days after the Seller is notified in
writing of such breach, to repurchase the affected Contracts or Mortgage Loans,
in general at a price equal to the Unpaid Principal Balance of such Contracts or
Mortgage Loans, together with unpaid interest thereon at the applicable Asset
Rates through the end of the month in which such repurchase is made, or to
substitute Contracts or Mortgage Loans in accordance with the criteria set forth
herein under "The Trusts -- Substitution of Contracts or Mortgage Loans."
The Servicer will be required under each Agreement to enforce the Seller's
obligations to cure breaches or to repurchase or substitute for Assets for the
benefit of the Trustee and the Certificateholders and to indemnify the Company
and its assignees (including the Trust) against losses or damages caused by such
breaches. The Seller's obligations to repurchase or substitute for Assets
affected by its breaches and to indemnify the Company and its assignees against
losses and damages caused by such breaches will constitute the sole remedies
available to Certificateholders or the Trustee for a breach of representation by
a Seller.
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Neither the Company nor the Servicer will be obligated to repurchase or
substitute for a Contract or Mortgage Loan if a Seller defaults on its
obligation to repurchase or substitute for such Asset, and no assurance can be
given that a Seller will carry out its repurchase or substitution obligations
with respect to Contracts and Mortgage Loans.
SERVICING
GENERAL. The Servicer will service and administer each Asset Pool assigned
to the Trustee either exclusively or through other servicing institutions
("Sub-servicers"), as more fully set forth below.
The Servicer and any Sub-servicer (the latter subject to general
supervision by the Servicer) for any Asset Pool will perform diligently all
services and duties specified in the related Agreement, consistently with the
servicing standards and practices of prudent lending institutions with respect
to manufactured housing installment sales contracts of the same type as the
Contracts and mortgage loans of the same type as the Mortgage Loans in those
jurisdictions where the related Manufactured Homes and Mortgaged Properties are
located or as otherwise specified in the Agreement. The Servicer will monitor
the performance of each Sub-servicer, if any, and will have the right to remove
a Sub-servicer at any time if it considers such removal to be in the best
interest of the related Certificateholders. The duties to be performed by the
Servicer, directly or through a Sub-servicer, with respect to a Series will
include (1) collection and remittance of principal and interest payments on the
related Assets; (2) administration of any related mortgage escrow accounts; (3)
collection of related insurance claims; (4) if necessary, repossession of
related Manufactured Homes and/or foreclosure on related Mortgaged Properties;
and (5) if necessary, the obligation to advance funds to the extent certain
payments are not made by the Obligors and are considered recoverable from late
Obligor payments, from proceeds of any applicable insurance policies or from
Liquidation Proceeds of the related Contract or Mortgage Loan. The Servicer
shall also provide information on a periodic basis to the Company and the
Trustee concerning the Contracts and Mortgage Loans, and shall file required
reports with the Commission concerning the Trusts as required by the Agreements.
If a Sub-servicer shall be terminated by the 44 Servicer, the servicing function
of the Sub-servicer either shall be transferred to a substitute Sub-servicer or
performed by the Servicer.
The Servicer shall keep in force throughout the term of each Agreement (1)
a policy or policies of insurance covering errors and omissions with respect to
its duties under such Agreement, and (2) a fidelity bond. Such policy or
policies and such fidelity bond shall be in such form and amount as is generally
customary among entities which service a portfolio of manufactured housing
installment sales contracts having an aggregate principal amount of $100 million
or more and which are generally regarded as servicers acceptable to
institutional investors.
The Servicer, to the extent practicable, shall cause the Obligors to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home or Mortgaged Property having a priority equal or senior to
the lien of the related Contract or Mortgage Loan, the Servicer shall advance
any such delinquent tax or charge to the extent it determines that it will be
able to recover such advance from the related Obligor or from Liquidation
Proceeds of the related Contract or Mortgage Loan.
COLLECTION PROCEDURES. The Servicer, directly or through Sub-servicers,
will make reasonable efforts to collect all payments called for under the
Contracts or Mortgage Loans and, consistently with the Agreement and any Pool
Insurance Policy, any Primary Mortgage Insurance Policy, FHA insurance, VA
guaranty and Obligor Bankruptcy Insurance, will follow such collection
procedures as it follows with respect to contracts or mortgage loans serviced by
it that are comparable to the Contracts or Mortgage Loans.
Under the Agreement, the Servicer will repossess, foreclose upon or
otherwise convert the ownership of properties that secure a defaulted Contract
or Mortgage Loan if no satisfactory arrangements can be made for collection of
delinquent payments. In connection with such repossession, foreclosure or other
conversion, the Servicer will follow such practices and procedures as it shall
deem necessary or advisable and as shall be normal and usual in its general
Contract and Mortgage Loan servicing activities. The Servicer, however, will not
be required to expend its own funds in connection with any repossession or the
restoration of any property unless it determines (1) that such restoration or
repossession will increase the proceeds of liquidation of the related Contract
or Mortgage Loan to the Certificateholders after reimbursement to itself for
such expenses and (2) that such expenses will be recoverable to it either
through Liquidation Proceeds or through Insurance Proceeds.
A Contract or the Mortgage Note or Mortgage used in originating a
conventional Mortgage Loan may contain a "due-on-sale" clause. See " -- The
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale'
Clauses" and " -- The Mortgage Loans -- Due-On-Sale Clauses," in each case under
the heading "Certain Legal Aspects of Contracts and Mortgage Loans" herein. The
Servicer may enforce "due-on-sale" clauses with respect to any Contract,
Mortgage Note or
38
Mortgage containing such a clause, provided that such enforcement has no adverse
effect on the coverage of any applicable Insurance Policy. In any case in which
a Manufactured Home or Mortgaged Property has been or is about to be conveyed by
the Obligor on the related Contract or Mortgage Loan and the due-on-sale clause
has not been enforced (or the related Contract or Mortgage Note is by its terms
assumable), the Servicer will be authorized, on behalf of the Trustee, to enter
into an assumption agreement with the person to whom such Manufactured Home or
Mortgaged Property has been or is about to be conveyed, if such person meets
certain loan underwriting criteria, including the criteria necessary to maintain
the coverage provided by any applicable Credit Insurance policies. In the event
that the Servicer enters into an assumption agreement in connection with any
such conveyance of a Manufactured Home or Mortgaged Property, the Servicer, on
behalf of the Trustee, may release the original Obligor from liability upon the
Contract or Mortgage Loan and substitute the assuming party as the new obligor
thereon. In no event can the assumption agreement permit a decrease in the Asset
Rate or an increase in the term of the assumed Contract or Mortgage Loan. Fees
collected for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation.
The Servicer, either directly or through Sub-servicers, to the extent
permitted by law, may establish and maintain an escrow account (the "Escrow
Account") in which mortgagors under Mortgage Loans may be required to deposit
amounts sufficient to pay taxes, assessments, mortgage insurance premiums and
standard hazard insurance premiums and other comparable items and in which
Obligors under Contracts will be required to deposit amounts sufficient to pay
standard hazard insurance premiums and other comparable items. Withdrawals from
the Escrow Account maintained for mortgagors may be made to effect timely
payment of taxes, assessments, mortgage insurance and hazard insurance, to
refund to mortgagors amounts determined to be overages, to pay interest to
mortgagors on balances in the Escrow Account to the extent required by law, to
repair or otherwise protect the related Mortgaged Properties and to clear and
terminate the Escrow Account. The Servicer will be responsible for the
administration of the Escrow Account and will be obligated to make advances to
such account when a deficiency exists therein, so long as it determines that
such advances will be recoverable from the related Obligors or from Liquidation
Proceeds collected with respect to the related Assets. The Servicer may decline
to establish Escrow Accounts with respect to any Contracts or Mortgage Loans in
its discretion.
COLLECTION OF PAYMENTS ON CONTRACTS AND MORTGAGE LOANS. The Servicer will
establish and maintain a Certificate Account for the benefit of the Trustee. The
Certificate Account must be an "Eligible Account;" I.E., it must be maintained
(1) at a 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 Federal Deposit Insurance Corporation (the "FDIC"), whose commercial
paper or long-term unsecured debt has a rating, as specified in the related
Agreement, sufficient to support the ratings requested on the Certificates of
the related Series, and which institution is subject to examination by federal
or state authorities; (2) in the corporate trust department of the Trustee; or
(3) at an institution otherwise acceptable to each applicable Rating Agency. The
Certificate Account is to be held in trust for the benefit of the Trustee on
behalf of the Certificateholders and shall be designated as specified in the
related Agreement. Funds in the Certificate Account will be invested in Eligible
Investments (as defined in the Agreement) that will mature or be subject to
redemption not later than the business day preceding the applicable monthly
Remittance Date. Earnings on amounts deposited into a Certificate Account shall
be credited to the account of the Servicer as servicing compensation in addition
to its monthly Servicing Fee. The Servicer may use such earnings to offset P&I
Advances due from the Servicer in respect of the Remittance Date next succeeding
the date on which such earnings were made or, at the Servicer's option, such
earnings may be released to the Servicer on such Remittance Date. The amount of
any losses incurred in respect of any such investments shall be deposited into
the Certificate Account by the Servicer out of its own funds promptly after such
losses are incurred.
All payments in respect of principal and interest on the Contracts and
Mortgage Loans in the Asset Pool for a Series that are received by the Servicer
on or after the applicable Cut-off Date (exclusive of collections relating to
scheduled payments due on or prior to the Cut-off Date) will be deposited into
the Certificate Account no later than the second business day following the
Servicer's receipt thereof. Such payments shall include the following:
39
(1) all Obligor payments in respect of principal, including principal
prepayments, on the Contracts and Mortgage Loans;
(2) all Obligor payments in respect of interest on the Contracts and
Mortgage Loans, together with moneys transferred from any Buy-Down Fund or
GPM Fund;
(3) all Net Liquidation Proceeds received and retained in connection
with the liquidation or disposition of defaulted Contracts, Mortgage Loans
or property acquired in respect thereof through repossession, foreclosure
or otherwise;
(4) all proceeds received under any title, hazard or other insurance
policy covering any Contract or Mortgage Loan, other than proceeds received
as part of Liquidation Proceeds or such proceeds that are to be applied to
the restoration or repair of the related Manufactured Home or Mortgaged
Property or released to the Obligor;
(5) any condemnation awards or settlements which are not released to
Obligors in accordance with normal servicing procedures;
(6) all amounts received from credit enhancement provided with respect
to a Series of Certificates;
(7) all proceeds of any Contract or Mortgage Loan (or property
acquired in respect thereof) that is repurchased by the related Seller or
by a terminating party as described above or under "The Pooling and
Servicing Agreements -- Termination" below; and
(8) all amounts, if any, required to be transferred to the Certificate
Account from a Reserve Fund pursuant to the Agreement.
In those cases where a Sub-servicer is servicing a Contract or Mortgage
Loan, the Sub-servicer will establish and maintain an Eligible Account (a
"Sub-servicing Account") that will comply with the standards set forth above for
the Certificate Account and which is otherwise acceptable to the Servicer. The
Sub-servicer is required to deposit into the Sub-servicing Account on a daily
basis all amounts enumerated in the preceding paragraph in respect of the
Contracts or Mortgage Loans as received by the Sub-servicer, less its servicing
compensation. On the date specified in the related Prospectus Supplement, the
Sub-servicer shall remit to the Servicer all funds held in the Sub-servicing
Account with respect to each related Contract or Mortgage Loan. The
Sub-servicer, to the extent described in the related Prospectus Supplement, may
be required to advance any monthly installment of principal and interest that
was not received, less its servicing fee, by the date specified in the related
Prospectus Supplement.
With respect to each Buy-Down Loan, the Servicer will deposit into a
custodial Eligible Account (which may be interest-bearing) complying with the
requirements set forth above for the Certificate Account (the "Buy-Down Fund")
an amount which, together with investment earnings thereon, will provide funds
sufficient to support the payments on such Buy-Down Loan on a level debt service
basis. The Servicer will not be obligated to supplement any Buy-Down Fund should
investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans (in which event distributions to the
Certificateholders may be affected).
With respect to each GPM Loan, the Servicer will, if and to the extent
provided in the related Prospectus Supplement, deposit in a custodial Eligible
Account (which may be interest-bearing) complying with the requirements set
forth above for the Certificate Account (the "GPM Fund") an amount which,
together with investment earnings thereon, will provide funds sufficient to
support the payments thereon on a level debt service basis. The Servicer will
not be obligated to supplement any GPM Fund should investment earnings thereon
prove insufficient to maintain the scheduled level of payments (in which event
distributions to the Certificateholders may be affected).
DISTRIBUTIONS ON CERTIFICATES. On each Remittance Date, the Servicer will
withdraw from the applicable Certificate Account and remit to the Trustee for
deposit into the Distribution Account (1) all scheduled payments of principal
and interest due on the related Contracts and Mortgage Loans during the related
Collection Period and collected by the Servicer from the related Obligors or
otherwise and (2) all unscheduled collections in respect of principal and
interest on the Contracts and Mortgage Loans received during the related
Prepayment Period, in each case to the extent such collections comprise part of
the Available Distribution (as specified in the related Prospectus Supplement)
for the upcoming Distribution Date (collectively, the "Remittance Amount"). In
addition, on each Remittance Date, the Servicer shall remit to the Trustee, for
deposit into the Distribution Account, the amount of its required P&I Advance
and of any Compensating Interest required to be paid by the Servicer for the
upcoming Distribution Date. See " -- Advances" and " -- Compensating Interest"
below. The Remittance Date for any Distribution Date shall be the business day
preceding such Distribution Date.
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The Available Distribution for any Series will be allocated among the
related Classes of Certificates in the proportion and order of application set
forth in the related Agreement and described in the related Prospectus
Supplement. Prior to each Distribution Date for a Series, the Servicer will
furnish to the Trustee a report setting forth certain information concerning the
underlying Asset Pool and amounts to be distributed on each related Class of
Certificates.
ADVANCES
The Servicer shall not be required to make an Advance to the extent it
determines, in its reasonable judgment, that such Advance, if made, would not be
recoverable from late collections from the related Obligor or from Liquidation
Proceeds or other collections in respect of the related Contract or Mortgage
Loan (such an advance being referred to as a "Non-Recoverable Advance"). The
advance obligation of a Trustee or Pool Insurer may also be limited to an amount
specified by the Rating Agency or Agencies rating the Certificates. Otherwise,
the Servicer will be required to advance funds to cover (1) delinquent payments
of principal and interest on related Contracts and Mortgage Loans ("P&I
Advances") and (2) delinquent payments of taxes, insurance premiums and escrowed
items in respect of related Contracts and Mortgage Loans and liquidation-related
expenses ("Servicing Advances," and together with P&I Advances, "Advances"). The
failure of the Servicer to make any required Advances under an Agreement
constitutes a default under such Agreement for which the Servicer may be
terminated. Upon a default by the Servicer, the Trustee (as substitute Servicer)
may, if so provided in the related Agreement, be required to make Advances,
provided that, in its reasonable discretion, it deems such Advances not to be
Non-Recoverable Advances. With respect to certain Assets, the Company may obtain
an endorsement to an applicable Pool Insurance Policy which obligates the Pool
Insurer to advance delinquent payments of principal and interest. The Pool
Insurer would only be obligated under such endorsement to the extent the Obligor
fails to make such payment and the Servicer fails to make a required Advance.
The Servicer may agree to reimburse the Pool Insurer for any sums the Pool
Insurer pays under such endorsement.
Any P&I Advances by the Servicer, the Trustee or a Pool Insurer, as the
case may be, must be deposited into the applicable Certificate Account or into
the Distribution Account and will be due not later than the Distribution Date to
which such delinquent payment relates. Any Advance made by the Servicer or the
Trustee or a Pool Insurer, as the case may be, will be reimbursable out of
future collections in respect of the particular Contract or Mortgage Loan in
respect of which the Advance was made (including collections of or from
Insurance Proceeds, Additional Assets or Liquidation Proceeds relating to such
Contract or Mortgage Loan) ("Related Proceeds"). If an Advance made by the
Servicer or a Trustee or a Pool Insurer later proves to be unrecoverable from
Related Proceeds, the Servicer or the Trustee or Pool Insurer, as the case may
be, will be entitled to reimbursement from funds in the Certificate Account or
Distribution Account prior to the disbursement of distributions to the
Certificateholders.
Any P&I Advances with respect to Contracts or Mortgage Loans included in
the Trust for any Series are intended to enable the Trustee to make timely
payment of the scheduled distributions of principal and interest on the
Certificates of such Series. However, neither the Servicer nor the Trustee nor
any Pool Insurer will insure or guarantee the Certificates of any Series or the
Contracts or Mortgage Loans included in the Trust for any Series.
COMPENSATING INTEREST
To the extent provided in a Prospectus Supplement, if a Contract or
Mortgage Loan is prepaid in full or liquidated other than on a Due Date, the
Obligor generally is only required to pay interest to the date of prepayment or
liquidation. In such event, for so long as Oakwood is the Servicer of the
related Asset, the Servicer may be obligated to pay interest from the last day
for which interest is due from the Obligor to the next Due Date, so long as such
amount does not exceed the Servicer's servicing compensation for such month
("Compensating Interest").
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE. The Servicer will cause to be maintained for
each Asset underlying a Series, or use its best reasonable efforts to cause each
Sub-servicer to cause to be maintained for each such Asset, a Standard Hazard
Insurance Policy providing coverage in an amount at least equal to the lesser of
(a) 100% of the replacement value of the related Manufactured Home or Mortgaged
Property or (b) the outstanding principal balance of such Contract or Mortgage
Loan. The Servicer also shall maintain on any Manufactured Home acquired by
repossession or on any Real Property or Mortgaged Property acquired through
foreclosure or deed in lieu of foreclosure of any Mortgage Loan, a Standard
Hazard Insurance Policy in an amount that is at least equal to the lesser of the
Unpaid Principal Balance of the defaulted Contract or Mortgage Loan or the
maximum insurable value of the Manufactured Home or Mortgaged Property. To the
extent permitted by applicable law and if so specified in the related Prospectus
Supplement, the Servicer may require Obligors on Contracts or Mortgage Loans
secured by Manufactured Homes, Real Properties or Mortgaged Properties located
in California to maintain earthquake insurance on their Manufactured Homes, Real
Properties or Mortgaged Properties. Otherwise, no earthquake or other additional
insurance is to be required of any Obligor or maintained on property acquired in
respect of a Contract or Mortgage
41
Loan, other than as required by applicable laws and regulations. If, at the time
of origination of a Contract or Mortgage Loan, the related Manufactured Home or
Mortgaged Property is located in a federally designated special flood hazard
area, the Servicer will cause to be maintained, or to use its best reasonable
efforts to cause the related Sub-servicer to cause to be maintained, flood
insurance, limited, under certain circumstances, to availability under the
National Flood Insurance Act of 1968, as amended. In the event that an Asset is
covered by a blanket policy providing coverage against losses incurred on Assets
as a result of the absence or insufficiency of individual Standard Hazard
Insurance Policies, the Servicer will be deemed conclusively to have satisfied
its obligations to cause to be maintained a Standard Hazard Insurance Policy for
such Asset. This blanket policy may contain a deductible clause, in which case
the Servicer will, in the event that there has been a loss that would have been
covered by such policy absent such deductible clause, deposit in the Certificate
Account the amount not otherwise payable under the blanket policy because of the
application of such deductible clause.
Any amounts collected by the Servicer under any such policies (other than
amounts to be applied to the restoration or repair of the related Manufactured
Home or Mortgaged Property or released to the Obligor in accordance with normal
servicing procedures) shall be deposited into the Certificate Account.
OTHER INSURANCE. To the extent specified in the related Prospectus
Supplement, the Servicer will maintain a Primary Mortgage Insurance Policy on
any Conventional Mortgage Loan with an initial Mortgage Loan-to-Value Ratio in
excess of 80% unless the conditions for waiver of such insurance by the Servicer
are met. See "The Trusts -- Insurance -- Credit Insurance -- Primary Mortgage
Insurance" herein.
The Servicer will be required to maintain any Special Hazard Insurance
Policy, any Obligor Bankruptcy Insurance and any Pool Insurance Policy for any
Series in full force and effect throughout the term of the related Trust,
subject to payment of the applicable premiums by the Trustee. The Servicer will
be required to notify the Trustee to pay from amounts in the Trust Estate the
premiums for any such Special Hazard Insurance Policy, any such Obligor
Bankruptcy Insurance and any such Pool Insurance Policy for such Series on a
timely basis. Any such premiums may be payable on a monthly basis in advance, or
pursuant to any other payment schedule acceptable to the applicable insurer. In
the event that the Special Hazard Insurance Policy, Obligor Bankruptcy Insurance
or Pool Insurance Policy for a Series is canceled or terminated for any reason
(other than the exhaustion of total policy coverage), the Servicer will be
obligated to obtain from another insurer a comparable replacement policy with a
total coverage which is equal to the remaining coverage (or a lesser amount if
the Servicer confirms in writing with each Rating Agency rating any Certificates
of such Series that such lesser amount will not impair the rating on such
Certificates) provided by the canceled or terminated Special Hazard Insurance
Policy, Obligor Bankruptcy Insurance or Pool Insurance Policy. However, if the
cost of any such replacement policy or bond is greater than the cost of the
policy or bond which has been terminated, then the amount of the coverage will
be reduced to a level such that the applicable premium will not exceed the cost
of the premium for the policy or bond that was terminated.
PRESENTATION OF CLAIMS. The Servicer, on behalf of itself, the Trustee and
the Certificateholders, will present claims to the issuer of each insurance
policy described herein (including the FHA and the VA), and will take such
reasonable steps as are necessary to permit recovery under such insurance
policies respecting defaulted Contracts or Mortgage Loans that are the subject
of bankruptcy proceedings. As set forth above, all collections by the Servicer
under any insurance policy are to be deposited into the Certificate Account for
the related Series and are subject to withdrawal as described above. With
respect to a Mortgage Loan or Contract that is serviced by a Sub-servicer, the
Sub-servicer, on behalf of itself, the Trustee and the Certificateholders will
present claims to the applicable insurer, and all collections shall be deposited
into the applicable Sub-servicing Account for deposit into the Certificate
Account.
If any property securing a defaulted Contract or Mortgage Loan is damaged
and proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, any FHA insurance or
any VA guarantee, as the case may be, the Servicer is not required to expend its
own funds to restore the damaged property unless it determines (1) that such
restoration will increase the proceeds to the Certificateholders upon
liquidation of the Contract or Mortgage Loan after reimbursement of the expenses
incurred by the Servicer and (2) that such expenses will be recoverable by it
through proceeds of the sale of the property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy, any FHA
insurance, or any VA guarantee, as the case may be.
If, in respect of any defaulted Contract or Mortgage Loan, recovery under
any related Pool Insurance Policy or any related Primary Mortgage Insurance
Policy, any FHA insurance, or any VA guarantee, as the case may be, is not
available, the Servicer nevertheless is obligated to follow such normal
practices and procedures as it deems necessary or advisable to liquidate the
collateral for the defaulted Contract or Mortgage Loan. If the proceeds of any
liquidation of the related Manufactured Home or Mortgaged Property are less than
the principal balance of the defaulted Contract or Mortgage Loan plus interest
accrued thereon at the applicable Asset Rate, the related Trust will realize a
loss in the amount of such difference plus the aggregate of expenses incurred by
the Servicer in connection with such proceedings.
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ALTERNATE CREDIT ENHANCEMENT. To the extent provided in a Prospectus
Supplement, the Company, the Servicer or another party, from time to time, may
be required to obtain or cause to be obtained an insurance policy, guarantee,
letter of credit or surety bond (or make deposits in lieu thereof) to enhance
the credit rating of the related Series of Certificates.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES. As compensation for its
servicing duties in respect of any Series, the Servicer will be entitled to the
Servicing Fee specified in a particular Prospectus Supplement. In addition, the
Servicer may be entitled to servicing compensation in the form of assumption
fees, late payment charges or otherwise, which fees or charges shall be retained
by the Servicer to the extent not required to be deposited into the related
Certificate Account.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with the servicing of the Contracts and Mortgage Loans
included in a Trust Estate, including, without limitation, payment of the fees
and expenses of the Trustee, payment of related insurance policy premiums (other
than premiums for Standard Hazard Insurance Policies or Primary Mortgage
Insurance Policies) and payment of expenses incurred in enforcing the
obligations of any Sub-servicers. Certain of these expenses may be reimbursable
from Liquidation Proceeds and proceeds of Pool Insurance and from specific
recoveries of costs.
The Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Contracts or
Mortgage Loans. The related Trust will suffer no loss by reason of such expenses
to the extent claims are paid under the related Pool Insurance Policies, if any.
If no Pool Insurance Policy is in effect for the Series, or if claims are either
not made or paid under the related Pool Insurance Policies or coverage
thereunder has been terminated or canceled, the related Trust will suffer a loss
to the extent that the Liquidation Proceeds of a defaulted Asset, after
reimbursement of the Servicer's related expenses, are less than the principal
balance of the Asset plus accrued interest thereon at the related Asset Rate. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of any Manufactured Home or
Mortgaged Property, such right of reimbursement being prior to the rights of the
related Certificateholders to receive any related Pool Insurance proceeds or
Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE. With respect to each Series of Certificates, the
Servicer will deliver each year to the Trustee an officer's certificate stating
that (i) a review of the activities of the Servicer and any Sub-servicers during
the preceding calendar year and of the Servicer's performance under the related
Agreement has been made under the supervision of such officer, and (ii) to the
best of such officer's knowledge, the Servicer has fulfilled all its obligations
under the Agreement throughout such year, and, to the best of such officer's
knowledge, based on such review, each Sub-servicer has fulfilled its obligations
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Such officer's certificate shall be accompanied by a
statement by a firm of independent public accountants to the effect that (1)
such firm has audited the financial statements of the Servicer for the
Servicer's most recently ended fiscal year and issued its report thereon; (2)
such audit included tests of the records and documents relating to manufactured
housing installment sale contracts and mortgage loans serviced by the Servicer
for others in accordance with the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, or any successor program promulgated by the
accounting profession ("USAP"); and (3) such other statements as are
contemplated under USAP, including, if called for under USAP, a statement as to
whether the Servicer's management's written assertion to such firm (which shall
be attached to the statement of such firm) that its servicing during the
applicable fiscal year complied with USAP's minimum servicing standards in all
material respects is fairly stated in all material respects. The audit tests
referred to in clause (2) of the preceding sentence in respect of any Series
shall be applied to manufactured housing installment sale contracts and mortgage
loans serviced under the related Pooling and Servicing Agreement and/or, in the
sole discretion of such firm, manufactured housing installment sale contracts
and mortgage loans serviced under pooling and servicing agreements, trust
agreements or indentures substantially similar to such Pooling and Servicing
Agreement (hereinafter referred to as "Pooling Agreements"). For purposes of
such statement, such firm may assume conclusively that all Pooling Agreements
under which the Servicer is the servicer of manufactured housing installment
sale contracts and mortgage loans for a trustee relating to certificates
evidencing an interest in manufactured housing installment sale contracts and
mortgage loans are substantially similar to one another except for any such
Pooling Agreement which by its terms specifically states otherwise.
43
THE POOLING AND SERVICING AGREEMENTS
The following summaries describe certain provisions of each Pooling and
Servicing Agreement, including the Standard Terms to Pooling and Servicing
Agreement to be incorporated by reference into each Series Agreement. Although
the Company believes that the foregoing is a fair summary of the material terms
of the Pooling and Servicing Agreement, the summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Pooling and Servicing Agreement for each Series. When
particular provisions or terms used in an Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries.
THE SERVICER
The Servicer shall not resign from the obligations and duties imposed on it
under a Pooling and Servicing Agreement, except (1) upon appointment of a
successor servicer and receipt by the Trustee of a letter from each applicable
Rating Agency that the Servicer's resignation and the appointment of the
successor will not, in and of itself, result in a downgrading of any rated
Certificates of the affected Series or (2) upon determination by the Servicer's
Board of Directors that the performance of its duties under the Agreement are no
longer permissible under applicable law. No such resignation shall become
effective until the Trustee or a successor servicer shall have assumed the
responsibilities and obligations of the Servicer in accordance with the
applicable Agreement.
Neither the Servicer nor any of its directors, officers, employees or
agents shall be under any liability to the Trust or the Certificateholders, and
all such Persons shall be held harmless, for any action taken or not taken in
good faith pursuant to each Pooling and Servicing Agreement, or for errors in
judgment; PROVIDED, HOWEVER, that no such Person shall be protected from
liability (1) for actions or omissions resulting from willful misfeasance, bad
faith or gross negligence in the performance of such Person's duties or by
reason of reckless disregard of such Person's obligations and duties under the
Agreement or (2) for breaches of representations or warranties made by such
Person in the Agreement. The Servicer and any of the directors, officers,
employees or agents of the Servicer may rely in good faith on any document of
any kind which, PRIMA FACIE, is properly executed and submitted by any Person
respecting any matters arising under an Agreement. The Servicer shall be under
no obligation to appear in, prosecute or defend any legal action unless such
action is related to its duties under an Agreement and such action in its
opinion does not involve it in any expense or liability, except as otherwise
explicitly provided in the Agreement; PROVIDED, HOWEVER, that the Servicer may
in its discretion undertake any such action that it deems necessary or desirable
with respect to an Agreement if the Certificateholders offer to the Servicer
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee for that Series. The Trustee for a Series may resign at any time, in
which event the Company will be obligated to attempt to appoint a successor
Trustee. The Company may remove a Trustee if the Trustee ceases to be eligible
to continue as Trustee under the applicable Agreement or upon the occurrence of
certain bankruptcy- or insolvency-related events with respect to the Trustee.
The Trustee for a Series will also be subject to removal at any time by the
holders of Certificates of such Series evidencing at least 51% of the Voting
Rights of such of Series, as specified in the related Agreement. If the
Certificateholders remove the Trustee other than for reasonable cause based upon
the Trustee's failure to continue to meet the eligibility requirements set forth
in the related Agreement or the Trustee's failure to perform its duties as
described therein, then the Certificateholders so removing the Trustee shall
bear any and all costs and expenses arising from such removal and substitution.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance by the Company of the appointment of
the successor Trustee.
A Trustee must be a corporation or a national banking association organized
under the laws of the United States or any state and authorized under the laws
of the jurisdiction in which it is organized to have corporate trust powers. It
must also have combined capital and surplus of at least $50,000,000 (or be a
Qualified Bank) and be subject to regulation and examination by state or federal
regulatory authorities. Although a Trustee may not be an affiliate of the
Company or the Servicer, either the Company or the Servicer may maintain normal
banking relations with the Trustee if the Trustee is a depository institution.
REPORTS TO CERTIFICATEHOLDERS
The Trustee for a Series will furnish the related Certificateholders with
monthly statements prepared by the Servicer (each a "Remittance Report")
containing information with respect to principal and interest distributions and
Realized Losses
44
for such Series and the assets of the related Trust. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. Copies of such monthly statements and any annual
reports prepared by the Servicer evidencing the status of its compliance with
the provisions of an Agreement will be furnished to related Certificateholders
upon request addressed to the Trustee.
A Remittance Report for a Distribution Date in respect of any Series of
Certificates will identify the following items:
(1) the related Available Distribution for such Distribution Date;
(2) the amount of interest distributable on such Distribution Date on
each Class of the Certificates of such Series, and the amount of interest
to be distributed on each such Class based upon the Available Distribution
for such Distribution Date;
(3) the amount to be distributed on such Distribution Date on each
Class of the Certificates of such Series to be applied to reduce the
Certificate Principal Balance of such Class, separately identifying any
portion of such amount attributable to prepayments;
(4) any other amounts to be distributed on the Certificates of such
Series (to the extent not covered by clauses (2) and (3) above);
(5) the aggregate amount of P&I Advances required to be made by the
related Servicer with respect to such Distribution Date in connection with
the related Asset Pool;
(6) the amount of any Realized Losses to be allocated to reduce the
Certificate Principal Balance of any Class of the Certificates of such
Series on such Distribution Date;
(7) the Certificate Principal Balance of each Class of the
Certificates of such Series after giving effect to the distributions and
allocations of any Realized Losses to be made on such Distribution Date;
(8) the amount of Due Date Interest Shortfall, Soldiers' and Sailors'
Shortfall and Realized Interest Loss, in each case if any, incurred during
the related Collection Period on the related Assets;
(9) the aggregate interest remaining unpaid, if any, for each Class of
the Certificates of such Series (exclusive of Shortfall allocated to such
Class), after giving effect to the distribution made on such Distribution
Date;
(10) the aggregate amount of withdrawals, if any, from any Reserve
Fund or any other form of credit enhancement, and the amount, if any,
available thereunder;
(11) the amount of the Servicing Fee in respect of such Distribution
Date;
(12) the aggregate number and the aggregate of the Unpaid Principal
Balances of outstanding Contracts and outstanding Mortgage Loans, stated
separately, that are (i) delinquent one month (i.e., 30 to 59 days) as of
the end of the related Prepayment Period, (ii) delinquent two months (i.e.,
60 to 89 days) as of the end of the related Prepayment Period, (iii)
delinquent three months (i.e., 90 days or longer) as of the end of the
related Prepayment Period and (iv) as to which repossession, foreclosure or
other comparable proceedings have been commenced as of the end of the
related Prepayment Period; and
(13) in the case of a Trust (or designated assets thereof) for which a
REMIC election has been or will be made, any other information required to
be provided to Certificateholders by the REMIC Provisions.
In the case of information furnished pursuant to clauses (2), (3) and (4) above,
the amounts shall be expressed, with respect to any Certificate, as a dollar
amount per $1,000 denomination; PROVIDED, HOWEVER, that if any Class of
Certificates does not have a Certificate Principal Balance, then the amounts
shall be expressed as a dollar amount per 10% Percentage Interest.
EVENTS OF DEFAULT
Events of Default by the Servicer under any Agreement will include (1) any
failure by the Servicer to remit funds to the Distribution Account as required
by the applicable Agreement, which failure continues unremedied for five days
(or such other period specified in the related Agreement) after the date upon
which such remittance was due; (2) any failure or breach by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements that materially and adversely affects the interests of
Certificateholders, which, in either case, continues unremedied for 60 days
after the giving of written notice of such failure or breach to the Servicer by
the related Trustee or by the Holders of Certificates
45
evidencing at least 25% of the Voting Rights for the applicable Series; and (3)
certain events involving insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the Servicer.
So long as an Event of Default remains unremedied, the Trustee may, and, at
the written direction of the Certificateholders of the applicable Series
evidencing greater than 50% of the Voting Rights for such Series, shall,
terminate all of the rights and obligations of the Servicer under the related
Agreement and in and to the related Contracts and Mortgage Loans and the
proceeds thereof, whereupon (subject to applicable law regarding the Trustee's
ability to make advances) the related Trustee or a successor Servicer will
succeed to all the responsibilities, duties and liabilities of the terminated
Servicer under the Agreement and such successor Servicer will be entitled to
similar compensation arrangements to those provided for the terminated Servicer.
In the event that the Trustee would be obligated to succeed the Servicer but is
unwilling or unable to do so, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a successor Servicer meeting the criteria
set forth in the related Agreement. Pending such appointment, the Trustee is
obligated to act as successor Servicer unless prohibited by law from doing so.
The Trustee and such successor Servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
paid to the terminated Servicer under the Agreement.
CERTIFICATEHOLDER RIGHTS
No Certificateholder will have any right under the related Agreement to
institute any proceeding with respect to such Agreement unless such holder
previously has provided the Trustee with written notice of a default thereunder
and unless the holders of Certificates evidencing at least 25% of the Voting
Rights for the applicable Series (a) requested the Trustee in writing to
institute such proceeding in its own name as Trustee and (b) have offered to the
Trustee reasonable indemnity and the Trustee for 15 days has neglected or
refused to institute any such proceeding. The Trustee will be under no
obligation to take any action or to institute, conduct or defend any litigation
under the related 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.
AMENDMENT
An Agreement may be amended by the Company, the Servicer, and the related
Trustee without the consent of the related Certificateholders, (1) to cure any
ambiguity therein; (2) to correct or supplement any provision therein that may
be inconsistent with any other provision therein; (3) to maintain the REMIC
status of the Trust and to avoid the imposition of certain taxes on any related
REMIC (if applicable); or (4) to make any other provisions with respect to
matters or questions arising under such Agreement that are not covered by such
Agreement, provided that such action will not adversely affect in any material
respect the interests any holder of Certificates of the related Series, as
evidenced by (A) an opinion of counsel independent of the Company, the Servicer
and the Trustee or (B) a letter from each Rating Agency from whom the Company
requested a rating of any of the Certificates of such Series stating that the
proposed amendment will not result in a downgrading of the rating of any of the
Certificates of such Series rated by such Rating Agency. An Agreement may also
be amended by the Company, the Servicer and the related Trustee with the consent
of the related Certificateholders evidencing a majority of the Voting Rights of
each affected Class for the purpose of adding any provisions to, or for the
purpose of eliminating any provisions from, or for the purpose of changing in
any manner any of the provisions of, such Agreement, or for the purpose of
modifying in any manner the rights of the Certificateholders; PROVIDED, HOWEVER,
that no such amendment that (a) reduces in any manner the amount of, or delays
the timing of, any payment received on or with respect to Contracts or Mortgage
Loans which are required to be distributed on any Certificate; (b) otherwise
materially adversely affects the rights of any Certificateholder; or (c) reduces
the percentage of Certificateholders required to consent to any amendment of the
related Agreement, may be effective without the consent of the holder of each
such Certificate.
TERMINATION
The obligations created by each Agreement will terminate upon the date
calculated as specified in the Agreement, generally upon (1) the later of the
final payment or other liquidation of the last Contract or Mortgage Loan subject
thereto and the disposition of all property acquired upon repossession of any
Manufactured Home or foreclosure of (or other realization on) any Mortgage Loan
and (2) the payment to the related Certificateholders of all amounts held by the
Servicer or the Trustee and required to be paid to them pursuant to the
Agreement. In addition, (1) subject to the specifications in the related
Prospectus Supplement, a Trust may be subject to early termination at the option
of the Company, the Servicer or the holders of a majority in interest of any
related Residual Certificates and (2) if so specified in the related Prospectus
Supplement, the Certificates of a Series shall be subject to redemption by the
Company, the Servicer or any other party specified in the related
46
Prospectus Supplement, as described more fully herein under "Description of the
Certificates -- Optional Redemption or Termination."
CERTAIN LEGAL ASPECTS OF CONTRACTS AND MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of manufactured housing installment sales contracts and mortgage loans.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially from state to state), the summaries do not purport to be
complete or to reflect the laws of any particular state, or to encompass the
laws of all states in which the security for the Contracts or Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts and Mortgage Loans.
Contracts differ from Mortgage Loans in certain material respects. In
general, Contracts may experience a higher level of delinquencies than Mortgage
Loans, because the credit underwriting standards applied to borrowers under
manufactured housing installment sales contracts generally are not as stringent
as those applied to borrowers under many conventional residential first-lien
mortgage loans. See "Underwriting Policies -- Contract Underwriting Guidelines"
herein. In addition, Manufactured Homes generally decline in value over time,
which may not necessarily be the case with respect to the Mortgaged Properties
underlying Mortgage Loans. Consequently, the losses incurred upon repossession
of or foreclosure on Manufactured Homes securing the Contracts may be expected
to be more severe in many cases than the losses that would be incurred upon
foreclosure on Mortgaged Properties securing Mortgage Loans (in each case
measured as a percentage of the outstanding principal balances of the related
Assets). The servicing of manufactured housing installment sales contracts is
generally similar to the servicing of conventional residential mortgage loans,
except that, in general, servicers of manufactured housing installment sales
contracts place greater emphasis on making prompt telephone contact with
delinquent borrowers than is generally customary in the case of the servicing of
conventional residential mortgage loans. See "Sale and Servicing of Contracts
and Mortgage Loans -- Servicing" herein. Realization on defaulted Contracts is
generally accomplished through repossession and subsequent resale of the
underlying Manufactured Homes by or on behalf of the Servicer, as described
below under " -- The Contracts," whereas realization on defaulted Mortgage Loans
is generally accomplished through foreclosure on the underlying Mortgaged
Properties or similar proceedings, as described below under " -- The Mortgage
Loans." Realization on defaulted Land Secured Contracts may involve a
combination of repossession and foreclosure-related procedures. See " -- The
Contracts" below. Certificates evidencing interests in Contracts may also be
subject to other risks that are not present in the case of Certificates
evidencing interests in Mortgage Loans. See "Risk Factors -- 3. Security
Interests in Manufactured Homes," " -- 4. Conveyance of Contracts," and " -- 5.
Lender Regulations" herein.
THE CONTRACTS
GENERAL. As a result of the assignment of the Contracts underlying a Series
to the related Trustee, the related Trust will succeed to all of the rights
(including the right to receive payments on the Contracts), and will assume the
obligations, of the obligee under the Contracts. Each Contract evidences both
(1) the obligation of the Obligor to repay the loan evidenced thereby, and (2)
the grant of a security interest in the related Manufactured Home to secure
repayment of such loan. Certain aspects of both features of the Contracts are
described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were located. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Servicer will retain possession of the Contracts
as custodian for the Trustee. Because the Servicer is not relinquishing
possession of the Contracts, the Servicer will file a UCC-1 financing statement
in the appropriate recording offices in North Carolina as necessary to perfect
the Trustee's ownership interest in the Contracts. Notwithstanding such filings,
if, through negligence, fraud or otherwise, a subsequent purchaser from the
Company or from a predecessor owner of the Contracts were able to take physical
possession of the Contracts without notice of the assignment of the Contracts to
the Trustee, the Trustee's interest in Contracts could be subordinated to the
interest of such purchaser. To provide a measure of protection against this
possibility, within ten days after the Closing Date, the Contracts will be
stamped or marked otherwise to reflect their assignment from the Company to the
Trustee.
SECURITY INTERESTS IN THE MANUFACTURED HOMES. The Manufactured Homes
securing the Contracts may be located in any or all of the 50 states and the
District of Columbia. The manner in which liens on Manufactured Homes are
"perfected" is governed by applicable state law. In many states ("Title
States"), a lien on a manufactured home may be "perfected" under applicable
motor vehicle titling statutes by notation of the secured party's lien on the
related certificate of title or by delivery of certain required documents and
payment of a fee to the state motor vehicle authority to re-register the home,
depending
47
upon applicable state law. In some states ("UCC States"), perfection of a lien
on a manufactured home is accomplished pursuant to the provisions of the
applicable UCC by filing UCC-3 financing statements or other appropriate
transfer instruments with all appropriate UCC filing offices. Some states are
both Title States and UCC States. The Company will cause the security interests
created by the Contracts in the related Manufactured Homes to be assigned to the
Trustee on behalf of the Certificateholders. However, because of the expense and
administrative inconvenience involved, neither DFC nor any other Seller are
expected to amend any certificate of title to change the lienholder specified
therein from DFC or such Seller to the Trustee, deliver any documents or pay
fees to re-register any Manufactured Home, or file any UCC transfer instruments,
and neither DFC nor such Seller will deliver any certificate of title to the
Trustee or note thereon the Trustee's interest. In some states, simple
assignment of the security interest created by a Contract in the related
Manufactured Home constitutes an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title, re-
registration of the underlying home, or filing of any statement under the
applicable UCC, and the assignee succeeds to the seller's rights as the secured
party as to such Manufactured Home. In other states, however, the law is unclear
whether a security interest in a Manufactured Home is effectively assigned in
the absence of an amendment to a certificate of title, re-registration of the
underlying home, or the filing of an appropriate UCC transfer instrument, as
appropriate under applicable state law. In such event, the assignment of the
security interest created by a Contract in the related Manufactured Home may not
be effective against creditors of the Company or the Seller or a trustee in
bankruptcy of the Company or the Seller.
In recent years, manufactured homes have become increasingly large and
often are attached to their sites, without appearing to be readily mobile.
Perhaps in response to these trends, courts in many states have held that
manufactured homes, under certain circumstances, are subject to real estate
title and recording laws. As a result, a security interest created by an
installment sales contract in a manufactured home located in such a state could
be rendered subordinate to the interests of other parties claiming an interest
in the home under applicable state real estate law. In order to perfect a
security interest in a manufactured home under real estate laws, the holder of
the security interest must file either a "fixture filing" under the provisions
of the applicable UCC or a real estate mortgage, deed of trust, deed to secure
debt or security deed, as appropriate under the real estate laws of the state in
which the related home is located (any of the foregoing, a "Mortgage"). These
filings must be made in the real estate records office of the jurisdiction in
which the home is located. Neither DFC nor any other Seller will be required to
make fixture filings or to file Mortgages with respect to any of the
Manufactured Homes (except in the case of Land Secured Contracts, as described
below). Consequently, if a Manufactured Home is deemed subject to real estate
title or recording laws because the owner attaches it to its site or otherwise,
the Trustee's interest therein may be subordinated to the interests of others
that may claim an interest therein under applicable real estate laws.
The Trustee's security interest in a Manufactured Home would be subordinate
to, among others, subsequent purchasers for value of the Manufactured Home and
holders of perfected security interests therein, in either case without notice
of the Trustee's adverse interest in such home. In the absence of fraud, forgery
or affixation of the Manufactured Home to its site by the Manufactured Home
owner, or administrative error by state recording officials, the notation of the
lien of DFC (or another Seller) on the related certificate of title or delivery
of the required documents and fees necessary to register the home in the name of
DFC (or the other Seller) or the public filing of appropriate transfer
instruments reflecting the lien of DFC (or another Seller), in each case as
required under applicable state law, will be sufficient to protect the
Certificateholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured Home
from anyone other than the entity whose lien is perfected under state law (be it
DFC or another Seller), because they will be on notice of the interest in the
home held by such entity.
Certain of the Contracts ("Land Secured Contracts") will be secured by real
estate as well as a Manufactured Home. The Seller will cause the liens created
by the Land Secured Contracts on the related real estate to be assigned to the
Trustee. The Contract File for each Land Secured Contract will be required to
include an original or a certified copy of the recorded Mortgage relating to
such Contract, together with originals or certified copies of a chain of
recorded assignments of such Mortgage sufficient to reflect the Seller as the
record holder of such Mortgage and the lien it evidences on the related real
estate. Assignments in recordable form for such Mortgages naming the Trustee as
assignee will not be prepared by the Servicer or any Seller. However, the Seller
will deliver to the Trustee a power of attorney entitling the Trustee to
prepare, execute and record such assignments of Mortgages, in the event that
recordation thereof becomes necessary to enable the Servicer to foreclose on the
related real property.
Under the laws of most states, in the event that a manufactured home is
moved to a state other than the state in which it initially is registered, any
perfected security interest in such home would continue automatically for four
months after such relocation, during which time the security interest must be
re-perfected in the new state in order to remain perfected after such four-month
period. Generally, a security interest in such a manufactured home may be
re-perfected after the expiration
48
of such four-month period, but, for the period between the end of such
four-month period and the date of such re-perfection, the security interest
would be unperfected.
If a Manufactured Home is moved to a UCC State, an appropriate UCC
financing statement generally would have to be filed in such state within the
four-month period after the move in order for the Seller's security interest in
the Manufactured Home to remain perfected continuously. If a Manufactured Home
is moved to a Title State, re-perfection of a security interest in such home
generally would be accomplished by registering the Manufactured Home with the
Title State's motor vehicle authority. In the ordinary course of servicing its
portfolio of manufactured housing installment sales contracts, the Servicer
takes steps to re-perfect its security interests in the related manufactured
homes upon its receipt of notice of registration of such home in a new state
(which it should receive by virtue of the notation of its lien on the original
certificate of title, if the home is moved from a Title State to a Title State)
or of information from a related borrower as to relocation of such home. In some
Title States, the certificate of title to a Manufactured Home (which is required
to be in the Servicer's possession) must be surrendered before the home could be
re-registered; in such states an Obligor could not re-register a Manufactured
Home to a transferee without the Servicer's assistance. In other Title States,
when an Obligor under a Contract sells the related Manufactured Home (if it is
located in a Title State both before and after the sale), the Seller should at
least receive notice of any attempted re-registration thereof because its lien
is noted on the related certificate of title and accordingly should have the
opportunity to require satisfaction of the related Contract before releasing its
lien on the home. If the motor vehicle authority of a Title State to which a
Manufactured Home is relocated or in which a Manufactured Home is located when
it is transferred registers such Manufactured Home in the name of the owner
thereof or such owner's transferee without noting the Seller's lien on the
related certificate of title, whether because (1) such state did not require the
owner to surrender the certificate of title issued prior to the transfer or
issued by the Title State from which such home was moved or failed to notify the
Seller of re-registration and failed to note the Seller's lien on the new
certificate of title issued upon re-registration or (2) such Manufactured Home
was moved from a state that is not a Title State, such re-registration could
defeat the perfection of the Seller's lien in the Manufactured Home. In
addition, re-registration of a Manufactured Home (whether due to a transfer or
relocation thereof) in a state, such as a UCC State, which does not require a
certificate of title for registration of a Manufactured Home, could defeat
perfection of the Seller's lien thereon.
The Seller will be required to report to the Servicer any notice it
receives of any re-registration of a Manufactured Home. Under the Pooling and
Servicing Agreement, the Servicer is obligated to take all necessary steps, at
its own expense, to maintain perfection of the Trustee's security interests in
the Manufactured Homes, to the extent it receives notice of relocation, sale or
re-registration thereof (provided that, as long as Oakwood remains the Servicer,
the Servicer will not be required to cause notations to be made on any
certificate of title or to execute any instrument relating to any Manufactured
Home (other than a notation or a transfer instrument necessary to show DFC (or
another Seller if applicable)) as the lienholder or legal titleholder). However,
the Servicer has no independent obligation to monitor the status of the Seller's
lien on any Manufactured Home.
Under the laws of most states, liens for repairs performed on a
manufactured home and for property taxes on a manufactured home take priority
even over a prior perfected security interest. Such liens could arise at any
time during the term of a Contract. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES. The Servicer, on
behalf of the Trustee, to the extent required by the related Agreement, may take
action to enforce the Trustee's security interest with respect to Contracts in
default by repossession and resale of the Manufactured Homes securing such
defaulted Contracts. So long as the manufactured home has not become subject to
the real estate laws of a state, a creditor is entitled, in most states, to
repossess a manufactured home through the voluntary surrender thereof, by
"self-help" repossession that is "peaceful" (I.E., not including any breach of
the peace) or, if the creditor is unable to repossess through either of the
foregoing means, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies depending on the state (usually
ranging from 10 to 30 days depending on applicable state law), prior to
commencement of any repossession action. The UCC and consumer protection laws in
most states place restrictions on repossession sales; among other things, such
laws require prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice prior to any resale of a repossessed home so that the debtor may
redeem the home at or before such resale. In the event of such repossession and
resale of a Manufactured Home, the Trustee would be entitled to receive the net
proceeds of such resale up to the amount of the Unpaid Principal Balance of the
related Contract plus all accrued and unpaid interest thereon at the related
Contract Rate.
Under applicable laws of most states, a creditor is entitled to obtain a
judgment against a debtor for any deficiency remaining after repossession and
resale of the manufactured home securing such debtor's loan. However, obtaining
and
49
collecting such deficiency judgments may not be economically feasible. In
addition, some states impose prohibitions or limitations on deficiency
judgments, and certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, the federal
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act")
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured lender to repossess and resell collateral or to enforce a
deficiency judgment. For example, in certain proceedings under the federal
Bankruptcy Code, when a court determines that the value of a home is less than
the principal balance of the loan it secures, the court may prevent a lender
from repossessing or foreclosing on the home, and, as part of the debtor's
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a manufactured
housing installment sales contract not secured by the debtor's principal
residence, also may reduce the monthly payments due under such contract, change
the rate of interest and alter the repayment schedule. Certain court decisions
have applied such relief to claims secured by the debtor's principal residence.
If a court relieves an Obligor's obligation to repay all or any portion of the
amounts otherwise due on a Contract, the Servicer will not be required to
advance such amounts, and any loss in respect thereof may reduce amounts
available for distribution on the related Certificates.
Under the terms of the federal Relief Act, an Obligor who enters military
service after the origination of such Obligor's Contract (including an Obligor
who is a member of the National Guard or who is in reserve status at the time of
the origination of the Contract and is later called to active duty) may not be
charged interest above an annual rate of 6.00% during the period of such
Obligor's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Contracts. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent not
covered by the subordination of a Class of Subordinated Certificates, could
result in losses to Certificateholders. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to repossess or
foreclose on the Manufactured Home securing an affected Contract during the
Obligor's period of active duty status. Thus, in the event that such a Contract
goes into default, there may be delays and losses occasioned by the inability to
liquidate the related Manufactured Home in a timely fashion.
Because of certain requirements of the REMIC Provisions, a Trust as to
which a REMIC election has been made generally must dispose of any related
Manufactured Homes acquired pursuant to repossession, foreclosure, or similar
proceedings within two years after acquisition. Consequently, if the Servicer,
acting on behalf of the Trust, is unable to sell a Manufactured Home in the
course of its ordinary commercial practices within 22 months after its
acquisition thereof (or a longer period as permitted by the Pooling and
Servicing Agreement), the Servicer will auction such home to the highest bidder
(which bidder may be the Servicer) in an auction reasonably designed to produce
a fair price. There can be no assurance that the price for any Manufactured Home
would not be substantially lower than the Unpaid Principal Balance of the
Contract relating thereto. In fact, manufactured homes, unlike site-built homes,
generally depreciate in value, and it has been industry experience that, upon
repossession and resale, the amount recoverable on a manufactured home securing
an installment sales contract is generally lower than the principal balance of
the contract.
FORECLOSURE UNDER REAL PROPERTY LAWS. If a Manufactured Home has become
attached to real estate to a degree such that the home would be treated as real
property under the laws of the state in which it is located, it may not be
legally permissible for the Servicer to repossess the home under the provisions
of the UCC or other applicable personal property laws. If so, the Servicer could
obtain possession of the home only pursuant to real estate mortgage foreclosure
laws. See " -- The Mortgage Loans -- Foreclosure" below. In addition, in order
to realize upon the Real Property securing any Land Secured Contract, the
Servicer must proceed under applicable state real estate mortgage foreclosure
laws. The requirements that the Servicer must meet in order to foreclose on the
Real Property securing a Land Secured Contract, and the restrictions on such
foreclosure, are identical to the requirements and restrictions that would apply
to foreclosure of any Mortgage Loan. For a description of such foreclosure, see
" -- The Mortgage Loans" below. Mortgage foreclosure generally is accomplished
through judicial action, rather than by private action as permitted under
personal property laws, and real estate laws generally impose stricter notice
requirements and require public sale of the collateral. In addition, real estate
mortgage foreclosure is usually far more time-consuming and expensive than
repossession under personal property laws, and applicable real estate law
generally affords debtors many more protections than are provided under personal
property laws. Rights of redemption under real estate laws generally are more
favorable to debtors than they are under personal property laws, and in many
states antideficiency judgment legislation will be applicable in the real estate
foreclosure context even if it would not apply to repossessions under personal
property laws. If real estate laws apply to a Manufactured Home, to the extent
the Seller has not
50
perfected its security interest in a Manufactured Home under applicable real
estate laws, the Seller's security interest in such Manufactured Home would be
subordinate to a lien on such home recorded pursuant to applicable real estate
laws.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to prevent a seller of goods pursuant to a
consumer credit contract (and certain related lenders and assignees) from
transferring such contract free of claims by the debtor thereunder against the
seller. The effect of this rule is to subject the assignee of a consumer credit
contract to all claims and defenses that the debtor could have asserted against
the seller under the contract. Assignee liability under this rule (which would
be applicable to the Trust, as assignee of the Contracts) is limited to amounts
paid by the debtor under the assigned contract; however, a borrower also may
assert the rule to set off remaining amounts due under such a contract as a
defense against a claim brought by the assignee of such contract against such
borrower. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Magnuson-Moss Warranty -- Federal Trade Commission Improvement Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. The failure of the
originator of a Contract to have complied with the provisions of some of these
laws may result in liability of the related Trust to the Obligor thereunder or
in a reduction of the amount payable under such Contract. However, each Seller
(a) will be required to represent and warrant that each Contract it sells to the
Company complied, at the time of its origination, with all requirements of law
and (b) will be required to make certain representations and warranties as to
each Contract to be included in an Asset Pool concerning the validity,
existence, perfection and priority of its security interest in each underlying
Manufactured Home as of the related Cut-off Date. A breach of any such
representation or warranty that materially and adversely affects a Trust's
interest in any Contract would create an obligation on the part of the related
Seller to use its best efforts to cure such breach to the satisfaction of the
Trustee or to repurchase such Contract. Nevertheless, this requirement may not
eliminate the Trust's liability to an Obligor.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES.
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer to which consent has not been obtained. The Servicer will act in
accordance with its customary underwriting procedures and with the terms of the
related Pooling and Servicing Agreement in determining whether to permit such
transfers in respect of Contracts included in an Asset Pool. The Servicer will
require, among other things, a satisfactory credit review of any person
proposing to assume any Contract. If the Servicer permits an assumption of a
Contract, no material term of the Contract (including the interest rate or the
remaining term to maturity of the Contract) may be modified unless the Servicer
has received an opinion of independent counsel to the effect that such
modification will not be treated, for federal income tax purposes, as an
acquisition of the modified Contract by the Trust in exchange for the unmodified
Contract on the date the modification occurs. In certain cases, a delinquent
borrower may transfer his or her manufactured home in order to avoid a
repossession proceeding with respect to such manufactured home.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides,
subject to certain conditions described in the next sentence, that state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered under
Title V if they satisfy certain conditions governing, among other things, the
terms of any prepayments, late charges and deferral fees and requiring 30 days'
prior notice before the institution of any action leading to repossession of or
foreclosure with respect to the related manufactured home.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting a law or constitutional provision which expressly
rejects application of the federal law before April 1, 1983. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Servicer will represent that all of the Contracts comply with applicable
usury laws.
THE MORTGAGE LOANS
GENERAL. Mortgage Loans as described herein are distinct from Land Secured
Contracts (which are discussed above under " -- The Contracts -- Foreclosure
under Real Property Laws"). A Mortgage Loan is secured by a Mortgaged Property
on which a one- to four-family residential structure is located, whereas a Land
Secured Contract is secured primarily by a Manufactured Home and is secured only
secondarily by a parcel of Real Property.
The Mortgage Loans will be secured by either first mortgages, deeds of
trust, deeds to secure debt or security deeds (any of the foregoing, a
"Mortgage"), depending upon the prevailing practice in the state in which the
underlying Mortgaged
51
Property is located. A mortgage creates a lien upon the real property described
in the mortgage. There are two parties to a mortgage: the mortgagor, who is the
obligor, and the mortgagee, who is the lender. Under a first mortgage, the
mortgagor delivers to the mortgagee a note or bond evidencing the loan and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties; the borrower, a lender as beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the loan. The trustee's authority under a deed
of trust and the mortgagee's authority under a mortgage are governed by the
express provisions of the deed of trust or mortgage, applicable law, and, in
some cases, with respect to the deed of trust, the directions of the
beneficiary.
FORECLOSURE. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the Mortgaged
Property. Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties. 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 receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial power of sale as discussed
below.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the related note or the deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest of record in the underlying real property,
including any junior lienholders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, must be published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property. In some states, the borrower has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
See " -- Rights of Reinstatement and Redemption" below.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
not common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property from the trustee or receiver
for an amount which may be as great as (but is more often somewhat less than)
the unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. Thereafter, subject to the right of the obligor in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the property suitable
for sale. The lender commonly will obtain the services of a real estate broker
and pay the broker a commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss with
respect to a Mortgage Loan may be reduced by the receipt of mortgage insurance
proceeds. See "The Trusts -- Insurance -- Credit Insurance" and "The
Trusts -- Insurance -- Hazard Insurance" herein.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve obligors 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 obligor's default and the
likelihood that the obligors will be able to reinstate the loan. In some cases,
courts have required lenders to reinstate loans or recast payment schedules to
accommodate obligors who are suffering temporary financial disabilities. In some
cases, courts have limited the right of a lender to foreclose if the default
under the related mortgage instrument is not monetary, such as a default arising
from the obligor's failure to maintain the property adequately or the obligor's
executing a second 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 obligors under deeds of trust receive notices in addition to
statutorily-prescribed minimum requirements. For the most part, these cases have
upheld state statutory 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
protections to the obligor.
52
RIGHTS OF REINSTATEMENT AND REDEMPTION. In some states, an obligor, or any
other person having a junior encumbrance on the related real estate, may, during
a reinstatement or redemption period, cure an obligor default by paying the
entire amount in arrears plus certain of the costs and expenses incurred by or
on behalf of the lender in attempting to enforce the obligor's obligation.
Certain state laws control the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. In some states,
an obligor under a mortgage loan has the right to reinstate the loan at any time
following default until shortly before the foreclosure sale.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the related obligor and certain foreclosed junior lienors are given a
statutory period in which to redeem the related 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 taxes. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property that it purchased. 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 its purchase
of the related property at a judicial foreclosure sale or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender (or other purchaser of property at a foreclosure sale) to maintain
the property and pay the expenses of ownership until the redemption period has
run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory restrictions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against a borrower following foreclosure on the related
property or sale of the related property under a deed of trust. A deficiency
judgment is a personal judgment against the obligor equal in most cases to the
difference between the amount due to the lender and the greater of the net
amount realized upon the foreclosure sale or the market value of the related
mortgaged property.
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 obligor.
In certain other states, the lender has the option of bringing a personal action
against the obligor 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
other remedies with respect to such security. Consequently, the practical effect
of the election requirement, when applicable, is that lenders will usually
proceed first against the security for a mortgage or deed of trust rather than
bringing a personal action against the obligor.
Other statutory provisions may limit any deficiency judgment against the
former obligor under a mortgage loan 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 obligor
as a result of low or no bids at the foreclosure sale or sale pursuant to a deed
of trust.
In some states, exceptions to the anti-deficiency statutes are provided in
certain instances where the value of the lender's security has been impaired by
acts or omissions of the obligor, for example, in the event of waste of the
property by the obligor.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal and state
bankruptcy and insolvency laws and general equitable principles, the federal
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of a secured mortgage lender to realize upon its security.
For example, in certain proceedings under the federal Bankruptcy Code, when a
court determines that the value of a home is less than the principal balance of
the loan it secures, the court may prevent a lender from foreclosing on the
home, and, as part of the debtor's rehabilitation plan, reduce the amount of the
secured indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan repayment
schedule. Certain court decisions have applied such relief to claims secured by
the debtor's principal residence. If a court relieves an Obligor's obligation to
repay all or any portion of the amounts otherwise due on a Mortgage Loan, the
Servicer will not be required to advance such amounts, and any loss in respect
thereof may reduce amounts available for distribution on the related
Certificates.
53
Under the terms of the federal Relief Act, an obligor who enters military
service after the origination of such obligor's Mortgage Loan (including an
obligor who is a member of the National Guard or who is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest above an annual rate of 6.00% during the period of
such obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. Any shortfall in
interest collections resulting from the application of the Relief Act, to the
extent not covered by the subordination of a Class of Subordinated Certificates,
could result in losses to Certificateholders. In addition, the Relief Act
imposes limitations which would impair the ability of the Servicer to foreclose
on an affected Mortgage Loan during the obligor's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned by the inability to liquidate the related Mortgaged
Property in a timely fashion.
The Internal Revenue Code of 1986, as amended (the "Code") and the laws of
some states provide priority to certain tax liens over the lien of a 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 Property Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases, this
liability may affect the lender's assignees as to the mortgage loans.
"DUE ON SALE" CLAUSES. The forms of note, mortgage and deed of trust
relating to conventional Mortgage Loans may contain a "due-on-sale" clause
permitting acceleration of the maturity of a loan if the Mortgagor transfers its
interest in the underlying property. 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 Act, which purports to pre-empt state laws
that prohibit the enforcement of "due-on-sale" clauses and provides, among other
things, that "due-on-sale" clauses in certain loans (which loans include the
Conventional Mortgage 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 may generally be
permitted to accelerate any conventional Mortgage Loan which contains a
"due-on-sale" clause upon transfer by the Obligor of an interest in the property
subject to the related mortgage or deed of trust. With respect to any Mortgage
Loan secured by a residence occupied or to be occupied by the mortgagor, this
ability to accelerate will not apply to certain types of transfers, including
(1) the granting of a leasehold interest which has a term of three years or less
and which does not contain an option to purchase; (2) a transfer to a family
relative resulting from the death of a mortgagor, or a transfer where the spouse
or child(ren) becomes an owner of the property in each case where the
transferee(s) will occupy the property; (3) a transfer resulting from a decree
of dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse of the mortgagor becomes an
owner of the property; (4) 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 property (provided that such lien or
encumbrance is not created pursuant to a contract for deed); (5) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety; and (6) other transfers as set forth in the Garn-St Germain Act
and the regulations thereunder. FHA and VA loans do not contain "due-on-sale"
clauses. See "Maturity and Prepayment Considerations" herein.
ADJUSTABLE RATE ASSETS. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee under a deed of trust arrangement will
not be deemed to be a "holder in due course" within the meaning of the UCC and
may take such a mortgage note subject to certain restrictions on its ability to
foreclose on the related Mortgaged Property and to certain contractual defenses
available to the related Obligor.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to secure recovery of the costs
of clean-up. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable, as an
"owner" or "operator," for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property securing a mortgage
loan owned by such lender, if agents
54
or employees of the lender have become sufficiently involved in the operations
of the related obligor, regardless of whether or not the environmental damage or
threat was caused by such lender's obligor or by a prior owner. A lender also
risks such liability arising out of foreclosure of a mortgaged property securing
a mortgage loan owned by such lender. Until recent legislation was adopted, it
was uncertain what actions could be taken by a secured lender in the event of a
loan default without it incurring exposure under CERCLA in the event the
property was environmentally contaminated. The Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996 (the "1996 Lender Liability Act")
provides for a safe harbor for secured lenders from CERCLA liability even though
the lender forecloses and sells the real estate securing the loan, provided the
secured lender sells "at the earliest practicable, commercially reasonable time,
at commercially reasonable terms, taking into account market conditions and
legal and regulatory requirements." Although the 1996 Lender Liability Act
provides significant protection to secured lenders, it has not been construed by
the courts, and there are circumstances in which actions taken could expose a
secured lender to CERCLA liability. And, the transferee from the secured lender
is not entitled to the protections enjoyed by a secured lender. Thus,
contamination may decrease the amount that prospective buyers are willing to pay
for an Asset and, thus, decrease the likelihood that a Trust will recover fully
on the Asset through foreclosure.
Application of environmental laws other than CERCLA could also result in
the imposition of liability on lenders for costs associated with environmental
hazards. The most significant of these other laws is the Resource Conservation
and Recovery Act of 1976, as amended ("RCRA"), and state regulatory programs
implemented thereunder. Subtitle I of RCRA imposes cleanup liabilities on owners
or operators of underground storage tanks. Some states also impose similar
liabilities on owners and operators of aboveground storage tanks. The definition
of "owner" under RCRA Subtitle I contains a security interest exemption nearly
identical to the CERCLA security interest exemption. However, as with CERCLA
costs, it is possible that such costs, if imposed in connection with a Mortgage
Loan or a Land Secured Contract included in a Trust Estate, could become a
liability of the related Trust in certain circumstances.
At the time the Mortgage Loans or Land Secured Contracts underlying a
Series were originated, it is possible that no environmental assessment or a
very limited environmental assessment of the related Mortgaged Properties or
Real Properties was conducted. No representations or warranties are made by the
Seller of Mortgage Loans or Contracts (including Land Secured Contracts) as to
the absence or effect of hazardous wastes or hazardous substances on any of the
related Mortgaged Properties or Real Properties. In addition, the Servicer has
not made any representations or warranties or assumed any liability with respect
to the absence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property or Real Property or any casualty resulting from the presence
or effect of hazardous wastes or hazardous substances on any Mortgaged Property
or Real Property, and any loss or liability resulting from the presence or
effect of such hazardous wastes or hazardous substances will reduce the amounts
otherwise available to pay to the holders of the related Certificates.
Pursuant to the Standard Terms, the Servicer is not required to foreclose
on any Mortgaged Property or Real Property if one of its principal officers has
actual knowledge that such property is contaminated with or affected by
hazardous wastes or hazardous substances. If the Servicer does not foreclose on
the Mortgaged Property underlying a defaulted Mortgage Loan or the Real Property
securing a Land Secured Contract, the amounts otherwise available to pay to the
holders of the Certificates may be reduced. The Servicer will not be liable to
the holders of the Certificates if it fails to foreclose on a Mortgaged Property
or Real Property that it believes may be so contaminated or affected, even if
such Mortgaged Property or Real Property is, in fact, not so contaminated or
affected. Similarly, the Servicer will not be liable to the holders of any
Certificates if the Servicer forecloses on a Mortgaged Property or Real Property
and takes title to a Mortgaged Property or Real Property that is so contaminated
or affected.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of Contract, Note, mortgage and deed of trust used by
the originators of Contracts and Mortgage Loans may contain provisions
obligating the Obligor to pay a late charge if payments are not timely made and
in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In certain states, there are or may be
specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. Under each Agreement, late charges and prepayment fees on Assets in the
related Trust Estate (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
55
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used to purchase the Contracts and Mortgage Loans
related to such Series or to reimburse the amounts previously used to effect
such a purchase, the costs of carrying such Contracts and Mortgage Loans until
the sale of the related Certificates and other expenses connected with pooling
the Contracts and Mortgage Loans and issuing the Certificates.
THE COMPANY
Deutsche Financial Capital Securitization LLC (the "Company") was organized
in the State of North Carolina on March 31, 1997 as a limited purpose finance
company owned by Deutsche Financial Capital I Corp., a North Carolina
corporation (the "Manager"), and Deutsche Financial Capital Limited Liability
Company, a North Carolina limited liability company ("DFC"). The Manager is
owned in equal shares by Oakwood Acceptance Corporation, a North Carolina
corporation, and Deutsche Financial Services Corporation, a Nevada corporation.
DFC is a joint venture of Oakwood Acceptance Corporation and Deutsche Financial
Services Corporation. The Manager manages the business operations of the
Company, and each of the Manager's officers are also officers of either Oakwood
Acceptance Corporation or Deutsche Financial Services Corporation. The Company
maintains its principal office at 7800 McCloud Road, Greensboro, North Carolina
27409-9634. Its telephone number is (800) 440-2102.
Oakwood Homes Corporation ("Oakwood Homes"), which was founded in 1946,
designs, manufactures and markets manufactured homes and finances the majority
of its sales. Oakwood Homes operates five manufacturing plants in North
Carolina, four in Georgia, three in Texas, and one each in California, Colorado,
Oregon and Tennessee. Oakwood Homes' manufactured homes are sold at retail
through over 260 owned and operated sales centers located primarily in the
southeastern and southwestern United States and to selected independent
retailers located primarily in the western and southern United States. Oakwood
Homes also earns commissions on insurance written for its customers.
Deutsche Financial Services Corporation is a financial services company
that provides a full range of financing and servicing solutions that facilitate
the product distribution and sales process. Programs include inventory
financing, accounts receivable financing, traditional asset-based financing,
non-funded service programs, retail financing, commercial end-user financing and
related services. Deutsche Financial Services Corporation provides its programs
and services to dealers, distributors and manufacturers of consumer and other
durable goods. Industries served by Deutsche Financial Services Corporation
include, but are not limited to: computers and related products, manufactured
housing, recreation vehicles, boats and motors, consumer electronics,
appliances, keyboards and other musical instruments, industrial, transportation
and agricultural equipment, office automation products, snowmobiles and
motorcycles. Deutsche Financial Services Corporation operates in the United
States and through affiliates in Canada, Europe and Puerto Rico. Deutsche
Financial Services Corporation (which was formerly known as ITT Commercial
Finance Corp.) is an indirect, wholly-owned subsidiary of Deutsche Bank AG.
Deutsche Bank AG is the largest banking institution in the Federal Republic of
Germany, with total assets at December 31, 1996 of $570 billion. The Deutsche
Bank Group has operations in 65 countries and employs over 70,000 people. With a
presence in all of the world's major financial centers, the Deutsche Bank Group
offers a full range of financial services including private banking, commercial
and institutional banking, and investment banking through Deutsche Morgan
Grenfell Inc.
As described herein under "The Trusts," "Underwriting Policies," and "Sale
and Servicing of Contracts and Mortgage Loans -- Representations and
Warranties," the only obligations, if any, of the Company with respect to a
Series of Certificates may be pursuant to certain limited representations and
warranties and limited undertakings to repurchase or substitute Contracts or
Mortgage Loans under certain circumstances. The Company will have no ongoing
servicing obligations or responsibilities with respect to any Asset Pool. The
Company does not have, nor is it expected in the future to have, any significant
assets.
The Company will not insure or guarantee the Certificates of any Series.
THE SERVICER
Oakwood Acceptance Corporation ("Oakwood" or, in its capacity as servicer,
the "Servicer") was incorporated in 1984 in the State of North Carolina as a
wholly-owned subsidiary of Oakwood Homes. Oakwood is primarily engaged in the
business of underwriting, originating, pooling, selling and servicing
installment sales contracts for the sale of manufactured housing. Oakwood's
principal offices are located at 7800 McCloud Road, Greensboro, North Carolina
27409-9634 (telephone 910/664-2500).
56
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. The summary is based upon laws, regulations,
rulings, and decisions now in effect, all of which are subject to change.
Because REMIC status may be elected with respect to certain Series of
Certificates, the discussion includes a summary of the federal income tax
consequences to holders of REMIC Certificates.
The discussion does not purport to deal with the federal income tax
consequences to all categories of investors (such as banks, insurance companies
and foreign investors), some of which may be subject to special rules. The
discussion focuses primarily on investors who will hold the Certificates as
"capital assets" (generally, property held for investment) within the meaning of
section 1221 of the Code, although much of the discussion is applicable to other
investors as well. Investors should note that, although final regulations under
the REMIC Provisions have been issued by the Treasury, no currently effective
regulations or other administrative guidance has been issued with respect to
certain provisions of the Code that are or may be applicable to
Certificateholders, particularly the provisions dealing with market discount and
stripped debt instruments. Although the Treasury recently issued final
regulations dealing with original issue discount and premium, those regulations
do not address directly the treatment of Regular Certificates and certain other
types of Certificates. Furthermore, the REMIC Provisions do not address all of
the issues that arise in connection with the formation and operation of a REMIC.
Hence, definitive guidance cannot be provided with respect to many aspects of
the tax treatment of Certificateholders. Moreover, this summary and the opinion
referred to below is based on current law, and there can be no assurance that
the law will not change or that the Internal Revenue Service (the "Service")
will not take positions that would be materially adverse to investors. Finally,
the summary does not purport to address the anticipated state income tax
consequences to investors of owning and disposing of the Certificates.
Consequently, investors should consult their own tax advisors in determining the
federal, state, local, and any other tax consequences to them of the purchase,
ownership, and disposition of the Certificates.
GENERAL
Many aspects of the federal income tax treatment of the Certificates of a
particular Series will depend upon whether an election is made to treat the
Trust, or one or more segregated Asset Pools thereof, as a Series REMIC. The
Prospectus Supplement for each Series will indicate whether a REMIC election or
elections will be made with respect to the related Trust Estate and, if such an
election or elections are to be made, will identify all "regular interests" and
the "residual interest" in each Series REMIC. For each Series with respect to
which one or more REMIC elections are to be made, Hunton & Williams, counsel to
the Company, will deliver a separate opinion generally to the effect that,
assuming timely filing of the REMIC election or elections and compliance with
the related Pooling and Servicing Agreement and certain other documents
specified in the opinion, the Trust (or one or more segregated Asset Pools
thereof) will qualify as one or more Series REMICs. For each Series with respect
to which a REMIC election is not to be made, Hunton & Williams will deliver a
separate opinion generally to the effect that, assuming compliance with the
Pooling and Servicing Agreement and certain other documents, the Trust will be
treated as a grantor trust under subpart E, Part I of subchapter J of the Code
and not as an association taxable as a corporation. Those opinions will be based
on existing law and there can be no assurance that the law will not change or
that contrary positions will not be taken by the Service.
REMIC CERTIFICATES
REMIC Certificates will be classified as either Regular Certificates, which
generally are treated as debt for federal income tax purposes, or Residual
Certificates, which generally are not treated as debt for such purposes, but
rather as representing rights and responsibilities with respect to the taxable
income or loss of the related Series REMIC. The Prospectus Supplement for each
Series of Certificates will indicate whether one or more REMIC elections will be
made for that Series and which of the Certificates of such Series will be
designated as Regular Certificates, and which will be designated as Residual
Certificates.
REMIC Certificates held by a REIT will qualify as "real estate assets"
within the meaning of section 856(c)(5)(A) of the Code, and interest on such
Certificates will be considered Qualifying REIT Interest, in the same proportion
that the assets of the related Series REMIC would qualify as real estate assets
for REIT purposes. Similarly, REMIC Certificates held by a Thrift Institution
taxed as a "domestic building and loan association" will-qualify as a "loan
secured by an interest in real property," for purposes of the qualification
requirements of domestic building and loan associations set forth in section
7701(a)(19) of the Code, in the same proportion that the assets of the related
Series REMIC would so qualify. However, if 95% or more of the assets of a given
Series REMIC constitute real estate assets for REIT purposes, the REMIC
Certificates
57
issued by such REMIC will be treated entirely as such assets and 100% of the
interest income derived from such REMIC will be treated as Qualifying REIT
Interest. Similarly, if 95% or more of the assets of a given Series REMIC
constitute loans secured by interests in real property, the REMIC Certificates
will be treated entirely as such assets for purposes of the qualification
requirement of domestic building and loan associations. REMIC Regular and
Residual Certificates held by a financial institution to which Section 585 of
the Code applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. The Regular Certificates generally will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code with
respect to other REMICs. Effective September 1, 1997, Regular Certificates held
by a financial asset securitization investment trust (a "FASIT") will qualify
for treatment as "permitted assets" within the meaning of Section 860L(c)(1)(G)
of the Code. In the case of a Series for which two or more REMICs will be
created, all such Series REMICs will be treated as a single REMIC for purposes
of determining the extent to which the related Certificates and the income
thereon will be treated as qualifying assets and income for such purposes.
However, REMIC Certificates will not qualify as "Government securities" for
either REIT or RIC qualification purposes.
TAX TREATMENT OF REGULAR CERTIFICATES
Payments received by holders of Regular Certificates generally should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate debt instruments. Except as described below for Regular
Certificates issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on a Regular Certificate will be
treated as ordinary income to the Certificateholder and a principal payment on
such Certificate will be treated as a return of capital to the extent that the
Certificateholder's basis in the Certificate is allocable to that payment.
Holders of REMIC Regular or Residual Certificates must report income from such
Certificates under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. The Tax Administrator, the
Servicer or the Trustee will report annually to the Service and to
Certificateholders of record with respect to interest paid or accrued and
original issue discount, if any, accrued on the Certificates.
Under temporary Treasury regulations, holders of Regular Certificates
issued by "single-class REMICs" who are individuals, trusts, estates, or
pass-through entities in which such investors hold interests may be required to
recognize certain amounts of income in addition to interest and discount income.
A single-class REMIC, in general, is a REMIC that (i) would be classified as an
investment trust in the absence of a REMIC election or (ii) is substantially
similar to an investment trust. Under the temporary Treasury regulations, each
holder of a regular or residual interest in a single-class REMIC is allocated
(i) a share of the REMIC's "allocable investment expenses" (I.E., expenses
normally allowable under section 212 of the Code, which may include servicing
and administrative fees and insurance premiums) and (ii) a corresponding amount
68 of additional income. Section 67 of the Code permits an individual, trust or
estate to deduct miscellaneous itemized expenses (including expenses allowable
under section 212 of the Code) only to the extent that such expenses, in the
aggregate, exceed 2% of its adjusted gross income. Consequently, an individual,
trust or estate that holds a regular interest in a single-class REMIC (either
directly or through a pass-through entity) will recognize additional income with
respect to such regular interest to the extent that its share of allocable
investment expenses, when combined with its other miscellaneous itemized
deductions for the taxable year, fails to exceed 2% of its adjusted gross
income. Any such additional income will be treated as interest income. In
addition, Code section 68 provides that the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds the applicable amount ($100,000, or $50,000 in the case of a
separate return by a married individual within the meaning of Code section 7703
for taxable year 1991 and adjusted for inflation each year thereafter) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The amount of such additional taxable income
recognized by holders who are subject to the limitations of either section 67 or
section 68 of the Code may be substantial and may reduce or eliminate the
after-tax yield to such holders of an investment in the Certificates of an
affected Series. Where appropriate, the Prospectus Supplement for a particular
Series will indicate that the holders of Certificates of such Series may be
required to recognize additional income as a result of the application of the
limitations of either section 67 or section 68 of the Code. Non-corporate
holders of Regular Certificates evidencing an interest in a single-class REMIC
also should be aware that miscellaneous itemized deductions, including allocable
investment expenses attributable to such REMIC, are not deductible for purposes
of the alternative minimum tax.
ORIGINAL ISSUE DISCOUNT
Certain Classes of Regular Certificates may be issued with "original issue
discount" within the meaning of section 1273(a) of the Code. In general, such
original issue discount will equal the difference between the "stated redemption
price at maturity" of the Regular Certificate (generally, its principal amount)
and its issue price. Holders of Regular Certificates as to
58
which there is original issue discount should be aware that they generally must
include original issue discount in income for federal income tax purposes on an
annual basis under a constant yield accrual method that reflects compounding. In
general, original issue discount is treated as ordinary interest income and must
be included in income in advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in the income
of the holder of a Regular Certificate in any taxable year will be computed in
accordance with section 1272(a)(6) of the Code, which provides rules for the
accrual of original issue discount under a constant yield method for certain
debt instruments, such as the Regular Certificates, that are subject to
prepayment by reason of the prepayment of the underlying obligations. Under
section 1272(a)(6), the amount and rate of accrual of original issue discount on
a Regular Certificate generally is calculated based on (i) a single constant
yield to maturity and (ii) the Pricing Prepayment Assumptions. No regulatory
guidance currently exists under Code section 1272(a)(6). Accordingly, until the
Treasury issues guidance to the contrary, the Tax Administrator will, except as
otherwise provided herein, base its computations on Code section 1272(a)(6), the
OID Regulations, and certain other guidance, all as described below. There can
be no assurance, however, that the methodology described below represents the
correct manner of calculating original issue discount on the Regular
Certificates. The Tax Administrator will account for income on certain Regular
Certificates that provide for one or more contingent payments as described
herein under "Federal Income Tax Consequences -- REMIC Certificates -- Interest
Weighted Certificates and Non-VRDI Certificates." Prospective purchasers should
be aware that neither the Company, any Servicer, nor the Trustee will make any
representation that the Assets underlying a Series will in fact prepay at a rate
conforming to the Pricing Prepayment Assumptions or at any other rate.
The amount of original issue discount on a Regular Certificate equals the
excess, if any, of the Certificate's "stated redemption price at maturity" over
its "issue price." Under the OID Regulations, a debt instrument's stated
redemption price at maturity is the sum of all payments of principal and
interest provided for on the instrument other than Qualified Stated Interest
(I.E., the sum of its Deemed Principal Payments). Thus, in the case of any
Regular Certificate, the stated redemption price at maturity will equal the
total amount of all Deemed Principal Payments due on that Certificate. Since a
Certificate that is part of an Accretion Class generally will not require
unconditional payments of interest at least annually, the stated redemption
price at maturity of such a Certificate will equal the aggregate of all payments
due, whether designated as principal, accrued interest, or current interest. The
issue price of a Regular Certificate generally will equal the initial price at
which a substantial amount of such Certificates is sold to the public.
Although the OID Regulations contain an aggregation rule (the "Aggregation
Rule"), under which two or more debt instruments issued in connection with the
same transaction (or related transactions in certain circumstances) generally
are treated as a single debt instrument for federal income tax accounting
purposes if issued by a single issuer to a single holder, that Rule does not
apply if the debt instruments are part of an issue (i) a substantial portion of
which is traded on an established market or (ii) a substantial portion of which
is issued for cash (or property traded on an established market) to parties who
are not related to the issuer or holder and who do not purchase other debt
instruments of the same issuer in connection with the same transaction or
related transactions. In most cases, the Aggregation Rule will not apply to
Regular Certificates of different Classes because one or both of the exceptions
to the Aggregation Rule will have been met. Although the Tax Administrator will
apply the Aggregation Rule to all regular interests in a Series REMIC that are
held by another REMIC created with respect to the same Series, it generally will
not apply the Aggregation Rule to Regular Certificates for purposes of reporting
to Certificateholders.
Under a DE MINIMIS rule, a Regular Certificate will be considered to have
no original issue discount if the amount of original issue discount on the
Certificate is less than 0.25% of the Certificate's stated redemption price at
maturity multiplied by the Certificate's WAM. Although no Treasury regulations
have been issued under the relevant provisions of the 1986 Act, it is expected
that the WAM of a Regular Certificate will be computed using the Pricing
Prepayment Assumptions. The holder of a Regular Certificate will include DE
MINIMIS original issue discount in income on a pro rata basis as stated
principal payments on the Certificate are received or, if earlier, upon
disposition of the Certificate, unless the holder of such Certificate makes the
All OID Election.
Regular Certificates of certain Series may constitute Teaser Certificates.
Under certain circumstances, a Teaser Certificate may be considered to have a DE
MINIMIS amount of original issue discount even though the amount of original
issue discount on such Certificate would be more than DE MINIMIS if determined
as described above. If the stated interest on a Teaser Certificate would be
Qualified Stated Interest but for the fact that during one or more accrual
periods its interest rate is below the rate applicable for the remainder of its
term, the amount of original issue discount on such Certificate that is measured
against the DE MINIMIS amount of original issue discount allowable on the
Certificate is the greater of (i) the excess
59
of the stated principal amount of the Certificate over its issue price and (ii)
the amount of interest that would be necessary to be payable on the Certificate
in order for all stated interest to be Qualified Stated Interest.
The holder of a Regular Certificate generally must include in gross income
the sum, for all days during his taxable year on which he holds the Regular
Certificate, of the "daily portions" of the original issue discount on such
Certificate. In the case of an original holder of a Regular Certificate, the
daily portions of original issue discount with respect to such Certificate
generally will be determined by allocating to each day in any accrual period the
Certificate's ratable portion of the excess, if any, of (i) the sum of (a) the
present value of all payments under the Certificate yet to be received as of the
close of such period and (b) the amount of any Deemed Principal Payments
received on the Certificate during such period over (ii) the Certificate's
"adjusted issue price" at the beginning of such period. The present value of
payments yet to be received on a Regular Certificate is computed by using the
Pricing Prepayment Assumptions and the Certificate's original yield to maturity
(adjusted to take into account the length of the particular accrual period), and
taking into account Deemed Principal Payments actually received on the
Certificate prior to the close of the accrual period. The adjusted issue price
of a Regular Certificate at the beginning of the first accrual period is its
issue price. The adjusted issue price at the beginning of each subsequent period
is the adjusted issue price of the Certificate at the beginning of the preceding
period increased by the amount of original issue discount allocable to that
period and decreased by the amount of any Deemed Principal Payments received
during that period. Thus, an increased (or decreased) rate of prepayments
received with respect to a Regular Certificate will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Certificate.
The yield to maturity of a Regular Certificate is calculated based on (i)
the Pricing Prepayment Assumptions and (ii) any contingencies not already taken
into account under the Pricing Prepayment Assumptions that, considering all of
the facts and circumstances as of the issue date, are more likely than not to
occur. Contingencies, such as the exercise of "mandatory redemptions," that are
taken into account by the parties in pricing the Regular Certificate typically
will be subsumed in the Pricing Prepayment Assumptions and thus will be
reflected in the Certificate's yield to maturity. The Tax Administrator's
determination of whether a contingency relating to a Class of Regular
Certificates is more likely than not to occur is binding on each holder of a
Certificate of such Class unless the holder explicitly discloses on its federal
income tax return that its determination of the yield and maturity of such
Certificate is different from that of the Tax Administrator.
In many cases, Regular Certificates will be subject to optional redemption
before their stated maturity dates. Under the OID Regulations, any party
entitled to redeem Certificates will be presumed to exercise its option to
redeem for purposes of computing the accrual of original issue discount if, and
only if, by using the optional redemption date as the maturity date and the
optional redemption price as the stated redemption price at maturity, the yield
to maturity of the Certificates is lower than it would be if the Certificates
were not redeemed early. If a party entitled to do so is presumed to exercise
its option to redeem the Certificates, original issue discount on such
Certificates will be calculated as if the redemption date were the maturity date
and the optional redemption price were the stated redemption price at maturity.
In cases in which all of the Certificates of a particular Series are issued at
par or at a discount, the Certificates will not be presumed to have been
redeemed because a redemption would not lower the yield to maturity of the
Certificates. If, however, some Certificates of a particular Series are issued
at a premium, a party entitled to redeem Certificates may be able to lower the
yield to maturity of the Certificates by exercising its redemption option. In
determining whether such a party will be presumed to exercise its option to
redeem Certificates when one or more Classes of the Certificates is issued at a
premium, the Tax Administrator will take into account all Classes of
Certificates that are subject to the possibility of optional redemption to the
extent that they are expected to remain outstanding as of the optional
redemption date, based on the Pricing Prepayment Assumptions. If, determined on
a combined weighted average basis, the Certificates of such Classes were issued
at a premium, the Tax Administrator will presume that a party entitled to redeem
such Certificates will exercise its option to do so. However, the OID
Regulations are unclear as to how the redemption presumption rules should apply
to instruments such as the Certificates, and there can be no assurance that the
Service will agree with the Tax Administrator's position.
Under the OID Regulations, the holder of a Regular Certificate generally
may make an All OID Election to include in gross income all stated interest,
original issue discount, DE MINIMIS original issue discount, market discount,
and DE MINIMIS market discount that accrues on such Certificate (reduced by any
amortizable premium or acquisition premium on such Certificate) under the
constant yield method used to account for original issue discount. To make an
All OID Election, the holder of the Certificate must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Certificate. The statement must identify the instruments to which
the election applies. An All OID Election is irrevocable unless the holder
obtains the consent of the Service. If an All OID Election is made for a debt
instrument with market discount, the holder is deemed to have made an election
to include in income currently the market discount on all of the holder's other
debt instruments with market discount, as described below under "Federal Income
Tax Consequences -- REMIC Certificates -- Tax Treatment of Regular
Certificates -- Market Discount." In addition, if an All OID Election is
60
made for a debt instrument with amortizable premium, the holder is deemed to
have made an election to amortize the premium on all of the holder's other debt
instruments with amortizable premium under the constant yield method. See
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Regular Certificates -- Amortizable Premium" below. Certificateholders should be
aware that the law is unclear as to whether an All OID Election is effective for
Interest Weighted Certificates or Non-VRDI Certificates. See "Federal Income Tax
Consequences -- REMIC Certificates -- Tax Treatment of Regular
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates" below.
A Regular Certificate having original issue discount may be acquired in a
transaction subsequent to its issuance for more than its adjusted issue price.
If the subsequent holder's adjusted basis in such a Regular Certificate,
immediately after its acquisition, exceeds the sum of all Deemed Principal
Payments to be received on the Certificate after the acquisition date, the
Certificate will no longer have original issue discount, and the holder may be
entitled to reduce the amount of interest income recognized on the Certificate
by the amount of amortizable premium. See "Federal Income Tax
Consequences -- REMIC Certificates -- Tax Treatment of Regular
Certificates -- Amortizable Premium" below. If the subsequent holder's adjusted
basis in the Certificate immediately after the acquisition exceeds the adjusted
issue price of the Certificate, but is less than or equal to the sum of the
Deemed Principal Payments to be received under the Certificate after the
acquisition date, the amount of original issue discount on the Certificate will
be reduced by a fraction, the numerator of which is the excess of the
Certificate's adjusted basis immediately after its acquisition over the adjusted
issue price of the Certificate and the denominator of which is the excess of the
sum of all Deemed Principal Payments to be received on the Certificate after the
acquisition date over the adjusted issue price of the Certificate. For that
purpose, the adjusted basis of a Regular Certificate generally is reduced by the
amount of any Qualified Stated Interest that is accrued but unpaid as of the
acquisition date. Alternatively, the subsequent purchaser of a Regular
Certificate having original issue discount may make an All OID Election with
respect to the Certificate.
If the First Distribution Period with respect to a Regular Certificate
contains more days than the number of days of stated interest that are payable
on the first Distribution Date, the effective interest rate received by the
holder of such Certificate during the first Distribution Period will be less
than the Certificate's stated interest rate, making such Certificate a Teaser
Certificate. If the amount of original issue discount on the Teaser Certificate
measured under the expanded DE MINIMIS test described above exceeds the DE
MINIMIS amount of original issue discount allowable on the Certificate, the
amount by which the stated interest on the Certificate exceeds the interest that
would be payable on the Certificate at the effective rate of interest for the
First Distribution Period would be treated as part of the Certificate's stated
redemption price at maturity. Accordingly, the holder of a Teaser Certificate
may be required to recognize ordinary income arising from original issue
discount in addition to any Qualified Stated Interest that accrues in a period.
Similarly, if the First Distribution Period with respect to a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
and the holder of such Certificate receives interest on the first Distribution
Date based on a full accrual period, the effective rate of interest payable on
such Certificate during the First Distribution Period will be higher than the
stated rate of interest on such Certificate, making such Certificate a Rate
Bubble Certificate. A Rate Bubble Certificate that otherwise bears Qualified
Stated Interest would be issued with original issue discount unless the
Pre-Issuance Accrued Interest Rule applies or the amount of original issue
discount on the Certificate is DE MINIMIS. The amount of original issue discount
on a Rate Bubble Certificate attributable to the First Distribution Period would
be the amount by which the interest payment due on the first Distribution Date
exceeds the amount that would have been payable had the effective rate for that
Period been equal to the stated interest rate. However, if a portion of the
initial purchase price of a Rate Bubble Certificate is allocable to Pre-Issuance
Accrued Interest and such Certificate provides for a payment of stated interest
on the first payment date within one year of its issue date that equals or
exceeds the amount of such Pre-Issuance Accrued Interest, the Tax Administrator
will apply the Pre-Issuance Accrued Interest Rule to such Certificate. Under the
Pre-Issuance Accrued Interest Rule, the Tax Administrator will (i) subtract from
the issue price of a Rate Bubble Certificate an amount of Pre-Issuance Accrued
Interest equal to the excess of (a) the amount of stated interest paid on the
Certificate on the first Distribution Date over (b) the portion of such interest
that is economically allocable to the period after the issue date, which
generally should be an amount equal to the stated interest rate on the
Certificate expressed as a daily percentage times the number of days in the
first payment period (i.e., from the issue date to the first payment date) times
the Certificates initial principal amount and (ii) treat a portion of the
interest received on the first Distribution Date with respect to such
Certificate as a return of the Pre-Issuance Accrued Interest excluded from the
issue price of such Certificate rather than as a payment on the Certificate.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble
Certificate will not have original issue discount attributable to the First
Distribution Period, provided that the increased effective interest rate for
that Period is attributable solely to Pre-Issuance Accrued Interest, as
typically will be the case. The Tax Administrator will apply the Pre-Issuance
Accrued Interest Rule as described above to each Rate Bubble Certificate for
which it is available if the Certificate's
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stated interest otherwise would be Qualified Stated Interest. If, however, the
First Distribution Period for a Rate Bubble Certificate is longer than
subsequent Distribution Periods, the application of the Pre-Issuance Accrued 72
Interest Rule typically will not prevent disqualification of the Certificate's
stated interest because its effective interest rate during the First
Distribution Period will be less than its stated interest rate. Thus, a Regular
Certificate with a long First Distribution Period typically will be a Teaser
Certificate, as discussed above. The Pre-Issuance Accrued Interest Rule will not
apply to any amount paid at issuance for such a Teaser Certificate that is
nominally allocable to interest accrued under the terms of such Certificate
before its issue date. All amounts paid for such a Teaser Certificate at
issuance, regardless of how designated, will be included in the issue price of
such Certificate for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to
Interest Weighted Certificates. Unless and until the Service provides contrary
administrative guidance on the income tax treatment of an Interest Weighted
Certificate, the Tax Administrator will take the position that an Interest
Weighted Certificate does not bear Qualified Stated Interest, and will account
for the income thereon as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates"
herein. Some Interest Weighted Certificates may be Superpremium Certificates.
Superpremium Certificates technically are issued with amortizable premium.
However, because of their close similarity to other Interest Weighted
Certificates it appears more appropriate to account for Superpremium
Certificates in the same manner as for other Interest Weighted Certificates.
Consequently, in the absence of further administrative guidance, the Tax
Administrator will account for Superpremium Certificates in the same manner as
other Interest Weighted Certificates. However, there can be no assurance that
the Service will not assert a position contrary to that taken by the Tax
Administrator, and, therefore, holders of Superpremium Certificates should
consider making a protective election to amortize premium on such Certificates.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Regular Certificates, each
investor should consult its own tax advisor to determine the appropriate amount
and method of inclusion in income of original issue discount on such
Certificates for federal income tax purposes.
VARIABLE RATE CERTIFICATES
Under the OID Regulations, a Variable Rate Certificate will qualify as a
VRDI Certificate only if (i) the Certificate is not issued at an Excess Premium;
(ii) stated interest on the Certificate compounds or is payable unconditionally
at least annually at (a) one or more "qualified floating rates," (b) a single
fixed rate and one or more qualified floating rates, (c) a single "objective
rate," or (d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate"; and (iii) the qualified floating rate or the
objective rate in effect during an accrual period is set at a current value of
that rate (i.e., the value of the rate on any day occurring during the interval
that begins three months prior to the first day on which that value is in effect
under the Certificate and ends one year following that day). VRDI Certificates
are subject to the rules applicable to VRDIs in the OID Regulations that are
described below.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than zero but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate. If a Regular Certificate provides for two or more
qualified floating rates that reasonably can be expected to have approximately
the same values throughout the term of such Certificate, the qualified floating
rates together will constitute a single qualified floating rate. Two or more
qualified floating rates conclusively will be presumed to have approximately the
same values throughout the term of a Certificate if the values of all rates on
the issue date of such Certificate are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a Cap, Floor, Governor, or other similar restriction only if: (a) the
Cap, Floor, or Governor is fixed throughout the term of the related Certificate
or (b) the Cap, Floor, Governor, or similar restriction is not reasonably
expected, as of the issue date, to cause the yield on the Certificate to be
significantly less or significantly more than the expected yield on such
Certificate determined without such Cap, Floor, Governor, or similar
restriction, as the case may be. Although the OID Regulations are unclear, it
appears that a VRDI Certificate, the principal rate on which is subject to a
Cap, Floor, or Governor that itself is a qualified floating rate, bears interest
at an objective rate.
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Under final Treasury regulations issued on June 12, 1996, an objective rate
is a rate (other than a qualified floating rate) that (i) is determined using a
single fixed formula, (ii) is based on objective financial or economic
information, and (iii) is not based on information that either is within the
control of the issuer (or a related party) or is unique to the circumstances of
the issuer (or related party), such as dividends, profits, or the value of the
issuer's (or related party's) stock. That definition is broader than the former
definition of objective rate set forth in the OID Regulations and would include,
in addition to a rate that is based on one or more qualified floating rates or
on the yield of actively traded personal property, a rate that is based on
changes in a general inflation index. In addition, a rate would not fail to be
an objective rate merely because it is based on the credit quality of the
issuer.
Under the OID Regulations, if interest on a Certificate is stated at a
fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Single Rate VRDI
Certificate is treated as Qualified Stated Interest. The amount and accrual of
OID on a Single Rate VRDI Certificate is determined, in general, by converting
such Certificate into a hypothetical fixed rate certificate and applying the
rules applicable to fixed rate certificates described under "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" above to such
hypothetical fixed rate certificate. Qualified Stated Interest or original issue
discount allocable to an accrual period with respect to a Single Rate VRDI
Certificate also must be increased (or decreased) if the interest actually
accrued or paid during such accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during such accrual period under the
related hypothetical equivalent fixed rate certificate.
Except as provided below, the amount and accrual of OID on a Multiple Rate
VRDI Certificate is determined by converting such Certificate into a
hypothetical equivalent fixed rate certificate that has terms that are identical
to those provided under the Multiple Rate VRDI Certificate, except that such
hypothetical equivalent fixed rate certificate will provide for fixed rate
substitutes in lieu of the qualified floating rates or objective rate provided
for under the Multiple Rate VRDI Certificate. A Multiple Rate VRDI Certificate
providing for a qualified floating rate or rates or a qualified inverse floating
rate is converted to a hypothetical equivalent fixed rate certificate by
assuming that each qualified floating rate or the qualified inverse floating
rate will remain at its value as of the issue date. A Multiple Rate VRDI
Certificate providing for an objective rate or rates is converted to a
hypothetical equivalent fixed rate certificate by assuming that each objective
rate will equal a fixed rate that reflects the yield that reasonably is expected
for such Multiple Rate VRDI Certificate. Qualified Stated Interest or original
issue discount allocable to an accrual period with respect to a Multiple Rate
VRDI Certificate must be increased (or decreased) if the interest actually
accrued or paid during such accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during such accrual period under the
related hypothetical equivalent fixed rate certificate.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate
VRDI Certificate that provides for stated interest at either one or more
qualified floating rates or at a qualified inverse floating rate and in addition
provides for stated interest at a single fixed rate (other than an initial fixed
rate that is intended to approximate the subsequent variable rate), is
determined using the method described in the preceding paragraph except that
prior to its conversion to a hypothetical equivalent fixed rate certificate,
such Multiple Rate VRDI Certificate is treated as if it provided for a qualified
floating rate (or a qualified inverse floating rate) rather than the fixed rate
during the period in which the fixed rate applies. The qualified floating rate
(or qualified inverse floating rate) replacing the fixed rate must be such that
the fair market value of the Multiple Rate VRDI Certificate as of its issue date
would be approximately the same as the fair market value of an otherwise
identical debt instrument that provides for the qualified floating rate (or
qualified inverse floating rate), rather than the fixed rate.
It is not entirely clear how income should be accrued with respect to
Weighted Average Certificates. Under the OID Regulations, Weighted Average
Certificates relating to a Trust (or a designated Asset Pool thereof) whose
Assets are exclusively Adjustable Rate Assets appear to bear interest at an
objective rate provided the Adjustable Rate Assets themselves bear interest at
qualified floating rates. However, Weighted Average Certificates relating to a
Trust (or a designated Asset Pool thereof) whose Assets do not bear interest at
qualified floating rates (I.E., NOWA Certificates), do not bear interest at an
objective or a qualified floating rate and, consequently, do not qualify as VRDI
Certificates described above. Accordingly, unless and until the Service provides
contrary administrative guidance on the income tax treatment of NOWA
Certificates, the Tax Administrator will treat such Certificates as debt
obligations that provide for one or more contingent payments, and
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will account for the income thereon as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Interest Weighted Certificates and
Non-VRDI Certificates" below.
Under the OID Regulations, Inverse Floater Certificates generally bear
interest at objective rates because their rates either constitute qualified
inverse floating rates under those Regulations or, although not qualified
floating rates themselves, are based on one or more qualified floating rates.
Consequently, if such Certificates are not issued at an Excess Premium and their
interest rates otherwise meet the test for Qualified Stated Interest, the income
on such Certificates will be accounted for under the rules applicable to VRDI
Certificates described above. However, an Inverse Floater Certificate may have
an interest rate parameter equal to the weighted average of the interest rates
on some or all of the Assets of the related Trust (or designated Asset Pool
thereof) in a case where one or more of the interest rates on such Assets is a
fixed rate or otherwise may not qualify as a VRDI Certificate. Unless and until
the Service provides contrary administrative guidance on the income tax
treatment of such Inverse Floater Certificates, the Tax Administrator will treat
such Certificates as debt obligations that provide for one or more contingent
payments, and will account for the income thereon as described in "Federal
Income Tax Consequences -- REMIC Certificates -- Interest Weighted Certificates
and Non-VRDI Certificates" below.
INTEREST WEIGHTED CERTIFICATES AND NON-VRDI CERTIFICATES
The treatment of a NOWA Certificate, a Variable Rate Certificate that is
issued at an Excess Premium, any other Variable Rate Certificate that does not
qualify as a VRDl Certificate (each a Non-VRDI Certificate) or an Interest
Weighted Certificate is unclear under current law. The OID Regulations contain
provisions (the "Contingent Payment Regulations") that address the federal
income tax treatment of debt obligations that provide for one or more contingent
payments ("Contingent Payment Obligations").
Under the Contingent Payment Regulations, any variable rate debt instrument
that is not a VRDI is classified as a Contingent Payment Obligation. However,
the Contingent Payment Regulations, by their terms, do not apply to REMIC
regular interests and other instruments that are subject to section 1272(a)(6)
of the Code. In the absence of further guidance, the Tax Administrator will
account for Non-VRDI Certificates, Interest Weighted Certificates, and other
Regular Certificates that are Contingent Payment Obligations in accordance with
Code section 1272(a)(6) and the accounting methodology described in this
paragraph. Income will be accrued on such Certificates based on a constant yield
that is derived from a projected payment schedule as of the Closing Date. The
projected payment schedule will take into account the Pricing Prepayment
Assumptions and the interest payments that are expected to be made based on the
value of any relevant indices on the issue date. To the extent that actual
payments differ from projected payments for a particular taxable year,
appropriate adjustments to interest income and expense accruals will be made for
that year. In the case of a Weighted Average Certificate, the projected payment
schedule will be derived based on the assumption that the principal balances of
the Assets that collateralize the Certificate pay down pro rata.
The method described in the foregoing paragraph for accounting for Interest
Weighted Certificates, Non-VRDI Certificates, and any other Regular Certificates
that are Contingent Payment Obligations is consistent with Code section
1272(a)(6) and the legislative history thereto. Because of the uncertainty with
respect to the treatment of such Certificates under the OID Regulations,
however, there can be no assurance that the Service will not assert successfully
that a method less favorable to Certificateholders should apply. In view of the
complexities and the current uncertainties as to income inclusions with respect
to Non-VRDI Certificates, Interest Weighted Certificates and any other Regular
Certificates that are Contingent Payment obligations, each investor should
consult his or her own tax advisor to determine the appropriate amount and
method of income inclusion on such Certificates for federal income tax purposes.
ANTI-ABUSE RULE
Concerned that taxpayers might be able to structure debt instruments or
transactions, or apply the bright-line or mechanical rules of the OID
Regulations, in a way that produces unreasonable tax results, the Treasury
issued regulations containing an anti-abuse rule. These regulations provide that
if a principal purpose in structuring a debt instrument, engaging in a
transaction, or applying the OID Regulations is to achieve a result that is
unreasonable in light of the purposes of the applicable statutes, the Service
can apply or depart from the OID Regulations as necessary or appropriate to
achieve a reasonable result. A result is not considered unreasonable under the
regulations, however, in the absence of a substantial effect on the present
value of a taxpayer's tax liability.
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MARKET DISCOUNT
A subsequent purchaser of a Regular Certificate at a discount from its
outstanding principal amount (or, in the case of a Regular Certificate having
original issue discount, its "adjusted issue price") will acquire such
Certificate with market discount. The purchaser generally will be required to
recognize the market discount (in addition to any original issue discount
remaining with respect to the Certificate) as ordinary income. A person who
purchases a Regular Certificate at a price lower than the remaining outstanding
Deemed Principal Payments but higher than its adjusted issue price does not
acquire the Certificate with market discount, but will be required to report
original issue discount, appropriately adjusted to reflect the excess of the
price paid over the adjusted issue price. See "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" above. A Regular
Certificate will not be considered to have market discount if the amount of such
market discount is DE MINIMIS, I.E., less than the product of (i) 0.25% of the
remaining principal amount (or, in the case of a Regular Certificate having
original issue discount, the adjusted issue price of such Certificate),
multiplied by (ii) the WAM of the Certificate remaining after the date of
purchase. Regardless of whether the subsequent purchaser of a Regular
Certificate with more than a DE MINIMIS amount of market discount is a
cash-basis or accrual-basis taxpayer, market discount generally will be taken
into income as principal payments (including, in the case of a Regular
Certificate having original issue discount, any Deemed Principal Payments) are
received, in an amount equal to the lesser of (i) the amount of the principal
payment received or (ii) the amount of market discount that has "accrued" (as
described below), but that has not yet been included in income. The purchaser
may make a Current Recognition Election, which generally will apply to all
market discount instruments held or acquired by the purchaser in the taxable
year of election or thereafter, to recognize market discount currently on an
uncapped accrual basis. The Service has indicated in Revenue Procedure 92-67 the
manner in which a Current Recognition Election may be made. The purchaser also
may make an All OID Election with respect to a Regular Certificate purchased
with market discount. See "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" above.
Until the Treasury promulgates applicable regulations, the purchaser of a
Regular Certificate with market discount generally may elect to accrue the
market discount either: (i) on the basis of a constant interest rate; (ii) in
the case of a Regular Certificate not issued with original issue discount, in
the ratio of stated interest payable in the relevant period to the total stated
interest remaining to be paid from the beginning of such period; or (iii) in the
case of a Regular Certificate issued with original issue discount, in the ratio
of original issue discount accrued for the relevant period to the total
remaining original issue discount at the beginning of such period. The Service
indicated in Revenue Ruling 92-67 the manner in which an election may be made to
accrue market discount on a Regular Certificate on the basis of a constant
interest rate. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Certificateholder who has acquired any Regular Certificate with market
discount generally will be required to treat a portion of any gain on a sale or
exchange of the Certificate as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income as
partial principal payments were received. Moreover, such Certificateholder
generally must defer interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Certificate to the extent they
exceed income on the Certificate. Any such deferred interest expense, in
general, is allowed as a deduction not later than the year in which the related
market discount income is recognized. If a holder of a Regular Certificate makes
a Current Recognition Election or an All OID Election, the interest deferral
rule will not apply. Under the Contingent Payment Regulations, a secondary
market purchaser of a Non-VRDI Certificate or an Interest Weighted Certificate
at a discount generally would continue to accrue interest and determine
adjustments on such Certificate based on the original projected payment schedule
devised by the issuer of such Certificate. See "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount -- Interest
Weighted Certificates and Non-VRDI Certificates" herein. The holder of such a
Certificate would be required, however, to allocate the difference between the
adjusted issue price of the Certificate and its basis in the Certificate as
positive adjustments to the accruals or projected payments on the Certificate
over the remaining term of the Certificate in a manner that is reasonable (E.G.,
based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of a Regular Certificate subject to optional
redemption that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Regular Certificates. Prospective investors in
Regular Certificates should consult their own tax advisors regarding the
application of the market discount rules to those certificates.
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AMORTIZABLE PREMIUM
A purchaser of a Regular Certificate who purchases the Certificate at a
premium over the total of its Deemed Principal Payments may elect to amortize
such premium under a constant yield method that reflects compounding based on
the interval between payments on the Certificates. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a
Regular Certificate will be calculated using the Pricing Prepayment Assumptions.
Under the Code, except as otherwise provided in Treasury regulations issued,
amortized premium would be treated as an offset to interest income on a Regular
Certificate and not as a separate deduction item. If a holder makes an election
to amortize premium on a Regular Certificate, such election will apply to all
taxable debt instruments (including all REMIC regular interests) held by the
holder at the beginning of the taxable year in which the election is made, and
to all taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the Service. Purchasers who pay a premium for
the Regular Certificates should consult their tax advisors regarding the
election to amortize premium and the method to be employed.
Amortizable premium on a Regular Certificate that is subject to redemption
at the option of the Company generally must be amortized as if the optional
redemption price and date were the Certificate's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization during
the period ending with the optional redemption date. Thus, a Certificateholder
would not be able to amortize any premium on a Regular Certificate that is
subject to optional redemption at a price equal to or greater than the
Certificateholder's acquisition price unless and until the redemption option
expires. In cases where premium must be amortized on the basis of the price and
date of an optional redemption, the Certificate will be treated as having
matured on the redemption date for the redemption price and then having been
reissued on that date for that price. Any premium remaining on the Certificate
at the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above. Under the
Contingent Payment Regulations, a secondary market purchaser of a Non-VRDI
Certificate or an Interest Weighted Certificate at a premium generally would
continue to accrue interest and determine adjustments on such Certificate based
on the original projected payment schedule devised by the issuer of such
Certificate. See "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates"
herein. The holder of such a Certificate would be required, however, to allocate
the difference between its basis in the Certificate and the adjusted issue price
of the Certificate as negative adjustments to the accruals or projected payments
on the Certificate over the remaining term of the Certificate in a manner that
is reasonable (E.G., based on a constant yield to maturity).
CONSEQUENCES OF REALIZED LOSSES
Under section 166 of the Code, both corporate holders of Regular
Certificates and noncorporate holders that acquire Regular Certificates in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their Regular
Certificates become wholly or partially worthless as the result of one or more
Realized Losses on the underlying Assets. However, a noncorporate holder that
does not acquire a Regular Certificate in connection with its trade or business
will not be entitled to deduct a loss under Code section 166 until its Regular
Certificate becomes wholly worthless (I.E., until its outstanding principal
balance has been reduced to zero), and the loss will be characterized as
short-term capital loss.
Each holder of a Regular Certificate will be required to accrue original
issue discount income with respect to such Certificate without giving effect to
any reduction in distributions attributable to a default or delinquency on the
underlying Assets until a Realized Loss is allocated to such Certificate or
until such earlier time as it can be established that any such reduction
ultimately will not be recoverable. As a result, the amount of original issue
discount reported in any period by the holder of a Regular Certificate could
exceed significantly the amount of economic income actually realized by the
holder in such period. Although the holder of a Regular Certificate eventually
will recognize a loss or a reduction in income attributable to previously
included original issue discount that, as a result of a Realized Loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income. Accordingly, holders of
Regular Certificates should consult with their own tax advisors with respect to
the federal income tax consequences of Realized Losses on original issue
discount.
The Tax Administrator will adjust the accrual of original issue discount on
Regular Certificates in a manner that it believes to be appropriate to reflect
Realized Losses. However, there can be no assurance that the Service will not
contend successfully that a different method of accounting for the effect of
Realized Losses is correct and that such method will not have an adverse effect
upon the holders of Regular Certificates.
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GAIN OR LOSS ON DISPOSITION
If a Regular Certificate is sold, the Certificateholder will recognize gain
or loss equal to the difference between the amount realized on the sale and his
adjusted basis in the Certificate. The adjusted basis of a Regular Certificate
generally will equal the cost of the Certificate to the Certificateholder,
increased by any original issue discount or market discount previously
includible in the Certificateholder's gross income with respect to the
Certificate, and reduced by the portion of the basis of the Certificate
allocable to payments on the Certificate (other than Qualified Stated Interest)
previously received by the Certificateholder and by any amortized premium.
Similarly, a Certificateholder who receives a scheduled or prepaid principal
payment with respect to a Regular Certificate will recognize gain or loss equal
to the difference between the amount of the payment and the allocable portion of
his adjusted basis in the Certificate. Except to the extent that the market
discount rules apply and except as provided below, any gain or loss on the sale
or other disposition of a Regular Certificate generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Certificate is
held as a capital asset for the long-term capital gain holding period
(currently, more than twelve months).
If the holder of a Regular Certificate is a bank, thrift, or similar
institution described in section 582 of the Code, any gain or loss on the sale
or exchange of such Certificate will be treated as ordinary income or loss. In
the case of other types of holders, gain from the disposition of a Regular
Certificate that otherwise would be capital gain will be treated as ordinary
income to the extent that the amount actually includible in income with respect
to the Certificate by the Certificateholder during his holding period is less
than the amount that would have been includible in income if the yield on that
Certificate during the holding period had been 110% of a specified U.S. Treasury
borrowing rate as of the date that the Certificateholder acquired the
Certificate. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a Regular Certificate that will be
recharacterized as ordinary income is limited to the amount of original issue
discount (if any) on the Certificate that was not previously includible in
income, the applicable Code provision contains no such limitation.
A portion of any gain from the sale of a Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable federal rate" (which rate is computed and
published monthly by the Service) at the time the taxpayer entered into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income from the transaction.
Currently, the highest marginal individual income tax bracket is 36%, and a
10% surtax is imposed on taxpayers whose taxable income for 1993 and later years
exceeds $250,000 (resulting in a 39.6% marginal rate). The alternative minimum
tax rate for individuals is 26% with respect to alternative minimum tax income
up to $175,000 and 28% with respect to alternative minimum tax income over
$175,000. Because the highest marginal federal tax rate on net capital gains for
individuals is 28%, there is a significant marginal tax rate differential
between net capital gains and ordinary income for individuals. The highest
marginal corporate tax rate is 35% for corporate taxable income over $10
million, and the marginal tax rate on corporate net capital gains is 35%.
TAX TREATMENT OF RESIDUAL CERTIFICATES
OVERVIEW
A Residual Certificate will represent beneficial ownership of a percentage
of the "residual interest" in the Series REMIC to which it relates, and a
Regular Certificate generally will represent beneficial ownership of a
percentage of a "regular interest" in the Series REMIC to it relates. A REMIC is
an entity for federal income tax purposes consisting of a fixed pool of
mortgages (including manufactured housing installment sales contracts) or other
mortgage-backed assets in which investors hold multiple classes of interests. To
be treated as a REMIC, the Trust (or a segregated Asset Pool thereof) underlying
a Series must meet certain continuing qualification requirements, and a REMIC
election must be in effect. See "Federal Income Tax Consequences -- REMIC
Certificates -- REMIC Qualification" below. A REMIC generally is treated as a
pass-through entity for federal income tax purposes, I.E., as not subject to
entity-level tax. All interests in a REMIC other than the residual interest must
be regular interests. As described in "Federal Income Tax Consequences -- REMIC
Certificates -- Tax Treatment of Regular Certificates" above, a regular interest
has terms analogous to those of a debt instrument and generally is
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treated as a debt instrument for all federal income tax purposes. The Regular
Certificates will generate interest and, depending upon the issue price of the
Regular Certificates, original issue discount deductions or income attributable
to premium for the related Series REMIC. As a residual interest, a Residual
Certificate represents the right to (i) the stated principal and interest on
such Certificate, if any, and (ii) such Certificate's pro rata share of the
income generated by the related Series REMIC's assets in excess of the amount
necessary to service that REMIC's regular interests and pay that REMIC's
expenses.
In a manner similar to that employed in the taxation of partnerships, REMIC
taxable income or loss will be determined at the REMIC level, but passed through
to the Residual Certificateholders. Thus, REMIC taxable income or loss will be
allocated pro rata to the related Residual Certificateholders, and each such
Certificateholder will report his share of REMIC taxable income or loss on his
own federal income tax return. Prospective investors in Residual Certificates
should be aware that the obligation to account for the related Series REMIC's
income or loss will continue until all of that REMIC's Regular Certificates have
been retired, which may not occur until well beyond the date on which the last
payments on Residual Certificates are made. In addition, because of the way in
which REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom income" (I.E., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such loss or reduction.
A portion of the income of a Residual Certificateholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions (except in the case of certain thrift institutions
holding Residual Certificates with significant value); (ii) it will be
considered UBTI to tax-exempt entities; and (iii) it is ineligible for any
statutory or treaty reduction in the 30% withholding tax otherwise available to
a foreign Residual Certificateholder.
The concepts presented in this overview are discussed more fully below.
TAXATION OF RESIDUAL CERTIFICATEHOLDERS
A Residual Certificateholder will recognize his share of the related Series
REMIC's taxable income or loss for each day during his taxable year on which he
holds the Residual Certificate. The amount so recognized will be characterized
as ordinary income or loss and will not be taxed separately to the Series REMIC.
If a Residual Certificate is transferred during a calendar quarter, REMIC
taxable income or loss for that quarter will be prorated between the transferor
and the transferee on a daily basis.
A REMIC generally determines its taxable income or loss in a manner similar
to that of an individual using a calendar year and the accrual method of
accounting. A REMIC's taxable income or loss generally will be characterized as
ordinary income or loss, and will consist of the REMIC's gross income, including
interest, original issue discount, and market discount income, if any, on the
REMIC's assets (including temporary cash flow investments), premium amortization
on the REMIC's Regular Certificates, income from foreclosure property, and any
cancellation of indebtedness income due to the allocation of realized losses to
the REMIC's Regular Certificates, reduced by the REMIC's deductions, including
deductions for interest and original issue discount expense on the REMIC's
Regular Certificates, premium amortization and servicing fees with respect to
the REMIC's assets, the administrative expenses of the REMIC and the Regular
Certificates, any tax imposed on the REMIC's income from foreclosure property,
and any bad debt deductions with respect to the related Assets. The REMIC may
not take into account any items allocable to a "prohibited transaction." See
"Federal Income Tax Consequences -- REMIC Certificates -- REMIC-Level Taxes"
below. The deduction of REMIC expenses by Residual Certificateholders who are
individuals is subject to certain limitations as described below in "Federal
Income Tax Consequences -- REMIC Certificates -- Special Considerations for
Certain Types of Investors -- Individuals and Pass- Through Entities" below.
The amount of the REMIC's net loss with respect to a calendar quarter that
may be deducted by a Residual Certificateholder is limited to such
Certificateholder's adjusted basis in the Residual Certificate as of the end of
that quarter (or time of disposition of the Residual Certificate, if earlier),
determined without taking into account the net loss for that quarter. A Residual
Certificateholder's basis in its Residual Certificate initially is equal to the
price paid for such Certificate. Such basis is increased by the amount of
taxable income of the REMIC reportable by the Residual Certificateholder with
respect to the Residual Certificate and decreased (but not below zero) by the
amount of distributions made and the amount of net losses recognized with
respect to that Certificate. The amount of the REMIC's net loss allocable to a
Residual Certificateholder that is disallowed under the basis limitation may be
carried forward indefinitely, but may be used only to offset income with respect
to the related Residual Certificate. The ability of Residual Certificateholders
to deduct net losses with respect to a Residual Certificate may be subject to
additional limitations under the Code, as to which Certificateholders should
consult
68
their tax advisors. A distribution with respect to a Residual Certificate is
treated as a non-taxable return of capital up to the amount of the Residual
Certificateholder's adjusted basis in his Residual Certificate. If a
distribution exceeds the adjusted basis of the Residual Certificate, the excess
is treated as gain from the sale of such Residual Certificate.
Although the law is unclear in certain respects, a Residual
Certificateholder effectively should be able to recover some or all of the basis
in his Residual Certificate as the related REMIC recovers the basis of its
assets through either the amortization of premium on such assets or the
allocation of basis to principal payments received on such assets. A REMIC's
initial aggregate basis in its assets generally will equal the sum of the issue
prices of its Regular Certificates and Residual Certificates. In general, the
issue price of a Regular Certificate of a particular Class is the initial price
at which a substantial amount of the Certificates of such Class is sold to the
public. In the case of a Regular Certificate of a Class not offered to the
public in substantial amounts, the issue price is either the price paid by the
first purchaser of such Certificate or the fair market value of the property
received in exchange for such Certificate, as appropriate. The REMIC's aggregate
basis will be allocated among its assets in proportion to their respective fair
market values.
The assets of certain Series REMICs may have bases that exceed their
principal amounts. Except as indicated in "Federal Income Tax
Consequences -- REMIC Certificates -- Treatment by the REMIC of Original Issue
Discount, Market Discount, and Amortizable Premium" below, the premium on such
assets will be amortizable under the constant yield method and the same
prepayment assumptions used in pricing the Certificates. The amortized premium
will reduce the REMIC's taxable income or increase its tax loss for each year,
which will offset a corresponding amount of the stated interest or other
residual cash flow, if any, allocable to the Residual Certificateholders. It
should be noted, however, that the law concerning the amortization of premium on
Assets is unclear in certain respects. If the Service were to contend
successfully that part or all of the premium on the assets underlying a REMIC is
not amortizable, the holders of the Residual Certificates in such REMIC would
recover the basis attributable to the unamortizable premium only as principal
payments are received on such assets or upon the disposition or worthlessness of
their Residual Certificates. The inability to amortize part or all of the
premium could give rise to timing differences between the REMIC's income and
deductions, creating phantom income (as described below).
In the first years after the issuance of the Regular Certificates, REMIC
taxable income may include significant amounts of phantom income. Phantom income
arises from timing differences between income on the underlying Assets and
deductions on the Regular Certificates that result from the multiple-class
structure of the Certificates. Since phantom income will arise from timing
differences between income and deductions, it will be matched by a corresponding
loss or reduction in taxable income in later years, during which economic or
financial income will exceed REMIC taxable income. Any acceleration of taxable
income, however, could lower the yield to a Residual Certificateholder, since
the present value of the tax paid on that income will exceed the present value
of the corresponding tax reduction in the later years. The amount and timing of
any phantom income are dependent upon (i) the structure of the particular REMIC
and (ii) the rate of prepayment on the Assets held by the REMIC and, therefore,
cannot be predicted without reference to a particular REMIC.
The assets of certain Series REMICs may have bases that are less than their
principal amounts. In such a case, a Residual Certificateholder will recover the
basis in his Residual Certificate as the REMIC recovers the portion of its basis
in the assets that is attributable to the residual interest. The REMIC's basis
in the assets is recovered as it is allocated to principal payments received by
the REMIC.
A portion of a Series REMIC's taxable income may be subject to special
treatment. That portion (known as "excess inclusion income") generally is any
taxable income beyond that which the Residual Certificateholder would have
recognized had the Residual Certificate been a conventional debt instrument
bearing interest at 120% of the applicable long-term federal rate (based on
quarterly compounding) as of the date on which the Residual Certificate was
issued. Excess inclusion income generally is intended to approximate phantom
income and may result in unfavorable tax consequences for certain investors. See
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Residual Certificates -- Limitations on Offset or Exemption of REMIC Income" and
" -- Special Considerations for Certain Types of Investors" below.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Generally, a Residual Certificateholder's taxable income for any taxable
year may not be less than such Certificateholder's excess inclusion income for
that taxable year. Excess inclusion income is equal to the excess of REMIC
taxable income for the quarterly period for the Residual Certificates over the
product of (i) 120% of the long-term applicable federal rate that would have
applied to the Residual Certificates if they were debt instruments for federal
income tax purposes on the Closing Date and (ii) the adjusted issue price of
such Residual Certificates 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
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Certificate, increased by the amount of the daily accruals of REMIC income for
all prior quarters, and decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period. If the
Residual Certificateholder is an organization subject to the tax on UBTI imposed
by Code section 511, the Residual Certificateholder's excess inclusion income
will be treated as UBTI. In addition, under Treasury regulations yet to be
issued, if a REIT or a RIC owns a Residual Certificate that generates excess
inclusion income, a pro rata portion of the dividends paid by the REIT or the
RIC generally will constitute excess inclusion income for their shareholders.
Finally, Residual Certificateholders who are foreign persons will not be
entitled to any exemption from the 30% withholding tax or a reduced treaty rate
with respect to their excess inclusion income from the REMIC. See "Federal
Income Tax Consequences -- REMIC Certificates -- Taxation of Certain Foreign
Holders of REMIC Certificates -- Residual Certificates" below.
NON-RECOGNITION OF CERTAIN TRANSFERS FOR FEDERAL INCOME TAX PURPOSES
In addition to the limitations specified above, the REMIC Provisions
provide that the transfer of a "noneconomic residual interest" to a United
States person will be disregarded for tax purposes if a significant purpose of
the transfer was to impede the assessment or collection of tax. A Residual
Certificate will constitute a noneconomic residual interest unless, at the time
the interest is transferred, (i) the present value of the expected future
distributions with respect to the Residual Certificate equals or exceeds the
product of the present value of the anticipated excess inclusion income and the
highest corporate tax rate for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC in amounts sufficient to satisfy the taxes on excess inclusion
income as they accrue. If a transfer of a residual interest is disregarded, the
transferor would continue to be treated as the owner of the Residual Certificate
and thus would continue to be subject to tax on its allocable portion of the net
income of the related REMIC. 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, (I.E., the
transferor had "improper knowledge"). Under the REMIC Provisions, a transferor
is presumed not to have such improper knowledge if (i) the transferor conducted,
at the time of the transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically 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 come due and (ii) the transferee
represents to the transferor that it understands that, as the holder of a
noneconomic residual interest, it may incur tax liabilities in excess of any
cash flows generated by the interest and that it intends to pay the taxes
associated with holding the residual interest as they become due. A similar
limitation exists with respect to transfers of certain residual interests to
foreign investors. See "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Certain Foreign Holders of REMIC
Certificates -- Residual Certificates" below.
OWNERSHIP OF RESIDUAL INTERESTS BY DISQUALIFIED ORGANIZATIONS
The Code contains three sanctions that are designed to prevent or
discourage the direct or indirect ownership of a REMIC residual interest (such
as a Residual Certificate) by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any tax-exempt organization
(other than a farmers' cooperative described in section 521 of the Code) unless
such organization is subject to the tax on UBTI, or any rural electrical or
telephone cooperative (each a "Disqualified Organization"). A corporation is not
treated as an instrumentality of the United States or any state or political
subdivision thereof if all of its activities are subject to tax and, with the
exception of FHLMC, a majority of its board of directors is not selected by such
governmental unit.
First, REMIC status is dependent upon the presence of reasonable
arrangements designed to prevent a Disqualified Organization from acquiring
record ownership of any portion of the REMIC's residual interest. No residual
interest issued pursuant to a Pooling and Servicing Agreement (whether or not
such interest is represented by a Residual Certificate) will be offered for sale
to Disqualified Organizations. Furthermore, (i) the residual interest in each
Series REMIC will be registered as to both principal and any stated interest
with the Trustee (or its agent) and transfer of such residual interest (or a
percentage interest therein) may be effected only (A) by surrender of the old
residual interest instrument and reissuance by the Trustee of a new residual
interest instrument to the new holder or (B) through a book-entry system
maintained by the Trustee; (ii) the applicable Pooling and Servicing Agreement
will prohibit the ownership of residual interests by Disqualified Organizations;
and (iii) each residual interest instrument will contain a legend providing
notice of that prohibition. Consequently, each Series REMIC should be considered
to have made reasonable arrangements designed to prevent the ownership of its
residual interest by Disqualified Organizations.
Second, the Code imposes a one-time tax on the transferor of a residual
interest (including a Residual Certificate or an interest therein) to a
Disqualified Organization. The one-time tax equals the product of (i) the
present value of the total
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anticipated excess inclusions with respect to the transferred residual interest
for periods after the transfer and (ii) the highest marginal federal income tax
rate applicable to corporations. Under the REMIC Provisions, the anticipated
excess inclusions with respect to a transferred residual interest must be based
on (i) both actual prior prepayment experience and the prepayment assumptions
used in pricing the related REMIC's interests and (ii) any required or permitted
clean up calls, or required qualified liquidation provided for in the REMIC's
organizational documents. The present value of anticipated excess inclusions is
determined using a discount rate equal to the applicable federal rate that would
apply to a debt instrument that was issued on the date the Disqualified
Organization acquired the residual interest and whose term ends on the close of
the last quarter in which excess inclusions are expected to accrue with respect
to the residual interest. Where a transferee is acting as an agent for a
Disqualified Organization, the transferee is subject to the one-time tax. For
that purpose, the term "agent" includes a broker, nominee, or other middleman.
Upon the request of such transferee or the transferor, the REMIC must furnish to
the requesting party and to the Service information sufficient to permit the
computation of the present value of the anticipated excess inclusions. The
transferor of a residual interest (including a Residual Certificate or interest
therein) will not be liable for the one-time tax if the transferee furnishes to
the transferor an affidavit that states, 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 one-time tax must be paid by April 15th of the year following the
calendar year in which the residual interest is transferred to a Disqualified
Organization. The one-time tax may be waived by the Secretary of the Treasury
if, upon discovery that a transfer is subject to the one-time tax, the
Disqualified Organization promptly disposes of the residual interest and the
transferor pays any amounts that the Secretary of the Treasury may require.
Third, the Code imposes an annual tax on any pass-through entity (I.E.,
RIC, REIT, common trust fund, partnership, trust, estate or cooperative
described in Code section 1381) that owns a direct or indirect interest in a
residual interest (including a Residual Certificate), if record ownership of an
interest in the pass-through entity is held by one or more Disqualified
Organizations. The tax imposed equals the highest corporate income tax rate
multiplied by the share of any excess inclusion income of the pass-through
entity for the taxable year allocable to interests in the pass-through entity
held by Disqualified Organizations. The same tax applies to a nominee who
acquires an interest in a residual interest (including a Residual Certificate)
on behalf of a Disqualified Organization. For example, a broker that holds an
interest in a Residual Certificate in "street name" for a Disqualified
Organization is subject to the tax. The tax due must be paid by the fifteenth
day of the fourth month following the close of the taxable year of the
pass-through entity in which the Disqualified Organization is a record holder.
Any such tax imposed on a pass-through entity would be deductible against that
entity's ordinary income in determining the amount of its required
distributions. In addition, dividends paid by a RIC or a REIT are not considered
preferential dividends within the meaning of section 562(c) of the Code solely
because the RIC or REIT allocates such tax expense only to the shares held by
Disqualified Organizations. A pass-through entity will not be liable for the
annual tax if the record holder of the interest in the pass-through entity
furnishes to the pass-through entity an affidavit that states, under penalties
of perjury, that the record holder is not a Disqualified Organization, and the
pass-through entity does not have actual knowledge that such affidavit is false.
The REMIC Provisions also require that reasonable arrangements be made with
respect to each REMIC to enable the REMIC to provide the Treasury and the
transferor with information necessary for the application of the one-time tax
described above. Consequently, the applicable Pooling and Servicing Agreement
will provide for the Servicer or an Affiliate thereof to perform such
information services as may be required for the application of the one-time tax.
If a Residual Certificateholder transfers an interest in a Residual Certificate
in violation of the relevant transfer restrictions and triggers the information
requirement, the Servicer or Affiliate thereof may charge such Residual
Certificateholder a reasonable fee for providing the information.
SPECIAL CONSIDERATIONS FOR CERTAIN TYPES OF INVESTORS
DEALERS IN SECURITIES. Residual Certificateholders that are dealers in
securities should be aware that, under Treasury regulations (the "Mark-to-Market
Regulations") relating to the requirement under section 475 of the Code that
dealers in securities use mark-to-market accounting for federal income tax
purposes, dealers in securities are not permitted to mark to market any REMIC
residual interests acquired on or after January 4, 1995. Prospective purchasers
of Residual Certificates should consult with their tax advisors regarding the
possible application of the Mark-to-Market Regulations to such Certificates.
TAX-EXEMPT ENTITIES. Any excess inclusion income with respect to a Residual
Certificate held by a tax-exempt entity, including a qualified profit-sharing,
pension, or other employee benefit plan, will be treated as UBTI. Although the
legislative history and statutory provisions imply otherwise, the Treasury
conceivably could take the position that, under pre-existing Code provisions,
substantially all income on a Residual Certificate (including non-excess
inclusion income) is to be
71
treated as UBTI. See "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Residual Certificateholders" above.
INDIVIDUALS AND PASS-THROUGH ENTITIES. A Residual Certificateholder who is
an individual, trust, or estate will be permitted to deduct its allocable share
of the fees or expenses relating to servicing the assets of and administering
the related REMIC under section 212 of the Code only to the extent that the
amount of such fees and expenses, when combined with the Residual
Certificateholder's other miscellaneous itemized deductions for the taxable
year, exceeds 2% of that holder's adjusted gross income. That same limitation
will apply to individuals, trusts, or estates that hold Residual Certificates
indirectly through a grantor trust, a partnership, an S corporation, a common
trust fund, a REMIC, or a nonpublicly offered RIC. A nonpublicly offered RIC is
a RIC other than one whose shares are (i) continuously offered pursuant to a
public offering; (ii) regularly traded on an established securities market; or
(iii) held by no fewer than 500 persons at all times during the taxable year. In
addition, that limitation will apply to individuals, trusts, or estates that
hold Residual Certificates through any other person (i) that is not generally
subject to federal income tax and (ii) the character of whose income may affect
the character of the income generated by that person for its owners or
beneficiaries. Further, Code section 68 provides that the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount ($100,000, or $50,000 in the
case of a separate return by a married individual within the meaning of Code
section 7703 for taxable year 1991 and adjusted for inflation each year
thereafter) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. In some cases, the amount
of additional income that would be recognized as a result of the foregoing
limitations by a Residual Certificateholder who is an individual, trust, or
estate could be substantial. Non-corporate holders of Residual Certificates also
should be aware that miscellaneous itemized deductions, including allocable
investment expenses attributable to the related Series REMIC, are not deductible
for purposes of the alternative minimum tax. Finally, persons holding an
interest in a Residual Certificate indirectly through an interest in a RIC,
common trust fund or one of certain corporations doing business as a cooperative
generally will recognize a share of any excess inclusion allocable to that
Residual Certificate.
EMPLOYEE BENEFIT PLANS. See "Federal Income Tax Consequences -- REMIC
Certificates -- Special Considerations for Certain Types of
Investors -- Tax-exempt entities" above and "ERISA Considerations" below.
REITS AND RICS. If a Residual Certificateholder is a REIT and the related
Series REMIC generates excess inclusion income, a portion of REIT dividends will
be treated as excess inclusion income for the REIT's shareholders, in a manner
to be provided by regulations. Thus, shareholders in a REIT that invests in
Residual Certificates could face unfavorable treatment of a portion of their
REIT dividend income for purposes of (i) using current deductions or net
operating loss carryovers or carrybacks; (ii) UBTI in the case of tax-exempt
shareholders; and (iii) withholding tax in the case of foreign shareholders (see
"Federal Income Tax Consequences -- REMIC Certificates -- Special Considerations
for Certain Types of Investors -- Foreign Residual Certificateholders" below).
Moreover, because Residual Certificateholders may recognize phantom income (see
"Federal Income Tax Consequences -- REMIC Certificates -- Taxation of Residual
Certificateholders" above), a REIT contemplating an investment in Residual
Certificates should consider carefully the effect of any phantom income upon its
ability to meet its income distribution requirements under the Code. The same
rules regarding excess inclusion will apply to a Residual Certificateholder that
is a RIC, common trust fund, or one of certain corporations doing business as a
cooperative.
A Residual Certificate held by a REIT will be treated as a real estate
asset for purposes of the REIT qualification requirements in the same proportion
that the related Series REMIC's assets would be treated as real estate assets if
held directly by the REIT, and interest income derived from such Residual
Certificate will be treated as Qualifying REIT Interest to the same extent. If
95% or more of a Series REMIC's assets qualify as real estate assets for REIT
purposes, 100% of that REMIC's regular and residual interests (including
Residual Certificates) will be treated as real estate assets for REIT purposes,
and all of the income derived from such interests will be treated as Qualifying
REIT Interest. The REMIC Provisions provide that payments of principal and
interest on Assets that are reinvested pending distribution to the holders of
the REMIC Certificates constitute real estate assets for REIT purposes. Two
REMICs that are part of a tiered structure will be treated as one REMIC for
purposes of determining the percentage of assets of each REMIC that constitutes
real estate assets. It is expected that at least 95% of the assets of each
Series REMIC will be real estate assets throughout such REMIC's life. The amount
treated as a real estate asset in the case of a Residual Certificate apparently
is limited to the REIT's adjusted basis in the Certificate.
Significant uncertainty exists with respect to the treatment of a Residual
Certificate for purposes of the various asset composition requirements
applicable to RICs. A Residual Certificate should be treated as a "security,"
but probably will not be considered a "Government security" for purposes of
section 851(b)(4) of the Code. Moreover, it is unclear whether a
72
Residual Certificate will be treated as a "voting security" under that Code
section. Finally, because a Series REMIC will be treated as the "issuer" of the
Residual Certificate for purposes of that section, a RIC would be unable to
invest more than 25% of the value of its total assets in Residual Certificates
issued by the same Series REMIC.
FOREIGN RESIDUAL CERTIFICATEHOLDERS. Certain adverse tax consequences may
be associated with the holding of certain Residual Certificates by a foreign
person or with the transfer of such Certificates to or from a foreign person.
See "Federal Income Tax Consequences -- REMIC Certificates -- Taxation of
Certain Foreign Holders of REMIC Certificates -- Residual Certificates" below.
THRIFT INSTITUTIONS, BANKS, AND CERTAIN OTHER FINANCIAL INSTITUTIONS.
Residual Certificates will be treated as loans secured by interests in real
property ("qualifying assets") for Thrift Institutions in the same proportion
that the assets of the Series REMIC to which they relate would be so treated.
However, if 95% or more of the assets of a given Series REMIC are qualifying
assets for Thrift Institutions, 100% of that REMIC's regular and residual
interests (including Residual Certificates) would be treated as qualifying
assets. In addition, the REMIC Provisions provide that payments of principal and
interest on Assets included in a REMIC that are reinvested pending their
distribution to the holders of the related REMIC Certificates will be treated as
qualifying assets for Thrift Institutions. Moreover, two REMICs that are part of
a tiered structure will be treated as one REMIC for purposes of determining the
percentage of assets of each REMIC that constitutes qualifying assets for Thrift
Institution purposes. It is expected that at least 95% of the assets of each
Series REMIC will be qualifying assets for Thrift Institutions throughout such
REMIC's life. The amount of a Residual Certificate treated as a qualifying asset
for Thrift Institutions, however, cannot exceed the holder's adjusted basis in
that Residual Certificate.
Generally, gain or loss arising from the sale or exchange of Residual
Certificates held by certain financial institutions will give rise to ordinary
income or loss, regardless of the length of the holding period for the Residual
Certificates. Those financial institutions include banks, mutual savings banks,
cooperative banks, domestic building and loan institutions, savings and loan
institutions, and similar institutions. See "Federal Income Tax
Consequences -- REMIC Certificates -- Tax Treatment of Residual
Certificates -- Disposition of Residual Certificates" below.
DISPOSITION OF RESIDUAL CERTIFICATES
Upon the sale or exchange of a Residual Certificate, a Residual
Certificateholder will recognize gain or loss equal to the difference between
the amount realized and its adjusted basis in the Residual Certificate. It is
possible that a disqualification of a Series REMIC (other than an inadvertent
disqualification for which relief may be provided in Treasury regulations) may
be treated as a sale or exchange of a related Residual Certificate. If the
holder has held the Residual Certificate for the long-term capital gain holding
period (currently, more than twelve months), gain or loss on its disposition
generally will be characterized as long-term capital gain or loss. In the case
of banks, thrifts, and certain other financial institutions described in section
582 of the Code, however, gain or loss on the disposition of a Residual
Certificate will be treated as ordinary gain or loss, regardless of the length
of the holding period. See "Federal Income Tax Consequences -- REMIC
Certificates -- Special Considerations for Certain Types of Investors" herein.
A special version of the wash sale rules of the Code applies to
dispositions of Residual Certificates. Under that rule, losses on dispositions
of Residual Certificates generally will be disallowed where, within six months
before or after the disposition, the seller of such Certificates acquires any
residual interest in a REMIC or any interest in a Taxable Mortgage Pool that is
economically comparable to a Residual Certificate. Treasury Regulations
providing for appropriate exceptions to the application of the wash sale rules
have been authorized, but have not yet been promulgated.
LIQUIDATION OF THE REMIC
A REMIC may liquidate without the imposition of entity-level tax only in a
qualified liquidation. A liquidation is considered a "qualified liquidation" if
the REMIC (i) adopts a plan of complete liquidation; (ii) sells all of its
non-cash assets within 90 days of the date on which it adopts the plan; and
(iii) credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims against it) to its
Certificateholders within that 90-day period. An early termination of a REMIC
caused by the redemption of all outstanding classes of Certificates issued by
such REMIC, and the distribution to the Residual Certificateholders of the
excess, if any, of the fair market value of the REMIC's assets at the time of
such redemption over the unpaid principal balance and accrued and unpaid
interest of such REMIC Certificates (and any administrative costs associated
with such REMIC), will constitute a complete liquidation as described in the
preceding sentence. Under the REMIC Provisions, a plan of liquidation need not
be in any special form. Furthermore, if a REMIC specifies the first day in the
90-day liquidation period in a statement attached to its final tax return, the
REMIC will be considered to have adopted a plan of liquidation on that date.
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TREATMENT BY THE REMIC OF ORIGINAL ISSUE DISCOUNT, MARKET DISCOUNT, AND
AMORTIZABLE PREMIUM.
ORIGINAL ISSUE DISCOUNT. Generally, a REMIC's deductions for original issue
discount expense on its REMIC Certificates will be determined in the same manner
as for determining the original issue discount income on such Certificates as
described in "Federal Income Tax Consequences -- REMIC Certificates -- Tax
Treatment of Regular Certificates -- Original Issue Discount" above, without
regard to the DE MINIMIS rule described therein.
MARKET DISCOUNT. In general, a REMIC will have market discount income with
respect to its Qualified Mortgages if the basis of the REMIC in such assets is
exceeded by their adjusted issue prices. A REMIC's aggregate initial basis in
its Qualified Mortgages (and any other assets transferred to the REMIC on the
startup day) equals the aggregate of the issue prices of the regular and
residual interests in the REMIC. That basis is allocated among the REMIC's
Qualified Mortgages based on their relative fair market values. Any market
discount that accrues on a REMIC's Qualified Mortgages will be recognized
currently as an item of REMIC ordinary income. The amount of market discount
income to be recognized in any period is determined in a manner generally
similar to that used in the determination of original issue discount, as if the
Qualified Mortgages had been issued (i) on the date they were acquired by the
REMIC and (ii) for a price equal to the REMIC's initial basis in the Qualified
Mortgages. The same prepayment assumptions used in pricing the Certificates are
used to compute the yield to maturity of a REMIC's Qualified Mortgages.
PREMIUM. Generally, if the basis of a REMIC in its Qualified Mortgages
exceeds the unpaid principal balances of those assets the REMIC will be
considered to have acquired such assets at a premium equal to the amount of such
excess. A REMIC that holds a Qualified Mortgage as a capital asset may elect
under Code section 171 to amortize premium on such asset under a constant
interest method, to the extent such asset was originated, or treated as
originated, after September 27, 1985. The legislative history to the 1986 Act
indicates that, while the deduction for amortization of premium will not be
subject to the limitations on miscellaneous itemized deductions of individuals,
it will be treated as interest expense for purposes of other provisions in the
1986 Act limiting the deductibility of interest for non-corporate taxpayers.
Because substantially all of the obligors on the Assets are expected to be
individuals, section 171 of the Code will not be available for the amortization
of premium on such Assets to the extent they were originated on or prior to
September 27, 1985. Such premium may be amortizable under more general
provisions and principles of federal income tax law in accordance with a
reasonable method regularly employed by the holder of such Assets. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such premium
should be allocated in a different manner, such as allocating such premium
entirely to the final payment of principal.
REMIC-LEVEL TAXES
Income from certain transactions by a REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC at a 100%
rate. In addition, net income from one prohibited transaction may not be offset
by losses from other prohibited transactions. Prohibited transactions generally
include: (i) the disposition of Qualified Mortgages other than pursuant to (a)
the repurchase of a defective asset, (b) the substitution for a defective asset
within two years of the closing date, (c) a substitution for any Qualified
Mortgage within three months of the closing date, (d) the foreclosure, default,
or imminent default of a Qualified Mortgage, (e) the bankruptcy or insolvency of
the REMIC, (f) the sale of an adjustable-rate asset the interest rate on which
is convertible to a fixed rate of interest upon its conversion for an amount
equal to the asset's current principal balance plus accrued but unpaid interest
(and provided that certain other requirements are met) or (g) a qualified
liquidation of the REMIC; (ii) the receipt of income from assets that are not
the type of assets or investments that a REMIC is permitted to hold; (iii) the
receipt of compensation for services by a REMIC; and (iv) the receipt of gain
from disposition of cash-flow investments other than pursuant to a qualified
liquidation of the REMIC. A disposition of a Qualified Mortgage or cash flow
investment will not give rise to a prohibited transaction, however, if the
disposition was (i) required to prevent default on a regular interest resulting
from a default on one or more of the REMIC's Qualified Mortgages or (ii) made to
facilitate a clean-up call. The REMIC Provisions define a clean-up call as the
redemption of a class of regular interests when, by reason of prior payments
with respect to those interests, the administrative costs associated with
servicing the class outweigh the benefits of maintaining the class. Under those
regulations, the redemption of a class of regular interests with an outstanding
principal balance of no more than 10% of the original principal balance
qualifies as a clean-up call. The REMIC Provisions also provide that the
modification of an asset generally will not be treated as a disposition of that
asset if it is occasioned by a default or a reasonably foreseeable default, an
assumption of the asset, the waiver of a due-on-sale or encumbrance clause, or
the conversion of an interest rate by an obligor pursuant to the terms of a
convertible adjustable rate asset.
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In addition, a REMIC generally will be taxed at a 100% rate on any
contribution to the REMIC after the closing date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the closing date; (ii) is made to facilitate a clean-up call (as defined in
the preceding paragraph) or a qualified liquidation (as defined in "Federal
Income Tax consequences -- REMIC Certificates -- Liquidation of the REMIC"
above); (iii) is a payment in the nature of a guarantee; (iv) constitutes a
contribution by the holder of the Residual Certificates in the REMIC to a
qualified reserve fund; or (v) is otherwise permitted by Treasury regulations
yet to be issued. The structure and operation of each Series REMIC will be
designed to avoid the imposition of the 100% tax on contributions.
To the extent that a REMIC derives certain types of income from foreclosure
property (generally, income relating to dealer activities of the REMIC), it will
be taxed on such income at the highest corporate income tax rate. Although the
relevant law is unclear, it is not anticipated that any Series REMIC will
receive significant amounts of such income.
The organizational documents governing the Regular and Residual
Certificates of a Series REMIC will be designed to prevent the imposition of the
foregoing taxes on such REMIC in any material amounts. If any of the foregoing
taxes is imposed on a Series REMIC, the Trustee will seek to place the burden
thereof on the person whose action or inaction gave rise to such taxes. To the
extent that the Trustee is unsuccessful in doing so, the burden of such taxes
will be borne by any outstanding subordinated Class of Certificates before it is
borne by a more senior Class of Certificates.
REMIC QUALIFICATION
The Trust underlying a Series (or one or more designated Asset Pools
thereof) will qualify under the Code as a REMIC if a REMIC election is in effect
and certain tests concerning (i) the composition of the assets of the REMIC and
(ii) the nature of the Certificateholders' interests in the REMIC are met on a
continuing basis.
ASSET COMPOSITION
In order for a Trust (or one or more designated Asset Pools thereof) to be
eligible for REMIC status, substantially all of the assets of the Trust (or the
designated Asset Pool) must consist of "qualified mortgages" and "permitted
investments" as of the close of the third month beginning after the closing date
and at all times thereafter. Substantially all of a REMIC's assets will be
deemed to consist of "Qualified Mortgages" and "permitted investments" if no
more than a DE MINIMIS amount of its assets (I.E., assets with an aggregate
adjusted basis that is less than 1% of the aggregate adjusted basis of all the
REMIC's assets) are assets other than qualified mortgages and permitted
investments.
A "Qualified Mortgage" is any obligation that is principally secured by an
interest in real property, including a regular interest in another REMIC, and
that is either transferred to the REMIC on the closing date or purchased by the
REMIC pursuant to a fixed price contract within a three-month period thereafter.
Under the REMIC Provisions, a Qualified Mortgage includes any obligation secured
by manufactured housing that qualifies as a "single family residence" within the
meaning of Code section 25(e)(10). Manufactured housing qualifies as a "single
family residence" under Code Section 25(e)(10) if it: (i) is used as a single
family residence; (ii) has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches; and (iii) is of a kind customarily used
at a fixed location. A Qualified Mortgage also includes a "qualified replacement
mortgage," which is any property that would have been treated as a Qualified
Mortgage if it were transferred to the REMIC on the closing date and that is
received either in exchange for a defective asset within a two-year period
beginning on the closing date or in exchange for any Qualified Mortgage within a
three-month period beginning on that date.
The Mortgage Loans of each Series REMIC will be treated as Qualified
Mortgages. In addition, the Seller will represent and warrant in the related
Pooling and Servicing Agreement or Sales Agreement, as the case may be, that
each Contract will be secured by a Manufactured Home that meets the definition
of "single family residence" in section 25(e)(10) of the Code. Accordingly the
Contracts of each Series REMIC will be treated as Qualified Mortgages.
"Permitted Investments" include cash flow investments, qualified reserve
assets, and foreclosure property. Cash flow investments are investments of
amounts received with respect to Qualified Mortgages for a temporary period (not
to exceed thirteen months) before distribution to holders of regular or residual
interests in the REMIC. Qualified reserve assets are intangible investment
assets (other than REMIC residual interests) that are part of a qualified
reserve fund maintained by the REMIC. A qualified reserve fund is any reasonably
required reserve maintained by a REMIC to provide for full payment of expenses
of the REMIC or amounts due on the regular interests or residual interest in
such REMIC in the event of (i) defaults or delinquencies on the Qualified
Mortgages held by such REMIC; (ii) interest shortfalls on such Qualified
Mortgages caused by prepayments of those assets; (iii) lower than expected
returns on cash-flow investments; or (iv) unanticipated losses or expenses
incurred by the REMIC. A qualified reserve fund will be disqualified if more
than 30% of the gross income from
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the assets in such fund for the year is derived from the sale of property held
for less than three months, unless such sale was required to prevent a default
on the regular interests caused by a default on one or more Qualified Mortgages.
To the extent that the amount in a qualified reserve fund exceeds a reasonably
required amount, it must be reduced "promptly and appropriately." Foreclosure
property generally is property acquired by the REMIC in connection with the
default or imminent default of a Qualified Mortgage. Foreclosure property may
not be held for more than two years, unless it is established to the
satisfaction of the Secretary of the Treasury that an extension of the two-year
period is necessary for the orderly liquidation of the foreclosure property. The
Secretary of the Treasury may grant one or more extensions, but any such
extension shall not extend the grace period beyond the date which is six years
after the date such foreclosure property is acquired.
INVESTORS' INTERESTS
In addition to the foregoing asset qualification requirements, the various
interests in a REMIC also must meet certain requirements. All of the interests
in a REMIC must be issued on the Closing Date (or within a specified 10-day
period) and belong to either of the following: (i) one or more classes of
regular interests; or (ii) a single class of residual interests on which
distributions are made pro rata. For each Series REMIC with respect to which
REMIC Certificates are issued, the Regular Certificates will constitute one or
more classes of "regular interests" in that REMIC and the Residual Certificates
will constitute the single class of "residual interests" in that REMIC.
A REMIC interest qualifies as a regular interest if (i) it is issued on the
startup day with fixed terms; (ii) it is designated as a regular interest; (iii)
it entitles its holder to a specified principal amount; and (iv) if it pays
interest, such interest either (a) constitutes a specified portion of the
interest payable on one or more of the REMIC's Qualified Mortgages, and that
portion does not vary during the period that the regular interest is outstanding
(a "specified nonvarying portion"), (b) is payable at a fixed rate with respect
to the principal amount of the regular interest, or (c) to the extent permitted
under the REMIC Provisions, is payable at a variable rate with respect to such
principal amount. Pursuant to the REMIC Provisions, the following rates are
permissible variable rates for REMIC regular interests: (i) a qualified floating
rate set at a current value as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Variable Rate Certificates" above, without
regard to the rules in the OID Regulations limiting the use of Caps, Floors, and
Governors with respect to such a rate; (ii) a rate equal to the highest, lowest,
or average of two or more qualified floating rates (e.g., a rate based on the
average cost of funds of one or more financial institutions); or (iii) a rate
equal to the weighted average of the interest rates on one or more of the
Qualified Mortgages held by the REMIC provided, however, that the Qualified
Mortgages taken into account in determining the weighted average rate bear
interest at a fixed rate or a rate that would be a permissible variable rate for
a REMIC regular interest as described in this sentence. Under the REMIC
Provisions, the presence of a ceiling or floor on the interest payable on a
variable rate regular interest will not prevent such an interest from qualifying
as a regular interest. In addition, a qualifying variable rate may be expressed
as a multiple of, or a constant number of basis points more or less than, one of
the permissible types of variable rates described above. Finally, a limitation
on the amount of interest to be paid on a variable rate regular interest based
on the total amount available for distribution is permissible, provided that it
is not designed to avoid the restrictions on qualifying variable rates. The
REMIC Provisions also provide that the specified principal amount of a REMIC
regular interest may be zero if the interest associated with such regular
interest constitutes a specified nonvarying portion of the interest on one or
more of the REMIC's Qualified Mortgages.
If the interest payable on a REMIC regular interest is disproportionately
high relative to the specified principal amount of that interest, that interest
may be treated, in whole or in part, as a second residual interest, which could
result in the disqualification of the REMIC. Under the REMIC Provisions,
interest payments (or similar amounts) are considered disproportionately high if
the issue price of a regular interest exceeds 125% of its specified principal
amount. Under the REMIC Provisions, however, interest payable at a
disproportionately high rate will not cause a regular interest to be
recharacterized as a residual interest if the interest payable on that regular
interest consists of a specified nonvarying portion of the interest payable on
one or more of the REMIC's Qualified Mortgages. None of the Regular Certificates
will have an issue price that exceeds 125% of their respective specified
principal amounts unless the interest payable on those Certificates consists of
a specified nonvarying portion of the interest payable on one or more of the
REMIC's Qualified Mortgages.
The Code requires certain arrangements to be made with respect to all
REMICs. Those arrangements, which are intended to prevent acquisitions of REMIC
residual interests (including the Residual Certificates) by certain
organizations that are not subject to federal income tax, are described in
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Residual Certificates -- Ownership of Residual Interests by Disqualified
Organizations" above. Each Series REMIC will be structured to provide for such
arrangements.
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CONSEQUENCES OF DISQUALIFICATION
If a Series REMIC fails to comply with one or more of the Code's ongoing
requirements for REMIC status during any taxable year, the Code provides that
its REMIC status may be lost for that year and thereafter. If REMIC status is
lost, the treatment of the former REMIC and the interests therein for federal
income tax purposes is uncertain. The former REMIC might be entitled to
treatment as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code, in which case no entity-level tax would be imposed on the former REMIC.
Alternatively, the Regular Certificates may continue to be treated as debt
instruments for federal income tax purposes, but the arrangement could be
treated as a Taxable Mortgage Pool. See "Federal Income Tax
Consequences -- REMIC Certificates -- Taxable Mortgage Pools" above. If a Series
REMIC is treated as a Taxable Mortgage Pool, any residual income of the former
REMIC (I.E., interest and discount income from the underlying Assets less
interest and original issue discount expense allocable to the Regular
Certificates and any administrative expenses of the REMIC) would be subject to
corporate income tax at the Taxable Mortgage Pool level. On the other hand, the
arrangement could be treated under Treasury regulations as a separate
association taxable as a corporation and the Regular Certificates could be
treated as stock interests therein, rather than debt instruments. In the latter
two cases, Residual Certificates would be treated as stock interests in such
Taxable Mortgage Pool or association, respectively. The Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for REMIC status occurs inadvertently and in good faith. Such
regulations have not yet been issued. The conference report accompanying the
1986 Act indicates that disqualification relief may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC's
income for the period of time in which the requirements for REMIC status are not
satisfied.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a REIT will be considered a
Taxable Mortgage Pool if (i) substantially all of the assets of the entity
consist of debt obligations and more than 50% of such obligations consist of
"real estate mortgages" (which term, for purposes of this paragraph, includes
Mortgage Loans and Contracts), (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payment on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Company generally will structure offerings of non-REMIC Certificates to
avoid the application of the Taxable Mortgage Pool rules.
TAXATION OF CERTAIN FOREIGN HOLDERS OF REMIC CERTIFICATES
REGULAR CERTIFICATES
Interest, including original issue discount, paid on a Regular Certificate
to a Foreign Person generally will be treated as "portfolio interest" and,
therefore, will not be subject to any United States withholding tax, provided
that (i) such interest is not effectively connected with a trade or business in
the United States of the Certificateholder, and (ii) the Trustee (or other
person who would otherwise be required to withhold tax) is provided with a
Foreign Person Certification. If the holder of a Regular Certificate does not
provide the Trustee (or other person who would otherwise be required to withhold
tax) with a Foreign Person Certification, interest (including original issue
discount) paid on such a Certificate may be subject to either a 30% withholding
tax or 31% backup withholding. See "Federal Income Tax Consequences -- Taxation
of Certain Foreign Holders of REMIC Certificates -- Backup Withholding" below.
RESIDUAL CERTIFICATES
Amounts paid to Residual Certificateholders who are Foreign Persons are
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Under temporary Treasury Regulations, non-excess inclusion
income received by Residual Certificateholders who are Foreign Persons generally
would qualify as "portfolio interest" exempt from the 30% withholding tax (as
described in the preceding paragraph) only to the extent that (i) the Assets
held by the related Series REMIC were issued in registered form and (ii) such
Assets were originated after July 18, 1984. Because the Assets held by a Series
REMIC will not be issued in registered form, amounts received by Residual
Certificateholders who are Foreign Persons will not be exempt from the 30%
withholding tax. Such amounts generally will be subject to United States
withholding tax when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to those for withholding on debt
instruments that have original issue discount. However, the Code grants the
Treasury authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to
77
prevent avoidance of tax (I.E., where the Residual Certificates, as a Class, do
not have significant value). Further, a Residual Certificateholder will not be
entitled to any exemption from the 30% withholding tax or a reduced treaty rate
on excess inclusion income.
Under the REMIC Provisions, the transfer of a Residual Certificate that has
tax avoidance potential to a Foreign Person will be disregarded for all federal
income tax purposes. A Residual Certificate is deemed to have "tax avoidance
potential" under those regulations unless, at the time of the transfer, the
transferor reasonably expects that, for each accrual of excess inclusion, the
REMIC will distribute to the transferee an amount that will equal at least 30%
of the excess inclusion, and that each such amount will be distributed no later
than the close of the calendar year following the calendar year of accrual. A
transferor of a Residual Certificate to a Foreign Person will be presumed to
have had a reasonable expectation at the time of the transfer that, for each
accrual of excess inclusion, the REMIC will distribute to the transferee an
amount that will equal at least 30% of the excess inclusion, and that each such
amount will be distributed no later than the close of the calendar year
following the calendar year of accrual, if such distributions would be made
under all Asset prepayment rates between 50% and 200% of the Pricing Prepayment
Assumption. See "Federal Income Tax Consequences -- REMIC Certificates -- Tax
Treatment of Regular Certificates -- Original Issue Discount" above. If a
Foreign Person transfers a Residual Certificate to a United States person and
the transfer, if respected, would permit avoidance of withholding tax on accrued
excess inclusion income, that transfer also will be disregarded for federal
income tax purposes and distributions with respect to the Residual Certificate
will continue to be subject to 30% withholding as though the Foreign Person
still owned the Residual Certificate. Investors who are Foreign Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning and disposing of a Residual Certificate.
BACKUP WITHHOLDING
Under federal income tax law, a Certificateholder may be subject to "backup
withholding" under certain circumstances. Backup withholding applies to a
Certificateholder who is a United States person if the Certificateholder, among
other things, (i) fails to furnish his social security number or other taxpayer
identification number to the Trustee; (ii) furnishes the Trustee an incorrect
taxpayer identification number; (iii) fails to report properly interest and
dividends; or (iv) under certain circumstances, fails to provide the Trustee or
the Certificateholder's securities broker with a certified statement, signed
under penalties of perjury, that the taxpayer identification number provided to
the Trustee is correct and that the Certificateholder is not subject to backup
withholding. Backup withholding applies, 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 a Foreign
Person Certification (as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Certain Foreign Holders of REMIC
Certificates -- Regular Certificates" above). Backup withholding applies to
"reportable payments," which include interest payments and principal payments to
the extent of accrued original issue discount, as well as distributions of
proceeds from the sale of Regular Certificates or REMIC Residual Certificates.
The backup withholding rate for reportable payments made on or after January 1,
1993 is 31%. Backup withholding, however, does not apply to payments on
Certificates made to certain exempt recipients, such as 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.
REPORTING AND TAX ADMINISTRATION
REGULAR CERTIFICATES
Reports will be made at least annually to holders of record of Regular
Certificates (other than those with respect to whom reporting is not required)
and to the Service as may be required by statute, regulation, or administrative
ruling with respect to (i) interest paid or accrued on the Certificates; (ii)
original issue discount, if any, accrued on the Certificates; and (iii)
information necessary to compute the accrual of any market discount or the
amortization of any premium on the Certificates.
RESIDUAL CERTIFICATES
For purposes of federal income tax reporting and administration, a Series
REMIC generally will be treated as a partnership, and the related Residual
Certificateholders as its partners. A Series REMIC will file an annual return on
Form 1066 and will be responsible for providing information to Residual
Certificateholders sufficient to enable them to report properly their shares of
the REMIC's taxable income or loss, although it is anticipated that such
information actually will be supplied by the Trustee based upon information it
receives from the Servicer in its monthly reports delivered pursuant to the
Agreement. The REMIC Provisions require reports to be made by a REMIC to its
Residual Certificateholders each calendar quarter in order to
78
permit such Certificateholders to compute their taxable income accurately. A
person that holds a Residual Certificate as a nominee for another person is
required to furnish those quarterly reports to the person for whom it is a
nominee within 30 days of receiving such reports. A REMIC is required to file
all such quarterly reports for a taxable year with the Service as an attachment
to the REMIC's income tax return for that year. As required by the Code, a
Series REMIC's taxable year will be the calendar year.
Residual Certificateholders should be aware that their responsibilities as
holders of the residual interest in a REMIC, including the duty to account for
their shares of the REMIC's income or loss on their returns, continue for the
life of the REMIC, even after the principal and interest on their Residual
Certificates have been paid in full.
The Treasury has issued temporary and final regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's tax matters person or TMP.
The TMP 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, although other holders of the
Residual Certificates of the same Series would be able to participate in such
proceedings in appropriate circumstances. It is expected that the Servicer or an
Affiliate thereof will acquire a portion of the residual interest in each Series
REMIC in order to permit it to be designated as TMP for the REMIC and will
prepare and file the REMIC's federal and state income tax and information
returns.
Treasury regulations provide that a Residual Certificateholder is not
required to treat items on its return consistently with their treatment on the
REMIC's return if the Certificateholder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each Residual Certificateholder is
required to treat items on its returns consistently with their treatment on the
REMIC's return, unless the Certificateholder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC. The Service may assess a
deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC level. A Series
REMIC typically will not register as a tax shelter pursuant to Code section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Certificate as a
nominee for another person may be required to furnish the related Series REMIC,
in a manner to be provided in Treasury regulations, with the name and address of
such person and other specified information.
NON-REMIC CERTIFICATES
TREATMENT OF THE TRUST FOR FEDERAL INCOME TAX PURPOSES
In the case of Series with respect to which a REMIC election is not made,
the Trust will be classified as a grantor trust under Subpart E, Part I of
subchapter J of the Code and not as an association taxable as a corporation.
Thus, the owner of a Non-REMIC Certificate issued by such a Trust generally will
be treated as the beneficial owner of an appropriate portion of the principal
and interest payments (according to the characteristics of the Certificate in
question) to be received on the Assets assigned to a Trust for federal income
tax purposes.
TREATMENT OF THE NON-REMIC CERTIFICATES FOR FEDERAL INCOME TAX PURPOSES
GENERALLY
The types of Non-REMIC Certificates offered in a Series may include: (i)
Strip Certificates (I.E., IO Certificates, PO Certificates, and Ratio
Certificates) and (ii) Participation Certificates. The federal income tax
treatment of Strip Certificates will be determined in part by section 1286 of
the Code. Little administrative guidance has been issued under that section and,
thus, many aspects of its operation are unclear, particularly the interaction
between that section and the rules pertaining to discount and premium. Hence,
significant uncertainty exists with respect to the federal income tax treatment
of Strip Certificates, and potential investors should consult their own tax
advisors concerning such treatment.
Several Code sections provide beneficial treatment to certain taxpayers
that invest in certain types of mortgage assets. For purposes of those Code
sections, Participation Certificates will be characterized with reference to the
Assets in the related Trust, but it is not clear whether Strip Certificates will
be so characterized. The Service could take the position that the character of
the Assets is not attributable to Strip Certificates for purposes of those Code
sections. However, because Strip Certificates represent sole ownership rights in
the principal and interest payments on the Assets, Strip Certificates, like
Participation Certificates, should be characterized with reference to the Assets
in the Trust. Accordingly, all Non-REMIC Certificates should be treated as
qualifying assets for Thrift Institutions, and as real estate assets for REITs
in the same proportion that the Assets in the Trust would be so treated.
Similarly, the interest income attributable to Non-REMIC Certificates should be
considered Qualifying REIT Interest for REIT purposes to the extent that the
Assets in the Trust qualify as real estate assets for REIT purposes.
79
One or more Classes of Non-REMIC Certificates may be subordinated to one or
more other Classes of Non-REMIC Certificates of the same Series. In general,
such subordination should not affect the federal income tax treatment of either
the subordinated Non-REMIC Certificates or the senior Non-REMIC Certificates.
However, to the extent indicated in "Description of the
Certificates -- Allocation of Distributions from the Assets" herein and to the
extent provided in the relevant Prospectus Supplement, holders of such
subordinated Certificates will be allocated losses prior to their allocation to
the holders of more senior Classes of Certificates. Holders of such subordinated
Certificates should be able to recognize any such losses no later than the
taxable year in which they become Realized Losses. Employee benefit plans
subject to ERISA should consult their own tax advisors before purchasing any
subordinated Certificates. See "ERISA Considerations" herein and in the
Prospectus Supplement.
TREATMENT OF PARTICIPATION CERTIFICATES
The holder of a Participation Certificate issued by a Trust generally will
be treated as owning a pro rata undivided interest in each of the Assets held by
such Trust. Accordingly, each holder of a Participation Certificate will be
required to include in income its pro rata share of the entire income from the
Trust's assets, including interest and discount income, if any. Such
Certificateholder generally will be able to deduct from its income its pro rata
share of the administrative fees and expenses incurred with respect to the
Trust's assets (provided that such fees and expenses represent reasonable
compensation for the services rendered). An individual, trust, or estate that
holds a Participation Certificate directly or through a pass-through entity will
be entitled to deduct such fees and expenses under section 212 of the Code only
to the extent that the amount of the fees and expenses, when combined with its
other miscellaneous itemized deductions for the taxable year in question,
exceeds 2% of its adjusted gross income. In addition, Code section 68 provides
that the amount 94 of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
($100,000, or $50,000 in the case of a separate return by a married individual
within the meaning of Code section 7703 for taxable year 1991, adjusted each
year thereafter for inflation) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year. Each
Participation Certificateholder generally will determine its net income or loss
with respect to the Trust in accordance with its own method of accounting,
although income arising from original issue discount must be taken into account
under the accrual method even though the Certificateholder otherwise would use
the cash receipts and disbursements method.
The Code provisions concerning original issue discount, market discount,
and amortizable premium will apply to the Trust assets. The rules regarding
discount and premium that are applicable to Non-REMIC Certificates generally are
the same as those that apply to REMIC Regular Certificates. See the discussions
under "Federal Income Tax Consequences -- REMIC Certificates -- Original Issue
Discount," " -- Variable Rate Certificates," " -- Market Discount," and
" -- Amortizable Premium" above.
For instruments to which it applies, Code section 1272(a)(6) requires the
use of an income tax accounting methodology that utilizes (i) a single constant
yield to maturity and (ii) the Pricing Prepayment Assumptions. Unlike in the
case of Regular Certificates, Code section 1272(a)(6) technically does not apply
to Non-REMIC Certificates. Although the Treasury has authority to apply that
section to certificates such as the Non-REMIC Certificates, it has not yet done
so. Nonetheless, unless and until the release of administrative guidance to the
contrary, the Tax Administrator will account for the Non-REMIC Certificates as
though section 1272(a)(6) applied to them. Thus, the Tax Administrator will
account for a class of Non-REMIC Certificates in the same manner as it would
account for a class of Regular Certificates with the same terms. There can be no
assurance, however, that the Service ultimately will sanction the Tax
Administrator's position.
The original issue discount rules generally apply to residential mortgage
loans originated after March 2, 1984, and the market discount rules apply to any
such loans originated after July 18, 1984. The rules allowing for the
amortization of premium are available with respect to mortgage loans originated
after September 27, 1985. It is anticipated that most or all of the Assets
securing any Series will be subject to the original issue discount, market
discount, and amortizable premium rules. Although most Mortgage Loans and
Contracts nominally are issued at their original principal amounts, original
issue discount could arise from the payment of points or certain other
origination charges by the Obligors if the discount attributable to such
payments exceeds the DE MINIMIS amount. If the Trust contains Assets purchased
for prices below their outstanding principal amounts, holders of Participation
Certificates will be required to take into account original issue discount not
previously accrued to the prior holder of such Assets. Moreover, if such Assets
were purchased for less than their adjusted issue prices, Participation
Certificateholders generally will be required to take into account market
discount, unless the amount of such market discount is DE MINIMIS under the
market discount rules. Finally, Participation Certificateholders generally may
elect to amortize any premium paid for Assets over the aggregate adjusted issue
price of such Assets. For a more complete
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elaboration of the rules pertaining to original issue discount, market discount,
and acquisition premium, see the discussion under "Federal Income Tax
Consequences -- REMIC Certificates -- Tax Treatment of Regular Certificates"
above.
TREATMENT OF STRIP CERTIFICATES
Many aspects of the federal income tax treatment of Strip Certificates are
uncertain. The discussion below describes the treatment that the Company
believes is fair and accurate, but there can be no assurance that the Service
will not take a contrary position. Potential investors, therefore, should
consult their own tax advisors with respect to the federal income tax treatment
of Strip Certificates.
Under section 1286 of the Code, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments on such obligation
results in the creation of "stripped coupons" with respect to the separated
rights to interest payments and "stripped bonds" with respect to the principal
and any undetached interest payments associated with that principal. The
issuance of IO or PO Certificates effects a separation of the ownership of the
interest and principal payments on some or all of the Assets in the Trust. In
addition, the issuance of Ratio Certificates effectively separates and
reallocates the proportionate ownership of the interest and principal payments
on the Assets. Therefore, Strip Certificates will be subject to section 1286.
For federal income tax accounting purposes, section 1286 treats a stripped
bond or a stripped coupon as a new debt instrument issued (i) on the date that
the stripped interest is purchased and (ii) at a price equal to its purchase
price or, if more than one stripped interest is purchased, the share of the
purchase price allocable to such stripped interest. Each stripped bond or coupon
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. The Stripping
Regulations, however, provide that the original issue discount on a stripped
bond or stripped coupon is zero if the amount of the original issue discount
would be DE MINIMIS under rules generally applicable to debt instruments. For
purposes of that determination, (i) the number of complete years to maturity is
measured from the date the stripped bond or stripped coupon is purchased; (ii)
an aggregation approach similar to the Aggregation Rule (as described in
"Federal Income Tax Consequences -- REMIC Certificates -- Original Issue
Discount" above) may be applied; and (iii) unstripped coupons may be treated as
stated interest with respect to the related bonds and, therefore, may be
excluded from stated redemption price at maturity in appropriate circumstances.
In addition, the Stripping Regulations provide that, in certain circumstances,
the excess of a stripped bond's stated redemption price at maturity over its
issue price is treated as market discount, rather than as original issue
discount. See "Federal Income Tax Consequences -- Non-REMIC
Certificates -- Treatment of Strip Certificates -- Determination of Income With
Respect to Strip Certificates" below.
The application of section 1286 to the Strip Certificates is not entirely
clear under current law. It could be interpreted as causing: (i) in the case of
an IO Certificate, each interest payment due on the underlying Assets to be
treated as a separate debt instrument; (ii) in the case of a Ratio Certificate
entitled to a disproportionately high share of principal, each excess principal
amount (I.E., the portion of each principal payment on such Assets that exceeds
the amount to which the Ratio Certificateholder would have been entitled if he
had held an undivided interest in the underlying Assets) to be treated as a
separate debt instrument; and (iii) in the case of a Ratio Certificate entitled
to a disproportionately high share of interest, each excess interest amount to
be treated as a separate debt instrument. In addition, section 1286 would
require the purchase price of a Strip Certificate to be allocated among each of
the rights to payment on the underlying Assets to which the Certificateholder is
entitled that are treated as separate debt instruments. Despite the foregoing,
it may be appropriate to treat stripped coupons and stripped bonds issued to the
same holder as a single debt instrument under an aggregation approach, depending
on the facts and circumstances surrounding the issuance. Facts and circumstances
considered relevant for this purpose should include the likelihood of the debt
instruments trading as a unit and the difficulty of allocating the purchase
price of the unit among the individual payments. Strip Certificates are designed
to trade as whole investment units and, to the extent that the Underwriter
develops a secondary market for the Strip Certificates, it anticipates that the
Strip Certificates would trade in such market as whole units. In addition,
because no market exists for individual payments on Assets, the proper
allocation of the Certificate's purchase price to each separate payment on the
Assets in the Trust would be difficult and burdensome to determine. Based on
those facts and circumstances, it appears that all payments of principal and
interest to which the holder of a Strip Certificate is entitled should be
treated as a single installment obligation. Although the OID Regulations do not
refer directly to debt instruments that are governed by section 1286 of the
Code, the application of the OID Regulations to such instruments is consistent
with the overall statutory and regulatory scheme. Therefore, the Tax
Administrator will treat each Strip Certificate as a single debt instrument for
income tax accounting purposes.
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DETERMINATION OF INCOME WITH RESPECT TO STRIP CERTIFICATES
For purposes of determining the amount of income on a Strip Certificate
that accrues in any period, the rules described under "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount," " -- Variable
Rate Certificates," " -- Anti-Abuse Rule," " -- Interest Weighted Certificates
and Non-VRDI Certificates," " -- Market Discount," and " -- Amortizable Premium"
will apply. PO Certificates and certain Classes of Ratio Certificates will be
issued at a price that is less than their stated principal amount and thus
generally will be issued with original issue discount. A Strip Certificate that
would meet the definition of an Interest Weighted Certificate or a Weighted
Average Certificate if it were a Regular Certificate is subject to the same tax
accounting considerations applicable to the Regular Certificate to which it
corresponds. Thus, as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates,"
certain aspects of the tax accounting treatment of such a Strip Certificate are
unclear. Unless and until the Service provides administrative guidance to the
contrary, the Tax Administrator will account for such a Strip Certificate in the
manner described for the corresponding Regular Certificate. See "Federal Income
Tax Consequences -- REMIC Certificates -- Interest Weighted Certificates and
Non-VRDI Certificates."
If a PO Certificate or a Ratio Certificate that is not considered a
Contingent Payment Obligation (an "Ordinary Ratio Certificate") subsequently is
sold, the purchaser apparently would be required to treat the difference between
the purchase price and the stated redemption price at maturity as original issue
discount. The holder of such a Certificate generally will be required to include
such original issue discount in income as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" above. PO
Certificates and Ordinary Ratio Certificates issued at a price less than their
stated principal amount will be treated as issued with market discount rather
than with original issue discount if, after the most recent disposition of the
related Certificate, either (i) the amount of original issue discount on the
Certificate is considered to be DE MINIMIS under the Stripping Regulations or
(ii) the annual stated rate of interest payable on the Certificate is no more
than 1% lower than the annual stated rate of interest payable on the Asset from
which the Certificate was stripped. The holders of such Certificates generally
would be required to include market discount in income in the manner described
in "Federal Income Tax Consequences -- REMIC Certificates -- Market Discount"
above. Some Classes of Ordinary Ratio Certificates may be issued at a price that
exceeds their stated principal amount. Subject to the discussion of Superpremium
Certificates in "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" above, holders of such Ordinary Ratio
Certificates generally should be able to amortize that premium as described in
"Federal Income Tax Consequences -- REMIC Certificates -- Amortizable Premium"
above.
IO Certificates do not represent a right to stated principal amounts.
Rather, IO Certificates represent rights only to payments of interest which, as
a result of prepayments on the Assets in the related Trust, may never be made.
The Tax Administrator will account for IO Certificates in the same manner as for
Interest Weighted Certificates. See "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount," " -- Variable Rate Certificates," and
" -- Interest Weighted Certificates and Non-VRDI Certificates" above.
PURCHASE OF COMPLEMENTARY CLASSES OF STRIP CERTIFICATES
Complementary Strip Certificates, when held in combination, provide an
aggregate economic effect equivalent to that of a Participation Certificate.
When an investor purchases Complementary Strip Certificates, it appears that,
for federal income tax purposes, each such Certificate should be treated
separately and should be subject to the rules described above. The Service could
assert, however, that Complementary Strip Certificates held in combination
should be treated as a single pass-through type instrument, with the result that
the rules governing stripped bonds and stripped coupons under section 1286 of
the Code would not be applied. Consequently, investors who acquire Complementary
Strip Certificates should consult their own tax advisors as to the proper
treatment of such Certificates.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS
The Service could assert that the Strip Certificates should be
characterized for tax purposes in a manner different from that described above.
For example, the Service could contend that each Ratio Certificate whose
interest rate is higher than the related Series Rate is to be treated as being
composed of two certificates: (i) a Participation Certificate of the same
principal amount as the Ratio Certificate but generating interest at the Series
Rate; and (ii) an IO Certificate representing the excess of the rate on the
Ratio Certificate over the Series Rate. Similarly, a Ratio Certificate whose
interest rate is lower than the Series Rate could be treated as composed of a
Participation Certificate with an interest rate equal to the Series Rate and a
PO Certificate. Alternatively, the Service could interpret section 1286 to
require that each individual interest payment with respect to an IO Certificate
or a Ratio Certificate be treated as a separate debt instrument for original
issue discount purposes. The Service also might challenge the manner in which
original issue discount is calculated, contending that (i) the stated
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maturity should be used to calculate yield on a Non-REMIC Certificate; (ii) the
Contingent Payment Regulations should not apply to IO Certificates; or (iii) the
Contingent Payment Regulations should apply to the Ordinary Ratio Certificates.
Given the variety of alternative treatments of Strip Certificates and the
different federal income tax consequences that could result from each
alternative, a potential investor is urged to consult its own tax advisor
regarding the proper treatment of such Certificates for federal income tax
purposes.
LIMITATIONS ON DEDUCTIONS WITH RESPECT TO STRIP CERTIFICATES
The holder of a Strip Certificate will be treated as owning an interest in
each of the Assets of the related Trust and will recognize an appropriate share
of the income and expenses associated with those Assets. Accordingly, an
individual, trust, or estate that holds a Strip Certificate directly or through
a pass-through entity will be subject to the same limitations on deductions with
respect to such Certificate as are applicable to holders of Participation
Certificates. See "Federal Income Tax Consequences -- Non-REMIC
Certificates -- Treatment of Participation Certificates" above.
SALE OF A NON-REMIC CERTIFICATE
A sale of a non-REMIC Certificate prior to its maturity will result in gain
or loss equal to the difference between the amount received and the holder's
adjusted basis in such Certificate. The rules for computing the adjusted basis
of a Non-REMIC Certificate are the same as in the case of a Regular Certificate.
See "Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Regular Certificates -- Gain or Loss on Disposition" above. Gain or loss from
the sale or other disposition of a Non-REMIC Certificate generally will be
capital gain or loss to the Certificateholder if the Certificate is held as a
"capital asset" within the meaning of section 1221 of the Code, and will be
long-term or short-term depending on whether the Certificate has been held for
the long-term capital gain holding period (currently, more than twelve months).
Ordinary income treatment, however, will apply to the extent mandated by the
original issue discount and market discount rules or if the Certificateholder is
a financial institution described in section 582 of the Code. See "Federal
Income Tax Consequences -- REMIC Certificates -- Gain or Loss on Disposition"
above.
TAXATION OF CERTAIN FOREIGN HOLDERS OF NON-REMIC CERTIFICATES
Interest, including original issue discount, paid on a Non-REMIC
Certificate to a Foreign Person generally is treated as "portfolio interest"
and, therefore, is not subject to any United States tax, provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Certificateholder, and (ii) the Trustee (or other person who would
otherwise be required to withhold tax) is provided with Foreign Person
Certification. If the holder of a Non-REMIC Certificate does not provide the
Trustee (or other person who would otherwise be required to withhold tax) with a
Foreign Person Certification, interest (including original issue discount) paid
on such a Certificate may be subject to either a 30% withholding tax or 31%
backup withholding.
In the case of certain Series, portfolio interest treatment will not be
available for interest paid with respect to certain classes of Non-REMIC
Certificates. Interest on debt instruments issued on or before July 18, 1984
does not qualify as "portfolio interest" and, therefore, is subject to United
States withholding tax at a 30% rate (or lower treaty rate, if applicable). IO
Certificates and PO Certificates generally are treated, and Ratio Certificates
generally should be treated, as having been issued when they are sold to an
investor. In the case of Participation Certificates, however, the issuance date
of the Certificate is determined by the issuance date of the underlying Assets.
Thus, to the extent that the interest received by a holder of a Participation
Certificate is attributable to Assets issued on or before July 18, 1984, such
interest will be subject to the 30% withholding tax. Moreover, to the extent
that a Ratio Certificate is characterized as a pass-through type certificate and
the underlying Assets were issued on or before July 18, 1984, interest generated
by the Certificate may be subject to the withholding tax. See "Federal Income
Tax Consequences -- Non-REMIC Certificates -- Treatment of Strip Certificates --
Possible Alternative Characterizations" above. Although recently enacted tax
legislation denies portfolio interest treatment to certain types of contingent
interest, that legislation generally applies only to interest based on the
income, profits, or property values of the debtor. Accordingly, it is not
anticipated that such legislation will apply to deny portfolio interest
treatment to Certificateholders who are Foreign Persons. However, because the
scope of the new legislation is not entirely clear, investors who are Foreign
Persons should consult their tax advisors regarding the potential application of
the legislation before purchasing a Certificate.
BACKUP WITHHOLDING
The application of backup withholding to Non-REMIC Certificates generally
is the same as in the case of REMIC Certificates. See "Federal Income Tax
Consequences -- REMIC Certificates -- Backup Withholding" above.
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REPORTING AND TAX ADMINISTRATION
For purposes of reporting and tax administration, the holders of Non-REMIC
Certificates will be treated in the same fashion as the holders of Regular
Certificates. See "Federal Income Tax Consequences -- REMIC
Certificates -- Reporting and Tax Administration" above.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
CERTIFICATEHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE CERTIFICATES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above under
"Federal Income Tax Consequences" above, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various state tax
consequences of an investment in the Certificates.
ERISA CONSIDERATIONS
In considering an investment in a Certificate of the assets of any employee
benefit plan or retirement arrangement, including individual retirement accounts
and annuities, Keogh plans, and collective investment funds in which such plans,
accounts, annuities or arrangements are invested, that are described in or
subject to the Plan Asset Regulations, ERISA, or corresponding provisions of the
Code (each hereinafter referred to as a Plan), a fiduciary should consider,
among other things, (i) the purposes, requirements, and liquidity needs of such
Plan; (ii) the impact of the plan asset provisions of ERISA and DOL regulations
concerning the definition of plan assets; (iii) whether the investment satisfies
the diversification requirements of section 404(a)(1)(C) of ERISA; and (iv)
whether the investment is prudent, considering the nature of an investment in a
Certificate and the fact that no market in which such fiduciary can sell or
otherwise dispose of Certificates may be created or, if created, will continue
to exist for the life of the Certificates. The prudence of a particular
investment must be determined by the responsible fiduciary (usually the trustee
or investment manager) with respect to each Plan taking into account all of the
facts and circumstances of the investment.
Sections 406 and 407 of ERISA and section 4975 of the Code prohibit certain
transactions that involve (i) a Plan and any "party in interest" or
"disqualified person" with respect to such Plan, and (ii) plan assets. The Plan
Asset Regulations issued by the DOL define "plan assets" to include not only
securities (such as the Certificates) held by a Plan but also the underlying
assets of the issuer of any equity securities, unless one or more exceptions
specified in those Regulations are satisfied. Thus, under the Plan Asset
Regulations, a Plan that acquires a Certificate could be treated for ERISA
purposes as having acquired a direct interest in some or all of the assets in
the related Trust. Such treatment could cause certain transactions with respect
to such assets to be deemed "prohibited transactions" under ERISA and, in
addition, could result in a finding of an improper delegation by the plan
fiduciary of its duty to manage plan assets.
The DOL has issued several exemptions from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of section 4975
of the Code. Those exemptions include, but are not limited to: (1) Prohibited
Transaction Class Exemption 95-6 ("PTCE 95-6"), regarding investments by
insurance company general accounts; (2) Prohibited Transaction Class Exemption
91-38, regarding investments by bank collective investment funds; (3) Prohibited
Transaction Class Exemption 90-1, regarding investments by insurance company
pooled separate accounts; (4) Prohibited Transaction Class Exemption 83-1,
regarding acquisitions by Plans of interests in mortgage pools; and (5) various
underwriter exemptions. Before purchasing any Certificates, a Plan subject to
the fiduciary responsibility provisions of ERISA or described in section
4975(e)(1) of the Code should consult with its counsel to determine whether the
conditions of any exemption would be met. A purchaser of Certificates should be
aware, however, that certain of the exemptions do not apply to the purchase,
sale, and holding of subordinated certificates. In addition, PTCE 83-1 will not
apply to Certificates evidencing interests in a Trust Estate that contains
Contracts. Moreover, even if the conditions specified in one or more exemptions
are met, the scope of the relief provided by an exemption might not cover all
acts that might be construed as prohibited transactions.
The Plan Asset Regulations will not apply to a Certificate if (1) the
Certificate is registered under the Securities Exchange Act of 1934, is freely
transferable and is part of a class of Certificates that is held by more than
100 unrelated
84
investors (the "Publicly Offered Exception") or (2) immediately after the most
recent acquisition of a Certificate of the same Series, benefit plan investors
do not own 25% or more of the value of any class of Certificates in that Series
(the "Insignificant Participation Exception"). A purchaser of Certificates
should be aware, however, that determining whether the Insignificant
Participation Exception applies is administratively impracticable in many
situations. Prior to purchasing a Certificate, a Plan should consult with its
counsel to determine whether the Publicly Offered Exception, the Insignificant
Participation Exception, or any other exception to the Plan Asset Regulations
would apply to the purchase of the Certificate.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities (such as the Certificates) are
deemed to be plan assets of a Plan investing in such securities, the "holding in
trust" requirement of section 403 of ERISA will be satisfied if such securities
are held in trust on behalf of the Plan.
Because the purchase or holding of Certificates may result in unfavorable
consequences for a Plan or its fiduciaries under the Plan Asset Regulations or
the prohibited transaction provisions of ERISA or the Code, (i) certain classes
of Certificates will not be offered for sale to, and are not transferable to,
any Plan Investor and (ii) certain Classes of Certificates will not be offered
for sale to, and are not transferable to, any Plan Investor unless such Plan
Investor provides the Company with a Benefit Plan Opinion (I.E., an opinion of
counsel satisfactory to the Company and the Servicer (and upon which the
Company, the Servicer, the Trustee, the TMP, and their respective counsel are
authorized to rely) generally to the effect that the ownership of a Certificate
of such class will not (1) cause any of the assets in the related Trust to be
regarded as plan assets for purposes of the Plan Asset Regulations; (2) give
rise to any fiduciary duty under ERISA on the part of the Company, the Trustee,
a Servicer, or the TMP; or (3) be treated as, or result in, a prohibited
transaction under sections 406 and 407 of ERISA or section 4975 of the Code.)
The Prospectus Supplement for an affected Series will indicate which classes of
Certificates are restricted in their availability to benefit plan investors.
In considering the possible application of the Plan Asset Regulations,
potential Plan Investors should be aware that, with respect to certain Series
and under certain circumstances, the Servicer and the holders of a majority in
interest of the related Residual Certificates may have a right to redeem the
Certificates of such Series, at its option. In such cases, the Servicer's
purpose for the retention of such a redemption right is to enable the Servicer
to terminate its administration obligations with respect to the Certificates in
the event such obligations become unprofitable. The Servicer undertakes no
obligation to consider the interests of Certificateholders in deciding whether
to exercise any redemption right.
As described in "Federal Income Tax Consequences" above, an investment in a
Certificate may produce UBTI for tax-exempt employee benefit plans. Potential
investors also should be aware that ERISA requires that the assets of a Plan be
valued at their fair market value as of the close of the plan year. Neither the
Company, Oakwood, the Servicer nor the Underwriters currently intend to provide
valuations to Certificateholders.
Prospective purchasers of Certificates that are insurance companies should
be aware that the United States Supreme Court interpreted the fiduciary
responsibility rules of ERISA in JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V.
HARRIS BANK AND TRUST. 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 of
Certificates that are insurance companies should consult with their counsel with
respect to the application of the JOHN HANCOCK case and PTCE 95-6 to their
purchase of Certificates, and should be aware that certain restrictions may
apply to their purchase of Certificates.
Due to the complexity of the rules applicable to Plans and Plan
fiduciaries, and the considerable uncertainty that exists with respect to many
aspects of those rules, Plan Investors contemplating the acquisition of
Certificates should consult their legal advisors with respect to the ERISA,
Code, and other consequences of an investment in the Certificates.
PLAN OF DISTRIBUTION
The Company may sell the Certificates offered hereby either directly or
through one or more underwriters or underwriting syndicates. The Prospectus
Supplement with respect to each Series of Certificates will set forth the terms
of the offering of such Series of Certificates and each Class within such
Series, including the name or names of the Underwriter(s), the proceeds to and
their intended use by the Company, and either the initial public offering price,
the discounts and commissions to the Underwriter(s) and any discounts or
concessions allowed or reallowed to certain dealers, or the method by which the
price at which the related Underwriter(s) will sell the Certificates will be
determined.
The Certificates of a Series may be acquired by Underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined
85
at the time of sale. The obligations of any Underwriters will be subject to
certain conditions precedent, and such Underwriters will be severally obligated
to purchase all the Certificates of a Series offered pursuant to the related
Prospectus Supplement, if any are purchased. If Certificates of a Series are
offered otherwise than through Underwriters, the related Prospectus Supplement
will contain information regarding the nature of such offering and any
agreements to be entered into between the Company and purchasers of Certificates
of such Series.
The place and time of delivery for the Certificates of a Series in respect
of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL INVESTMENT CONSIDERATIONS
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the Classes of Certificates of such Series will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). If so, Certificates designated as qualifying
as "mortgage related securities" will continue to qualify as such for so long as
they are rated in one of the two highest categories by at least one nationally
recognized statistical rating agency. Classes of Certificates that qualify as
"mortgage related securities" under SMMEA will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state whose authorized investments are subject to state
regulation to the same extent as, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for any such entities.
Certain states have enacted legislation specifically limiting, to varying
degrees, the legal investment authority of such entities with respect to
"mortgage related securities," in most cases requiring investors to rely solely
upon existing state law and not SMMEA. In any case in which any such legislation
is applicable, the Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided in such state
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage-related
securities" without limitation as to the percentage of their assets represented
thereby; federal credit unions may invest in "mortgage-related securities;" and
national banks may purchase "mortgage-related securities" for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. (section mark)24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
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 any particular Certificates constitute
legal investments for such investors.
Certificates that do not constitute "mortgage related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws in those states that have enacted legislation overriding
SMMEA's provisions pre-empting state "blue sky" laws. In addition, such
Certificates may not be "legal investments" to the same extent as "mortgage
related securities" under SMMEA. The appropriate characterization under various
legal investment restrictions of the Classes of Certificates that do not qualify
as "mortgage related securities" under SMMEA and thus the ability of investors
subject to these restrictions to purchase such Classes of Certificates, may be
subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, the Classes of
Certificates that do not qualify as "mortgage related securities" will
constitute legal investments for them.
EXPERTS
The consolidated financial statements of Oakwood Homes Corporation and its
subsidiaries (collectively, "Oakwood Homes Corporation") as of September 30,
1996 and 1995 and for each of the three years in the period ended September 30,
1996, incorporated in this Prospectus by reference to Oakwood Homes
Corporation's Annual Report on Form 10-K for the year ended September 30, 1996
(except as they relate to Destiny Industries, Inc., a wholly-owned subsidiary of
Oakwood
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Homes Corporation, for the year ended October 1, 1994) have been audited by
Price Waterhouse LLP, independent accountants, and insofar as they relate to
Destiny Industries, Inc. for the year ended October 1, 1994, by Allen, Pritchett
& Bassett, CPAs, independent accountants. Such financial statements have been so
incorporated in reliance on the reports of such independent accountants given on
the authority of such firms as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters relating to the Certificates and material federal
income tax consequences concerning the Certificates will be passed upon for the
Company by Hunton & Williams, Richmond, Virginia.
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GLOSSARY
There follows abbreviated definitions of certain capitalized terms used in
this Prospectus and each Prospectus Supplement, except as may be otherwise
specified in the Prospectus Supplement for a particular Series. The related
Agreement may contain a more complete definition of certain of the terms defined
herein and reference should be made to the Agreement for a more complete
definition of all such terms.
"1986 ACT" means the Tax Reform Act of 1986.
"ACCOUNTING DATE" means, unless otherwise specified in a Prospectus
Supplement, for any Distribution Date, the last day of the preceding calendar
month.
"ACCRETION CLASS" means a Compound Interest Class or a Capital Appreciation
Class.
"ADDITIONAL ASSETS" means, with respect to any Series, non-recourse
guarantees on Contracts and/or Mortgage Loans, additional Contracts and/or
Mortgage Loans beyond those included in the related Asset Pool, letters of
credit or other Eligible Investments delivered to any Trust in addition to the
related Trust Estate.
"ADJUSTABLE RATE ASSET" means a Contract or Mortgage Loan bearing interest
at an adjustable rate.
"ADJUSTED CERTIFICATE PRINCIPAL BALANCE" means, with respect to each Class
of Subordinated Certificates on any date of determination, its Certificate
Principal Balance immediately following the most recently preceding Distribution
Date reduced by all Writedown Amounts allocated to such Class on such
Distribution Date.
"ADVANCE" means any P&I Advance or Servicing Advance.
"AFFILIATE" means, as to any specified Person, any other Person controlling
or controlled by or under common control with such specified Person. For the
purposes of this definition, "control," when used with respect to any specified
Person, means the power to direct the management and Policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise, and the terms "controlling" and "controlled" have the
meanings correlative to the foregoing.
"AGGREGATION RULE" means the rule in the OID Regulations under which two or
more debt instruments issued in connection with the same transaction (or related
transactions in certain circumstances) are treated as a single debt instrument
for federal income tax accounting purposes if issued by a single issuer to a
single holder.
"AGREEMENT" means the Pooling and Servicing Agreement for a Series,
including the Series Agreement and the Standard Terms.
"ALL OID ELECTION" means, with respect to a Regular Certificate, an
election to include in gross income all stated interest, original issue
discount, de minimis original issue discount, market discount, and de minimis
market discount that accrues on such Certificate (reduced by any amortizable
premium or acquisition premium on such Certificate) under the constant yield
method used to account for original issue discount.
"APPROVED SALE" means, as to any Asset, (1) a sale of the related
Manufactured Home or Mortgaged Property acquired by the Insured because of a
default by the borrower if the related Pool Insurer has given prior approval to
such sale, (2) a foreclosure or trustee's sale of the related Manufactured Home
or Mortgaged Property at a price exceeding the maximum amount specified by the
Pool Insurer, (3) the acquisition of the Mortgaged Property under any related
Primary Mortgage Insurance Policy by the related Mortgage Insurer or (4) the
acquisition of the related Manufactured Home or Mortgaged Property by the Pool
Insurer.
"ASSET" means a Contract or Mortgage Loan underlying a Series of
Certificates.
"ASSET FILE" means a Contract File or Mortgage Loan File, as applicable.
"ASSET POOL" means, with respect to any Series, the pool of Contracts
and/or Mortgage Loans included in the related Trust Estate.
"ASSET RATE" means, with respect to any Asset, the related Contract Rate or
Mortgage Rate, as applicable.
"ASSET SCHEDULE" means the schedule which identifies each Asset supporting
a Series (and includes certain other information regarding each such Asset,
including its Cut-off Date Principal Balance, its Asset Rate, its original
principal balance and other information) and appears as an exhibit to the
related Agreement.
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"AVAILABLE DISTRIBUTION AMOUNT" means, as to any Distribution Date and any
Series, the amount to be distributed on the Certificates of such Series on such
Distribution Date, which will be described in the related Prospectus Supplement.
"BALLOON PAYMENT LOAN" means an Asset that does not require any scheduled
amortization of principal prior to its scheduled maturity, or the principal of
which is amortized over a longer period than the Asset's scheduled term to
maturity.
"BANKRUPTCY CODE" means the United States Bankruptcy Code, as amended, as
set forth in Title 11 of the United States Code.
"BENEFICIAL OWNER" means, as to any Book-Entry Certificate, the beneficial
owner thereof, whose interest therein is reflected in the records of a Financial
Intermediary.
"BENEFIT PLAN OPINION" means an opinion of counsel satisfactory to the
Company and the Servicer (and upon which the Company, the Servicer, the Trustee,
the TMP, and their respective counsel are authorized to rely) generally to the
effect that the proposed transfer of a Certificate will not (1) cause any of the
assets in the related Trust to be regarded as "plan assets" for purposes of the
Plan Asset Regulations; (2) give rise to any fiduciary duty under ERISA on the
part of the Company, the Trustee, the Servicer, or the TMP; or (3) be treated
as, or result in, a prohibited transaction under section 406 or section 407 of
ERISA or section 4975 of the Code.
"BI-WEEKLY LOAN" means an Asset that provides for Obligor payments to be
made on a bi-weekly basis.
"BOOK-ENTRY CERTIFICATES" means Certificates of any Class specified as such
in the Prospectus Supplement for a Series and as to which Definitive
Certificates will not be issued, beneficial interests therein being maintained
through Participants or Indirect Participants in the Depository.
"BUY-DOWN FUND" means a custodial Eligible Account established by the
Servicer for any Buy-Down Loan, which must comply with the standards applicable
to the related Certificate Account, to be funded with an amount which, together
with projected reinvestment earnings thereon at a rate specified in the related
Prospectus Supplement, will provide funds sufficient to support the payments
required on such Buy-Down Loan on a level debt service basis.
"BUY-DOWN LOAN" means an Asset the amortization of which includes payments
made by the seller of the related Mortgaged Property or Manufactured Home or by
someone else other than the related Obligor.
"CAP" means a restriction or restrictions on the maximum stated interest
rate on a Certificate.
"CAPITAL APPRECIATION CLASS" means a Class of Certificates upon which
interest will accrue but will not be distributed until certain other Classes of
Certificates of the same Series have received their final distributions.
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
"CERTIFICATE" means any Pass-Through Certificate issued pursuant to an
Agreement.
"CERTIFICATE ACCOUNT" means an account or accounts maintained by the
Servicer for any Series, into which the Servicer must deposit collections in
respect of the related Assets pending remittance thereof to the related
Distribution Account on the applicable Remittance Date.
"CERTIFICATE REGISTER" means, for any Series, the register maintained by or
at the direction of the Trustee containing the names and addresses of all
current Holders of Certificates of each Class of such Series, and noting the
Class and denomination of each Certificate of such Series held by each such
holder.
"CERTIFICATEHOLDER" means the registered holder of a Certificate.
"CERTIFICATE PRINCIPAL BALANCE" means the outstanding principal balance of
a Certificate or Class of Certificates.
"CLASS" means any class of the Certificates of a Series, as specified in
the related Prospectus Supplement.
"CLEARING AGENCY" means an entity registered pursuant to Section 17A of the
Securities Act of 1934, as amended.
"CLOSING DATE" means, for any Series, the date on which such Series is
issued, which will be specified in the related Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
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"COLLECTION PERIOD" means, unless otherwise provided in a related
Prospectus Supplement, with respect to any Distribution Date, the period
commencing on the second day of the calendar month preceding the month in which
such Distribution Date occurs and ending on the first day of the month in which
such Distribution Date occurs.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANION CLASS" means a Class of Certificates structured to receive
principal payments on the underlying Assets on any Distribution Date only to the
extent those principal payments exceed the principal distribution amounts
scheduled to be made on a related PAC Class on such Distribution Date.
"COMPANY" means Deutsche Financial Capital Securitization LLC, a North
Carolina limited liability company.
"COMPENSATING INTEREST" means, for any Distribution Date, the amount of all
Due Date Interest Shortfalls for the preceding Prepayment Period to the extent
such Shortfalls do not exceed the Servicer's aggregate servicing compensation in
respect of such Prepayment Period.
"COMPLEMENTARY STRIP CERTIFICATES" means different Classes of Strip
Certificates of the same Series that, when held in combination, provide an
aggregate economic effect equivalent to that of a Participation Certificate.
"COMPOUND INTEREST CERTIFICATE" means a Certificate on which interest is
accrued and is compounded and added to the principal balance thereof
periodically, but which is not unconditionally entitled to distributions of
interest at least annually.
"COMPOUND INTEREST CLASS" means a Class of Certificates on which interest
may accrue but not be paid for the period described in the related Prospectus
Supplement.
"CONTINGENT PAYMENT OBLIGATION" means a debt obligation with one or more
contingent payments as defined in the Contingent Payment Regulations.
"CONTINGENT PAYMENT REGULATIONS" means those provisions of the OID
Regulations that address the federal income tax treatment of Contingent Payment
Obligations.
"CONTRACT" means a manufactured housing installment sales contract
including any and all rights to receive payments due thereunder on and after the
Cut-off Date and any security interest in a Manufactured Home purchased with the
proceeds of such contract.
"CONTRACT DOCUMENTS" means, with respect to each Contract:
(1) the original Contract;
(2) either (a) the original title document for the related
Manufactured Home, a duplicate certified by the appropriate governmental
authority that issued the original thereof or, if such original is not yet
available, a copy of the application filed with the appropriate
governmental authority pursuant to which the original title document will
issue (which copy may be on microfilm or optical disk maintained by the
Servicer in its records separate from the other related Contract
Documents), or (b) if the laws of the jurisdiction in which the related
Manufactured Home is located do not provide for the issuance of title
documents for manufactured housing units, other evidence of ownership of
the related Manufactured Home that is customarily relied upon in such
jurisdiction as evidence of title to a manufactured housing unit;
(3) unless such Contract is a Land Secured Contract, evidence of one
or more of the following types of perfection of the Seller's or the
Trustee's security interest in the related Manufactured Home granted by
such Contract (or, if such evidence is not yet available, a copy of the
application or other filing used to obtain such security interest (which
copy may be on microfilm or optical disk maintained by the Servicer in its
records separate from the other related Contract Documents)), as
appropriate in the applicable jurisdiction: (a) notation of such security
interest on the title document, (b) a financing statement meeting the
requirements of the UCC, with evidence of recording indicated thereon, (c)
a fixture filing in accordance with the UCC, with evidence of filing
indicated thereon, or (d) such other evidence of perfection of a security
interest in a manufactured housing unit as is customarily relied upon in
the jurisdiction in which the related Manufactured Home is located;
(4) an original assignment of the Contract from the initial named
payee thereunder to the Seller (unless the Seller is the initial named
payee for such Contract);
(5) originals of any assumption agreements relating to such Contract,
together with originals of any surety or guaranty agreement relating to
such Contract or to any such assumption agreement, payable to the order of
the Trustee,
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or, if not so payable, endorsed to the order of, or assigned to, the
Trustee by the holder/payee thereunder without recourse;
(6) originals of any extension, modification or waiver agreement(s)
relating to such Contract; and
(7) proof of maintenance of a Standard Hazard Insurance Policy (and a
flood insurance policy, if applicable) for the related Manufactured Home.
In the case of any Land Secured Contract, the related Contract Documents
shall consist of the following documents in lieu of those listed in clause (3)
of the foregoing paragraph: (a) the original recorded Mortgage for the related
Real Property, with evidence of recordation noted thereon or attached thereto,
or a certified copy thereof issued by the appropriate recording office (or, if
the Mortgage is in the process of being recorded, a photocopy of the Mortgage,
which may be on microfilm or optical disk maintained by the Servicer in its
records separate from the other related Contract Documents); (b) if the Mortgage
does not name the Seller as mortgagee therein or beneficiary thereof, an
original recorded assignment or assignments of the Mortgage from the Persons
named as mortgagee in, or beneficiary of, such Mortgage, to the Seller, with
evidence of recordation noted thereon or attached thereto, or a certified copy
of each such assignment issued by the appropriate recording office (or, if such
an original assignment is in the process of being recorded, a photocopy of each
such assignment, which may be on microfilm or optical disk maintained by the
Servicer in its records separate from the other related Contract Documents); and
(c) if such Land Secured Contract's original principal balance was $40,000 or
greater, a copy of the title search report and bring-down thereof (or evidence
of title insurance) with respect to the related Real Property.
"CONTRACT FILE" means, with respect to any Contract, all of the related
Contract Documents.
"CONTRACT LOAN-TO-VALUE RATIO" means, (i) as to each Contract with respect
to which a lien on land is required for underwriting purposes, the ratio,
expressed as a percentage, of the principal amount of such Contract to the sum
of the purchase price of the home (including taxes and insurance) and the
appraised value of the land; and (ii) as to each other Contract, the ratio,
expressed as a percentage, of the principal amount of such Contract to the
purchase price of the home (including taxes and insurance).
"CONTRACT RATE" means the annual percentage rate or "APR" specified in a
Contract.
"CONTRACT SCHEDULE" means an Asset Schedule to the extent it identifies
Contracts.
"CONVENTIONAL MORTGAGE LOANS" means Mortgage Loans that are not insured by
the FHA or partially guaranteed by the VA.
"CONVERTIBLE LOAN" means an Adjustable Rate Asset subject to a provision
pursuant to which, subject to certain limitations, the related Obligor may
exercise an option to convert the adjustable Asset Rate to a fixed Asset Rate.
"CREDIT INSURANCE" means the Primary Mortgage Insurance Policies, FHA
insurance, VA guarantees, and Pool Insurance Policies, if any, obtained with
respect to any Asset Pool.
"CREDIT INSURER" means a Mortgage Insurer or a Pool Insurer.
"CURRENT RECOGNITION ELECTION" means the election under section 1278(b) of
the Code to recognize market discount on a debt instrument currently on an
uncapped accrual basis.
"CUSTODIAL AGREEMENT" means the agreement, if any, among the Company, a
Trustee and a Custodian, by which the Custodian is appointed to hold the
Mortgage Loan Documents for a Trust Estate for the benefit of the Trustee.
"CUSTODIAN" means the custodian, if any, appointed pursuant to a Custodial
Agreement to hold the Mortgage Loan Documents for a Trust Estate for the benefit
of the related Trustee.
"CUT-OFF DATE" means, for any Series, the date specified in the related
Prospectus Supplement as the date after which scheduled principal and interest
payments on the related Contracts and Mortgage Loans, and on and after which
unscheduled collections of principal on the related Contracts and Mortgage
Loans, are to be included in the related Trust Estate.
"CUT-OFF DATE PRINCIPAL BALANCE" means, as to any Asset, the original
principal amount of such Asset, minus the principal portion of all Monthly
Payments due on such Asset on or before the applicable Cut-off Date and minus
all other payments applied to reduce such original principal amount before the
applicable Cut-off Date.
"DEEMED PRINCIPAL PAYMENTS" means all payments of principal and interest
provided for on a debt instrument other than Qualified Stated Interest.
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"DEFINITIVE CERTIFICATE" means any Certificate that will be issued in
fully-registered, certificated form to the owners thereof, or their nominees.
"DEPOSITORY" means DTC or any successor or other Clearing Agency selected
by the Company as depository for any Book-Entry Certificates.
"DFC" means Deutsche Financial Limited Liability Company, a North Carolina
limited liability company owned in equal shares by Oakwood and Deutsche
Financial Services Corporation, a Nevada corporation.
"DISCOUNT CERTIFICATE" means a Certificate that has a purchase price less
than its principal amount.
"DISQUALIFIED ORGANIZATION" means either (1) the United States; (2) any
state or political subdivision thereof; (3) any foreign government; (4) any
international organization; (5) any agency or instrumentality of any of the
foregoing; (6) any tax-exempt organization (other than a farmers' cooperative
described in section 521 of the Code) unless such organization is subject to the
tax on UBTI; or (7) any rural electrical or telephone cooperative; provided,
however, that a corporation will not be treated as an instrumentality of the
United States or any state or political subdivision thereof if all of its
activities are subject to tax and, with the exception of FHLMC, a majority of
its board of directors is not selected by such governmental unit.
"DISTRIBUTION ACCOUNT" means the account maintained by the Trustee, as
specified in the related Prospectus Supplement, from which distributions are
made on the Certificates.
"DISTRIBUTION DATE" means, with respect to each Series, unless otherwise
provided in the related Prospectus Supplement, the 15th day of each month (or
the next business day if such 15th day is not a business day), commencing in the
month following the month in which the related Closing Date occurs.
"DISTRIBUTION PERIOD" means, for any Certificate, the interval between one
Distribution Date and the next Distribution Date.
"DOL" means the United States Department of Labor.
"DTC" means The Depository Trust Company.
"DUE DATE" means, for any Asset, the date on which a Monthly Payment is due
on such Asset from the Obligor thereunder (without regard to any grace period).
"DUE DATE INTEREST SHORTFALL" means, for any Asset that is prepaid in full
or liquidated on other than a Due Date for such Asset, the difference between
(1) the amount of interest that would have accrued on such Asset through the day
preceding the first Due Date after such prepayment in full or liquidation had
the Asset not been prepaid in full or liquidated (net of Servicing Fees and any
other administrative fees payable out of such interest had it accrued and been
paid) and (2) the amount of interest that actually accrued on such Asset prior
to the prepayment in full or liquidation (net of an allocable portion of
Servicing Fees and any other administrative fees payable from interest payments
on such Asset during the related Collection Period).
"ELIGIBLE ACCOUNT" means, as to any Series, an account which is maintained
(1) at a 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 Federal Deposit Insurance Corporation (the "FDIC"), whose commercial
paper or long-term unsecured debt has a rating, as specified in the related
Agreement, sufficient to support the ratings requested on the Certificates of
the related Series, and which institution is subject to examination by federal
or state authorities, (2) in the corporate trust department of the Trustee or
(3) at an institution otherwise acceptable to each applicable Rating Agency.
"ELIGIBLE INVESTMENTS" means one or more of the investments specified in an
Agreement in which moneys in the related Distribution Account and certain other
accounts are permitted to be invested.
"EPA" means the United States Environmental Protection Agency.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW ACCOUNT" means an account established and maintained by the
Servicer with respect to Mortgage Loans in which Mortgagors under certain
Mortgage Loans are required to deposit amounts sufficient, as applicable, to pay
taxes, assessments, hazard insurance premiums and other comparable items.
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"EVENT OF DEFAULT" means, with respect to an Agreement, the occurrence of a
default as specified in such Agreement, coupled with the passage of a period of
any cure period specified in the Agreement for a default of such type without
such default having been cured. Events of Default will be as specified in the
Agreements, but will generally include (1) any failure by the Servicer to remit
funds to the Distribution Account as required by the applicable Agreement, which
failure continues unremedied for five days (or such other period specified in
the related Agreement) after the date upon which such remittance was due; (2)
any failure or breach by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements that materially and adversely
affects the interests of Certificateholders, which, in either case, continues
unremedied for 60 days after the giving of written notice of such failure or
breach to the Servicer by the related Trustee or by the Holders of Certificates
evidencing at least 25% of the Voting Rights for the applicable Series; and (3)
certain events involving insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the Servicer.
"EXCESS PREMIUM" means, with respect to a Regular Certificate, a premium
over such Certificate's noncontingent principal amount in excess of the lesser
of (1) .015 multiplied by the product of such noncontingent principal amount and
the WAM of the Certificate or (2) 15% of such noncontingent principal amount.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"FHA CONTRACT" or "FHA MORTGAGE LOAN" means a Contract or Mortgage Loan
that is insured by the FHA.
"FHA PREPAYMENT EXPERIENCE" means certain statistical data compiled by the
Actuarial Division of HUD concerning prepayment rates on FHA mortgage loans, as
set forth in tables which, assuming full mortgage loan prepayments at the rates
experienced by FHA on FHA mortgage loans, set forth the percentages of the
original number of FHA mortgage loans included in pools of Level Payment
Mortgage Loans with varying maturities that will remain outstanding on each
anniversary of the origination date of such mortgage loans (assuming they all
have the same origination date).
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FINAL SCHEDULED DISTRIBUTION DATE" means, for any Class, unless otherwise
provided in the related Prospectus Supplement, the date, based on the
assumptions set forth in the related Prospectus Supplement, on which the
Certificate Principal Balance of all Certificates of such Class is scheduled to
be reduced to zero, assuming no prepayments.
"FINANCIAL INTERMEDIARY" means a brokerage firm, bank, thrift institution
or any other entity that is a Depository Participant or Indirect Participant,
and that maintains a Beneficial Owner's account for the purpose of reflecting
such Beneficial Owner's interest in a Book-Entry Certificate.
"FIRST DISTRIBUTION PERIOD" means, with respect to a Certificate, the
interval between its issue date and its first Distribution Date.
"FLOOR" means a restriction or restrictions on the minimum stated interest
rate on a Certificate.
"FNMA" means the Federal National Mortgage Association.
"FOREIGN PERSON" means a nonresident alien individual, foreign corporation,
foreign partnership, or other nonUnited States Person.
"FOREIGN PERSON CERTIFICATION" means a written certification (signed under
penalty of perjury) provided by the beneficial owner of a Certificate that such
owner is, INTER ALIA, a Foreign Person.
"FRAUD LOSS" means a loss incurred on a Contract or Mortgage Loan with
respect to which there was fraud in connection with the origination of such
Contract or Mortgage Loan or fraud, dishonesty or misrepresentation in
connection with the application for any insurance obtained with respect to such
Contract or Mortgage Loan.
"FULL COVERAGE INSURANCE POLICY" means a Primary Mortgage Insurance Policy
which provides full coverage against any loss maintained by reason of
nonpayments by the related Mortgagor.
"GARN-ST GERMAIN ACT" means the Garn-St Germain Depository Institutions Act
of 1982, as amended.
"GEM LOAN" means a fixed-rate fully-amortizing Asset providing for (1)
Monthly Payments during the first year after origination that are at least
sufficient to pay interest due on the Asset, and (2) an increase in such Monthly
Payments in subsequent years at a predetermined rate generally not more than a
specified percentage of the Monthly Payments due on such Asset during the
preceding year.
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"GOVERNOR" means a restriction or restrictions on the amount of increase or
decrease in the stated interest rate on a Certificate on any Interest Adjustment
Date.
"GPM FUND" means a custodial Eligible Account established by the Servicer
for any GPM Loan, which must comply with the standards applicable to the related
Certificate Account, to be funded with an amount which, together with projected
reinvestment earnings thereon at a rate specified in the related Prospectus
Supplement, will provide funds sufficient to support the payments required on
such GPM Loan on a level debt service basis.
"GPM LOAN" means a "graduated payment" Asset the terms of which provide for
Monthly Payments during the initial years of its term that are less than the
actual amount of principal and interest that would be payable on a level debt
service basis.
"GROSS MARGIN" means, with respect to any Adjustable Rate Asset, the fixed
percentage per annum specified in the related Contract or Mortgage Note that is
added to the applicable Index on each related Interest Adjustment Date to
determine the new Asset Rate for such Adjustable Rate Asset.
"HOUSING ACT" means Section 306(g) of Title III of the National Housing Act
of 1934, as amended.
"HUD" means the United States Department of Housing and Urban Development.
"INCREASING PAYMENT LOAN" means an Asset that provides for Obligor Monthly
Payments that are fixed for an initial period of six, 12 or 24 months following
origination, and which increase thereafter at a predetermined rate expressed as
a percentage of the Obligor's Monthly Payment during the preceding period,
subject to any caps on the amount of any single Monthly Payment increase, for a
period not to exceed nine years after origination, after which the Monthly
Payment amount is fixed at a level-payment amount so as to amortize the Asset
fully over its remaining term.
"INDEX" means, with respect to any Adjustable Rate Asset, the index
specified in the related Contract or Mortgage Note that is added to the related
Gross Margin on each related Interest Adjustment Date to determine the new Asset
Rate for such Adjustable Rate Asset.
"INDIRECT PARTICIPANTS" means organizations which have indirect access to a
Clearing Agency, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly.
"INSURANCE PROCEEDS" means amounts paid or payable (as the context
requires) under any insurance policy maintained with respect to a Series, to the
extent such amounts are not applied to the restoration or repair of the
Manufactured Home or Mortgaged Property in respect of which such amounts were
paid.
"INSURED" means the Company and the Trustee, each as assignee of the
Seller.
"INTEREST ADJUSTMENT RATES" means, with respect to any Adjustable Rate
Asset, the dates on which the related Asset Rate changes in accordance with the
terms of the related Contract or Mortgage Note.
"INTEREST REDUCTION LOAN" means an Asset for which, subject to certain
conditions, the related Obligor has a one-time option to reduce the interest
rate payable with respect to such Asset.
"INTEREST WEIGHTED CERTIFICATE" means a Regular Certificate, the payments
on which consist entirely or primarily of a specified nonvarying portion of the
interest payable on one or more of the Assets held by the related Series REMIC.
"INVERSE FLOATER CERTIFICATE" means a Regular Certificate that provides for
the payment of interest at a rate determined as the difference between two
interest rate parameters, one of which is a variable rate and the other of which
is a fixed rate or a different variable rate.
"IO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership of a
percentage of the interest payments (net of certain fees) on the Assets assigned
to the related Trust.
"LAND SECURED CONTRACT" means a Contract secured at origination by a parcel
of real estate in addition to a Manufactured Home.
"LEVEL PAYMENT LOAN" means an Asset the terms of which provide for regular
level payments of principal and interest throughout its entire term.
"LEVEL PAYMENT BUY-DOWN LOAN" means an Asset that provides for a reduction
in the amount of the related Obligor's Monthly Payments for a period of up to
the first four years following origination of such Asset and as to which funds
have
94
been provided by someone other than the Obligor to cover the reductions in such
Monthly Payments during those years, but for which the aggregate monthly amount
due on such Asset from the Obligor and anyone else are level for the term of
such Asset.
"LIQUIDATED LOAN" means a defaulted Contract or Mortgage Loan as to which
all amounts that the Servicer expects to recover through the date of disposition
of the related Manufactured Home or Mortgaged Property have been received.
"LIQUIDATION EXPENSES" means all reasonable, out-of-pocket costs and
expenses (exclusive of the Servicer's overhead costs) incurred by the Servicer
in connection with liquidation of any Contract or Mortgage Loan or disposition
of any related Repo Property or REO Property.
"LIQUIDATION PROCEEDS" means amounts received and retained by the Servicer
in connection with the liquidation of a Liquidated Loan, whether through
foreclosure thereon or repossession and resale of the related Manufactured Home
or otherwise (including Insurance Proceeds collected in connection with such
liquidation).
"LOAN-TO-VALUE RATIO" means the Contract Loan-to-Value Ratio or the
Mortgage Loan-to-Value Ratio of an Asset, as applicable.
"MANUFACTURED HOME" means a unit of manufactured housing, including all
accessions thereto, securing the indebtedness of the Obligor under the related
Contract.
"MARK-TO-MARKET REGULATIONS" means Treasury regulations relating to the
requirement under section 475 of the Code that dealers in securities use
mark-to-market accounting for federal income tax purposes.
"MONTHLY PAYMENT" means the scheduled monthly payment of principal and
interest on a Contract or Mortgage Loan.
"MORTGAGE" means the mortgage, deed of trust or other instrument creating a
first lien on a first priority ownership interest in or estate in fee simple in
real property securing a Mortgage Note.
"MORTGAGE INSURER" means the insurance company or companies which issue any
Primary Mortgage Insurance Policies with respect to any Mortgage Loans.
"MORTGAGE LOAN" means a mortgage loan secured by a first lien on a one-to
four-family residential real property which is sold and assigned by the Company
to a Trustee and included in the Trust Estate for a Series of Certificates.
"MORTGAGE LOAN DOCUMENTS" means, with respect to each Mortgage Loan, the
following documents:
(1) the original Mortgage Note bearing a complete chain of
endorsements, if necessary, from the initial payee thereunder to the
Seller, with a further endorsement without recourse from the Seller in
blank or to the Trustee or its Custodian, in a form specified in the
related Sales Agreement, together with all related riders and addenda and
any related surety or guaranty agreement, power of attorney and buydown
agreement;
(2) the original recorded Mortgage (or a copy thereof certified to be
a true and correct reproduction of the original thereof by the appropriate
public recording office) with evidence of recordation noted thereon or
attached thereto, or, if the Mortgage is in the process of being recorded,
a photocopy of the Mortgage, certified by an officer of the Seller or the
originator, the related title insurance company, the related
closing/settlement/escrow agent or the related closing attorney to be a
true and correct copy of the Mortgage submitted for recordation;
(3) the original recorded assignment of the Mortgage from the Seller
to the Trustee or its Custodian, in a form specified in the related Sales
Agreement (or a copy thereof certified to be a true and correct
reproduction of the original thereof by the appropriate public recording
office) with evidence of recordation noted thereon or attached thereto, or,
if the assignment is in the process of being recorded, a photocopy of the
assignment, certified by an officer of the Seller to be a true and correct
copy of the assignment submitted for recordation;
(4) each original recorded intervening assignment of the Mortgage as
is necessary to show a complete chain of title from the original mortgagee
(or beneficiary, in the case of a deed of trust) to the Seller (or a copy
of each such assignment certified to be a true and correct reproduction of
the original thereof by the appropriate public recording office) with
evidence of recordation noted thereon or attached thereto, or, if an
assignment is in the process of being recorded, a photocopy of the
assignment, certified by an officer of the Seller to be a true and correct
copy of the assignment submitted for recordation;
(5) an original Title Insurance Policy or, if such policy has not yet
been issued or is otherwise not available, (a) a written commitment to
issue such policy issued by the applicable title insurance company and an
officer's certificate of
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the Seller certifying that all of the requirements specified in such
commitment have been satisfied, (b) a preliminary title report if the
related Mortgaged Property is located in a state in which preliminary title
reports are acceptable evidence of title insurance or (c) a certificate of
an officer of the Seller certifying that a Title Insurance Policy is in
full force and effect as to the related Mortgage;
(6) for each Mortgage Loan identified in the related Agreement as
having in place a Primary Mortgage Insurance Policy, a Primary Mortgage
Insurance Policy or a certificate of primary mortgage insurance issued by
the related Mortgage Insurer or its agent indicating that such a policy is
in effect as to such Mortgage Loan or, if neither a policy nor a
certificate of insurance from the related Mortgage Insurer is available, a
certificate of an officer of the Seller certifying that a Primary Mortgage
Insurance Policy is in effect as to such Mortgage Loan;
(7) each related assumption agreement, modification, written assurance
or substitution agreement, if any; and
(8) proof of the maintenance of a Standard Hazard Insurance Policy
(and a flood insurance policy, if applicable) as to the related Mortgaged
Property.
"MORTGAGE LOAN FILE" means, as to any Mortgage Loan, all the related
Mortgage Loan Documents.
"MORTGAGE LOAN SCHEDULE" means an Asset Schedule to the extent it
identifies Mortgage Loans.
"MORTGAGE LOAN-TO-VALUE RATIO" means, as to a Mortgage Loan, the ratio,
expressed as a percentage, of the principal amount of such Mortgage Loan at the
time of determination, to the sum of the appraised value of the land and
improvements, and the amount of any prepaid finance charges or closing costs
that are financed.
"MORTGAGE NOTE" means the note or other evidence of indebtedness of a
mortgagor secured by a Mortgage.
"MORTGAGE RATE" means, with respect to each Mortgage Loan, the interest
rate specified in the related Mortgage Note.
"MORTGAGED PROPERTY" means the mortgaged property securing a Mortgage Loan.
"MORTGAGOR" means the obligor on a Mortgage Note.
"MULTIPLE RATE VRDI CERTIFICATE" means a VRDI Certificate that does not
qualify as a Single Rate VRDI Certificate.
"NEGATIVE ADJUSTMENT" means any reduction in the income accrual on a
Certificate for a period below zero.
"NET LIQUIDATION PROCEEDS" means the amount of Liquidation Proceeds
received with respect to any Liquidated Loan, net of the amount of any
Liquidation Expenses incurred with respect to such Liquidated Loan and not
previously reimbursed to the Servicer at the time of liquidation.
"NET RATE" means, as to any Asset, the Asset Rate thereon minus applicable
servicing, administration and guarantee fees and insurance premiums, if any
(plus reinvestment income thereon if payable to the related Certificateholders),
expressed as a percentage per annum of the principal balance of such Asset.
"NON-RECOVERABLE ADVANCE" means any Advance previously made or proposed to
be made in respect of a Contract or Mortgage Loan by the Servicer (or a Trustee
or Pool Insurer) pursuant to the related Agreement, which, in the good faith
judgment of the Servicer (or such Trustee or Pool Insurer), will not or, in the
case of a proposed Advance, would not, be ultimately recoverable by the Servicer
(or such Trustee or Pool Insurer) from Related Proceeds of such Contract or
Mortgage Loan.
"NON-REMIC CERTIFICATE" means a Certificate representing an interest in a
Trust Estate as to which no REMIC elections have been made.
"NON-REMIC STRIP CERTIFICATE" means an IO Certificate, a PO Certificate, or
a Ratio Certificate.
"NON-VRDI CERTIFICATE" means a NOWA Certificate, a Variable Rate
Certificate that is issued at an Excess Premium, or any other Variable Rate
Certificate that does not qualify as a VRDl Certificate.
"NOTIONAL PRINCIPAL AMOUNT" means a fictional principal balance that may be
assigned to a Certificate or a Class of Certificates that is to be used solely
for purposes of determining the amount of interest distributions and certain
other rights and obligations of the holder(s) of such Certificate or Class and
does not represent any beneficial interest in principal payments on the Assets
in the related Trust.
"NOWA CERTIFICATE" means a Weighted Average Certificate relating to a Trust
(or a designated Asset Pool thereof) whose Assets do not bear interest at
qualified floating rates.
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"NVRI" means a residual interest that has negative value because, on the
date it is acquired, the present value of the anticipated tax liabilities
associated with holding the interest exceeds the sum of (1) the present value of
the expected future distributions on the interest and (2) the present value of
the anticipated tax savings associated with holding the interest as the related
REMIC generates losses.
"OAKWOOD" means Oakwood Acceptance Corporation, a North Carolina
corporation wholly owned by Oakwood Homes.
"OAKWOOD HOMES" means Oakwood Homes Corporation, a North Carolina
corporation.
"OBLIGOR" means a person who is indebted under a Contract or who has
acquired a Manufactured Home subject to a Contract or a person who is the
mortgagor or borrower under a Mortgage Loan or who has acquired a Mortgaged
Property subject to a Mortgage Loan.
"OBLIGOR BANKRUPTCY INSURANCE" means an insurance policy, reserve fund or
other form of credit enhancement that provides protection against losses
resulting from the bankruptcy of an Obligor.
"OBLIGOR BANKRUPTCY LOSS" means, for any Distribution Date as to any Asset
that was the subject of a Principal Cramdown during the preceding Prepayment
Period, the related Principal Cramdown Amount.
"OFFERED CERTIFICATES" means, as to any Series, the Certificates of Classes
of such Series that are offered pursuant to the related Prospectus Supplement
and this Prospectus.
"OID REGULATIONS" means the final regulations governing original issue
discount that were issued by the Treasury.
"ORDINARY RATIO CERTIFICATE" means a Ratio Certificate that is not
considered a Contingent Payment Obligation.
"ORIGINAL CONTINGENT PAYMENT REGULATIONS" means the proposed regulations
relating to debt instruments issued with contingent payments that were issued as
part of the Original Proposed OID Regulations.
"ORIGINAL PROPOSED OID REGULATIONS" means the proposed regulations
governing original issue discount that were issued by the Treasury in 1986.
"PAC CLASS" means a "planned amortization" Class of Certificates structured
to receive fixed principal distribution amounts on designated Distribution Dates
so long as principal payments on the underlying Assets are received at a rate
that is within a range of constant percentages of the prepayment assumption
model used (as specified in the related Prospectus Supplement).
"PARITY PRICE" means the price at which a Certificate will yield its
coupon, after giving effect to any payment delay.
"PARTICIPANTS" means the participating organizations that utilize the
services of the Depository, including securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations.
"PARTICIPATION CERTIFICATE" means a Non-REMIC Certificate evidencing
ownership of equal percentages of the principal and interest payments on the
Assets assigned to the related Trust.
"PASS-THROUGH RATE" means, with respect to any Class of Certificates, the
per annum interest rate, if any, which will accrue on the Certificate Principal
Balance of such Class.
"PERCENTAGE INTEREST" means, with respect to a Certificate to which an
initial principal amount is assigned as of the Closing Date, the portion of the
Class of which such Certificate is a part evidenced by such Certificate,
expressed as a percentage, the numerator of which is the denomination
represented by such Certificate and the denominator of which is the initial
Certificate Principal Balance of such Class. With respect to a Certificate to
which an initial principal balance is not assigned as of the Closing Date, the
portion of the Class of which such Certificate is a part evidenced by such
Certificate, expressed as a percentage stated on the face of such Certificate.
"PERIODIC RATE CAP" means, with respect to any Adjustable Rate Asset, the
limit on the percentage increase that may be made to the related Asset Rate on
any Interest Adjustment Date.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization or government or any agency or political subdivision
thereof.
"P&I ADVANCE" means any amount advanced (or required to be advanced, as the
context requires) by the Servicer in respect of a delinquent payment of
principal and interest on a Contract or Mortgage Loan.
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"PLAN" means any employee benefit plan or retirement arrangement, including
individual retirement accounts and annuities, Keogh plans, and collective
investment funds in which such plans, accounts, annuities or arrangements are
invested, that are described in or subject to the Plan Asset Regulations, ERISA,
or corresponding provisions of the Code.
"PLAN ASSET REGULATIONS" means the DOL regulations set forth in 29 C.F.R.
(section mark) 2510.3-101, as amended from time to time.
"PLAN INVESTOR" means any Plan, any Person acting on behalf of a Plan, or
any Person using the assets of a Plan.
"PO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership of a
percentage of the principal payments on some or all of the Assets assigned to
the related Trust.
"POOLING AND SERVICING AGREEMENT" means, with respect to any Series, the
pooling and servicing agreement pursuant to which the related Trust was
established and the related Certificates were issued, which will be among the
Company, the Servicer and the related Trustee and will consist of a Series
Agreement which incorporates by reference the Standard Terms.
"POOL INSURANCE POLICY" shall have the meaning assigned and shall be as
described herein under "The Trusts -- Insurance -- Credit Insurance."
"POOL INSURER" means the insurer under any Pool Insurance Policy.
"POOL SCHEDULED PRINCIPAL BALANCE" means, on any Distribution Date for a
Series, the aggregate of the Scheduled Principal Balances, immediately prior to
the beginning of the related Collection Period, of the related Assets that were
outstanding at the beginning of such Collection Period, without giving effect to
any principal prepayments, Net Liquidation Proceeds or Repurchase Prices
received (or Realized Losses incurred) on such Assets on the day preceding the
beginning of such Collection Period, plus the aggregate of the principal
components of any Monthly Payments that were due at or prior to the beginning of
such Collection Period on such Assets, but which Monthly Payments were not
collected from a related Obligor or advanced by the Servicer and which were not
reflected in a corresponding reduction of the Certificate Principal Balance of
the Certificates on the related Distribution Date. The Pool Scheduled Principal
Balance as of any date of determination that is not a Distribution Date shall be
the Pool Scheduled Principal Balance for the next upcoming Distribution Date.
"PRE-FUNDED AMOUNT" means the amount initially deposited into a Pre-Funding
Account for a Series.
"PRE-FUNDED ASSET" means an Asset acquired by a Trust after the related
Closing Date using funds on deposit in the related Pre-Funding Account.
"PRE-FUNDING ACCOUNT" means an account established for the purpose of
enabling a Trust to purchase Pre-Funded Assets, with an aggregate principal
balance not to exceed 25% of the Certificate Principal Balance of Certificates
issued by such Trust during the applicable Pre-Funding Period, as described
herein under "The Trusts -- Pre-Funding Accounts."
"PRE-FUNDING PERIOD" means any period specified as such in a Prospectus
Supplement not to exceed three months, during which the related Trust may
acquire Pre-Funded Assets using funds on deposit in a related Pre-Funding
Account.
"PRE-ISSUANCE ACCRUED INTEREST" means interest that has accrued under the
terms of a Certificate prior to the issue date of such Certificate.
"PRE-ISSUANCE ACCRUED INTEREST RULE" means the rule in the OID Regulations
under which a Certificate's issue price may be computed by subtracting from the
issue price the amount of Pre-Issuance Accrued Interest on the Certificate, and
a portion of the interest received on the first Distribution Date with respect
to such Certificate would be treated as a return of such Pre-Issuance Accrued
Interest rather than as a payment on the Certificate, provided: (i) a portion of
the initial purchase price of the Certificate is allocable to Pre-Issuance
Accrued Interest and (ii) the Certificate provides for a payment of stated
interest on the first payment date within one year of the issue date that equals
or exceeds the amount of such Pre-Issuance Accrued Interest.
"PREMIUM CERTIFICATE" means a Certificate that has a purchase price greater
than its principal amount.
"PREPAYMENT MODEL" means a prepayment standard or model which represents an
assumed rate of prepayment of the Assets in an Asset Pool relative to the
aggregate outstanding principal balance of such Asset Pool from time to time.
"PREPAYMENT PERIOD" means, unless otherwise provided in a related
Prospectus Supplement, with respect to any Distribution Date, the calendar month
immediately preceding the calendar month in which such Distribution Date occurs.
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"PRICING PREPAYMENT ASSUMPTIONS" means, with respect to a Series of
Certificates, the assumptions concerning the rate and timing of principal
prepayments on the underlying Assets and concerning the reinvestment rate on
amounts held pending distribution that were assumed in pricing such
Certificates.
"PRIMARY MORTGAGE INSURANCE" means the insurance provided under any Primary
Mortgage Insurance Policy.
"PRIMARY MORTGAGE INSURANCE POLICY" means the primary mortgage insurance
policy, if applicable, covering certain Conventional Mortgage Loans for which
the initial Mortgage Loan-to-Value Ratios exceeded 80%.
"PRINCIPAL CRAMDOWN" means, as to any Asset, either (a) a decree by a
bankruptcy court to the effect that the portion of such Asset that is secured by
the underlying Manufactured Home or Mortgaged Property is less than its Unpaid
Principal Balance due to the fact that the value of such Manufactured Home or
Mortgaged Property is less than such Unpaid Principal Balance or (b) the
permanent forgiveness by a bankruptcy court of some or all of the Unpaid
Principal Balance owed by the related Obligor.
"PRINCIPAL CRAMDOWN AMOUNT" means, with respect to any Prepayment Period as
to any Asset that has been the subject of a Principal Cramdown, the amount by
which (a) the Unpaid Principal Balance of such Asset exceeds (b) as applicable,
depending upon the type of Principal Cramdown that was applied to such Asset,
either (1) the portion of such Unpaid Principal Balance that remains secured by
the related Manufactured Home or Mortgaged Property after taking the related
Principal Cramdown into account or (2) the Unpaid Principal Balance after taking
into account the permanent forgiveness of debt ordered by the bankruptcy court
in connection with the related Principal Cramdown.
"PRINCIPAL DISTRIBUTION AMOUNT" means, for any Series, except as otherwise
defined in the related Agreement, on any Distribution Date other than the
Distribution Date on which the related Trust is to be terminated, the sum of the
following amounts: (1) the sum of the principal components of all Monthly
Payments scheduled to be made on the Due Date occurring during the related
Collection Period on the related Assets that were Outstanding at the opening of
business on such Due Date (regardless of whether such Monthly Payments were
received by the Servicer from the related Obligors), not including any Monthly
Payments due on Liquidated Loans or repurchased Assets; (2) the sum of the
amounts of all Principal Prepayments received by the Servicer on the related
Assets during the related Prepayment Period; (3) with respect to any related
Asset that became a Liquidated Loan during the related Prepayment Period, the
Scheduled Principal Balance thereof on the date of liquidation thereof
(determined without giving effect to such liquidation), plus an amount equal to
the principal components of all Monthly Payments due on or prior to such date on
such Asset but theretofore unpaid by the related Obligors and not advanced by
the Servicer; (4) with respect to any related Asset that was purchased or
repurchased by the Servicer, OAC or the Company pursuant to the related
Agreement during the related Prepayment Period, the Scheduled Principal Balance
thereof on the date of purchase or repurchase thereof (determined without giving
effect to such purchase or repurchase), plus an amount equal to the principal
components of all Monthly Payments due on or prior to such date on such Asset
but theretofore unpaid by the related Obligor and not advanced by the Servicer;
and (5) an amount equal to all Principal Distribution Amounts from previous
Distribution Dates that have not yet been distributed on the Certificates (not
including any portion of such previous Principal Distribution Amounts that is
included in either of the amounts described in clause (3) or clause (4) above)
minus the amount of any Writedown Amounts that have previously been allocated to
the Class of Certificates then entitled to receive the Principal Distribution
Amount in accordance with the related Pooling and Servicing Agreement.
On the Distribution Date on which the Trust is terminated, the Pool
Scheduled Principal Balance for such Distribution Date.
"PRINCIPAL PREPAYMENT" means, with respect to any Asset, a payment
attributable to principal of such Asset, other than a scheduled principal
payment on such Asset, which may be received (1) from the related Obligor
together with a regular Monthly Payment, (2) from the related Obligor together
with an early Monthly Payment, or (3) in the form of net Insurance Proceeds
received by the Servicer otherwise than as a component of Liquidation Proceeds.
"PRINCIPAL-ONLY CLASS" means a Class of Certificates representing an
interest only in specified collections of principal on the underlying Assets,
which will have no Pass-Through Rate.
"QUALIFIED BANK" means any domestic bank not affiliated with DFC or the
Company (1) having long-term unsecured debt obligations rated in one of the two
highest rating categories of each applicable Rating Agency or short-term
unsecured debt obligations rated in each applicable Rating Agency's highest
applicable rating category, (2) having commercial paper or short-term unsecured
debt obligations rated in each Rating Agency's highest applicable rating
category, or (3) that is otherwise acceptable to each applicable Rating Agency.
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"QUALIFIED MORTGAGE" has the meaning assigned to such term herein under
"Federal Income Tax Consequences -- REMIC Certificates -- REMIC
Qualification -- Asset Composition."
"QUALIFIED STATED INTEREST" means, in general, stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at (1) a single fixed rate or (2) a variable rate that
meets certain requirements set out in the OID Regulations.
"QUALIFIED SUBSTITUTE ASSET" means an Asset substituted by the Company, the
Seller or the Servicer for a Replaced Asset which must, on the date of such
substitution, (1) have an Unpaid Principal Balance not greater than (and not
more than $10,000 less than) the Unpaid Principal Balance of the Replaced Asset,
(2) have an Asset Rate not less than (and not more than one percentage point in
excess of) the Asset Rate of the Replaced Asset, (3) have a Net Rate equal to
the Net Rate of the Replaced Asset, (4) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Replaced Asset,
(5) have a Loan-to-Value Ratio as of the first day of the month in which the
substitution occurs equal to or less than the Loan-to-Value Ratio of the
Replaced Asset as of such date (in each case, using the appraised value at
origination, and after taking into account the Monthly Payment due on such
date), and (6) comply with each representation and warranty set forth in Section
2.05 of the Standard Terms and in the related Sales Agreement. In the event that
more than one Asset is substituted for a Replaced Asset, the amount described in
clause (1) hereof shall be determined on the basis of aggregate Unpaid Principal
Balances, the rates described in clauses (2) and (3) hereof shall be determined
on the basis of weighted average Asset Rates and Net Rates, as the case may be,
and the term described in clause (4) hereof shall be determined on the basis of
weighted average remaining terms to maturity, provided that no Qualified
Substitute Asset may have an original term to maturity beyond the latest
original term to maturity of any Asset assigned to the Trust on the Closing
Date. In the case of a Trust for which a REMIC election has been or will be
made, a Qualified Substitute Asset also shall satisfy the following criteria as
of the date of its substitution for a Replaced Asset: (A) the Obligor shall not
be 90 or more days delinquent in payment on the Qualified Substitute Asset, (B)
the Asset File for such Asset shall not contain any material deficiencies in
documentation, and shall include an executed Contract or Mortgage Note, as
applicable, and, if it is a Land Secured Contract or a Mortgage Loan, a recorded
Mortgage; (C) the Loan-to-Value Ratio of the Asset must be 125% or less either
(i) on the date of origination of the Asset, or, if any of the terms of such
Asset were modified other than in connection with a default or imminent default
on such Asset, on the date of such modification, or (ii) on the date of the
substitution, based on an appraisal conducted within the 60 day period prior to
the date of the substitution; (D) no property securing such Asset may be subject
to foreclosure, bankruptcy, or insolvency proceedings; and (E) such Asset, if a
Land Secured Contract or a Mortgage Loan, must be secured by a valid first lien
on the related Real Property or Mortgaged Property.
"QUALIFYING REIT INTEREST" means interest that is treated as "interest on
obligations secured by mortgages on real property" for REIT qualification
purposes.
"RATE BUBBLE CERTIFICATE" means a Regular Certificate, the effective
interest rate on which is higher during the Certificate's First Distribution
Period than during the remainder of the life of the Certificate.
"RATING AGENCY" means a nationally-recognized statistical securities rating
organization, such as Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc., Moody's investors Service, Inc., Fitch Investors Service,
Inc., and Duff & Phelps Credit Rating Co. With respect to any Series, each
Rating Agency rating any Certificates of such Series offered hereunder will be
identified in the related Prospectus Supplement.
"RATIO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership of a
percentage of the interest payments and a different percentage of the principal
payments on the Assets assigned to the related Trust.
"RCRA" means the Resource Conservation and Recovery Act of 1976, as
amended.
"REALIZED INTEREST LOSS" means a shortfall in interest resulting from the
receipt of Net Liquidation Proceeds in respect of a Contract or Mortgage Loan in
an amount that is insufficient to pay accrued and unpaid interest thereon.
"REALIZED LOSS" means (1) the amount of any loss realized by a Trust in
respect of any related Liquidated Loan (which may be a Special Hazard Loss or a
Fraud Loss), which shall generally equal (a) the Unpaid Principal Balance of the
Liquidated Loan, plus accrued and unpaid interest on such Liquidated Loan, plus
amounts reimbursable to the Servicer for previously unreimbursed Servicing
Advances, minus (b) Net Liquidation Proceeds in respect of the Liquidated Loan
or (2) any Obligor Bankruptcy Loss.
"REAL PROPERTY" means a parcel of real estate securing a Land Secured
Contract.
100
"RECORD DATE" means, for any Distribution Date, the date on which the
identities of the Certificateholders entitled to distributions on the related
Certificates on such Distribution Date are fixed, which shall be the last day of
the preceding calendar month unless otherwise specified in the related
Prospectus Supplement.
"REGULAR CERTIFICATE" means a Certificate evidencing a "regular interest"
in a REMIC.
"REIT" means a "real estate investment trust" as defined in the Code.
"RELATED PROCEEDS" means, with respect to any Contract or Mortgage Loan in
respect of which an Advance has been or is to be made, future collections in
respect of such Contract or Mortgage Loan (including collections of or from
Insurance Proceeds, Additional Assets or Liquidation Proceeds relating to such
Contract or Mortgage Loan).
"RELIEF ACT" means the federal Soldiers' and Sailors' Civil Relief Act of
1940, as amended.
"REMIC" means a "real estate mortgage investment conduit" as defined in the
Code.
"REMIC CERTIFICATE" means a Certificate representing an interest in a Trust
Estate as to which one or more REMIC elections have been made.
"REMIC PROVISIONS" means provisions of the Code relating to REMICs, which
appear at Sections 860A through 860G of the Code, related Code provisions,
regulations (whether in proposed, temporary or final form), announcements and
rulings thereunder, as the foregoing may be in effect from time to time.
"REMITTANCE ACCOUNT" shall have the meaning assigned to such term herein
under "Sale and Servicing of Contracts and Mortgage
Loans -- Servicing -- Distributions on Certificates."
"REMITTANCE DATE" means the business day preceding any monthly Distribution
Date.
"REMITTANCE REPORT" means, with respect to any Distribution Date, the
monthly statement relating to such Distribution Date which is to be prepared by
the Servicer and furnished by the Trustee to the related Certificateholders, as
more fully described herein under "The Pooling and Servicing
Agreements -- Reports to Certificateholders."
"REO PROPERTY" means a Mortgaged Property acquired by the Servicer on
behalf of a Trust pursuant to a foreclosure or other similar proceeding in
respect of a related Mortgage Loan.
"REPLACED ASSET" MEANS AN ASSET REPLACED OR TO BE REPLACED BY A QUALIFIED
SUBSTITUTE ASSET.
"REPO PROPERTY" means a Manufactured Home (and any related Real Property)
acquired by the Servicer on behalf of a Trust pursuant to a repossession,
foreclosure or other similar proceeding in respect of a related Contract.
"REPURCHASE PRICE" shall, for any Asset, have the meaning assigned in the
related Agreement. Generally, the "Repurchase Price" of an Asset will equal the
Unpaid Principal Balance thereof, plus unpaid interest thereon at the applicable
Asset Rate through the end of the month in which such price is paid for the
Asset.
"RESERVE FUND" means a fund established and funded by the Company or such
other party specified in the related Prospectus Supplement to make payments on
certain Certificates to the extent funds are not otherwise available.
"RESIDUAL CERTIFICATE" means a Certificate evidencing a "residual interest"
in a REMIC.
"RIC" means a "regulated investment company" as defined in the Code.
"SALES AGREEMENT" means, with respect to any Asset, the agreement pursuant
to which the related Seller sold such Asset to the Company.
"SCHEDULED PRINCIPAL BALANCE" means, as of any date of determination with
respect to any Contract, Repo Property, Mortgage Loan or REO Property, (1) the
Cut-off Date Principal Balance of such Contract or Mortgage Loan (or of the
related Contract or Mortgage Loan, in the case of a Repo Property or REO
Property) minus (2) the sum of (a) the principal components of any Monthly
Payments due on such Contract or Mortgage Loan (or on the related Contract or
Mortgage Loan, in the case of a Repo Property or REO Property) after the related
Cut-off Date and on or before such date of determination (regardless of whether
such Monthly Payments were received from the related Obligor) plus (b) all
principal prepayments received by the Servicer on such Contract or Mortgage Loan
(or on the related Contract or Mortgage Loan, in the case of a Repo Property or
REO Property) (including the principal portion of Net Liquidation Proceeds and
the principal portion of all amounts paid by the Seller or another party to
repurchase such Contract or Mortgage Loan) on or after the Cut-off Date and on
or prior to such date of determination, plus (c) all Realized Losses incurred on
such Contract or Mortgage Loan (or the
101
related Contract or Mortgage Loan, in the case of a Repo Property or REO
Property) on or after the Cut-off Date and on or prior to such date of
determination.
"SELLER" means, as to any Contract or Mortgage Loan included in the Trust
Estate for a Series, the entity that sold such Contract or Mortgage Loan to the
Company under a Sales Agreement, which will be DFC unless otherwise specified in
the related Prospectus Supplement.
"SENIOR CERTIFICATES" means, with respect to each Series of Certificates,
the Class or Classes which have rights to receive distributions or with respect
to allocations of Realized Losses and/or Shortfalls that are preferential to
those of another Class or Classes in such Series.
"SERIES" means a series of Certificates offered pursuant to this Prospectus
and a Prospectus Supplement thereto.
"SERIES AGREEMENT" means the Pooling and Servicing Agreement for a
particular Series, not including the Standard Terms.
"SERIES RATE" means, with respect to a Series, the interest rate equal to a
weighted average of the interest rates on all of the Non-REMIC Certificates
issued in such Series.
"SERIES REMIC" means a REMIC created with respect to a particular Series.
"SERVICE" means the Internal Revenue Service.
"SERVICER" means Oakwood, in its capacity as servicer of the Mortgage Loans
and/or Contracts underlying a Series of Certificates, or such other entity
specified as the servicer in the related Prospectus Supplement.
"SERVICING ADVANCE" means an advance required to be made by the Servicer in
respect of Contracts or Mortgage Loans (other than P&I Advances) including, but
not limited to, advances for the payment of personal property taxes, real
property taxes and premiums for Standard Hazard Insurance Policies.
"SERVICING FEE" means the monthly fee paid to the Servicer in respect of a
Series, as specified in the related Prospectus Supplement, which is typically a
fixed percentage of the Pool Scheduled Principal Balance of the related Asset
Pool.
"SHORTFALL" means, for any month and any Contract or Mortgage Loan, the
amount by which the amount of interest due on such Contract or Mortgage Loan for
such month exceeds the amount of interest collected or advanced in respect of
such Contract, which may be due to Due Date Interest Shortfall or Soldiers' and
Sailors' Shortfall.
"SINGLE RATE VRDI CERTIFICATE" means a VRDI Certificate that provides for
stated interest unconditionally payable in cash or property at least annually at
a single qualified floating rate or a single objective rate.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"SOLDIERS' AND SAILORS' SHORTFALL" means a Shortfall in respect of a
Contract or Mortgage Loan resulting from application of the Relief Act.
"SPECIAL HAZARD INSURANCE POLICY" shall have the meaning assigned and shall
be as described herein under "The Trusts -- Insurance -- Hazard
Insurance -- Special Hazard Insurance Policy."
"SPECIAL HAZARD INSURER" means the insurer under any Special Hazard
Insurance Policy.
"SPECIAL HAZARD LOSS" means a loss incurred on a Contract or Mortgage Loan
attributable to physical damage to the related Manufactured Home or Mortgaged
Property of a type which is not covered by standard hazard insurance policies,
excluding losses caused by war, nuclear reaction, nuclear or atomic weapons,
insurrection or normal wear and tear.
"STANDARD HAZARD INSURANCE POLICY" shall mean a policy providing standard
hazard insurance coverage with respect to a Manufactured Home or Mortgaged
Property as described herein under "The Trusts -- Insurance -- Hazard
Insurance -- Standard Hazard Insurance Policies."
"STANDARD TERMS" means the Standard Terms to Pooling and Servicing
Agreement, incorporated by reference by any Series Agreement.
"STEP-UP RATE" means the Asset Rate on a Step-up Rate Loan.
"STEP-UP RATE LOAN" means an Asset which bears interest at an Asset Rate
that increases over time.
102
"STRIP CLASS" means a Class of Certificates representing an interest only
in a specified portion of interest collections on the underlying Assets, which
may have no principal balance, a nominal principal balance or a Notional
Principal Amount.
"STRIPPING REGULATIONS" means the regulations issued by the Treasury under
section 1286 of the Code.
"SUBORDINATED CERTIFICATES" means, with respect to each Series of
Certificates, the Class or Classes with rights to receive distributions or with
respect to the allocation of Realized Losses and/or Shortfalls that are
subordinate to those of another Class or Classes of such Series.
"SUBORDINATION AMOUNT" means a specific amount of subordination provided by
Subordinated Certificates, as specified, if applicable, in the related
Prospectus Supplement.
"SUB-SERVICER" means any party, if any, with whom the Servicer has entered
into a Sub-servicing Agreement.
"SUB-SERVICING ACCOUNT" means an Eligible Account established by a
Sub-servicer that must comply with all standards applicable to the related
Certificate Account, into which the Sub-servicer must deposit collections in
respect of the related Assets pending remittance thereof to the related
Certificate Account.
"SUB-SERVICING AGREEMENT" means the written contract between the Servicer
and any Sub-servicer relating to servicing and/or administration of certain
Mortgage Loans or Contracts as provided in the Agreement.
"SUPERPREMIUM CERTIFICATE" means a Certificate that provides for a
relatively small amount of principal and for interest that can be expressed as
Qualified Stated Interest at a very high fixed rate with respect to that
principal.
"TAXABLE MORTGAGE POOL" means any entity other than a REMIC or a REIT if
(i) substantially all of the assets of the entity consist of debt obligations
and more than 50% of such obligations consist of "real estate mortgages" (which
term, for purposes of this definition, includes Mortgage Loans and Contracts),
(ii) such entity is the obligor under debt obligations with two or more
maturities, and (iii) under the terms of the debt obligations on which the
entity is the obligor, payments on such obligations bear a relationship to
payment on the obligations held by the entity.
"TAXABLE MORTGAGE POOL RULES" means the Code sections governing Taxable
Mortgage Pools, and the regulations that were issued by the Treasury thereunder.
"TAX ADMINISTRATOR" means the entity responsible for computing the amount
of original issue discount to be reported to the holders of Regular Certificates
each taxable year, which, unless otherwise provided in the related Pooling and
Servicing Agreement, will be Oakwood or an Affiliate thereof.
"TEASER CERTIFICATE" means a Regular Certificate that bears interest under
terms that provide for a teaser rate period, interest holiday, or other period
during which the rate of interest payable on such Certificate is lower than the
rate payable during the remainder of the life of the Certificate.
"THRIFT INSTITUTION" means a thrift institution taxed as a "mutual savings
bank" or a "domestic building and loan association."
"TITLE I" means Title I of the National Housing Act, as amended.
"TITLE STATE" means a state in which a lien on a Manufactured Home is
"perfected" under applicable motor vehicle titling statues, either by notation
of the secured party's lien on the related certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority to re-register the Manufactured Home.
"TITLE V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
"TMP" means the holder of a residual interest in a REMIC that is designated
as the tax matters person of such REMIC.
"TREASURY" means the United States Treasury Department.
"TRUST" means a trust that issues a Series of Certificates.
"TRUSTEE" means the Trustee for a Series of Certificates specified in the
related Prospectus Supplement.
"TRUSTEE MORTGAGE LOAN FILE" means, as to any Mortgage Loan, a file which
is required to contain all of the Mortgage Loan Documents for such Mortgage
Loan.
"TRUST ESTATE" means, with respect to each Series of Certificates, the
corpus of the trust created by the related Agreement, to the extent described in
such Agreement, consisting of, among other things, Contracts and/or Mortgage
Loans, such
103
assets as shall from time to time be identified as deposited in the related
Distribution Account, property which secured a Contract or Mortgage Loan but
which has been acquired by the related Trust through repossession or foreclosure
or otherwise, any related insurance policy, any related Reserve Fund and any
related alternate credit enhancement, if any.
"UBTI" means "unrelated business taxable income" as defined in the Code.
"UCC" means the Uniform Commercial Code.
"UCC STATE" means a state in which a lien on a Manufactured Home is
"perfected" pursuant to the provisions of the applicable UCC, by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices.
"UNDERWRITER" means any firm that underwrites the purchase of the
Certificates of a Series.
"UNOFFICIAL CONTINGENT PAYMENT REGULATIONS" means the proposed Treasury
regulations applicable to instruments with contingent payments that were
unofficially released by the Service on January 19, 1993.
"UNPAID PRINCIPAL BALANCE" means the unpaid principal balance of a
particular Contract or Mortgage Loan.
"VA" means the United States Department of Veterans Affairs.
"VA CONTRACT" or "VA MORTGAGE LOAN" means a Contract or Mortgage Loan that
is partially guaranteed by the VA.
"VARIABLE RATE CERTIFICATE" means a Regular Certificate that bears interest
at a variable rate.
"VOTING RIGHTS" means, with respect to a Certificate, the portion of the
voting rights of all of the Certificates of the related Series which is
allocated to any such Certificate. Unless otherwise provided in the related
Agreement, (1) if any Class of Certificates does not have a Certificate
Principal Balance or has an initial Certificate Principal Balance that is less
than or equal to 1% of the aggregate Certificate Principal Balance of all the
Certificates of its Series, then 1% of the Voting Rights for such Series shall
be allocated to each such Class, and the balance of the Voting Rights for such
Series shall be allocated among the remaining Classes of Certificates of such
Series in proportion to their respective Certificate Principal Balances
following the most recent Distribution Date, and (b) if no Class of Certificates
of such Series has an initial Certificate Principal Balance less than 1% of the
aggregate Certificate Principal Balance of all Certificates of such Series, then
all of the Voting Rights for such Series shall be allocated among all the
Classes of Certificates of such Series in proportion to their respective
Certificate Principal Balances following the most recent Distribution Date.
Voting Rights allocated to each Class of Certificates shall be allocated among
the Certificates of such Class in proportion to the respective Percentage
Interests of the Holders thereof.
"VRDI" means a "variable rate debt instrument" as defined in section
1.1275-5 of the OID Regulations.
"VRDI CERTIFICATE" means a Variable Rate Certificate that qualifies as a
VRDI under the OID Regulations.
"WAM" means, with respect to a Regular Certificate, the sum of the amounts
obtained by multiplying the amount of each Deemed Principal Payment on the
Certificate by a fraction, the numerator of which is the number of complete
years from the Certificate's issue date until the payment is made, and the
denominator of which is the Certificate's stated redemption price at maturity.
"WEIGHTED AVERAGE CERTIFICATE" means a Regular Certificate that provides
for interest based on a weighted average of the interest rates on some or all of
the Assets held by the related REMIC.
"WEIGHTED AVERAGE NET ASSET RATE" means, for any Distribution Date, a rate
equal to (i) the weighted average of the Asset Rates applicable to the scheduled
Monthly Payments that were due in the related Collection Period on outstanding
Assets less (ii) the Servicing Fee Rate.
"WRITEDOWN AMOUNT" means with respect to each Distribution Date, the
amount, if any, by which (i) the aggregate Certificate Principal Balance of all
the Certificates, after all distributions have been made on the Certificates on
such Distribution Date, exceeds (ii) the Pool Scheduled Principal Balance of the
Assets for the next Distribution Date.
104
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offering of $500,000,000 of the mortgage pass-through certificates being
registered under this Registration Statement, other than underwriting discounts
and commission:
SEC Registration........................................................................ $ 151,515
Printing and Engraving.................................................................. 120,000
Legal Fees and Expenses................................................................. 200,000
Accounting Fees and Expenses............................................................ 125,000
Trustee Fees and Expenses............................................................... 30,000
Rating Agency Fees...................................................................... 350,000
Miscellaneous........................................................................... 23,485
Total.............................................................................. $1,000,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 3, Part 3 of the North Carolina Limited Liability Company Act
provides in substance that North Carolina limited liability companies shall have
the power, under specified circumstances, to indemnify their managers and
members in connection with judgements, settlements, penalties, fines or expenses
incurred in a proceeding to which such person is a party because of their
activities as a manager or member. The North Carolina Limited Liability Company
Act also provides that North Carolina limited liability companies may purchase
insurance on behalf of any member, manager, employee or agent. Section VIII of
the Registrant's Operating Agreement incorporates the indemnification provisions
of Article 3 of the North Carolina Limited Liability Company Act to the fullest
extent provided for therein.
Article 8 of the North Carolina Business Corporation Act provides in
substance that North Carolina corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with pending or threatened actions, suits or proceedings (whether
civil, criminal, administrative, or investigative and whether formal or
informal) against liability and expenses incurred in any proceeding arising out
of such directors', officers', employees' or agents' status as such or their
activities in any one of the foregoing capacities. The North Carolina Business
Corporation Act also provides that North Carolina corporations may purchase
insurance on behalf of any such director, officer, employee or agent. Article VI
of Deutsche Financial Capital I Corp.'s (the Registrant's managing member)
Articles of Incorporation incorporates the indemnification provisions of Article
8 of the North Carolina Business Corporation Act to the fullest extent provided
for therein.
Oakwood Homes Corporation and Deutsche Financial Services Corporation each
carry insurance policies providing directors' and officers' liability insurance
for any liability its directors or officers or the directors or officers of any
of its subsidiaries, including the Registrant, may incur in their capacities as
such.
Under certain sales agreements entered into by the Registrant (as
purchaser) with DFC as seller of collateral, DFC is obligated to indemnify the
Registrant against certain expenses and liabilities.
Reference is made to the form of Underwriting Agreement filed as an exhibit
hereto for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant and the Manager against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS.
1.1 Underwriting Agreement Standard Provisions (March 1997), together with Form of Underwriting Agreement*
3.1 Articles of Organization of Registrant*
3.2 Operating Agreement of Registrant*
4.1 Form of Pooling and Servicing Agreement*
4.2 Standard Terms to Pooling and Servicing Agreement (March 1997 Edition)*
4.3 Form of Limited Guarantee*
5.1 Opinion of Hunton & Williams*
8.1 Tax Opinion re: Adequacy of Prospectus Disclosure*
8.2 Tax Opinion re: REMIC Certificates*
II-1
8.3 Tax Opinion re: Non-REMIC Certificates*
23.1 Consent of Hunton & Williams (included in Exhibits 5.1, 8.1, 8.2 and 8.3)
23.2 Consent of Price Waterhouse LLP*
23.3 Consent of Allen, Pritchett & Bassett, CPAs*
24.1 Power of Attorney (included on the signature page of this Registration Statement)
99.1 Form of Prospectus Supplement for Transactions Involving Senior and Subordinated Manufactured Housing
Contract Pass-Through Certificates
99.2 Form of Sales Agreement between the Registrant, as Purchaser, and Deutsche Financial Capital Limited
Liability Company, as Seller*
99.3 Preliminary Form of Prospectus Supplement for Transaction 1997-1*
* previously filed
ITEM 17. UNDERTAKINGS.
(a) 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 in the information set forth
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 of such information in the Registration
Statement; provided, however, that paragraphs (a)(1) (i) and (a)(1) (ii)
do not apply if the information required to be included in the 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 included by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
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 Amendment No. 5 to
the Registrant's Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Greensboro, County of
Guilford, State of North Carolina, on June 18, 1997.
DEUTSCHE FINANCIAL CAPITAL
SECURITIZATION LLC
By: DEUTSCHE FINANCIAL CAPITAL I
CORP.
as Manager
By: /s/ RICHARD H. SCHUMACHER
RICHARD H. SCHUMACHER
PRESIDENT
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Richard
H. Schumacher, Douglas R. Muir, and Myles E. Standish his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Amendment No. 5 to the Registrant's Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registrant's Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ RICHARD H. SCHUMACHER Director and President June 18, 1997
RICHARD H. SCHUMACHER
/s/ DOUGLAS R. MUIR Director, Treasurer, Assistant Secretary and Vice June 18, 1997
DOUGLAS R. MUIR President (Principal Financial Officer)
Director June 18, 1997
PAUL STEPHANZ
II-3
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
1.1 Underwriting Agreement Standard Provisions (March 1997), together with
Form of Underwriting Agreement*
3.1 Articles of Organization of Registrant*
3.2 Operating Agreement of Registrant*
4.1 Form of Pooling and Servicing Agreement*
4.2 Standard Terms to Pooling and Servicing Agreement (March 1997 Edition)*
4.3 Form of Limited Guarantee*
5.1 Opinion of Hunton & Williams*
8.1 Tax Opinion re: Adequacy of Prospectus Disclosure*
8.2 Tax Opinion re: REMIC Certificates*
8.3 Tax Opinion re: Non-REMIC Certificates*
23.1 Consent of Hunton & Williams (included in Exhibits 5.1, 8.1, 8.2 and
8.3)
23.2 Consent of Price Waterhouse LLP*
23.3 Consent of Allen, Pritchett & Bassett, CPAs*
24.1 Power of Attorney (included on the signature page of this Registration
Statement)
99.1 Form of Prospectus Supplement for Transactions Involving Senior and
Subordinated Manufactured Housing Contract Pass-Through Certificates
99.2 Form of Sales Agreement between the Registrant, as Purchaser, and
Deutsche Financial Capital Limited Liability Company, as Seller*
99.3 Preliminary Form of Prospectus Supplement for Transaction 1997-1*
* previously filed