UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-21341
OCWEN FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0039856
- ------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THE FORUM, SUITE 1000
---------------------
1675 PALM BEACH LAKES BOULEVARD, WEST PALM BEACH, FLORIDA 33401
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Number of shares of Common Stock, $.01 par value, outstanding as of May 12,
1998: 60,708,739
OCWEN FINANCIAL CORPORATION
FORM 10-Q
I N D E X
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Interim Consolidated Financial Statements (Unaudited).............. 3
Consolidated Statements of Financial Condition
at March 31, 1998 and December 31, 1997............................ 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997............................... 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 1998 and the year
ended December 31, 1997............................................ 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997............................... 6
Notes to Consolidated Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 44
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 46
Signature................................................................... 48
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (UNAUDITED)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, December 31,
1998 1997
------------ ------------
Assets
Cash and amounts due from depository institutions ...................... $ 17,830 $ 12,243
Interest earning deposits .............................................. 31,269 140,001
Federal funds sold and repurchase agreements ........................... 104,000 --
Securities available for sale, at market value ......................... 650,200 476,796
Loans available for sale, at lower of cost or market ................... 493,106 177,041
Investment securities, net ............................................. 61,314 13,295
Loan portfolio, net .................................................... 280,518 266,299
Discount loan portfolio, net ........................................... 1,171,623 1,434,176
Investments in low-income housing tax credit interests ................. 118,964 128,614
Investment in joint ventures ........................................... 1,056 1,056
Real estate owned, net ................................................. 172,693 167,265
Investment in real estate .............................................. 60,946 65,972
Premises and equipment, net ............................................ 22,568 21,542
Income taxes receivable ................................................ 19,422 --
Deferred tax asset ..................................................... 48,261 45,148
Excess of purchase price over net assets acquired ...................... 23,403 15,560
Principal, interest and dividends receivable ........................... 23,076 17,284
Escrow advances on loans ............................................... 48,214 47,888
Other assets ........................................................... 72,679 38,985
----------- -----------
$ 3,421,142 $ 3,069,165
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ............................................................ $ 1,933,594 $ 1,982,822
Securities sold under agreements to repurchase ...................... 168,419 108,250
Obligations outstanding under lines of credit ....................... 441,671 118,304
Notes, debentures and other interest bearing obligations ............ 226,812 226,975
Accrued interest payable ............................................ 42,258 32,238
Income taxes payable ................................................ -- 3,132
Accrued expenses, payables and other liabilities .................... 34,695 51,709
----------- -----------
Total liabilities ................................................. 2,847,449 2,523,430
----------- -----------
Company-obligated, mandatorily redeemable securities of
subsidiary trust holding solely junior subordinated
debentures of the Company ........................................ 125,000 125,000
Minority interest ...................................................... 1,381 1,043
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.01 par value; 20,000,000 shares authorized;
0 shares issued and outstanding ................................... -- --
Common stock, $.01 par value; 200,000,000 shares authorized;
60,708,735 and 60,565,835 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively ................ 607 606
Additional paid-in capital .......................................... 164,865 164,751
Retained earnings ................................................... 281,695 259,349
Unrealized gain (loss) on securities available for sale, net of taxes 145 (5,014)
----------- -----------
Total stockholders' equity ........................................ 447,312 419,692
----------- -----------
$ 3,421,142 $ 3,069,165
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
For the three months ended March 31, 1998 1997
- ----------------------------------------------------------- ------------ ------------
Interest income:
Federal funds sold and repurchase agreements ........... $ 1,032 $ 1,658
Securities available for sale .......................... 3,962 8,173
Securities held for trading ............................ -- 248
Loans available for sale ............................... 9,503 2,851
Loans .................................................. 6,262 10,692
Discount loans ......................................... 36,797 30,224
Investment securities and other ........................ 485 681
---------- ----------
58,041 54,527
---------- ----------
Interest expense:
Deposits ............................................... 27,845 29,894
Securities sold under agreements to repurchase ......... 1,639 272
Advances from the Federal Home Loan Bank ............... 100 283
Obligations outstanding under lines of credit .......... 4,520 --
Notes, debentures and other interest bearing obligations 6,752 6,715
---------- ----------
40,856 37,164
---------- ----------
Net interest income before provision for loan losses ... 17,185 17,363
Provision for loan losses ................................ 2,254 9,742
---------- ----------
Net interest income after provision for loan losses .... 14,931 7,621
---------- ----------
Non-interest income:
Servicing fees and other charges ....................... 9,772 5,236
Gains on sales of interest earning assets, net ......... 28,737 16,778
Gain (loss) on real estate owned, net .................. 1,026 (794)
Other income ........................................... 5,871 131
---------- ----------
45,406 21,351
---------- ----------
Non-interest expense:
Compensation and employee benefits ..................... 21,482 14,923
Occupancy and equipment ................................ 6,457 2,829
Net operating loss on investments in real estate and
certain low-income housing tax credit interests ..... 1,246 1,093
Other operating expenses ............................... 4,868 3,852
---------- ----------
34,053 22,697
---------- ----------
Distributions on Company-obligated, mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the Company ................ 3,398 --
Equity in earnings of investment in joint venture ........ -- 14,372
---------- ----------
Income before income taxes ............................. 22,886 20,647
Income tax expense ....................................... (573) (3,606)
Minority interest in net loss of consolidated subsidiary . 33 --
---------- ----------
Net income ............................................. $ 22,346 $ 17,041
========== ==========
Earnings per share:
Basic .................................................. $ 0.37 $ 0.32
========== ==========
Diluted ................................................ $ 0.36 $ 0.31
========== ==========
Weighted average common shares outstanding:
Basic .................................................. 60,708,735 53,599,006
========== ==========
Diluted ................................................ 61,542,122 54,146,732
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1997
Notes
Unrealized receivable
gain (loss) on exercise
Common Stock Additional on of common
----------------------- paid-in Retained securities, stock
Shares Amount capital earnings net of taxes options Total
---------- ---------- ---------- ---------- ------------ ----------- -----------
Balances at December 31, 1996 ...... 53,488,340 $ 535 $ 22,990 $ 180,417 $ 3,486 $ (3,832) $ 203,596
Net income ......................... -- -- -- 78,932 -- -- 78,932
Repurchase of common stock options . -- -- (3,208) -- -- -- (3,208)
Exercise of common stock options ... 171,297 2 3,035 -- -- -- 3,037
Issuance of common stock ........... 6,906,198 69 141,934 -- -- -- 142,003
Repayment of notes receivable on
exercise of common stock options,
net of advances .................. -- -- -- -- -- 3,832 3,832
Change in unrealized gain (loss) on
securities net of taxes ........... -- -- -- -- (8,500) -- (8,500)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 ...... 60,565,835 606 164,751 259,349 (5,014) -- 419,692
Net income ......................... -- -- -- 22,346 -- -- 22,346
Repurchase of common stock options . -- -- (14,107) -- -- -- (14,107)
Exercise of common stock options ... 142,900 1 14,221 -- -- -- 14,222
Change in unrealized gain (loss) on
securities, net of taxes ......... -- -- -- -- 5,159 -- 5,159
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at March 31, 1998 ......... 60,708,735 $ 607 $ 164,865 $ 281,695 $ 145 $ -- $ 447,312
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 1998 1997
- ---------------------------------------------------------------------------- --------- ---------
Cash flows from operating activities:
Net income ............................................................. $ 22,346 $ 17,041
Adjustments to reconcile net income to net cash provided
by operating activities:
Net cash provided from trading activities .............................. 24,629 85,167
Proceeds from sales of loans available for sale ........................ 166,577 88,184
Purchases of loans available for sale .................................. (321,716) (37,667)
Origination of loans available for sale ................................ (182,522) (28,164)
Principal payments received on loans available for sale ................ 19,868 3,010
Premium amortization (discount accretion), net ......................... 40,524 11,029
Depreciation and amortization .......................................... 7,940 4,579
Provision for loan losses .............................................. 2,254 9,742
Gains on sales of interest earning assets, net ......................... (28,737) (16,778)
Provision for real estate owned ........................................ 4,234 2,337
Gain on sale of real estate owned, net ................................. (8,763) (3,898)
Gain on sale of interest in tax credit partnership interests ........... (4,746) --
(Increase) decrease in principal, interest and dividends receivable .... (5,792) 1,080
(Increase) decrease in income taxes receivable ......................... (22,554) 918
(Increase) decrease in deferred tax asset .............................. (1,558) 2,181
Increase in escrow advances ............................................ (326) (6,419)
(Increase) decrease in other assets .................................... (25,582) 1,254
Decrease in accrued expenses, interest payable and other liabilities ... (6,994) (9,400)
--------- ---------
Net cash (used) provided by operating activities .......................... (320,918) 124,196
========= =========
Cash flows from investing activities:
Proceeds from sales of securities available for sale ................... 3,658 14,631
Purchases of securities available for sale ............................. (242,565) (21,679)
Maturities of and principal payments received on securities
available for sale ................................................... 31,738 3,831
Purchase of securities held for investment ............................. (45,415) (2,306)
Purchase of low income housing tax credit interests .................... (8,226) (9,966)
Proceeds from sales of discount loans .................................. 240,688 86,061
Proceeds from sales of loans held for investment ....................... -- 1,192
Purchase and originations of loans held for investment,
net of undisbursed loan funds ........................................ (43,713) (31,104)
Purchase of discount loans ............................................. (64,774) (401,390)
Decrease in real estate held for investment ............................ 5,026 --
Decrease in investment in joint ventures ............................... -- 34,542
Principal payments received on loans held for investment ............... 29,995 19,303
Principal payments received on discount loans .......................... 49,267 48,117
Proceeds from sales of real estate owned ............................... 50,660 48,768
Purchase of real estate owned in connection with discount loan purchases (2,915) --
Acquisition of DTS Communications, Inc. ................................ (8,064) --
Additions to premises and equipment .................................... (7,847) --
Other, net ............................................................. -- (2,826)
--------- ---------
Net cash used by investing activities ..................................... (12,487) (212,826)
========= =========
(Continued on next page)
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
For the three months ended March 31, 1998 1997
- ------------------------------------------------------------------------- ---------- ----------
Cash flows from financing activities:
(Decrease) increase in deposits ...................................... $ (49,228) $ 187,180
Increase (decrease) in securities sold under agreements to repurchase 60,169 (35,322)
Repayment of short-term notes........................................ (163) --
Proceeds from issuance of obligations under lines of credit,
net of repayments ................................................. 323,367 --
Loans made to executive officers, net of repayments ................. -- 1,505
Exercise of common stock options .................................... 14,222 1,722
Repurchase of common stock options .................................. (14,107) (1,870)
Other, net .......................................................... -- (36)
--------- ---------
Net cash provided by financing activities .............................. 334,260 153,179
--------- ---------
Net increase in cash and cash equivalents .............................. 855 64,549
Cash and cash equivalents at beginning of period ....................... 152,244 52,219
--------- ---------
Cash and cash equivalents at end of period ............................. $ 153,099 $ 116,768
========= =========
Reconciliation of cash and cash equivalents at end of period:
Cash and amounts due from depository institutions ................... $ 17,830 $ 8,966
Interest earning deposits ........................................... 31,269 8,802
Federal funds sold and repurchase agreements ........................ 104,000 99,000
--------- ---------
$ 153,099 $ 116,768
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 30,836 $ 36,206
========= =========
Income taxes ...................................................... $ 21,653 $ 509
========= =========
Supplemental schedule of non-cash investing and financing activities:
Real estate owned acquired through foreclosure .................... $ 43,704 $ 42,095
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
7
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in conformity with the instructions to Form 10-Q and Article 10, Rule
10-01 of Regulation S-X for interim financial statements. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. The
consolidated financial statements include the accounts of Ocwen Financial
Corporation ("Ocwen" or the "Company") and its subsidiaries. Ocwen owns directly
and indirectly all of the outstanding common and preferred stock of its primary
subsidiaries, Ocwen Federal Bank FSB (the "Bank") and Investors Mortgage
Insurance Holding Company ("IMI"). Ocwen also owns 97.8% of Ocwen Financial
Services ("OFS"), with the remaining 2.2% owned by Admiral Home Loan ("Admiral")
and reported in the consolidated financial statements as a minority interest.
All significant intercompany transactions and balances have been eliminated in
consolidation.
In the opinion of management, the accompanying financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the Company's financial condition at March 31, 1998 and
December 31, 1997, the results of its operations for the three months ended
March 31, 1998 and 1997, its cash flows for the three months ended March 31,
1998 and 1997, and its changes in stockholders' equity for the year ended
December 31, 1997 and the three months ended March 31, 1998. The results of
operations and other data for the three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for any other
interim periods or the entire year ending December 31, 1998. The unaudited
consolidated financial statements presented herein should be read in conjunction
with the audited consolidated financial statements and related notes thereto
included in the Company's Form 10-K for the year ended December 31, 1997.
Certain reclassifications have been made to the prior period's consolidated
financial statements to conform to the March 31, 1998 presentation.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the statements of financial condition and
revenues and expenses for the periods covered. Actual results could differ from
those estimates and assumptions.
NOTE 2 ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 simplifies the
standards found in APB No. 15 for computing earnings per share ("EPS") and makes
them comparable to international standards. Under SFAS No. 128, the Company is
required to present both basic and diluted EPS on the face of its statements of
operations. Basic EPS, which replaces primary EPS required by APB No. 15 for
entities with complex capital structures, excludes common stock equivalents and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
gives effect to all dilutive potential common shares that were outstanding
during the period. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997 with earlier
application not permitted. The Company adopted SFAS No. 128 effective December
31, 1997. All prior period EPS data has been restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive income, either in
a separate statement for comprehensive income, or as part of a combined
statement of income and comprehensive income in a full-set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. SFAS No. 130 requires that comprehensive income be presented
beginning with net income, adding the elements of comprehensive income not
included in the determination of net income, to arrive at comprehensive income.
SFAS No. 130 also requires that an enterprise display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS No. 130 is effective for the Company's fiscal year beginning January 1,
1998. SFAS No. 130 requires the presentation of
8
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
information already contained in the Company's financial statements and
therefore did not have an impact on the Company's financial position or results
of operation upon adoption.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting of information about operating segments by public
business enterprises in their annual and interim financial reports issued to
shareholders. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information, including profit or loss, certain
specific revenue and expense items, and segment assets, about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997. SFAS No. 131
is a disclosure requirement and therefore did not have an effect on the
Company's financial position or results of operations upon adoption.
NOTE 3 ACQUISITION AND DISPOSITION TRANSACTIONS
On November 6, 1997, the Company acquired AMOS, Inc., a Connecticut
based company engaged primarily in the development of mortgage loan servicing
software. AMOS' products are Microsoft(R) Windows(R) based, client/server
architecture and feature real-time processing, year 2000 compliance, a scaleable
database platform and strong workflow capabilities. The aggregate purchase price
was $9.7 million, including $4.9 million which is contingent on AMOS, Inc.
meeting certain software development performance criteria. The excess of
purchase price over net assets acquired related to this transaction, which
amounted to $4,807, net of accumulated amortization of $131 at March 31, 1998,
is amortized on a straight-line basis over a period of 15 years.
On January 20, 1998, the Company acquired DTS Communications, Inc.
("DTS"), a real estate technology company located in San Diego, California, for
a purchase price of $13.0 million in cash, common stock of the Company and
repayment of certain indebtedness. DTS has developed technology tools to
automate real estate transactions over the Internet. DTS has been recognized by
Microsoft Corporation for the Microsoft(R) component-based architecture to
facilitate electronic data interchange. The common stock of the Company issued
in the acquisition was acquired from affiliates of the Company at the same price
per share as was used to calculate the number of shares issued in the
acquisition. The excess of purchase price over net assets acquired related to
this transaction, which amounted to $7,959, net of accumulated amortization of
$105 at March 31, 1998, is amortized on a straight-line basis over a period of
15 years.
The Company's investment in joint venture includes an investment in
BCFL, L.L.C. ("BCFL"), a limited liability corporation formed in January 1997
between the Company and BlackRock Capital Finance L.P. ("BlackRock"). The
Company owns a 10% interest in BCFL which was formed to acquire multifamily
loans. At March 31, 1998, the Company's 10% investment, which is accounted for
under the cost method, amounted to $1,056.
On December 12, 1997, BCBF, L.L.C., (the "LLC"), a limited liability
company formed in March 1996 between the Company and BlackRock distributed all
of its assets to the Company and its other 50% investor, BlackRock.
Simultaneously, the Company acquired BlackRock's portion of the distributed
assets.
The Company's equity in earnings of the LLC of $0 and $14,372 for the
first quarter of 1998 and 1997, respectively, includes 50% of the net income of
the LLC before deduction of the Company's 50% share of loan servicing fees which
are paid 100% to the Bank. Equity in earnings for the three months ended March
31, 1997 includes the recapture of $2,641 of valuation allowances established in
1996 by the Company on its equity investment in the joint venture as a result of
the resolution and securitization of loans during the first quarter of 1997. The
Bank has recognized 50% of the loan servicing fees not eliminated in
consolidation in servicing fees and other charges.
9
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
Set forth below is the statement of operations of the LLC for the three
months ended March 31, 1997.
BCBF, L.L.C.
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997
Interest income .................................................... $ 3,485
Interest expense ................................................... --
--------
Net interest income ............................................. 3,485
--------
Non-interest income:
Gain on sale of loans held for sale ............................. 18,412
Gain on real estate owned, net .................................. 1,543
Loan fees ....................................................... 22
--------
19,977
--------
Operating expenses:
Loan servicing fees ............................................. 676
Other loan expenses ............................................. --
--------
676
--------
Net income ......................................................... $ 22,786
========
In March, 1997, as part of a larger transaction involving the Company
and an affiliate of BlackRock, the LLC securitized 1,196 loans with an unpaid
principal balance of $51,714 and past due interest of $14,209, and a net book
value of $40,454. Proceeds from sales of such securities by the LLC amounted to
$58,866.
NOTE 4 CAPITAL SECURITIES
In August 1997, Ocwen Capital Trust I, a wholly-owned subsidiary of
Ocwen, issued $125.0 million of 10 7/8% Capital Securities (the "Capital
Securities"). Proceeds from issuance of the Capital Securities were invested in
10 7/8% Junior Subordinated Debentures issued by Ocwen. The Junior Subordinated
Debentures, which represent the sole assets of Ocwen Capital Trust I, will
mature on August 1, 2027.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. Payment of distributions out of moneys held by
Ocwen Capital Trust I, and payments on liquidation of Ocwen Capital Trust I or
the redemption of Capital Securities, are guaranteed by the Company to the
extent Ocwen Capital Trust I has funds available. If the Company does not make
principal or interest payments on the Junior Subordinated Debentures, Ocwen
Capital Trust I will not have sufficient funds to make distributions on the
Capital Securities, in which event the guarantee shall not apply to such
distributions until Ocwen Capital Trust I has sufficient funds available.
Therefore, the Company has the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semi-annual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, the Company may elect to begin a new extension period. Accordingly, there
could be multiple extension periods of varying lengths throughout the term of
the Junior Subordinated Debentures. If interest payments on the Junior
Subordinated Debentures are deferred, distributions on the Capital Securities
will also be deferred and the Company may not, and may not permit any subsidiary
of the Company to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire, or make a liquidation payment with respect to, the
Company's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities that rank
PARI PASSU with or junior to the Junior Subordinated Debentures. During an
extension period, interest on the Junior Subordinated Debentures will continue
to accrue at the rate of 10 7/8% per annum, compounded semi-annually.
10
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company, subject to the receipt of any necessary prior
regulatory approval, (i) in whole or in part on or after August 1, 2007 at a
redemption price equal to 105.438% of the principal amount thereof on August 1,
2007 declining ratably on each August 1 thereafter to 100% on or after August 1,
2017, plus accrued interest thereon, or (ii) at any time, in whole (but not in
part), upon the occurrence and continuation of a special event (defined as a tax
event, regulatory capital event or an investment company event) at a redemption
price equal to the greater of (a) 100% of the principal amount thereof or (b)
the sum of the present values of the principal amount and premium payable with
respect to an optional redemption of such Junior Subordinated Debentures on
August 1, 2007, together with scheduled payments of interest from the prepayment
date to August 1, 2007, discounted to the prepayment date on a semi-annual basis
at the adjusted Treasury rate plus accrued interest thereon to the date of
prepayment. The Capital Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at maturity or
their earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, Ocwen Capital Trust I is treated as a
subsidiary of the Company and, accordingly, the accounts of Ocwen Capital Trust
I are included in the consolidated financial statements of the Company.
Intercompany transactions between Ocwen Capital Trust I and the Company,
including the Junior Subordinated Debentures, are eliminated in the consolidated
financial statements of the Company. The Capital Securities are presented as a
separate caption between liabilities and stockholders' equity in the
consolidated statement of financial condition of the Company as
"Company-obligated, mandatorily redeemable securities of subsidiary trust
holding solely junior subordinated debentures of the Company". Distributions
payable on the Capital Securities are recorded as a separate caption immediately
following non-interest expense in the consolidated statement of operations of
the Company. The Company intends to continue this method of accounting going
forward.
NOTE 5 COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances,
excluding those resulting from investments by and distributions to owners. SFAS
No. 130 requires that comprehensive income be presented beginning with net
income, adding the elements of comprehensive income not included in the
determination of net income, to arrive at comprehensive income. Comprehensive
income for the three months ended March 31, 1998 and 1997 amounted to $27,505
and $20,203, respectively.
11
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
NOTE 6 INTEREST RATE RISK MANAGEMENT INSTRUMENTS
In managing its interest rate risk, the Company on occasion enters into
swaps. Under swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The terms
of the swaps provide for the Company to receive a floating rate of interest
equal to the London Interbank Offered Rate ("LIBOR") and to pay fixed interest
rates. The notional amount of the outstanding swap is amortized (i.e., reduced)
monthly based upon estimated prepayment rates of the mortgages underlying the
securities being hedged. The terms of the outstanding interest rate swaps at
March 31, 1998 and December 31, 1997 follow:
Notional LIBOR Fixed Floating Rate at
Maturity Amount Index Rate End of Period Fair Value
---------- ---------- -------- ------- ----------------- ------------
MARCH 31,1998........ 1998 $ 36,860 1-Month 6.18% 6.69% $ (843)
DECEMBER 31, 1997.... 1998 $ 36,860 1-Month 6.18% 5.69% $ (94)
The 1-month LIBOR was 5.69% and 5.72% on March 31, 1998 and December
31, 1997, respectively.
On February 25, 1998, the Company entered into a foreign currency swap
with a AAA-rated counterparty to hedge certain cash flows in connection with its
investment in 35% of the outstanding common stock of Kensington Mortgage
Company, a leading originator of nonconforming residential mortgages in the U.K.
Under the terms of the agreement, the Company will swap (pound)27,500 for
$43,546 in five years based on the exchange rate on the date the contract became
effective.
The Company also enters into short sales of Eurodollar and U.S.
Treasury interest rate futures contracts as part of its overall interest rate
risk management activity. Interest rate futures contracts are commitments to
either purchase or sell designated financial instruments at a future date for a
specified price and may be settled in cash or through delivery. U.S. Treasury
futures have been sold by the Company to hedge the risk of a reduction in the
market value of fixed-rate mortgage loans and certain fixed-rate mortgage-backed
and related securities available for sale in a rising interest rate environment.
Terms and other information on interest rate futures contracts sold
short were as follows at the dates indicated:
Maturity Notional Principal Fair Value
--------- ------------------- ------------
MARCH 31, 1998:
U.S. Treasury futures... 1998 $ 326,000 $ (508)
DECEMBER 31, 1997:
U.S. Treasury futures... 1998 $ 194,500 $ 1,996
Because interest rate futures contracts are exchange traded, holders of
these instruments look to the exchange for performance under these contracts and
not the entity holding the offsetting futures contract, thereby minimizing the
risk of nonperformance under these contracts. The Company is exposed to credit
loss in the event of nonperformance by the counterparty to the swap and controls
this risk through credit monitoring procedures. The notional principal amount
does not represent the Company's exposure to credit loss.
NOTE 7 STOCK SPLIT
On October 29, 1997, the Company's Board of Directors approved a
2-for-1 stock split of its issued and outstanding common stock, par value $.01
per share. The stock split was effected through the distribution of authorized
but unissued shares of its common stock on November 20, 1997, to holders of
record of its common stock at the close
12
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
of business on November 12, 1997. All references in the interim consolidated
financial statements to the number of shares and per share amounts have been
adjusted retroactively for the stock split.
NOTE 8 REGULATORY REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to Office
of Thrift Supervision ("OTS") supervision. The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items. An institution
that fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and certain
restrictions on its operations. At March 31, 1998, the minimum regulatory
capital requirements were:
o Tangible and core capital of 1.5 percent and 3.0 percent of total adjusted
assets, respectively, consisting principally of stockholders' equity, but
excluding most intangible assets, such as goodwill and any net unrealized
holding gains or losses on debt securities available for sale.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
general valuation allowances on loans receivable, equal to 8.0 percent of
the value of risk-weighted assets.
At March 31, 1998, the Bank was "well-capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Bank must maintain minimum core capital,
Tier 1 risk-based capital and total risk-based capital ratios as set forth in
the table below and must not be subject to any written agreement, order or
directive issued by the OTS to meet and maintain a specific capital level for
any capital measure. The Bank's capital amounts and classification are subject
to review by federal regulators about components, risk-weightings and other
factors. There are no conditions or events since March 31, 1998 that management
believes have changed the institution's category.
13
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
The following tables summarize the Bank's actual and required
regulatory capital at March 31, 1998:
Minimum To Be Well
for Capital Capitalized for Agreed Upon
Adequacy Purposes Prompt Corrective Capital
Actual --------------------- Action Provisions Requirements
--------------------- --------------------- ------------
Ratio Amount Ratio Amount Ratio Amount Ratio
------- ------------- ------- ------------- ------- ------------- ------------
Stockholders' equity, and ratio to
total assets...................... 10.16% $ 253,746
Net unrealized loss on certain
available for sale securities .... 3,544
Excess mortgage servicing rights
and deferred tax assets .......... (1,217)
-----------
Tangible capital, and ratio to
adjusted total assets............. 10.24% $ 256,073 1.50% $ 37,501
=========== ===========
Tier 1 (core) capital, and ratio to
adjusted total assets............. 10.24% $ 256,073 3.00% $ 75,003 5.00% $ 125,005 9.00%
=========== =========== ===========
Tier 1 capital, and ratio to
risk-weighted assets.............. 12.82% $ 256,073 6.00% $ 119,876
=========== ===========
Allowance for loan and lease losses. 19,249
Subordinated debentures............. 100,000
-----------
Tier 2 capital...................... 119,249
Low-level recourse deduction........ (15,917)
-----------
Total risk-based capital, and ratio.
to risk-weighted assets........... 17.99% $ 359,405 8.00% $ 159,835 10.00% $ 199,794 13.00%
=========== =========== ===========
Total regulatory assets............. $ 2,497,768
===========
Adjusted total assets............... $ 2,500,095
===========
Risk-weighted assets................ $ 1,997,940
===========
The OTS has promulgated a regulation governing capital distributions.
The Bank is considered to be a Tier 1 association under this regulation because
it met or exceeded its fully phased-in capital requirements at March 31, 1998. A
Tier 1 association that before and after a proposed capital distribution meets
or exceeds its fully phased-in capital requirements may make capital
distributions during any calendar year equal to the greater of (i) 100% of net
income for the calendar year to date plus 50% of its "surplus capital ratio" at
the beginning of the year or (ii) 75% of its net income over the most recent
four-quarter period. In order to make these capital distributions, the Bank must
submit written notice to the OTS 30 days in advance of making the distribution.
Notwithstanding the foregoing, however, the Bank's ability to make capital
distributions as a Tier 1 institution is limited by agreements between it and
the OTS to maintain specified capital levels and to dividend to Ocwen
subordinate and residual securities resulting from the Bank's securitization
activities.
In addition to these OTS regulations governing capital distributions,
the indenture governing the $100,000 of 12% subordinated debentures (the
"Debentures") due 2005 and issued by the Bank on June 12, 1995 limits the
declaration or payment of dividends and the purchase or redemption of common or
preferred stock in the aggregate to the sum of 50% of consolidated net income
and 100% of all capital contributions and proceeds from the issuance or sale
(other than to a subsidiary) of common stock, since the date the Debentures were
issued.
In connection with an examination of the Bank in late 1996 and early
1997, the staff of the OTS expressed concern about many of the Bank's
non-traditional operations, which generally are deemed by the OTS to involve
higher risk, certain of the Bank's accounting policies and the adequacy of the
Bank's capital in light of the Bank's lending and investment strategies. The
activities which were of concern to the OTS included the Bank's subprime
14
OCWEN FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
single family residential lending activities, the Bank's origination of
acquisition, development and construction loans with terms which provide for
shared participation in the results of the underlying real estate, the Bank's
discount loan activities, which involve significantly higher investment in
nonperforming and classified assets than the majority of the savings and loan
industry, and the Bank's investment in subordinated classes of mortgage-related
securities issued in connection with the Bank's asset securitization activities
and otherwise.
Following the above-referenced examination, the Bank committed to the
OTS to maintain a core capital (leverage) ratio and a total risk-based capital
ratio of at least 9% and 13%, respectively. The Bank continues to be in
compliance with this commitment as well as the regulatory capital requirements
of general applicability (as indicated above). Based on discussions with the
OTS, the Bank believes that this commitment does not affect its status as a
"well-capitalized" institution, assuming the Bank's continued compliance with
the regulatory capital requirements required to be maintained by it pursuant to
such commitment.
NOTE 9 COMMITMENTS AND CONTINGENCIES
At March 31, 1998 the Company had commitments to (i) purchase and
originate $107,812 of subprime loans secured by single family residential
properties, (ii) fund $29,956 of loans secured by multi-family residential
buildings, (iii) fund $16,798 of loans secured by office buildings and (iv) fund
$5,125 of loans secured by hotel properties. The Company, through its investment
in subordinate securities and REMIC residuals which had a book value of $108,852
at March 31, 1998, supports senior classes of mortgage-related securities having
an outstanding principal balance of $2,383,241.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
GENERAL
The Company's business activities currently consist primarily of its
single family, small commercial and large commercial discount loan acquisition
and resolution activities, commercial real estate lending, subprime single
family residential lending, mortgage loans serviced for others, investments in a
wide variety of mortgage-related securities and investments in low-income
housing tax credit interests.
The Company is a registered savings and loan holding company subject to
regulation by the OTS. The Bank is subject to regulation by the OTS, as its
chartering authority, and by the Federal Deposit Insurance Corporation ("FDIC")
as a result of its membership in the Savings Association Insurance Fund ("SAIF")
administered by the FDIC, which insures the Bank's deposits up to the maximum
extent permitted by law. The Bank is also subject to certain regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") and
currently is a member of the Federal Home Loan Bank ("FHLB") of New York, one of
the 12 regional banks which comprise the FHLB System.
At March 31, 1998, the only significant subsidiaries of the Company,
other than the Bank, were IMI, OFS and Ocwen Capital Trust I. Prior to July 15,
1997, IMI, through subsidiaries, owned and managed the Westin Hotel (the
"Hotel") in Columbus, Ohio. On July 15, 1997, IMI sold a 69% partnership
interest in the Hotel for a minimal gain and no longer manages the Hotel. In
addition, as of March 31, 1998, IMI owned 8.12% or 1,540,000 shares of the
outstanding common stock of Ocwen Asset Investment Corp. ("OAC"), as well as
1.74% or 335,000 units of Ocwen Partnership, L.P. ("OPLP"), the operating
partnership formed to undertake the business of OAC and, through subsidiaries,
also owns non-residential real estate properties as well as residential units in
cooperative buildings. OFS was formed in October 1996 for the purpose of
purchasing substantially all of the assets of Admiral (a transaction which
closed on May 1, 1997), the Company's primary correspondent mortgage banking
firm for subprime single family residential loans, and assuming all of the
Bank's subprime single family residential lending operations. Ocwen Capital
Trust I, a wholly owned subsidiary of Ocwen, was formed for the express purpose
of issuing $125.0 million of 10 7/8% Capital Securities, the proceeds of which
were invested in 10 7/8% Junior Subordinated Debentures issued by Ocwen.
The following discussion of the Company's consolidated financial
condition and results of operations and capital resources and liquidity should
be read in conjunction with the Interim Consolidated Financial Statements and
related Notes included in Item 1 hereof.
RECENT DEVELOPMENTS
On January 30, 1998, the Company was assigned the special servicing
rights to a pool of 6,309 subprime mortgage loans underlying a subordinate
security acquired by OAC, a publicly held real estate investment trust managed
by Ocwen Capital Corporation ("OCC"), a wholly owned subsidiary of Ocwen. The
Company, through the Bank, will become the special servicer of any loans which
are 60 days or more delinquent.
On March 13, 1998, DTS Communications, Inc. ("DTS"), a wholly-owned
real estate technology subsidiary of Ocwen, was honored from over 100 nominees
as the recipient of this year's Inman Innovator Award for "Software Applications
that help the Real Estate Industry be more efficient and speed up the Real
Estate Transaction Process." DTS has developed technology tools to automate real
estate transactions over the Internet. DTS Data Trak (TM) software allows real
estate professionals access to ancillary services necessary to close a real
estate transaction or loan. DTS has been recognized by Microsoft Corporation for
its Microsoft(R) component-based architecture to facilitate electronic data
interchange. DTS continues to attract mortgage origination, loss mitigation,
mortgage servicing and real estate brokerage firms seeking to reduce the time
necessary to order, track and process services used to close real estate
transactions. It is anticipated that five of the top mortgage originators will
be on-line by the end of the fourth quarter.
On March 17, 1998, pursuant to a definitive agreement executed by OAC
with a Wall Street firm related to OAC's acquisition of a subordinate security,
the Bank was designated the special servicer for the nonperforming securitized
loans underlying the subordinate security.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
On March 18, 1998, the Company completed the securitization of 1,439
subprime single family residential mortgage loans with an aggregate unpaid
principal balance of $161.4 million. The Company recorded total gains of $7.9
million on the sale of the senior classes of securities in connection with this
transaction. The Company continues to service the loans for a fee and has
retained an interest in the related subordinate security.
On March 25, 1998, Standard & Poor's raised its counterparty rating on
Ocwen to "BB-" from "B+". Standard & Poor's also raised the counterparty rating
on the Bank to "BB+" from "BB". The "B-" trust preferred rating of Ocwen Capital
Trust I was affirmed.
On March 26, 1998, the Company, as part of a larger transaction
involving the Company, BlackRock and Union Bank of Switzerland ("UBS"),
completed the securitization of 3,777 discount single family residential
mortgage loans with an aggregate unpaid principal balance of $227.5 million. The
Company recorded total gains of $16.7 million on the sale of the senior classes
of securities in connection with this transaction. The Company continues to
service the loans for a fee and has retained an interest in the related
subordinated security.
On March 31, 1998, the Company completed the sale of its investment in
two low-income housing tax credit projects and realized a gain of $4.7 million
on proceeds of $21.9 million.
On March 31, 1998, the Company purchased 7,518 additional shares of
common stock of OFS for $40.0 million, increasing its ownership from 93.7% to
97.8%.
On April 28, 1998, the Company and OAC announced the joint closing of
the transaction previously agreed to by the Company for the acquisition of
substantially all of the assets, and certain liabilities, of the United Kingdom
operations of Cityscape Financial Corp. ("Cityscape"). As consummated, the
Company acquired Cityscape's U.K. mortgage loan portfolio and mortgage loan
origination and servicing businesses for (pound)249.6 million ($407.5 million)
and assumed (pound)7.2 million ($11.8 million) of Cityscape's liabilities. OAC
acquired Cityscape's U.K. securitized mortgage loan residuals for (pound)33.7
million ($55.0 million). The amount paid by the Company was funded with both
cash on hand and a loan from Greenwich International Ltd. in the principal
amount of (pound)225.3 million ($367.8 million) and is subject to adjustment to
account for the actual balances on the closing date of the mortgage loan
portfolio and the assumed liabilities. In addition, the Company and OAC entered
into an agreement for the Bank to service the securitized mortgage loan
residuals purchased by OAC in the transaction.
On May 1, 1998, the Company acquired 3,228 single family residential
discount loans with an unpaid principal balance of $217.7 million from UBS for
approximately $185.5 million.
On March 31, 1998, the Company entered into a master repurchase
agreement with Lehman Commercial Paper, Inc. to finance the Company's purchase
of $292.8 million of single family residential loans from the U.S. operations of
Cityscape.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
CONSOLIDATED FINANCIAL HIGHLIGHTS
At or for the Three Months Ended March 31,
--------------------------------------------------
1998 1997 Change
------------ ------------ -----------
(Dollars in thousands, except share data)
Net interest income.................................. $ 17,185 $ 17,363 (1)%
Provision for loan losses............................ 2,254 9,742 (77)
Non-interest income.................................. 45,406 21,351 113
Non-interest expense................................. 34,053 22,697 50
Equity in earnings of investment in joint ventures... -- 14,372 (100)
Net income........................................... 22,346 17,041 31
PER COMMON SHARE (1)
Earnings per share:
Basic............................................. $ 0.37 $ 0.32 16%
Diluted........................................... $ 0.36 $ 0.31 16%
Stock price:
High ............................................. $ 30.75 34.75 (12)%
Low .............................................. 22.25 25.25 (12)
Close............................................. 27.75 29.00 (4)
AVERAGE BALANCES
Interest-earning assets.............................. $ 2,641,517 $ 2,167,601 22%
Interest-bearing liabilities......................... 2,459,400 2,259,367 9
Stockholders' equity................................. 430,681 212,706 102
KEY RATIOS
Interest rate spread:
Yield on interest-earning assets.................. 8.79% 10.06% (13)%
Cost of interest-bearing liabilities.............. 6.64 6.58 1
Interest rate spread.............................. 2.15 3.48 (38)
Annualized return on average assets (2).............. 2.88 2.61 10
Annualized return on average equity ................. 20.75 32.05 (35)
Efficiency ratio(3).................................. 54.41 42.76 27
Core (leverage) capital ratio........................ 10.24 9.48 8
Risk-based capital ratio............................. 17.99 13.22 36
(1) Retroactively adjusted for the 2-for-1 stock split approved by the
Company's Board of Directors on October 29, 1997.
(2) Includes the Company's pro rata share of average assets held by
its 50% joint venture for the three months ended March 31, 1997.
(3) Before provision for loan losses and including for the three
months ended March 31, 1997 equity in earnings of investment in
joint venture.
FIRST QUARTER SUMMARY
The Company recorded net income of $22.3 million for the three months
ended March 31, 1998 as compared to $17.0 million for the same period in 1997.
This increase in net income was attributable to an increase in non-interest
income and a lower provision for loan losses, offset in part by an increase in
non-interest expense. Diluted earnings per share were $0.36 for the first
quarter of 1998 as compared to $0.31 for the first quarter of 1997.
The $178,000 or 1% decrease in net interest income during the first
quarter of 1998 as compared to the first quarter of 1997 is primarily due to an
$8.5 million write down offset by the reversal of $4.5 million of reserves
related to the securities available for sale portfolio during the first quarter
of 1998 due to declining interest rates and the resulting increase in prepayment
speeds. This decline is largely offset by a $473.9 million increase in average
interest-earnings assets, primarily discount loans and loans available for sale.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The $7.5 million decrease in the provision for loan losses for the
three months ended March 31, 1998 as compared to the same period in 1997, is due
primarily to a $6.5 million decline in the loan loss provision for discount
loans, which was largely attributable to the recapture of previously established
provisions in connection with the securitization of single family residential
discount loans during the first quarter of 1998.
The $24.1 million or 113% increase in non-interest income for the three
months ended March 31, 1998 is due primarily to a $12.0 million increase in
gains on sales of interest earning assets, a $4.7 million gain recognized in
connection with the sale of investments in two low-income housing tax credit
projects and a $4.5 million increase in servicing fees and other charges,
reflecting a 200% increase in the average balance of loans serviced for others.
On December 12, 1997, the LLC distributed all of its remaining assets
to its partners. As a result, no equity in earnings of investment in joint
venture was recorded during the first quarter of 1998. During the first quarter
of 1997, the Company recorded $14.4 million of income related to its investment
in joint venture.
Non-interest expense increased $11.4 million or 50% during the three
months ended March 31, 1998 as compared to the same period in 1997 primarily as
a result of (i) a $6.6 million increase in compensation and benefits, due to an
82% increase in the average number of employees and (ii) a $3.6 million increase
in occupancy and equipment expense.
Distributions on the 10 7/8% Capital Securities issued in August 1997
amounted to $3.4 million for the first quarter of 1998 as compared to $0 for the
same period in 1997.
RESULTS OF OPERATIONS: THREE MONTHS ENDED MARCH 31, 1998 VERSUS THREE MONTHS
ENDED MARCH 31, 1997
The Company continues to engage in significant discount loan
acquisition and resolution activities and a variety of other mortgage lending
activities, which generally reflect the Company's focus on business lines which
offer the potential for greater returns without increased risk of loss. The
following table presents the estimated contribution by business activity to the
Company's net income for the periods indicated.
For the Three Months Ended March 31, 1998 1997
--------------------- --------------------
(Dollars in Thousands) Amount % Amount %
--------------------------------------------- -------- -------- -------- --------
Discount Loans:
Single family residential loans ............ $ 16,995 76% $ 6,329 37%
Large commercial real estate loans ......... 2,863 13 2,610 15
Small commercial real estate loans ......... 3,683 16 483 3
Investment in low-income housing
tax credits .............................. 4,750 21 3,566 21
Commercial real estate lending ............. (384) (2) 525 3
Subprime single family residential lending . 974 4 544 3
Mortgage loan servicing .................... 1,528 7 934 6
Investment securities ...................... (6,782) (30) 1,714 10
Other ...................................... (1,281) (5) 336 2
-------- --- -------- ---
$ 22,346 100% $ 17,041 100%
======== === ======== ===
The Company's discount loan activities include asset acquisition,
servicing and resolution of single family residential, large commercial and
small commercial loans and the related real estate owned. Investment in
low-income housing tax credits includes the Company's investments, primarily
through limited partnerships, in qualified low-income rental housing for the
purpose of obtaining Federal income tax credits pursuant to Section 42 of the
Code. Low-income housing tax credits and benefits of $4.7 million and $3.6
million are included as credits against income tax expense for the three months
ended March 31, 1998 and 1997, respectively. Commercial lending includes the
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Company's origination of multi-family and commercial real estate loans held for
investment. Subprime single family lending includes the Company's acquisition
and origination of single family residential loans to nonconforming borrowers
which are recorded as available for sale, and the Company's historical loan
portfolio of single family residential loans held for investment. Mortgage loan
servicing includes the Company's fee-for-services business of providing loan
servicing, including asset management and resolution services, to third-party
owners of nonperforming, underperforming and subprime assets. Investment
securities includes the results of the securities portfolio, whether available
for sale, trading or investment, other than REMIC residuals and subordinate
interests related to the Company's securitization activities which have been
included in the related business activity.
Interest income and expense have been allocated to each business
segment for the investment of funds raised or funding of investments made at an
interest rate based upon the Treasury swap yield curve taking into consideration
the actual duration of such liabilities or assets. Allocations of non-interest
expense generated by corporate support services were made to each business
segment based upon management's estimate of time and effort spent in the
respective activity. As such, the resulting net income amounts represent
estimates of the contribution of each business activity to the Company.
NET INTEREST INCOME. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received from its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. Net interest income is
determined by an institution's net interest spread (i.e., the difference between
the yield earned on its interest-earning assets and the rates paid on its
interest-bearing liabilities), the relative amount of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-bearing
liabilities, expressed in dollars and rates, and the net interest rate spread
and net interest margin. Information is based on daily balances during the
indicated periods.
Three months ended March 31,
--------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Average Annualized Average Annualized
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ----------- ---------- ------------ ---------- ----------
AVERAGE ASSETS: (Dollars in thousands)
Federal funds sold and repurchase
agreements...................... $ 79,885 $ 1,032 5.17% $ 132,337 $ 1,658 5.01%
Securities available for trading.. -- -- -- 13,179 248 7.53
Securities available for sale (2). 527,058 3,962 3.01 338,956 8,173 9.64
Loans available for sale (1)...... 339,394 9,503 11.20 118,729 2,851 9.61
Investment securities and other... 34,855 485 5.57 23,032 681 11.83
Loan portfolio (1)................ 281,215 6,262 8.91 423,135 10,692 10.11
Discount loan portfolio........... 1,379,110 36,797 10.67 1,118,233 30,224 10.81
---------- --------- ---------- --------
Total interest-earning assets,
interest income ................ 2,641,517 58,041 8.79 2,167,601 54,527 10.06
--------- --------
Non-interest earning cash......... 38,524 11,350
Allowance for loan losses......... (25,889) (16,515)
Investments in low-income
housing tax credit interests ... 131,699 90,398
Investment in joint ventures...... 1,056 63,637
Real estate owned, net............ 171,952 112,227
Other assets...................... 147,630 179,156
---------- ----------
Total assets................... $3,106,489 $2,607,854
========== ==========
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing demand deposits.. $ 32,907 $ 356 4.33% $ 24,699 $ 227 3.68%
Savings deposits.................. 1,735 10 2.31 2,620 15 2.29
Certificates of deposit........... 1,790,973 27,479 6.14 1,964,020 29,652 6.04
---------- --------- ---------- --------
Total interest-bearing deposits 1,825,615 27,845 6.10 1,991,339 29,894 6.00
Notes, debentures and other....... 230,453 6,752 11.72 225,573 6,715 11.91
Obligations outstanding under lines
of credit...................... 281,218 4,520 6.43 -- -- --
Securities sold under agreements
to repurchase ................ 114,633 1,639 5.72 20,934 272 5.20
Federal Home Loan Bank advances... 7,481 100 5.35 21,521 283 5.26
---------- --------- ---------- --------
Total interest-bearing
liabilities, interest expense 2,459,400 40,856 6.64 2,259,367 37,164 6.58
--------- --------
Non-interest bearing deposits...... 23,536 15,543
Escrow deposits.................... 111,094 71,713
Other liabilities.................. 81,778 48,525
---------- ----------
Total liabilities............... 2,675,808 2,395,148
Stockholders' equity............... 430,681 212,706
---------- ----------
Total liabilities and
stockholders' equity.......... $3,106,489 $2,607,854
========== ==========
Net interest income before
provision for loan losses ....... $ 17,185 $ 17,363
========= ========
Net interest rate spread........... 2.15% 3.48%
======= =======
Net interest margin................ 2.60% 3.20%
======= =======
Ratio of interest-earning assets to
interest-bearing liabilities...... 107% 96%
========== ==========
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) The average balances of loans available for sale and loan portfolio
include non-performing loans, interest on which is recognized on a cash
basis.
(2) Excludes effect of unrealized gains or losses on securities available
for sale.
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior rate), (ii) changes
in rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
1998 vs. 1997
For the quarter ended March 31, ------------------------------------------
(Dollars in thousands) Increase (decrease) due to
- ------------------------------------------------------------- ------------------------------------------
Rate Volume Total
-------- -------- --------
Interest-Earning Assets:
Federal funds sold and repurchase agreements ............ $ 50 $ (676) $ (626)
Securities held for trading ............................. -- (248) (248)
Securities available for sale ........................... (7,353) 3,142 (4,211)
Loans available for sale ................................ 546 6,106 6,652
Loans ................................................... (1,158) (3,272) (4,430)
Discount loans .......................................... (392) 6,965 6,573
Investment securities and other ......................... (454) 258 (196)
-------- -------- --------
Total interest-earning assets ......................... (8,761) 12,275 3,514
-------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing demand deposits ........................ 45 84 129
Savings deposits ........................................ -- (5) (5)
Certificate of deposit .................................. 475 (2,648) (2,173)
-------- -------- --------
Total interest-bearing deposits ....................... 520 (2,569) (2,049)
Notes, debentures and other interest-bearing obligations (107) 144 37
Securities sold under agreements to repurchase .......... 32 1,335 1,367
Obligations outstanding under lines of credit ........... -- 4,520 4,520
Federal Home Loan Bank advances ......................... 5 (188) (183)
-------- -------- --------
Total interest-bearing liabilities ...................... 450 3,242 3,692
-------- -------- --------
Decrease in net interest income ............................ $ (9,211) $ 9,033 $ (178)
======== ======== ========
The Company's net interest income of $17.2 million decreased $178,000
or 1% during the three months ended March 31, 1998 as compared to the comparable
period in the prior year. Interest income increased $3.5 million or 6% due to a
$473.9 million or 22% increase in the Company's average interest-earning assets
from period to period offset by an $8.5 million write down net of the reversal
of $4.5 million of reserves taken against the securities available for sale
portfolio during the first quarter of 1998, resulting in a 127 basis point
decrease in the weighted average yield earned. Interest expense increased $3.7
million or 10% due to a $200.0 million or 9% increase in the Company's average
interest-bearing liabilities. Of the $200.0 million net increase in the average
balance of interest-bearing liabilities, $281.2 million and $93.7 million
related to increases in borrowings under lines of credit and securities sold
under agreements to repurchase, respectively, offset by a $173.0 million decline
in certificates of deposit.
INTEREST INCOME. Interest income on the discount loan portfolio
increased by $6.6 million or 22% in the three months ended March 31, 1998 versus
the three months ended March 31, 1997 primarily as a result of a $260.9 million
or 23% increase in the average balance of the discount loan portfolio.
Interest income on the loan portfolio decreased by $4.4 million or 41%
in the first quarter of 1998 from the comparable period in 1997 primarily due to
$141.9 million or 34% decrease in the average balance of the loan portfolio and
a 120 basis point decline in the weighted average yield earned.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Interest income on loans available for sale increased $6.7 million or
233% during the first quarter of 1998 as compared to the same period in 1997
primarily as a result of a $220.7 million increase in the average balance and a
159 basis point increase in the weighted average yield earned.
Interest income on securities available for sale decreased by $4.2
million or 52% during the first quarter of 1998 as compared to the same period
in 1997 primarily as a result of a $8.5 million write down net of the reversal
of $4.5 million of reserves taken against the securities available for sale
portfolio, offset by a $188.1 million or 55% increase in the average balance.
The $8.5 million write down recorded by the Company against its interest-only
securities portfolio resulted from increases in projected prepayment speeds
during this period and a resulting shortening of the weighted average lives of
certain individual securities in the portfolio. As a result, a determination was
made to write down the recorded investment in those securities where the
reduction in fair value was considered to be other than temporary. The Company
believes that the current low levels of interest rates, and the inverted shape
of the yield curve, are relatively short-term phenomena. To the extent that
longer term interest rates increase or the relationship between short-term and
long-term rates revert to their historical spreads, the value of the portfolio
should recover. To the extent that the current environment persists, or that
rates decrease further, additional impairment losses may be recognized.
INTEREST EXPENSE. The $3.7 million increase in interest expense during
the three months ended March 31, 1998 as compared to the same period in 1997 is
primarily due to $4.5 million of interest expense incurred in connection with
Company's use of lines of credit at OFS to fund its subprime single family
residential lending growth. The average amount of the Company's borrowings under
lines of credit increased from $0 during the three months ended March 31, 1997
to $281.2 million during the three months ended March 31, 1998. For additional
information regarding lines of credit, see "Changes in Financial Condition -
Obligations Outstanding Under Lines of Credit" and "Liquidity, Commitments and
Off-Balance Sheet Risks."
PROVISIONS FOR LOAN LOSSES. Provisions for losses on loans are charged
to operations to maintain an allowance for losses on each of the loan portfolio
and the discount loan portfolio at a level which management considers adequate
based upon an evaluation of known and inherent risks in such loan portfolios.
Management's periodic evaluation is based upon portfolio composition, asset
classifications, historical loss experience, current economic conditions and
other relevant factors.
The following table sets forth the components of the Company's
provision for loan losses for the periods indicated.
For the three months ended March 31, 1998 1997
- ------------------------------------------------- --------- ---------
(Dollars in Thousands)
Discount loans................................ $ 1,924 $ 8,431
Loan portfolio................................ 330 1,311
--------- ---------
Total....................................... $ 2,254 $ 9,742
========= =========
The decline in the loan loss provision for discount loans during the
three months ended March 31, 1998 is related to several factors. First, the
provision for the three months ended March 31, 1998 includes the recapture of
previously established provisions in connection with the securitization of
single family residential discount loans during the first quarter of 1998.
Second, the loan loss provision fluctuates in direct relation to net
acquisitions and resolutions of discount loans. In the first quarter of 1998,
the balance of discount loans (before allowance for losses) decreased by $266.6
million, whereas in the first quarter of 1997, the balance of discount loans
(before allowance for losses) increased by $225.3 million. Third, the provision
for the first quarter of 1997 included $2.0 million of additional reserves
provided in connection with the unsecuritized discount loans remaining from the
first quarter securitization. No similar charges were taken in 1998. The decline
in the loan loss provision for the loan portfolio is primarily due to a one-time
charge of $1.1 million in the first quarter of 1997 to reserve for losses on a
specific loan.
Although management utilizes its best judgment in providing for
possible loan losses, there can be no assurance that the Company will not change
its provisions for possible loan losses in subsequent periods to a higher level
from that recorded to date in 1998. Changing economic and business conditions,
fluctuations in local markets for real estate, future changes in non-performing
asset trends, large upward movements in market interest rates or other
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
reasons could affect the Company's future provisions for loan losses. For
further discussion and analysis regarding the provisions for loan losses, see
"Changes in Financial Condition Allowances for Losses."
NON-INTEREST INCOME. The following table sets forth the principal
components of the Company's non-interest income during the periods indicated.
For the three months ended March 31, 1998 1997
- ----------------------------------------------------- ---------- ----------
(Dollars in Thousands)
Servicing fees and other charges.................... $ 9,772 $ 5,236
Gains on sales of interest-earning assets, net...... 28,737 16,778
Gain on real estate owned, net...................... 1,026 (794)
Other income........................................ 5,871 131
---------- ----------
Total.......................................... $ 45,406 $ 21,351
========== ==========
The $4.5 million increase in servicing fees and other charges during
the first quarter of 1998 was due to an increase in loan servicing and related
fees as a result of the Company's increase in loans (primarily subprime and
non-performing) serviced for others. The average unpaid principal balance of
loans serviced for others amounted to $6.12 billion during the three months
ended March 31, 1998, as compared to $2.04 billion during the three months ended
March 31, 1997.
The following table sets forth the Company's loans serviced for others
at March 31, 1998.
Discount Loans Subprime Loans Other Loans Total
----------------------- ----------------------- ----------------------- -----------------------
No. of No. of No. of No. of
Amount Loans Amount Loans Amount Loans Amount Loans
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans securitized ...... $ 836,580 14,588 $ 681,908 6,125 $ -- -- $1,518,488 20,713
Loans serviced for third
parties ................ 1,715,748 24,631 3,068,791 33,166 269,269 1,167 5,053,808 58,964
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$2,552,328 39,219 $3,750,699 39,291 $ 269,269 1,167 $6,572,296 79,677
========== ========== ========== ========== ========== ========== ========== ==========
Net gains on sales of interest-earning assets in the first quarter of
1998 were primarily comprised of a $7.9 million gain recognized in connection
with the securitization of 1,439 subprime single-family residential mortgage
loans with an aggregate unpaid principal balance of $161.4 million, a $16.7
million gain recognized in connection with the securitization of 3,777 discount
single family residential mortgage loans with an aggregate unpaid principal
balance of $227.5 million, a $2.0 million gain recognized on the sale of $12.9
million in unpaid principal balance of small commercial discount loans, and a
$2.3 million gain recognized on the sale of certain REMIC residual securities.
The Company continues to service the securitized loans for a fee and has
retained an interest in the related subordinate class securities with a combined
book value of $25.8 million. See table below. Net gains on sales of
interest-earning assets in the first quarter of 1997 were primarily comprised of
$2.7 million of gains from sales of single family nonconforming loans, $3.5
million of gains from sales of certain large commercial loans in the Company's
discount loan portfolio and a $9.5 million net gain in connection with the
securitization completed in March 1997 of single family residential mortgage
loans with an unpaid principal balance of $44.8 million acquired from HUD.
Gains on sale of interest-earning assets (as well as other assets, such
as real estate owned, as discussed below) generally are dependent on various
factors which are not necessarily within the control of the Company, including
market and economic conditions. As a result, there can be no assurance that the
gains on sale of interest-earning assets (and other assets) reported by the
Company in prior periods will be reported in future periods or that there will
not be substantial inter-period variations in the results from such activities.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the Company's net gains recognized in
connection with the securitization of loans during the periods indicated:
Loans Securitized Book Value
- --------------------------------------------------------------------- of Securities
Type of Loans Principal No.of Loans Retained Net Gain
- ------------------------------------------- --------- ----------- ------------- --------
For the Three Months Ended March 31, 1998:
Single family discount ............... $ 227,549 3,777 $ 15,917 $ 16,698
Single family subprime ............... 161,400 1,439 9,862 7,932
--------- --------- --------- ---------
$ 388,949 5,216 $ 25,779 $ 24,630
========= ========= ========= =========
For the Three Months Ended March 31, 1997:
Single family discount ............... $ 44,755 881 $ 2,953 $ 9,498
========= ========= ========= =========
The following table sets forth the results of the Company's investment
in real estate owned (which does not include investments in real estate), which
were primarily related to the discount loan portfolio, during the periods
indicated:
For the three months ended March 31, 1998 1997
- ------------------------------------------------- ----------- -----------
(Dollars in Thousands)
Gains on sales .................................. $ 8,763 $ 3,898
Provision for loss in fair value ................ (4,234) (2,337)
Rental income (carrying costs), net ............. (3,503) (2,355)
--------- ---------
Gain (loss) on real estate owned, net ......... $ 1,026 $ (794)
========= =========
For additional information relating to the Company's real estate owned,
see "Changes in Financial Condition-Real Estate Owned."
Included in other income for the three months ended March 31, 1998 was
a $4.7 million gain recognized in connection with the sale of investments in two
low-income housing tax credit projects. See "Changes in Financial
Condition-Investments in Low-Income Housing Tax Credit Interests."
NON-INTEREST EXPENSE. The following table sets forth the principal
components of the Company's non-interest expense during the periods indicated.
For the three months ended March 31, 1998 1997
- ------------------------------------------------------- ----------- -----------
(Dollars in Thousands)
Compensation and employee benefits .................... $ 21,482 $ 14,923
Occupancy and equipment ............................... 6,457 2,829
Net operating loss on investments in real estate
and certain low-income housing tax credit interests 1,246 1,093
Other operating expenses .............................. 4,868 3,852
--------- ---------
Total .............................................. $ 34,053 $ 22,697
========= =========
The increase in compensation and employee benefits during the three
months ended March 31, 1998 reflects an increase in the average number of
employees from 629 during the three months ended March 31, 1997 to 1,147 during
the three months ended March 31, 1998.
The $3.6 million increase in occupancy and equipment expenses during
the three months ended March 31, 1998, as compared to the same period in the
prior year, was primarily due to a $1.1 million increase in data processing
costs, a $1.3 million increase in general office and equipment expenses and a
$1.3 million increase in occupancy related
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
expenses, all largely attributable to the increase in leased corporate and loan
production office space and the increase in employees discussed above.
The $1.0 million increase in other operating expenses during the first
quarter of 1998 as compared to the first quarter of 1997, is due primarily to a
$1.1 million increase in loan expenses, an $800,000 increase in professional
fees, $400,000 amortization of excess of purchase price over net assets acquired
and a $400,000 increase in regulatory and insurance expenses, offset in part by
a $1.7 million decline in miscellaneous expenses primarily as a result of
management's decision to reverse general reserves no longer deemed necessary.
DISTRIBUTIONS ON COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY. In August 1997, Ocwen Capital Trust I issued $125.0 million of 10 7/8%
Capital Securities. Cash distributions on the Capital Securities are payable
semi-annually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10 7/8% of the liquidation amount of
$1,000 per Capital Security. For the three months ended March 31, 1998, the
Company has recorded $3.4 million of distributions to holders of the Capital
Securities.
EQUITY IN EARNINGS OF INVESTMENT IN JOINT VENTURES. On December 12,
1997, the LLC distributed all of its remaining assets to its partners. As a
result, no equity in earnings of investment in joint venture was recorded during
the first quarter of 1998. During the first quarter of 1997, the Company
recorded $14.4 million of income related to its investment in joint venture. The
Company's pro rata share of the income from the joint venture in the first
quarter of 1997 consisted primarily of $1.7 million of net interest income, a
$9.2 million net gain related to the securitization of single family residential
loans and the recapture of $2.5 million of valuation allowances established in
1996 by the Company on its equity investment in the LLC as a result of the
resolution and securitization of loans.
INCOME TAX EXPENSE. Income tax expense amounted to $573,000 and $3.6
million during the three months ended March 31, 1998 and 1997, respectively. The
Company's income tax expense is reported net of tax credits of $4.7 million and
$3.6 million during the first quarter of 1998 and 1997, respectively, resulting
from the Company's investment in certain low-income housing tax credit
interests. Exclusive of such amounts, the Company's effective tax rate amounted
to 23.0% and 34.7% during the three months ended March 31, 1998 and 1997,
respectively. The decline in the effective tax rate is primarily the result of
the utilization of $8.6 million of net operating loss carry forwards by IMI. IMI
had at March 31, 1998 net operating loss carryforwards of $1.1 million which can
only be used to offset future taxable income of IMI. See "Changes in Financial
Condition-Investments in Low Income Housing Tax Credit Interests".
MINORITY INTEREST. Minority interest in net loss of consolidated
subsidiary represents the loss attributable to the 2.2% interest in OFS owned by
Admiral. See Note 1 to the Interim Consolidated Financial Statements included in
Item 1 hereof.
CHANGES IN FINANCIAL CONDITION
GENERAL. From December 31, 1997 to March 31, 1998 total assets
increased by $352.0 million or 11%. This increase was primarily due to a $316.1
million increase in the loans available for sale, a $173.4 million increase in
securities available for sale, a $48.0 million increase in investment securities
and a $33.7 million increase in other assets, offset in part by a $262.6 million
decrease in discount loans. Total liabilities increased by $324.0 million from
December 31, 1997 to March 31, 1998 primarily due to a $323.4 million increase
in obligations outstanding under lines of credit and a $60.2 million increase in
securities sold under agreements to repurchase, offset by a $49.2 million
decrease in deposits.
SECURITIES AVAILABLE FOR SALE. At March 31, 1998, securities available
for sale amounted to $650.2 million or 19% of the Company's total assets.
Securities available for sale are carried at market value with unrealized gains
or losses reported as a separate component of stockholders' equity net of
deferred taxes. Unrealized losses on securities that reflect a decline in value
which is other than temporary are charged to earnings. Securities available for
sale at March 31, 1998 included an aggregate of $8.5 million of unrealized
losses ($145,000 unrealized gain net of deferred taxes) as compared to $11.7
million of unrealized losses ($5.0 million unrealized loss net of deferred
taxes) at December 31, 1997.
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the carrying value (which represents
market value) of the Company's securities available for sale at the dates
indicated.
March 31, December 31,
1998 1997
------------- -------------
(Dollars in Thousands)
Mortgage-related securities:
Single family residential:
CMOs (AAA-rated) ..................... $ 310,705 $ 160,451
Interest-only:
FHLMC .............................. 60,276 64,745
FNMA ............................... 53,977 59,715
GNMA ............................... 25,190 29,766
AAA-rated .......................... 15,199 13,863
Subordinates ......................... 114,579 67,830
REMIC residuals ...................... 14,644 15,693
Swap contracts ....................... (843) (94)
----------- ----------
593,727 411,969
----------- ----------
Multi-family residential and commercial:
Interest-only:
AAA-rated .......................... 3,896 1,030
Non-investment grade ............... -- 3,477
Subordinates ......................... 14,381 14,048
----------- ----------
18,277 18,555
----------- ----------
Marketable equity securities:
Common stocks ........................ 38,196 46,272
----------- ----------
Total .............................. $ 650,200 $ 476,796
=========== ==========
The Company's securities available for sale of $650.2 million at March
31, 1998 increased by $173.4 million or 36% from December 31, 1997 due primarily
to $242.6 million of purchases, offset by $3.7 million of sales, $31.7 million
of maturities and principal repayments and $38.9 million of net premium
amortization.
At March 31, 1998, the carrying value of the Company's investment in
interest-only and inverse interest-only securities (together "IOs") amounted to
$158.5 million or 24% of total securities available for sale. IOs exhibit
considerably more price volatility than mortgages or ordinary mortgage
pass-through securities, due in part to the uncertain cash flows that result
from changes in the prepayment rates of the underlying mortgage collateral.
Increased prepayments of the underlying mortgage collateral resulting from a
decrease in market interest rates or other factors can result in a loss of all
or part of the purchase price of such security. At March 31, 1998, all of the
Company's IO securities were either issued by FHLMC, GNMA, or FNMA or were rated
AAA by national rating agencies. At March 31, 1998, unrealized losses on the
Company's portfolio of IO securities amounted to $30.0 million, excluding
deferred taxes.
At March 31, 1998 the carrying value of the Company's investment in
subordinate interests amounted to $129.0 million or 20% of total securities
available for sale and supported senior classes of securities having an
outstanding principal balance of $2.38 billion. Because of their subordinate
position, subordinate classes of mortgage-related securities involve more risk
than the other classes. The Company does not intend to purchase subordinate
classes of mortgage-related securities created by unaffiliated parties. The
Company may however retain subordinate classes resulting from the securitization
of assets held by it directly, although it is intended that any such securities
held by the Bank will be distributed to the Company as a dividend, subject to
the Bank's ability to declare such dividends under applicable limitations. Five
such securities with an aggregate book value of $40.6 million were distributed
to the Company from the Bank in the form of a dividend during January 1998. At
March 31, 1998, the Bank held one subordinate security with a carrying value and
book value of $19.2 million and $15.9 million, respectively.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
LOANS AVAILABLE FOR SALE. The Company's loans available for sale at
March 31, 1998, which are carried at the lower of cost or fair value, increased
by $316.1 million or 179% from December 31, 1997 and consist primarily of single
family residential loans to subprime borrowers. The Company generally intends to
sell or securitize its single family residential loans to subprime borrowers
and, as a result, all of such loans were classified as available for sale at
March 31, 1998 and December 31, 1997. The Company's single family residential
lending activities to subprime borrowers is conducted by OFS.
The following table sets forth the composition of the Company's loans
available for sale by type of loan at the dates indicated.
March 31, December 31,
1998 1997
---------- -----------
(Dollars in thousands)
Single family residential loans .................. $ 492,667 $ 176,554
Consumer loans ................................... 439 487
---------- ----------
$ 493,106 $ 177,041
========== ==========
The following table sets forth the activity in the Company's net loans
available for sale during the periods indicated.
For the three months ended March 31, 1998 1997
- ------------------------------------------------------ ---------- -----------
(Dollars in Thousands)
Balance at beginning of period ....................... $ 177,041 $ 126,366
Purchases:
Single family residential ......................... 321,720 37,667
Originations:
Single family residential ......................... 182,522 28,164
Sales ................................................ (166,159) (85,486)
Increase (decrease) in lower of cost or market
reserve ........................................... (327) 158
Loans transferred to loan portfolio .................. -- (13,694)
Principal repayments, net of capitalized interest .... (21,003) (2,959)
Transfer to real estate owned ........................ (688) (1,705)
--------- ---------
Net increase (decrease) in loans .................. 316,065 (37,855)
--------- ---------
Balance at end of period ............................. $ 493,106 $ 88,511
========= =========
During the three months ended March 31, 1998 and 1997 the Company
purchased and originated $479.8 million and $64.5 million, respectively, of
single family residential loans to subprime borrowers. Purchases of single
family residential loans during the three months ended March 31, 1998 include
$292.8 million purchased from the U.S. operations of Cityscape Financial Corp.
The Company also securitized $161.4 million of subprime loans during the three
months ended March 31, 1998 for a gain of $7.9 million.
The following table presents a summary of the Company's non-performing
loans (loans which were past due 90 days or more) in the loans available for
sale portfolio at the dates indicated:
March 31, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
Non-performing loans:
Single
family ............................... $ 8,006 $ 13,509
35 25
Consumer ............................. ---------- ----------
$ 8,041 $ 13,534
========== ==========
Non-performing loans as a percentage of:
Total loans available for sale ....... 1.63% 7.64%
Total assets ......................... 0.23% 0.44%
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Non-performing loans available for sale consist primarily of subprime
single family residential loans, reflecting the higher risks of default
associated with such loans. Although subprime loans generally have higher levels
of default than prime loans, the Company believes that the borrower's equity in
the security property and the Company's expertise in the area of resolution of
nonperforming loans will make its subprime borrower loan program successful.
INVESTMENT SECURITIES. Investment securities increased by $48.0 million
from December 31, 1997 to March 31, 1998 as a result of the Company's $45.4
million investment in 35% of the outstanding common stock of Kensington Mortgage
Company, a leading originator of nonconforming residential mortgages in the
U.K., and a $2.6 million additional investment in OPLP in exchange for an
additional 175,000 limited partnership units. The additional investment in OPLP
increases the Company's ownership to 335,000 units or 1.74%. See Note 1 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
DISCOUNT LOAN PORTFOLIO. At March 31, 1998, the Company's net discount
loan portfolio amounted to $1.17 billion or 34% of the Company's total assets.
The following table sets forth the composition of the Company's discount loan
portfolio by type of loan at the dates indicated.
March 31, December 31,
1998 1997
-------------- --------------
(Dollars in thousands)
Single family residential loans.......... $ 630,776 $ 900,817
Multi-family residential loans........... 165,366 191,302
Commercial real estate loans (1)......... 701,858 701,035
Other loans.............................. 6,878 1,865
------------ ------------
Total discount loans.................. 1,504,878 1,795,019
Unaccreted discount (2).................. (313,765) (337,350)
Allowance for loan losses................ (19,490) (23,493)
------------ ------------
Discount loans, net................... $ 1,171,623 $ 1,434,176
============ ============
(1) The balance at March 31, 1998 consisted of $377.5 million of loans
secured by office buildings, $107.1 million of loans secured by hotels,
$106.0 million of loans secured by retail properties or shopping
centers and $111.3 million of loans secured by other properties. The
balance at December 31, 1997 consisted of $363.7 million of loans
secured by office buildings, $98.9 million of loans secured by hotels,
$106.8 million of loans secured by retail properties or shopping
centers and $131.6 million of loans secured by other properties.
(2) The balance at March 31, 1998 consisted of $150.5 million on single
family residential loans, $38.8 million on multi-family residential
loans, $122.0 million on commercial real estate loans and $2.5 million
on other loans. The balance at December 31, 1997 consisted of $170.7
million on single family residential loans, $46.0 million on
multi-family residential loans, $120.5 million on commercial real
estate loans and $0.2 million on other loans.
The following tables set forth the activity in the Company's gross
discount loan portfolio during the periods indicated.
Three months ended March 31
------------------------------------------------
1998 1997
------------------------ -----------------------
No. of No. of
Balance Loans Balance Loans
------------ ----------- ------------ ----------
(Dollars in thousands)
Balance at beginning of period ........... $1,795,019 12,980 $1,314,399 5,460
Acquisitions(1) ........................... 90,550 572 442,878 8,211
Resolutions and repayments (2) ........... (75,526) (497) (63,553) (194)
Loans transferred to real estate owned .... (64,802) (687) (51,586) (392)
Sales(3) .................................. (240,363) (3,797) (79,753) (883)
---------- --------- ---------- --------
Balance at end of period ................. $1,504,878 8,571 $1,562,385 12,202
========== ========= ========== ========
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
(1) During the three months ended March 31, 1998, acquisitions consisted
primarily of $41.4 million of single family residential loans, $3.0
million of multi-family residential loans and $41.2 million of
commercial real estate and $5.0 million of other loans. Included in
acquisitions for the three months ended March 31, 1997 are the
Company's approximate one-half allocated share of 13,781 single family
residential loans with an aggregate unpaid principal balance of $855.7
million, acquired by the Company and its co-investor at an auction by
HUD for a purchase price of $757.4 million.
(2) Resolutions and repayments consists of loans which were resolved in a
manner which resulted in partial or full repayment of the loan to the
Company, as well as principal payments on loans which have been brought
current in accordance with their original or modified terms (whether
pursuant to forbearance agreements or otherwise) or on other loans
which have not been resolved.
(3) Included in sales for the three months ended March 31, 1998 is the
securitization of 3,777 discount single family residential mortgage
loans with an aggregate unpaid principal balance of $227.5 million.
The following table sets forth certain information relating to the
payment status of loans in the Company's discount loan portfolio at the dates
indicated.
March 31, 1998 December 31, 1997
---------------------- ---------------------
Principal % of Principal % of
Amount Loans Amount Loans
------------ --------- ------------ --------
Loans without Forbearance Agreements:
Current .................................. $ 630,045 41.87% $ 670,115 37.33%
Past due 31 to 89 days ................... 64,712 4.30 21,098 1.18
Past due 90 days or more ................. 551,592 36.65 638,319 35.56
Acquired and servicing not yet transferred 31,394 2.09 28,053 1.56
---------- ------ ---------- ------
Subtotal ............................... 1,277,743 84.91 1,357,585 75.63
---------- ------ ---------- ------
Loans with Forbearance Agreements:
Current .................................. 1,134 0.08 3,140 0.18
Past due 31 to 89 days ................... 5,138 0.34 1,688 0.09
Past due 90 days or more (1) ............. 220,863 14.67 432,606 24.10
---------- ------ ---------- ------
Subtotal ............................... 227,135 15.09 437,434 24.37
---------- ------ ---------- ------
Total ....................................... $1,504,878 100.00% $1,795,019 100.00%
========== ====== ========== ======
(1) Includes $213.4 million of loans which were less than 90 days past due
under the terms of the forbearance agreements at March 31, 1998, of
which $114.1 million were current and $99.3 million were past due 31 to
89 days.
For discussion and analysis regarding the allowance for loan losses on
discount loans, see "Changes in Financial Condition - Allowance for Losses"
below.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
LOAN PORTFOLIO. The following table sets forth the composition of the
Company's loan portfolio by type of loan at the dates indicated.
March 31, December 31,
1998 1997
------------ ------------
(Dollars in thousands)
Single family residential loans .................. $ 41,326 $ 46,226
Multi-family residential loans ................... 66,038 71,382
Commercial real estate and land loans:
Hotel ......................................... 90,274 89,362
Office buildings .............................. 90,967 68,759
Land .......................................... 2,541 2,858
Other ......................................... 13,701 16,094
--------- ---------
Total ....................................... 197,483 177,073
Consumer ......................................... 225 244
--------- ---------
Total loans ................................. 305,072 294,925
Undisbursed loan funds ........................... (18,077) (22,210)
Unaccreted discount .............................. (2,451) (2,721)
Allowance for loan losses ........................ (4,026) (3,695)
--------- ---------
Loans, net .................................. $ 280,518 $ 266,299
========= =========
The following table sets forth the activity in the Company's gross loan
portfolio during the periods indicated.
For the three months ended March 31, 1998 1997
- ------------------------------------------------- ----------- -----------
(Dollars in Thousands)
Balance at beginning of period .................. $ 294,925 $ 501,114
Originations:
Single family residential loans .............. -- 1,769
Multi-family residential loans ............... 13,771 12,680
Commercial real estate loans and land loans .. 18,985 --
Commercial non-mortgage and consumer loans ... -- 1,134
--------- ---------
Total loans originated ..................... 32,756 15,583
--------- ---------
Loans transferred from available for sale ....... -- 13,802
Principal repayments, net of capitalized interest (22,609) (17,652)
Transfer to real estate owned ................... -- (353)
--------- ---------
Net increase in loans ...................... 10,147 11,380
--------- ---------
Balance at end of period(1) ..................... $ 305,072 $ 512,494
========= =========
(1) The decline in the balance of the gross loan portfolio at March 31,
1998 as compared to March 31, 1997, is primarily due to significant
payoffs of commercial real estate loans secured by hotel and office
buildings during the latter part of 1997.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table presents a summary of the Company's non-performing
loans (loans which are past due 90 days or more) in the loan portfolio and
significant ratios at the dates indicated:
March 31, December 31,
1998 1997
----------- ------------
Nonperforming loans (1) ............................ (Dollars in Thousands)
Single family residential loans ................. $ 1,307 $ 1,575
Multi-family residential loans .................. 12,200 7,583
--------- ---------
$ 13,507 $ 9,158
========= =========
Nonperforming loans as a percentage of:
Total loans (2) ................................. 4.71% 3.36%
Total assets .................................... 0.39% 0.30%
Allowance for loan losses as a percentage of:
Total loans (2) ................................. 1.41% 1.37%
Nonperforming loans ............................. 29.81% 40.35%
(1) The Company did not have any loans which were accruing interest but
past due 90 days or more at the dates indicated.
(2) Total loans is net of undisbursed loan proceeds.
ALLOWANCES FOR LOSSES. The Company uses an internal asset review system
to identify problem assets. The Company's asset classification process, in
accordance with applicable regulations, provides for the classification of
assets into the categories of satisfactory, special mention, substandard,
doubtful or loss. The Company's determination of the level and the allocation of
the allowance for loan losses and, correspondingly, the provisions for such
losses, is based on various judgments, assumptions and projections regarding a
number of factors, including, but not limited to, asset classifications, current
and forecasted economic and market conditions, loan portfolio composition,
historical loan loss experience and industry experience. The allowance for loan
losses is adjusted monthly to reflect management's current assessment of the
effect of these factors on estimated inherent loan losses. While management uses
all information available to it to estimate losses on loans, future changes to
the allowance may become necessary based on changes in economic and market
conditions. The OTS, as part of its examination process, periodically reviews
the adequacy of the Company's allowance for loan losses. Such agency may require
the company to recognize changes to the allowance based on its judgment about
information available to it at the time of examination.
The following table sets forth the allocation of the Company's
allowance for loan losses at the dates indicated by loan category and the
percentage of loans in each category to total loans in the respective portfolios
at the dates indicated:
March 31, 1998 December 31, 1997
-------------------------------- ---------------------------------
Gross Gross
Loan Loan
Allowance Balance Percent Allowance Balance Percent
---------- ------------ ------- ----------- ------------ -------
Loan portfolio:
Single family ........ $ 375 $ 41,326 13.5% $ 512 $ 46,226 15.7%
Multi-family ......... 2,164 66,038 21.7% 2,163 71,382 24.2%
Commercial real estate 1,477 197,483 64.7% 1,009 177,073 60.0%
Consumer ............. 10 225 0.1% 11 244 0.1%
-------- ---------- ----- -------- ---------- -----
$ 4,026 $ 305,072 100.0% $ 3,695 $ 294,925 100.0%
======== ========== ===== ======== ========== =====
Discount loan portfolio:
Single family ........ $ 8,144 $ 630,776 41.9% $ 15,017 $ 900,817 50.2%
Multi-family ......... 2,673 165,366 11.0% 2,616 191,302 10.7%
Commercial real estate 8,673 701,858 46.6% 5,860 701,035 39.0%
Other ................ -- 6,878 0.5% -- 1,865 0.1%
-------- ---------- ----- -------- ---------- -----
$ 19,490 $1,504,878 100.0% $ 23,493 $1,795,019 100.0%
======== ========== ===== ======== ========== =====
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any other category.
The following table summarizes activity in the allowance for loan
losses related to the Company's loan portfolio and discount loan portfolio
during the three months ended March 31, 1998.
Balance Balance
December 31, March 31,
1997 Additions Charge-offs Recoveries 1998
----------- ----------- ----------- ---------- -----------
Loan portfolio:
Single family ........ $ 512 $ (137) $ -- $ -- $ 375
Multi-family ......... 2,163 1 -- -- 2,164
Commercial real estate 1,009 467 -- -- 1,476
Consumer ............. 11 (1) -- -- 10
--------- --------- --------- -------- ---------
$ 3,695 $ 330 $ -- $ -- $ 4,025
========= ========= ========= ======== =========
Discount loans:
Single family ........ $ 15,017 $ (2,214) $ (4,717) $ 58 $ 8,144
Multi-family ......... 2,616 428 (371) -- 2,673
Commercial ........... 5,860 3,710 (897) -- 8,673
--------- --------- --------- -------- ---------
$ 23,493 $ 1,924 $ (5,985) $ 58 $ 19,490
========= ========= ========= ======== =========
INVESTMENTS IN LOW-INCOME HOUSING TAX CREDIT INTERESTS. In 1993, the
Company commenced a program to invest in multi-family residential projects which
have been allocated low income housing tax credits under Section 42 of the
Internal Revenue Code by a state tax credit allocating agency. At March 31, 1998
the Company had $119.0 million of investments in low-income housing tax credit
interests as compared to $128.6 million at December 31, 1997. On March 31, 1998,
the Company completed the sale of its investment in two low-income housing tax
credit projects which had a carrying value of $17.2 million for a gain of $4.7
million.
Investments by the Company in low-income housing tax credit interests
made on or after May 18, 1995 in which the Company invests solely as a limited
partner, which amounted to $32.6 million at March 31, 1998, are accounted for
using the equity method in accordance with the consensus of the Emerging Issues
Task Force through Issue Number 94-1. Limited partnership investments made prior
to May 18, 1995, which amounted to $30.6 million at March 31, 1998, are
accounted for under the effective yield method as a reduction of income tax
expense. Low-income housing tax credit partnerships in which the Company invests
as both a limited and, through a subsidiary, general partner amounted to $55.8
million at March 31, 1998 and are presented on a consolidated basis.
INVESTMENT IN JOINT VENTURES. From time to time the Company and a
co-investor acquire discount loans by means of a co-owned joint venture. At
March 31, 1998 and December 31, 1997, the Company's $1.1 million investment in
joint venture, net consisted of a 10% interest in BCFL, a limited liability
Company which was formed by the Bank and BlackRock in January 1997 to acquire
discount multi-family residential loans from HUD. In December 1997, the LLC
distributed its assets to the Company and its other 50% investor, BlackRock.
Simultaneous with the distribution, the Company acquired BlackRock's portion of
the distributed assets.
REAL ESTATE OWNED. Properties acquired through foreclosure are valued
at the lower of the adjusted cost basis of the loan or fair value less estimated
costs of disposal of the property at the date of foreclosure. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to dispose. Rental income related to properties is reported as
earned. Holding and
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
maintenance costs related to properties are recorded as period costs as
incurred. Decreases in market value of foreclosed real estate subsequent to
foreclosure are recognized as a valuation allowance on a property specific
basis. Subsequent increases in the market value of the foreclosed real estate
are reflected as reductions in the valuation allowance, but not below zero. Such
changes in the valuation allowance are charged or credited to income.
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth certain information relating to the
Company's real estate owned at the dates indicated:
March 31, December 31,
1998 1997
----------- -----------
(Dollars in thousands)
Discount loan portfolio:
Single family residential ............ $ 82,867 $ 76,409
Multi-family residential ............. 14,798 16,741
Commercial real estate .............. 72,152 71,339
--------- ---------
Total .............................. 169,817 164,489
Loan portfolio .......................... 312 357
Loans available for sale portfolio....... 2,564 2,419
--------- ---------
$ 172,693 $ 167,265
========= =========
The following table sets forth the activity in the valuation allowance
on real estate owned for the periods indicated.
For the three months ended March 31, 1998 1997
- ----------------------------------------- ------------ ------------
(Dollars in Thousands)
Balance at beginning of period........... $ 12,346 $ 11,493
Provision for loss in fair value......... 4,234 2,337
Charge-offs and sales.................... (3,338) (6,239)
---------- ----------
Balance at end of period................. $ 13,242 $ 7,591
========== ==========
The following table sets forth the activity in real estate owned during
the periods indicated.
Three months ended March 31,
--------------------------------------------------
1998 1997
------------------------ ------------------------
No. of No. of
Amount Properties Amount Properties
----------- ----------- ----------- -----------
(Dollars in thousands)
Balance at beginning of period ....... $ 167,265 1,505 $ 103,704 825
Properties acquired through
foreclosure or deed-in-lieu thereof 43,703 694 37,653 407
Acquired in connection with
acquisitions of discount loans ... 2,915 53 70 3
Sales ................................ (40,294) (610) (46,863) (533)
Change in allowance .................. (896) -- 3,902 --
--------- --------- --------- ---------
Balance at end of period(1) .......... $ 172,693 1,642 $ 98,466 702
========= ========= ========= =========
(1) The increase in the balance of real estate owned at March 31, 1998 as
compared to March 31, 1997 is primarily the result of single family and
multi-family properties acquired through foreclosures on discount
loans.
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the amount of time that the Company had
held its real estate owned at the dates indicated.
March 31, December 31,
1998 1997
------------ -------------
(Dollars in thousands)
One to two months ...................... $ 43,231 $ 83,144
Three to four months ................... 22,648 28,912
Five to six months ..................... 34,065 20,929
Seven to twelve months ................. 56,213 23,621
Over twelve months ..................... 16,536 10,659
---------- ----------
$ 172,693 $ 167,265
========== ==========
INVESTMENT IN REAL ESTATE. The Company's investments in real estate
amounted to $60.9 million at March 31, 1998 as compared to $66.0 million at
December 31, 1997, a decrease of $5.1 million.
In conjunction with its multi-family and commercial real estate lending
business activities, the Company has made certain acquisition, development and
construction loans in which the Company participates in the expected residual
profits of the underlying real estate and the borrower has not made an equity
contribution substantial to the overall project. As such, the Company accounts
for these loans under the equity method of accounting as though it has made an
investment in a real estate limited partnership. The Company's investment in
such loans decreased to $53.0 million at March 31, 1998, as compared to $62.0
million at December 31, 1997, primarily as a result of principal repayments.
DEFERRED TAX ASSET. At March 31, 1998 the deferred tax asset, net of
deferred tax liabilities, amounted to $48.3 million, an increase of $3.1 million
from the $45.1 million deferred tax asset at December 31, 1997. At March 31,
1998, the gross deferred tax asset amounted to $53.1 million and consisted
primarily of $2.9 million of mark-to-market adjustments and reserves on real
estate owned, $7.7 million of deferred interest expense on the discount loan
portfolio, $11.3 million of loan loss reserves, $3.2 million of profit sharing
expense, $5.1 million related to tax residuals, $5.6 million of gains on loan
foreclosures, $9.3 million of reserves on securities available for sale, $1.2
million mark-to-market on securities available for sale and $900,000 of
contingency reserves. The gross deferred tax liability amounted to $4.8 million
and consisted primarily of $2.3 million of deferred interest income on the
discount loan portfolio. At December 31, 1997, the gross deferred tax asset
amounted to $49.5 million and consisted primarily of $3.5 million related to tax
residuals, $5.6 million of gains on loan foreclosures, $3.2 million of
mark-to-market adjustments and reserves on real estate owned, $9.8 million of
loan loss reserves, $4.0 million of reserves on securities available for sale,
$2.0 million of contingency reserves, $3.2 million of accrued profit sharing
expense, $7.7 million of deferred interest expense on the discount loan
portfolio and $6.7 million mark-to-market on securities available for sale. The
gross deferred tax liability amounted to $4.4 million and consisted primarily of
$2.3 million of deferred interest income on the discount loan portfolio.
As a result of the Company's earnings history, current tax position and
taxable income projections, management believes that the Company will generate
sufficient taxable income in future years to realize the deferred tax asset
which existed at March 31, 1998. In evaluating the expectation of sufficient
future taxable income, management considered future reversals of temporary
differences and available tax planning strategies that could be implemented, if
required. A valuation allowance was not required at March 31, 1998 because it
was management's assessment that, based on available information, it is more
likely than not that all of the deferred tax asset will be realized. A valuation
allowance will be established in the future to the extent of a change in
management's assessment of the amount of the net deferred tax asset that is
expected to be realized.
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED. During 1997, the
Company consolidated its subprime single family lending operations within OFS in
connection with its acquisition of substantially all of the assets of Admiral in
May 1997. The excess of purchase price over net assets acquired related to this
transaction amounted to $10.6 million at March 31, 1998 and is being amortized
on a straight-line basis over a period of 15 years.
As part of its strategic focus to market its advanced loan resolution
technology to third parties in the mortgage industry through software licenses,
the Company recently acquired two software technology companies. On November 6,
1997, the Company acquired AMOS, Inc., a Connecticut based company engaged
primarily in the development of
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
mortgage loan servicing software for an aggregate purchase price of $9.7
million, including $4.9 million which is contingent on AMOS, Inc. meeting
certain software development performance criteria. Subsequently, on January 20,
1998, the Company acquired DTS Communications, Inc. ("DTS"), a real estate
technology company located in San Diego, California, for a purchase price of
$13.0 million in cash, common stock of the Company and repayment of certain
indebtedness. DTS has developed technology tools to automate real estate
transactions over the Internet and has been recognized by Microsoft Corporation
for the Microsoft (R) component-based architecture to facilitate electronic data
interchange. The common stock of the Company issued in the acquisition was
acquired from affiliates of the Company at the same price per share as was used
to calculate the number of shares issued in the acquisition. The aggregate
excess of purchase price over net assets acquired related to these transactions
amounted to $12.8 million, net of accumulated amortization at March 31, 1998 and
is being amortized on a straight-line basis over a period of 15 years.
DEPOSITS. Deposits decreased $49.2 million or 2% from December 31, 1997
to March 31, 1998. The decrease in deposits during the first quarter of 1998 was
primarily the result of a $55.7 million decrease in brokered deposits obtained
through national investment banking firms which solicit deposits from their
customers, a $4.9 million decrease in deposits obtained through direct
solicitation and marketing efforts to regional and local investment banking
firms, institutional investors and high net worth individuals and a $22.4
million decrease in checking and money funds, offset by a $33.7 million increase
in escrow deposits. Brokered deposits obtained through national investment
banking firms amounted to $1.29 billion at March 31, 1998, as compared to $1.34
billion at December 31,1997. Deposits obtained through direct solicitation and
marketing amounted to $424.9 million at March 31, 1998, as compared to $429.8
million at December 31, 1997. At March 31, 1998 the Company had $184.0 million
of certificates of deposit in amounts of $100,000 or more, including $93.3
million of deposits of states and political subdivisions in the U.S. which are
secured or collateralized as required under state law. See "- Liquidity,
Commitments and Off-Balance Sheet Risks" below.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under
agreements to repurchase increased $60.2 million to $168.4 million from December
31, 1997 to March 31, 1998. From time to time, the Company utilizes such
collateralized borrowings as additional sources of liquidity.
NOTES, DEBENTURES AND OTHER INTEREST-BEARING OBLIGATIONS. Notes,
debentures and other interest-bearing obligations of $226.8 million at March 31,
1998 decreased $163,000 during the three months ended March 31, 1998 primarily
as a result of repayments of short-term notes payable. Notes, debentures and
other interest-bearing obligations consist of $100.0 million of 12% debentures
issued by the Bank in June 1995 and due June 2005, $125.0 million of 11.875%.
Notes issued by the Company in September 1996 and due September 2003 and $1.8
million of short-term notes payable.
OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT. Obligations outstanding
under lines of credit increased by $323.4 million to $441.7 million from
December 31, 1997 to March 31, 1998 primarily as a result of new borrowings to
fund the acquisition and origination of subprime single family loans at OFS.
Borrowings under lines of credit have a one-year term and interest rates which
float in accordance with a designated prime rate. For additional information
regarding lines of credit, see "Liquidity, Commitments and Off-Balance Sheet
Risks."
COMPANY-OBLIGATED, MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY. In August
1997, Ocwen Capital Trust I issued $125.0 million of 10 7/8% Capital Securities.
Proceeds from issuance of the Capital Securities were invested in 10 7/8% Junior
Subordinated Debentures issued by the Company. The Junior Subordinated
Debentures, which represent the sole assets of the Trust, will mature on August
1, 2027. Intercompany transactions between Ocwen Capital Trust I and the
Company, including the Junior Subordinated Debentures, are eliminated in the
consolidated financial statements of the Company.
Through March 31, 1998, the Company had recorded $3.4 million of
distributions to holders of the Capital Securities. See Note 4 to the Interim
Consolidated Financial Statements included in Item 1 hereof.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $27.6 million or
7% during the three months ended March 31, 1998. The increase in stockholders'
equity during this period was primarily attributable to net income of $22.3
million and an increase of $5.2 million in the unrealized gain on securities
available for sale. See the Consolidated Statements of Changes in Stockholders'
Equity in the Interim Consolidated Financial Statements included in Item 1
hereof.
37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements. In
general, management's strategy is to match asset and liability balances within
maturity categories to limit the Company's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Company's asset and liability management strategy is formulated and
monitored by the Asset/Liability Committee, which is composed of directors and
officers of the Company, in accordance with policies approved by the Board of
Directors of the Company. The Asset/Liability Committee meets regularly to
review, among other things, the sensitivity of the Company's assets and
liabilities to interest rate changes, the book and market values of assets and
liabilities, unrealized gains and losses, including those attributable to
hedging transactions, purchase and sale activity, and maturities of investments
and borrowings. The Asset/Liability Committee also approves and establishes
pricing and funding decisions with respect to overall asset and liability
composition.
The Asset/Liability Committee is authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it in the management of
interest rate risk. These techniques include interest rate exchange agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate exchange agreements are utilized by
the Company to protect against the decrease in value of a fixed-rate asset or
the increase in borrowing cost from a short-term, fixed-rate liability, such as
reverse repurchase agreements, in an increasing interest-rate environment. At
March 31, 1998, the Company had entered into interest rate exchange agreements
with an aggregate notional amount of $36.9 million. Interest rate exchange
agreements had the effect of decreasing the Company's net interest income by
$38,000 and $74,000 during the three months ended March 31, 1998 and 1997,
respectively.
On February 25, 1998, the Company entered into a foreign currency swap
with a AAA-rated counterparty to hedge certain cash flows in connection with its
investment in 35% of the outstanding common stock of Kensington Mortgage
Company, a leading originator of nonconforming residential mortgages in the U.K.
Under the terms of the agreement, the Company will swap (pound)27,500 for
$43,546 in five years based on the exchange rate on the date the contract became
effective.
The Company also enters into interest rate futures contracts, which are
commitments to either purchase or sell designated financial instruments at a
future date for a specified price and may be settled in cash or through
delivery. Eurodollar futures contracts have been sold by the Company to hedge
the repricing or maturity risk of certain short duration mortgage-related
securities, and U.S. Treasury futures contracts have been sold by the Company to
offset declines in the market value of its fixed-rate loans and certain
fixed-rate mortgage-backed and related securities available for sale in the
event of an increasing interest rate environment. At March 31, 1998, the Company
had entered into U.S. Treasury futures (short) contracts with an aggregate
notional amount of $326.0 million. The Company had no outstanding Eurodollar
futures contracts at March 31, 1998. Futures contracts had the effect of
decreasing the Company's net interest income by $49,000 and 904,000 during the
three months ended March 31, 1998 and 1997, respectively. See Note 6 to the
Interim Consolidated Financial Statements included in Item 1 hereof.
The Asset/Liability Committee's methods for evaluating interest rate
risk include an analysis of the Company's interest rate sensitivity "gap", which
is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities. A gap is considered
negative when the amount of interest-rate sensitive liabilities exceeds
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
The following table sets forth the estimated maturity or repricing of
the Company's interest-earning assets and interest-bearing liabilities at March
31, 1998. The amounts of assets and liabilities shown within a particular period
were determined in accordance with the contractual terms of the assets and
liabilities, except (i) adjustable-rate loans, performing discount loans,
securities and FHLB advances are included in the period in which they are first
scheduled to adjust and not in the period in which they mature, (ii) fixed-rate
mortgage-related securities reflect estimated prepayments, which were estimated
based on analyses of broker estimates, the results of a prepayment model
utilized by the Company and empirical data, (iii) non-performing discount loans
reflect the estimated timing of resolutions which result in repayment to the
Company, (iv) fixed-rate loans reflect scheduled contractual amortization, with
no estimated prepayments, (v) NOW and money market checking deposits and savings
deposits, which do not have contractual maturities, reflect estimated levels of
attrition, which are based on detailed studies of each such category of deposit
by the Company, and (vi) escrow deposits and other non-interest bearing checking
accounts, which amounted to $148.5 million at March 31, 1998, are excluded.
Management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities in the table could vary substantially if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.
March 31, 1998
------------------------------------------------------------------------
More than 1
Within 4 to 12 Year to 3 Years
3 Months Months 3 Years and Over Total
------------ ------------ ------------ ------------ ------------
Rate-Sensitive Assets:
Interest-earning cash, federal funds sold and
repurchase agreements .......................... $ 135,269 $ -- $ -- $ -- $ 135,269
Securities available for sale .................... 104,800 219,792 158,441 167,167 650,200
Loans available for sale (1) ..................... 92,683 273,871 61,738 64,814 493,106
Investment securities, net ....................... -- -- -- 61,314 61,314
Loan portfolio, net (1) .......................... 100,074 55,882 93,399 31,163 280,518
Discount loan portfolio, net ..................... 116,187 351,183 286,810 417,443 1,171,623
---------- ---------- ---------- ---------- ----------
Total rate-sensitive assets .................... 549,013 900,728 600,388 741,901 2,792,030
---------- ---------- ---------- ---------- ----------
Rate-Sensitive Liabilities:
NOW and money market checking deposits ........... 7,205 2,055 4,095 7,635 20,990
Savings deposits ................................. 82 220 435 1,023 1,760
Certificates of deposit .......................... 292,125 575,861 570,901 323,450 1,762,337
---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ................ 299,412 578,136 575,431 332,108 1,785,087
Securities sold under agreements to repurchase ... 168,419 -- -- -- 168,419
Obligations outstanding under lines of credit .... 441,671 -- -- -- 441,671
Notes, debentures and other interest bearing
obligations .................................... -- -- -- 226,812 226,812
---------- ---------- ---------- ---------- ----------
Total rate-sensitive liabilities ............... 909,502 578,136 575,431 558,920 2,621,989
Interest rate sensitivity gap before off-balance
sheet financial instruments .................... (360,489) 322,592 24,957 182,981 170,041
Off-Balance Sheet Financial Instruments:
Futures contracts and interest rate swap ......... 88,649 (7,294) (13,848) (67,507) --
---------- ---------- ---------- ---------- ----------
Interest rate sensitivity gap ....................... (271,840) 315,298 11,109 115,474 $ 170,041
========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap ............ $ (271,840) $ 43,458 $ 54,567 $ 170,041
========== ========== ========== ==========
Cumulative interest rate sensitivity gap as a
percentage of total rate-sensitive assets ........ (9.74)% 1.56% 1.95% 6.09%
==== ==== ==== ====
(1) Balances have not been reduced for non-performing loans.
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, and as required by OTS regulations, the Asset/Liability Committee also
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity ("MVPE"), which is defined as the net present value of an institution's
existing assets, liabilities and off-balance sheet instruments, and evaluating
such impacts against the maximum potential changes in net interest income and
MVPE that is authorized by the Board of Directors of the Bank.
The following table sets forth at March 31, 1998 the estimated
percentage change in the Company's net interest income over a four-quarter
period and MVPE based upon the indicated changes in interest rates, assuming an
instantaneous and sustained uniform change in interest rates at all maturities.
Change Estimated Change in
(in Basis Points) ---------------------------------------------------
in Interest Rates Net Interest Income MVPE
- ---------------------------- ----------------------- --------------------------
+400 (8.90)% (22.18)%
+300 (6.62) (15.05)
+200 2.47 (7.05)
+100 1.67 (0.39)
0 -- --
-100 (10.82) (5.94)
-200 (19.36) (5.38)
-300 (21.01) (1.04)
-400 (22.88) 3.81
The negative estimated changes in MVPE for -100 to -300 changes in
interest rates is attributable to the Company's sensitivity to decreases in
interest rates. Such sensitivity stems primarily from the Company's investments
in IOs. IOs exhibit considerably more price volatility than mortgage or ordinary
mortgage pass-through securities, due in part to the uncertain cash flows that
result from changes in the prepayment rates of the underlying mortgages. In the
case of IOs, increased prepayments of the underlying mortgages as a result of a
decrease in market interest rates or other factors can result in a loss of all
or part of the purchase price of such security. See "Results of Operations -
Interest Income", and "Changes in Financial Condition-Securities Available for
Sale."
Management of the Company believes that the assumptions used by it to
evaluate the vulnerability of the Company's operations to changes in interest
rates approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Company's assets and liabilities and the
estimated effects of changes in interest rates on the Company's net interest
income and MVPE could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Liquidity is a measurement of the Company's ability to meet potential
cash requirements, including ongoing commitments to fund deposit withdrawals,
repay borrowings, fund investment, loan acquisition and lending activities and
for other general business purposes. The primary sources of funds for liquidity
consist of deposits, FHLB advances, reverse repurchase agreements, lines of
credit and maturities and principal payments on loans and securities and
proceeds from sales thereof. An additional significant source of asset liquidity
is the ability to securitize assets such as discount loans and subprime loans.
Sources of liquidity include certificates of deposit obtained primarily
from wholesale sources. At March 31, 1998 the Company had $1.76 billion of
certificates of deposit, including $1.29 billion of brokered certificates of
deposit obtained through national investment banking firms, all of which are
non-cancelable. At the same date scheduled maturities of certificates of deposit
during the 12 months ending March 31, 1999 and 2000 and thereafter amounted to
$868.0 million, $332.5 million and $561.8 million, respectively. Brokered and
other wholesale deposits generally are more responsive to changes in interest
rates than core deposits and, thus, are more likely to be withdrawn from the
Company upon maturity as changes in interest rates and other factors are
perceived by investors to make other
40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
investments more attractive. Management of the Company believes that it can
adjust the rates paid on certificates of deposit to retain deposits in changing
interest rate environments, and that brokered and other wholesale deposits can
be both a relatively cost-effective and stable source of funds. There can be no
assurance that this will continue to be the case in the future, however.
Sources of borrowings include FHLB advances, which are required to be
secured by single family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. At March 31, 1998, the
Company was eligible to borrow up to an aggregate of $621.9 million from the
FHLB of New York (subject to the availability of acceptable collateral) and had
$83.7 million of single family residential loans, $10.3 million of multi-family
residential loans and $14.1 million of loans secured by hotel properties which
could be pledged as security for such advances. At the same date, the Company
had contractual relationships with 12 brokerage firms and the FHLB of New York
pursuant to which it could obtain funds from reverse repurchase agreements and
had $249.3 million of unencumbered mortgage-related securities which could be
used to secure such borrowings. At present, the Company has no outstanding FHLB
advances due to the availability of other less costly sources of funding, a
circumstance which the Company evaluates on a regular basis.
The liquidity of the company at March 31, 1998 includes lines of credit
obtained by OFS subsequent to its assumption of the subprime lending activities
of the Bank and acquisition of substantially all of the assets of Admiral, as
follows: (i) a $200.0 million secured line of credit from Morgan Stanley
Mortgage Capital Inc., of which $100 million was committed, (ii) a $50.0 million
secured line of credit from Texas Commerce Bank National Association, (iii) a
$200 million secured line of credit from Merrill Lynch, of which $100 million
was committed, and (iv) a $350 million secured line of credit from Lehman
Commercial Paper, Inc., of which $100 million was committed. An aggregate of
$437.4 million was outstanding to OFS under these lines of credit at March 31,
1998, which have interest rates which float in accordance with a designated
prime rate. In addition, the company has provided a $30.0 million unsecured,
subordinated credit facility to OFS, of which $30.0 million was outstanding at
March 31, 1998. At present OFS intends to continue to seek appropriate leverage
with respect to its underlying business, and thus, will seek additional lines of
credit as its assets warrant.
The Company believes that its existing sources of liquidity, including
internally generated funds, will be adequate to fund planned activities for the
foreseeable future, although there can be no assurances in this regard.
Moreover, the Company continues to evaluate other sources of liquidity, such as
lines of credit from unaffiliated parties, which will enhance the management of
its liquidity and the costs thereof.
The Company's operating activities used cash flows of $320.9 million
and provided cash flows of $124.2 million during the three months ended March
31, 1998 and 1997, respectively. During the foregoing periods cash flows from
operating activities were provided primarily by net income, the sale of
securities held for trading and proceeds from sales of loans available for sale,
and cash resources were used primarily to purchase and originate loans available
for sale. The increase in net cash flows used by operating activities during the
first quarter of 1998 as compared to 1997 was due primarily to increased
purchases and originations of loans available for sale.
The Company's investing activities used cash flows totaling $12.5
million and $212.8 million during the three months ended March 31, 1998 and
1997, respectively. During the foregoing periods, cash flows from investing
activities were provided primarily by principal payments on and sales of
discount loans and loans held for investment and proceeds from sales of
securities available for sale and real estate owned. Cash flows from investing
activities were primarily utilized to purchase and originate discount loans and
loans held for investment and purchase securities available for sale. The
decline in net cash used by investing activities during the first quarter of
1998 as compared to 1997 was due primarily to a decline in purchases of discount
loans, net of sales, and securities available for sale.
The Company's financing activities provided $334.3 million and $153.2
million during the three months ended March 31, 1998 and 1997, respectively.
During the foregoing periods, cash flows from financing activities were provided
primarily by proceeds from the issuance of obligations under lines of credit,
and changes in the Company's deposits and reverse repurchase agreements.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less.
41
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. The Bank's liquidity, as measured for regulatory purposes,
averaged 4.49% during the three months ended March 31, 1998.
Management of the Company believes that the Bank's ability to make
capital distributions as a Tier 1 association pursuant to the OTS capital
distribution regulation are limited by the regulatory capital levels which it
has committed to the OTS it would maintain, commencing on June 30, 1997. Taking
into account such commitments and applicable laws and regulations, management
estimates that the Bank could dividend to the Company $30.0 million as of March
31, 1998. As a result of an agreement by the Company with the OTS to dividend
subordinate and residual mortgage-related securities resulting from
securitization activities conducted by the Bank, which had an aggregate book
value of $15.9 million at March 31, 1998, the Bank may not be able to pay any
cash dividends to the Company without prior OTS approval, however. See
"Regulatory Capital Requirements" below.
At March 31, 1998, the Company had $159.7 million of unfunded
commitments related to the purchase and origination of loans. Management of the
Company believes that the Company has adequate resources to fund all of its
commitments to the extent required and that substantially all of such
commitments will be funded during 1998. See Note 9 to the Interim Consolidated
Financial Statements included in Item 1 hereof.
In addition to commitments to extend credit, the Company is party to
various off-balance sheet financial instruments in the normal course of business
to manage its interest rate risk. See "Asset and Liability Management" above and
Note 5 to the Interim Consolidated Financial Statements included in Item 1
hereof.
The Company conducts business with a variety of financial institutions
and other companies in the normal course of business, including counterparties
to its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through financial
analysis, dollar limits and other monitoring procedures.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured institutions such as the Bank are required to
maintain minimum levels of regulatory capital. These standards generally must be
as stringent as the comparable capital requirements imposed on national banks.
In addition to regulatory capital requirements of general applicability, a
federally-chartered savings association such as the Bank may be required to meet
individual minimum capital requirements established by the OTS on a case-by-case
basis upon a determination that a savings association's capital is or may become
inadequate in view of its circumstances.
In connection with an examination of the Bank in late 1996 and early
1997, the staff of the OTS expressed concern about many of the Bank's
non-traditional operations, which generally are deemed by the OTS to involve
higher risk, certain of the Bank's accounting policies and the adequacy of the
Bank's capital in light of the Bank's lending and investment strategies. The
activities which were of concern to the OTS included the Bank's subprime single
family residential lending activities, the Bank's origination of acquisition,
development and construction loans with terms which provide for shared
participation in the results of the underlying real estate, the Bank's discount
loan activities, which involve significantly higher investment in nonperforming
and classified assets than the majority of the savings and loan industry, and
the Bank's investment in subordinated classes of mortgage-related securities
issued in connection with the Bank's asset securitization activities and
otherwise.
Following the above-referenced examination, the Bank committed to the
OTS to maintain a core capital (leverage) ratio and a total risk-based capital
ratio of at least 9% and 13%, respectively. The Bank continues to be in
compliance with this commitment as well as the regulatory capital requirements
of general applicability, as indicated in Note 8 to the Interim Consolidated
Financial Statements included in Item 1. Based on discussions with the OTS, the
Bank believes that this commitment does not affect its status as a
"well-capitalized" institution, assuming the Bank's continued compliance with
the regulatory capital requirements required to be maintained by it pursuant to
such commitment.
Although the above individual regulatory capital requirements have been
agreed to by the OTS, there can be no assurance that in the future the OTS will
agree to a decrease in such requirements or will not seek to increase such
requirements or will not impose these or other individual regulatory capital
requirements in a manner which affects the Bank's status as a "well-capitalized"
institution under applicable laws and regulations.
42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects on the Company of the adoption
of recent accounting standards see Note 1 to the Consolidated Financial
Statements.
CERTAIN STATEMENTS CONTAINED HEREIN ARE NOT, AND CERTAIN STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION, IN THE COMPANY'S PRESS RELEASES OR IN THE COMPANY'S OTHER PUBLIC OR
SHAREHOLDER COMMUNICATIONS, MAY NOT BE BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS
AMENDED. THESE FORWARD-LOOKING STATEMENTS, WHICH ARE BASED ON VARIOUS
ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL), MAY BE IDENTIFIED
BY REFERENCE TO A FUTURE PERIOD(S) OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "ANTICIPATE," "BELIEVE," "COMMITMENT," "CONSIDER," "CONTINUE," "COULD,"
"ENCOURAGE," "ESTIMATE," "EXPECT," "INTEND," "MAY," "PLAN," "PRESENT,"
"PROPOSE," "PROSPECT," "WILL," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS,
VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY
BELIEVES THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH FORWARD
LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE
THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS, UNCERTAINTIES
AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO,
INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS (PARTICULARLY
IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL AND MONETARY
POLICIES (PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES),
PREVAILING INTEREST OR CURRENCY EXCHANGE RATES, GOVERNMENT REGULATIONS AFFECTING
FINANCIAL INSTITUTIONS OR REAL ESTATE INVESTMENT TRUSTS (INCLUDING REGULATORY
FEES, CAPITAL REQUIREMENTS AND TAXATION), COMPETITIVE PRODUCTS AND PRICING,
CREDIT, PREPAYMENT, BASIS AND ASSET/LIABILITY RISKS, LOAN SERVICING
EFFECTIVENESS, THE COURSE OF NEGOTIATIONS AND THE ABILITY TO REACH AGREEMENT
WITH RESPECT TO THE MATERIAL TERMS OF ANY PARTICULAR TRANSACTION, SATISFACTORY
DUE DILIGENCE RESULTS, SATISFACTION OR FULFILLMENT OF AGREED UPON TERMS AND
CONDITIONS OF CLOSING OR PERFORMANCE, THE TIMING OF TRANSACTION CLOSINGS,
ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, SOFTWARE INTEGRATION,
DEVELOPMENT AND LICENSING, THE FINANCIAL AND SECURITIES MARKETS, THE
AVAILABILITY OF AND COSTS ASSOCIATED WITH OBTAINING ADEQUATE AND TIMELY SOURCES
OF LIQUIDITY, DEPENDENCE ON EXISTING SOURCES OF FUNDING, AVAILABILITY OF
DISCOUNT LOANS FOR PURCHASE, SIZE AND NATURE OF THE SECONDARY MARKET FOR
MORTGAGE LOANS AND THE MARKET FOR SECURITIZATIONS, GEOGRAPHIC CONCENTRATIONS OF
ASSETS (TEMPORARY OR OTHERWISE), OTHER FACTORS GENERALLY UNDERSTOOD TO AFFECT
THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING MARKETS AND SECURITIES
INVESTMENTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
AND FILINGS WITH THE SEC, INCLUDING ITS REGISTRATION STATEMENT ON FORM S-1 AND
PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K. THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY RELEASE THE RESULT(S) OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
43
FORWARD-LOOKING STATEMENTS
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item appears under the caption "Asset and
Liability Management" included in Item 2 hereof and Note 6 to the Interim
Consolidated Financial Statements included in Item 1 hereof, and is incorporated
herein by reference.
44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
================================================================================
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Bylaws (1)
4.0 Form of Certificate of Common Stock (1)
4.1 Form of Indenture between the Company and Bank One, Columbus, NA
as Trustee (1)
4.2 Form of Note due 2003 (included in Exhibit 4.1) (1)
4.3 Certificate of Trust of Ocwen Capital Trust I (3)
4.4 Amended and Restated Declaration of Trust of Ocwen Capital Trust
I (3)
4.5 Form of Capital Security of Ocwen Capital Trust I (4)
4.6 Form of Indenture relating to 10 7/8% Junior Subordinated
Debentures due 2027 of the Company (3)
4.7 Form of 10 7/8% Junior Subordinated Debentures due 2027 of the
Company (4)
4.8 Form of Guarantee of the Company relating to the Capital
Securities of Ocwen Capital Trust I (3)
4.9 Form of Indenture between the Company and The Bank of New York
as Trustee
4.10 Form of Subordinated Debentures due 2005 (5)
10.1 Ocwen Financial Corporation 1991 Non-Qualified Stock Option
Plan, as amended (1)
10.2 Annual Incentive Plan (1)
10.3 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (2)
10.4 Ocwen Financial Corporation 1998 Annual Incentive Plan (6)
10.5 Ocwen Financial Corporation Long-Term Incentive Plan (6)
10.6 Agreement for the Sale and Purchase of the Business of City
Mortgage Corporation Limited and its Subsidiaries and the Entire
Issued Share Capital of City Mortgage Receivables 7 PLC (7)
10.7 Loan Facility Agreement between Ocwen Limited, Greenwich
International, Ltd., and Ocwen Financial Corporation
10.8 Form of Master Repurchase Agreement Governing Purchases and
Sales of Mortgage Loans between Lehman Commercial Paper Inc.,
and Ocwen Financial Services, Inc.
27.1 Financial Data Schedule-For the three months ended March 31,
1998
- ----------------------
(1) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 333-5153, declared effective by the commission on September
25, 1996.
(2) Incorporated by reference to the similarly described exhibit included
with the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996.
(3) Incorporated by reference to the similarly identified exhibit filed in
connection with the Company's Registration Statement on Form S-1 (File
No. 333-28889), as amended, declared effective by the Commission on
August 6, 1997.
(4) Incorporated by reference to similarly described exhibit included with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(5) Incorporated by reference to the similarly described exhibit filed in
connection with Amendment No.2 to Offering Circular on Form OC (on Form
S-1) filed on June 7, 1995.
(6) Incorporated by reference to the similarly described exhibit to the
Company's Definitive Proxy Statement with respect to the Company's 1998
Annual Meeting as filed with the Commission on March 31, 1998.
(7) Incorporated by reference to the similarly described exhibit included
with Cityscape Financial Corp.'s Form 8-K, as filed with the Commission
on April 4, 1998.
45
--------------------------------
(i) Incorporated by reference to the similarly identified exhibit filed in
connection with the Company's Registration Statement on Form S-1 (File
No. 333-28889), as amended, declared effective by the Commission on
August 6, 1997.
(b) Reports on Form 8-K.
(1) A Form 8-K was filed by the Company on January 30, 1998 which
contained a news release announcing its financial results for
the three months and the year ended December 31, 1997,
including consolidated financial statements for the three
months and the year ended December 31, 1997.
(2) A Form 8-K was filed by the Company on April 7, 1998 which
contained a news release announcing an agreement to acquire
substantially all of the United Kingdom operations of
Cityscape Financial.
(3) A Form 8-K was filed by the Company on May 12, 1998 which
contained a news release announcing its financial results for
the three months ended March 31, 1998.
46
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Ocwen Financial Corporation
By: /s/ MARK S. ZEIDMAN
---------------------------------------
Mark S. Zeidman,
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as its principal financial officer)
Date: May 15, 1998
THIS AGREEMENT is made on 24 April 1998 between:
(1) OCWEN LIMITED, a company incorporated under the laws of England and
Wales, registered number 3542994 whose registered office is at 18
Southampton Place, London WC1A 2AJ (the "BORROWER"); and
(2) GREENWICH INTERNATIONAL, LTD. a company incorporated under the laws of
Bermuda, whose branch office in the United Kingdom is at 1 Jermyn
Street, 7th Floor, London (the "LENDER"); and
(3) OCWEN FINANCIAL CORPORATION, a company incorporated in the State of
Florida, USA and whose principal place of business is at The Forum,
1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401 ("OFC"
or the "Guarantor")
WHEREAS:
(1) City Mortgage Corporation Limited ("CMC"), Mortgage Management Limited
("MML"), a wholly owned subsidiary of CMC and the Lender have entered
into, inter alia, a Loan Facility Agreement dated 27 February 1998
pursuant to which a loan facility was made available to MML to enable
MML to purchase mortgage loans originated by CMC and its subsidiaries
(the "MML LOAN FACILITY AGREEMENT").
(2) OFC and CMC together with other parties referred to therein have
entered into an agreement for the sale and purchase of the business of
CMC and its subsidiaries dated 31 March 1998 (the "SALE AGREEMENT")
pursuant to which OFC has agreed to buy or procure another Buyer Group
Company (as therein defined) or any OAIC Group Company (as therein
defined) to buy the assets specified therein and the entire issued
share capital of City Mortgage Receivables 7 Plc.
(3) The Borrower, CMC and the other Donors (as defined therein) have agreed
to enter into the Supplemental Sale Agreement pursuant to which
Pipeline Loans will be originated by the Borrower, as agent of CMC and
the other Donors and immediately thereafter sold by CMC (or other
Donors) to the Borrower as principal.
(4) The Lender has agreed to provide a facility to the Borrower to finance
the acquisition by the Borrower of certain of the assets under the Sale
Agreement and to finance the origination by the Borrower of New
Production Mortgage Loans or the purchase of Pipeline Loans, on the
terms and subject to the conditions contained herein.
(5) OFC has agreed to indemnify the Lender in respect of inter alia, the
obligations of the Borrower under this Agreement.
1
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement (including the recitals hereto) the following terms
shall have the respective meanings set forth below:
"ACCELERATION" means any acceleration of the Advances hereunder
following the occurrence of an Event of Default.
"ACCOUNT ASSIGNMENTS" means the Borrower Collection Account Assignment
and the Borrower Funding Account Assignment.
"ACCOUNT BANK" means National Westminster Bank Plc or such other bank
or financial institution as may be substituted as account bank with the
prior written consent of the Lender.
"ADVANCE" means, save as otherwise provided herein, an advance (as from
time to time reduced by repayment and prepayment) made or to be made by
the Lender hereunder pursuant to the Term Loan or the Revolving
Commitment.
"ADVANCE DATE" means each date on which the Lender from time to time
shall make Advances to fund the origination or purchase of Mortgage
Loans hereunder.
"ADVANCE DATE PRINCIPAL BALANCE" means as to any Mortgage Loan, the
unpaid principal balance thereof as of the related Advance Date (or, if
later, the date of origination of such Mortgage Loan) provided that
(unless otherwise agreed between the Lender and the Borrower) such
unpaid principal balance shall be calculated after application of all
payments of principal due and received on or prior thereto, but without
giving effect to any instalments of principal received in respect of
due dates thereafter.
"ADVANCE PERCENTAGE" in respect of any Mortgage Loan to be funded
pursuant to a Revolving Advance hereunder means the lesser of (a) the
Market Value Percentage for such Mortgage Loan and (b) (i) 100% in the
case of Performing Senior Mortgage Loans, and (ii) 95% in the case of
Performing Junior Mortgage Loans.
"AGREED FORM UNDERTAKINGS AND DOCUMENTATION LETTERS" means the letters
of even date from the Lender, addressed respectively to (i) the
Borrower, Tomlinsons and Bernard Elliston Sandler & Co. and (ii) the
Borrower and Turner McFarlane Green, with agreed form documentation
attached, in each case signed by way of acknowledgement and acceptance
by the relevant solicitors and the Borrower.
"AGREEMENT" means this Loan Facility Agreement, including all schedules
and annexures hereto, which expression shall include the same as
varied, supplemented, re-stated, extended or replaced from time to
time.
2
"AVAILABLE COMMITMENT" means, at any time, the Revolving Commitment at
such time LESS the principal amount of the Revolving Loan then
outstanding.
"AVAILABILITY PERIOD" means the period commencing on the date of this
Agreement and ending on the earlier of:-
(1) the date on which the Lender ceases to be under any
obligation to make further Advances to the Borrower
hereunder pursuant to the terms hereof; and
(2) the Final Maturity Date.
"BORROWER COLLECTION ACCOUNT" means the account in the name of the
Borrower with the Account Bank number 36156914 assigned to the Lender
pursuant to the Borrower Collection Account Assignment.
"BORROWER COLLECTION ACCOUNT ASSIGNMENT" means the assignment of the
Borrower Collection Account in favour of the Lender dated on or about
the date hereof in form and substance satisfactory to the Lender.
"BORROWER FUNDING ACCOUNT" means an account in the name of the Borrower
at the Account Bank number 36156892 assigned to the Lender under the
Borrower Funding Account Assignment.
"BORROWER FUNDING ACCOUNT ASSIGNMENT" means the assignment of the
Borrower Funding Account in favour of the Lender dated on or about the
date hereof in form and substance satisfactory to the Lender.
"BORROWER WORKING CAPITAL ACCOUNT" means the account in the name of the
Borrower with the Account Bank number 36156906 charged by way of
floating charge in favour of the Lender pursuant to the Debenture.
"BORROWING BASE DEFICIENCY" means, on any day by reference to which the
same falls to be calculated, the excess (if any) of Outstanding
Advances over Collateral Value calculated and agreed in accordance with
clause 19.
"BUSINESS DAY" means a day (other than a Saturday or Sunday) on which
banks are generally open for business in London and New York.
"CCA" means the Consumer Credit Act 1974.
"CMC TRANSFER POWER OF ATTORNEY" means the power of attorney granted to
the Borrower and Solicitors by City Mortgage Corporation Limited and
the other Donors (as therein defined) pursuant to the Supplemental Sale
Agreement the form of which is annexed thereto ;
3
"CMC COLLECTION ACCOUNT" means account number 76694895 with the Account
Bank utilized for the time being for the purpose of collection of sums
payable by Mortgagors under all Mortgage Loans originated by CMC and
J&J.
"CMC COLLECTION ACCOUNT DECLARATION OF TRUST" means the declaration of
trust dated 21 March 1996, as supplemented by all supplemental
declarations of trust relating thereto, pursuant to which trusts over
all amounts credited from time to time to the CMC Collection Account
are (prior to execution of the Novation Agreements) constituted in
favour of, inter alia, GIL, CMF, certain Issuers and the trustee under
each Securitisation Receivables Trust.
"CMF" means City Mortgage Funding 1 Limited, incorporated under the
laws of England and Wales, number 3299937, whose registered office is
at Cityscape House, Croxley Business Park, Watford.
"CMF COLLECTION ACCOUNT" means an account in the name of CMF with the
Account Bank number 95660208.
"CMF COLLECTION ACCOUNT DECLARATION OF TRUST" means the declaration of
trust dated 30 April 1997, as supplemented by all supplemental
declarations of trust relating thereto, pursuant to which trusts over
all amounts credited from time to time to the CMF Collection Account
are (prior to execution of the Novation Agreements) constituted in
favour of, inter alia, GIL and City Mortgage Receivables 6 plc.
"COLLATERAL PERCENTAGE" in respect of any category of Mortgage Loan
means the percentage set out in the table below by reference to such
category of Mortgage Loan:-
Performing Senior Mortgage Loan 100%
Performing Junior Mortgage Loan 95%
Non Performing Senior Mortgage Loan 70%
Non Performing Junior Mortgage Loan 30%
"COLLATERAL SECURITY" has the meaning attributed to it in the
Debenture.
"COLLATERAL VALUE" means, on any Interest Payment Date by reference to
which the same falls to be determined, the aggregate of the values
attributed to each Existing Mortgage Loan, each New Production Mortgage
Loan and each Pipeline Loan financed under the Facility as at the
related Determination Date, the value to be attributed to each such
Mortgage Loan for such purpose to be determined by multiplying the
lesser of the Collateral Percentage and the Market Value Percentage for
each Mortgage Loan (on the basis of the status of such Mortgage Loan as
at the related Determination Date) by the outstanding principal amount
of each such Mortgage Loan as at the relevant Determination Date.
4
"COLLECTION ACCOUNTS" means the CMC Collection Account, the GFS Master
Collection Account, the CMF Collection Account and the Greyfriars
Originator Collection Accounts.
"COLLECTION ACCOUNT NOVATION AGREEMENT" means the agreement to be
entered into on or about the date hereof between, inter alia, the
Lender, the Borrower, each Greyfriars Originator, CMC, CMF and the
Account Bank pursuant to which, inter alia, the bank account agreements
relating to the Collection Accounts are to be amended and novated.
"COLLECTION PERIOD" means the calendar month immediately prior to the
calendar month in which the relevant Interest Payment Date falls.
"CONSOLIDATED INDEBTEDNESS" means for any period, the aggregate
Indebtedness of the relevant entity determined on a consolidated basis
in accordance with GAAP less any non-specific balance sheet reserves
maintained in accordance with GAAP.
"CONSOLIDATED TANGIBLE NET WORTH" means all amounts included as capital
on the relevant entity's consolidated balance sheet determined in
accordance with GAAP less amounts owing to affiliates and less any
intangible assets including, without limitation, goodwill and deferred
tax assets.
"COUNTER INDEMNITY" means the counter indemnity to be entered into on
or about the date hereof between OFC and the Borrower in respect of the
Indemnity, in form and substance satisfactory to the Lender.
"DEBENTURE" means the debenture to be entered into on or about the date
hereof in form and substance satisfactory to the Lender by the Borrower
in favour of the Lender creating fixed and floating charges over all of
the Borrower's undertaking and assets.
"DEFERRED ASSIGNMENT OF COLLATERAL SECURITY" means the assignments of
Collateral Security by the relevant Originator, direct to the Borrower,
pursuant to the Sale Agreement in relation to Existing Mortgage Loans
originated since 27 February 1998 but in respect of which the relevant
Collateral Security has not been assigned to MML.
"DETERMINATION DATE" means the last day of each Collection Period.
"DRAWDOWN REQUEST" means the form of written request for an Advance to
be delivered by the Borrower to the Lender prior to the relevant
Advance Date, substantially in the form set out in Schedule 1 together,
where the Advance is under the Revolving Commitment, with a Solicitors
Certificate of Title and Undertaking attached thereto in relation to
each Mortgage Loan to be originated and/or each Pipeline Loan to be
acquired.
5
"DUE DATE" means the due date for payment by the Mortgagor of principal
and/or interest under the terms of the relevant Mortgage Loan.
"ELIGIBLE COLLATERAL" means any Mortgage Loan which is not, at the date
on which the same is charged in favour of the Lender under clause 15.5
already subject to the Debenture and:-
(a) which has not already been financed hereunder; and
(b) which would, were it to be financed hereunder, fulfill all
required criteria including, without limitation, compliance
with all representations and warranties.
"ENGLISH MORTGAGE LOAN" means a Mortgage Loan secured over a Mortgaged
Property situated in England or Wales.
"EVENT OF DEFAULT" means any one of the conditions or circumstances
referred to in clause 17.
"EXCLUDED LOANS" means any mortgage loans acquired or originated by the
Borrower from time to time but which are not funded pursuant to this
Agreement, other than Securitised Mortgage Loans.
"EXISTING MORTGAGE LOANS" means those Mortgage Loans to be purchased by
the Borrower from, inter alia, MML pursuant to the terms of the Sale
Agreement and listed in Schedule 1 to the Debenture (which schedule
shall exclude the Excluded Loans and the Securitised Mortgage Loans).
"EXTENSION" means any renewal of the Revolving Facility, for one or
more further periods pursuant to clauses 2.8 and 2.9.
"EXTENSION PERIOD" means each period by which the Revolving Facility
may, from time to time, be extended.
"FACILITY" means the facility granted to the Borrower by the Lender
under this Agreement.
"FACILITY OFFICE" means the office of the Lender through which it makes
any Advance to the Borrower.
"FINAL MATURITY DATE" means:
(a) the day falling 180 days from the date hereof unless that day
is not a Business Day in which case the Final Maturity Date
shall be the immediately preceding day which is a Business
Day; or
6
(b) in the event that there is any Extension or Extensions of the
Revolving Facility, the last Business Day of (and falling
within) the first Extension Period (if there is not more than
one Extension) or, if there is more than one Extension, the
final Extension Period.
"GFS MASTER COLLECTION ACCOUNT" means an account in the name of
Greyfriars Financial Services Limited with the Account Bank number
80126243 to which are credited all payments made by Mortgagors under
Mortgage Loans originated by any Greyfriars Originator.
"GFS MASTER COLLECTION ACCOUNT DECLARATION OF TRUST" means the
declaration of trust dated 18 October 1996 (as supplemented by all
supplemental declarations of trust relating thereto) constituting
trusts over all amounts standing to the credit of the GFS Master
Collection Account (prior to execution of the Novation Agreement) in
favour of, inter alia, GIL, CMF, certain Issuers and the trustees of
each Securitisation (prior to execution of the Novation Agreement)
Receivables Trust.
"GREYFRIARS ORIGINATOR" means each of Home Funding Corporation Limited,
Assured Funding Corporation Limited and Home Mortgage Corporation
Limited.
"GREYFRIARS ORIGINATOR COLLECTION ACCOUNTS" has the meaning attributed
thereto in the Greyfriars Originator Collection Account Declaration of
Trust.
"GREYFRIARS ORIGINATOR COLLECTION ACCOUNT DECLARATION OF TRUST" means
the declaration of trust dated 18 October 1996 (as supplemented by all
supplemental declarations of trust relating thereto) constituting
trusts (declared by, inter alia, each Greyfriars Originator) over all
amounts standing to the credit of the Greyfriars Originator Collection
Accounts in favour of (prior to execution of the Novation Agreements),
inter alia, GIL, certain Issuers and the trustees of each
Securitisation Receivables Trust.
"HOLDING COMPANY" of a company or corporation means any company or
corporation of which the first-mentioned company or corporation is a
subsidiary, and references to a company or corporation shall be deemed
to include a company or corporation which is not formed and registered
under the Companies Act 1985.
"INDEBTEDNESS" means any obligation (whether incurred as principal,
cautioner or surety) for the payment or repayment of money in respect
of:
(a) monies borrowed and debit balances at banks;
(b) any loan note, bond, note, loan stock, commercial paper,
debenture or other security;
(c) any acceptance or documentary credit;
7
(d) the deferred purchase price of property or services, except
accounts payable and accrued expenses arising in the ordinary
course of business;
(e) any receivable sold or discounted (otherwise than on a
non-recourse basis);
(f) the capital value of any lease (whether in respect of land,
machinery, equipment or otherwise) entered into primarily as a
method of raising finance or financing the acquisition of the
asset leased;
(g) any currency or interest swap, cap, collar, floor or corridor
transaction, any repurchase or reverse repurchase transaction,
any foreign exchange, spot or forward transaction, any stock
lending transaction, any financial option, or any combination
of any of the foregoing; or
(h) without double counting, any guarantee, indemnity or
contingent liability in respect of any borrowings of any
person of a type referred to in (a) to (g) above but only to
the extent the borrowings thereby guaranteed or indemnified
against are outstanding.
"INDEMNITY" means the indemnity to be given by OFC on or about the date
hereof in form and substance satisfactory to the Lender indemnifying,
inter alia, the Lender for, inter alia, the obligations of the Borrower
under this Agreement.
"INITIAL ADVANCE" means the advance of the Term Loan.
"INTEREST PAYMENT DATE" means the 15th day of each month unless that
day is not a Business Day in which case the Interest Payment Date shall
be the immediately preceding day which is a Business Day.
"INTEREST PERIOD" means, for each Advance, each of the following
periods:
(a) the period commencing on (and including) the day the relevant
Advance is made and ending on (but excluding) the next
following Interest Payment Date; and
(b) thereafter, each period commencing on (and including) an
Interest Payment Date and ending on (but excluding) the next
following Interest Payment Date,
provided that any Interest Period which would otherwise overrun the
Final Maturity Date or the Repayment Date (of the relevant Advance)
shall end upon whichever is the earlier of the Final Maturity Date or
the relevant Repayment Date.
"INTIMATIONS OF ASSIGNATIONS OF TRUST PROPERTY" means the intimations
of the Scottish Trust Assignations, in the form set out in Schedule 5.
8
"ISSUERS" means each of City Mortgage Receivables 1 Plc (Company No.
3126751), City Mortgage Receivables 2 Plc (Company No. 3245450), City
Mortgage Receivables 3 Plc (Company No. 3245445), City Mortgage
Receivables 4 Plc (Company No. 3246090), City Mortgage Receivables 5
Plc (Company No. 3304205) and City Mortgage Receivables 6 Plc (Company
No. 3328209).
"J&J" means J&J Securities Limited, a company incorporated in England
and Wales under number 1335672 whose registered office is at Cityscape
House, Croxley Business Park, Watford, Herts, WD1 8YF.
"JUNIOR MORTGAGE LOAN" means any Existing Mortgage Loan, New Production
Mortgage Loan or Pipeline Loan financed or to be financed hereunder and
which is secured other than by way of a first ranking legal mortgage or
first ranking Standard Security.
"LIBOR" in respect of a particular period and in relation to an Advance
or other amount in respect of which an interest rate is to be
determined pursuant to this Agreement, means the percentage interest
rate per annum for the time being offered in the London Interbank
Market to prime banks for one month sterling deposits at or about 11.00
a.m. (London time) on the first day of such period as published on the
relevant page of The Bloomberg (Bloomberg L.P.) under the heading
"Money Market-Money Market Rates".
"MANUALS" has the meaning attributed to it in the Servicing Agreement.
"MARGIN" means (a) 1.50% with respect to the Initial Advance under the
Term Loan and (b) with respect to all Revolving Advances under the
Revolving Facility (i) 1.50% until the Interest Payment Date
immediately following the date on which at least (pound
sterling) 200,000,000 in aggregate principal amount of the Initial
Advance has been repaid to the Lender and (ii) 0.875% for any Interest
Payment Date thereafter.
"MARKET VALUE PERCENTAGE" in respect of any Mortgage Loan on any date
of determination means the market value of such Mortgage Loan
(expressed as a percentage of the unpaid principal balance of such
Mortgage Loan) determined by the Lender in its sole discretion acting
reasonably following consultation with the Borrower, which
determination in the absence of manifest error shall be conclusive.
"MASTER NOVATION AGREEMENT" means the novation agreement to be entered
into on or about the date hereof between, inter alia, the Lender, Ocwen
Asset Investment - UK, LLC, each Issuer, CMC, CMF, each Greyfriars
Originator and CMS, pursuant to which, inter alia:-
(a) contracts relating to the Securitisations are amended and
novated or, as the case may be, amended and rights thereunder
assigned; and
9
(b) trusts in favour of the Borrower over all amounts credited,
inter alia, to any Collection Account from time to time which
represent or relate to monies received or recovered from
Mortgagors under Mortgage Loans owned (whether legally or
beneficially) by the Borrower, other than Securitisation
Mortgage Loans, are constituted.
"MHA DOCUMENTATION" means in relation to any Scottish Mortgage Loan,
any affidavit, consent or renunciation granted in terms of the
Matrimonial Homes (Family Protection) (Scotland) Act 1981 given in
connection with such Scottish Mortgage Loan or the Mortgaged Property
secured thereunder.
"MINDED TO REVOKE NOTICE" means any notice given under section 32 of
the CCA.
"MIRAS SCHEME" means the mortgage interest relief at source scheme
specified in section 369 of the Income and Corporation Taxes Act 1988.
"MML" means Mortgage Management Limited;
"MML ASSIGNMENT OF COLLATERAL SECURITY" means the assignment of
Collateral Security by, inter alia, MML to the Borrower of even date
hereto pursuant to the terms of the Sale Agreement.
"MML TRANSFERS" means the transfers of even date of all Existing
Mortgage Loans executed by, inter alia, MML and CMF in favour of the
Borrower pursuant to the Sale Agreement.
"MORTGAGE DEED" means in relation to each Mortgage Loan, the deed
creating the charge by way of first or subsequent ranking legal
mortgage or first or subsequent ranking Standard Security over the
relevant Mortgaged Property, and incorporating the terms and conditions
on which the relevant advance to the Mortgagor was made.
"MORTGAGE FILE" means the Mortgage Loan Documents pertaining to a
particular Mortgage Loan, together with the related mortgage
application forms completed by the relevant Mortgagor(s), credit agency
checks, if any, carried out in respect of such Mortgagor(s),
correspondence files and all other material documents, papers and
computer records held by or for the relevant Originator in respect of
the particular Mortgage Loan.
"MORTGAGE LOAN" means the relevant loan (and, as the context admits,
all security therefor (including Collateral Security in relation
thereto) and all rights and entitlements of the relevant Originator in
relation thereto and all references to Mortgage Loan in or connection
with any representation and warranty herein shall be construed as a
reference to the Mortgage Loan, together with the related Mortgage and
all Collateral Security related thereto) made by an Originator to a
Mortgagor secured by a first or junior ranking legal mortgage or first
or junior ranking Standard Security in favour of the Originator over
the relative Mortgaged Property.
10
"MORTGAGE LOAN DOCUMENTS" means the documents listed in Schedule 3
pertaining to any Mortgage Loan.
"MORTGAGE LOAN PACKAGE" means the Mortgage Loans requested to be
financed hereunder under any Drawdown Notice.
"MORTGAGE LOAN PURCHASE AGREEMENT" means the agreement dated 14 June
1996 between the Lender (1) and CMC (2) whereby the Lender agreed to
purchase and CMC agreed to sell mortgage loans originated by CMC and
its approved affiliates.
"MORTGAGE LOAN SCHEDULE" means the schedule of Mortgage Loans annexed
to each Drawdown Request.
"MONTHLY PAYMENT" means in respect of any Existing Mortgage Loan or New
Production Mortgage Loan financed hereunder the monthly payment due and
payable by the relevant Mortgagor on the relevant Monthly Payment Date.
"MORTGAGED PROPERTIES" means each and all (as the context admits)
freehold and/or leasehold properties in England or Wales mortgaged
under and/or properties held on heritable title or long lease in
Scotland secured under the relative Mortgage Deeds.
"MORTGAGE TRANSFER AGREEMENT" means the Agreement dated 27 February
1998 made between Greenwich International, Ltd., City Mortgage Funding
1 Limited, MML and the Originators.
"MORTGAGOR" means the party (or parties) referred to as such or as "THE
BORROWER"in the relevant Mortgage Deed.
"NEW PRODUCTION MORTGAGE LOANS" means Mortgage Loans originated by the
Borrower on or after the date hereof.
"NON PERFORMING JUNIOR MORTGAGE LOANS" means a Junior Mortgage Loan
which as of the last day of the related Collection Period has due and
unpaid all or any part of at least one Monthly Payment.
"NON PERFORMING SENIOR MORTGAGE LOANS" means each Existing Mortgage
Loan, New Production Mortgage Loan and Pipeline Loan financed hereunder
and which:
(a) is a Senior Mortgage Loan; and
(b) as of the last day of the related Collection Period has due
and unpaid all or any part of at least two Monthly Payments.
"NOVATION AGREEMENTS" means the Master Novation Agreement and the
Collection Account Novation Agreement.
"OFT" means the Office of Fair Trading.
11
"OFT GUIDELINES" means the guidelines issued by the OFT relating to the
non-status lending market in effect from time to time.
"ORIGINATION SALE AND PURCHASE AGREEMENT" means the agreement dated 27
February 1998 made between City Mortgage Corporation Limited and others
and MML;
"ORIGINATOR" means in relation to all New Production Mortgage Loans,
the Borrower, and in relation to all Existing Mortgage Loans and
Pipeline Loans the originator of such Mortgage Loan (which, for the
avoidance of doubt, shall, in relation to Pipeline Loans, be construed
as a reference to the relevant Donor (as defined in the CMC Transfer
Power of Attorney).
"ORIGINATOR ASSIGNMENTS OF COLLATERAL SECURITY" means the assignments
of Collateral Security executed by Originators in favour of MML dated
27 February 1998 and executed pursuant to the Mortgage Transfer
Agreement;
"ORIGINATOR ASSIGNMENTS OF NEW COLLATERAL SECURITY" means the
assignments of Collateral Security executed by Originators in favour of
MML pursuant to the terms of the Origination Sale and Purchase
Agreement.
"ORIGINATOR TRANSFERS" means the transfers of Pre-Existing Mortgage
Loans by Originators in favour of MML pursuant to the Mortgage Transfer
Agreement and dated 27 February 1998, and transfers of Existing
Mortgage Loans originated since that date, dated the date of the
origination of the relevant Existing Mortgage being transfers by
Originators in favour of MML pursuant to the Originator Sale and
Purchase Agreement.
"ORIGINATORS AND MML POWER OF ATTORNEY" means the Power of Attorney of
even date in the form annexed to the Sale Agreement and therein
referred to as the "Buyer's Power of Attorney" executed by, inter alia,
the Originators (of Existing Mortgage Loans) and MML in favour of the
Borrower and the Lender.
"OUTSTANDING ADVANCES" means, on any day by reference to which the same
falls to be determined, the aggregate amount of all Advances
outstanding under the Facility.
"PERFORMING JUNIOR MORTGAGE LOAN" means a Junior Mortgage Loan which is
not a Non Performing Junior Mortgage Loan.
"PERFORMING SENIOR MORTGAGE LOAN" means each Existing Mortgage Loan,
New Production Mortgage Loan or Pipeline Loan financed hereunder and
which:
(a) is a Senior Mortgage Loan; and
(b) is not a Non Performing Senior Mortgage Loan.
12
"PIPELINE LOANS" means the Mortgage Loans acquired by the Borrower
pursuant to the terms of the Supplemental Sale Agreement from time to
time, and financed hereunder;
"POTENTIAL EVENT OF DEFAULT" means any event which with the giving of
notice or the passing of time or both or the occurrence of any other
event will become an Event of Default.
"PRE-EXISTING MORTGAGE LOAN" means each Existing Mortgage Loan
originated on or before 27 February, 1998.
"REGISTERS OF SCOTLAND" means the Land Register of Scotland and/or the
General Register of Sasines.
"REGULATED MORTGAGE LOAN" means a Mortgage Loan that is a regulated or
partly regulated agreement for the purposes of the Consumer Credit Act
1974.
"REPAYMENT DATE" means in relation to any Advance, the date which shall
be 180 days following its Advance Date or the Final Maturity Date,
whichever is the earlier.
"REVOLVING ADVANCE" means an Advance drawn under the Revolving
Facility.
"REVOLVING COMMITMENT" means an initial commitment of 50,000,000 (fifty
million pounds) increasing to 100,000,000 (one hundred million pounds)
in the circumstances set out in clause 2.6 or such lesser amount
following a cancellation pursuant to clause 5 hereof.
"REVOLVING FACILITY" means the revolving credit facility made available
pursuant to clause 2.1(b).
"REVOLVING LOAN" means the aggregate of Advances drawn down against the
Revolving Commitment by the Borrower save to the extent that any such
Advances have been repaid to the Lender.
"SCOTTISH MORTGAGE LOAN" means a Mortgage Loan secured over a Mortgaged
Property situated in Scotland.
"SCOTTISH TRUST ASSIGNATION" has the meaning defined in the Debenture.
"SECURED LIABILITIES" means all liabilities and obligations of whatever
nature of the Borrower, OFC or any other person secured under any
Security Document.
"SECURITISATION BANK AGREEMENTS" means the six bank agreements dated 21
March 1996, 18 October 1996, 31 October 1996, 31 January 1997 and 30
April 1997 in relation to the Securitisations.
13
"SECURITISATION COLLECTION ACCOUNT TRUSTS" means the CMC Collection
Account Declaration of Trust, the CMF Collection Account Declaration of
Trust, the GFS Master Collection Account Declaration of Trust and the
Greyfriars Originator Collection Account Declaration of Trust.
"SECURITISATIONS" means each of the six securitisations of Mortgage
Loans originated by CMC and certain of its subsidiaries, effected
through sales of the Mortgage Loans to the Issuers on 21 March, 1996,
18 October, 1996, 31 October, 1996, 31 January, 1997 and 30 April,
1997.
"SECURITISED MORTGAGE LOANS" has the meaning attributed to it in the
Debenture.
"SECURITY" includes any mortgage, sub mortgage, Standard Security,
fixed or floating charge, sub charge, encumbrance, lien, pledge,
hypothecation, absolute assignment, assignment by way of security, or
title retention arrangement, and any agreement or arrangement having
substantially the same economic or financial effect as any of the
foregoing (including any "hold back" or "flawed asset" arrangement).
"SECURITY DOCUMENTS" means the Debenture, (and each further security
document executed pursuant thereto including, without limitation, any
Supplemental Deed of Charge), the Account Assignments and any security
executed in respect of additional collateral provided pursuant to the
terms hereof.
"SENIOR MORTGAGE LOANS" means each Existing Mortgage Loan, New
Production Mortgage Loan and Pipeline Loan financed or to be financed
hereunder and which is secured by way of a first ranking legal mortgage
or first ranking Standard Security.
"SERVICE DOCUMENT" means "a writ, summons, order, judgment or other
process issued out of the courts of England and Wales in connection
with any Proceedings.
"SERVICER" means Ocwen UK Servicing Limited.
"SERVICING AGREEMENT" means the interim servicing agreement in form and
substance satisfactory to the Lender to be entered into on or about the
date hereof between the Borrower, the Lender and the Servicer.
"SOLICITOR LETTERS OF INSTRUCTION" means the form of letters of
instruction so described and annexed to each of the Agreed Form
Undertakings and Documentation Letters.
"SOLICITORS" means each of Tomlinsons, Bernard Elliston Sandler & Co,
and in relation to Scottish Mortgage Loans, Turner MacFarlane Green and
each other firm of solicitors approved in writing by the Lender, each
comprising a minimum of two partners holding current practicing
certificates issued by the Law Society or the Law Society of Scotland,
engaged by the Borrower to undertake conveyancing and/or security
enforcement services in relation to Mortgaged Properties, and who carry
professional indemnity insurance in the sum of at least (pound
sterling) 1,000,000 for each and every claim against them by any party
in any one year or such increased amount as may from time to time be
prescribed by the Lender, acting reasonably.
14
"SOLICITORS CERTIFICATE OF TITLE AND UNDERTAKING" means the certificate
of title and undertaking to be attached to each Drawdown Request in
relation to Advances under the Revolving Commitment in the form set out
in Schedule 5 addressed to the Borrower and the Lender (in relation to
both the origination of New Production Mortgage Loans and the
acquisition of Pipeline Loans).
"SOLICITORS UNDERTAKING" means the Solicitors Certificate of Title and
Undertaking, the Solicitors Undertaking re: Existing Mortgage Loans;
the Solicitors Undertaking re: New Advance Monies; and the Solicitors
Undertaking re: New Mortgage Loans in the forms set out in Schedule 5.
"SOLICITOR'S UNDERTAKING RE: EXISTING MORTGAGE LOANS" means the form of
undertaking so described and annexed to each of the Agreed Form
Undertakings and Documentation Letters and set out in Schedule 5
hereto;
"SOLICITOR'S UNDERTAKING RE: NEW ADVANCE MONIES" means the form of
undertaking so described and annexed to each of the Agreed Form
Undertakings and Documentation Letters and set out in Schedule 5
hereto;
"SOLICITOR'S UNDERTAKING RE: NEW MORTGAGE LOANS" means the form of
undertaking so described and annexed to each of the Agreed Form
Undertakings and Documentation Letters and set out in Schedule 5;
"STANDARD SECURITY" means a standard security in terms of the
Conveyancing and Feudal Reform (Scotland) Act 1970.
"STANDARD FORM DOCUMENTATION" means the standard form documents used or
to be used by the Borrower or CMC and the other Donors (as defined
under the Supplemental Sale Agreement) where origination has continued
in the name of such companies after the date hereof in the origination
of Mortgage Loans as the same have been initialled by the parties
hereto for the purpose of identification and annexed hereto in Annexure
2 or as otherwise changed, varied or substituted by or on behalf of the
Borrower as approved and agreed by the Lender.
"SUBSIDIARY" has the meaning given to it by section 736 of the
Companies Act 1985 save that references therein to company shall be
deemed to include a company which has not been formed and registered
under the Companies Act 1985.
"SUPPLEMENTAL SALE AGREEMENT" means the origination and transfer
agreement to be entered into on or about the date hereof between, inter
alia, the Borrower, CMC and the Donors (as defined thereunder).
15
"SUPPLEMENTAL SECURITY POWERS OF ATTORNEY" means the powers of attorney
granted by the Borrower in favour of the Solicitors in the form set out
in Schedule 5 hereto.
"SUPPLEMENTAL DEED OF CHARGE" means any supplemental charge or
assignation in security made by the Borrower in favour of the Lender
pursuant to the Debenture.
"TERM" means save as otherwise provided herein, in relation to any
Advance, the period commencing on (and including) the date on which
such Advance is made and ending on (but excluding) the Repayment Date
relating to such Advance.
"TERM LOAN" means a loan in the amount of (pound sterling)
225,276,933.93 to be made available to finance the purchase of all
Existing Mortgage Loans to be acquired by the Borrower pursuant to the
Sale Agreement.
"TERM LOAN REPAYMENT DATE" means the date which shall be 180 days after
the date on which the Term Loan is drawn or, if such day is not a
Business Day the immediately preceding Business Day.
"TRANSACTION DOCUMENTS" means this Agreement, the Security Documents,
the Indemnity, the Servicing Agreement, and each other document at any
time entered into between all or any of the Borrower, OFC, the Lender,
the Servicer and any third party pursuant to or in connection with any
document which is a Transaction Document.
"UNDERTAKING" means the undertaking to be given by OFC to the Borrower
on or about the date hereof, in form and substance satisfactory to the
Lender.
"UNDERWRITING GUIDELINES" means the underwriting guidelines published
by City Mortgage Corporation Limited as adopted by the Borrower as at
the date of completion under the Sale Agreement, and initialled by the
parties hereto for the purpose of identification and attached hereto as
Annexure 2 as the same may be amended or supplemented from time to time
with the prior written consent of the Lender.
the "LENDER" shall be construed so as to include its and any subsequent
successors and assigns in accordance with their respective interests.
a "MONTH" is a reference to a period starting on one day in a calendar
month and ending on the numerically corresponding day in the next
following calendar month; PROVIDED that, where any such period would
otherwise end on a day which is not a Business Day, it shall end on the
following succeeding Business Day, unless that day falls in the
calendar month next following that in which it would otherwise have
ended, in which case it shall end on the immediately preceding Business
Day; and provided further that, if there is no numerically
corresponding day in the next following calendar month, that period
shall end on the last Business Day in that next following calendar
month (and references to "MONTHS" shall be construed accordingly).
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a "PERSON" shall be construed as a reference to any person, firm,
company, corporation, government, state or agency of a state or any
association or partnership (whether or not having separate legal
personality) of two or more of the foregoing.
"REPAY" (or any derivative form thereof) shall, subject to any contrary
indication, be construed to include "PREPAY" (or, as the case may be,
the corresponding derivative form thereof).
"TAX" shall be construed so as to include any present or future tax,
levy, impost, duty or other charge of a similar nature (including any
penalty or interest payable in connection with any failure to pay or
any delay in paying any of the same).
"VAT" shall be construed as a reference to value added tax including
any similar tax which may be imposed in place thereof from time to
time.
the "WINDING-UP", "DISSOLUTION" or "ADMINISTRATION" of a company or
corporation shall be construed so as to include any equivalent or
analogous proceedings under the law of the jurisdiction in which such
company or corporation is incorporated or any jurisdiction in which
such company or corporation carries on business including the seeking
of liquidation, winding-up, reorganisation, dissolution,
administration, arrangement, adjustment, protection or relief of
debtors.
1.2 INTERPRETATION
For the purposes of this Agreement except as otherwise expressly
provided or unless the context otherwise requires:-
(1) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally
accepted accounting principles save that references herein to
GAAP are to generally accepted accounting principles in the
United States of America;
(2) references herein to "clauses", "sub-clauses", "paragraphs",
and other subdivisions without reference to a document are to
designated clauses, sub-clauses paragraphs and other
subdivisions of this Agreement;
(3) reference to a sub-clause without further reference to a
clause is a reference to such sub-clause as contained in the
same clause in which the reference appears, and this rule
shall also apply to paragraphs and other subdivisions;
(4) the words "herein", "hereof", "hereunder" and other words of
similar import refer to this Agreement as a whole and not to
any particular provision;
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(5) headings to clauses and Schedules are for convenience only and
do not affect the interpretation of this Agreement;
(6) references to a "company" shall be construed so as to include
any company, corporation or other body corporate, wherever and
however incorporated or established;
(7) references to times of the day are to London time;
(8) references to any agreement (including without limitation to
each Transaction Document), shall be construed as a reference
to such agreement as the same may be, or may from time to time
have been, amended, modified, supplemented or restated in
accordance with the terms of the Transaction Documents;
(9) "(pound sterling)", "POUNDS" and "STERLING" denote the lawful
currency of the United Kingdom;
(10) any reference in this Agreement to a statute shall be
construed as a reference to such statute as the same may have
been, or may from time to time be, amended, modified or
re-enacted.
2. THE FACILITY AND PURPOSE
2.1 The Lender hereby grants to the Borrower a credit facility comprising:-
(1) the Term Loan; and
(2) a revolving credit facility in an initial maximum aggregate
principal amount of 50,000,000 (fifty million pounds)
increasing to 100,000,000 (one hundred million pounds) in the
circumstances set out in clause 2.6 or such lesser amount
following a cancellation pursuant to Clause 5, on and subject
to the terms of this Agreement.
2.2 At no time may the aggregate principal amount of Advances drawn under
the Revolving Facility hereunder exceed the Revolving Commitment.
2.3 The Initial Advance will be used by the Borrower for the sole purpose
of financing the purchase of the Existing Mortgage Loans from inter
alia, MML on the terms of the Sale Agreement.
2.4 Advances drawn under the Revolving Facility will be used by the
Borrower for the sole purpose of financing the origination of New
Production Mortgage Loans or the purchase of Pipeline Loans pursuant to
the Supplemental Sale Agreement.
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2.5 The Lender shall not be obliged to concern itself with the application
of amounts borrowed by the Borrower under this Agreement and
application by the Borrower of funds so borrowed contrary to the
provisions of clauses 2.3 and 2.4 shall not prejudice the Lender's
rights hereunder or under any other Transaction Document.
2.6 The Revolving Commitment shall increase in the following manner:-
(a) upon repayment of (pound sterling) 200,000,000 of the Term
Loan, from 50,000,000 (fifty million pounds) to 75,000,000
(seventy five million pounds);
(b) thereafter for every (pound sterling) 1.00 repaid under the
Term Loan, by (pound sterling) 1.00; and
(c) in any event, upon repayment of the Term Loan in full to
100,000,000 (one hundred million pounds).
2.7 The Lender shall cease to be obliged to make any Advances hereunder on
the Final Maturity Date and any undrawn portion of the Revolving
Commitment shall be automatically cancelled on that date.
2.8 The Borrower may, not later than 7 days prior to the then current Final
Maturity Date, by written notice to the Lender, request an extension of
the Revolving Facility for a further period provided that the Borrower
may only request an extension which would not, if granted, cause the
overall term of the Revolving Facility to exceed 364 days.
2.9 In the event that the Borrower requests an extension of the Revolving
Facility pursuant to clause 2.8 the Lender may, in its sole discretion,
agree to the requested extension or may agree to an extension of the
Revolving Facility for a further period which is less than the
requested extension, and shall, by notice in writing to the Borrower to
be given no later than 2 days prior to the then current Final Maturity
Date inform the Borrower of its decision. For the avoidance of doubt
the Lender shall be under no obligation whatsoever to agree to any
requested extension of the Revolving Facility.
3. AVAILABILITY
3.1 The Facility will not become available to the Borrower and the Lender
shall be under no obligation to make any Advance hereunder until each
of the following conditions precedent shall have been fulfilled to the
satisfaction of the Lender:
(1) the Lender shall have received each of the following
documents, each in form and substance satisfactory to it:-
(1) a certified copy of the Certificate of Incorporation
and Memorandum and Articles of Association or
constitutional documents of each of the Borrower, OFC
(comprising, in the case of OFC, articles of
incorporation, byelaws and a certificate of good
standing) and the Servicer each duly certified by the
secretary or a director of the relevant company as
true, accurate and complete as at the date of drawing
of the Initial Advance;
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(2) originals (or, where the Lender is not party to the
relevant document, certified copies) of each of the
following documents, duly executed by each party
thereto other than the Lender:-
(1) the Indemnity, Counter Indemnity and
Undertaking;
(2) the Security Documents and all notices and
acknowledgements thereof to be given and
received thereunder and all consents to any
such security being granted;
(3) the Servicing Agreement;
(4) the Collection Account Novation Agreement, the
Master Novation Agreement and all documents
referred to therein, including without
limitation mandates relating to the Collection
Accounts and declarations of trust;
(5) the Sale Agreement including all schedules
thereto and the disclosure letter relating
thereto;
(6) the Supplemental Sale Agreement (and the CMC
Transfer Power of Attorney annexed thereto);
(7) Solicitors Undertaking re: Existing Mortgage
Loans;
(8) MML Transfers;
(9) Scottish Trust Assignation;
(10) Intimations of Assignation of Trust Property;
(11) MML Assignment of Collateral Security;
(12) Originator and MML Power of Attorney;
(13) Deferred Assignment of Collateral Security;
(14) Agreed Form Undertakings and Documentation
Letters;
(15) Originator Transfers;
(16) Originator Assignments of Collateral Security;
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(17) Solicitor Letters of Instruction;
(18) Solicitors Undertaking re: New Advance Monies;
(19) Supplemental Security Power of Attorney;
(20) CMC Transfer Power of Attorney;
(21) Standard Security Sasine Register and Land
Register;
(3) in respect of each of the Borrower, OFC and the
Servicer, a copy (certified by the secretary or a
director or equivalent officer of the relevant
company to be true, complete and up to date as at the
date of drawing of the Initial Advance) of all board
minutes and all other resolutions and authorisations
passed or given in relation to the Transaction
Documents;
(4) in respect of the Borrower, a solvency certificate in
the form set out in Schedule 2 dated the date of the
Initial Advance;
(5) in respect of each of the Borrower, OFC and the
Servicer a copy (certified by the secretary or a
director or equivalent officer of the relevant
company to be true, complete and up to date as at the
date of advance of the Initial Advance) of all
consents, approvals, authorisations or orders of any
court or governmental agency or body (including,
without limitation, the OFT) required for the
execution, delivery and performance by it of, or
compliance by it with, the terms of any Transaction
Document or the consummation of the transactions
contemplated thereby;
(6) in relation to each of the Borrower and the Servicer
a copy (certified by the secretary or a director of
the relevant company as in full force and effect) of
the Consumer Credit Act license held by such company
together with evidence of registration of each such
company under the Data Protection Act 1984;
(7) duly executed account mandates in relation to the
Borrower Funding Account and the Borrower Collection
Account, specifying the authorised signatories for
the Borrower;
(8) Assignations of the Scottish Declarations of Trust or
Supplemental Declarations of Trust (as the case may
be) in favour of the Borrower executed by MML.
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(2) the Lender shall have received confirmation as to the identity
of all Solicitors engaged or intended by the Borrower as at
the date of this Agreement to be engaged in relation to
conveyancing and/or security enforcement concerning Mortgaged
Properties, together with evidence as to their respective
professional indemnity insurance cover;
(3) all conditions precedent under each other Transaction Document
(other than any requirement that the Facility shall have
become available hereunder) shall have been fulfilled or
expressly waived by the Lender;
(4) the Lender shall have received legal opinions, each in form
and substance satisfactory to it, from each of the following
firms:
(1) Edge and Ellison;
(2) Tods Murray;
(3) Akin, Gump, Strauss, Hauer & Feld LLP; and
(4) in house counsel to OFC.
(5) all conditions precedent to the Novation Agreements shall have
been satisfied; and
(6) the Lender shall have received a copy of the acceptances of
appointment as agent for service of process under clause 30.
4. DRAWINGS
4.1 Subject to:-
(1) The conditions precedent in Clause 3 having been fulfilled to
the satisfaction of the Lender or waived by the Lender;
(2) no Event of Default or Potential Event of Default having
occurred and subsisting unremedied (to the satisfaction of the
Lender) and unwaived;
(3) there having been received from the Borrower by the Lender not
later than 5pm (London time) on the Business Day before the
date on which the Initial Advance is to be made a duly
completed Drawdown Request relating thereto including a
schedule giving required details of each Existing Mortgage
Loan,
the Lender will make the Initial Advance to the Borrower on the date
hereof.
4.2 Subject to:-
(1) each condition precedent in Clause 3 having been fulfilled to
the satisfaction of the Lender or waived by the Lender;
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(2) no Event of Default or Potential Event of Default having
occurred and subsisting unremedied (to the satisfaction of the
Lender) and unwaived;
(3) there having been received from the Borrower by the Lender not
later than 5pm (London time) on the Business Day before the
date on which an Advance under the Revolving Commitment is to
be made a Solicitor's Certificate of Title and Undertaking in
respect of each Mortgage Loan the origination or acquisition
of which the Borrower proposes to finance by the relevant
Advance and a duly completed Drawdown Request (and a schedule
thereto) together with a copy of the schedules of all Mortgage
Loans to be originated or acquired on its behalf on the
relevant date and a data tape in respect of the relevant
Mortgage Loans, in computer readable form, containing such
information regarding the Mortgage Loans as was previously
provided to the Lender under the MML Loan Facility Agreement
immediately prior to the date hereof;
(4) the Lender having approved the Mortgage Loans to be financed,
such approval to be evidenced by the Lender by signing the
schedule of Mortgage Loans and the related Drawdown Request
having deleted therefrom any Mortgage Loans which do not meet
the Underwriting Guidelines;
(5) no event described under 17.1 (l), (m), (n) or (o) having
occurred;
(6) no Minded to Revoke Notice having been served on the Borrower
or the Servicer;
(7) no injunction or interdict having been obtained by (or on
behalf of) the OFT against the Borrower or the Servicer which
relates to its respective residential mortgage lending
activities including, without limitation, any Mortgage Loan
financed hereunder;
(8) where the proposed Advance is to fund Mortgage Loans secured
by a Mortgage over unregistered land where the Borrower does
not hold the title deeds to such Mortgaged Property (and in
relation to which the Borrower's legal mortgage is therefore a
second or subsequent ranking legal mortgage protected at
Central Land Charges Registry by registration of a C(i) Land
Charge) the Lender shall have received a schedule of such
Mortgage Loans (together in relation to such Mortgage Loans
with the full names of the owners of such Mortgaged Property
and the full address of that Mortgaged Property);
(9) where the proposed Advance is to fund a Pipeline Loan:-
(1) the date of the Advance being no later than two
months after the date hereof;
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(2) no event described under 17.1(l) having occurred and
no petition for an administration order having been
presented in relation to CMC or other Donor (as
defined in the CMC Transfer Power of Attorney); and
(3) each Donor (as described in the CMC Transfer Power of
Attorney) having, at the time of the proposed
Advance, a valid consumer credit license,
the Borrower may draw additional Advances under the Revolving
Commitment (subject to the provisions of this Agreement) Provided
always that:-
(i) Advances may be made on Business Days during the
Availability Period;
(ii) each Advance shall be a minimum of (pound sterling)
100,000 or, if less than (pound sterling) 100,000,
the Available Commitment;
(iii) no Advance shall be made to the extent that, if as a
result thereof the Revolving Loan for the time being
outstanding would exceed the Revolving Commitment;
(iv) no Advance shall be made or may be requested to
refinance any Mortgage Loan the origination or
purchase of which was financed by a prior Advance
under this Agreement;
(v) the amount of each Advance requested shall not be
greater than the amount equal to the Advance
Percentage of the Advance Date Principal Balance of
the particular Mortgage Loan.
4.3 Subject to the foregoing provisions of this Clause 4, upon receipt of a
duly executed Drawdown Request, the Lender shall, not later than 10 am
New York time on the date on which the Advance is to be made (or such
later time as maybe agreed between the Borrower and the Lender), make
the Advance requested, such Advance to be credited to the Borrower
Funding Account or, after prior consultation with and written notice to
the Borrower, the applicable Solicitors and the Servicer, to be
advanced to the Solicitors acting for the Borrower in relation to the
particular New Production Mortgage Loans or Pipeline Loans, against the
Solicitors Undertaking re: New Advance Monies from the relevant
Solicitors, and it is acknowledged (for the avoidance of doubt) that
any Advance paid to Solicitors under clause 4.3 shall be deemed to have
been drawn by the Borrower under this Agreement on the date of such
payment.
4.4 If the Borrower fails for any reason whatsoever (other than as a
consequence of a breach of the Lender's obligations) to draw down an
Advance after a Drawdown Request has been received by the Lender
(whether such failure be the result of the occurrence of an Event of
Default or otherwise), the Borrower will pay to the Lender on demand
such amount as the Lender certifies to be necessary to compensate for
all losses excluding loss of Margin incurred or to be incurred on
account of deposits acquired or arranged in order to fund the Advance.
Any such certificate by the Lender shall be PRIMA FACIE evidence of
such losses.
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4.5 In the event that no duly completed Solicitors Undertaking re: New
Mortgage Loans shall have been received by the Lender in respect of any
Mortgage Loan(s) in respect of which an Advance shall have been made
hereunder by the close of business on the third Business Day following
the making of the Advance the Lender shall immediately notify the
Borrower and an amount equal to the Advance, or such part thereof as
was advanced in respect of such Mortgage Loan or Mortgage Loans shall
become immediately due and repayable by the Borrower to the Lender
together with accrued interest thereon.
4.6 If all or any part of any Advance made to finance a Mortgage Loan which
is subject to the provisions of Clause 4.5 shall be held by any
Solicitors payment in full by such Solicitors to the Lender of the
amounts due under Clause 4.5 shall discharge the Borrower's obligation
to pay the same.
4.7 All parties hereby agree and acknowledge that:
(1) all sums credited to the Borrower Funding Account shall be
subject to the Borrower Funding Account Assignment; and (1)
(2) all sums credited to the Borrower Collection Account shall be
subject to the Borrower Collection Account Assignment.
5. CANCELLATION
5.1 The Borrower may at any time by giving not less than two Business Days
irrevocable written notice to the Lender cancel any amount (in integral
multiples of (pound sterling) 5,000,000) of the Revolving Commitment to
the extent not currently outstanding or requested in a current Drawdown
Request Provided that the cancelled amount does not reduce the
Revolving Commitment below the outstanding principal amount of Advances
drawn under the Revolving Commitment plus the amount of Advances
requested in a current Drawdown Request.
5.2 During such period of notice the Borrower may not serve a Drawdown
Request purporting to draw all or any part of the amount of the subject
of such notice of cancellation.
5.3 Upon such cancellation becoming effective, the Revolving Commitment
shall be appropriately reduced.
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6. INTEREST ON ADVANCES
6.1 The Borrower will pay interest on each Advance on each Interest Payment
Date in respect of each Interest Period referable thereto at the rate
per annum equal to the aggregate of (i) the Margin and (ii) LIBOR for
the relevant Interest Period.
6.2 The Lender will, as soon as practicable after commencement of each
Interest Period advise the Borrower of LIBOR for that Interest Period.
Any certificate of the Lender as to the rate and amount of interest
determined by it under this Agreement in respect of any Interest Period
shall, save for manifest error, be conclusive and binding on the
Borrower and OFC.
6.3 Interest at the rate determined as aforesaid shall be calculated on
each Advance and each part thereof on the basis of actual days elapsed
and a 365 day year, shall accrue from day to day from and including the
first day of each Interest Period to but excluding the date of
repayment of such Advance.
6.4 If LIBOR cannot be determined for any reason the rate of interest
applicable to such Advance shall be the sum of the Margin and the rate,
expressed as a percentage rate per annum, which is the actual cost to
the Lender of funding such Advance from whatever sources it may select
during such Interest Period (as applicable) and, if the Lender so
requires, within five days of such notification the Lender and the
Borrower shall enter into negotiations with a view to agreeing a
substitute basis for determining the rates of interest which may be
applicable to Advances in the future.
7. REPAYMENT AND APPLICATION OF RECEIPTS
7.1 The Borrower shall, subject as provided herein, repay the amount of the
Term Loan then outstanding in full on the Term Loan Repayment Date. Any
amount repaid, or any part thereof, may not be redrawn.
7.2 The Borrower shall repay the whole of the outstanding amount of each
Revolving Advance on the Repayment Date relating thereto. Any amount
repaid or any part thereof may, subject to the provisions of this
Agreement, be redrawn.
7.3 If on any Interest Payment Date there is a BORROWING BASE DEFICIENCY
the Borrower shall, at its option, on the Business Day immediately
following the Interest Payment Date either:-
(1) prepay an amount equal to the amount of the Borrowing Base
Deficiency; or
(2) provide additional Eligible Collateral of a value which is
determined by the Lender to be at least equal to the amount of
the Borrowing Base Deficiency, charged (by way of first fixed
charge) in favour of the Lender.
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7.4 On each Interest Payment Date all amounts standing to the credit of the
Borrower Collection Account shall be applied in or toward satisfaction
of obligations of the Borrower in the following order of priority:-
(a) first, in or toward payment of all interest falling due to the
Lender hereunder on the relevant Interest Payment Date
together with any overdue interest accrued thereon up to and
including the relevant distribution date;
(b) second, in or towards repayment of any Borrowing Base
Deficiency or any other amount due under Clause 7 on such
date;
(c) third, in or towards payment of all amounts due and owing to
the Lender under all Transaction Documents other than the
foregoing; and
(d) the balance to be released to the Borrower,
Provided that at all times following an Acceleration the provisions of
this Clause 7.4 shall cease to apply and after such time all amounts
received or recovered in respect of the assets subject to the Security
Documents may be applied by the Lender in or towards satisfaction of
the Secured Liabilities in such order as the Lender in its absolute
discretion shall determine.
7.5 If the Borrower is required to repay principal on any Advance on any
day other than an Interest Payment Date, the Borrower shall be obliged
to pay such amount together with interest accrued thereon to the date
of such repayment.
7.6 If all or any part of any Advance is repaid under this clause other
than on an Interest Payment Date, the Borrower will pay to the Lender
on demand such amount as the Lender certifies to be necessary to
compensate it for all losses excluding loss of Margin incurred or to be
incurred by it on account of deposits acquired or arranged in order to
fund the relevant Advance except in the case of repayment of any
Advance pursuant to a securitisation underwritten by Greenwich Capital
Markets, Inc. of Mortgage Loans financed hereunder. Any such
certificate by the Lender shall be PRIMA FACIE evidence of such losses.
7.7 Subject to Clause 7.6, the Borrower may on any Business Day, upon five
Business Days prior written notice to the Lender, prepay in whole or in
part any Advance outstanding hereunder together with all accrued
interest thereon.
7.8 If the outstanding Advances are prepaid pursuant to clause 10.6 or
clause 11.4, the Revolving Commitment shall be reduced to zero and the
Lender shall cease to be obliged to make Advances hereunder.
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8. EXAMINATION OF MORTGAGE FILES
8.1 The Lender shall have the right to examine the Mortgage Files to
determine whether the Mortgage Loans to be financed fulfill the
Underwriting Guidelines. Such examination may be made by the Lender at
any time before or after the date on which any Advance is to be or was
made.
8.2 If the Lender makes such examination prior to the date on which an
Advance is to be made and properly identifies any Mortgage Loans which
do not fulfill the Underwriting Guidelines such Mortgage Loans shall be
deleted from the schedule of Mortgage Loans appended to the Drawdown
Request.
8.3 The Lender may make an Advance without conducting any partial or
complete examination. The fact that the Lender has conducted or has
failed to conduct any partial or complete examination of the Mortgage
Files shall not affect the Lender's (or any of its successor's) rights
provided herein.
9. EVIDENCE OF DEBT
The Lender shall maintain in accordance with its usual practice
accounts evidencing the amounts from time to time lent by and owing to
it hereunder, and in any legal action or proceeding arising out of or
in connection with this Agreement, the entries made in such accounts
shall in the absence of manifest error be PRIMA FACIE evidence of the
existence and amounts of the specified obligations of the Borrower.
10. TAXES
10.1 The Lender and the Borrower intend:
(1) that they shall not vary this Agreement so as to extend:
(1) the term of the Term Loan;
(2) the period during which any Advance may be drawn down
or outstanding, beyond the Final Maturity Date, and
(2) that the Lender shall not make any further advance or advances
to the Borrower after the Final Maturity Date under or
pursuant to any further agreement; and
(3) that this clause 10.1 shall be without prejudice to the
provisions of clause 16.9.
10.2 Accordingly, all payments to be made by the Borrower to the Lender
hereunder shall be made free and clear of and without deduction or
withholding for or on account of tax.
28
10.3 If the Borrower is nevertheless required as a result of any change in
law or in its interpretation or administration to make any payment to
the Lender hereunder subject to any deduction or withholding on account
of tax the sum payable by the Borrower in respect of which such
deduction or withholding is required to be made shall (subject to
Clause 10.8) be increased to the extent necessary to ensure that, after
the making of the required deduction or withholding, the Lender
receives and retains (free from any liability in respect of such
deduction or withholding) a net sum equal to the sum which it would
have received and so retained had no such deduction or withholding been
made or required to be made.
10.4 If the Borrower makes any payment hereunder in respect of which it is
required by law to make any deduction or withholding on account of tax,
it shall pay the full amount required to be deducted or withheld to the
relevant taxation or other authority within the time allowed for such
payment under applicable law and shall deliver to the Lender, within
thirty days after it has made such payment to the applicable authority,
an original receipt (or a certified copy thereof) issued by such
authority evidencing the payment to such authority of all amounts so
required to be deducted or withheld in respect of such payment or any
other written evidence acceptable to the Lender.
10.5 All amounts payable under this Agreement are expressed to be exclusive
of any VAT chargeable in respect thereof. If any VAT is chargeable in
respect of such amounts, the Borrower shall, in addition, pay to the
Lender an amount equal to such VAT, and the Lender shall provide the
Borrower with a proper VAT invoice in respect thereof.
10.6 If the Lender or the Borrower becomes aware that the Borrower will be
required as a result of any change in law or its interpretation or
administration to make any payment to the Lender hereunder subject to
any deduction or withholding on account of tax, the Lender or, as the
case may be, the Borrower shall, promptly upon becoming aware of the
same, notify the other party, in writing, setting out the reasons for
the anticipated deduction or withholding and the date from which such
deduction or withholding will be required by law to be made (such date
the "WITHHOLDING DATE").
10.7 The Borrower shall be entitled, at any time within 45 days after the
giving or receipt of notice under clause 10.6 to prepay all (but not
part) of the Advances (together with all interest accrued thereon and
other amounts then due hereunder) provided that:-
(1) notice of prepayment pursuant to this clause 10.7 must state
that the prepayment is to be made pursuant to this clause
10.7; and
(2) the provisions of clause 7.6 shall not apply in respect of any
such prepayment.
10.8 If, during the 45 day period, the Borrower is required to make any
payment to the Lender hereunder subject to a deduction or withholding,
the Borrower shall be entitled to make such payment net of the
deduction or withholding but shall be obliged to pay the amount
deducted or withheld to the relevant taxation authority in accordance
with clause 10.4.
29
10.9 If, at the expiration of the 45 day period the Borrower has not prepaid
under clause 10.7, the provisions of clause 10.3 shall apply from the
46th day.
11. INCREASED COSTS
11.1 If, by reason of:-
(1) the introduction of, or any change in any applicable law,
regulation or regulatory requirement or any change in the
interpretation or application of any thereof in each case
after the date hereof and/or
(2) compliance by the Lender or any holding company of the Lender
with any applicable directive, request or requirement whether
or not having the force of law but, if not having the force of
law being of general application and of a type with which the
Lender or a holding company of the Lender is accustomed to
comply of any central bank or any self regulating organisation
or any governmental, fiscal, monetary or other authority
(including, but not limited to, a directive, request or
requirement which affects the manner in which any bank
allocates capital in support of its assets or liabilities or
contingent liabilities or deposits with it or for its account
or advances or commitments made by it) which is brought into
effect after the date hereof,
and if, to the extent of compliance with either or both of paragraphs
(a) and (b):-
(3) the Lender or any holding company of the Lender is unable to
obtain the rate of return on its capital which it would have
been able to obtain but for the Lender's entering into or
assuming or maintaining a commitment or performing its
obligations (including its obligation to make Advances) under
this Agreement;
(4) the Lender or any holding company of the Lender incurs a cost
as a result of the Lender's entering into or assuming or
maintaining a commitment or performing its obligations
(including its obligation to make Advances) under this
Agreement;
(5) there is any increase in the cost to the Lender or any holding
company of the Lender of funding or maintaining all or any of
the Advances;
(6) the Lender or any holding company of the Lender becomes liable
to make any payment on account of tax or otherwise (except on
account of any tax imposed on and calculated by reference to
the net income of the Facility Office by the jurisdiction in
which the Lender (or its holding company) is incorporated or
in
30
which the Facility Office is located), or foregoes any
interest or other return, on or calculated by reference to the
amount of any Advance or the amount of any sum received or
receivable by it (or its subsidiary) under this Agreement,
then the Borrower shall, from time to time on demand of the Lender,
promptly pay to the Lender amounts sufficient to indemnify the Lender
and its holding company against, as the case may be, (1) such reduction
in the rate of return of capital, (2) such cost, (3) such increased
cost (or such proportion of such increased cost as is, in the opinion
of the Lender, attributable to its or its holding company funding or
maintaining the Advance), or (4) such liability.
11.2 If the Lender intends to make a claim pursuant to clause 11.1 it shall
notify the Borrower of the event by reason of which it is entitled to
do so, such notification to be given as soon as practicable following
the Lender becoming aware of the same, PROVIDED that nothing herein
shall require the Lender to disclose any confidential information
relating to the organisation of its affairs.
11.3 If the Borrower receives notice under clause 11.2, then without
prejudice to the Lender's rights under clause 11.1, the Lender shall
consult with the Borrower as to possible steps that could be taken to
reduce any such increased costs, provided that the Lender shall be
under no obligation to take any such steps considered.
11.4 Upon receipt of a notice under clause 11.2 the Borrower shall be
entitled, upon the giving of 5 Business Days written notice, to prepay
all (but not part) of the Advances (together with all interest accrued
thereon and other amounts then due hereunder) provided that the
provisions of clause 7.6 shall not apply in respect of any such
prepayment.
12. ILLEGALITY
If, at any time, it is or becomes unlawful for the Lender to make, fund
or allow to remain outstanding all or part of any of the Advances, then
the Lender shall, promptly after becoming aware of the same, deliver to
the Borrower a notice to that effect, the Lender shall not thereafter
be obliged to make any Advances hereunder, the Revolving Commitment
shall be immediately reduced to zero and, if the Lender so requires,
the Borrower shall on such date as the Lender shall have specified
repay any outstanding Advances, in each case together with accrued
interest thereon and all other amounts owing to the Lender hereunder.
13. PAYMENTS
Any payment to be paid by the Borrower to the Lender pursuant to this
Agreement shall be made in sterling, in immediately available, freely
transferrable and cleared funds for value same day, to such account of
the Lender as the Lender shall, from time to time, have specified in
writing for such purpose.
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14. REPRESENTATIONS AND WARRANTIES
14.1 The Borrower and OFC (each in relation to itself) hereby represent,
warrant, covenant and undertake to the Lender that (except as
previously disclosed to the Lender in writing on or prior to the date
hereof):-
(1) it is a limited liability company duly incorporated under the
laws of England and Wales and, in the case of OFC, it is a
corporation duly incorporated and validly existing and in good
standing under the laws of the State of Florida and is duly
authorised and qualified to transact any and all business
contemplated by this Agreement and the other Transaction
Documents to be conducted by it and is in compliance with such
laws to the extent necessary to ensure its ability to enforce
each Mortgage Loan;
(2) it has the full corporate power and authority to execute,
deliver and perform, and to enter into and consummate the
transactions contemplated by this Agreement and the other
Transaction Documents to which it is a party and has been duly
authorised by all necessary corporate action on its part the
execution, delivery and performance of this Agreement and the
other Transaction Documents to which it is a party; and this
Agreement and each Transaction Document to which it is a
party, assuming the due authorisation, execution and delivery
thereof by the Lender, constitutes its legal, valid and
binding obligation, enforceable against it in accordance with
its respective terms, except to the extent that (a) the
enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, receivership and other similar laws
relating to creditors' rights generally and (b) the remedy of
specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and
to the discretion of the court before which any proceeding
therefor may be brought;
(3) its execution and delivery of this Agreement and each
Transaction Document to which it is a party, the consummation
of any other of the transactions herein or therein
contemplated on its part and the fulfillment of or compliance
with the terms hereof or thereof will not (i) result in a
material breach of any term or provision of its Memorandum and
Articles of Association and/or its other constitutional
documents or (ii) materially conflict with, result in a
material breach, violation or acceleration of, or result in a
material default under, the terms of any other material
agreement or instrument to which it is a party or by which it
may be bound, or any statute, order or regulation applicable
to it of any court, regulatory body, administrative agency or
governmental body having jurisdiction over it;
(4) it is not party to, bound by, or in breach or violation of any
material indenture or other material agreement or instrument,
or subject to or in violation of any statute, order or
regulation of any court, regulatory body, administrative
agency or governmental body having jurisdiction over it, which
materially and adversely affects or, to its knowledge, would
in the future materially and adversely affect, (i) its ability
to perform its obligations under this Agreement or the
Transaction Documents to which it is a party or (ii) its
business, operations, financial condition, properties or
assets taken as a whole;
32
(5) no litigation is pending or, to the best of its knowledge,
threatened against it that would materially and adversely
affect the execution, delivery or enforceability of this
Agreement or the Transaction Documents to which it is a party
or its ability to perform any of its obligations hereunder or
thereunder in accordance with the terms hereof or thereof;
(6) no consent, approval, authorisation or order of any court or
governmental agency or body is required for the execution,
delivery and performance by it of, or compliance by it with,
this Agreement or any Transaction Document to which it is a
party or the consummation of the transactions contemplated
hereby or thereby, or if any such consent, approval,
authorisation or order is required, it has obtained or it is
in the process of obtaining the same.
14.2 The representations and warranties under clause 14.1(a)-(f) inclusive
shall be given on the date of this Agreement and shall be repeated on
each date on which any Advance is outstanding hereunder by reference to
the facts and circumstances existing at the relevant time.
14.3 The Lender represents and warrants to the Borrower in terms of clauses
14.1(a) to (f) (inclusive), mutatis mutandis, provided that the
reference in clause 14.1(a) to England and Wales shall be construed as
a reference to Bermuda.
14.4 (a) The Borrower hereby represents and warrants (as of the date
hereof and the date on which the Initial Advance is made)
that:
(1) with respect to each Pre-Existing Mortgage Loan, each
of the representations and warranties set out in
paragraph 7.3 of the Mortgage Loan Purchase Agreement
as set out in Schedule 4 Part I hereto was, on the
date on which such Pre-Existing Mortgage Loan was
completed true and accurate in all respects; and
(2) with respect to each Existing Mortgage Loan which is
not a Pre-Existing Mortgage Loan, each of the
representations and warranties set out in paragraph
14.3(B) of the MML Loan Facility Agreement as set out
in Schedule 4 Part II hereto was on the date referred
to therein in respect of such Existing Mortgage Loan
true and accurate in all respects.
33
(2) The Borrower hereby represents and warrants to the
Lender in relation to each New Production Mortgage
Loan and each Pipeline Loan, in each case as of the
Advance Date on which an Advance was made to fund the
origination or the purchase of the same hereunder or,
if later, the date on which a Solicitors Undertaking
re: New Mortgage Loans in respect thereof is issued,
as follows (but on the basis that each reference in
each representation and warranty to:-
(1) a Mortgage Loan shall be construed as a
reference to the relevant New Production
Mortgage Loan and/or Pipeline Loan; and
(ii) the Advance Date shall be construed as a
reference to whichever is the later of the
relevant Advance Date or the date on which the
relevant Solicitors Undertaking re. New
Mortgage Loans is given):
(1) The information set forth on the Mortgage
Loan Schedule with respect to each
Mortgage Loan is true and correct in all
material respects;
(2) Unless otherwise agreed from time to time
with respect to Non Performing Senior
Mortgage Loans and Non Performing Junior
Mortgage Loans, all payments due prior to
the Advance Date have been made and none
of the Mortgage Loans will have been
contractually delinquent for 31 or more
days more than once since the origination
thereof, the Lender hereby agreeing that
where the Mortgage Loan is funded
hereunder on its origination, this
warranty shall not apply;
(3) Each Mortgage Deed constitutes (i) in the
case of English Mortgage Loans, a valid
and enforceable legal mortgage of the
relevant Mortgaged Property subject only
in certain cases to registration of the
relevant Mortgage Deed at HM Land
Registry, or (ii) in the case of Scottish
Mortgage Loans, a valid and enforceable
Standard Security over the relevant
Mortgaged Property subject only in
certain cases to registration or
recording of the relevant Mortgage Deed
in the Registers of Scotland, in either
case duly executed by the Mortgagor named
in the relevant Mortgage Deed;
(4) On the date upon which an Advance is made
the Borrower (subject only to
registration of legal title at HM Land
Registry or the Registers of Scotland as
appropriate) has good title to each
Mortgage Loan and the Collateral Security
in respect of each such Mortgage Loan,
has full right and authority to charge
and assign the same by way of security
and the same is the absolute property of
the Borrower (subject to any registration
or recording in favour of the Borrower
which may be pending at
34
HM Land Registry or the Registers of
Scotland) free and clear of all
mortgages, securities, charges, liens,
encumbrances, claims and equities
(including, without limitation, rights of
set off or counterclaim, overriding
interest within the meaning of Section
3(xvi) of the Land Registration Act 1925
or Section 28(1) of the Land Registration
(Scotland) Act 1979 and adverse entries
or notices of application therefor
against any title at HM Registry or the
Registers of Scotland to any relevant
Mortgaged Property) except any such
encumbrances, claims, equities,
overriding interests or entries which
rank after the interests of the Borrower,
the Lender in the Mortgaged Loans or
which do not have an adverse effect on
the value of the relevant Mortgaged
Property as security for the relevant
Mortgage Loan or which are the subject of
a duly completed and signed Postponement
Agreement or appropriate executed MHA
Documentation as contemplated in
sub-clause (X) below;
(5) Each Mortgaged Property is a residential
property or mixed commercial and
residential property in the United
Kingdom;
(6) The steps necessary to perfect the
vesting of full legal and equitable title
to each Mortgage Loan and the Collateral
Security in the Borrower have been duly
taken at the appropriate time or are in
the course of being taken with all due
diligence;
(7) To the best of its knowledge, each
Mortgaged Property is free of material
damage;
(8) Each Mortgage Loan at origination
complied in all material respects with
applicable laws and regulations
including, where applicable, the Consumer
Credit Act 1974 and any regulations made
thereunder (and in particular no Mortgage
Loan is cancellable thereunder) and
consummation of the transactions
contemplated hereby will not involve the
violation of any such laws and
regulations;
(9) Neither it nor any prior holder of any
Mortgage Loan has; (a) modified the
Mortgage Loan in any material respect,
except that a Mortgage Loan may have been
modified by a written instrument in
respect of which any applicable
registration(s) have been completed; (b)
satisfied, cancelled or subordinated such
Mortgage Loan in whole or in part; (c)
released the related Mortgaged Property
in whole or in part from the security
created by the relevant Mortgage Deed; or
(d) executed any instrument of release,
cancellation, discharge, modification or
satisfaction with respect thereto;
35
(10) No sub-mortgage, sub-charge, pledge, lien
or right of set off or counterclaim or
other security interest or other adverse
right or interest has been created or has
arisen between it and any Mortgagor which
entitles or entitled the Mortgagor to
reduce the amount of any payment
otherwise due under the terms of such
Mortgagor's Mortgage Loan (save, in the
case of junior mortgages, the relevant
prior ranking legal mortgage or mortgages
of or Standard Security over the relevant
Mortgaged Property created by the
Mortgagor and any related security for
the loan secured thereby);
(11) Each Mortgage Loan was originated in all
material respects in accordance with the
criteria set out in the Underwriting
Guidelines;
(12) In relation to each Mortgaged Property:-
1) in respect of title to property in
England or Wales which is not
registered, the relevant Mortgagor
had or was acquiring good and
marketable title to the fee simple
absolute in possession (if freehold)
or a term of years absolute of not
less than thirty years beyond the
term of the Mortgage Loan (if
leasehold) relating to such
Mortgaged Property and is free from
any encumbrance which would
adversely affect such title;
2) in relation to title which is
registered at HM Registry, it was so
registered with title absolute in
the case of freehold property or
absolute leasehold or good leasehold
title of the requisite title
aforesaid in the case of leasehold
property;
3) in relation to which title is
registered or recorded in the
Registers of Scotland, it was so
registered or recorded with valid
and marketable title (whether feudal
or long lease), having in the case
of a long lease an unexpired term of
not less than thirty years beyond
the term of the Mortgage Loan;
4) no works on the relevant Mortgaged
Property were carried out in
violation of any applicable planning
law or regulation or building
regulations;
36
5) if the relevant Mortgaged Property
is leasehold or (in Scotland) held
under long lease, any requisite
consent of the landlord to or notice
to the landlord of the creation of
the relevant Mortgage had been
obtained or given and no consents of
or notices to such landlord are
required to any transfer,
assignation or sub-charge of the
relevant Mortgage, and a copy of any
such consent or notice is held with
the title deeds to the relevant
Mortgaged Property or held to the
order of the Lender or its
Solicitors;
6) the relevant Mortgaged Property is
not subject to any adverse third
party claim or proceeding for
compulsory acquisition thereof;
(13) Each Mortgage relating to a Mortgage Loan
(and any other documents entered into in
relation to the relevant Mortgage Loan)
is the legal, valid and binding
obligation of the grantor thereof,
enforceable in accordance with its terms
and with applicable laws and parties
thereto had legal capacity to execute the
same and the same have been duly and
properly executed by such parties;
(14) Either:
1) the proceeds of the Mortgage Loans
have been fully disbursed and there
is no requirement for further
advances thereunder; or
2) if any retention was recommended by
the Borrower or its valuer, the
recommendation to make a retention
was implemented and cash was not
advanced until the Borrower had
received a certificate (or other
evidence acceptable to it) of
completion of the relevant repairs
or other works.
(15) Each Mortgage Deed is in, or
substantially in, the form of the
relevant attachment annexed hereto in
Annexure 2 or as otherwise agreed and
approved by the Lender.
(16) The origination and underwriting
practices used by the Borrower with
respect to each Mortgage Loan have been
in all respects legal, proper, prudent
and customary in the mortgage servicing
business in the United Kingdom and comply
with the Underwriting Guidelines;
37
(17) Either:
1) each Mortgaged Property is insured
under the block insurance policy
from time to time maintained by the
Borrower to provide, where it is
agreed that the Mortgagor will not
insure, cover against such risks and
contingencies as are commonly
insured against in a fully
comprehensive buildings insurance
for residential properties to a
minimum of the full cost of
reinstatement thereof together with
inflation cost over any period that
may be required for obtaining any
relevant planning permission and
other approvals and the
reinstatement or repair period and
architects and other professional
fees; or
2) where the Mortgagor insures, the
Borrower has established that such
insurance was, at the date of
origination of the relevant Mortgage
Loan, in accordance with the
foregoing provisions of this
sub-clause, with a reputable
insurer, with an acknowledgement by
the insurer that the interest of the
Borrower has been or will be
promptly following the relevant
Advance Date noted on the relevant
policy. In the case of leasehold
property in England and Wales, the
relevant Mortgaged Property is
insured under arrangements effected
by the freeholder or any
intermediate leaseholder, on a fully
comprehensive basis as aforesaid.
(18) Prior to making the relevant advance the
subject of a Mortgage Loan, the Borrower
carried out or caused to be carried on
its behalf the investigations, searches
(other than local authority searches) and
other actions and made or caused to be
made on its behalf the enquiries as to
the Mortgagor's status that were required
in accordance with the relevant lending
criteria of the Borrower applicable at
the time when the offer of advance was
made and the results thereof were
acceptable to the Borrower in accordance
with such lending criteria for the
purposes of the proposed advance;
(19) Any further advances after the date of
the Mortgage Deed but made prior to the
Advance Date have been advanced under
separate mortgage documentation (and,
accordingly, have not been consolidated
with the outstanding principal amount
secured by the Mortgage), and all ground
rents, ground burdens and service charges
and other payments required in relation
to
38
leasehold property or heritable property
which previously became due and owing
have been paid. Except for interest
accruing from the date of the relevant
Mortgage Deed or date of advance to the
relevant Mortgagor, whichever is later,
to the day which precedes by one month
the date for payment of the first
installment of principal and interest,
the Borrower has not advanced funds, or
induced, solicited or knowingly received
any advance of funds by a party other
than the Mortgagor, directly or
indirectly, for the payment of any amount
in relation to the relevant Mortgage Loan
save to the extent that the same reduces
the Mortgage Loan;
(20) To the best of the Borrower's knowledge
and belief (the Borrower having made all
reasonable enquiries) there is no
default, breach, violation or event of
acceleration existing under any Mortgage
Loans and it has not waived any default,
breach, violation or event of
acceleration other than any waiver which
is in accordance with and permitted under
the relevant Manuals;
(21) Each Mortgage File contains a valuation
of the relevant Mortgaged Property
undertaken on the instructions of the
Borrower or instructions issued on its
behalf or as the case may be by any
predecessor in title in relation to the
relevant Mortgage Loan) by an independent
qualified valuer being an associate or
fellow of the Royal Institute of
Chartered Surveyors or, as the case may
be, Society of Valuers and Auctioneers,
in each case approved by the Borrower and
unless otherwise agreed between the
Lender and the Borrower, the principal
amount advanced to the relevant Mortgagor
was not more than the amount permissible
under the terms of the relevant Program;
(22) At the time of the making of the Mortgage
Loan, the Mortgaged Property was not
located within a 1 mile radius of any
contaminated land or any land with
environmental or hazardous waste risks
known to the Borrower or, where such was
the case, an environmental audit was
procured by the Borrower or evaluated in
accordance with its established
environmental review procedures, and
found to be satisfactory;
(23) In selecting the Mortgage Loans in
respect of which Advances are made
hereunder, no selection procedure was
employed by the Borrower which was
intended to adversely affect the
interests of the Lender;
39
(24) Prior to the making of the relevant
mortgage advance, enquiry was made of
each Mortgagor as to the identity of the
persons in actual occupation of the
Mortgaged Property and (i) in the case of
English Mortgage Loans, any person who at
the date when the advance was made had
attained the age of 18 and who was
identified in writing to the Borrower or
its Solicitor by the Mortgagor as
residing or being about to reside in the
relevant Mortgaged Property is either
named as joint mortgagor on the relevant
Mortgage Deed or has signed a legally
binding agreement postponing (each a
"POSTPONEMENT AGREEMENT") all rights and
entitlements to which such person may be
entitled in the Mortgaged Property to the
interests, rights and entitlements of the
Borrower or such other person as may have
or acquire as mortgagee or chargee of the
property from time to time, such
agreement in a form as was satisfactory
to such Solicitor, and (ii) in the case
of Scottish Mortgage Loans, prior to the
making of the advance, the Borrower or
its Solicitor obtained all necessary
validly executed MHA Documentation so as
to ensure that neither the relevant
Mortgage Loan nor the relevant Mortgaged
Property was subject to or affected by
any statutory right of occupancy in
favour of a non-entitled spouse;
(25) The Borrower has kept, or caused to be
kept, full and proper accounts, books and
records showing all transactions
payments, receipts and proceedings
relating to that Mortgage and all such
accounts, books and records are up to
date and in its possession or held to its
order;
(26) There exists no litigation, dispute or
complaint (subsisting or pending or
threatened) calling into question in any
way title of the Borrower to any Mortgage
Loan or, to the best of its knowledge,
the relevant Mortgagor's title to his
Mortgaged Property;
(27) The Mortgage Loan Documents are held to
the order of the Lender by the relevant
Solicitor or have been lodged at H.M.
Land Registry or the Registers of
Scotland and in the case of each
Mortgaged Property the title to which is
registered or for which application for
first registration has been made the
Borrower knows the title number under
which the Mortgaged Property is (or, in
the case of first registration, is to be)
registered at H.M. Land Registry or the
Registers of Scotland;
(28) In relation to each Mortgage Deed for
Mortgaged Property where registration is
pending at H.M. Land Registry, there is
no caution, notice or other entry which
would prevent the registration of the
Mortgage Deed as a charge by way of first
or, as the case may be, second or third
subsequent legal mortgage.
40
(29) None of the Mortgagors which pay interest
is a company.
14.5 It is acknowledged, that references in this clause 14 to Mortgage Loans
shall include reference to the relevant Collateral Security, as
appropriate.
15. REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES
15.1 lt is understood and agreed that the representations and warranties set
forth in clauses 14.1, 14.2 and 14.4 shall survive the charging of
Mortgage Loans to the Lender and shall enure to the benefit of the
Lender notwithstanding the examination by the Lender or failure by the
Lender to examine any Mortgage File.
15.2 With respect to the representations and warranties contained in clauses
14.1. and 14.4 which are made to the best of the Borrower's (or OFC's)
knowledge, after reasonable inquiry and investigation, if it is
discovered by either the Borrower or OFC or the Lender that the
substance of such representation and warranty is inaccurate and in the
case of those in clause 14.4 such inaccuracy materially and adversely
affects the value of the related Mortgage Loan or the Lender's interest
in the Mortgage Loan then, notwithstanding the Borrower's (or OFC's)
lack of knowledge with respect to the inaccuracy at the time the
representation or warranty was made, the Lender shall have the same
rights in respect of the breach thereof as it would have if the
applicable representation or warranty was breached.
15.3 Upon discovery by OFC (but only with respect to the representation and
warranties made by OFC in clause 14.1) the Borrower or the Lender of a
breach of any of the foregoing representations and warranties
(a) given under clause 14.1; or
(b) given under clause 14.4 which materially and
adversely affects the value of the Mortgage Loans or
the interest of the Lender in the Mortgage Loan (or
which materially and adversely affects the interests
of the Lender in or to the related Mortgage Loan in
the case of a representation and warranty relating to
a particular Mortgage Loan)
the party discovering such breach shall give prompt written notice to
the other.
15.4 If following a review undertaken by the Lender within a period of 30
days after the date of any Revolving Advance, a material breach of the
warranties in clause 14.4 shall be discovered, the same shall
constitute a breach of such representation and warranty irrespective of
whether the same materially and adversely affects the value of the
relevant Mortgage Loan(s) provided that notice regarding such breach
shall have been delivered by the Lender to the Borrower promptly
following such review.
41
15.5 Within 60 days of the earlier of either discovery by or notice to the
Borrower of any breach of a representation or warranty given under
clause 14.4 which materially and adversely affects the value of any
Mortgage Loan, the Borrower shall use all reasonable endeavours
promptly to cure such breach and, if such breach cannot be cured or is
not cured at the end of such 60 day period or if it is determined at
any time following discovery or notice that such breach cannot be
cured, the Borrower shall:-
(1) repay the Advance (or such part thereof) made hereunder to
fund the relevant Mortgage Loan, together with accrued
interest thereon, on demand of the Lender; or
(2) with the Lender's prior consent provide additional collateral
of a type and amount reasonably acceptable to the Lender
(which may include Eligible Collateral Loans), charged in
favour of the Lender pursuant to such security documents as
shall be acceptable to the Lender;
and when the Borrower has repaid the Advance (or relevant part thereof)
under sub-clause 15.5(a) or provided additional collateral in
accordance with sub-clause 15.5(b) the Lender shall, at the cost of the
Borrower, release the relevant Mortgage Loan or Mortgage Loans from the
security constituted by the Debenture together with all Collateral
Security related thereto.
15.6 Without prejudice to the Lender's rights under clause 15.5(a), and for
such time as the Borrower's obligations thereunder shall remain
undischarged, the Lender shall be entitled to satisfy and discharge any
obligation it may have to make an Advance hereunder through set-off of
the Borrower's obligations to it under clause 15.5(a) and if the Lender
does so it shall be treated for all purposes as if it had satisfied its
obligation to make the relevant Advance through remittance of the
relevant funds in cash.
15.7 The Lender agrees that, in respect of breaches of warranty under clause
14.4 (but not under clause 14.1) its sole remedies shall be those
provided in this clause 15.
16. UNDERTAKINGS AND COVENANTS
16.1 The Borrower and (but only where the covenant or undertaking relates to
OFC) OFC hereby undertake with the Lender that from and after the date
hereof and until all sums due and to become due hereunder have been
paid or repaid in full and the Facility shall no longer exist:
42
(1) the Borrower and OFC shall obtain, comply with the terms of
and do all that is necessary to maintain in full force and
effect all authorisations, approvals, licenses and consents
required in or by the laws and regulations of England,
Scotland and (in the case of OFC) Florida to enable it
lawfully to enter into and perform its obligations under this
Agreement and each Transaction Document and to ensure the
legality, validity, enforceability or admissibility in
evidence in England and in Scotland of this Agreement and each
Transaction Document and shall ensure that none of the
foregoing are revoked or modified;
(2) the Borrower and OFC shall promptly inform the Lender of the
occurrence of any Event of Default or Potential Event of
Default and, upon receipt of a written request to that effect
from the Lender, confirm to the Lender that, save as
previously notified to the Lender or as notified in such
confirmation, no such event has occurred;
(3) the Borrower shall ensure that at all times the claims of the
Lender against it under this Agreement are secured as provided
in the Security Documents and that the security thereunder
will be of the nature and will rank in the priority it is
expressed to have in the Security Documents;
(4) the Borrower shall not, without the prior written consent of
the Lender, create or permit to subsist any Security over all
or any of its present or future revenues or assets save for
security created (or permitted) under the Security Documents;
(5) the Borrower shall not, without the prior written consent of
the Lender, make any loans, grant any credit or give any
guarantee or indemnity (except (i) as contemplated in the
Transaction Documents; or (ii) to OFC or any of its subsidiary
companies or affiliates) to or for the benefit of any person
or otherwise voluntarily assume any liability, whether actual
or contingent, in respect of any obligation of any other
person;
(6) the Borrower shall not, without the prior written consent of
the Lender, sell, lease, transfer or otherwise dispose of, by
one or more transactions or series of transactions (whether
related or not), the whole or any part of its revenues or its
assets except as permitted under the Debenture;
(7) the Borrower undertakes to continue to endeavour to settle all
matters outstanding and pending with the OFT from time to time
as expeditiously as reasonably practicable;
(8) the Borrower will procure that the origination of all New
Production Mortgage Loans and Pipeline Loans does not violate
in any material respect:-
(1) OFT Guidelines and;
43
(2) any undertakings or agreements from time to time
between the Borrower, any holding company or any
subsidiary of the Borrower and the OFT;
(9) the Borrower will procure that the Lender is promptly provided
with copies of any OFT related correspondence sent or received
on or after the date hereof provided that nothing in this or
any other undertaking shall entitle the Lender to receive
access to or copies of privileged correspondence between the
Borrower and its counsel;
(10) the Borrower will procure that all Mortgage Files are
delivered to Hayes Business Services Limited or such other
storer as the Lender may have approved (acting reasonably)
from time to time (subject always to clause 3.10(c) of the
Debenture) as soon as reasonably practicable following receipt
of the recorded deed and shall use reasonable endeavours to
procure that the Lender has, upon 1 Business Day's notice,
access to the offices of all Solicitors, Hayes Business
Services Limited or other storage provider aforesaid) during
normal business hours and shall procure that the Solicitors
are instructed to allow the Lender to take possession of any
Mortgage File in relation to any Mortgage Loan financed or to
be financed hereunder;
(11) all New Production Mortgage Loans will be originated and all
Pipeline Loans acquired have been originated in accordance
with the Underwriting Guidelines;
(12) the Borrower will not amend the Standard Documentation without
the prior written consent of the Lender;
(13) the Borrower shall deliver to the Lender as soon as the same
are available, and in any event within one hundred and twenty
(120) days after the end of each of its financial years a copy
of its audited annual financial statements;
(14) the Borrower shall provide the Lender promptly upon request
with any information relating to it and/or its financial
condition as the Lender may from time to time reasonably
require in connection with this Agreement;
(15) the Borrower shall ensure that each set of audited annual
financial statements delivered pursuant to sub-clause (m) are
prepared in accordance with generally accepted accounting
principles and on the same basis every year and half year
(save as may be required from time to time as a result of
changes in law or regulation or generally accepted accounting
principles);
(16) each of the Borrower and OFC shall, promptly upon receipt of
the same, deliver to the Lender a copy of any independent
accountants' management letters received by it relating to it;
44
(17) the legal and equitable title of each Existing Mortgage Loan
and New Production Mortgage Loan and Pipeline Loan financed
hereunder and not sold or otherwise disposed of (whether
through a securitisation, whole loan sale or otherwise) by the
Borrower will be held in the name of the Borrower;
(18) the Borrower shall procure that:
(1) the transfer to it of legal and equitable title to
all Existing Mortgage Loans pursuant to the Sale
Agreement is perfected in the name of the Borrower;
and
(2) the transfer to it of legal and equitable title to
any New Production Mortgage Loan the origination of
which is financed hereunder or to any Pipeline Loan
the acquisition of which is financed hereunder is
perfected in the name of the Borrower,
and shall procure that in each case all necessary steps are
undertaken to protect the Borrower's Security including as
appropriate registration of the relevant mortgages in the name
of the Borrower at HM Land Registry or Registers of Scotland
which registration shall be completed within 6 months from the
date of application to the relevant registry and will submit
each such application promptly (and within any applicable
priority time periods) and shall procure that the Solicitors
will comply with the Solicitors Undertakings and the Borrower
shall be responsible for and meet any registration fees and
other costs in connection therewith, provided that breach by
the Borrower of this provision in relation to any one or more
Existing Mortgage Loans, New Production Mortgage Loans or
Pipeline Loans shall not constitute an Event of Default but
shall entitle the Lender to require repayment of the Advance,
or part thereof, (and all interest accrued thereon) which
funded the acquisition of the relevant New Production Mortgage
Loan or Existing Mortgage Loan or Pipeline Loan against
release by the Lender of the relevant Mortgage Loan from the
security created by the Debenture;
(19) the Borrower shall procure that where any retention is made in
respect of a Mortgage Loan funded hereunder, the amount
retained is, pending advance of the same against the relevant
certificate (or other evidence) of completion of the relevant
works, held either in the Borrower Funding Account or with the
relevant Solicitor under the terms of the Solicitor's
Undertaking re: New Monies Advance.
16.2 The Borrower shall procure that the Servicer provides such certificates
as required by the Lender pursuant to the Servicing Agreement.
16.3 The Borrower shall, or shall procure that either the Servicer or the
Solicitors shall, within 5 days of the date hereof in relation to
Existing Mortgage Loans and within 5 days of the requisition of a
Pipeline Loan forward to the relevant Mortgagor and any other relevant
Mortgagee of a Mortgaged Property a notice of transfer in the form
approved in writing by the Lender.
45
16.4 The Borrower shall not originate any MIRAS loans without the prior
written consent of the Lender.
16.5 The Borrower shall, if required by the Lender give notice to Borrowers
requiring the Borrowers to redirect payment so as to pay direct to the
Borrower Collection Account, or such other account of the Borrower or
(following an Acceleration) such other Account as the Lender shall
specify.
16.6 The Borrower shall not be entitled, without the prior written consent
of the Lender, to give Notice to any Borrower requiring such Borrower
to redirect payments so as to make payments directly to any account
other than the relevant Collection Account, or other account to which
they are, at the relevant time, required to make such payments.
16.7 The Borrower shall procure, in so far as it is able to do so, that all
amounts payable under each Existing Mortgage Loan, New Production
Mortgage Loans and Pipeline Loans financed hereunder is, for so long as
it is so financed, paid by the relevant Mortgagor:
(1) to the relevant Collection Account until notice is given in
accordance with the Transaction Documents to any Mortgagor
requiring the relevant Mortgagor to pay all amounts under the
relevant Mortgage Loan directly to the Borrower Collection
Account, or other account specified in any such notice; and
(2) thereafter (save for amounts properly deducted therefrom by
the Servicer as permitted by the Servicing Agreement) directly
to the Borrower Collection Account or other account so
specified in such notice;
16.8 The Guarantor shall, for so long as this Agreement is in effect:
(a) maintain a minimum Consolidated Tangible Net Worth of
$320,000,000.00 (three hundred and twenty million United
States dollars);
(b) not permit the ratio of its Consolidated Indebtedness to
Consolidated Tangible Net Worth to exceed 12:1; and
(c) maintain liquid assets consisting of cash and cash equivalents
on an unconsolidated basis of not less than $15,000,000.00
(fifteen million United States dollars);
provided that if the Guarantor is or becomes obligated to another
creditor during the term of this Agreement to comply with financial
covenants of a type substantially similar to the foregoing but on terms
more favourable to such creditor, the Guarantor shall, so long as such
more favourable covenants shall be in effect, be obligated to comply
with such covenants as though set out in full herein.
46
16.9 The parties hereto covenant with each other to use reasonable best
endeavours to procure that a further loan facility (and associated
security and guarantee documentation) (the "New Facility") is entered
into between the Borrower, the Guarantor and Greenwich Capital
Financial Products Inc. or such other Greenwich entity (other than the
Lender) as is agreed between the parties (the "NEW LENDER") prior to
the Final Maturity Date, pursuant to which the New Facility would be
provided:-
(1) to refinance indebtedness under the Revolving Facility; and
(2) to refinance indebtedness under the Term Loan, but only until
the Term Loan Repayment Date,
on substantially the same terms and conditions as set out in the
Transaction Documents save that:-
(1) the Final Maturity Date (subject to extension in the
sole discretion of the Lender) of the revolving
facility thereunder shall be the day falling 364 days
after the date of this Agreement;
(2) the repayment date of the term loan thereunder shall
be the Term Loan Repayment Date; provided that the
repayment date for up to (pound sterling) 25,000,000
of the Term Loan may have a final maturity date of up
to 90 days beyond the Term Loan Repayment Date;
(3) the New Lender shall obtain to its satisfaction a
valid first priority Security interest in, to and
under, inter alia, the Scottish Mortgage Loans;
(4) the New Lender shall, at its option, either have
valid, first priority fixed Security over buildings
policies (including all block policies), contingency
policies, mortgage indemnity policies, life policies,
ASU policies and protected income cover policies
relating to the Mortgage Loans, or shall be named as
an additional assured in respect of its interest on
such policies, subject to such endorsements as the
Lender shall reasonably request; and
(5) under the New Facility up to 20% of the aggregate
credit available under the New Facility may be used
to fund in any combination:
(1) non performing mortgage loans provided such
loans have not been financed under this
Agreement and the New Facility (in the
aggregate) longer than 180 days; and
47
(2) performing mortgage loans which have been
financed under this Agreement and the New
Facility (in the aggregate) longer than 180
days, provided that such loans remain
performing and are removed from the facility
no later than the 270th day;
(6) except as provided in clause (ii) and (v) above, no
mortgage loan may be funded under this Agreement and
the New Facility (in the aggregate) longer than 180
days;
(7) from a date to be mutually agreed advances under the
revolving facility may only be made once a week on
Business Days during the Availability Period.
In the event that a New Facility is entered into the Borrower will
procure that the Mortgage Loans are serviced for the duration of such
facility by the Servicer (or other servicer acceptable to the Lender
and the Borrower in accordance with clause 16.9 of the Servicing
Agreement) pursuant to a servicing agreement on substantially the same
terms as those under the Servicing Agreement.
17. DEFAULT
17.1 In the event of:-
(1) any default by the Borrower in the payment of any amount due
for payment hereunder or under any Transaction Document within
two Business Days after receipt of written notice by the
Lender requiring payment of the same; or
(2) the Borrower failing to observe or perform any other
covenants, obligations or agreements of the Borrower under
this Agreement or any Transaction Document which, if (in the
good faith opinion of the Lender) capable of remedy shall not
have been remedied (to the satisfaction of the Lender) within
thirty days of being required by the Lender to do so; or
(3) any representation or warranty made or repeated by the
Borrower under this Agreement (other than any representation
or warranty made or deemed to be made pursuant to clause 14.4)
or under any other Transaction Document or any representation
and warranty made or repeated by OFC hereunder being or
proving to be or have been untrue or incorrect or misleading
in any material respect as at the date at which it was made or
repeated, and in the case of any such breach which is (in the
good faith opinion of the Lender) capable of remedy, the
relevant breach not having been remedied within thirty days of
the Lender requiring the Borrower or, as the case may be, OFC
to do so; or
(4) any default by OFC in the payment of any amount due for
payment hereunder or under the Indemnity on the due date
therefor; or
48
(5) OFC failing to observe or perform any other covenant,
obligation or agreement contained hereunder or in the
Indemnity which, if (in the good faith opinion of the Lender)
is capable of remedy has not been remedied (to the
satisfaction of the Lender) within thirty days of the Lender
requiring OFC to do so; or
(6) the Servicing Agreement being terminated, or becoming capable
of being terminated (after expiration of any applicable grace
periods) in accordance with its terms other than by reason of
a Disposal that by its terms is conditional upon a release of
servicing in respect of such Mortgage Loans; or
(7) OFC or the Servicer failing to observe or perform any material
covenant, obligation or agreement (including any obligation to
make any payment) on its part to be observed or performed
under any Transaction Document (other than, in the case of
OFC, this Agreement, or the Indemnity and, in the case of the
Servicer the Servicing Agreement) which is (in the good faith
opinion of the Lender) capable of remedy shall not have been
remedied (to the satisfaction of the Lender) within thirty
days (or such shorter or longer grace period as may apply in
respect of the relevant breach under the relevant Transaction
Document) of the Lender requiring remedy of the same; or
(8) any representation or warranty made or repeated by OFC or the
Servicer under any Transaction Document (other than, in the
case of OFC, this Agreement and the Indemnity and in the case
of the Servicer, the Servicing Agreement) being or becoming
untrue or misleading as of the date on which made or repeated
and, in the case of any such breach which is (in the good
faith opinion of the Lender) capable of remedy, the relevant
breach not having been remedied to the satisfaction of the
Lender within thirty days (or such shorter or longer grace
period as may apply in respect of the relevant breach under
the relevant Transaction Document) of the Lender requiring OFC
or the Servicer, as the case may be, to do so; or
(9) the loss by the Borrower or the Servicer of its Consumer
Credit Act License; or
(10) an adverse determination being made by the OFT in respect of
any Minded to Revoke Notice served by the OFT on any of the
Borrower or the Servicer in respect of the Consumer Credit Act
License of the Borrower or the Servicer irrespective of any
right to appeal (or other right) which the Borrower, or the
Servicer may have thereafter, a "determination" being the
decision or determination made by the Director (as defined
under the CCA) under section 34(3) CCA in respect of the
relevant Minded to Revoke Notice; or
(11) an injunction or interdict (which relates to its residential
mortgage lending business including, without limitation,
Mortgage Loans financed hereunder) being obtained by (or on
behalf of) the OFT against the Servicer or the Borrower which
remains in effect for more than 60 days;
49
(12) an order being made or an effective resolution being passed
for winding up of the Borrower, the Servicer or OFC or any
analogous provision or order being made under any applicable
jurisdiction; or
(13) the Borrower, the Servicer or OFC ceasing or threatening to
cease to carry on business or a substantial part of such
business or stopping payment or threatening to stop payment of
its debts or being or becoming unable to pay its debts within
the meaning of Section 123(1)(a), (b), (c) or (d) of the
Insolvency Act 1986, as that section may be amended, (or as
the case may be any analogous provision under any applicable
jurisdiction) or otherwise becoming unable to pay its debts as
they fall due or the value of its assets falling to less than
the amount of its liabilities (taking into account for both
these purposes its contingent and prospective liabilities) or
the Borrower, the Servicer or OFC otherwise becoming
insolvent;
(14) proceedings being initiated against the Borrower, the Servicer
or OFC under any applicable liquidation, insolvency,
composition, bankruptcy, reorganisation (other than a
reorganisation the terms of which have been approved by the
Lender and where the Borrower, the Servicer or OFC is solvent)
or other similar laws, or a petition for an administration
order being presented against the Borrower, or the Servicer or
OFC or an administrative or other receiver, administrator or
other similar official in any applicable jurisdiction being
appointed in relation to the Borrower, or the Servicer or OFC
or in relation to the whole or any substantial part of the
undertaking of or assets of the Borrower, or the Servicer or
OFC or an encumbrancer taking possession of the whole or any
substantial part of the undertaking or assets of the Borrower,
or the Servicer or OFC or a distress, diligence or execution
or other process being levied or enforced upon or sued out
against the whole or any substantial part of the undertaking
or assets of the Borrower, or the Servicer or OFC or the
Borrower, or the Servicer or OFC initiating or consenting to
judicial proceedings relating to itself under any applicable
liquidation, insolvency, composition, reorganisation or other
similar laws or making a conveyance or assignment for the
benefit of its creditors generally; or
(15) any material adverse change in the condition (financial,
business, prospects or otherwise) of any of the Borrower or
OFC occurring, which, in the reasonable judgment of the Lender
is reasonably likely to prevent the Borrower or OFC, as the
case may be, from performing its respective material
obligations under any Transaction Document or is likely to
adversely affect the value (to the Lender) of its security
whether by adversely affecting the value of such security, the
prospects of a sale thereof or otherwise; or
50
(16) the Borrower ceasing to be a wholly owned subsidiary of the
Guarantor; or
(17) any Indebtedness, arising under any one or more transactions
of the Guarantor and/or the Borrower, in excess (in aggregate)
of $5,000,000 or the equivalent thereof in any other currency
(determined by translating the other currency into dollars at
the mean of National Westminster Bank Plc's spot buying and
selling rates (based on the market rates prevailing at the
relevant time) for the exchange of dollars and such currency
at the relevant time):-
(1) not being paid on its due date or within any
applicable grace period; or
(2) if payable on demand, not being paid on demand or
within any applicable grace period; or
(3) becoming due by reason of a declared (or automatic)
event of default (howsoever described) prior to its
original maturity date and not being paid within 5
days of its required date of payment.
(each of the foregoing an "EVENT OF DEFAULT"), the Lender may, for so
long as such event is continuing unwaived by the Lender do each or any
of the following:
(i) declare, by notice in writing to the Borrower, any
undrawn portion of the Revolving Commitment or any of
it to be no longer available to the Borrower; and/or
(ii) declare, by written notice to the Borrower, all
Advances outstanding together with all interest
accrued thereon and all other sums then due and
outstanding hereunder from the Borrower to be
immediately due and payable, whereupon the same shall
become immediately due and payable; and/or
(iii) enforce all or any of its security under the Security
Documents; and/or
(iv) terminate the Servicing Agreement pursuant to its
terms; and/or
(v) terminate this Agreement,
whereupon the Lender shall cease to be obliged to make Advances
hereunder.
17.2 If any Advance shall be declared immediately due and payable as
aforesaid, the Borrower shall pay to the Lender such amount as the
Lender certifies to be necessary to compensate it for any loss incurred
(excluding loss of Margin) or to be incurred on account of deposits
acquired or arranged in order to fund such Advances as a consequence of
such Event of Default.
51
17.3 The rights conferred on the Lender pursuant to this clause 17 shall be
in addition to whatever rights the Lender may have both at law and in
equity.
17.4 The Lender may waive any default by the Borrower in the performance of
its obligations hereunder and its consequences. Upon any such waiver of
a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for
every purpose of this Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon
except to the extent expressly so waived.
17.5 The Borrower agrees to indemnify and keep indemnified the Lender from
and against any loss, cost (including any cost of enforcement),
liability (including any tax liability), claim or damage which the
Lender incurs or suffers as a consequence of the occurrence of any
Event of Default and the indemnity may, without limiting the Lender's
rights, be claimed as a debt or liquidated demand. 1.1
18. DEFAULT INTEREST
18.1 If any sum due and payable by the Borrower hereunder is not paid on the
due date therefor or if any sum due and payable by the Borrower under
any judgement or decree of any court in connection herewith is not paid
on the date of such judgement or decree, the period beginning on the
date seven days after such due date (in the case of non payment by the
Borrower of an amount due hereunder) or, as the case may be, the date
of such judgement or decree and ending on the date upon which the
obligation of the Borrower to pay such sum (the balance thereof for the
time being unpaid being herein referred to as an "UNPAID SUM") is
discharged shall be divided into successive periods, each of which
(other than the first) shall start on the last day of the preceding
such period and the duration of each of which shall (except as
otherwise provided in this clause 18) be selected by the Lender.
18.2 During each such period relating thereto as is mentioned in clause 18.1
an unpaid sum shall bear interest at the rate per annum which is the
sum from time to time of two per cent and the Margin in respect thereof
at such time and LIBOR on the first day of the relevant period provided
that:
(1) if, for any such period, LIBOR cannot be determined, the rate
of interest applicable to such unpaid sum shall be the rate
per annum which is the sum of two per cent and the Margin in
respect thereof at such time and the rate per annum determined
by the Lender to be equal to the rate which express as a
percentage rate per annum equals the cost to it of funding
such unpaid sum for such period from whatever sources it may
select; and
(2) if such unpaid sum is all or part of an Advance which became
due and payable on a day other than the Repayment Date
therefor, the first such period applicable thereto shall be of
a duration equal to the unexpired portion of that Term and the
rate of interest applicable thereto from time to time during
such period shall be that which exceeds by two per cent the
rate which would have been applicable to it had it not so
fallen due.
52
18.3 Any interest which shall have accrued under clause 18 in respect of an
unpaid sum shall be due and payable and shall be paid by the Borrower
at the end of the period by reference to which it is calculated or on
such other dates as the Lender may specify by written notice to the
Borrower.
19. CALCULATIONS
19.1 The Borrower shall, for each Interest Payment Date, calculate the
Borrowing Base Deficiency for that date such calculation to be done as
soon as possible after the applicable Determination Date and in any
event no later than the third Business Day prior to the Interest
Payment Date in question and shall notify the same to the Lender,
immediately upon calculation of the same.
19.2 The Lender shall, for the purposes of the calculation under clause
19.1, notify the Borrower of the fair market value of all Existing
Mortgage Loans, New Production Mortgage Loans and Pipeline Loans
financed under this Agreement which have not, at the relevant time,
been sold or otherwise disposed of by the Borrower, as determined by
the Lender in good faith.
19.3 The Lender's determination of the matters to be notified to the
Borrower under clause 19.2 shall, in the absence of manifest error or
bad faith, be final and binding on the parties hereto.
19.4 The Borrower's determination of the Borrowing Base Deficiency once
agreed by the Lender under clause 19.5 shall, in the absence of
manifest error or bad faith (on the part of either party), be final and
binding on the parties hereto.
19.5 The Lender shall use reasonable endeavours to agree the Borrower's
determinations of the Borrowing Base Deficiency within three Business
Days of notification of the same to the Lender.
20. CURRENCY OF ACCOUNT
20.1 Sterling is the currency of account and payment for each and every sum
at any time due from the Borrower hereunder provided that each payment
in respect of costs and expenses shall be made in the currency in which
the same were incurred.
20.2 If any sum due from the Borrower under this Agreement or any order or
judgement given or made in relation hereto has to be converted from the
currency (the "FIRST CURRENCY") in which the same is payable hereunder
or under such order, decree or judgement into another currency (the
"SECOND CURRENCY") for the purpose of (a) making or filing a claim or
proof against the Borrower, (b) obtaining an order, decree or judgement
in any court or other tribunal or (c) enforcing any order, decree or
53
judgement given or made in relation hereto, the Borrower shall
indemnify and hold harmless each of the persons to whom such sum is due
from and against any loss suffered as a result of any discrepancy
between (i) the rate of exchange used for such purpose to convert the
sum in question from the first currency into the second currency and
(ii) the rate or rates of exchange at which such person may in the
ordinary course of business purchase the first currency with the second
currency upon receipt of a sum paid to it in satisfaction, in whole or
in part, of any such order, judgement, decree, claim or proof.
21. SET-OFF
21.1 The Borrower authorizes the Lender to apply any credit balance to which
the Borrower is entitled on any account of the Borrower with the Lender
in satisfaction of any sum due and payable from the Borrower to the
Lender hereunder but unpaid.
21.2 All payments required to be made by the Borrower hereunder shall be
calculated without reference to any set-off, deduction or counterclaim
and shall be made free and clear of and without any deduction for or on
account of any set-off, deduction or counterclaim.
22. CALCULATION OF INTEREST
23.1 Interest shall accrue from day to day and shall be calculated on the
basis of a year of 365 days and the actual number of days elapsed.
23. COSTS AND EXPENSES
23.1 The Borrower shall, save where expressed to the contrary in any other
Transaction Document, from time to time on demand of the Lender,
reimburse the Lender for all reasonable costs and expenses (including
legal fees) together with any VAT thereon incurred by it in connection
with the negotiation, preparation and execution of this Agreement, the
Transaction Documents and the completion of the transactions pursuant
to this Agreement or the Transaction Documents or in connection with
the preservation and/or enforcement of any of the rights of the Lender
under this Agreement and the Transaction Documents.
23.2 The Borrower shall pay all stamp, registration and similar taxes to
which this Agreement or any judgement or decree given in connection
herewith is or at any time may be subject (including in relation to the
perfection of security granted by the Security Documents) and shall,
from time to time on demand of the Lender, indemnify the Lender against
any liabilities, costs, claims and expenses resulting from any failure
to pay or any delay in paying any such tax.
23.3 The Borrower shall, from time to time on demand of the Lender
compensate the Lender at such daily and/or hourly rates as the Lender
shall from time to time reasonably determine for the time and
expenditure, all costs and expenses (including
54
telephone, fax, copying, travel and personnel costs) incurred by the
Lender in connection with its taking such action as it may deem
appropriate or in complying with any request by the Borrower in
connection with (a) the granting or proposed granting of any waiver or
consent requested hereunder by the Borrower; (b) any actual, potential
or reasonably suspected breach by the Borrower of its obligations
hereunder; (c) the occurrence of any event which is an Event of Default
or a Potential Event of Default; or (d) any amendment or proposed
amendment hereto requested by the Borrower.
24. REMEDIES AND WAIVERS
No failure to exercise, nor any delay in exercising, on the part of the
Lender, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right or
remedy prevent any further or other exercise thereof or the exercise of
any other right or remedy. Save as otherwise expressly provided herein
the rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
25. CONFIDENTIALITY
The Borrower shall not, without the prior written consent of the
Lender, disclose to any person the existence or any details concerning
the Transaction Documents except to the extent such disclosure is
contemplated in any Transaction Document, or is required pursuant to
the application of any applicable law or an order of a court of
competent jurisdiction, or is made to the Borrower's auditors or other
professional advisors who are subject to confidentiality restrictions
imposed by a professional body which are substantially similar to those
set forth above.
26. NOTICES
26.1 ADDRESSES
Any notice or other communication or document to be made or delivered
under this Agreement shall be made or delivered by fax or otherwise in
writing. Each notice, communication or other document to be delivered
to any party to this Agreement shall (unless that other person has by
fifteen days' written notice to the other party specified another
address or fax number) be made or delivered to that person at the
address(es) or fax number (if any) set out below:-
(a) in the case of the Lender to their branch office in the United
Kingdom, facsimile number: 0171 375 5510, attention Jeff
Beckwith with a simultaneous copy to the office of the General
Counsel located at 600 Steamboat Road, Greenwich, Connecticut
06830, USA, facsimile number: 001 203 629 4571, attention
General Counsel;
(b) in the case of the Borrower, to its offices at 18-19
Southampton Place, London WC1A 2AJ facsimile number: 0171 831
9152, care of Edge & Ellison;
55
(c) in the case of OFC, to its offices at:
The Forum
1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
Attention: John R. Erbey, Corporate Secretary
Telephone No.: 561-682-8000
Telefax No.: 561-682-8177
With a copy to:
John Erbey
Company Secretary
Ocwen Financial Corporation
The Forum
1675 Palm Beach Lakes Boulevard
Suite 1002
West Palm Beach, Florida 33401
Telephone No.: 561-682-8661
Telefax No.: 561-682-8163
26.2 DEEMED DELIVERY
Any notice, communication or document to be delivered to any person
shall be deemed to have been delivered:-
(1) in the case of personal delivery, at the time of such
delivery;
(2) in the case of delivery by post, on the business day following
the day on which it was posted and in proving such delivery it
shall be sufficient to prove that the relevant notice,
communication or document was properly addressed, stamped and
posted (by airmail, if to another country) in the United
Kingdom or, in the case of service to or from an address
outside the United Kingdom at 9.00 a.m. on the fourth day
following the day on which it was posted;
(3) in the case of any notice or other communication by fax, (a)
on the business day the same was transmitted so long as there
is evidence that such fax message was received prior to 5.00
p.m. local time of the recipient on such day and such day is a
business day for the recipient, otherwise (b) on the business
day following the day on which it was transmitted and, in
either case, in proving such delivery it shall be sufficient
to prove that the whole of the fax message was received on any
fax machine of the recipient and that there was no evidence
that such transmission had been interrupted.
56
27. SEVERABILITY
If at any time any provision of this Agreement is or becomes illegal,
invalid or unenforceable in any respect under the law of any
jurisdiction, that shall not affect or impair:-
(1) the legality, validity or enforceability in that jurisdiction
of any other provision of this Agreement; or
(2) the legality, validity or enforceability under the law of any
other jurisdiction of that or any other provision of this
Agreement.
28. ASSIGNMENT
28.1 The Lender may at any time:-
(1) sub-participate any part (but not the whole) of its rights or
benefits under this Agreement provided that at any time no
more than 51% of its rights and benefits hereunder may be
sub-participated; and
(2) assign or transfer any part (but not the whole) of its rights
or benefits under this Agreement provided that at any time, no
more than 51% of its rights and benefits may be assigned or
transferred so as to be held by a person other than the Lender
and provided further that:-
(1) if such assignment or transfer is to any person other
than a subsidiary, holding company of or other member
of the Lender's group such assignment or transfer
shall require the prior consent of the Borrower (such
consent not to be unreasonably withheld); and
(2) if, at the time and as a result of any proposed
transfer or assignment, the Borrower would incur any
increased cost or be liable to make payments in
excess of those required to be made hereunder
immediately prior thereto (other than any minimum
liquid asset costs) such assignment or transfer is on
terms that the Borrower is not and will not be liable
for any such increased cost or liability.
28.2 The Borrower shall not be entitled to assign, transfer or otherwise
dispose of all or any of its rights or benefits under this Agreement
without the prior written consent of the Lender.
28.3 The Lender may disclose to a proposed assignee, transferee or
sub-participant information in its possession relating to the
provisions of this Agreement and the Transaction Documents which it
considers necessary or desirable to disclose for the purposes of the
proposed assignment, transfer or sub-participation, notwithstanding the
provisions of clause 25 (Confidentiality) provided that the Lender
obtains from such assignee, transferee or sub-participant a
confidentiality undertaking on substantially the same terms as clause
25 (but substituting references to such proposed assignee, transferee
or sub-participant for references therein to the Borrower) or on such
other terms as may be agreed between the Borrower and the Lender.
57
28.4 This Agreement shall bind and inure to the benefit of and be
enforceable by the Lender and its respective successors, transferees
and assigns and references to the Lender shall be deemed to include
references to each of the foregoing.
29. FURTHER ASSURANCE
The Borrower shall, from time to time on being required to do so by the
Lender, now or at any time in the future, do or procure the doing of
all such acts and/or execute or procure the execution of all such
documents in a form satisfactory to the Lender as the Lender may
consider necessary for giving full effect to this Agreement and the
Transaction Documents and securing to the Lender the full benefit of
the rights, powers and remedies conferred upon the Lender in this
Agreement or any Transaction Documents.
30. ENTIRE AGREEMENT
This Agreement (together with the Transaction Documents entered into on
or after the date hereof) constitutes the whole and only agreement
between the parties relating to the secured, guaranteed facility
provided by the Lender to the Borrower described herein and supersedes
and extinguishes any prior drafts, agreements, undertakings,
representations, warranties and arrangements of any nature whatsoever,
including without limitation the "secured loan facility" described in
the commitment letter between OFC and Greenwich Capital Markets Inc
dated 31 March 1998.
31. AGENT FOR SERVICE
31.1 OFC irrevocably agrees that any Service Document may be sufficiently
and effectively served on it in connection with Proceedings, whether
pursuant to this Agreement or any other Transaction Document, in
England and Wales by service on its agent Ocwen Limited, if no
replacement agent has been appointed and notified to the Lender
pursuant to sub-clause 31.4, or on the replacement agent if one has
been appointed and notified to the Lender.
31.2 Any Service Document served pursuant to this clause shall be marked for
the attention of:
(a) Ocwen Limited (care of Edge & Ellison) at 18 Southampton
Place, London, WC1A 2AJ or such other address within England
and Wales as may be notified to the Lender by OFC; or
58
(b) such other person as is appointed as agent for service
pursuant to sub-clause 31.4 at the address notified pursuant
to sub-clause 31.4.
31.3 Any document addressed in accordance with sub-clause 30.2 shall be
deemed to have been duly served if:-
(a) left at the specified address, when it is left; or
(b) sent by first class post, two clear Business Days after the
date of posting.
31.4 If the agent referred to in sub-clause 31.4 (or any replacement agent
appointed pursuant to this sub-clause) at any time ceases for any
reason to act as such, OFC shall appoint a replacement agent to accept
service having an address for service in England or Wales and shall
notify the Lender of the name and address of the replacement agent;
failing such appointment and notification, the Lender shall be entitled
by notice to OFC to appoint such a replacement agent to act on OFC's
behalf.
31.5 A copy of any Service Document served on an agent pursuant to this
clause shall be sent by post to OFC at its address for the time being
for the service of notices and other communications under clause 26
(Notices), but no failure or delay in so doing shall prejudice the
effectiveness of service of the Service Document in accordance with the
provisions of sub-clause 31.1.
31.6 Each of OFC and the Lender irrevocably consent to the service of
process of any of the aforesaid courts in Submitted States in any such
action or Proceeding by the mailing of copies thereof by registered or
certified mail, postage prepaid to the party's notice address specified
above, such service to become effective upon receipt of evidence of the
receipt thereof.
59
32. GOVERNING LAW AND JURISDICTION
32.1 This Agreement shall be governed by and construed in accordance with
the laws of England.
32.2 The parties to this Agreement irrevocably agree that the courts of
England are to have jurisdiction to settle any dispute which may arise
out of or in connection with this Agreement and each other Transaction
Document and that accordingly any proceeding, suit, or action arising
out of or in connection with this Agreement or any other Transaction
Document ("Proceedings") may be brought in such courts.
32.3 Without prejudice to sub-Clause 32.2, all the parties further
irrevocably agree that any Proceedings may be brought in any court of
the State of New York, or the State of Florida or any other state of
the United States, where any party has its chief executive office (all
of such states being the "Submitted States") or federal court sitting
in the Submitted State and any court having jurisdiction over appeals
of matters heard in such courts and each of the parties hereto
irrevocably submits to the non-exclusive jurisdiction of such courts.
32.4 Each of the parties hereto irrevocably waives any objection it may have
now or hereafter to the laying of the venue of any Proceedings in any
such court as is referred to in this clause and any claim of FORUM NON
CONVENIENS and further irrevocably agrees that a judgment in any
Proceedings brought in any court referred to in this clause shall be
conclusive and binding upon it and may be enforced in the courts of any
other jurisdiction.
IN WITNESS WHEREOF, this Agreement is duly executed the date and year first
above written at London.
/s/ JOSEPH A. DLUTOWSKI
- --------------------------------------
for and on behalf of
OCWEN LIMITED
Witness /s/ JITENDRA PATEL
- --------------------------------------
Occupation. Jitendra Patel - Solicitor
Address: Edge & Ellison
18/19 Southampton Place
London WC1A 2AJ
60
/s/ JOHN C. ANDERSON
- --------------------------------------
for and on behalf of GREENWICH
INTERNATIONAL, LTD.
Witness /s/ JITENDRA PATEL
- --------------------------------------
Occupation. Jitendra Patel - Solicitor
Address: Edge & Ellison
18/19 Southampton Place
London WC1A 2AJ
/s/ JOSEPH A. DLUTOWSKI
- --------------------------------------
for and on behalf of OCWEN FINANCIAL CORPORATION
Witness /s/ JITENDRA PATEL
- --------------------------------------
Occupation. Jitendra Patel - Solicitor
Address: Edge & Ellison
18/19 Southampton Place
London WC1A 2AJ
61
The following schedules have been omitted from this filing, but copies thereof
are available to the Commission upon request:
SCHEDULE 1 FORM OF DRAWDOWN REQUEST(INITIAL ADVANCE)
FORM OF DRAWDOWN REQUEST(REVOLVING ADVANCES)
SCHEDULE 2 FORM OF SOLVENCY CERTIFICATE
SCHEDULE 3 MORTGAGE LOAN DOCUMENTS
SCHEDULE 4 PART I
62
SCHEDULE 4
PART II
(1) The information set forth on the Mortgage Loan Schedule with
respect to each Mortgage Loan is true and correct in all
material respects;
(2) Unless otherwise agreed from time to time, all payments due
prior to the Advance Date have been made and none of the
Mortgage Loans will have been contractually delinquent for 31
or more days more than once since the origination thereof;
(3) Each Mortgage Deed constitutes (i) in the case of English
Mortgage Loans, a valid and enforceable legal mortgage of the
relevant Mortgaged Property subject only in certain cases to
registration of the relevant Mortgage Deed at HM Land
Registry, or (ii) in the case of Scottish Mortgage Loans, a
valid and enforceable Standard Security over the relevant
Mortgaged Property subject only in certain cases to
registration or recording of the relevant Mortgage Deed in the
Registers of Scotland, in either case duly executed by the
Mortgagor named in the relevant Mortgage Deed;
(4) On the date upon which an Advance is made the Borrower
(subject only to registration of legal title at HM Land
Registry or the Registers of Scotland as appropriate) has good
title to each Mortgage Loan and the Collateral Security in
respect of each such Mortgage Loan, has full right and
authority to charge and assign the same by way of security and
the same is the absolute property of the Borrower (subject to
any registration or recording in favour of the Borrower which
may be pending at HM Land Registry or the Registers of
Scotland) free and clear of all mortgages, securities,
charges, liens, encumbrances, claims and equities (including,
without limitation, rights of set off or counterclaim,
overriding interest within the meaning of Section 3(xvi) of
the Land Registration Act 1925 or Section 28(1) of the Land
Registration (Scotland) Act 1979 and adverse entries or
notices of application therefor against any title at HM
Registry or the Registers of Scotland to any relevant
Mortgaged Property) except any such encumbrances, claims,
equities, overriding interests or entries which rank after the
interests of the Borrower, the Lender in the Mortgaged Loans
or which do not have an adverse effect on the value of the
relevant Mortgaged Property as security for the relevant
Mortgage Loan or which are the subject of a duly completed and
signed Postponement Agreement or appropriate executed MHA
Documentation as contemplated in sub-clause 14.3(B)(2) below;
63
(5) Each Mortgaged Property is a residential property or mixed
commercial and residential property in the United Kingdom;
(6) The steps necessary to perfect the vesting of full legal and
equitable title to each Mortgage Loan and the Collateral
Security in the Borrower have been duly taken at the
appropriate time or are in the course of being taken with all
due diligence;
(7) To the best of its knowledge, each Mortgaged Property is free
of material damage;
(8) Each Mortgage Loan at origination complied in all material
respects with applicable laws and regulations including, where
applicable, the Consumer Credit Act 1974 and any regulations
made thereunder (and in particular no Mortgage Loan is
cancellable thereunder) and consummation of the transactions
contemplated hereby will not involve the violation of any such
laws and regulations;
(9) Neither it nor any prior holder of any Mortgage Loan has; (a)
modified the Mortgage Loan in any material respect, except
that a Mortgage Loan may have been modified by a written
instrument in respect of which any applicable registration(s)
have been completed; (b) satisfied, cancelled or subordinated
such Mortgage Loan in whole or in part; (c) released the
related Mortgaged Property in whole or in part from the
security created by the relevant Mortgage Deed; or (d)
executed any instrument of release, cancellation, discharge,
modification or satisfaction with respect thereto;
(10) No sub-mortgage, sub-charge, pledge, lien or right of set off
or counterclaim or other security interest or other adverse
right or interest has been created or has arisen between it
and any Mortgagor which entitles or entitled the Mortgagor to
reduce the amount of any payment otherwise due under the terms
of such Mortgagor's Mortgage Loan (save, in the case of junior
mortgages, the relevant prior ranking legal mortgage or
mortgages of or Standard Security over the relevant Mortgaged
Property created by the Mortgagor and any related security for
the loan secured thereby);
(11) Each Mortgage Loan was originated in all material respects in
accordance with the criteria set out in the Underwriting
Guidelines;
(12) In relation to each Mortgaged Property:-
(1) in respect of title to property in England or Wales
which is not registered, the relevant Mortgagor had
or was acquiring good and marketable title to the fee
simple absolute in possession (if freehold) or a term
of years absolute of not less than thirty years
beyond the term of the Mortgage Loan (if leasehold)
relating to such Mortgaged Property and is free from
any encumbrance which would adversely affect such
title;
64
(2) in relation to title which is registered at HM
Registry, it was so registered with title absolute in
the case of freehold property or absolute leasehold
or good leasehold title of the requisite title
aforesaid in the case of leasehold property;
(3) in relation to which title is registered or recorded
in the Registers of Scotland, it was so registered or
recorded with valid and marketable title (whether
feudal or long lease), having in the case of a long
lease an unexpired term of not less than thirty years
beyond the term of the Mortgage Loan;
(4) no works on the relevant Mortgaged Property were
carried out in violation of any applicable planning
law or regulation or building regulations;
(5) if the relevant Mortgaged Property is leasehold or
(in Scotland) held under long lease, any requisite
consent of the landlord to or notice to the landlord
of the creation of the relevant Mortgage had been
obtained or given and no consents of or notices to
such landlord are required to any transfer,
assignation or sub-charge of the relevant Mortgage,
and a copy of any such consent or notice is held with
the title deeds to the relevant Mortgaged Property or
held to the order of the Lender or its Solicitors;
(6) the relevant Mortgaged Property is not subject to any
adverse third party claim or proceeding for
compulsory acquisition thereof;
(13) Each Mortgage relating to a Mortgage Loan (and any other
documents entered into in relation to the relevant Mortgage
Loan) is the legal, valid and binding obligation of the
grantor thereof, enforceable in accordance with its terms and
with applicable laws and parties thereto had legal capacity to
execute the same and the same have been duly and properly
executed by such parties;
(14) Either:
(1) the proceeds of the Mortgage Loans have been fully
disbursed and there is no requirement for further
advances thereunder; or
(2) if any retention was recommended by CMC's or the
relevant Approved Affiliate's valuer, the
recommendation to make a retention was implemented
and cash was not advanced until CMC or relevant
Approved Affiliate had received a certificate (or
other evidence acceptable to it) of completion of the
relevant repairs or other works.
65
(15) Each Mortgage Deed is in, or substantially in, the form of the
relevant attachment annexed hereto in Annexure 2.
(16) The origination and underwriting practices used by CMC or
relevant Approved Affiliate or with respect to each Mortgage
Loan have been in all respects legal, proper, prudent and
customary in the mortgage servicing business in the United
Kingdom and comply with the Underwriting Guidelines;
(17) Either:
(1) each Mortgaged Property is insured under the block
insurance policy from time to time maintained by CMC
or, as the case may be, the relevant Approved
Affiliate to provide, where it is agreed that the
Mortgagor will not insure, cover against such risks
and contingencies as are commonly insured against in
a fully comprehensive buildings insurance for
residential properties to a minimum of the full cost
of reinstatement thereof together with inflation cost
over any period that may be required for obtaining
any relevant planning permission and other approvals
and the reinstatement or repair period and architects
and other professional fees; or
(2) where the Mortgagor insures, CMC or, as the case may
be, the relevant Approved Affiliate has established
that such insurance was, at the date of origination
of the relevant Mortgage Loan, in accordance with the
foregoing provisions of this sub-clause, with a
reputable insurer, with an acknowledgement by the
insurer that the interest of CMC or relevant Approved
Affiliate has been or will be promptly following the
relevant Advance Date be noted on the relevant
policy. In the case of leasehold property in England
and Wales, the relevant Mortgaged Property is insured
under arrangements effected by the freeholder or any
intermediate leaseholder, on a fully comprehensive
basis as aforesaid.
(18) Prior to making the relevant advance the subject of a Mortgage
Loan, CMC or the relevant Approved Affiliate (as originator)
carried out or caused to be carried on its behalf the
investigations, searches (other than local authority searches)
and other actions and made or caused to be made on its behalf
the enquiries as to the Mortgagor's status that were required
in accordance with the relevant lending criteria of CMC or the
Approved Affiliate or Relevant Affiliate (as originator)
applicable at the time when the offer of advance was made and
the results thereof were acceptable to CMC or the relevant
Approved Affiliate or Relevant Affiliate (as originator) in
accordance with such lending criteria for the purposes of the
proposed advance;
66
(19) Any further advances after the date of the Mortgage Deed but
made prior to the Advance Date have been advanced under
separate mortgage documentation (and, accordingly, have not
been consolidated with the outstanding principal amount
secured by the Mortgage), and all ground rents, ground burdens
and service charges and other payments required in relation to
leasehold property or heritable property which previously
became due and owing have been paid. Except for interest
accruing from the date of the relevant Mortgage Deed or date
of advance to the relevant Mortgagor, whichever is later, to
the day which precedes by one month the date for payment of
the first installment of principal and interest, none of CMC,
the Approved Affiliate or Relevant Affiliate (as originator)
has advanced funds, or induced, solicited or knowingly
received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any
amount in relation to the relevant Mortgage Loan save to the
extent that the same reduces the Mortgage Loan;
(20) Subject to clause 14.3(B), to the best of the Borrower's
knowledge and belief (the Borrower having made all reasonable
enquiries of CMC or relevant Originator) there is no default,
breach, violation or event of acceleration existing under any
Mortgage Loan: and neither CMC nor any Approved Affiliate (as
originator) has waived any default, breach, violation or event
of acceleration other than any waiver which is in accordance
with and permitted under the relevant Manuals;
(21) Each Mortgage File contains a valuation of the relevant
Mortgaged Property undertaken on the instructions of CMC, the
relevant Approved Affiliate or Relevant Affiliate (as
originator), or instructions issued on its behalf or as the
case may be by any predecessor in title in relation to the
relevant Mortgage Loan) by an independent qualified valuer
being an associate or fellow of the Royal Institute of
Chartered Surveyors or, as the case may be, Society of Valuers
and Auctioneers, in each case approved by CMC, the relevant
Approved Affiliate or Relevant Affiliate (as originator) and
unless otherwise agreed between the Lender and the Borrower,
the principal amount advanced to the relevant Mortgagor was
not more than the amount permissible under the terms of the
relevant Program;
(22) At the time of the making of the Mortgage Loan, the Mortgaged
Property was not located within a 1 mile radius of any
contaminated land or any land with environmental or hazardous
waste risks known to CMC or the relevant Approved Affiliate or
(as originator) or, where such was the case, an environmental
audit was procured by CMC or the relevant Approved Affiliate
or (as originator) or evaluated in accordance with such
relevant originator's established environmental review
procedures, and found to be satisfactory;
67
(23) In selecting the Mortgage Loans in respect of which Advances
are made hereunder, no selection procedure was employed by the
Borrower which was intended to adversely affect the interests
of the Lender;
(24) Prior to the making of the relevant mortgage advance, enquiry
was made of each Mortgagor as to the identity of the persons
in actual occupation of the Mortgaged Property and (i) in the
case of English Mortgage Loans, any person who at the date
when the advance was made had attained the age of 18 and who
was identified in writing to CMC, the relevant Approved
Affiliate (as originator) or its Solicitor by the Mortgagor as
residing or being about to reside in the relevant Mortgaged
Property is either named as joint mortgagor on the relevant
Mortgage Deed or has signed a legally binding agreement
postponing (each a "POSTPONEMENT AGREEMENT") all rights and
entitlements to which such person may be entitled in the
Mortgaged Property to the interests, rights and entitlements
of CMC or the relevant Approved Affiliate (as originator) or
such other person as may have or acquire as mortgagee or
chargee of the property from time to time, such agreement in a
form as was satisfactory to such Solicitor, and (ii) in the
case of Scottish Mortgage Loans, prior to the making of the
advance, CMC or the relevant Approved Affiliate (as
originator) or its Solicitor obtained all necessary validly
executed MHA Documentation so as to ensure that neither the
relevant Mortgage Loan nor the relevant Mortgaged Property was
subject to or affected by any statutory right of occupancy in
favour of a non-entitled spouse;
(25) CMC and each Approved Affiliate have kept, or caused to be
kept, full and proper accounts, books and records showing all
transactions payments, receipts and proceedings relating to
that Mortgage and all such accounts, books and records are up
to date and in its possession or held to its order;
(26) There exists no litigation, dispute or complaint (subsisting
or pending or threatened) calling into question in any way
title of CMC or any Approved Affiliate to any Mortgage Loan
or, to the best of its knowledge, the relevant Mortgagor's
title to his Mortgaged Property;
(27) The Mortgage Loan Documents are held to the order of the
Lender by the relevant Solicitor or have been lodged at H.M.
Land Registry or the Registers of Scotland and in the case of
each Mortgaged Property the title to which is registered or
for which application for first registration has been made the
Borrower knows the title number under which the Mortgaged
Property is (or, in the case of first registration, is to be)
registered at H.M. Land Registry or the Registers of Scotland;
(28) In relation to each Mortgage Deed for Mortgaged Property where
registration is pending at H.M. Land Registry, there is no
caution, notice or other entry which would prevent the
registration of the Mortgage Deed as a charge by way of first
or, as the case may be, second or third subsequent legal
mortgage.
(29) None of the Mortgagors which pay interest is a company.
68
MASTER REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
Dated as of March 31, 1998
Between
LEHMAN COMMERCIAL PAPER INC.,
as Buyer
and
OCWEN FINANCIAL SERVICES, INC.
as Seller
WHEREAS, Seller and Buyer entered into that certain Master Repurchase
Agreement Governing the Purchases and Sales of Mortgage Loans dated as of
December 15, 1997 (the "December Master Repurchase Agreement") in the Committed
Amount of One hundred million Dollars ($100,000,000), and Seller is utilizing
the December Master Repurchase Agreement in the ordinary course of its business
as an originator of subprime mortgage loans (the "Ordinary Course Mortgage
Loans"); and
WHEREAS, Seller was offered the opportunity to acquire a single pool of
mortgage loans with an aggregate principal balance of $309,723,997 as of
November 1, 1997, and Buyer was willing to enter into this repurchase agreement
to enable Seller to acquire the new loans; and
WHEREAS, Ocwen Financial Corporation acquired certain mortgage loans
(the "Mortgage Loans") from Lehman Capital, a division of Lehman Brothers
Holdings, Inc., as buyer, pursuant to that certain Purchase and Sale Agreement
dated as of December 3, 1997 by and between Cityscape Corp., as seller, and
Lehman Capital, which was assigned to Ocwen Financial Corporation pursuant to
that certain Bill of Sale and Assignment dated as of February 27, 1998 by and
between Lehman Capital, as assignor, and Ocwen Financial Corporation, as
assignee (the "Mortgage Loan Purchase and Sale Agreement"); and
WHEREAS, Seller has agreed to buy and Ocwen Financial Corporation has
agreed to sell the Mortgage
Loans to Seller subject to the agreement of Buyer to purchase the Mortgage Loans
from Seller in accordance with this Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans (this "Agreement").
1. APPLICABILITY
Commencing on the date hereof and continuing through and including the
Termination Date, Lehman Commercial Paper Inc. ("BUYER") agrees, subject to the
terms and conditions hereof, to enter into a transaction upon the request of
Ocwen Financial Services, Inc. ("SELLER") in which Seller agrees to transfer to
Buyer all those Mortgage Loans acquired by Seller pursuant to and in accordance
with that certain Purchase and Sale Agreement dated as of December 3, 1997 by
and between Cityscape Corp., as seller, and Lehman Capital, a division of Lehman
Brothers Holdings, Inc., as buyer (the "Mortgage Loans") as assigned to Ocwen
Financial Corporation pursuant to that certain Bill of Sale and Assignment dated
as of February 27, 1998 by and between Lehman Capital, as assignor, and Ocwen
Financial Corporation, as assignee, as further assigned to Ocwen Financial
Services, Inc., pursuant to that certain Bill of Sale and Assignment dated March
31, 1998 (as so assigned, the "Mortgage Loan Purchase and Sale Agreement")
against the transfer of funds by Buyer in a single advance to Seller on the date
hereof (the "TRANSACTION"). The Transaction is entered into with the
understanding that on the Termination Date, or earlier upon the demand of
Seller, the Buyer agrees to transfer such Mortgage Loans to Seller, at a date
certain not later than 30 days after the transfer or on demand, as specified in
the Confirmation, against the transfer of funds by Seller. The Transaction shall
be governed by this Agreement and the related Confirmation, unless otherwise
agreed in writing. The Mortgage Loans are more fully set forth on Annex A to
Exhibit I, attached hereto and made a part hereof.
2. DEFINITIONS
"ACT OF INSOLVENCY" means, with respect to any party and its Affiliates, (i) the
filing of a petition, commencing, or authorizing the commencement of any case or
proceeding under any bankruptcy, insolvency, reorganization, liquidation,
dissolution or similar law relating to the protection of creditors, or suffering
any such petition or proceeding to be commenced by another which is consented
to, not timely contested or results in entry of an order for relief; (ii) the
seeking the appointment of a receiver, trustee, custodian or similar official
for such party or an Affiliate or any substantial part of the property of
either, (iii) the appointment of a receiver, conservator, or manager for such
party or an Affiliate by any governmental agency or authority having the
jurisdiction to do so; (iv) the making or offering by such party or an Affiliate
of a composition with its creditors or a general assignment for the benefit of
creditors, (v) the admission by such party or an Affiliate of such party of its
inability to pay its debts or discharge its obligations as they become due or
mature; or (vi) that any governmental authority or agency or any person, agency
or entity acting or purporting to act under governmental authority shall have
taken any action to condemn, seize or appropriate, or to assume custody or
control of, all or any substantial part of the property of such party or of any
of its Affiliates, or shall have taken any action to displace the management of
such party or of any of its Affiliates or to curtail its authority in the
conduct of the business of such party or of any of its Affiliates.
2
"ADDITIONAL LOANS" means Mortgage Loans or cash provided by Seller to Buyer or
its designee pursuant to Section 4(a).
"AFFILIATE" means, with respect to any Person, another Person that directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") means possession,
directly or indirectly, of power to direct or cause the direction of management
or policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise).
"AGENCY" means FNMA, FHLMC or GNMA.
"AGREEMENT" means this Master Repurchase Agreement Governing Purchases and Sales
of Mortgage Loans between Buyer and Seller, as amended from time to time.
"BALLOON MORTGAGE LOAN" means any Mortgage Loan that provided on the date of
origination for scheduled payments by the Mortgagor based upon an amortization
schedule extending beyond its maturity date.
"BUSINESS DAY" means a day other than (i) a Saturday or Sunday, or (ii) a day in
which the New York Stock Exchange is authorized or obligated by law or executive
order to be closed.
"BUYER" has the meaning specified in Section 1.
"COLLATERAL" has the meaning specified in Section 6.
"COLLATERAL AMOUNT" means, with respect to any Transaction, the amount obtained
by application of the applicable Collateral Amount Percentage to the related
Repurchase Price for such Transaction.
"COLLATERAL AMOUNT PERCENTAGE" means the amount set forth in the Confirmation
which, in any event (i) shall not be less than 105.26% with respect to the
Mortgage Loans in determining whether a Market Value Collateral Deficit exists
pursuant to the first sentence of Section 4(a) hereof and (ii) shall not be less
than 105.26% with respect to all Mortgage Loans in determining whether a
Securitization Value Collateral Deficit exists pursuant to the second sentence
of Section 4(a) hereof.
"COLLATERAL DEFICIT" means either a Market Value Collateral Deficit or a
Securitization Value Collateral Deficit.
"COLLATERAL INFORMATION" means the following information with respect to each
Mortgage Loan: (i) Seller's loan number, (ii) the Mortgagor's name, (iii) the
address of the Mortgaged Property, (iv) the current interest rate, (v) the
original balance, (vi) current balance as of the last day of the
3
immediately preceding month, (vii) the paid to date, (viii) the appraisal value
of the Mortgaged Property, (ix) whether interest rate is fixed or adjustable
(and if adjustable, the ARM terms, including the index, spread, adjustment
frequency, next adjustment date, caps and floors), (x) whether the Mortgage Loan
is convertible from ARM to fixed, (xi) the occupancy status of the Mortgaged
Property (including whether owner occupied), (xii) whether the Mortgage Loan is
a Balloon Loan, (xiii) the first payment date, (xiv) the maturity date, (xv) the
principal and interest payment, (xvi) the property type of the Mortgaged
Property, (xvii) the applicable credit grade, (xviii) the note date and (xix)
whether the Mortgage Loan is a Wet Ink Mortgage Loan.
"CONFIRMATION" has the meaning specified in Section 3(a).
"CUSTODIAL AGREEMENT" means that certain custodial agreement, dated as of
February 27, 1998, by and among Buyer, Seller and the Custodian.
"CUSTODIAL DELIVERY" means the form executed by Seller in order to deliver the
Mortgage Loan Schedule and/or the Mortgage File to Buyer or its designee
(including the Custodian) pursuant to Section 7, a form of which is attached
hereto as Exhibit II.
"CUSTODIAN" means the custodian under the Custodial Agreement. The custodian is
First Trust National Association.
"DELINQUENT" means, with respect to any Mortgage Loan, the period of time from
the date on which a Mortgagor fails to pay an obligation under the terms of such
Mortgage Loan (without regard to any applicable grace periods) to the date on
which such payment is made.
"Event of Default" has the meaning specified in Section 13.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"GNMA" means the Government National Mortgage Association.
"HEDGE" means, with respect to any or all of the Purchased Mortgage Loans, any
interest rate swap, cap or collar agreement or similar arrangements providing
for protection against fluctuations in interest rates or the exchange of nominal
interest obligations, either generally or under specific contingencies, entered
into by Seller with Buyer or its Affiliates, and reasonably acceptable to the
Buyer.
"HUD" means the United States Department of Housing and Urban Development.
"INCOME" means, with respect to any Purchased Mortgage Loan at any time, any
principal thereof then payable and all interest, dividends or other
distributions payable thereon less any related servicing fee(s) charged by a
subservicer.
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"LIBOR" means the London Interbank Offered Rate for one-month United States
dollar deposits as set forth on page 3750 of Telerate as of 11:00 a.m., London
time, on the date of determination.
"LOAN-TO-VALUE RATIO" means with respect to any Mortgage Loan as of any date,
the fraction, expressed as a percentage, the numerator of which is the principal
balance of such Mortgage Loan at the date of determination and the denominator
of which is the value of the related Mortgaged Property as set forth in the
appraisal of such Mortgaged Property obtained in connection with the origination
of such Mortgage Loan. .
"MARKET VALUE" means as of any date with respect to any Mortgage Loan, the price
at which such Mortgage Loan could readily be sold as determined by Buyer in its
sole discretion; provided, however, that Buyer shall not take into account, for
purposes of calculating Market Value, any Mortgage Loans that (i) are more than
59 days Delinquent or (ii) with respect to which there is a breach of a
representation, warranty or covenant made by Seller in this Agreement that
materially adversely affects Buyer's interest in such Mortgage Loan and which
breach has not been cured.
"MARKET VALUE COLLATERAL DEFICIT" has the meaning specified in Section 4(a).
"MORTGAGE" means a mortgage, deed of trust, deed to secure debt or other
instrument, creating a valid and enforceable first lien on or a first priority
ownership interest in an estate in fee simple in real property and the
improvements thereon, securing a mortgage note or similar evidence of
indebtedness.
"MORTGAGE FILE" means the documents specified as the "Mortgage File" in Section
7(d), together with any additional documents and information required to be
delivered to Buyer or its designee (including the Custodian) pursuant to this
Agreement.
"MORTGAGE LOAN" means (i) a non-securitized whole loan, namely a conventional
mortgage loan secured by a first lien on a one to four family residential
property which conform to Seller's underwriting guidelines or (ii) another type
of non-securitized whole loan as may be agreed upon in writing by the parties
hereto from time to time.
"MORTGAGE LOAN SCHEDULE" means a schedule of Mortgage Loans attached to each
Trust Receipt, Confirmation and Custodial Delivery.
"MORTGAGE NOTE" means a note or other evidence of indebtedness of a Mortgagor
secured by a Mortgage.
"MORTGAGED PROPERTY" means the real property securing repayment of the debt
evidenced by a Mortgage Note.
"MORTGAGEE" means the record holder of a Mortgage Note secured by a Mortgage.
5
"MORTGAGOR" means the obligor on a Mortgage Note and the grantor of the related
Mortgage.
"PERIODIC PAYMENT" has the meaning specified in Section 5(b).
"PERSON" means an individual, partnership, corporation, joint stock company,
trust or unincorporated organization or a governmental agency or political
subdivision thereof.
"PRICE DIFFERENTIAL" means, with respect to any Transaction hereunder as of any
date, the aggregate amount obtained by daily application of the Pricing Rate for
such Transaction to the Purchase Price for such Transaction on a 360 day per
year basis for the actual number of days during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the Repurchase Date (reduced by any amount of such Price Differential previously
paid by Seller to Buyer with respect to such Transaction).
"PRICING RATE" means the per annum percentage rate specified in the Confirmation
for determination of the Price Differential which shall not exceed LIBOR plus
the applicable Pricing Spread.
"PRICING SPREAD" means .75% (or 75bp) with respect to the Transactions.
"PRIME RATE" means the rate of interest published by THE WALL STREET JOURNAL,
northeast edition, as the "prime rate".
"PURCHASE AMOUNT" shall mean Two hundred seventy- eight million two hundred
thousand Dollars ($278,200,000.00).
"PURCHASE DATE" means the date on which Purchased Mortgage Loans are transferred
by Seller to Buyer or its designee (including the Custodian) as specified in the
Confirmation.
"PURCHASE PRICE" means on the Purchase Date, the price at which Purchased
Mortgage Loans are transferred by Seller to Buyer or its designee (including the
Custodian), which, subject to compliance with the collateral maintenance
requirements of Section 4, shall equal ninety-five per cent (95%) of the
aggregate outstanding principal amount of the Mortgage Loans on the Purchase
Date; provided, however, that the Purchase Price of any Mortgage Loan shall not
in any event exceed the outstanding principal amount thereof.
"PURCHASED MORTGAGE LOANS" means the Mortgage Loans sold by Seller to Buyer in a
Transaction, any Additional Loans and any Substituted Mortgage Loans.
"REPLACEMENT LOANS" has the meaning specified in Section 14(b)(ii).
"REPURCHASE DATE" means the date on which Seller is to repurchase the Purchased
Mortgage Loans from Buyer, including any date determined by application of the
provisions of Sections 3
6
or 14, as specified in the Confirmation; provided that in no event shall such
date later than the Termination Date.
"REPURCHASE PRICE" means the price at which Purchased Mortgage Loans are to be
transferred from Buyer or its designee (including the Custodian) to Seller upon
termination of a Transaction, which will be determined in each case (including
Transactions terminable upon demand) as the sum of the Purchase Price and the
Price Differential as of the date of such determination decreased by all cash,
Income and Periodic Payments actually received by Buyer pursuant to Sections
4(a), 5(a) and 5(b), respectively.
"SECURITIZATION VALUE" means, as of any date with respect to any Mortgage Loans,
the price at which such Mortgage Loans could be securitized and sold in a
securitization as determined by Buyer in its sole discretion; provided, however,
that Buyer shall not take into account, for purposes of calculating
Securitization Value, any Mortgage Loan (i) which are more than 59 days
Delinquent or (ii) with respect to which there is a breach of a representation,
warranty or covenant made by Seller in this Agreement that materially adversely
affects Buyer's interest in such Mortgage Loan and which breach has not been
cured.
"SECURITIZATION VALUE COLLATERAL DEFICIT" has the meaning specified in Section
4(a).
"SELLER" has the meaning specified in Section 1.
"SERVICING AGREEMENT" has the meaning specified in Section 25.
"SERVICING RECORDS" has the meaning specified in Section 25.
"SUBSTITUTED MORTGAGE LOANS" means any Mortgage Loans substituted for Purchased
Mortgage Loans in accordance with Section 9 hereof.
"TERMINATION DATE" shall mean that date which is the last to occur of (i) the
ninety-first (91st) day following the date upon which the Purchase Amount is
advanced by Buyer to Seller under the terms of this Agreement, or (ii) such
later date as the parties may determine by mutual written agreement .
"TRANSACTION" has the meaning specified in Section 1.
7
"TRUST RECEIPT" means a trust receipt issued by Custodian to Buyer confirming
the Custodian's possession of certain mortgage loan files which are the property
of and held by Custodian for the benefit of the Buyer or the registered holder
of such trust receipt.
3. INITIATION; CONFIRMATION; TERMINATION; MAXIMUM TRANSACTION AMOUNTS
(a) An agreement to enter into the Transaction shall be in writing at the
initiation of either Buyer or Seller. In any event, Buyer shall confirm the
terms of the Transaction by issuing a written confirmation to Seller promptly
after the parties enter into the Transaction in the form of Exhibit I attached
hereto (a "CONFIRMATION"). Such Confirmation shall describe the Purchased
Mortgage Loans, identify Buyer and Seller and set forth (i) the Purchase Date,
(ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to
be terminable on demand, (iv) the Pricing Rate applicable to the Transaction,
(v) the applicable Collateral Amount Percentages and (vi) additional terms or
conditions not inconsistent with this Agreement. After receipt of the
Confirmation, Seller shall, subject to the provisions of subsection (c) below,
sign the Confirmation and promptly return it to Buyer.
(b) Any Confirmation by Buyer shall be deemed to have been received by Seller on
the date actually received by Seller.
(c) The Confirmation, together with this Agreement, shall be conclusive evidence
of the terms of the Transaction covered thereby unless objected to in writing by
Seller no more than two (2) Business Days after the date the Confirmation was
received by Seller or unless a corrected Confirmation is sent by Buyer. An
objection sent by Seller must state specifically that writing which is an
objection, must specify the provision(s) being objected to by Seller, must set
forth such provision(s) in the manner that the Seller believes they should be
stated, and must be received by Buyer no more than two (2) Business Days after
the Confirmation was received by Seller.
(d) In the case of Transactions terminable upon demand, such demand shall be
made by Seller by telephone or otherwise, no later than 1:00 p.m. (New York
Time) on the Business Day prior to the day on which such termination will be
effective.
(e) On the Repurchase Date, termination of the Transaction will be effected by
transfer to Seller or its designee of the Purchased Mortgage Loans (and any
Income in respect thereof received by Buyer not previously credited or
transferred to, or applied to the obligations of, Seller pursuant to Section 5)
against the simultaneous transfer of the Repurchase Price to an account of
Buyer. Seller is obligated to obtain the Mortgage Files from Buyer or its
designee at Seller's expense on the Repurchase Date.
4. COLLATERAL AMOUNT MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Mortgage Loans
subject to then outstanding Transactions is less than the aggregate Collateral
Amount for all such Transactions (a "MARKET VALUE COLLATERAL DEFICIT"), then
Buyer may by notice to Seller require Seller to transfer to Buyer or its
designee (including the Custodian) Mortgage Loans ("ADDITIONAL LOANS") or cash,
so that the cash and aggregate Market Value of the Purchased Mortgage Loans,
8
including any such Additional Loans, will thereupon equal or exceed the
aggregate Collateral Amount. If at any time the aggregate Securitization Value
of all Mortgage Loans subject to then outstanding Transactions is less than the
aggregate Collateral Amount for all such Transactions (a "SECURITIZATION VALUE
COLLATERAL DEFICIT"), then Buyer may by notice to Seller require Seller to
transfer to Buyer or its designee (including the Custodian) Additional Loans or
cash, so that the cash and aggregate Securitization Value of such Mortgage
Loans, including any such Additional Loans, will thereupon equal or exceed the
aggregate Collateral Amount.
(b) Notice required pursuant to subsection (a) above may be given by any means
of telecopier or telegraphic transmission. A notice for the payment or delivery
in respect of a Collateral Deficit received before 9:00 a.m. on a Business Day,
local time of the party receiving the notice, must be met not later than 5:00
p.m. on the Business Day following the day upon which the notice was given,
local time of the party receiving the notice. Any notice given on a Business Day
after 9:00 a.m., local time of the party receiving the notice, shall be met not
later than 2:00 p.m. (New York time) on the following Business Day. The failure
of Buyer, on any one or more occasions, to exercise its rights under subsection
(a) of this Section shall not change or alter the terms and conditions to which
this Agreement is subject or limit the right of the Buyer to do so at a later
date. Buyer and Seller agree that a failure or delay to exercise its rights
under subsections (a) of this Section shall not limit Buyer's rights under this
Agreement or otherwise existing by law or in any way create additional rights
for Seller.
(c) In the event that Seller fails to comply with the provisions of this Section
4, Buyer shall not enter into any additional Transactions hereunder after the
date of such failure.
5. INCOME PAYMENTS
(a) Where a particular Transaction's term extends over an Income payment
date on the Purchased Mortgage Loans subject to that Transaction such Income
shall be the property of Buyer. Notwithstanding the foregoing, so long as no
Event of Default shall have occurred and be continuing, Seller shall be entitled
to all Income with respect to Purchased Mortgage Loans subject to Transactions.
Upon the occurrence and continuance of an Event of Default, all Income with
respect to Purchased Mortgage Loans subject to Transactions shall be held in a
segregated account established by the Custodian for the benefit of Buyer and
distributed under the Custodial Agreement.
(b) Notwithstanding that Buyer and Seller intend that the Transactions
hereunder be sales to Buyer of the Purchased Mortgage Loans, Seller shall pay by
wire transfer to Buyer the accreted value of the Price Differential (less any
amount of such Price Differential previously paid by Seller to Buyer)(each such
payment, a "PERIODIC PAYMENT") on the first Business Day of each month.
(c) Buyer shall offset against the Repurchase Price of each such
Transaction all Income and Periodic Payments actually received by Buyer pursuant
to Sections 5(a) and (b), respectively.
6. SECURITY INTEREST; ADDITIONAL COLLATERAL
(a) Buyer and the Seller intend that the Transaction hereunder be sales to Buyer
of the Purchased Mortgage Loans and not loans from Buyer to Seller secured by
the Purchased Mortgage Loans. However, in order to preserve Buyer's rights under
this Agreement in the event that a court or other forum recharacterizes the
Transactions hereunder as loans and as security for the
9
performance by Seller of all of Seller's obligations to Buyer under this
Agreement and the December Master Repurchase Agreement and the Transactions
entered into pursuant to this Agreement and the December Master Repurchase
Agreement, Seller grants Buyer a first priority security interest in the
Transactions set forth in the December Master Repurchase Agreement and the
Ordinary Course Mortgage Loans, and the Purchased Mortgage Loans, Servicing
Records, insurance relating to the Ordinary Course Mortgage Loans and the
Purchased Mortgage Loans, Income, any and all Hedges, any and all custodial
accounts and escrow accounts relating to the Purchased Mortgage Loans and the
Ordinary Course Mortgage Loans, and any other contract rights, general
intangibles and other assets relating to the Ordinary Course Mortgage Loans or
the Purchased Mortgage Loans or any interest in the Ordinary Course Mortgage
Loans or the Purchased Mortgage Loans and the servicing of the Ordinary Course
Mortgage Loans and the Purchased Mortgage Loans and any and all replacements,
substitutions, distributions on or proceeds of any and all of the foregoing
(collectively, the "COLLATERAL").
(b) Seller shall pay all fees and expenses associated with perfecting Buyer's
security interest in the Collateral, including, without limitation, the cost of
filing financing statements under the Uniform Commercial Code and recording
assignments of Mortgage, as and when required by Buyer in its sole discretion.
(c) Seller covenants to take such further actions as are necessary in order to
perfect Buyer's first priority security interest in the Hedges.
7. PAYMENT, TRANSFER AND CUSTODY
(a) Unless otherwise mutually agreed in writing, all transfers of funds
hereunder shall be in immediately available funds.
(b) On or before each Purchase Date, Seller shall deliver or cause to be
delivered to Buyer or its designee the Custodial Delivery in the form attached
hereto as Exhibit II.
(c) On the Purchase Date for the Transaction, ownership of the Purchased
Mortgage Loans shall be transferred to the Buyer or its designee (including the
Custodian) against the simultaneous transfer of the Purchase Price to an account
of Seller specified in the Confirmation. Seller, simultaneously with the
delivery to Buyer or its designee (including the Custodian) of the Purchased
Mortgage Loans relating to the Transaction hereby sells, transfers, conveys and
assigns to Buyer or its designee (including the Custodian) without recourse, but
subject to the terms of this Agreement, all the right, title and interest of
Seller in and to the Purchased Mortgage Loans together with all right, title and
interest in and to the proceeds of any related insurance policies.
(d) In connection with the sale, transfer, conveyance and assignment, on or
prior to each Purchase Date with respect to each Mortgage Loan, the Seller shall
deliver or cause to be delivered and released to the Custodian the following
original documents (collectively the "MORTGAGE FILE"), pertaining to each of the
Purchased Mortgage Loans identified in the Custodial Delivery delivered
therewith:
(i) the original Mortgage Note bearing all intervening
endorsements, endorsed "Pay to the order of ________ without recourse,
and without representation or warranty, express or implied" and signed
in the name of the last endorsee (the "LAST ENDORSEE") by an authorized
officer (in the event that the Mortgage Loan was acquired by the Last
Endorsee in a merger, the signature must be in the following form:
"[the Last Endorsee], successor by merger to [name of predecessor]"; in
the event that the Mortgage Loan was
10
acquired or originated while doing business under another name, the
signature must be in the following form: "[the Last Endorsee], formerly
known as [previous name]");
(ii) the original of any guarantee executed in connection with the
Mortgage Note (if any);
(iii) the original Mortgage with evidence of recording thereon or
copies certified by Seller to have been sent for recording;
(iv) the originals of all assumption, modification, consolidation or
extension agreements, with evidence of recording thereon or copies
certified by Seller to have been sent for recording;
(v) the original assignment of Mortgage in blank for each Mortgage
Loan, in form and substance acceptable for recording and signed in the
name of the Last Endorsee (in the event that the Mortgage Loan was
acquired by the Last Endorsee in a merger, the signature must be in the
following form: "[the Last Endorsee], successor by merger to [name of
predecessor]"; in the event that the Mortgage Loan was acquired or
originated while doing business under another name, the signature must
be in the following form: "[the Last Endorsee], formerly known as
[previous name]");
(vi) the originals of all intervening assignments of mortgage with
evidence of recording thereon or copies certified by Seller to have
been sent for recording;
(vii) the original policy of title insurance or a true copy thereof
or, if such policy has not yet been delivered by the insurer, the
commitment or binder to issue the same; and
(viii) the original of any security agreement, chattel mortgage or
equivalent document executed in connection with the Mortgage (if any).
(e) Intentionally deleted.
(f) With respect to all of the Mortgage Loans delivered by Seller to Buyer or
its designee (including the Custodian), Seller shall execute an omnibus power of
attorney substantially in the form of Exhibit III attached hereto irrevocably
appointing Buyer its attorney-in-fact with full power to complete and record the
assignment of Mortgage, complete the endorsement of the Mortgage Note and take
such other steps as may be necessary or desirable to enforce Buyer's rights
against such Mortgage Loans, the related Mortgage Files and the Servicing
Records.
(g) Buyer shall deposit the Mortgage Files representing the Purchased Mortgage
Loans, or direct that the Mortgage Files be deposited directly, with the
Custodian. The Mortgage Files shall be maintained in accordance with the
Custodial Agreement.
(h) Any Mortgage Files not delivered to Buyer or its designee (including the
Custodian) are and shall be held in trust by Seller or its designee for the
benefit of Buyer as the owner thereof. Seller or its designee shall maintain a
copy of the Mortgage File and the originals of the Mortgage File not delivered
to Buyer or its designee. The possession of the Mortgage File by Seller or its
designee is at the will of the Buyer for the sole purpose of servicing the
related Purchased Mortgage Loan, and such retention and possession by the Seller
or its designee is in a custodial capacity only. The books and records
(including, without limitation, any computer records or tapes) of Seller or its
designee shall be marked appropriately to reflect clearly the sale of the
related Purchased Mortgage Loan to Buyer. Seller or its designee (including the
11
Custodian) shall release its custody of the Mortgage File only in accordance
with written instructions from Buyer, unless such release is required as
incidental to the servicing of the Purchased Mortgage Loans or is in connection
with a repurchase of any Purchased Mortgage Loan by Seller.
8. REHYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS
Title to all Purchased Mortgage Loans shall pass to Buyer and Buyer shall have
free and unrestricted use of all Purchased Mortgage Loans. Nothing in this
Agreement shall preclude Buyer from engaging in repurchase transactions with the
Purchased Mortgage Loans or otherwise pledging, repledging, hypothecating, or
rehypothecating the Purchased Mortgage Loans, but no such transaction shall
relieve Buyer of its obligations to transfer Purchased Mortgage Loans to Seller
pursuant to Section 3 or of any other obligation under this Agreement during a
Transaction. Nothing contained in this Agreement shall obligate Buyer to
segregate any Purchased Mortgage Loans delivered to Buyer by Seller; provided
that Buyer acknowledges that the Custodian is contractually obligated to
segregate the Mortgage Files pursuant to the Custodial Agreement.
9. SUBSTITUTION
(a) Subject to Section 9(b), Seller may, upon one (1) Business Days'
written notice to Buyer, with a copy to Custodian, substitute other Mortgage
Loans for any Purchased Mortgage Loans. Such substitution shall be made by
transfer to Buyer or its designee (including the Custodian) of the Mortgage
Files of such other Mortgage Loans together with a Custodial Delivery and
transfer to Seller or its designee of the Purchased Mortgage Loans requested for
release. After substitution, the substituted Mortgage Loans, shall be deemed to
be Purchased Mortgage Loans subject to the same Transaction as the released
Mortgage Loans.
(b) Notwithstanding anything to the contrary in this Agreement, Seller may
not substitute other Mortgage Loans for any Purchased Mortgage Loans (i) if
after taking into account such substitution, a Collateral Deficit would occur or
(ii) such substitution would cause a breach of any provision of this Agreement.
10. REPRESENTATIONS AND WARRANTIES
(a) Each of Buyer and Seller represents and warrants to the other that (i) it is
duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance; (ii) it will engage in such Transactions as principal; (iii) the
person signing this Agreement on its behalf is duly authorized to do so on its
behalf; (iv) this Agreement is legal, valid and binding obligation of it,
enforceable against it in accordance with its terms, (v) no approval, consent or
authorization of the Transactions contemplated by this Agreement from any
federal, state, or local regulatory authority having jurisdiction over it is
required or, if required, such approval, consent or authorization has been or
will, prior to the Purchase Date, be obtained; (vi) the execution, delivery, and
performance of this Agreement and the Transactions hereunder will not violate
any law, regulation, order, judgment, decree, ordinance, charter, by-law, or
rule applicable to it or its property or constitute a default (or an event
which, with notice or lapse of time, or both would constitute a default) under
or result in a breach of any agreement or other instrument by which it is bound
or by which any of its assets are affected; (vii) it has received approval and
authorization to enter into this Agreement and each and every Transaction
actually entered into hereunder pursuant to its internal policies and
procedures; and
12
(viii) neither this Agreement nor any Transaction pursuant hereto are entered
into in contemplation of insolvency or with intent to hinder, delay or defraud
any creditor.
(b) Seller represents and warrants to Buyer that as of the
Purchase Date for the purchase of any Purchased Mortgage
Loans by Buyer from Seller and as of the date of this
Agreement and any Transaction hereunder and at all times
while this Agreement and any Transaction hereunder is in
full force and effect:
(i) ORGANIZATION. Seller is duly organized, validly existing
and in good standing under the laws of the State of
Florida and is duly licensed, qualified, and in good
standing in every state where Seller transacts business
and in any state where any Mortgaged Property is located
if the laws of such state require licensing or
qualification in order to conduct business of the type
conducted by Seller therein.
(ii) No Litigation. There is no action, suit, proceeding,
arbitration or investigation pending or threatened against
Seller which, either in any one instance or in the
aggregate, may result in any material adverse change in
the business, operations, financial condition, properties
or assets of Seller, or in any material impairment of the
right or ability of Seller to carry on its business
substantially as now conducted, or in any material
liability on the part of Seller, or which if adversely
determined would affect the validity of this Agreement or
any of the Purchased Mortgage Loans or of any action taken
or to be taken in connection with the obligations of
Seller contemplated herein, or which would be likely to
impair materially the ability of Seller to perform under
the terms of this Agreement;
(iii) No Broker. OTHER THAN Lehman Brothers Holdings, Inc.,
Seller has not dealt with any broker, investment banker,
agent, or other person, except for Buyer, who may be
entitled to any commission or compensation in connection
with the sale of Purchased Mortgage Loans pursuant to this
Agreement;
(iv) Good Title to Collateral. Purchased Mortgage Loans shall
be free and clear of any lien, encumbrance or impediment
to transfer, and Seller has good, valid and marketable
title and the right to sell and transfer such Purchased
Mortgage Loans to Buyer.
(v) Delivery of Mortgage File. With respect to each Purchased
Mortgage Loan which is not a Wet Ink Mortgage Loan, the
Mortgage Note, the Mortgage, the assignment of Mortgage
and any other documents required to be delivered under
this Agreement and the Custodial Agreement for such
Mortgage Loan has been delivered to the Custodian. Seller
or its designee is in possession of a complete, true and
accurate Mortgage File with respect to each Mortgage Loan,
except for such documents the originals of which have been
delivered to the Custodian.
(vi) Selection Process. Intentionally Deleted.
(vii) [Reserved].
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(viii) No Untrue Statements. To the best of Seller's knowledge,
neither this Agreement nor any written statement made, or
any report or other document issued or delivered or to be
issued or delivered by Seller pursuant to this Agreement
or in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements
contained herein or therein not misleading;
(ix) Origination Practices. Intentionally Deleted.
(x) Performance of Agreement. Seller does not believe, nor
does it have any reason or cause to believe, that it
cannot perform each and every covenant contained in this
Agreement on its part to be performed;
(xi) Seller Not Insolvent. Seller is not, and with the passage
of time does not expect to become, insolvent; and
(xii) No Event of Default. No Event of Default has occurred and
is continuing hereunder.
(c) Seller represents and warrants to the Buyer that each Purchased Mortgage
Loan sold hereunder, as of the related Purchase Date conform to the
representations and warranties set forth in Exhibit V attached hereto. Seller
further represents and warrants to the Buyer that, as of the date of its
delivery, the Collateral Information with respect to each Purchased Mortgage
Loan is complete, true and correct. It is understood and agreed that the
representations and warranties set forth on Exhibit V hereto, if any, shall
survive delivery of the respective Mortgage File to Buyer or its designee
(including the Custodian).
(d) On the Purchase Date for any Transaction, Buyer and Seller shall each be
deemed to have made all the foregoing representations with respect to itself as
of such Purchase Date.
11. NEGATIVE COVENANTS OF THE SELLER
On and as of the date of this Agreement and each Purchase Date and until this
Agreement is no longer in force with respect to any Transaction, Seller
covenants that it will not:
(a) take any action which would directly or indirectly impair or adversely
affect Buyer's title to or the value of the Purchased Mortgage Loans;
(b) pledge, assign, convey, grant, bargain, sell, set over, deliver or otherwise
transfer any interest in the Purchased Mortgage Loans to any person not a party
to this Agreement nor will the Seller create, incur or permit to exist any lien,
encumbrance or security interest in or on the Purchased Mortgage Loans except as
described in Section 6 of this Agreement; or
(c) create, incur or permit to exist any lien, encumbrance or security interest
in or on any of the Collateral without the prior express written consent of
Buyer.
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12. AFFIRMATIVE COVENANTS OF THE SELLER
For so long as this Agreement is in effect:
(a) Seller covenants that it will promptly notify Buyer of any material adverse
change in its business operations and/or financial condition;
(b) Seller shall provide Buyer with copies of such documentation as Buyer may
reasonably request evidencing the truthfulness of the representations set forth
in Section 10, including but not limited to resolutions evidencing the approval
of this Agreement by Seller's board of directors or loan committee, copies of
the minutes of the meetings of Seller's board of directors or loan committee at
which this Agreement and the Transactions contemplated by this Agreement were
approved;
(c) Seller shall, at Buyer's request, take all action necessary to ensure that
Buyer will have a first priority security interest in the Collateral, including,
among other things, filing such Uniform Commercial Code financing statements as
Buyer may reasonably request;
(d) Seller shall notify Buyer no later than one (1) Business Day after obtaining
actual knowledge thereof, if any event has occurred that constitutes an Event of
Default with respect to Seller or any event that with the giving of notice or
lapse of time, or both, would become an Event of Default with respect to Seller;
(e) Intentionally Deleted.
(f) Seller covenants, upon request of Buyer after the occurrence of a Collateral
Deficit, to enter into hedging transactions with respect to fixed rate Purchased
Mortgage Loans in order to provide adequate protection, in Seller's reasonable
judgment, against interest rate risks;
(g) Seller covenants to provide Buyer on the first Business Day of each month,
either by direct modem electronic transmission or via a computer diskette, the
Collateral Information in computer readable format with respect to all Purchased
Mortgage Loans then subject to Transactions;
(h) Intentionally Deleted.
(i) Seller covenants to provide Buyer with the following financial and reporting
information:
(i) Within 120 days after the last day of its fiscal year, Seller's
audited consolidated statements of income and statements of changes in
cash flow for such year and balance sheets as of the end of such year
in each case presented fairly in accordance with GAAP, and accompanied,
in all cases, by an unqualified report of a nationally recognized
independent certified public accounting firm consented to by Buyer
(which consent shall not be unreasonably withheld);
(ii) Within 90 days after the last day of the first three fiscal
quarters in any fiscal year, Seller's consolidated statements of income
and statements of changes in cash flow for such quarter and balance
sheets as of the end of such quarter presented fairly in accordance
with GAAP; and
15
(iii) Upon request and in any event not more frequently than quarterly,
an officer's certificate from a senior officer of the Seller addressed
to Buyer certifying that, as of such calendar month, (x) Seller is in
compliance with all of the terms, conditions and requirements of this
Agreement, and (y) no Event of Default exists.
13. EVENTS OF DEFAULT
(a) If any of the following events (each an "EVENT OF DEFAULT") occur, Seller
and Buyer shall have the rights set forth in Section 14, as applicable:
(i) Seller or Buyer fails to satisfy or perform either (i) any
payment obligation under this Agreement or (ii) any other
material obligation or covenant under this Agreement
within five (5) Business Days of notice of such breach;
(ii) an Act of Insolvency occurs with respect to Seller or
Buyer;
(iii) any representation made by Seller shall have been
incorrect or untrue in any material respect when made or
repeated or deemed to have been made or repeated and such
representation is not corrected or cured of its inaccuracy
within five (5) Business Days of notice of such breach;
(iv) Seller or Buyer shall admit its inability to, or its
intention not to, perform any of its obligations
hereunder;
(v) any governmental, regulatory, or self-regulatory
authority, including, but not limited to, the Agencies,
takes any action to remove, limit, restrict, suspend or
terminate the rights, privileges, or operations of the
Seller or any of its Affiliates, including suspension as
an issuer, lender or seller/servicer of mortgage loans,
which suspension has a material adverse effect on the
ordinary business operations of Seller or Seller's
Affiliate, and which continues for more than 24 hours;
(vi) Seller dissolves, merges or consolidates with another
entity (unless (A) it is the surviving party or (B) the
entity into which it mergers has equity and a market value
of at least that of the Seller immediately prior to such
merger and such entity expressly assumes the obligations
of the Seller at the time of such merger), or sells,
transfers, or otherwise disposes of a material portion of
its business or assets without Buyer's prior written
consent;
(vii) Buyer, in its good faith judgment, believes that there has
been a material adverse change in the business,
operations, corporate structure or financial condition of
Seller or that Seller will not meet any of its obligations
under any Transaction pursuant to this Agreement, this
Agreement or any other agreement between the parties, and
two (2) Business Days have elapsed since Buyer has
delivered to Seller written notice to such effect;
(viii) Seller is in default under any indenture or other
agreement with respect to the borrowing of money to which
it is a party, PROVIDED, HOWEVER, such a default shall not
constitute an Event of Default if the exercise of
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such remedies as are available to Seller's counterparty
with respect to such default would not result in a
material adverse change in the business operations or
financial condition of the Seller;
(ix) A final nonappealable judgment by any competent court in
the United States of America for the payment of money in
an amount of at least $250,000 is rendered against the
Seller, and the same remains undischarged or unpaid for a
period of sixty (60) days during which execution of such
judgment is not effectively stayed;
(x) This Agreement shall for any reason cease to create a
valid, first priority security interest in any of the
Purchased Mortgage Loans purported to be covered hereby;
(xi) A Market Value Collateral Deficit occurs with respect to
Seller or Buyer, as applicable, and is not eliminated
within the time period specified in Section 4(b); or
(xii) An "event of default" has occurred pursuant to a hedging
transaction entered into upon request of Buyer pursuant to
Section 12(h) hereof.
(xiii) An "event of default" shall have occurred and be
continuing under the terms of the December Master
Repurchase Agreement.
14. REMEDIES
(a) If an Event of Default occurs with respect to Seller, the following rights
and remedies are available to Buyer:
(i) At the option of Buyer, exercised by written notice to
Seller (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon
the occurrence of an Act of Insolvency), the Repurchase
Date for each Transaction hereunder shall be deemed
immediately to occur,
(ii) If Buyer exercises or is deemed to have exercised the
option referred to in subsection (a)(i) of this Section,
(A) Seller's obligations hereunder to repurchase all Purchased
Mortgage Loans in such Transactions shall thereupon become
immediately due and payable,
(B) to the extent permitted by applicable law, the Repurchase
Price with respect to each such Transaction shall be increased by
the aggregate amount obtained by daily application of, on a 360 day
per year basis for the actual number of days during the period from
and including the date of the exercise or deemed exercise of such
option to but excluding the date of payment of the Repurchase Price
as so increased, (x) the greater of the Prime Rate or the Pricing
Rate for each such Transaction to (y) the Repurchase Price for such
Transaction as of the Repurchase Date as determined pursuant to
subsection (a)(i) of this Section (decreased as of any day by (I)
any amounts actually in the possession of Buyer pursuant to clause
(C) of this subsection, (II) any proceeds from the sale of Purchased
Mortgage Loans applied to the Repurchase Price pursuant to
17
subsection (a)(xii) of this Section, and (III) any amounts applied
to the Repurchase Price pursuant to subsection (a)(iii) of this
Section), and
(C) all Income actually received by the Buyer or its designee
(including the Custodian) pursuant to Section 5 shall be applied to
the aggregate unpaid Repurchase Price owed by Seller.
(iii) After one Business Day's notice to Seller (which notice
need not be given if an Act of Insolvency shall have
occurred, and which may be the notice given under
subsection (a)(i) of this Section), Buyer may (A)
immediately sell, without notice or demand of any kind, at
a public or private sale and at such price or prices Buyer
may reasonably deem satisfactory any or all Purchased
Mortgage Loans subject to a Transaction hereunder or (B)
in its sole discretion elect, in lieu of selling all or a
portion of such Purchased Mortgage Loans, to give Seller
credit for such Purchased Mortgage Loans in an amount
equal to the Market Value of the Purchased Mortgage Loans
against the aggregate unpaid Repurchase Price and any
other amounts owing by Seller hereunder. The proceeds of
any disposition of Purchased Mortgage Loans shall be
applied first to the costs and expenses incurred by Buyer
in connection with Seller's default; second to the actual
costs of cover and/or related hedging transactions; third
to the Repurchase Price; and fourth to any other
outstanding obligation of Seller to Buyer or its
Affiliates.
(iv) The parties recognize that it may not be possible to
purchase or sell all of the Purchased Mortgage Loans on a
particular Business Day, or in a transaction with the same
purchaser, or in the same manner because the market for
such Purchased Mortgage Loans may not be liquid. In view
of the nature of the Purchased Mortgage Loans, the parties
agree that liquidation of a Transaction or the underlying
Purchased Mortgage Loans does not require a public
purchase or sale and that a good faith private purchase or
sale shall be deemed to have been made in a commercially
reasonable manner. Accordingly, Buyer may elect, in its
sole discretion, the time and manner of liquidating any
Purchased Mortgage Loan and nothing contained herein shall
(A) obligate Buyer to liquidate any Purchased Mortgage
Loan on the occurrence of an Event of Default or to
liquidate all Purchased Mortgage Loans in the same manner
or on the same Business Day or (B) constitute a waiver of
any right or remedy of Buyer. However, in recognition of
the parties' agreement that the Transactions hereunder
have been entered into in consideration of and in reliance
upon the fact that all Transactions hereunder constitute a
single business and contractual relationship and that each
Transaction has been entered into in consideration of the
other Transactions, the parties further agree that Buyer
shall use its best efforts to liquidate all Transactions
hereunder upon the occurrence of an Event of Default as
quickly as is prudently possible in the reasonable
judgment of Buyer.
(v) Buyer shall, without regard to the adequacy of the
security for the Seller's obligations under this
Agreement, be entitled to the appointment of a receiver by
any court having jurisdiction, without notice, to take
possession of and protect, collect, manage, liquidate, and
sell the Collateral or any portion thereof, and collect
the payments due with
18
respect to the Collateral or any portion thereof. Seller
shall pay all costs and expenses incurred by Buyer in
connection with the appointment and activities of such
receiver.
(vi) Seller agrees that Buyer may obtain an injunction or an
order of specific performance to compel Seller to fulfill
its obligations as set forth in Section 25, if Seller
fails or refuses to perform its obligations as set forth
therein.
(vii) Seller shall be liable to Buyer for the amount of all
expenses, reasonably incurred by Buyer in connection with
or as a consequence of an Event of Default, including,
without limitation, reasonable legal fees and expenses and
reasonable costs incurred in connection with hedging or
covering transactions.
(viii) Buyer shall have all the rights and remedies provided
herein, provided by applicable federal, state, foreign,
and local laws (including, without limitation, the rights
and remedies of a secured party under the Uniform
Commercial Code of the State of New York, to the extent
that the Uniform Commercial Code is applicable, and the
right to offset any mutual debt and claim), in equity, and
under any other agreement between Buyer and Seller.
(ix) Buyer may exercise one or more of the remedies available
to Buyer immediately upon the occurrence of an Event of
Default and, except to the extent provided in subsections
(a)(i) and (iii) of this Section, at any time thereafter
without notice to Seller. All rights and remedies arising
under this Agreement as amended from time-to-time
hereunder are cumulative and not exclusive of any other
rights or remedies which Buyer may have.
(x) In addition to its rights hereunder, Buyer shall have the
right to proceed against any assets of Seller which may be
in the possession of Buyer or its designee (including the
Custodian) including the right to liquidate such assets
and to set off the proceeds against monies owed by Seller
to Buyer pursuant to this Agreement. Buyer may set off
cash, the proceeds of the liquidation of the Purchased
Mortgage Loans, any Collateral or its proceeds, and all
other sums or obligations owed by Seller to Buyer against
all of Seller's obligations to Buyer, whether under this
Agreement, under a Transaction, or under any other
agreement between the parties, or otherwise, whether or
not such obligations are then due, without prejudice to
Buyer's right to recover any deficiency. Any cash,
proceeds, or property in excess of any amounts due, or
which Buyer reasonably believes may become due, to it from
Seller shall be returned to Seller after satisfaction of
all obligations of Seller to Buyer.
(xi) Buyer may enforce its rights and remedies hereunder
without prior judicial process or hearing, and Seller
hereby expressly waives any defenses Seller might
otherwise have to require Buyer to enforce its rights by
judicial process. Seller also waives any defense Seller
might otherwise have arising from the use of nonjudicial
process, enforcement and sale of all or any portion of the
Collateral, or from any other election
19
of remedies. Seller recognizes that nonjudicial remedies
are consistent with the usages of the trade, are
responsive to commercial necessity and are the result of a
bargain at arm's length.
(xii) Buyer and Seller hereby agree that sales of the Purchased
Mortgage Loans shall be deemed to include and permit the
sales of Purchased Mortgaged Loans pursuant to a
securities offering.
(xiii) Notwithstanding the foregoing remedies, if the Event of
Default (other than an Event of Default under Section
13(a)(xi)) arises from a breach of any representation or
warranty set forth in Sections 10(b)(iii), (v) or (ix) or
in Exhibit V attached hereto with respect to a Purchased
Mortgage Loan, then Seller may elect, subject to Buyer's
written consent (which consent shall not be unreasonably
withheld or delayed), to cure such default by repurchasing
such Mortgage Loan or substituting for such Mortgage Loan
within two (2) Business Days of such Event of Default,
PROVIDED, HOWEVER, that Seller shall not have the right to
make the foregoing election if such breach causes a
default with respect to Mortgage Loans that in the
aggregate represent ten percent (10%) or more of the
aggregate Purchase Price of all Purchased Mortgage Loans
subject to then outstanding Transactions. The repurchase
price for any such repurchase shall be the outstanding
Repurchase Price of such Mortgage Loan, as the case may
be. Any such substitution shall be performed in accordance
with Section 9 of this Agreement.
(b) If an Event of Default occurs with respect to Buyer, the following rights
and remedies are available to Seller:
(i) Upon tender by Seller of payment of the aggregate
Repurchase Price for all such Transactions, Buyer's right,
title and interest in all Purchased Mortgage Loans subject
to such Transactions shall be deemed transferred to
Seller, and Buyer shall deliver or cause to be transferred
all such Purchased Mortgage Loans to Seller or its
designee at Buyer's expense.
(ii) If Seller exercises the option referred to in subsection
(b)(i) of this Section and Buyer fails to deliver or cause
to be delivered the Purchased Mortgage Loans to Seller or
its designee, after one Business Day's notice to Buyer,
Seller may (A) purchase Mortgage Loans ("REPLACEMENT
LOANS") that are as similar as is reasonably practicable
in characteristics, outstanding principal amounts (as a
pool) and interest rate to any Purchased Mortgage Loans
that are not delivered by Buyer to Seller or its designee
as required hereunder or (B) in its sole discretion elect,
in lieu of purchasing Replacement Loans, to be deemed to
have purchased Replacement Loans at a price therefor on
such date, equal to the Market Value of the Purchased
Mortgage Loans.
(iii) Buyer shall be liable to the Seller, and Buyer shall pay
to the Seller on demand, (A) with respect to Purchased
Mortgage Loans (other than Additional Loans), for any
excess of the price paid (or deemed paid) by Seller for
Replacement Loans therefor over the Repurchase Price for
such Purchased Mortgage Loans and (B) with respect to
Additional Loans, for the price paid (or deemed paid) by
Seller for the Replacement
20
Loans therefor. In addition, Buyer shall be liable to
Seller for interest on such remaining liability with
respect to each such purchase (or deemed purchase) of
Replacement Loans calculated on a 360-day year basis for
the actual number of days during the period from and
including the date of such purchase (or deemed purchase)
until paid in full by Buyer. Such interest shall be at the
greater of the Pricing Rate or the Prime Rate.
(iv) Buyer shall be liable to Seller for the amount of all
expenses reasonably incurred by Seller in connection with
or as a consequence of an Event of Default, including,
without limitation, reasonable legal expenses and
reasonable expenses incurred in connection with covering
existing hedging transactions with respect to the
Purchased Mortgage Loans.
(v) Seller shall have all the rights and remedies provided
herein, provided by applicable federal, state, foreign,
and local laws, in equity, and under any other agreement
between Buyer and Seller, including, without limitation,
the right to offset any debt or claim.
(vi) Seller may exercise one or more of the remedies available
to Seller immediately upon the occurrence of an Event of
Default and at any time thereafter without notice to
Buyer. All rights and remedies arising under this
Agreement as amended from time-to-time hereunder are
cumulative and not exclusive of any other rights or
remedies which Seller may have.
15. ADDITIONAL CONDITION
Seller shall, on the date of the initial Transaction hereunder and, upon the
request of Buyer, on the date of any subsequent Transaction, cause to be
delivered to Buyer, with reliance thereon permitted as to any Person that
purchases the Purchased Mortgage Loan from Buyer in a repurchase transaction, a
favorable opinion or opinions of counsel with respect to the matters set forth
in Exhibit IV attached hereto.
16. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter into
each Transaction hereunder in consideration of and in reliance upon the fact
that, the Transaction hereunder constitute a single business and contractual
relationship. Accordingly, each of Buyer and Seller agrees (i) to perform all of
its obligations in respect of each Transaction hereunder, and that a default in
the performance of any such obligations shall constitute a default by it in
respect of all Transactions hereunder, (ii) that each of them shall be entitled
to set off claims and apply property held by them in respect of any Transaction
against obligations owing to them in respect of any other Transactions hereunder
and (iii) that payments, deliveries, and other transfers made by either of them
in respect of any Transaction shall be deemed to have been made in consideration
of payments, deliveries, and other transfers in respect of any other
Transactions hereunder, and the obligations to make any such payments,
deliveries, and other transfers may be applied against each other and netted;
provided, however, that the parties hereto acknowledge and agree that each
Purchased Mortgage Loan is identified and unique and nothing in this Agreement
should limit or reduce Buyer's obligation to deliver the Purchased Mortgage
Loans to Seller as and when provided herein.
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17. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party to whom
any written notice or other communication is to be given hereunder, all such
notices or communications shall in in writing or confirmed in writing and
delivered at the respective addresses set forth in the Confirmation.
18. ENTIRE AGREEMENT; SEVERABILITY
This Agreement together with the applicable Confirmation constitutes the entire
understanding between Buyer and Seller with respect to the subject matter it
covers and shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions involving
Purchased Mortgage Loans. By acceptance of this Agreement, Buyer and Seller
acknowledge that they have not made, and are not relying upon, any statements,
representations, promises or undertakings not contained in this Agreement. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
19. ASSIGNABILITY
The rights and obligations of the parties under this Agreement and under any
Transactions shall not be assigned by Seller without the prior written consent
of Buyer. This Agreement and the Transaction shall be binding upon and shall
inure to the benefit of the parties and their respective successors and assigns.
Nothing in this Agreement express or implied, shall give to any person, other
than the parties to this Agreement and their successors hereunder, any benefit
or any legal or equitable right, power, remedy or claim under this Agreement.
20. TERMINABILITY
This Agreement shall terminate upon the written notice from either party to the
other party to such effect, except that this Agreement shall, notwithstanding
the above clause, remain applicable to the Transaction through and including the
Termination Date. Notwithstanding any such termination or the occurrence of an
Event of Default, all of the representations and warranties hereunder (including
those made in Exhibit V) shall continue and survive.
21. GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
22. CONSENT TO JURISDICTION
The parties irrevocably agree to submit to the personal jurisdiction of the
United States District Court for the Southern District of New York, the parties
irrevocably waiving any objection thereto. If, for any reason, federal
jurisdiction is not available, and only if federal jurisdiction is not
available, the parties irrevocably agree to submit to the personal jurisdiction
of the Supreme Court of the State of New York, the parties irrevocably waiving
any objection thereto.
22
23. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Any such waiver or modification shall be effective only in the
specific instance and for the specific purpose for which it was given.
24. INTENT
The parties understand and intend that this Agreement and each Transaction
hereunder constitute a "repurchase agreement" and a "securities contract" as
those terms are defined under the relevant provisions of Title 11 of the United
States Code, as amended.
25. SERVICING
(a) Notwithstanding the purchase and sale of the Purchased Mortgage Loans
hereby, Seller shall continue to service the Purchased Mortgage Loans for the
benefit of Buyer and, if Buyer shall exercise its rights to pledge or
hypothecate the Purchased Mortgage Loan prior to the related Repurchase Date
pursuant to Section 8, Buyer's assigns; provided, however, that the obligations
of Seller to service the Purchased Mortgage Loans shall cease, at Seller's
option, upon the payment by Seller to Buyer of the Repurchase Price therefor.
Seller shall service the Purchased Mortgage Loans in accordance with the
servicing standards maintained by other prudent mortgage lenders with respect to
mortgage loans similar to the Purchased Mortgage Loans.
(b) Seller agrees that Buyer is the owner of all servicing records, including
but not limited to any and all servicing agreements, files, documents, records,
data bases, computer tapes, copies of computer tapes, proof of insurance
coverage, insurance policies, appraisals, other closing documentation, payment
history records, and any other records relating to or evidencing the servicing
of Purchased Mortgage Loans (the "SERVICING RECORDS") so long as the Purchased
Mortgage loans are subject to this Agreement. Seller grants Buyer a security
interest in all servicing fees and rights relating to the Purchased Mortgage
Loans and all Servicing Records to secure the obligation of the Seller or its
designee to service in conformity with this Section and any other obligation of
Seller to Buyer. Seller covenants to safeguard such Servicing Records and to
deliver them promptly to Buyer or its designee (including the Custodian) at
Buyer's request.
23
(c) Upon the occurrence and continuance of an Event of Default, Buyer may, in
its sole discretion, (i) sell its right to the Purchased Mortgage Loans on a
servicing released basis or (ii) terminate the Seller as servicer of the
Purchased Mortgage Loans with or without cause, in each case without payment of
any termination fee.
(d) Seller shall not employ sub-servicers to service the Purchased Mortgage
Loans without the prior written approval of Buyer, which approval shall not be
unreasonably withheld.
(e) Seller shall cause any sub-servicers engaged by Seller to execute a letter
agreement with Buyer acknowledging Buyer's security interest and agreeing that,
upon notice from Buyer (or the Custodian on its behalf) that an Event of Default
has occurred and in continuing hereunder, it shall deposit all Income with
respect to the Purchased Mortgage Loans in the account specified in the third
sentence of Section 5(a).
26. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that in the case of
Transactions in which one of the parties is an "insured depository institution"
as that term is defined in Section 1831(a) of Title 12 of the United States
Code, as amended, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or
the Bank Insurance Fund, as applicable.
27. NETTING
If Buyer and Seller are "financial institutions" as now or hereinafter defined
in Section 4402 of Title 12 of the United States Code ("SECTION 4402") and any
rules or regulations promulgated thereunder:
(a) All amounts to be paid or advanced by one party to or on behalf of the other
under this Agreement or any Transaction hereunder shall be deemed to be "payment
obligations" and all amounts to be received by or on behalf of one party from
the other under this Agreement or any Transaction hereunder shall be deemed to
be "payment entitlements" within the meaning of Section 4402, and this Agreement
shall be deemed to be a "netting contract" as defined in Section 4402.
(b) The payment obligations and the payment entitlements of the parties hereto
pursuant to this Agreement and any Transaction hereunder shall be netted as
follows. In the event that either party (the "DEFAULTING PARTY") shall fail to
honor any payment obligation under this Agreement or any Transaction hereunder,
the other party (the "NONDEFAULTING PARTY") shall be entitled to reduce the
amount of any payment to be made by the Nondefaulting Party to the Defaulting
Party by the amount of the payment obligation that the Defaulting Party failed
to honor.
28. MISCELLANEOUS
(a) Time is of the essence under this agreement and all Transactions and all
references to a time shall mean New York time in effect on the date of the
action unless otherwise expressly stated in this Agreement.
(b) Buyer shall be authorized to accept orders and take any other action
affecting any accounts of the Seller in response to instructions given in
writing or orally by telephone or otherwise by any person with apparent
authority to act on behalf of the Seller, and the Seller shall indemnify
24
Buyer, defend, and hold Buyer harmless from and against any and all liabilities,
losses, damages, costs, and expenses of any nature arising out of or in
connection with any action taken by Buyer in response to such instructions
received or reasonably believed to have been received from the Seller.
(c) If there is any conflict between the terms of this Agreement or any
Transaction entered into hereunder and the Custodial Agreement, this Agreement
shall prevail.
(d) If there is any conflict between the terms of a Confirmation or a corrected
Confirmation issued by the Buyer and this Agreement, the Confirmation shall
prevail.
(e) This Agreement may be executed in counterparts, each of which so executed
shall be deemed to be an original, but all of such counterparts shall together
constitute but one and the same instrument.
(f) Intentionally Deleted.
(g) The headings in this Agreement are for convenience of reference only and
shall not affect the interpretation or construction of this Agreement
25
IN WITNESS WHEREOF, the parties have entered into this Master Agreement
Governing Purchases and Sales of Mortgage Loans as of the date set forth above.
Seller:
OCWEN FINANCIAL SERVICES, INC.
a Florida corporation
By: (Seal)
---------------------------
Title:
------------------------
Date:
-------------------------
26
IN WITNESS WHEREOF, the parties have entered into this Master Agreement
Governing Purchases and Sales of Mortgage Loans as of the date set forth above.
LEHMAN COMMERCIAL PAPER, INC.
as Buyer
By: (Seal)
---------------------------
Title:
------------------------
Date:
-------------------------
27
The following exhibits have been deleted herefrom, but are available to the
Commission upon request.
EXHIBIT I Confirmation
EXHIBIT II Form of Custodial Delivery
EXHIBIT III Form of Power of Attorney
EXHIBIT IV Opinion of Counsel to Seller
EXHIBIT V Representations and Warranties
Regarding Mortgage Loan
EXHIBIT VI Seller's Underwriting Guidelines
28
9
0000873860
Ocwen Financial Corporation
1,000
USD
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
1
17,830
31,269
104,000
0
650,200
61,314
61,314
1,945,247
23,516
3,421,142
1,933,954
610,090
76,953
226,812
0
0
607
446,705
3,421,142
52,562
4,447
1,032
58,041
27,845
40,856
17,185
2,254
19,088
37,451
22,886
22,886
0
0
22,346
0.37
0.36
8.79
593,242
0
0
0
27,188
5,985
58
23,516
23,516
0
0
Tag 18 includes Loans Available for Sale of $493,106, Loan Portfolio of
$280,518, and Discount Loan Portfolio of $1,171,623.
Tag 19 includes Allowance for Loan Losses on Loan Portfolio of $4,026, and
on Discount Loan Portfolio of $19,490.
Tag 22 includes Securities sold under agreements to repurchase of
$168,419, and Obligations outstanding under lines of credit of $441,671.
Tag 30 includes Interest Income on Loans Available for Sale of $9,503,
Loans of $6,262, and Discount Loans of $36,797.
Tag 39 includes Non-interest expense of $34,053 and Distributions on
Company-obligated, Mandatorily Redeemable Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures of the Company of $3,398.
