-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RjIh0hcB0OcxpRG/6FMej3WTbTZaMTo1X+UG+stVM1mJ4z3LUEVKimjgUXRtnCkH q+IE7pHDjXT3VSfvGbOk2A== 0000950109-99-001205.txt : 19990402 0000950109-99-001205.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950109-99-001205 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WMF GROUP LTD CENTRAL INDEX KEY: 0001039206 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE AGENTS & MANAGERS (FOR OTHERS) [6531] IRS NUMBER: 541647759 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22567 FILM NUMBER: 99582067 BUSINESS ADDRESS: STREET 1: 1593 SPRING HILL RD STREET 2: STE 400 CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7036101400 MAIL ADDRESS: STREET 1: 1593 SPRING HILL RD STREET 2: STE 400 CITY: VIENNA STATE: VA ZIP: 22182 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K --------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998 ----------------- [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For the transition period from _________ to _____________ Commission File Number 000-22567 --------- THE WMF GROUP, LTD. ------------------- (Exact name of registrant as specified in its charter) Delaware 54-1647759 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification no.) 1593 Spring Hill Road, Suite 400, Vienna, Virginia 22182 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including are code (703) 610-1400 -------------- Securities registered pursuant to Section 12 (b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - -------------------------------------------------------------------------------- Common Stock, $.01 par value The Nasdaq Stock Market Securities registered pursuant to Section 12 (g) of the Act: NONE 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 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 ____ - Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $57.7 million based on the closing price of such shares on The Nasdaq Stock Market as of March 29, 1999. As of March 29, 1999 there were 11,260,415 shares of common stock issued and ---------- outstanding. DOCUMENTS INCORPORATED BY REFERENCE: THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS IS INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT. 1 The WMF GROUP, LTD. FORM 10-K TABLE OF CONTENTS -----------------
Item No. Page - -------- ---- PART I 1. Business 3 2. Properties 17 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 18 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 6. Selected Financial Data 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 7a. Quantitative and Qualitative Disclosure about Market Risk 32 8. Financial Statements and Supplementary Data 32 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure 32 PART III 10. Directors and Executive Officers of the Registrant 32 11. Executive Compensation 32 12. Security Ownership of Certain Beneficial Owners and Management 32 13. Certain Relationships and Related Transactions 32 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 32
2 A Warning About Forward Looking Statements This report may contain "forward-looking statements." Any statement in this report, other than a statement of historical fact, may be a forward-looking statement. You can generally identify forward-looking statements by looking for words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue." Variations on those or similar words, or the negatives of such words, also may indicate forward-looking statements. Although the Company believes that the expectations reflected in this report are reasonable, the Company cannot assure you that its expectations will be correct. The Company has included a discussion entitled "Risk Factors" in this report, disclosing important factors that could cause its actual results to differ materially from its expectations. If in the future you hear or read any forward-looking statements concerning the Company, you should refer to these Risk Factors. The forward-looking statements in this report are accurate only as of its date. If the Company's expectations change, or if new events, conditions or circumstances arise, the Company is not required to, and may not, update or revise any forward-looking statement in this report. PART I ITEM 1. BUSINESS COMPANY OVERVIEW The WMF Group, Ltd. (the "Company") is one of the largest commercial mortgage financial services companies in the United States, as measured by servicing portfolio size, according to a survey published by the Mortgage Bankers Association of America (the "MBA"). As the nation's largest originator of Federal National Mortgage Association ("Fannie Mae") and Federal Housing Authority ("FHA") insured multifamily and health care loans, the Company has originated more than $9 billion in conventional and FHA-insured multifamily and commercial loans since 1993, and has a servicing portfolio of approximately $12.1 billion, at December 31, 1998. The company has 346 employees and operates 19 offices nationwide. The Company has three principal lines of business: (i) mortgage banking, (ii) capital markets and (iii) advisory services. The WMF Group, Ltd. is a Delaware corporation formed in October 1992 under the name "WMF Holdings, Inc." Originally, the Company was created to hold the operations of WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige") and WMF Washington Mortgage Corp. ("WMF Washington Mortgage"). WMF Huntoon Paige and WMF Washington Mortgage are wholly-owned subsidiaries of the Company. WMF Huntoon Paige has originated and serviced multifamily and healthcare mortgages insured by FHA under various owners and under various names since 1979. WMF Washington Mortgage acquired WMF Huntoon Paige in 1991. WMF Washington Mortgage has originated and serviced multifamily and commercial mortgages under various owners and under various names since 1984. On April 1, 1996, NHP Incorporated ("NHP") purchased the Company and named it "NHP Financial Services, Inc." In early 1997, NHP was acquired by Apartment Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO required NHP to spin-off the Company. On December 8, 1997, the Company became an independent, publicly traded company. The Company's primary shareholders are Demeter Holdings Corporation ("Demeter"), Phemus Corporation ("Phemus") and Capricorn Investors II, L.P. ("Capricorn"). Demeter and Phemus are affiliates of Harvard Private Capital Holdings, Inc. ("Harvard"). 3 INDUSTRY OVERVIEW The Company believes that the financing of commercial and multifamily real estate offers significant growth opportunities. Commercial and multifamily real estate encompasses a wide spectrum of assets including multifamily, office, industrial, retail and hospitality. These assets are financed by an estimated $1.3 trillion of outstanding commercial real estate debt. During the past ten years, total commercial mortgage originations have averaged approximately $210 billion annually, of which approximately 75 percent to 80 percent consist of non-multifamily assets. The Company anticipates that on a stabilized basis, the commercial real estate market will require debt financing for existing properties of approximately $120 to $140 billion annually, plus additional amounts for new construction. Mortgage banking involves the origination and servicing of mortgage loans. Commercial mortgage banks have arranged a significant portion of the debt financing for commercial real estate. Historically, commercial mortgage banks originated and serviced loans for life insurance companies in specified geographic regions. In addition to providing loans to life insurance companies, some commercial mortgage banks acted as originators for Government Sponsored Entities ("GSEs") such as Fannie Mae and Federal Home Loan Mortgage Corporation ("Freddie Mac"), and also acted as brokers for other lenders. As a result, a fragmented industry has developed which is comprised of small local and regional firms. However, since the early 1990s the commercial mortgage banking industry has experienced significant change, in part due to the growth in commercial mortgage securitization, the expanded involvement of GSEs, increased borrower sophistication and advances in information technology. Many of the existing firms lack the capital and financial sophistication to compete effectively in today's rapidly changing market. Accordingly, the Company believes the commercial mortgage industry is going through a period of consolidation similar to that experienced in the residential mortgage industry. Although consolidation provides significant growth opportunities for the Company, certain risks are also involved. See "Risk Factors -- The Company May Be Unable to Complete Acquisitions or Enter into New Business Lines." STRATEGIC OBJECTIVES Because of its geographic scope, multiple investor relationships, underwriting expertise, operating systems and product development capabilities, the Company believes that it is well-positioned to compete effectively in the commercial real estate financing industry. Technological demands, large and sophisticated infrastructure for real estate underwriting and risk evaluation, and rapid market changes increasingly characterize this industry. The Company believes that these developments will lead to the creation of large and sophisticated mortgage finance enterprises offering a wide spectrum of commercial finance products. The Company seeks to use its existing infrastructure and market position to increase market share of its established businesses and to expand into related businesses. The Company seeks to increase reported earnings and cash flow through (i) acquisitions, (ii) internal growth, (iii) design and delivery of new mortgage products, including structured loan products and participating loan products, (iv) expansion into related businesses, such managing commercial mortgage investment funds, and (v) diversification of fee income sources. Acquisitions. The Company has pursued a strategy of acquiring (1) multifamily and commercial mortgage businesses that either serve key real estate markets in the United States or provide specialized services that enhance its product line, and (2) additional servicing portfolios. In the past, the Company has sought to acquire companies with active and productive loan origination staffs, significant market share and servicing portfolios of $250 million or more and expects to continue to do so in the future, to the extent adequate capital and attractive opportunities are available. Since 1996, the Company has made six acquisitions (the "Acquistions"): . During 1996, the Company increased its portfolio of serviced mortgages by 40.9 percent from $4.4 billion to $6.2 billion, primarily as a result of two acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of the loan production pipeline and servicing, as well as certain other assets, of American Capital Resources Investment Corp. ("ACR") for approximately $4.2 million, plus potential future payments based on realization of loans closed from the pipeline through August 1997. The acquired pipeline and loan production offices originated approximately $138 million in multifamily and healthcare loans for WMF Huntoon Paige in 1996. 4 . On December 31, 1996, WMF Washington Mortgage acquired all of the common stock of Detroit-based Proctor & Associates of Michigan ("Proctor"), the 37th largest commercial mortgage banking firm in the United States based on a survey by the MBA. WMF Washington Mortgage paid approximately $3.7 million in cash to acquire Proctor. The acquisition brought to the Company a $1.1 billion loan servicing portfolio of multifamily, retail and office building mortgages, as well as 17 active correspondent relationships with life insurance companies. . On April 15, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets and liabilities of Askew Investment Company ("Askew") in Dallas, Texas for $5.6 million, excluding transaction costs (82 percent of which was paid at closing and the remaining 18 percent of which will be paid in the form of earnouts upon the attainment of certain performance objectives over a 36-month period). Askew is a multifamily and commercial mortgage bank with correspondent relationships with 14 insurance companies, which originated $375 million of mortgages in 1996. The acquisition increased the Company's mortgage servicing portfolio by $425 million and gave the Company access to the traditional insurance company whole-loan buyers in the markets served by Askew. The purchase also provided the Company with a new source of loans it intended for securitization through the Company's capital market relationships. . On November 5, 1997, WMF Washington Mortgage purchased 100 percent of the outstanding stock of The Robert C. Wilson Company and its Arizona subsidiary (collectively, "Robert C. Wilson") for a purchase price of approximately $4.0 million in cash (80 percent of which was paid at closing and the remaining 20 percent of which will be paid in the form of earnouts upon the attainment of certain performance objectives over a 42-month period). In addition to its mortgage and equity origination and servicing activities, Robert C. Wilson provides commercial office leasing and real estate sales. Robert C. Wilson has correspondent relationships with 24 insurance companies and originated approximately $475 million of mortgages in 1997. The acquisition increased the Company's servicing portfolio by $554 million. . On December 23, 1997, WMF Washington Mortgage purchased substantially all of the mortgage banking assets of New York Urban West, Inc. ("New York Urban") for a purchase price of approximately $4.9 million in cash (84 percent of which was paid at closing and the remaining 16 percent of which will be paid in the form of earnouts upon the attainment of certain performance objectives over a 42-month period). An approved HUD mortgagee, New York Urban originated $225 million of mortgages in 1997 and had correspondent relationships with several life insurance companies. The acquisition increased the Company's servicing portfolio by $1.3 billion. . On March 27, 1998, the Company created WMF Carbon Mesa Advisors, Inc. ("WMF Carbon Mesa"), which purchased all of the assets of Carbon Mesa Advisors, Inc. and Strategic Real Estate Partners for a combination of cash and common stock. WMF Carbon Mesa develops new loan products, manages commercial mortgage investment funds, provides special asset management services and originates commercial mortgages. The Company also grows its servicing portfolio through the acquisition of servicing rights. Since 1992, the Company has acquired servicing rights on approximately $1.3 billion of mortgages in over 44 transactions. The Company routinely reviews and conducts investigations of potential acquisitions of multifamily and commercial mortgage businesses. As of March 30, 1999, the Company does not have any agreements or letters of intent with respect to pending acquisitions. However, if the Company has access to sufficient capital, the Company may enter into discussions with one or more potential acquisition targets in the commercial mortgage financial services business. The Company cannot assure you that such discussions will result in future acquisitions, or that if those acquisitions are completed, they will be successful. Internal Growth. The Company has grown through internal expansion. This growth has occurred though a combination of opening of new offices, hiring new loan officers, implementing loan officer training programs, and creating a national sales force capable of originating loans for multiple of investor sources. Prospectively, the Company seeks to grow via continued expansion of its national origination system, further streamlining of its servicing operations, and the realization of other operating efficiencies. - In addition to expanding its origination system through acquisitions, the Company opened four new loan origination offices and hired 16 new loan officers in 1998. Through training and other management initiatives, the Company has developed a national sales force, capable of selling all loan products offered by the Company. - The Company implemented a cost-reduction program, which is expected to result in savings of at least $7.5 million annually 5 from previously anticipated levels. See "Major Developments in 1998 - Cost- Saving Measures". As a result of acquisitions and internal growth, the Company has increased loan originations by approximately 62 percent annually, from approximately $240 million in 1992 to approximately $4.3 billion in 1998. The Company's servicing portfolio has increased by approximately 26 percent annually, from approximately $3.0 billion in 1992 to $12.1 billion as of December 31, 1998. Design and delivery of new mortgage products. Since 1992, the Company has been involved in developing more than eight new products, including one of the first whole-loan conduits (Common Sense/SM/), a revolving credit facility for real estate investment trusts, a bridge loan program for mark-to-market properties and a forward commitment program for tax-credit new construction. Using these products, the Company has originated loans totaling over $1.7 billion from 1992 to 1998. The Company has also enhanced its interim financing product, has added a number of loan products to sell to life insurance companies, has created a small loan program, and has developed a securitized loan product with a major Wall Street conduit for commercial lending. The Company intends to enhance its ability to develop new financing products in response to changing market conditions, including continued development of bridge loan products, as well as the addition of high-yield, mezzanine and participating loan products. The Company cannot assure you that it will be successful in developing any particular new product or, if a product is developed, that it will be profitable for the Company. Expansion into related businesses. The Company seeks to build upon its experience in evaluating real estate to expand its services and develop related products. The Company has used its expertise to provide due diligence services for institutional clients, to enter the advisory services/funds management business and to expand its presence in the commercial mortgage-backed securities market. Other possible businesses may include asset management, commercial leasing and management and the purchase and retention of commercial mortgage- backed securities. Expansion may occur through a combination of acquisitions, strategic alliances and internal business development. There can be no assurance that the Company will seek to undertake any specific line of business, or that, if it undertakes a particular line of business, that the business will be successful. Fee Diversification. The Company intends to manage the risks of the commercial real estate financing industry by (i) focusing its activities on earning service and origination fees rather than earning interest on retained mortgage assets, (ii) developing strategic relationships with multiple investors, (iii) lending to a variety of commercial asset classes and (iv) operating on a national basis. . Fee-based Earnings. In 1998, approximately 96.8% of the Company's revenue was ------------------ generated from origination, servicing and other related fees. Of this amount, fees and other revenue related to servicing and funds management agreements accounted for approximately 44% of Company fee revenue. In addition to providing a stable source of earnings, this approach requires significantly less capital than the retention of mortgage assets. While it may make minority investments in funds it manages, the Company does not intend to take significant principal risk positions. . Multiple Investors. In the past, changes in the financial markets and ------------------- investor requirements have contributed to the volatility of the commercial mortgage financial markets. The Company seeks to manage this risk by developing strategic relationships with a variety of investor sources, including commercial banks, GSEs, investment banks and insurance companies. The Company believes this strategy enabled it to originate $1.1 billion of multifamily and commercial mortgages in the fourth quarter of 1998 despite the limited liquidity in the conduit market. . Multiple Asset Classes. The Company has lent to a wide variety of commercial ---------------------- asset classes, including multifamily, retail, office and hospitality. The Company believes that business and financing cycles vary among asset classes. By lending to multiple asset classes, the Company can reduce risk and improve operating efficiency by redeploying its origination activities as market conditions change. . National Presence. The Company has 19 loan origination offices located ------------------ throughout the country and has originated loans in every state and the District of Columbia. This national presence provides another source of diversification, helping to mitigate the risk posed by changes in regional business conditions. See "Risk Factors" for a detailed discussion of the risks that may affect the Company. 6 MAJOR DEVELOPMENTS IN 1998 1998 Losses. During the year ended December 31, 1998, the Company incurred a net loss of $33.3 million, or $6.38 per share. Almost all of these losses were incurred at the Company's wholly owned subsidiary WMF Capital Corp. ("Capital Corp.") and resulted from volatility in commercial mortgage-backed securities markets and interest rates on U.S. Treasury securities. Despite the losses, the Company's mortgage banking segment remained profitable during the year, and the Company as a whole experienced increased revenue during 1998. Losses and Restructuring at Capital Corp. Most of the Company's losses during 1998 resulted from short-sale transaction losses related to Capital Corp.'s inventory of mortgage loans. During the first three quarters of 1998, Capital Corp. originated $969 million in mortgage loans. To protect itself against interest rate fluctuations prior to the sale or securitization of its loans, Capital Corp. entered into arrangements for the short sale of U.S. Treasury securities. Because of interest rate volatility during that period, the Company was required to fund losses related to changes in the value of its short-sale positions. To reduce its exposure to margin calls, Capital Corp. sold $691 million in loans and closed the related U.S. Treasury short positions at a loss in the third quarter of 1998. During December of 1998, Capital Corp. sold the remainder of its loan inventory and closed the related short-sale positions without incurring additional losses. As part of these sales, the Company and Commercial Mortgage Investment Trust, Inc. ("COMIT") purchased $2.4 million and $7.6 million, respectively, of subordinated interests in a pool of $63.5 million of these loans. COMIT is a real estate investment trust ("REIT") that is owned by Harvard, Capricorn and the Company. WMF Carbon Mesa manages COMIT. See "The Company's Lines of Business - Advisory Services (WMF Carbon Mesa)" for more information on WMF Carbon Mesa. As a result of the losses incurred, Capital Corp. was unable to satisfy certain loan commitments. Capital Corp. has settled one claim related to these obligations but Capital Corp. may not be able to settle similar claims in the future. See "Risk Factors -- Unsatisfied Loan Obligations May Cause Additional Losses." The Company does not intend to contribute additional capital to Capital Corp. or to take principal risk positions at Capital Corp. Cost-Saving Measures. In response to its 1998 losses, the Company implemented a cost-reduction program, reducing its workforce by 15 percent and decreasing general and administrative expenses. The Company expects that the cost- reduction program will result in annual savings of at least $7.5 million from previously anticipated levels, beginning in 1999. Issuance and Repayment of Subordinated Notes. On September 4, 1998, the Company entered into a Credit Agreement with COMIT. Under the Credit Agreement, Harvard and Capricorn contributed a total of $20 million to COMIT, and the Company then sold $20 million of its subordinated notes to COMIT. The Company also issued warrants to COMIT entitling it to purchase 1,200,000 shares of common stock at $11.25 per share. COMIT later assigned 960,000 of the warrants to Harvard and 240,000 of the warrants to Capricorn. As part of the Recapitalization Plan, described below, Harvard and Capricorn surrendered those warrants. The Company repaid $16.6 million of the subordinated notes on December 31, 1998. On March 12, 1999, the Company repaid the remaining principal and interest due under the subordinated notes, and the notes were canceled. Recapitalization Plan. To provide for its working and other capital needs after the losses at Capital Corp., the Company entered into the Recapitalization Plan. The Recapitalization Plan had two parts and raised a total of approximately $27.5 million of new equity: . Sale of $16.6 Million of Capital Stock to Demeter, Phemus and Capricorn On December 31, 1998, Demeter, Phemus and Capricorn acquired 3,635,972 shares of the Company's Class A Non-Voting Convertible Preferred Stock (the "Class A Stock") for total cash proceeds of approximately $16.6 million. On January 14, 1999, each share of Class A Stock was converted into one share of common stock. As a result of these transactions, Demeter acquired 2,757,633 shares of the Company's common stock, Phemus acquired 151,145 shares of common stock, and Capricorn acquired 727,194 shares of common stock. As part of the Class A Stock transaction, Harvard and Capricorn canceled the warrants to purchase 1,200,000 shares of common stock issued to COMIT in connection with the subordinated notes. In addition, Demeter, Phemus and Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028 shares of common stock not otherwise purchased in the rights offering described below, for a total purchase price of $3,320,140. The Company applied the proceeds of the sale of Class A Stock to repay part of the subordinated notes held by COMIT. 7 Because of their participation in this transaction, Demeter, Phemus and Capricorn agreed not to exercise, transfer or acquire any rights during the rights offering. . $10.9 Million Public Rights Offering/Private Placement The Company issued all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999. Through the rights offering, the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7.4 million. On March 19, 1999, Demeter, Phemus and Capricorn completed the purchase of a total of 664,028 shares of the Company's common stock pursuant to the Standby Purchase Agreement, for total proceeds to the Company of approximately $3.3 million. Also, Capricorn has agreed to purchase an additional 34,520 shares at $5.375 per share, for proceeds to the Company of $185,545. The Company expects that this sale to Capricorn will close shortly. The Company applied the proceeds from the rights offering first to repay the remaining subordinated notes held by COMIT. The Recapitalization Plan resulted in the effective conversion of the Company's $20 million of subordinated notes into common stock and raised approximately $7.5 million of additional common equity, which was used to repay borrowings under the Company's revolving line of credit and for working capital. Expansion into Funds Management. Though the acquisition of Carbon Mesa Advisors, Inc. and Strategic Real Estate Partners in March 1998, the Company started its advisory services segment, which manages commercial mortgage investment funds, provides special asset management services and develops new loan products. In June, the Company, with Harvard and Capricorn, formed a commercial mortgage REIT to invest in bridge, mezzanine, and structured loans originated by the Company. The REIT is managed by WMF Carbon Mesa and is expected to fund up to $345 million of commercial and multifamily mortgages through June 1999. THE COMPANY'S LINES OF BUSINESS MORTGAGE ORIGINATION Mortgage origination involves the making of loans to borrowers who use real estate property as collateral. The Company's staff of 59 loan originators targets a wide variety of borrowers, including developers, local entrepreneurial owners, large portfolio owners and public companies such as REITs. Currently, the Company originates mortgages through two channels -- retail and correspondent. For the retail operation, the Company has loan originators in 19 offices located throughout the country. Those individuals directly solicit owners of real estate, as well as local multifamily and commercial mortgage brokers. The Company believes that having a local presence within a market significantly adds to its understanding of the local economic, demographic and real estate trends, thus allowing it to serve borrowers and investors better. A local presence also helps develop borrower relationships and identify new customers. In those markets where the Company does not have a retail presence, it acts through "correspondent relationships" with local mortgage brokers. In this relationship, a local commercial mortgage broker identifies potential borrowers and refers them to the Company for their loans. Currently, the Company originates loans through correspondents throughout the United States. In 1998, the Company obtained 25.9 percent of its $4.3 billion of loan originations through correspondents. The Company's relationship with correspondents differs between multifamily and commercial lending and FHA lending. For multifamily and commercial lending, the Company enters into an agreement with each correspondent which generally provides that (1) the borrower will pay the correspondent, usually based on a percentage of the loan, (2) in some instances, the Company will have a right of first refusal to finance properties meeting the criteria of its loan programs and investors and (3) the correspondent will be eligible for incentive fees based on the servicing fees received by the Company from the originated loans. Generally either party to a multifamily and commercial correspondent agreement may terminate the relationship without cause upon prior written notice. The multifamily and commercial correspondent agreements usually do not place geographic restrictions on either the Company or the correspondent. With respect to FHA lending, correspondents generally enter into agreements with the Company for each individual 8 transaction and the terms of the agreements vary from transaction to transaction. These agreements define the compensation, roles, representations and warranties for the correspondent and the Company. After it identifies a potential borrower, the Company determines which of its mortgage products best meets the borrower's needs. Then the Company works with the borrower and a mortgage investor to prepare a loan application. When the borrower completes the application, the Company's underwriters conduct due diligence. In the case of FHA loans, the FHA conducts due diligence. See "-- Mortgage Underwriting" below. The loan is evaluated, and if appropriate, submitted to a loan committee consisting of senior officers of the Company. If the Company or the FHA approves the loan, the Company issues a commitment to the borrower. Normally, the Company simultaneously commits to sell the loan to an appropriate investor. This simultaneous commitment from both a borrower and a mortgage investor enables the Company to eliminate its exposure to interest rate changes for each transaction. Typical investors include insurance companies, banks, credit corporations, GSEs (such as Fannie Mae) and other institutional investors. Typically the Company funds a loan 15 to 30 days after the loan commitment. At that time, the Company funds the loan using its warehouse lines of credit and the borrower pays the Company an origination fee, typically one percent of the principal amount of the loan. Within 10 to 45 days after funding the loan, the Company completes the sale of the loan to an investor. In connection with such sales, the Company sometimes retains certain liabilities. See "Risk Factors -- The Company is Liable for Certain Representation and Warranties Concerning Mortgage Loans" and "Risk Factors -- The Company May Incur Losses on Mortgage Loans Under the DUS Program." After selling a mortgage loan, the Company typically retains the right to service the loan. See "-- Mortgage Servicing" below. As of December 31, 1998, the Company held 33 mortgage loans for sale with an aggregate principal balance of $34.2 million. After December 31, 1998, the Company sold these loans. As of December 31, 1997, the Company held 32 mortgage loans for sale with an aggregate principal balance of $49.4. After that date, the Company sold these loans. As of December 31, 1998, the Company's subsidiary, Capital Corp., had $65.8 million of forward commitments to lend that were not matched with investor commitments. Those commitments are subject to market risk until such time as a permanent investor is identified. See "Risk Factors - The Company May Incur Losses Related To Loan Commitments For Which It Does Not Have A Purchaser And Has Not Entered Into Hedge Arrangements" below. The Company provides a diverse range of products to borrowers through three business units: Conventional Multifamily, FHA Multifamily and Healthcare, and Commercial/Life Insurance Company. The following table sets forth information regarding loan origination volume by business unit for each of the last three years. 9 LOAN ORIGINATION VOLUME BY BUSINESS UNIT (DOLLARS IN MILLIONS)
1998 1997 1996 -------- -------- -------- CONVENTIONAL MULTIFAMILY $1,263.5 $ 742.0 $ 505.4 FHA MULTIFAMILY AND HEALTHCARE 451.3 489.7 505.6 COMMERCIAL/LIFE INSURANCE/ (1)/ 2,633.9 1,075.2 117.5 -------- -------- -------- TOTAL $4,348.7 $2,306.9 $1,128.5 ======== ======== ========
/(1)/ Includes Capital Corp. and other conduit originations. Conventional Multifamily (Fannie Mae). This business unit finances multifamily properties that are not supported by governmental insurance or guaranties. The Company sells such loans to a variety of mortgage investors, including Fannie Mae. Through WMF Washington Mortgage, one of the Company's most active conventional products is Fannie Mae's Delegated Underwriting and Servicing Program ("DUS Program"). Currently, there are only 26 companies approved to participate in this program. The Company, through WMF Washington Mortgage, originated approximately $660 million and $240 million of DUS Program loans in 1998 and 1997, respectively. Under the DUS Program, Fannie Mae allows WMF Washington Mortgage to approve, close and service loans on multifamily mortgages that meet predetermined criteria. Fannie Mae commits to purchase these loans after they close. As part of the program, Fannie Mae requires that participating companies share in the risk of loss on the loan. See "Risk Factors -- The Company May Incur Losses on Mortgage Loans Under the DUS Program." In return for sharing the risk of loss, the Company receives a servicing fee that is significantly higher than its typical fee. The Company underwrites each loan to manage its loss exposure and enhance its return on servicing. See "-- Mortgage Underwriting" below. In addition to its participation in the DUS Program, the Company, through WMF Washington Mortgage, is a Fannie Mae Prior Approval Lender and is one of the designated post-closing review lenders for the Fannie Mae Aggregation Facility. These programs allow WMF Washington Mortgage to sell certain loans to Fannie Mae that would not otherwise qualify for the DUS Program. Unlike DUS, however, neither of these programs requires that the Company share in the risk of loss. FHA Multifamily and Healthcare. The Company, through WMF Huntoon Paige, is the largest provider of FHA-insured multifamily and healthcare financing in the country. The Company originates and services both construction and permanent loans. For the twelve months ended September 30, 1998, WMF Huntoon Paige originated approximately 12.0 percent of all FHA multifamily and healthcare insured debt financing, more than any other FHA mortgagee. The Company operates FHA lending through a separate subsidiary because typical property characteristics, borrower requirements, licensing and approval processes differ significantly between FHA and conventional multifamily financing. The Company, through WMF Huntoon Paige, is an FHA-approved mortgagee and, as such, must comply with the applicable requirements of the National Housing Act ("Housing Act") and the regulations and policies of the FHA that are promulgated pursuant to the Housing Act. See "Risk Factors-The Company May Be Unable To Continue To Comply With Government Regulations and Programs," below. Commercial/Life Insurance Company Loans. With its acquisitions in 1996 and 1997, the Company substantially increased its presence in the market for commercial, non-multifamily financing. The Company originates loans secured by a variety of properties, including office buildings, retail centers, hotels, warehouses and nursing homes. Through relationships with regional mortgage banks, insurance companies have been particularly active investors in this segment. The Company, through its acquisitions, has established relationships with a number of insurance companies, including: John Hancock, UNUM, Canada Life, CIGNA, American General, Nationwide, Berkshire Life, Government Personnel Mutual and Century Life. In addition to originating commercial and multifamily loans placed with insurance companies, the Company has established origination relationships with commercial mortgage conduits operated by major financial institutions, including Greenwich Capital Markets and NationsBank, N.A. In 1998, the Company originated loans totaling approximately $1.5 billion through commercial mortgage conduits. The Company will typically process conduit eligible loans through WMF Funding, a division of WMF 10 Washington Mortgage (see "-Capital Markets (WMF Funding)" below). MORTGAGE UNDERWRITING. The Company's originators work with underwriters who perform due diligence on all loans prior to commitment and approval. The Company's underwriters assess each proposed loan including a review of (1) borrower financial position and credit history, (2) past operating performance of the underlying collateral, (3) potential changes in project economics and (4) appraisal, environmental and engineering studies completed by a pre-approved list of third-party consultants. Additionally, underwriters inspect the property, review tenant and lease files, survey comparable markets, and analyze area economic and demographic trends. A loan committee consisting of the Company's senior officers reviews and approves each proposed loan. The Company applies its own underwriting guidelines, as well as those provided by investors. Among other things, the Company considers debt service coverage and loan-to-value ratios, property financial and operating performance, quality of property management, borrower credit history and tenant profile. The standards vary from investor to investor and may include a subjective element based on an assessment of the total credit risk. The standards generally do not involve mechanical application of a set formula. The Company revises its underwriting criteria based on its experience and as market conditions and investor requirements change. Due in part to its underwriting procedures, in 1998 the Company achieved a loan delinquency rate (i.e., loans delinquent over 60 days) equal to only .14 percent of its entire conventional multifamily and commercial portfolios based on unpaid principal balance. In connection with the Fannie Mae DUS Program, the Company has originated over 358 DUS loans since 1990 with original principal balances in excess of $1.9 billion. The Company has experienced one loss of $0.3 million on a DUS Program loan. Another lender originated that loan, and the Company acquired the risk-sharing obligation as part of its DUS approval in 1990. The Company uses the underwriting criteria established by the FHA to recommend loans for FHA insurance. The Company must provide the FHA with certain information. The FHA then examines the loans and decides whether to provide insurance. MORTGAGE SERVICING As a mortgage servicer, the Company performs both primary and master servicing functions. Primary servicing involves the collection of mortgage payments, maintenance of escrow accounts for the payment of taxes and insurance premiums, remittance of payments of principal and interest, reporting to investors on financial and property issues and general loan administration. The primary servicer must inspect properties, determine the adequacy of insurance coverage, monitor delinquent accounts and, in cases of extreme delinquency, institute forbearance arrangements or foreclosure proceedings on behalf of investors. Master servicers administer and report on securitized pools of mortgage- backed securities. Normally, the mortgages in the pool are serviced by individual primary servicers. Master servicing agreements typically require the primary servicer to retain responsibility for administering the mortgage loans, and the master servicer supervises the primary servicers by monitoring their compliance with the servicing contract. The master servicer consolidates all accounting and reporting to the issuer of the securities. The Company has contracts to service loans with mortgage owners and originators of mortgage-backed securities. The contracts are generally for a term equal to the term of the serviced mortgage or the mortgage-backed security and are terminable for cause. Contracts with insurance companies who own mortgages are usually terminable on 30 days' notice by the owner, in many instances without cause. In some circumstances, the insurance company must pay a termination fee if it terminates a servicing contract without cause. Under these agreements, the Company receives an annual fee for primary servicing. The fee typically ranges from five basis points to 40 basis points of the unpaid principal balance of the loans underlying the securities. Fees for master servicing typically range from one to ten basis points. As of December 31, 1998, the Company acted as the primary servicer for approximately $10.6 billion of loans and as the master servicer for an additional $1.6 billion of loans. These loans were obtained through the Company's origination network and through the purchase of servicing rights. A breakdown of the servicing portfolio is shown below. 11 SERVICING PORTFOLIO BY PRODUCT TYPE $ IN MILLIONS
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 1996 ---- ---- ---- CONVENTIONAL MULTIFAMILY $ 2,583 $ 1,544 $1,644 FHA AND GINNIE MAE 3,905 4,201 3,076 COMMERCIAL 4,069 4,173 1,267 MASTER SERVICING 1,585 952 214 ------- ------- ------ TOTAL $12,142 $10,870 $6,201 ======= ======= ======
The Company principally services loans in its offices in Vienna, Virginia; Edison, New Jersey; and Houston, Texas. It employs approximately 70 people in these servicing facilities. As of December 31, 1998, the Company serviced 3,154 loans. As part of its servicing functions on these loans, the Company managed escrow accounts totaling approximately $350 million and processed approximately $83.0 million in principal and interest payments each month. The Company continuously reviews its servicing operations and seeks to implement improvements in its systems and business processes. CAPITAL MARKETS (WMF FUNDING) To capitalize on its national loan origination system and conduit loan processing system, as well as to reduce the capital requirements and principal risks associated with operating a conduit, the Company created WMF Funding, a division of WMF Washington Mortgage, in December 1998. The Company has entered into a strategic relationship with Greenwich Capital Markets ("Greenwich") pursuant to which WMF Funding will originate loans for sale to Greenwich. Greenwich is expected to pool these loans with other loans and then sell interests in, or "securitize," the pool. The Company will service the loans it originates and receive a portion of the profits, if any, from any securitization of those loans. Prior to September 1998, the Company had operated an independent commercial mortgage conduit through its subsidiary Capital Corp. The operations of Capital Corp. have been curtailed since it suffered substantial losses in the second and third quarters of 1998 and the Company has determined not to make further investments in Capital Corp. However, the Company cannot assure you that it will not be required to do so. ADVISORY SERVICES (WMF CARBON MESA) The Company's advisory services segment, WMF Carbon Mesa, was formed in March 1998, when the Company acquired all of the assets of Carbon Mesa Advisors, Inc. and Strategic Real Estate Partners. Based in Los Angeles, WMF Carbon Mesa manages a private commercial mortgage fund, provides a variety of advisory services to institutional investors and originated over $400 million in loans and investments in 1997. WMF Carbon Mesa employs 16 people. WMF Carbon Mesa develops new loan products, manages commercial mortgage investment funds, provides special asset management servicing and originates commercial mortgages. In June 1998, WMF Carbon Mesa entered into an agreement to manage COMIT. COMIT invests in multifamily and commercial mortgages, primarily those originated by the Company that are not sold in securitizations or to other institutional investors. These types of multifamily and commercial loans include bridge, mezzanine and structured transactions. Financial information for each of the Company's operating segments is included in Note 15 of the Company's Consolidated Financial Statements. EMPLOYEES At December 31, 1998, the Company employed 346 persons. Most of these people work in professional, administrative and technical positions and no employee is represented by a labor union or subject to a collective bargaining agreement. The Company believes that its employee relations are generally good. 12 RISK FACTORS UNSATISFIED CONTRACTUAL COMMITMENTS MAY CAUSE ADDITIONAL LOSSES - As a result of the losses described above (See "Major Developments in 1998 - 1998 Losses") and to reduce its exposure to additional losses, the Company has decided that it will no longer contribute capital to Capital Corp. This determination, combined with changes in market conditions, resulted in Capital Corp.'s being unable to fulfill its obligations under at least one loan commitment. The Company has settled all claims related to that loan commitment, but the Company cannot assure you that it will not incur significant losses in the future related to the Company's inability to meet other contractual commitments of Capital Corp. LOSSES RELATED TO LOANS HELD FOR SALE FOR WHICH THE COMPANY DOES NOT HAVE INVESTOR COMMITMENTS COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS -Generally the Company sells loans to third-party mortgage investors at predetermined prices before the Company funds or purchases the loan. However, sometimes the Company originates or purchases a mortgage loan before an investor has agreed to purchase it from the Company. During the period between the Company's origination or purchase of a loan and the sale of the loan to an investor (called the "holding period"), the Company must bear the interest rate risk and credit risk associated with that loan. If the holding period is long, the Company's risks are higher. Adverse changes in interest rates, the market for these mortgage loans or the value of assets securing the mortgages could impair the Company's ability to sell loans, increasing the Company's holding period and potential losses. If the Company is unable to sell its loans for a long period of time, the Company's business and results of operations could be materially adversely affected. THE COMPANY MAY INCUR LOSSES RELATED TO LOAN COMMITMENTS FOR WHICH IT DOES NOT HAVE A PURCHASER AND HAS NOT ENTERED INTO HEDGE ARRANGEMENTS - Capital Corp. has entered into forward commitments to lend money on certain terms and conditions which subject the Company to interest rate and market risks until the Company sells the loans. As of December 31, 1998, Capital Corp. had commitments outstanding to extend credit to borrowers of $65.8 million. No investor has committed to purchase these loans, and Capital Corp. has not entered into arrangements to manage the interest rate and market risk associated with those loans. If interest rates increase or the demand for such loans declines before Capital Corp. is able to sell these loans, Capital Corp. may incur significant losses. The Company is currently seeking investors for the loans, but the Company cannot assure you that Capital Corp. will not incur significant losses before such an investor is found or that it will locate an investor at all. COMPANY'S LOSS OF DEFERRED TAX ASSETS COULD ADVERSELY AFFECT SHAREHOLDER EQUITY- As of December 31, 1998, the Company had $17.3 million in deferred tax assets related to the Company's losses during 1998. The Company has recognized the tax benefit of those operating losses as deferred tax assets and believes that it is more likely than not that the Company will have sufficient taxable income to realize the tax benefits of those losses during the next 20 years. However, in the event of a change of control of the Company or Capital Corp. or certain other material changes in the Company's business, the Company would have to establish a valuation allowance against the deferred tax asset. An increase in the valuation allowance relating to the deferred tax asset could adversely affect operating results and shareholder equity. THE COMPANY MAY BE UNABLE TO COMPLETE ACQUISITIONS OR ENTER INTO NEW BUSINESS LINES - The Company plans to expand its business both internally and through acquisitions of other commercial mortgage financial service companies. The Company cannot assure you that it will be able to support its continued growth. The Company also cannot assure you that it will be able to identify, finance and purchase additional acquisition candidates, or that future acquisitions, if completed, will be successful. When the Company acquires new businesses with different markets, customers, financial products, systems and management, the Company may have difficulty integrating those business into its existing operations. This integration process may cause unforeseen difficulties and may require a large portion of management's attention and the Company's resources. These difficulties may be particularly acute as the Company expands into business lines outside of its traditional multifamily business. The Company originally focused on originating and servicing mortgages on multifamily properties, such as apartment buildings and condominiums. Since 1996, the Company has expanded its origination and servicing of mortgages on other commercial properties, such as office buildings, hotels, and retail stores. The Company plans to continue to expand its business in both the multifamily and commercial mortgage areas. See "Business - Strategic Objectives." To support, manage and control continued growth, the Company must be able to hire, train, retain, supervise and manage its workforce. The Company must also develop the skills necessary to compete successfully in its new business lines. In particular, the 13 success of certain acquisitions may depend on the Company's ability to retain key employees of the acquired business. THE COMPANY MAY INCUR LOSSES ON MORTGAGE LOANS UNDER THE DUS PROGRAM - WMF Washington Mortgage is an approved lender under the Fannie Mae DUS Program. Under this program, WMF Washington Mortgage originates, places and services multifamily loans for Fannie Mae without having to obtain Fannie Mae's prior approval for each loan. The DUS Program requires WMF Washington Mortgage to pay a portion of any losses on mortgages that it originates under the program. These losses may cost WMF Washington Mortgage up to 20 percent of the original principal balance of the loan. Additionally, if borrowers default under loans in the DUS Program, the value of WMF Washington Mortgage's servicing rights for those loans could materially decrease. See "The Company's Operations May Decline As a Result of Impairment of Mortgage Servicing Rights" To remain in the DUS Program, WMF Washington Mortgage must maintain a letter of credit or cash sufficient to cover its estimated portion of any losses. As of December 31, 1998, the unpaid principal balance of WMF Washington Mortgage loans in the DUS Program totaled $1.5 billion and WMF Washington Mortgage had a $6.3 million reserve for probable loan losses under the DUS Program. WMF Washington Mortgage also had a $5.2 million letter of credit to pay for losses under the program. While the Company believes that these reserves are sufficient, actual losses under the DUS Program could exceed these reserves and hurt the Company's performance. If the Company incurs and is required to fund additional losses, results of operations may be adversely affected. THE COMPANY IS LIABLE FOR CERTAIN REPRESENTATIONS AND WARRANTIES CONCERNING MORTGAGE LOANS - When the Company originates mortgage loans and then sells them to investors, the Company must make certain representations and warranties concerning those mortgages. These representations and warranties cover such matters as title to mortgaged property, lien priority, environmental reviews and certain other matters. When making these representations and warranties, the Company relies in part on similar representations and warranties made by the borrower or others. If the representations made by a borrower or others are false, the Company will have a claim against the borrower or other party. The Company's ability to recover its damages, however, depends on the financial condition of the party that made the false representation. In addition, the Company makes some representations and warranties even though it does not receive similar representations and warranties from borrowers or others. If those representations are later found to be false, the Company would have to pay for any losses and would not have a claim against another party. The Company cannot assure you that it will not experience a material loss as a result of its representations and warranties. THE COMPANY MAY INCUR LOSSES AS A RESULT OF CHANGES IN GENERAL ECONOMIC CONDITIONS - The following general economic conditions could have an adverse effect on the Company's business: . periods of general, regional or industry-related economic slowdown or recession, . declining demand for real estate or . changes in interest rate levels. An economic slowdown will generally reduce the Company's origination and sales of mortgages, which generated approximately 56.0 percent of the Company's revenue during 1998. In addition, periods of economic slowdown or recession may increase the risk that borrowers will default on multifamily and commercial mortgage loans, and those defaults may have an adverse effect on the Company's financial condition. When the owner of a mortgage forecloses on a property, the Company's servicing fees may be reduced or eliminated and the Company may experiences additional losses. Periods of economic slowdown or recession may be accompanied by decreased demand for multifamily or commercial properties. Decreased demand may result in declining values for the properties securing outstanding loans, and decreased property values weaken the Company's collateral coverage and increase the possibility of losses in the event of default. If more properties are for sale during recessionary periods, the Company may receive lower prices when it sells foreclosed properties, or it may have to delay such sales. The Company cannot assure you that it will be able to sell foreclosed properties in the multifamily or commercial markets. Any material deterioration of such markets could reduce the Company's proceeds from foreclosure sales. THE COMPANY EARNINGS MAY BE AFFECTED BY CHANGES IN INTEREST RATES - The Company believes that interest rate changes can affect its operating results in a variety of ways, including impacts on 14 origination fees, servicing fees, placement fee income and gains on loan sales, as well as its own cost of financing. Generally, interest rate increases reduce the level of economic and real estate activity, thereby decreasing the demand for mortgage financing, which in turn may negatively affect the Company's ability to earn origination fees and generate gains on loan sales. In addition to possibly depressing loan origination levels, gains on loan sales may be further restricted because the value of fixed income securities, such as many real estate mortgages, tend to decline as interest rates increase. Finally, interest rate increases raise the cost of debt financing, particularly if the Company finances its operations with variable rate debt. Interest rate increases, however, positively affect Company earnings from loan servicing activities. A reduction in real estate activity may reduce the risk of borrower prepayments, potentially increasing the level of servicing fees and the value of the Company's servicing portfolio. Additionally, placement fee income earned by the Company may benefit from increased interest rate levels. Declines in interest rates should generally have a corresponding favorable impact on Company earnings from originating, loan sales and financing activities and a negative impact on servicing and placement fee income. Changes in the relationship between short-term and long-term interest rates may also affect the Company's results of operations. The Company earns net interest income, typically based upon long-term rates earned on loans held between loan closing and mortgage investor funding. Net interest income increases when long-term rates increase relative to short-term rates and decreases when short-term rates increase relative to long-term rates. Although the Company believes that the interest rate environment generally has the foregoing effects, there is no consistent correlation between interest rate levels and either the Company's revenues or its overall profitability. In part, this lack of correlation reflects the refinancing of existing permanent and construction mortgages at their maturities which may occur regardless of the interest rate environment. Additionally, approximately 56 percent of the Company's revenues are derived from originating and approximately 44 percent of the Company's revenues are derived from servicing activities, and interest rates have different impacts on each, as described above. See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for additional information about the Company's exposure to interest rate risk. THE COMPANY'S OPERATIONS MAY DECLINE AS A RESULT OF IMPAIRMENT OF MORTGAGE SERVICING RIGHTS - Under generally accepted accounting principles ("GAAP"), the Company must treat its servicing rights as an asset. Servicing rights are recorded as an asset on the Company's balance sheet at either the purchase price paid for the servicing rights or the relative fair value of the servicing rights at the time the Company sells a loan and retains the servicing associated with that loan. The Company also must amortize the value of the servicing rights over their estimated lives. If the value of the servicing rights, as shown on the Company's balance sheet, exceeds their fair value, then the rights are impaired. The fair value of the servicing rights may be affected by, and impairment may result from, factors such as: . changes in mortgage prepayments, which tend to increase as long- term interest rates decline, and tend to decrease as such interest rates rise; . prepayment penalty terms, including lockout and yield maintenance requirements; . higher than expected rate of loan defaults; . lower than expected short-term interest rates; . factors which impact the net cash flow generated from the servicing rights, such as the cost of servicing such loans; and . the underlying loans' average custodial balances (the amount deposited by borrowers for taxes, deposits and replacement reserves). To the extent that the Company's servicing rights are impaired, the Company's operating results may be adversely affected. Although the Company has not recorded any impairment in the Consolidated Financial Statements presented herein, it may record impairment at any time in the future. The Company cannot assure you that it has accurately estimated the factors that could cause impairment of the servicing, or that the Company's mortgage servicing rights can be sold at their value, if at all. THE COMPANY MAY INCUR LOSSES UPON TERMINATION OF CERTAIN SERVICING CONTRACTS -As of December 31, 1998, the Company had contracts to service mortgages with a total principal balance of $12.1 billion. Approximately 24 percent of those contracts are terminable upon 30 days' notice by the owner of the serviced mortgage. Most of the contracts with these termination provisions are for the servicing of mortgages held by insurance companies. As the Company increases its servicing of mortgages held by insurance companies, the percentage of servicing contracts with such termination provisions may also increase. 15 The rest of the Company's servicing contracts are for a term equal to the life of the mortgage. The holder of the mortgage may terminate the contract only for cause, after paying the Company a termination fee, or after prepayment or other early termination of the mortgage. If a significant number of the Company's mortgage servicing contracts were terminated and the Company were unable to replace them with new servicing contracts, the Company's operations would be adversely affected. THE COMPANY MAY BE UNABLE TO CONTINUE TO COMPLY WITH GOVERNMENT REGULATIONS AND PROGRAMS - The Company's operations are regulated by: . federal, state and local government authorities, including the FHA and the Government National Mortgage Association ("Ginnie Mae"); . various federal, state and local laws and judicial and administrative decisions; and . regulations of GSEs (such as Fannie Mae) that purchase mortgages originated and/or serviced by the Company. Among other things, these laws, regulations and decisions: . require the Company to maintain a minimum net worth, minimum lines of credit, minimum liquid reserves and minimum errors and omissions and fidelity insurance; . require the employment of trained personnel competent to perform their assigned responsibilities; . require periodic financial reports; . require a quality control plan for the underwriting, origination and servicing of loans; . restrict loan originations, credit activities, maximum interest rates, and finance and other charges; . regulate disclosures to customers, the terms of secured transactions and personnel qualifications; and . require certain collection, repossession and claims-handling procedures and other trade practices. Although the Company believes that it complies in all material respects with applicable laws and regulations and with the requirements of mortgage purchasers, the Company cannot assure you that it will be able to continue to comply if more restrictive laws, rules, regulations or requirements are adopted in the future. If the Company fails to comply with all applicable requirements, the Company could lose the opportunity to originate, sell or service mortgages in certain jurisdictions, or to originate mortgages on behalf of, sell mortgages to or service mortgages held by certain institutions. If that occurs, the Company's financial results could be adversely affected. The FHA insured approximately 10.4 percent of loans originated by the Company during the year ended December 31, 1998 and approximately 44.9 percent of loans serviced by the Company as of December 31, 1998. If the laws or regulations governing FHA programs change, the availability of FHA-insured loans could decrease, and the Company's ability to originate or service those mortgages could be affected. Any such change could have a material adverse effect on the Company and its results of operations. THE COMPANY MAY INCUR LOSSES RELATED TO THE YEAR 2000 CONVERSION - The Year 2000 Problem refers to errors that may occur when computers use two digits rather than four to define the applicable year. Software and hardware may recognize a date using "00" as the year 1900, rather than the year 2000. If a computer does not recognize a date on or after January 1, 2000, the error could, among other things, prevent the Company from processing transactions, sending invoices or engaging in other normal business activities. Although the Company's Year 2000 program (see "Management's Discussion and Analysis Of Financial Condition and Results of Operations - Year 2000") is intended to minimize the adverse effects of the Year 2000 Problem on the Company's business and operations, the actual effects of the Year 2000 Problem and the success or failure of the Company's efforts described below cannot be known until after January 1, 2000. If the Company, its major vendors, service providers or major customers fail to address adequately the Year 2000 Problem in a timely manner, the Company's business, results of operations and financial condition could be adversely affected. THE COMPANY MAY NOT BE ABLE TO COMPETE WITH OTHER MORTGAGE BANKING BUSINESSES - The Company's competition varies by geographic market. Generally, competition is fragmented with very few national competitors and many local and regional competitors. 16 In addition, the Company's business is characterized by low barriers to entry, and new competitors have recently been successful in raising the capital necessary to enter the business. Moreover, certain of the Company's competitors are larger and have greater financial resources than the Company, including the commercial mortgage banking arms of General Motors, General Electric, Mellon Bank, Banc One and First Union. The Company competes largely on the basis of its experience in purchasing and servicing and on its ability to respond promptly to changing market conditions. Although management believes that the Company is well positioned to continue to compete effectively in the multifamily and commercial mortgage banking businesses, there can be no assurance that it will do so or that the Company will not encounter further increased competition in the future which could limit its ability to maintain or increase its market share. ITEM 2. PROPERTIES The following table summarizes information about the Company's primary leased office space:
-------------------------------------------------------------------------------------------------------------------------- Location of the Approximate square feet Lease Expiration Business Segment office Occupied Date Occupying Space -------------------------------------------------------------------------------------------------------------------------- Vienna, VA 52,000 sf December 31, 2000 Mortgage Banking, Headquarters -------------------------------------------------------------------------------------------------------------------------- Edison, NJ 15,200 sf April, 28, 2000 Mortgage Banking -------------------------------------------------------------------------------------------------------------------------- Houston, TX 10,200 sf January 28, 2001 Mortgage Banking -------------------------------------------------------------------------------------------------------------------------- Los Angeles, CA 17,700 sf January 30, 2007 Advisory Services, Mortgage Banking -------------------------------------------------------------------------------------------------------------------------- Charlotte, NC 16,500 sf February 14, 2003 Capital Markets, Mortgage Banking -------------------------------------------------------------------------------------------------------------------------- New York, NY 13,600 sf October 20, 2008 Mortgage Banking --------------------------------------------------------------------------------------------------------------------------
The Company's headquarters are currently located in Vienna, Virginia. In addition to the offices listed above, the Company has thirteen corporate offices located around the country, including Phoenix, AZ; Detroit, MI; Dallas, TX; Denver, CO; and Atlanta, GA. ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in legal proceedings arising in the ordinary course of business. In connection with the Company's loan servicing activities, the Company is indemnified to varying degrees by the party on whose behalf the Company is acting. The Company also maintains insurance that management believes is adequate for the Company's operations. Except as described below, none of the legal proceedings in which the Company is currently involved, either individually or in the aggregate (and after consideration of available indemnities and insurance), is expected to have a material adverse effect on the Company's business or financial condition; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Company's business or financial condition. Two lawsuits have been filed against Capital Corp. alleging, among other things, breach of contract by Capital Corp. due to its failure to fund certain loan commitments issued by it. The Company is also named as a defendant in one of the lawsuits. An adverse judgement in these matters against Capital Corp. would be material to Capital Corp., and if against the Company, could be material to the Company. Capital Corp. is attempting to resolve the matters by settlement and compromise but no assurances can be given that such attempts will be successful. The Company does not anticipate a material adverse judgement against it in the case where it is named as a defendant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 1998. PART II ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 17 The Company's common stock began trading on December 8, 1997 and trades on The Nasdaq Stock Market under the symbol "WMFG". The following table sets forth the high and low per-share closing prices for the Company's common stock for each quarterly period since its initial public offering:
CALENDAR YEAR HIGH LOW ------------- ---- --- 1997 ---- Fourth Quarter (from December 9, 1997) $14 $12 1/8 1998 ---- First Quarter 32 1/2 11 1/8 Second Quarter 28 1/4 19 5/8 Third Quarter 29 5 Fourth Quarter 8 1/4 3 3/8 1999 ---- First Quarter (through March 29, 1999) 6 1/2 4 3/4
On March 29, 1999, the Company had approximately 244 stockholders of record. The Company does not anticipate declaring and paying cash dividends on the Company's common stock in the foreseeable future. The decision whether to apply any legally available funds to the payment of dividends on the Company common stock will be made by the Board of Directors of the Company from time to time in the exercise of its business judgment, taking into account the Company's financial condition, results of operations, existing and proposed commitments for use of the Company's funds and other relevant factors. The Company's ability to pay dividends may be restricted from time to time by financial covenants in its credit agreements or in arrangements with or regulations of government sponsored entities. On December 30, 1998, the Company issued a total of 250,000 warrants as part of a settlement agreement between the Company and one of its borrowers. As adjusted, the warrants permit the borrower to purchase 100,000 shares of the Company's common stock at $5.90 per share and 150,000 shares of the Company's common stock at $9.70 per share. The exercise price of the warrants may be further adjusted upon the occurrence of certain dilutive events. Also as part of the settlement, the Company issued 50,000 shares of its common stock to be held in escrow to secure Capital Corp.'s obligations under the settlement agreement. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), because they did not involve any public offering. On December 31, 1998, the Company sold a total of 3,635,972 shares of Class A Stock to Demeter, Phemus and Capricorn for total proceeds of approximately $16.6 million. The shares of Class A Stock were subsequently converted to an equal number of shares of common stock. The Company used the proceeds from the sale of Class A Stock to partially repay the subordinated notes held by COMIT. The sale of the Class A Stock was exempt from registration pursuant to Section 4(2) of the Securities Act, because the sale did not involve any public offering. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data of the Company as of and for each of the years ended December 31, 1998, 1997, 1995. Also set forth is data as of and for the three-month period ended March 31, 1996 and as of and for the nine-month period ended December 31, 1996. The data for the three-month period ended March 31, 1996 and the nine-month period ended December 31, 1996 are presented separately as a result of the acquisition of the Company, which was formerly known as WMF Holdings Ltd., by NHP effective April 1, 1996 (the "NHP Acquisition"). The table also sets forth pro forma income statement data for the year ended December 31, 1996 giving effect to the NHP Acquisition as though it occurred January 1, 1996. The selected financial data of the Company as of and for each of the above mentioned periods were derived from the Company's consolidated 18 financial statements contained elsewhere herein. The pro forma data (which are unaudited) are derived from the footnote 19 of the Company's consolidated financial statements contained in this document. The pro forma results are not necessarily indicative of operating results that would have been achieved had the NHP Acquisition actually occurred on January 1, 1996. Additionally, the pro forma operating results are not intended to be a projection of results of future operations. The selected financial and operating data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, pro forma financial statements and related notes included elsewhere herein. 19 SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
WMF Holdings Ltd. and The Company Subsidiaries ------------------------------- -------------------------- For the period For the period Pro Forma April 1 to January 1 to Year Ended December 31, December 31, March 31, December 31, 1998 1997 1996 (1) 1996 1996 1995 --------------------------------------------------------------------------------------------- (Unaudited) INCOME STATEMENT DATA Revenues $ 72,541 $ 44,645 $ 30,301 $23,473 $ 6,828 $ 21,999 Expenses 105,863 42,203 29,416 22,318 6,523 21,222 Net income (loss) (33,322) 2,442 885 1,155 305 777 Net income (loss) per share-Basic (2) (6.38) 0.57 0.21 0.27 0.07 0.16 Weighted average shares outstanding-Basic (2) 5,224 4,272 4,217 4,217 4,217 4,717 Net income (loss) per share-Diluted(2) (6.38) 0.55 0.21 0.27 0.07 0.16 Weighted average shares outstanding- Diluted(2) 5,224 4,452 4,217 4,217 4,217 4,717
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, 1998 1997 1996 1996 1995 ---- ---- ---- ---- ---- BALANCE SHEET DATA Mortgage loans held for sale $ 34,217 $ 49,431 $40,263 $23,116 $ 32,462 Servicing rights 26,243 26,796 22,460 8,477 8,466 Total assets 144,527 119,331 88,097 48,976 57,176 Total debt (3) 79,151 59,904 46,136 34,108 43,304 Shareholders' equity 27,378 38,825 22,528 4,324 4,018 OTHER DATA Cash Flows from Operating activities (4) $ 14,086 $ (1,099) $ 1,275 $(8,708) $ 9,983 $(21,897) Investing activities (4) (54,759) (21,463) (9,824) (9,276) (548) (2,343) Financing activities (4) 41,122 26,529 7,833 17,029 (9,196) 26,833 EBITDA (4) (41,168) 11,439 8,256 6,502 1,754 4,743
_____________ (1) Adjusted to reflect results of operations for the twelve months ended December 31, 1996, as if the NHP Acquisition had occurred January 1, 1996. Adjustments include all income amounts for the three months ended March 31,1996 and additional amortization of $575,648. (2) Gives retroactive effect to a 789.94 per share stock split effective October 3, 1997. (3) Includes $5,000,000 of notes to the Company's former shareholder as of March 31, 1996 and December 31, 1995, which were repaid in conjunction with the NHP Acquisition. (4) Operating, investing and financing cash flow represents the amount of cash generated from operating, investing and financing activities, respectively, as determined using GAAP. (5) EBITDA is a non-GAAP presentation of the Company's performance and consists of income (loss) from operation before non-warehouse interest expense, income taxes, depreciation and amortization. EBITDA is included because it is used in the industry as a measure of a company's operating performance and provides information in addition to that supplied by GAAP-based data regarding the ability of the Company's business to generate cash, but should not be constructed as an alternative either (i) to income (loss) from operations (determined in accordance with GAAP) as measure of profitability or (ii) to cash flows from operating activities (determined in accordance with GAAP). EBITDA does not take into account the Company's debt service requirements and other commitments and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses and EBITDA as measured by the Company may not be comparable to EBITDA as measured by other companies. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On April 1, 1996, NHP acquired all the outstanding capital stock of the Company for consideration of approximately $21 million, in the form of $16.8 million in cash and 210,000 shares of NHP Common Stock. (For periods prior to NHP's acquisition of the Company, the Company is referred to as "WMF Holding."). As a result of the NHP Acquisition, all assets and liabilities acquired were recorded at their fair value which resulted in an increase of the recorded value of the Company's servicing rights of $10.7 million and goodwill of $5.1 million. The following discussion and analysis presents the significant changes in financial condition and results of operations of the Company for the years ended December 31, 1998, 1997 and 1996. The results of operations of acquired businesses are included in the Company's consolidated financial statements from the date of acquisition. This discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. For the purpose of comparing the year ended December 31, 1997 to the year ended December 31, 1996, the three months ended March 31, 1996 has been combined with the nine months ended December 31, 1996. As a result of the NHP Acquisition, the year ended December 31, 1997 includes $575,000 of additional amortization expense as compared to the year ended December 31, 1996. For purposes of comparing the year ended December 31, 1997 and 1996, no other income statement amounts have been impacted by the NHP Acquisition. Although it incurred significant losses in 1998, since 1996, the Company has experienced significant growth in its revenues, annual production volume and servicing volume. The Company seeks to continue to expand its business through (i) acquisitions, (ii) internal growth, (iii) design and delivery of new mortgage products, (iv) expansion into related businesses, and (v) diversification of fee income sources. On a going-forward basis, to the extent that the Company is successful in completing acquisitions, the Company will experience increased expenses associated with the amortization of goodwill and acquired mortgage servicing rights and, if the acquisitions are financed by additional indebtedness, an increase in interest expense. Through its acquisitions, the Company's primary focus is to increase its mortgage origination capabilities and servicing portfolio as well as to expand into related businesses. Accordingly, such acquisitions may result in a short-term decrease in income from operations during the period from acquisition through a period necessary to integrate the acquired companies. RESULTS OF OPERATIONS - SUMMARY The Company's primary business activities are commercial and multifamily loan servicing, loan origination and sales of the loans to investors in the secondary market. With the formation of Capital Corp. and the acquisition of Carbon Mesa in the first quarter of 1998, the Company operated a commercial mortgage conduit, manages commercial mortgage investment funds and provides special asset management services. The Company manages its operations through three business segments: mortgage banking, capital markets, and advisory services. Revenues from mortgage banking activities are earned from the origination of commercial and multifamily real estate mortgage loans and the servicing of such loans. Sources of mortgage banking revenue include loan servicing fees, gains on sale of mortgage loans (including related gains on originated servicing rights), interest income on loans prior to sale, "placement fees" (revenue earned relating to utilization of escrow funds) and origination fee income. In capital markets, the principal sources of revenue include gain on the sale of mortgage loans, gains on the sale of servicing and interest income on loans prior to securitization. Structuring fee income, management fees and origination fees represent the major sources of income for the advisory services segment. The Company's revenue is significantly influenced by the timing of origination and sales of mortgage loans and is somewhat sensitive to economic factors such as the general level of interest rates and demand for commercial and multifamily real estate. As a result, future revenues may fluctuate due to changes in these factors. Therefore, the Company's historical results may not be indicative of future periods. 21 The following table sets forth information derived from the Company's consolidated statements of operations and reconciles the summary segment financial information to the consolidated statements of operations for each of the periods presented: Segment Financial Information and Reconciliation to Consolidated Statements Statements of Operations (in thousands)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1996 ----------------------------------------------- Revenue (Proforma) - ------- Mortgage Banking (1) $ 67,567 $44,645 $30,301 Capital Markets 3,484 - - Advisory Services 1,490 - - ---------------------------------------------- Total 72,541 44,645 30,301 Consolidated Statement 72,541 44,645 30,301 Expenses (2) - ------------ Mortgage Banking (1) 59,169 39,116 27,154 Capital Markets 60,379 - - Advisory Services 2,114 - - Non-operating interest 3,267 758 278 ---------------------------------------------- Total 124,929 39,874 27,432 Consolidated Statement 124,929 39,874 27,432 Pretax income (loss) (52,388) 4,771 2,869 Provision (benefit) for taxes (19,066) 2,329 1,984 ---------------------------------------------- Net income (loss) ($33,322) $ 2,442 $ 885 ============================================== Mortgage Banking EBITDA (1) 16,074 11,439 $ 8,256 Capital Markets EBITDA (56,766) - - Advisory Services EBITDA (476) - - ---------------------------------------------- Total ($41,168) $11,439 $ 8,256 Consolidated EBITDA ($41,168) $11,439 $ 8,256
(1) Mortgage banking operations includes corporate administrative expenses. (2) The company recognized reorganization and recapitalization expenses of approximately $2.0 million with approximately $1.7 million reported in mortgage banking and $341,000 reported in capital markets. 22 The following table sets forth information derived from the Company's consolidated balance sheet for each of the periods presented and a reconciliation to the Company's consolidated balance sheet:
December 31, December 31, December 31, 1998 1997 1996 ---------------------------------------------- Assets - ------ Mortgage Banking (1) $131,264 $119,331 $88,097 Capital Markets 8,558 - - Advisory Services 4,705 - - ---------------------------------------------- Total 144,527 119,331 88,097 Consolidated Statement $144,527 $119,331 $88,097
(1) Mortgage banking operations includes corporate administration. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Net income (loss) was ($33.3) million for the year ended December 31, 1998, a decrease of $35.7 million from $2.4 million for the same period in 1997. The decline in net income was due primarily to U.S. Treasury short sale transaction losses of $36.7 million and losses of $10.5 million on loan sales at Capital Corp. The losses were partially offset by higher gains on loan sales, servicing revenue and placement fee income in the mortgage banking segment and structuring fee income in the advisory services segment. Net income includes a tax benefit of $19.1 million for the year ended December 31, 1998. The Company's earnings (losses) before non-operating interest expense, income taxes, depreciation and amortization (EBITDA) for the year ended December 31, 1998 was ($41.2) million, a decrease of $52.6 million from $11.4 million for the same period in 1997. The decrease in EBITDA for the year ended December 31, 1998 as compared to 1997 is due primarily to U.S. Treasury short sale transaction losses and losses on loans sales at Capital Corp., as discussed above. Higher servicing fee and placement fee income in the mortgage banking segment helped to offset the loss in EBITDA, as the Company's servicing portfolio balance at December 31, 1998 was $12.1 billion, up from $10.9 billion as of December 31, 1997. EBITDA is widely used in the industry as a measure of a company's operating performance, but should not be considered as an alternative either (i) to income from continuing operations (determined in accordance with GAAP) as a measure of profitability or (ii) to cash flows from operating activities (determined in accordance with GAAP). EBITDA does not take into account the Company's debt service requirements and other commitments and, accordingly, is not necessarily indicative of amounts that are available for discretionary uses. The Company's consolidated tax benefit for the year ended December 31, 1998 was $19.1 million, compared to a tax expense of $2.3 million for the same period in 1997. The tax provision change is the result of the Company recognizing a deferred tax asset related to the losses incurred at Capital Corp. during the year ended December 31, 1998. Differences between the effective income tax rate and the federal and state income tax rates are due primarily to the amortization of goodwill, a portion of which is not deductible for income tax purposes. The Company has concluded that it is more likely than not to have sufficient taxable income, either through continuing operations or asset dispositions during the carry forward period, to realize the tax benefit of $19.1 million. Mortgage Banking Operations: Servicing fees earned by the mortgage banking segment were $14.7 million for the year ended December 31, 1998, an increase of $2.8 million or 24% from $11.9 million for the same period in 1997. Revenue related to mortgage servicing is based upon the unpaid principal balance of loans serviced. The increase in servicing fees for the year ended December 31, 1998 is a result of the average principal balance of mortgage banking segment's servicing portfolio increasing to $11.7 billion in 1998, from $7.8 billion in 1997, an increase of 49%. The mortgage banking segment's servicing portfolio year-end principal balance was $12.1 billion and $10.9 billion for 1998 and 1997, respectively, an increase of 11%. The percentage increase in average principal balance is greater than the 23 percentage increase in the year-end servicing portfolio primarily due to a sale of servicing rights at the end of the fourth quarter of 1998 and the servicing portfolio increases resulting from the acquisitions of Askew, Robert C. Wilson, and New York Urban in 1997. Typically, the percentage increase in servicing fee revenue is less than the percentage increase in the average servicing portfolio because the servicing fee on the added servicing, which includes servicing received from insurance companies and conduits, is lower than the Company's historical average servicing rate. The average servicing fee rate was .126% in 1998, a decrease of .026% from .152% in 1997. Gain on sale of mortgage loans was $31.3 million for year ended December 31, 1998, an increase of $11.6 million or 59% from $19.7 million for the same period in 1997. For the year ended December 31, 1998, the mortgage banking segment sold $3.3 billion in mortgage loans, as compared to $2.3 billion for the year ended December 31, 1997. Gain on sale of mortgage loans includes the gain on recognizing originated mortgage servicing rights in the amount of $6.0 million and $2.1 million for the years ended December 31, 1998 and 1997, respectively. In addition, 1998 results include a $1.3 million loss related to an interest rate lock agreement, which was terminated in the third quarter. Gain on sale of servicing rights was $2.0 million for the year ended December 31, 1998, an increase of $1.7 million from $0.3 million for the same period in 1997. The increase in income is attributed to the sale of approximately $500 million of servicing rights. Interest income was $5.9 million for the year ended December 31, 1998, an increase of $0.1 million or 1.7% from $5.8 million for the same period in 1997. The increase in income is attributed to the higher average balance of loans held until funding during the fourth quarter of 1998. Placement fee income was $8.5 million for the year ended December 31, 1998, an increase of $3.2 million or 60% from $5.3 million for the same period in 1997. This increase was the result of an increase in the average investor escrow balances held by the Company, to $340 million from $277 million for the year ended December 31, 1998 and 1997, respectively. The escrow balances are on deposit in escrow bank accounts and are not included in the Company's balance sheet. Other income (which includes prepayment penalties, termination fees and loan management fees) was $5.2 million for the year ended December 31, 1998, an increase of $3.5 million or 206% from $1.7 million for the same period in 1997. The increase in income is attributed primarily to higher termination and prepayment fees associated with the prepayment of loans serviced by the Company. This increase in prepayments is mainly the result of a lower interest rate environment in 1998, which resulted in higher mortgage refinancing. The mortgage banking segment's total expenses consist of salaries and benefits (including commissions), other general and administrative expenses, provision for loan servicing losses, operating interest expense, amortization of mortgage servicing rights and other depreciation and amortization. The mortgage banking segment's expenses include corporate administrative expenses. Salaries and benefits, the largest category of expenses for the segment, increased with loan production due to the payment of commissions on loan originations. Salaries and benefits expense was $32.3 million for the year ended December 31, 1998, an increase of $11.1 million or 52%, from $21.2 million for the same period in 1997. This increase is due primarily to increased originations and the Acquisitions. Salaries and benefits related to corporate administrative costs also increased due to the acquisition of WMF Carbon Mesa and the formation of Capital Corp. These factors, combined with mortgage banking's expansion into non-multifamily commercial lending, contributed to the increase in the number of mortgage banking and corporate administrative employees to 318 as of December 31, 1998 from 272 as of December 31, 1997. Additionally, salaries and benefits in the fourth quarter of 1998 include approximately $429,000 related to severance payments as a result of the Company's cost-savings measures. General and administrative expenses consist of professional fees, travel, reorganization and recapitalization expenses, management information, equipment rental, and other expenses. General and administrative expenses were $12.3 million for the year ended December 31, 1998, an increase of $4.7 million or 62% from $7.6 million for the same period in 1997. The increase is a result of integration and start-up costs associated with the Acquisitions and formation of Capital Corp., as well as recapitalization and reorganization costs incurred during the fourth quarter of 1998. Recapitalization and reorganization costs reported in general and administrative expenses totaled $1,201,500 and include approximately $300,000 in legal and accounting fees, $337,500 in financial advisory service fees and $564,000 in other costs. Occupancy expense was $3.8 million for the year ended December 31, 1998, an increase of $1.7 million or 81% from $2.1 million for the same period in 1997. This increase was due to an increased number of offices in 1998. 24 The mortgage banking segment's provision for loan servicing losses was $1.1 million for the year ended December 31, 1998, an increase of $371,000 or 51% from $729,000 for the same period in 1997. The provision for losses is the result of management's ongoing assessment of the Company's exposure related to its Fannie Mae DUS portfolio. Mortgage banking's principal balance of Fannie Mae DUS loans in the servicing portfolio was $1.5 billion and $944 million as of December 31, 1998 and 1997, respectively. Although management considers the allowance appropriate and adequate to cover inherent loan servicing losses, management's judgment is based on a number of assumptions about future events which are believed to be reasonable but which may or may not prove valid. There can be no assurance that losses will not exceed the allowance, and future increases in the allowance may be required. Warehouse interest expense was $2.3 million for the year ended December 31, 1998, an increase of $0.8 million or 53% from $1.5 million for the same period in 1997. The increase is due to commitment fees paid to the warehouse lender during the fourth quarter of 1998 to temporarily increase the warehouse line. Non-operating interest expense was $3.3 million for the year ended December 31, 1998, an increase of $2.5 million or 313% from $0.8 million for the same period in 1997. The interest expense on a $20 million note issued by COMIT, combined with increased borrowings under bank credit facilities, contributed to the increase in expense. Depreciation and amortization was $7.7 million for the year ended December 31, 1998, an increase of $1.8 million or 31% from $5.9 million for the same period in 1997. This increase was due primarily to the amortization related to the originated mortgage servicing rights recognized during 1998 and the full year effect of amortization of goodwill related to 1997 Acquisitions. Capital Markets Segment: Capital Corp., the capital markets segment of the Company, was formed in February of 1998 to conduct the securitization conduit activities of the Company. During the year, capital markets experienced a loss of $10.5 million on the sale of loans with a principal balance $971.0 million. This loss is net of gains from the sales of the related servicing rights of $5.5 million. Interest income earned on commercial mortgage loans held for sale was $14.9 million for the year ended December 31, 1998. The capital markets segment sold its remaining loan portfolio of $278.8 million during the fourth quarter of 1998. Salary and benefits expense was $5.4 million for the year ended December 31, 1998. This expense includes $341,000 of severance costs associated with the Company's reorganization and recapitalization, which took place during the fourth quarter of 1998. Occupancy expense was $772,000 for the year ended December 31, 1998. Interest expense on warehouse balances was $12.2 million for the year ended December 31, 1998. Capital Markets sold its remaining loan portfolio and closed out the related warehouse balances during the fourth quarter of 1998. Realized losses on short sales of U.S. Treasury securities for the year ended December 31, 1998 was $36.7 million. Those losses were attributed to the Company's use of short sales of U.S. Treasury securities to manage interest rate volatility. The losses resulted from volatility in commercial mortgage-backed securities and interest rates on U.S. Treasury securities. Other general and administrative expense was $6.1 million for the year ended December 31, 1998. Capital Corp. recognized $1.5 million in legal settlement expenses incurred in connection with the curtailment of conduit operations during the fourth quarter. Advisory Services Segment: The advisory services segment of the Company, WMF Carbon Mesa, began operations during the second quarter of 1998. Revenue within the advisory services segment of the Company consists of origination fee income and management fees. Origination fee income includes structuring fees and loan processing fees, which are included in gain on loan sales. Structuring fees are paid to WMF Carbon Mesa for structuring loans for borrowers and loan processing fees are paid to WMF Carbon Mesa for processing mortgage loan applications. For the year ended December 31, 1998, origination fees totaled $1.2 million. WMF Carbon Mesa originates loans for and manages two commercial mortgage funds. Those funds paid WMF Carbon Mesa management fees of $295,000 for the year ended December 31, 1998. Total assets under management by WMF Carbon Mesa as of December 31, 1998, 25 was $138.7 million. Expenses consist primarily of salary and benefits, occupancy and amortization. Total expenses were $2.1 million for the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Net income increased by $1.5 million or 166% from $0.9 million for the year ended December 31, 1996 to $2.4 million for the year ended December 31, 1997. This increase was primarily due to an increase in loan originations and sales as well as increases in servicing fees. These increases were offset partially by increases in salaries and employee benefits, general and administrative expenses and income tax expense which were in part related to the Company's expansion into non-multifamily commercial lending, the impact of the WMF Proctor and WMF Askew acquisitions and increased interest expense. The Company's earnings before non-operating interest expense, income taxes, depreciation and amortization ("EBITDA") for the year ended December 31, 1997 was $11.4 million compared with $8.3 million for the same period of 1996, an increase of $3.1 million or 37%. The increase in EBITDA for the year ended December 31, 1997 is attributable primarily to an increase in loan originations and sales as well as increases in servicing fees, offset partially by increases in salaries and employee benefits, general and administrative expenses and income tax expense which were in part related to the Company's expansion into non-multifamily commercial lending, the impact of the WMF Proctor and WMF Askew acquisitions and increased interest expense. The fourth quarter results were affected by a one-time charge of $0.75 million related to the issuance of 138,000 shares of common stock through an employee stock purchase plan, the recognition of a one-time charge of $0.34 million related to the issuance of 271,250 stock options under the Key Employee Incentive Plan and the recognition of a $1.2 million gain related to the Company's origination of conduit mortgage loans. During the fourth quarter the Company evaluated recent market trades and other factors related to conduit servicing, and concluded it had sufficient basis to capitalize servicing rights related to the origination of conduit loans. As a result, the Company capitalized $1.2 million of conduit servicing. Prior to the fourth quarter, the Company only capitalized originated servicing rights on loans insured by the FHA. The Company originated multifamily and commercial mortgages of $2.3 billion and $1.1 billion for the years ended December 31, 1997 and 1996, respectively. The EBITDA increase also reflects the $0.6 million loss on Beverly Hills Securities in 1996 as discussed below. EBITDA is widely used in the industry as a measure of a company's operating performance, but should not be considered as an alternative either (i) to income from continuing operations (determined in accordance with GAAP) as a measure of profitability or (ii) to cash flows from operating activities (determined in accordance with GAAP). EBITDA does not take into account the Company's debt service requirements and other commitments and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. Servicing fees were $11.9 million for the year ended December 31, 1997, an increase of $2.6 million or 28% from $9.3 million for the year ended December 31, 1996. Revenue related to mortgage servicing is based upon the unpaid principal balance of loans serviced. The increase in servicing fees for the year ended December 31, 1997 is a result of the principal balance of the Company's servicing portfolio increasing. Such balances were $10.9 billion and $6.2 billion as of December 31, 1997 and 1996, respectively. The increase in the servicing portfolio for the year ended December 31, 1997 is attributable primarily to loan originations of $2.3 billion and the acquisitions of Proctor, ACR, Askew, Robert C. Wilson and New York Urban, which added rights to service loans with principal balances of $3.5 billion for the year ended December 31, 1997. The percentage increase in servicing fee revenue is less than the percentage increase in the servicing portfolio because the fee as a percentage of unpaid principal balance on the added servicing, primarily for insurance companies, is lower than the Company's historical average servicing rate. Gain on sale of mortgage loans was $19.7 million for the year ended December 31, 1997, an increase of $9.5 million or 93% from $10.2 million for the year ended December 31, 1996. For the years ended December 31, 1997 and 1996, the Company originated $2.3 billion and $1.1 billion mortgage loans, respectively. The increase in gain on sale of mortgage loans is a result of the increase in loan origination fees, recognition of gain in the amount of $1.2 million related to the Company's origination of conduit mortgage loans, as discussed above, and includes the gain on recognizing originated mortgage servicing rights on other products of $2.1 million and $2.8 million for the years ended December 31, 1997 and 1996, respectively. Gain on sale of servicing of $0.3 million, for the year ended December 31, 1997, represents the sale of the Company's servicing portfolio of loans held by Federal Home Loan Mortgage Corporation. The Company does not expect the sale of this portfolio 26 to have a material impact on future results. Interest income was $5.8 million for the year ended December 31, 1997, an increase of $1.5 million or 35% from $4.3 million for the year ended December 31, 1996. This increase was due to the increase in originations for the year ended December 31, 1997 compared to the year ended December 31, 1996, as discussed above. Placement fee income was $5.3 million for the year ended December 31, 1997, an increase of $0.3 million or 6% from $5.0 million for the year ended December 31, 1996. This increase was the result of earnings on invested mortgagor escrow amounts. The Company's escrow balance was $323 million and $228 million as of December 31, 1997 and 1996, respectively. Other income was $1.7 million for the year ended December 31, 1997, an increase of $0.2 million or 13% from $1.5 million for the year ended December 31, 1996. The increase was the result of loan modifications, prepayment penalties and recoveries. The increase in the year ended December 31, 1997 is primarily related to the recovery of approximately $0.5 million in escrow advances that had previously been written off during the year ended December 31, 1996. The Company's total expenses consist of salaries and benefits (including commissions), other general and administrative expenses, provision for loan servicing losses, operating interest expense, amortization of mortgage servicing rights, and other depreciation and amortization. Salaries and benefits, the largest category of expenses for the Company, increase with loan production due primarily to the payment of commissions on loan originations. Salaries and benefits increased $8.5 million, or 67%, from $12.7 million for the year ended December 31, 1996 to $21.2 million for the year ended December 31, 1997. This increase is due primarily to increased originations, recognition of a one-time charge related to issuance of shares through stock option plans, as discussed above, and the acquisitions of Proctor, Askew, Robert C. Wilson and New York Urban which occurred subsequent to the year ended December 31, 1996 and the acquisition of ACR in May, 1996. These acquisitions, combined with the Company's expansion into non-multifamily commercial lending contributed to the increase in the Company's number of employees from 171 at December 31, 1996 to approximately 300 at December 31, 1997. General and administrative expenses consist of professional fees, travel, management information, occupancy, telephone and equipment rental, and other expenses. General and administrative expenses were $7.6 million for the year ended December 31, 1997, an increase of $2.8 million or 58% from $4.8 million for the year ended December 31, 1996. The increase is a result of costs associated with acquisitions and the resulting additional offices. The Company's provision for loan servicing losses was $0.7 million for the year ended December 31, 1997, a decrease of $ 0.6 million or 46% from $1.3 million for the year ended December 31, 1996. The decrease in reserves is the result of management's determination, as part of its ongoing assessment of the reserve, that current market conditions do not require a further increase in reserves. The Company's principal balance of Fannie Mae DUS loans in the servicing portfolio was $944 million and $776 million as of December 31, 1997 and 1996, respectively. In 1997 the Company did not incur any losses related to its DUS portfolio. Interest expense of $2.3 million for the year ended December 31, 1997 increased $1.0 million or 77% from $1.3 million for the year ended December 31, 1996. This increase was due to the Company's increased production and acquisition borrowings. Depreciation and amortization of $5.9 million for the year ended December 31, 1997 increased $0.8 million or 16% from $5.1 million for the year ended December 31, 1996. This increase was due primarily to the acquisitions made by the Company. Losses from Beverly Hills Securities, as discussed below, of $0 and $0.6 million for the years ended December 31, 1997 and 1996, respectively, decreased due to the Company writing off its investment/advances in Beverly Hills Securities during the first quarter of 1996. In July 1994, the Company exchanged its stock in WMF Residential Mortgage Corporation ("Residential"), a wholly-owned subsidiary, for a 40 percent limited partnership interest in Beverly Hills Securities Company, Ltd. ("Beverly"). Residential and Beverly specialized in the origination, purchase, sale and servicing of single-family residential mortgage loans. No gain or loss was recognized on the exchange. The Company recognized $0.7 million and $0.7 million in equity losses relating to Beverly during 1995 and 1994, respectively. At December 31, 1995, the carrying value of the Company's investment in Beverly was written off as a result of operating losses and concerns about the recoverability of the investment. The Company's exposure was limited to its original 27 investment amount in and advances to Beverly. The Company had advanced approximately $1.1 million to Beverly at December 31, 1995. During 1996, approximately $0.5 million of the advance to Beverly was collected and the remaining balance was written off. LIQUIDITY AND CAPITAL RESOURCES The Company's principal financing needs are the funding of loan originations, the pursuit of new company acquisitions and the purchase of servicing rights. To meet these needs, the Company currently utilizes warehouse lines of credit, a secured line of credit and a revolving credit facility. As part of the Company's strategy to limit interest rate and spread risk, Capital Corp. has terminated its $50 million credit facility with Merrill Lynch Capital Markets, sold all remaining commercial mortgage loans and terminated the related U.S. Treasury short sale transactions, which were financed by the facility. The Company incurred substantial operating losses during the second and third quarters of 1998. In response to the losses, the Company has curtailed its operations at Capital Corp. The Company also refinanced its $150 million warehouse line of credit, $4.2 million term loan, $35 million secured revolving line and $10 million line of credit, on February 10, 1999. These facilities were replaced with the warehouse lines of credit, credit lines and term loans described below. The Company's servicing rights collateralize these facilities. In addition, the warehouse line of credit is secured by the mortgage loans held for sale. The Company has a warehouse line of credit for $150 million, which can be drawn for purposes of originating loans. Historically, the Company has temporarily increased this line of credit at times to allow borrowings beyond the credit limit. The warehouse line of credit is required to be repaid with interest upon sale of the mortgage loans. The interest rate of the warehouse line of credit is equal to one percent to the extent compensating balances are maintained at or above the amount borrowed, or is equal to the London InterBank Offered Rate ("LIBOR") plus one percent for amounts borrowed in excess of compensating balances. The warehouse line of credit is renewable annually. The facility can also be used for certain principal and interest advances with credit limits totaling $10.0 million. The Company has a $25 million term loan to be repaid in twenty quarterly installments based on a 10-year amortization schedule beginning on March 31, 1999. The interest rate on the term loan is three percent to the extent compensating balances are maintained at or above the amount borrowed and is equal to LIBOR plus three percent for amounts in excess of compensating balances. Interest is payable monthly. The Company cannot borrow any additional amounts under this line, which will mature as follows: $2.5 million in each year from 1999 to 2003 and $15 million in 2004. The Company has a $25 million revolving credit facility to be used for servicing acquisitions or working capital purposes. The facility matures in February 2002. The interest rate on the revolving credit facility is 2.5 percent to the extent compensating balances are maintained at or above the amount borrowed and is equal to LIBOR plus 2.5 percent for amounts in excess of compensating balances. Interest is payable monthly. At closing, the Company borrowed $10.7 million under this line to repay its previous credit facilities. In addition to these new facilities the Company has a $35 million revolving line of credit, which principally can be drawn for purposes of originating loans. The warehouse advances are secured by mortgage loans held for sale and are required to be repaid upon sale of the mortgage loans. The interest rate on the warehouse advances is 3/4 percent to the extent compensating balances are maintained and is equal to the Euro-Rate plus 3/4 percent for amounts borrowed in excess of the compensating balances. Interest is payable monthly. The facility can also be used for principal and interest advances and working capital purposes with credit limits of $4 million and $5 million, respectively. The interest rates on the principal and interest advances and working capital portion of the facility are 1.5 percent and 2.0 percent, respectively, to the extent compensating balances are maintained and the Euro-Rate plus 1.5 percent or 2 percent, respectively, for amounts borrowed in excess of the compensating balances, respectively. Interest is payable monthly. Borrowings under this facility totaled $19.9 million as of December 31, 1998 and $0 million as of December 31, 1997. This facility expires on April 1, 1999. The Company does not plan to renew this facility upon expiration, but may replace the facility in the future. The Company has also established a letter of credit on behalf of Fannie Mae for the DUS Program of $5.2 million and $4.4 million as of December 31, 1998 and 1997, respectively. This letter of credit is secured by cash equivalents and mortgage-backed securities with a market value of $6.3 million and $5.5 million as of December 31, 1998 and December 31, 1997, respectively. On September 4, 1998, the Company and COMIT entered into a Credit Agreement whereby COMIT loaned $20 million to the Company and the Company granted COMIT warrants to purchase up to 1.2 million shares of common stock of the Company at $11.25 per share. COMIT immediately assigned the warrants to two of its shareholders, which provided the capital for the loan. 28 Harvard received warrants for the purchase of up to 960,000 shares of common stock, and Capricorn received warrants for the purchase of up to 240,000 shares of common stock. The interest rate on the loan was 11 percent through January 31, 1999 and 15 percent thereafter, until the maturity date of May 31, 1999. On December 31, 1998, the Company used the proceeds from the sale of its Class A Stock, described below, to reduce the unpaid principal balance of the loan to $3.9 million. In connection with the sale of the Class A Stock, Harvard and Capricorn agreed to cancel the warrants that COMIT assigned to them. On March 12, 1999, the Company repaid the remaining principal and interest due under the subordinated notes, and the notes were canceled. On December 31, 1998, the company's three largest shareholders, Demeter, Phemus and Capricorn, purchased a total of 3,635,972 shares of Class A Stock for an aggregate purchase price of approximately $16.6 million. On January 14, 1999, each outstanding share of Class A Stock was converted into one share of the Company's common stock. In addition, Demeter, Phemus and Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028 shares of the Company's capital stock for up to $3,320,140 following the rights offering. Because of their participation in this transaction, Demeter, Phemus and Capricorn agreed not to exercise, transfer or acquire any rights during the rights offering described below. The Company issued to all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right entitled the holder to one share of common stock for $5.00. The rights expired on March 8, 1999. Through the rights offering, the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7.4 million. On March 19, 1999, Demeter, Phemus and Capricorn completed the purchase of a total of 664,028 shares of the Company's common stock pursuant to the Standby Purchase Agreement, for total proceeds to the Company of approximately $3.3 million. Also, Capricorn has agreed to purchase an additional 34,520 shares at $5.375 per share, for proceeds to the Company of $185,545. The Company expects that this sale to Capricorn will close shortly. On March 12, 1999, the Company applied a portion of the proceeds from the rights offering to repay the remaining subordinated notes held by COMIT. The remaining proceeds from the rights offering and the proceeds from the purchases by Demeter, Phemus and Capricorn will be used to repay borrowings under the Company's revolving line of credit and for working capital. In the course of the Company's mortgage banking operations, the Company sells to investors the mortgage loans it originates but generally retains the right to service the loans, thereby increasing the Company's investment in loan servicing rights. The Company views the sale of loans on a servicing-retained basis in part as an investing activity. Significant unanticipated prepayments in the Company's servicing portfolio could have a material adverse effect on the Company's future operating results and liquidity. The Company enters into commitments to extend credit to borrowers in the normal course of business. In the event there are significant fluctuations in interest rates and spreads, the value of the commitments could have a material adverse effect on the Company's future operating results and consequently the Company's ability to honor the commitments. In the future, the Company intends to manage this risk by issuing commitments to borrowers and obtaining loan sale commitments from appropriate investors at the same time. The Company expects that this essentially simultaneous commitment from both a borrower and a mortgage investor will enable it to eliminate its exposure to interest rate and credit spread changes for each transaction. The Company's debt agreements, as amended, require the maintenance of certain financial ratios relating to liquidity, leverage, working capital and net worth, among other restrictions, all of which were met at December 31, 1998. The Company believes its funds on hand at December 31, 1998, its unused borrowing capacity under its credit lines, and its proceeds from the public rights offering and private placements will be sufficient to meet its anticipated operating needs as well as planned investments for at least the next twelve months. Principal capital requirements in 1999 include co-investment in commercial mortgage funds managed by the advisory services segment, systems investments to support the Company's loan servicing and origination activities, and furniture, fixtures, and equipment. In addition, the Company is obligated to make certain earn-out and other payments to the prior owners of acquired companies. The maximum amounts of the payments total approximately $3.3 million. Of this amount, $1.6 million is subject to the achievement of certain performance objectives over a defined period. The magnitude of the Company's acquisition and investment program will be governed to some extent by the availability of capital. YEAR 2000 The Year 2000 Problem refers to errors that may occur when computers use two digits rather than four to define the applicable year. Software and hardware may recognize a date using "00" as the year 1900, rather than the year 2000. If a computer 29 does not recognize a date on or after January 1, 2000, the error could, among other things, prevent the Company from processing transactions, sending invoices, or engaging in other normal business activities. The Company's Program. The Company has developed a program to address the Year 2000 Problem as it may affect: . the Company's computer and operating systems, including its servicing, accounting, human resources and financial reporting systems; . the Company's other systems, such as buildings, equipment, telephone systems and other non-computer systems that may contain technology that is sensitive to the Year 2000 Problem; . certain systems of the Company's major vendors and material service providers, if those systems relate to the Company's business activities; . certain systems of the Company's material customers and investors, if those systems relate to the Company's ability to provide services to the customers and investors. As described below, the Company's Year 2000 program involves 1. assessing the Year 2000 Problem and determining how it may negatively affect the Company; 2. developing remedies to address the problems discovered in the assessment phase; 3. testing of the remedies; and 4. preparing contingency plans to deal with the most likely worst- case scenarios. Assessment Phase. The following table shows the current state of Year 2000 compliance in the Company's computer systems:
Year 2000 Year 2000 Compliant Non-Compliant Component Number Number ----------------------------------------------------------------------------- Business Critical Software -------------------------- Servicing Systems 2 0 Accounting System 1 0 Human Resources 1 0 Hardware -------- Personal Computers 400 0 File/Data Services 34 0 Networks 20 0 Office Software Suites 400 0 ----------------------
The Company has evaluated all of its systems and has completed remedies for the Year 2000 Problem. During the last quarter of 1998, the Company sent letters to certain of its significant hardware, software and other equipment vendors and other material service providers, as well as to its significant customers, requesting that they provide detailed, written information concerning existing or anticipated Year 2000 compliance by their systems. The Company expects that it will complete these inquiries and receive substantially all third-party responses by March 30, 1999. While the Company cannot thoroughly assess other parties' Year 2000 readiness, it will attempt to identify areas of vulnerability and change relationships with those parties as appropriate. If the Company believes that third-party systems may have a negative material impact on its operations, it will develop relationships with other parties who have been thoroughly screened for Year 2000 compliance. Remediation and Testing Phase. During the remediation and testing phase, the Company addressed potential Year 2000 Problems in systems. Vendors supply all computer software systems that are critical to the Company's business, and the vendors are contractually responsible for the systems' becoming Year 2000 compliant. However, the Company cannot assure you that it will be able to recover damages from any vendor who fails to bring a system into Year 2000 compliance. 30 Of the Company's critical systems, its accounting and human resources systems have been certified Year 2000 compliant and were substantially tested by December 31, 1998. The Company combined its four loan servicing systems into two. The two surviving loan-servicing systems are now Year 2000 compliant and have been tested internally. These systems will be tested with major customers and investors to ensure that the delivery of proper data will occur on and after January 1, 2000. All of the Company's servers are Year 2000 compliant. All non-compliant personal computers have been put out of service. The Company has replaced all critical non-Year 2000 compliant office software, and other less significant personal computer software will be upgraded by June 30, 1999. All telephone equipment is Year 2000 compliant. Contingency Plans. The Company has not yet fully identified its most likely worst-case scenarios that could occur because of the Year 2000 Problem. The Company is developing contingency plans for the scenarios that have been identified. The Company intends to complete its determination of worst case scenarios after it has received and analyzed responses to most of the inquiries it has made of third parties. After its analysis, the Company plans to develop a timetable for completing its contingency plans. Costs Related to the Year 2000 Problem. To date, the Company has spent approximately $100,000 for its Year 2000 program, mostly in labor costs and hardware replacement. The Company expects to incur additional costs, which it estimates will not exceed $300,000. Compliance costs are relatively low because all business critical software systems were upgraded under normal vendor maintenance agreements. The Company currently believes that the costs to resolve the Year 2000 Problem for its other systems will not be material. However, the Company cannot assure you that its cost estimates will not change until the Company completes its contingency planning NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997, but need not be applied to interim financial statements in the initial year of application. The Company has adopted the provisions of this statement as of and for the period ended December 31, 1998. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of certain exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted transaction, or (c) a hedge of the foreign currency exposures. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier adoption is permitted. The Company has not yet determined the impact, if any, of this statement, including its provisions for the potential reclassifications of investment securities, on earnings, financial condition or equity. In October 1998, SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, was issued. SFAS No. 134 requires that mortgage banks classify the retained interests in mortgage-backed securities that were originally classified as mortgage loans available for sale in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company adopted SFAS No. 134 upon its issuance. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest rate risk is the most significant market risk affecting the Company. Interest rate risk is the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate- sensitive assets, liabilities and commitments. In particular, changes in interest rates affect the volume of mortgage loan originations, the interest rate spread on the Company's portfolio of loans, the amount of gain on the sale of loans, the amount of placement fee income earned on invested escrow balances and the value of the Company's loan servicing portfolio. The Company has been managing this risk by striving to balance its revenue from loan origination and loan servicing segments, which generally are counter-cyclical in nature. The Company does not maintain a trading portfolio. As a result, the Company is not exposed to market risk as it relates to trading activities. 31 Generally, interest rate increases reduce the level of economic and real estate activity, thereby decreasing the demand for mortgage financing. Such a decrease in demand may negatively affect the Company's ability to earn origination fees and generate gains from the sale of loans. In the ordinary course of business, the Company enters into commitments to extend credit to borrowers. Normally, the Company simultaneously commits to sell the loan to an investor, limiting the Company's exposure to interest rate fluctuations. To the extent that the Company has committed to extend credit to borrowers without a pre-existing sale commitment, changes in interest rates and spreads affect the value of the commitments and could have a material adverse effect on the Company's future operating results. Between the time that the loan is originated and sold to the ultimate investor, the Company earns interest income. The loans are funded through the use of a revolving warehouse line of credit, for which the Company is charged interest based upon short-term interest rates. Therefore, the net interest income that is earned by the Company is generally dependent upon the spread between long-term mortgage rates and short-term interest rates. An increase in short-term rates relative to long-term rates could have an adverse effect on net interest income. Interest rate increases, however, positively affect Company earnings from loan servicing activities. A reduction in real estate activity may reduce the risk of borrower prepayments, potentially increasing the level of servicing fees and the value of the Company's servicing portfolio. Additionally, placement fee income earned by the Company may benefit from increased interest rate levels. Although loans within the servicing portfolio may have prepayment restrictions and yield maintenance provisions, declines in interest rates can adversely affect the Company's revenues by increasing the level of loan prepayments. To the extent that future mortgage servicing rights have been capitalized by the Company, higher than anticipated rates of loan prepayments or losses could cause an increase of the amortization of these servicing assets or require the Company to write down the value of these assets, adversely affecting earnings. In addition, increased prepayment rates can reduce the Company's servicing income by decreasing the size of the Company's servicing portfolio. Declines in interest rates could also have an adverse effect on the placement fee income earned on invested escrow balances. At the same time, interest rate declines should generally have a corresponding favorable impact on Company earnings from origination, loan sales and financing activities. The Company currently does not enter into hedging activities. In the future, the Company may use hedging techniques including futures, options, interest rate swap agreements or other hedge instruments to help mitigate interest rate and market risk. However, there can be no assurance that any of the above hedging techniques will be successful. To the extent they are not successful, the Company's profitability may be adversely affected. Based on the information available and the interest environment as of December 31, 1998, the Company believes that an instantaneous 100 basis point increase, all else being constant, would result in a decrease in the Company's net income of $1.7 million over a twelve-month period. An instantaneous 100 basis point decrease in rates, all else being constant, would result in an increase in the Company's net income of $0.4 million over a twelve-month period. The Company believes that larger or smaller interest rate changes would result in proportionately larger or smaller gains and losses. The change in net income principally reflects the impact of forward loan commitment gain or losses and interest expense on variable rate debt, offset partially by changes in placement fee income. The sensitivity analyses relate solely to the Company's rate- sensitive assets, liabilities and commitments at December 31, 1998 and do not capture changes in cash flows and earnings related to certain production and servicing activities that would be expected to affect financial performance in the simulated rate environments. These estimates are limited by the fact that they are performed at a particular point in time and do not incorporate other factors that would impact the Company's financial performance in such a scenario. Consequently, the preceding estimates should not be viewed as a forecast. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and Supplementary Data of the Company are listed and included under Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors and executive officers of the Company is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 1999, (the "1999 Proxy Statement") under the caption "Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference from the 1999 Proxy Statement under the caption 32 "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding the stock ownership of each person known to the Company to be the beneficial owner of more than 5 percent of the Common Stock, of each director and executive officer of The WMF Group, Ltd., and all directors and executive officers as a group is incorporated by reference from the 1999 Proxy Statement under the caption "Beneficial Ownership of Common Stock." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated by reference from the 1999 Proxy Statement under the caption "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K A. The following documents are filed as part of this report. 1. The Consolidated Financial Statements of The WMF Group, Ltd. See Index to Financial Statements on Page F-1 included herein B. The Company filed one current report on Form 8-K during the last quarter of 1998. On October 26, 1998, the Company filed a current report on Form 8-K, incorporating information from four press releases related to the Company's third-quarter losses, the Credit Agreement between the Company and COMIT, and the Recapitalization Plan. C. Exhibits - EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Rights Agreement dated as of April 21, 1997, by and between NHP Incorporated, NHP Financial Services, Ltd. and The First National Bank of Boston (1) 3.1 Restated Certificate of Incorporation of The WMF Group, Ltd. (the "Company") (3) 3.2 Amendment to the Company's Restated Certificate of Incorporation (4) 3.3 Certificate of Designations, Preferences and Rights of Class A Non-Voting Convertible Preferred Stock (2) 3.4 Amended and Restated Bylaws of The WMF Group, Ltd. (5) 4.1 Form of certificate representing shares of Common Stock of The WMF Group, Ltd. (4) 10.1 Mortgage Selling and Servicing Contract between Fannie Mae and the Company, dated December 21, 1990. (3) 10.2 Delegated Underwriting and Servicing Addendum to Mortgage Selling and Servicing Contract between Fannie Mae and the Company, dated as of March 1, 1994. (3) 10.3 Delegated Underwriting and Servicing Master Loss Sharing Agreement between Fannie Mae and the Company, dated as of March 1, 1994. (3) 10.4 Delegated Underwriting and Servicing Reserve Agreement among Fannie Mae, State Street Bank and Trust Company and the Company, dated as of June 4, 1996. (3) 10.5 Credit and Security Agreement (Syndicate Agreement) dated as of February 10, 1999, between the Company, WMF Washington Mortgage Corp., WMF/Huntoon Paige Associates Limited, WMF Proctor Ltd., The Robert C. Wilson Company, The Robert C. Wilson Company- Arizona, WMF Carbon Mesa Advisors, Inc. and Residential Funding Corporation and certain other lenders party thereto. 33 10.6 Warehousing Promissory Note between The WMF Group, Ltd., a Delaware corporation; WMF Washington Mortgage Corp., a Delaware corporation; WMF/Huntoon, Paige Associates Limited, a Delaware corporation; WMF Proctor, Ltd., a Michigan corporation; The Robert C. Wilson Company, a Texas corporation; The Robert C. Wilson-Arizona Company, an Arizona corporation and WMF Carbon Mesa Advisors, Inc., a Delaware corporation, and _______________ dated as of February 10, 1999 10.7 Term Loan Facility Promissory Note between The WMF Group, Ltd., a Delaware corporation; WMF Washington Mortgage Corp., a Delaware corporation; WMF/Huntoon, Paige Associates Limited, a Delaware corporation; WMF Proctor, Ltd., a Michigan corporation; The Robert C. Wilson Company, a Texas corporation; The Robert C. Wilson-Arizona Company, an Arizona corporation and WMF Carbon Mesa Advisors, Inc., a Delaware corporation, and __________________ dated as of February 10, 1999 10.8 Servicing Promissory Note between The WMF Group, Ltd., a Delaware corporation; WMF Washington Mortgage Corp., a Delaware corporation; WMF/Huntoon, Paige Associates Limited, a Delaware corporation; WMF Proctor, Ltd., a Michigan corporation; The Robert C. Wilson Company, a Texas corporation; The Robert C. Wilson-Arizona Company, an Arizona corporation and WMF Carbon Mesa Advisors, Inc., a Delaware corporation, and _____________________ dated as of February 10, 1999 10.9 Swingline Promissory Note between The WMF Group, Ltd., a Delaware corporation; WMF Washington Mortgage Corp., a Delaware corporation; WMF/Huntoon, Paige Associates Limited, a Delaware corporation; WMF Proctor, Ltd., a Michigan corporation; The Robert C. Wilson Company, a Texas corporation; The Robert C. Wilson-Arizona Company, an Arizona corporation and WMF Carbon Mesa Advisors, Inc., a Delaware corporation, and Residential Funding corporation dated as of February 10, 1999 10.10 Sublimit Promissory Note between The WMF Group, Ltd., a Delaware corporation; WMF Washington Mortgage Corp., a Delaware corporation; WMF/Huntoon, Paige Associates Limited, a Delaware corporation; WMF Proctor, Ltd., a Michigan corporation; The Robert C. Wilson Company, a Texas corporation; The Robert C. Wilson-Arizona Company, an Arizona corporation and WMF Carbon Mesa Advisors, Inc., a Delaware corporation, and __________________ dated as of February 10, 1999 10.11 Letter Agreement dated October 25, 1996 between Washington Mortgage Financial Group and Michael D. Ketcham. (3) 10.12 Key Employee Incentive Plan. (4) 10.13 Key Employee Incentive Award Agreement. (4) 10.14 Key Employee Deferral Compensation Plan. (4) 10.15 Employee Stock Purchase Plan. (4) 10.16 Stock Purchase Agreement dated as of October 31, 1997 between Washington Mortgage Financial Group, Ltd. and The Robert C. Wilson Company (7) 10.17 Asset Purchase Agreement dated as of Dated December 16, 1997 between Washington Mortgage Financial Group, Ltd. and NY Urban West Inc. (8) 10.18 Registration Rights Agreement dated December 7, 1997 between the Company and Capricorn Investors II, L.P. 10.19 Registration Rights Agreement dated June 12, 1998, between the Company, Harvard Private Capital Holdings, Inc. and Capricorn Investors II, L.P., as amended by the First Amendment to the Registration Rights Agreement, dated as of October 16, 1998, among the Company, Harvard Private Capital Holdings, Inc., Capricorn Investors II, L.P., Demeter Holdings Corporation and Phemus Corporation (2) 10.20 Series 2 Warrant Agreement dated December 30, 1998, between the Company and [*] (2)(6) 10.21 Series 3 Warrant Agreement dated December 30, 1998, between the Company and [*] (2)(6) 10.22 Registration Rights Agreement dated December 30, 1998, between the Company and [*] (2)(6) 21 Subsidiaries of the Registrant (8) 23 Consent of KPMG LLP 27 Financial Data Schedule 34 (1) Incorporated by reference to Exhibit 2.2 to the current report on Form 8-K previously filed by NHP Incorporated on April 24, 1997. (2) Incorporated by reference to the current report on Form 8-K previously filed by the Company on January 13, 1999. (3) Incorporated by reference to the registration statement on Form 10 previously filed by the Company on August 4, 1997 as amended. (4) Incorporated by reference to the registration statement on Form S-1 filed by the Company on October 30, 1997. (5) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1998, filed on May 15, 1998. (6) Portions of this document have been omitted pursuant to a confidential treatment request. (7) Incorporated by reference to the Form 8-K previously filed by the Company on November 20, 1997. (8) Incorporated by reference to the Company's annual report on Form 10-K for the year ended December 31, 1997, filed on March 31, 1998. (9) Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998, filed on August 14, 1998. 35 SIGNATURES 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. THE WMF GROUP, LTD. By: /s/ Shekar Narasimham ---------------------- Shekar Narasimham Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ J. Roderick Heller, III Chairman of the Board March 31, 1999 --------------------------- J. Roderick Heller, III /s/ Shekar Narasimhan Director, President and March 31, 1999 --------------------- Shekar Narasimhan Chief Executive Officer (Principal Executive Officer) /s/ Michael D. Ketcham Executive Vice President March 31, 1999 ---------------------- Michael D. Ketcham and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Mohammed A. Al-Tuwaijri Director March 31, 1999 --------------------------- Mohammed A. Al-Tuwaijri /s/ Tim R. Palmer Director March 31, 1999 ------------------ Tim R. Palmer /s/ John D. Reilly Director March 31, 1999 ------------------- John D. Reilly /s/ Herbert S. Winokur, Jr. Director March 31, 1999 ---------------------------- Herbert S. Winokur, Jr. /s/ Michael R. Eisenson Director March 31, 1999 ----------------------- Michael R. Eisenson
36 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------
Page Independent Auditors' Report F - 1 Consolidated Balance Sheets As of December 31, 1998 and 1997 F - 3 Consolidated Statements of Operations For the Years Ended December 31, 1998 and 1997, for the Period April 1, 1996 to December 31, 1996 and for the Period January 1, 1996 to March 31, 1996 F - 4 Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1998 and 1997, for the Period April 1, 1996 to December 31, 1996 and for the Period January 1, 1996 to March 31, 1996 F - 5 Consolidated Statements of Cash Flows For the Years Ended December 31, 1998 and 1997, for the Period April 1, 1996 to December 31, 1996 and for the Period January 1, 1996 to March 31, 1996 F - 6 Notes to Consolidated Financial Statements F - 8
37 INDEPENDENT AUDITORS' REPORT The Board of Directors The WMF Group, Ltd. and subsidiaries: We have audited the accompanying consolidated balance sheets of The WMF Group Ltd. and subsidiaries (collectively "the Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of the Company for the periods April 1, 1996 to December 31, 1996 and January 1, 1996 to March 31, 1996, were audited by other auditors whose report dated February 28, 1997, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Washington, D.C. March 5, 1999, except for Note 20 which is as of March 19, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of The WMF Group, Ltd. and Subsidiaries: We have audited the accompanying consolidated balance sheets of The WMF Group, Ltd., and Subsidiary (the "Company") (formerly NHP Financial Services, Ltd. and Subsidiary and formerly WMF Holdings Ltd., and Subsidiaries see Note 1) as of December 31, 1996, and the related consolidated statements of operations, changes in shareholder's equity and cash flows for the periods April 1, 1996, to December 31, 1996, and January 1, 1996, to March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1996, and the results of its operations and its cash flows for the periods April 1, 1996, to December 31, 1996, and January 1, 1996, to March 31, 1996, in conformity with generally accepted accounting principles. As explained in Note 2 to the consolidated financial statements, effective January 1, 1996, the Company changed its method of accounting for originated mortgage servicing rights to comply with Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights." ARTHUR ANDERSEN LLP Washington, D.C. February 28, 1997 THE WMF GROUP, LTD. Consolidated Balance Sheets As of December 31, 1998 and 1997 (dollars in thousands except per share data)
ASSETS 1998 1997 ---------------- ---------------- Cash and cash equivalents $ 8,897 8,448 Restricted cash 13,398 3,914 Mortgage-backed securities 6,195 3,851 Mortgage loans held for sale, pledged 34,217 49,431 Principal, interest and other servicing advances 2,588 2,631 Investment 3,780 -- Furniture, equipment and leasehold improvements, net 5,011 2,299 Servicing rights, net 26,243 26,796 Goodwill, net 22,360 18,465 Deferred tax assets, net 17,290 -- Other assets 4,548 3,496 ---------------- ---------------- Total assets $ 144,527 119,331 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 15,455 6,265 Escrow payable 10,853 2,338 Subordinated note 3,901 -- Warehouse lines of credit 34,757 48,743 Servicing loan 4,212 5,462 Revolving credit facility 36,281 5,699 Deferred fees 5,437 3,600 Accrued loan servicing portfolio losses 6,253 5,125 Deferred tax liability, net -- 3,274 ---------------- ---------------- Total liabilities 117,149 80,506 ---------------- ---------------- Stockholders' equity: Preferred stock, 12,500,000 shares authorized; 3,635,972 shares issued and outstanding in 1998 16,541 -- Common stock, $.01 par value, 25,000,000 shares authorized; 5,349,403 and 5,042,723 shares issued and outstanding in 1998 and 1997, respectively 53 50 Additional paid-in capital 40,509 35,178 Retained earnings (deficit) (29,725) 3,597 ---------------- ---------------- Total stockholders' equity 27,378 38,825 ---------------- ---------------- Total liabilities and stockholders' equity $ 144,527 119,331 ================ ================
The accompanying notes are an integral part of these consolidated financial statements. F-3 THE WMF GROUP, LTD. Consolidated Statements of Operations (dollars in thousands except per share data)
PRO FORMA FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE YEAR ENDED APRIL 1, 1996 FOR THE PERIOD ENDED ENDED DECEMBER 31, TO JANUARY 1, 1996 DECEMBER 31, DECEMBER 31, 1996 DECEMBER 31, TO 1998 1997 (UNAUDITED) 1996 MARCH 31, 1996 -------------- -------------- -------------- -------------- ---------------- Revenues: Servicing fees $ 14,715 11,871 9,329 7,274 2,055 Gain on sale of mortgage loans, net 20,064 19,652 10,221 8,113 2,108 Gain on sale of servicing rights 2,026 297 -- -- -- Interest income 20,844 5,771 4,250 3,388 862 Placement fee income 8,470 5,330 4,959 3,823 1,136 Other income 6,422 1,724 1,542 875 667 -------------- -------------- -------------- -------------- ---------------- Total revenues 72,541 44,645 30,301 23,473 6,828 -------------- -------------- -------------- -------------- ---------------- Expenses: Salaries and employee benefits 38,816 21,163 12,745 9,975 2,770 General and administrative 17,878 7,649 4,812 3,884 928 Occupancy 4,736 2,140 1,593 1,352 241 Provision for loan servicing losses 1,128 729 1,254 969 285 Interest 17,764 2,283 1,319 1,012 307 Realized losses on treasury short sale 36,653 -- -- -- -- Amortization of servicing rights 5,153 4,250 3,914 3,062 471 Depreciation and amortization 2,801 1,660 1,195 920 81 Losses on investments/advances -- -- 600 -- 600 -------------- -------------- -------------- -------------- ---------------- Total expenses 124,929 39,874 27,432 21,174 5,683 -------------- -------------- -------------- -------------- ---------------- Income (loss) before income tax expense (52,388) 4,771 2,869 2,299 1, 145 Income tax expense (benefit) (19,066) 2,329 1,984 1,144 840 ============== ============== ============== ============== ================ Net income (loss) $ (33,322) 2,442 885 1,155 305 ============== ============== ============== ============== ================ Net income (loss) per share - Basic $ (6.38) 0.57 0.21 0.27 0.07 ============== ============== ============== ============== ================ Net income (loss) per share - Diluted $ (6.38) 0.55 0.21 0.27 0.07 ============== ============== ============== ============== ================
The accompanying notes are an integral part of these consolidated financial statements. F-4 THE WMF GROUP, LTD. Consolidated Statements of Changes in Stockholders' Equity (dollars in thousands except per share data)
Number of shares outstanding Additional ---------------------------- Preferred Common Common Preferred paid-in Retained stock stock stock stock capital earnings Total ----- ----- ------ ----- ------- -------- ----- Balance at December 31, 1995 -- 4,217 $ 42 $ -- $ 2,640 $ 1,336 $ 4,018 Net income -- -- -- -- -- 305 305 -------- ------ ------- ------- -------- -------- ------- Balance at March 31, 1996 -- 4,217 42 -- 2,640 1,641 4,323 ------------------------------------------------------------------------------ Elimination of equity upon sale -- -- (42) -- (2,640) (1,641) (4,323) Initial investment -- -- 42 -- 21,331 -- 21,373 Net income -- -- -- -- -- 1,155 1,155 ------ ------ ------- ------- -------- -------- ------- Balance at December 31, 1996 -- 4,217 42 -- 21,331 1,155 22,528 Net income -- -- -- -- -- 2,442 2,442 Issuance of common stock - Capricorn Investors -- 547 6 -- 4,994 -- 5,000 Issuance of stock options -- -- -- -- 1,093 -- 1,093 Equity contribution - NHP -- -- -- -- 6,500 -- 6,500 Adjustment for NHP's conversion -- 129 1 -- (1) -- -- Exercise of stock options and others -- 150 1 -- 1,261 -- 1,262 ------ ------ ------- ------- -------- -------- ------- Balance at December 31, 1997 -- 5,043 50 -- 35,178 3,597 38,825 Net loss -- -- -- -- -- (33,322) (33,322) Issuance of preferred stock 3,636 -- -- 16,541 -- -- 16,541 Issuance of stock options and warrants -- 215 2 -- 3,239 -- 3,241 Stock issued in conjunction with the acquisition of WMF Carbon Mesa -- 91 1 -- 2,092 -- 2,093 ------ ------ ------- ------- -------- -------- ------- Balance at December 31, 1998 $3,636 5,349 $ 53 16,541 $ 40,509 (29,725) $27,378 ====== ====== ======= ======= ======== ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 THE WMF GROUP, LTD. Consolidated Statements of Cash Flows (dollars in thousands)
FOR THE PERIOD FOR THE PERIOD APRIL 1, 1996 JANUARY 1, 1996 TO TO DECEMBER 31, MARCH 31, 1998 1997 1996 1996 ----------- ----------- -------------- ------------- Cash flows from operating activities: Net income (loss) $ (33,322) 2,442 1,155 305 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of furniture, equipment and leasehold improvements 1,136 596 313 77 Amortization of mortgage servicing rights 5,153 4,250 3,062 471 Amortization of goodwill 1,665 1,064 578 4 Compensation related to stock options -- 1,093 -- -- Losses from investments/advances -- -- -- 600 Gain on sale of mortgage servicing rights (2,026) (297) -- -- Provision for loan servicing losses 1,128 729 969 285 Realized losses on treasury short sales 36,653 -- -- -- Deferred taxes, net (20,564) 90 -- -- Mortgage loans originated (4,333,507) (1,283,552) (657,217) (176,724) Mortgage loans sold 4,348,721 1,274,384 640,071 186,070 Increase (decrease) in escrows payable 8,515 (86) -- -- Decrease (increase) in principal, interest and other servicing advances 43 (619) 1,708 (926) Increase (decrease) in due (from) affiliates -- (872) 1,100 280 (Increase) decrease in restricted cash (9,484) (600) (2,391) (60) (Increase) decrease in other assets (1,052) (1,030) 1,210 (805) Increase (decrease) in payable and accrued expenses 9,190 495 (175) 1,563 Increase (decrease) in deferred fees 1,837 814 909 (1,157) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities 14,086 (1,099) (8,708) 9,983 ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of furniture, equipment and leasehold improvements (3,848) (1,410) (910) (71) Purchase of mortgage servicing rights (1,594) (4,272) (3,728) (332) Acquisition of servicing rights -- (1,252) -- -- Proceeds from securities sold but not yet purchased 850,000 -- -- -- Purchases to cover securities sold but not yet purchased (886,653) -- -- -- Origination of servicing rights (5,980) (3,251) (2,659) (150) Purchase of ACR production system and pipeline -- -- (2,000) -- Purchase price in excess of net assets acquired (5,560) (11,823) -- -- Purchase of investment (3,780) -- -- -- Proceeds from sale of mortgage servicing rights 5,000 486 -- -- Repayments of mortgage-backed securities 56 59 21 5 Purchase of mortgage-backed securities (2,400) -- -- -- ----------- ----------- ----------- ----------- Net cash used in investing activities (54,759) (21,463) (9,276) (548) ----------- ----------- ----------- -----------
F-6 THE WMF GROUP, LTD. Consolidated Statements of Cash Flows (dollars in thousands)
FOR THE PERIOD FOR THE PERIOD APRIL 1, 1996 JANUARY 1, 1996 TO TO DECEMBER 31, MARCH 31, 1998 1997 1996 1996 ------------- -------------- ---------------- --------------- Cash flows from financing activities: Repayment of servicing loan $ (1,250) (750) (201) (26) Increase (decrease) in warehouse lines of credit, net (13,986) 8,818 17,264 (9,170) Payments on notes payable -- -- (34) Increase in revolving credit facilities, net 30,582 5,699 -- -- Proceeds from issuance of subordinated debt 20,000 -- -- -- Repayment of subordinated debt (16,099) -- -- -- Stock issued in conjunction with acquisition 2,093 -- -- -- Issuance of stock options and warrants 3,241 6,262 -- -- Equity contribution by NHP -- 6,500 -- -- Proceeds from issuance of preferred stock 16,541 -- -- -- -------- -------- -------- -------- Net cash (used in) provided by financing activities 41,122 26,529 17,029 (9,196) -------- -------- -------- -------- Net increase in cash 449 3,967 (955) 239 Cash at beginning of period 8,448 4,481 5,436 5,197 ======== ======== ======== ======== Cash at end of period $ 8,897 8,448 4,481 5,436 ======== ======== ======== ======== Supplemental disclosures: Cash paid during the period for interest $ 17,117 2,290 990 474 Cash paid during the period for income taxes 1,156 2,610 1,008 935
The accompanying notes are an integral part of these consolidated financial statements. F-7 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (1) ORGANIZATION The Company originates, underwrites, structures, places, sells and services multifamily and commercial real estate loans. With the formation of WMF Capital Corp. ("Capital Corp.") and the acquisition of WMF Carbon Mesa Advisors, Inc. ("WMF Carbon Mesa") in the first quarter of 1998, the Company operates a commercial mortgage conduit, manages commercial mortgage investment funds and provides special asset management services. Through its relationships with Government Sponsored Enterprises ("GSEs"), investment banks, life insurance companies, commercial banks and other investors, the Company provides and arranges financing to owners of multifamily and commercial real estate on a nationwide basis using both a retail and wholesale network. The Company generates revenues through origination fees, servicing fees, management fees, structuring fees, net interest income on loans held for sale and placement fees. On April 1, 1996, NHP Incorporated ("NHP"), purchased the Company and named it "NHP Financial Services, Inc." In early 1997, NHP was acquired by Apartment Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO required NHP to spin-off the Company. On December 8, 1997, the Company became an independent, publicly traded company. The Company is a Delaware corporation formed in October 1992. The Company has three direct wholly owned subsidiaries: WMF Washington Mortgage Corp. ("WMF Washington Mortgage") (previously known as Washington Mortgage Financial Group, Ltd.), WMF Capital Corp., and WMF Carbon Mesa each of which are incorporated under the laws of Delaware. WMF Washington Mortgage's wholly owned subsidiaries are WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige"), WMF Proctor Ltd. ("WMF Proctor"), and WMF Robert C. Wilson Ltd. ("WMF Robert C. Wilson"), which are incorporated under the laws of the states of Delaware, Michigan and Texas, respectively. As a result of the Company's acquisition on April 1, 1996 by NHP, NHP's acquisition cost was pushed down to the Company and all assets acquired were recorded at their estimated fair value which resulted in an increase of the recorded value of the Company's servicing rights of $10,700. In addition, the Company recorded approximately $5,100 of goodwill related to the transaction and a deferred tax liability of approximately $3,200. The goodwill related to this transaction is being amortized over seven years. The acquired servicing rights are being amortized over their estimated lives. Both acquired servicing rights and goodwill are amortized based upon the estimated life of the assets acquired. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in F-8 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) consolidation. Certain prior year amounts have been reclassified to conform with the current year presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included in the financial statements relate to the valuation of mortgage-backed securities, mortgage loans held for sale, servicing rights, deferred tax assets, goodwill and accrued loan servicing portfolio losses. (B) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with initial maturities of 90 days or less to be cash equivalents. These include cash, demand deposits and overnight repurchase agreements. (C) RESTRICTED CASH Restricted cash includes cash deposited at banks to cover escrow payables and money market funds that are collateral on a Federal National Mortgage Association ("Fannie Mae") Delegated Underwriting and Servicing ("DUS") letter of credit. (D) MORTGAGE-BACKED SECURITIES The Company classifies its mortgage-backed securities as either held-to-maturity or as available for sale. Securities that it has the ability and the intent to hold until maturity are classified as held-to-maturity and are recorded at amortized cost. Premiums and discounts are amortized using the effective interest rate method over the term of the security. Mortgage backed securities classified as available for sale are carried at fair market value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. (E) MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of aggregate cost or market as determined by outstanding commitments from investors or current investor yield requirements. Typically, loans are held for a period of no more than three months. As of December 31, 1998 and 1997, there were no loans in the warehouse for a period greater than three months. (F) INVESTMENT In June 1998, the Company began investing in Commercial Mortgage Investment Trust, Inc. ("COMIT") a commercial mortgage REIT of which the Company owns less than 20 percent. COMIT invests in multifamily and commercial mortgages, primarily those originated by the Company that are not sold in securitizations or to other institutional investors. These types of F-9 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) multifamily and commercial loans include bridge, mezzanine and structured transactions. The Company records its investment in COMIT at cost. (G) FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Furniture, equipment and leasehold improvements are stated at cost, net of accumulated amortization and depreciation. Depreciation of furniture and equipment is recognized using the straight-line method over the estimated useful life of the asset, approximately five years. Leasehold improvements are amortized over the estimated useful life of the asset or the lease term, whichever is less. Cost of maintenance and repairs are charged to expense as incurred. (H) SERVICING RIGHTS The Company accounts for its servicing rights under Statement of Financial Accounting Standard ("SFAS") No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 requires servicing rights retained by the Company after the origination and sale of the related loan be capitalized by allocating the carrying amount between the loan and the servicing rights based on their relative fair value. If it is not practicable to determine the servicing rights' fair value then no value is allocated to the servicing rights. The Company has also determined that it is practicable to estimate the fair value of conduit servicing rights and servicing rights related to permanent Federal Housing Administration ("FHA") originated loans but does not capitalize other loan types due to the limited secondary market for the products. The capitalization of these originated mortgage servicing rights increases net income for the period by the amount capitalized less related amortization and impairment if any. Purchased servicing rights are initially recorded at their purchase price. Servicing rights are amortized over a seven-year period which is the estimated life of the asset. F-10 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) Under SFAS No. 125, all capitalized mortgage servicing rights are evaluated for impairment based on the excess of the carrying amount of the mortgage servicing rights over their fair value. In measuring impairment, the servicing rights are stratified based on the interest rate and loan type of the underlying loan. The assumptions used in estimating the net cash flows are based on market conditions and actual experience. Impairment, if any, is recognized through a valuation allowance for each individual stratum. (I) GOODWILL Goodwill arising from acquisitions is determined based on the excess of the purchase price paid over the fair value of the assets acquired. The Company evaluates the impairment of goodwill whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is amortized on a straight-line basis primarily over seven to twenty years. (J) ACCRUED LOAN SERVICING PORTFOLIO LOSSES The Company bears a portion of the credit loss risk associated with the loans it services as a result of its participation in the Fannie Mae DUS multifamily loan program. The accrual for loan servicing portfolio losses represents management's estimate of the losses which may be incurred on recourse loans underwritten to date. Management believes the current accrual reserve is adequate to provide for such losses. Management regularly reviews the adequacy of this accrual, considering such items as economic conditions and collateral value, and makes adjustments to the accrual through the provision for loan servicing losses as considered necessary. (K) SERVICING FEES Servicing fee income represents fees earned for servicing multi-family and commercial real estate mortgage loans owned by institutional investors, including subservicing fees, net of guarantee fees, pool insurance fees and trustee fees. The fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income when collected. Late charge income is recognized as income when collected and is included in servicing fee income. (L) GAIN ON SALE OF MORTGAGE LOANS Gains on sale of mortgage loans consist of origination fees, commitment fees and gains on originated mortgage servicing rights. The gain is recognized based upon the difference between the selling price and the carrying amount of the related mortgage loans sold, net of the allocation to servicing rights for permanent FHA and conduit originated loans. Origination fees and expenses, net of commitment fees paid in connection with the sale of the loans, are deferred and recognized at the time of sale in the gain or loss determination. F-11 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (M) GAIN ON SALE OF SERVICING RIGHTS Gain on sale of servicing rights is recognized based upon the difference between the selling price and the carrying amount of the related servicing rights. (N) PLACEMENT FEE INCOME Placement fee income represents revenue earned from the placement and utilization of escrow funds. Income is recognized during the period in which it is earned. (O) INCOME TAXES Between the acquisition of the Company by NHP on April 1, 1996 through May 8, 1997, the Company filed a consolidated tax return with NHP. Since May 8, 1997 the Company has filed consolidated tax returns on its own behalf. The Company records income tax expense or benefit for each of the periods presented herein as if it filed a return on a stand-alone basis. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to the acquisition on April 1, 1996, the Company filed a consolidated tax return together with its subsidiaries. (P) NET INCOME PER SHARE Effective December 15, 1997, the Company adopted the provision of SFAS No. 128 Earnings per Share. SFAS No. 128 requires earnings per share to be reported as basic earnings per share and diluted earnings per share. Basic earnings per share are based on total weighted average outstanding shares for a given period. Diluted earnings per share is based on total weighted average outstanding shares and also assumes exercise or conversion of all potentially dilutive instruments currently outstanding. In addition, net income per share is computed after retroactively applying the impact of the stock split. (Q) COMPREHENSIVE INCOME In June 1998, SFAS No. 130, Reporting Comprehensive Income became effective. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components and in total in the 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 from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company adopted the requirements of SFAS No. 130 on January 1, 1998. At December 31, 1998, the Company has no other items of comprehensive income. F-12 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (R) NEW ACCOUNTING STATEMENTS In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities was issued. SFAS No. 133 establishes accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of certain exposures to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted transaction, or (c) a hedge of foreign currency exposures. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier adoption is permitted. The Company has not yet determined the impact, if any, of this statement, including its provisions for the potential reclassifications of investment securities, on earnings, financial condition, or equity. In October 1998, SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, was issued. SFAS No. 134 requires that mortgage banks classify the retained interests in mortgage-backed securities that were originally classified as mortgage loans available for sale in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company adopted SFAS No. 134 upon its issuance. (S) STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS The Company follows Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Certain options granted by the Company have exercise prices less than the market price of the underlying stock on the date of grant. In accordance with APB 25, compensation expense is recognized on these options. (T) RECLASSIFICATIONS Certain amounts in 1997 and 1996 have been reclassified to conform to their presentation in 1998. (3) ACQUISITIONS On April 15, 1997, WMF Washington Mortgage acquired the assets and liabilities of Askew Investment in Dallas, Texas for $5,600. In accordance with the purchase agreement, $4,600 of the purchase price was paid upon closing with the remaining $1,000 paid in the form of earnouts upon attainment of certain performance objectives. The acquisition has been accounted for as a purchase resulting in goodwill of $4,600. Such goodwill will be amortized on a straight-line basis over twenty years which is the estimated life of the mortgage loan production operations acquired. During 1998 and 1997, respectfully, $727 and $300 of goodwill was recorded in connection with the earnout agreement related to the acquisition of Askew Investments. F-13 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) On November 5, 1997, WMF Washington Mortgage acquired 100 percent of the outstanding stock of The Robert C. Wilson Company and its Arizona subsidiary (collectively "WMF Robert C. Wilson"), a Houston based commercial mortgage banking company. WMF Washington Mortgage acquired all of Wilson's issued and outstanding common stock for a purchase price of approximately $4,000 in cash. In accordance with the purchase agreement $3,200 was paid at closing and the remaining $800 would be paid in the form of earnouts upon the attainment of certain performance objectives over a 42 month period. The funds for the acquisition were obtained through a draw on an existing credit line of WMF Washington Mortgage. The acquisition has been accounted for as a purchase resulting in goodwill of $3,200 million. Such goodwill will be amortized on a straight-line basis over twenty years which is the estimated life of the mortgage loan production operations acquired. During 1998 an additional $267 of goodwill was recorded in connection with the earnout agreement related to the acquisition of WMF Robert C. Wilson. On December 23, 1997, WMF Washington Mortgage acquired the assets and liabilities of New York Urban West, Inc. ("WMF New York Urban"), a New York based commercial mortgage banking company for $4,900. In accordance with the purchase agreement, approximately $4,100 was paid in cash and the remaining $800 would be paid in the form of earnouts upon the attainment of certain performance objectives over a 42 month period. The funds for the acquisition were obtained through a draw on an existing credit line of WMF Washington Mortgage. The acquisition has been accounted for as a purchase resulting in goodwill of $2,700. Such goodwill will be amortized on a straight-line basis over twenty years which is the estimated life of the mortgage loan production operations acquired On March 27, 1998, the Company created WMF Carbon Mesa, which purchased all of the assets of Carbon Mesa Advisors, Inc., and Strategic Real Estate Partners for a combination of cash and common stock. The purchase did not have a significant impact on the Company's financial position or results of operations. WMF Carbon Mesa develops new loan products, manages commercial mortgage investment funds, provides special asset management services, and originates commercial mortgages. (4) MORTGAGE-BACKED SECURITIES Mortgage-backed securities include Government National Mortgage Association ("Ginnie Mae") securities. These securities are classified as held to maturity. The market value of the securities is $3,813 and $3,935 at December 31, 1998 and 1997, respectively. The securities held will mature in the years 2028 and 2029 and are pledged as collateral for a letter of credit established on behalf of Fannie Mae for loans originated under the DUS program. These securities carry an AAA credit rating. Mortgage-backed securities also include a subordinated interest in certain commercial tenant leases retained by the Company after their origination and sale. The cost and fair value of these securities at December 31, 1998 was $2,400. These securities are classified as available-for-sale and are scheduled to mature in 2012. F-14 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (5) Mortgage Loans Held for Sale Mortgage loans that the Company acquires or originates with the intent to sell in the foreseeable future are initially recorded at cost including any premium or discount related to acquired loans. Loans held for sale are carried on the books at the lower of cost or fair value calculated on the aggregate basis. Gains and losses on the sale of loans is recognized upon settlement with investor. The Company does not anticipate prepayment of loans held for sale due to the Company's short holding period, which is typically less than three months. Mortgage loans held for sale are pledged as collateral against the Company's warehouse lines of credit. (6) Furniture, Equipment, and Leasehold Improvements As of December 31, 1998 and 1997, furniture, equipment and leasehold improvements consist of the following: 1998 1997 ------ ------ Furniture and equipment $5,911 2,745 Capital lease 125 125 Leasehold improvements 933 251 ------ ------ 6,969 3,121 Less -- accumulated depreciation and amortization 1,958 822 ------ ------ $5,011 2,299 ====== ====== (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (7) DEBT FACILITIES The Company has two warehouse lines of credit for a total of $185,000 (one for $150,000 and another for $35,000) which can be drawn upon for purposes of originating loans. The warehouse lines of credit are secured by mortgage loans held for sale and are required to be repaid, with interest, upon sale of the mortgage loans. The interest rate on the $150,000 line of credit was .75 to 1 percent for 1997 and 1998 and 1 to 1.5 percent in 1996 to the extent borrowings were equal to or less than compensating balances maintained and was equal to the London InterBank Offered Rate ("LIBOR") plus .75 to 1 percent for 1997 and 1998 and 1 to 1.5 percent in 1996 for amounts borrowed in excess of compensating balances. The interest rate on the $35,000 line of credit was .75 percent to the extent borrowings were equal to or less than compensating balances maintained and was equal to the Euro-Rate plus .75 percent for amounts borrowed in excess of compensating balances. The Company had borrowed $34,757 and $48,743 against these lines of credit as of December 31, 1998 and 1997, respectively. The $150,000 million line of credit was refinanced in February 1999. The $35,000 warehouse line of credit can also be used for principal and interest advances and working capital purposes with credit limits of $4,000 to $5,000 respectively. The interest rate on the principal and interest advances and working capital portion of the facility are 1.5 percent and 2.0 percent to the extent borrowings were equal to or less than compensating balances maintained and was equal to the Euro-Rate plus 1.5 percent or 2 percent for amounts borrowed in excess of the compensating balances, respectively. Interest and principal is repayable monthly. The balance of these advance lines are required to be zero for at least seven consecutive days during each month of the year. The Company had borrowed $4,763 against this facility as of December 31, 1998. The Company has a servicing loan. The loan is to be repaid in twenty equal quarterly installments based on a 10-year amortization schedule beginning in October 1996, with the remaining balance due in June 2001. The interest rate on the servicing loan was 3 percent for 1997 and 1998 and 3 to 3.5 percent in 1996 to the extent borrowings were equal to or less than compensating balances maintained and was equal to LIBOR plus 3 percent for 1997 and 1998 and LIBOR plus 3 to 3.5 percent in 1996 for amounts borrowed in excess of compensating balances. Interest is payable monthly. The servicing loan is collateralized by servicing rights. The Company had outstanding under this loan $4,212 and $5,462 as of December 31, 1998 and 1997, respectively. This loan was refinanced in February 1999. The Company has a $10,000 secured revolving credit agreement to be used for servicing acquisitions or working capital purposes. The revolving credit agreement is renewable annually through November 2002 and requires monthly interest payments. Any principal balance outstanding in November 2002 would be converted to a term loan due in quarterly installments through November 2007. The interest rate on the term loan is 2.5 percent for amounts borrowed to the extent borrowings were equal to or less than compensating balances maintained and is equal to LIBOR plus 2.5 percent for amounts borrowed in excess of compensating balances. The revolving credit agreement is collateralized by all nonrecourse servicing rights. The Company had borrowed $10,000 and $2,829 against this line as of December 31, 1998 and 1997, respectively. This line of credit was refinanced in February 1999. F-16 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) The Company has a $35,000 secured revolving line of credit which is utilized to finance the acquisition of commercial mortgage banking companies and related activities. The interest rate on this facility is 3 percent to the extent borrowings were equal to or less than compensating balances maintained and was equal to LIBOR plus 3 percent for amounts borrowed in excess of the compensating balances. Interest is payable monthly. This facility is collateralized by all nonrecourse servicing rights. The Company had borrowed $21,519 and $2,870 against this facility as of December 31, 1998 and 1997, respectively. This line of credit was refinanced in February 1999. On September 4, 1998, the Company issued $20.0 million of subordinated debt to COMIT. From this borrowing, the Company used $10.0 million to repay a portion of the credit line with another lender. The balance of $10.0 million was used for working capital purposes. The subordinated debt is subordinate in right of payment to certain of the Company's senior indebtedness, is unsecured and bears interest at a rate of 11 percent through January 31, 1999 and 15 percent from February 1, 1999 through the maturity date of May 31, 1999. Interest is payable on January 29, 1999, at maturity and upon repayment of principal. In connection with the COMIT subordinated debt agreement, the Company also issued COMIT warrants to purchase 1.2 million shares of the Company's common stock at an exercise price of $11.25 per share. The Company repaid $16.1 million of the subordinated notes on December 31, 1998 and as part of the sale of approximately $16.6 million of Class A Preferred Stock discussed in Note 20, the warrants were surrendered. The Company repaid the remainder of the subordinated note in March 1999 (see note 20). The Company refinanced its $4,200 servicing loan, $35,000 revolving line, $10,000 line of credit and $150,000 of its warehouse lines of credit. These facilities were replaced with the following warehouse lines of credit, credit lines and term loans on February 10, 1999. The Company's servicing rights collateralized these facilities. The Company's debt agreements require maintenance of certain financial ratios relating to liquidity, leverage, working capital, and net worth among other restrictions. As a result of the refinancing of the Company's debt in February 1999, the Company was in compliance with these restrictions at December 31, 1998. The Company has a $25 million term loan to be repaid in twenty quarterly installments based on a 10-year amortization schedule beginning on March 31, 1999. The interest rate on the term loan is 3 percent to the extent compensating balances are maintained and is equal to LIBOR plus 3 percent for amounts in excess of compensating balances. Interest is payable monthly. The Company cannot borrow any additional amounts under this line, which will mature as follows: $2.5 million in each year from 1999 to 2003 and $15 million in 2004. The Company has a $25 million revolving credit agreement to be used for servicing acquisitions or working capital purposes. The facility matures in February 2002. The interest rate on the revolving credit facility is 2.5 percent to the extent compensating balances are maintained and is equal to LIBOR Historically, the Company has temporarily increased its warehouse lines of credit at times to allow borrowing beyond the credit limit. The warehouse line of credit is renewable annually. The facility can also be used for certain principal and interest advances with credit limits totaling $10.0 million. F-17 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) Following is certain information relating to the Company's various credit agreements for the years ended December 31, 1998 and 1997, respectively.
Average Maximum Interest rate at Average December 31, balance balance December 31, interest 1998 outstanding outstanding 1998 rate ------------- ----------- ----------- ----------------- -------- $185,000 warehouse lines $34,757 71,159 170,815 2.58% 1.28% Servicing loan 4,212 4,844 5,462 3.10% 3.04% $45,000 revolving credit facilities 36,281 24,684 41,519 10.18% 3.92% Subordinated note 3,901 19,037 20,000 11.00% 11.00% ============= =========== =========== ================= ======== Average Maximum Interest rate at Average December 31, balance balance December 31, interest 1997 outstanding outstanding 1997 rate ------------- ----------- ----------- ----------------- -------- $185,000 warehouse line $48,473 56,377 127,675 0.75% 0.75% Servicing loan 5,462 5,775 6,212 3.0% 3.0% $10,000 servicing acquisition line 2,829 2,829 2,829 2.5% 2.5% $35,000 revolving credit facility 2,870 2,870 2,870 3.0% 3.0% ============= =========== =========== ================= ========
The Company has also established a letter of credit of $5,200 and $4,400 on behalf of Fannie Mae for the DUS program as of December 31, 1998 and 1997, respectively. This letter of credit is secured by cash equivalents and mortgagebacked securities with a market value of $6,358 and $5,511 as of December 31, 1998 and 1997, respectively. (8) Servicing Rights During 1998 and 1997, the activity for servicing rights consisted of the following: (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) 1998 1997 -------- -------- Beginning balance, net $ 26,796 22,460 Increase due to acquisition -- 1,252 Purchases 1,594 4,272 Originations 5,980 3,251 Sale, net (2,974) (189) Amortization (5,153) (4,250) -------- -------- Ending balance, net $ 26,243 26,796 ======== ======== SFAS No. 125 requires enterprises to measure the impairment of servicing rights based on the difference between the carrying amount of the servicing rights and their current fair value. At December 31, 1998 and 1997, no allowance for impairment in the Company's mortgage servicing rights was necessary. The estimated fair value of the capitalized mortgage servicing rights was approximately $51,200 at December 31, 1998. The estimated fair value was determined using a discounted cash flow valuation model incorporating prepayment, default, cost to service and interest rate assumptions to the underlying loans. This estimated fair value presented herein is not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions, valuation methodologies or both may have a material effect on the estimates of fair value. (9) Loan Administration The Company's portfolio of mortgage loans serviced for institutional investors aggregated $12,141,933 and $10,870,357 at December 31, 1998 and 1997, respectively. Included in the Company's portfolio are approximately $11,553,866 and $10,248,834 of permanent multifamily and commercial loans, and $588,067 and $621,523 in construction loans at December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the Company serviced and subserviced loans for the following investors:
1998 1997 ---------------------- ----------------------- Loan Principal Loan Principal count outstanding count outstandng ---------- ----------- --------- ------------ Investor: Federal National Mortgage Association 353 $ 2,583,180 256 $ 1,543,826 Government National Mortgage Association 283 1,411,756 382 1,612,716 Other investors 2,518 8,146,997 2,488 7,713,815 ----------- ----------- ----------- ----------- Total loans serviced for others 3,154 $12,141,933 3,126 $10,870,357 =========== =========== =========== ===========
(Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) The Company's DUS portfolio has the following geographic and interest rate concentrations as of December 31, 1998 and 1997, respectively: 1998 1997 ------ ------ State: New York 5% 5% Oklahoma 1 8 Texas 18 19 Other 76 68 ------ ------ 100% 100% ====== ====== Interest rate: Less than 7.5% 35% 27% 7.5% to 9.49% 60 70 Greater than 9.49% 5 3 ------ ------ 100% 100% ====== ====== In addition, the Company makes voluntary advances under certain of its servicing agreements pending receipt from the mortgagors. Such advances amounted to $2,588 and $2,631 at December 31, 1998 and 1997, respectively. Related escrow funds of approximately $305,368 and $323,000 at December 31, 1998 and 1997, respectively, are on deposit in escrow bank accounts and are not included in the accompanying consolidated balance sheet. As of December 31, 1998, the Company carried blanket bond insurance coverage of $13,100 and errors and omissions insurance coverage in the amount of $18,100. The Company bears the Level I risk of loss associated with the loans it services under the Fannie Mae DUS program. The Level I risk of loss imposes a lender deductible of 5 percent of the unpaid principal balance and limits the maximum loss to 20 percent of the original mortgage. The unpaid principal balance of the Fannie Mae DUS loan servicing portfolio was approximately $1,500,510 and $943,703 at December 31, 1998 and 1997, respectively. The DUS loans are secured by first liens on the underlying multifamily properties. The Company's portfolio includes one state (Texas) comprising over 10 percent of the total portfolio. No other state comprises over 10 percent of the Fannie Mae DUS portfolio. No Fannie Mae DUS loans were delinquent as of December 31, 1998 and 1997. The Company has provided a reserve for losses of $6,253 and $5,125 as of December 31, 1998 and 1997, respectively. This reserve represents management's estimate of inherent losses on loans underwritten to date that are currently being serviced. Activity in the reserve for loan servicing losses is summarized as follows: (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data)
For the period For the period April 1, 1996 to January 1, 1996 to 1998 1997 December 31, 1996 March 31, 1996 -------- -------- ----------------- ------------------- Balance, beginning of period $5,125 4,396 3,427 3,142 Provision for loan servicing losses 1,128 729 969 285 -------- -------- ----------------- ------------------- Balance, end of period $6,253 5,125 4,396 3,427 ======== ======== ================= ===================
(10) Income Taxes Income tax expense (benefit) attributable to income (loss) before income taxes for the years ended December 31, 1998 and 1997 and for the period April 1, 1996 to December 31, 1996 and the period January 1, 1996 to March 31, 1996 consisted of the following:
For the period For the period April 1, 1996 to January 1, 1996 to 1998 1997 December 31, 1996 March 31, 1996 -------- -------- ----------------- ------------------- Federal Current $ -- 2,092 (2,183) 613 Deferred (17,729) (90) 3,184 -- --------- -------- ------- ----- (17,729) 2,002 1,001 613 --------- -------- ------- ----- State Current 1,498 327 143 227 Deferred (2,835) -- -- -- --------- -------- ------- ----- (1,337) 327 143 227 --------- -------- ------- ----- Total $ (19,066) 2,329 1,144 840 ========= ======== ======= =====
The following is a summary of the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities. (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data)
For the period For the period April 1, 1996 to January 1, 1996 to 1998 1997 December 31, 1996 March 31, 1996 ---------- ----------- --------------------- -------------------- Deferred tax assets: Reserve for loan servicing portfolio losses $ 2,501 2,050 1,758 1,371 Mark to market valuation allowance 374 -- -- -- Loss on investment in Beverly -- -- -- 351 Net operating loss carryforwards 21,563 -- -- -- -------- -------- -------- -------- Total gross deferred tax assets 24,438 2,050 1,758 1,722 Less - valuation allowance (560) -- -- (1,038) -------- -------- -------- -------- Net deferred tax assets 23,878 2,050 1,758 684 Deferred tax liabilities: Originated mortgage servicing rights (6,472) (5,238) (4,883) (671) Other (116) (86) (59) (13) -------- -------- -------- -------- Total gross deferred tax liabilities (6,588) (5,324) (4,942) (684) -------- -------- -------- -------- Net deferred tax assets (liabilities) $ 17,290 (3,274) (3,184) -- ======== ======== ======== ========
The differences between the effective income tax rates and the Federal statutory income tax rates are as follows:
For the period For the period April 1, 1996 to January 1, 1996 to 1998 1997 December 31, 1996 March 31, 1996 ----------- ----------- --------------------- -------------------- Federal income tax rate (benefit) (35)% 35% 35% 35% State income tax rate (3) 5 5 5 Valuation allowance (1) -- -- 25 Goodwill amortization 3 9 10 8 ----------- ----------- --------------------- -------------------- Effective income tax rate (benefit) (36)% 49% 50% 73% =========== =========== ===================== ====================
As of December 31, 1998, the Company had a $17 million deferred tax asset related to the Company's losses during 1998. The Company will have to generate income to realize the deferred tax asset relating to net operating losses. Excluding the losses incurred in the Company's capital markets segment, which generated the 1998 losses and which the Company has taken steps to minimize, the Company believes its existing levels of pretax earnings for financial reporting purposes are sufficient to generate the minimum amount of future taxable income needed to realize the deferred tax asset. The Company has also identified the possible disposition of assets as a means of generating future taxable (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) income if enough taxable income is not derived from recurring operations in order to realize the deferred tax asset over the carryforward period of 20 years. Management believes that it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance for state deferred taxes at December 31, 1998. However, in the event of a change of control of the Company or Capital Corp. or certain other material changes in the Company's business, the Company would have to establish additional valuation allowances against the deferred tax asset. All of the net operating losses incurred in 1998 will expire in 2018. (11) Commitments and Contingencies (A) Leases The Company is obligated under noncancelable leases for office space, furniture and equipment. Minimum future lease payments are as follows as of December 31, 1998: Year Amount ------- 1999 $ 4,954 2000 4,307 2001 2,894 2002 2,683 2003 1,595 Thereafter 5,383 ------- Total $21,816 ======= Rent expense was $3,438 and $1,594, in the years ended December 31, 1998 and 1997, respectively, and $975 and $230 in the nine months ended December 31, 1996 and three months ended March 31, 1996, respectively. (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (B) COMMITMENTS The Company enters into commitments to extend credit to borrowers in the normal course of business. Normally, the Company simultaneously commits to sell the loan to an appropriate investor. Because the commitment for the loan sometimes occurs prior to the investor commitment, the Company limits its exposure to interest rate changes for these transactions. As of December 31, 1998 the Company had commitments outstanding to extend credit to borrowers of $65,800 without pre-existing investor sale commitments. In the event there are significant fluctuations in interest rates and spreads during the term of these commitments, the change in value of the commitments could have a material adverse effect on the Company's future operating results and consequently the Company's ability to honor the commitments. At December 31, 1998 and 1997, the Company had floating rate commitments outstanding to originate $49,627 and $183,207, respectively, in multifamily and commercial mortgage loans and mandatory delivery commitments in the amount of $229,830 and $212,883, respectively, to cover the Company's origination commitments and loans held for sale. (C) LITIGATION Two lawsuits have been filed against Capital Corp. alleging, among other things, breach of contract by Capital Corp. due to its failure to fund certain loan commitments issued by it. The Company is also named as a defendant in one of the lawsuits. An adverse judgment in these matters against Capital Corp. would be material to Capital Corp., and if against the Company, could be material to the Company. Capital Corp. is attempting to resolve the matters by settlement and compromise but no assurances can be given that such attempts will be successful. The Company does not anticipate a material adverse judgment against it in the case where it is named as a defendant. The Company is involved in other litigation related to the normal course of business. Management is of the opinion that the litigation will not have a material adverse impact on the Company's financial position or operating results. No amounts have been accrued because the loss, if any, cannot be reasonably estimated. (12) EMPLOYEE BENEFIT PLANS The Company has initiated a defined contribution plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. Employees may contribute to the plan up to 15 percent of their salary up to the maximum allowable by the Internal Revenue Code. The Company will match employee contributions at 50 percent for an amount up to 5 percent of each employee's salary. F-24 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) Company contributions vest 20 percent after the first year of employment and an additional 20 percent in each subsequent year until fully vested in the fifth year. Contributions by the Company were $285 and $168 for the years ended December 31, 1998 and 1997, respectively. (13) RELATED PARTY TRANSACTIONS As of December 31, 1998 the Company holds an investment in COMIT with a carrying value of $3,780 and owes a subordinated note to COMIT in the amount of $3,901, which was repaid in March 1999 (see note 20). WMF Carbon Mesa received $137 in advisory fees for services rendered to COMIT during 1998. As of December 31, 1995, the Company had advanced funds of $1,086 to Beverly Hills Securities. The Company collected $486 in 1996, and wrote the remainder of the receivable off resulting in a $600 loss in 1996. (14) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS The Company is required to disclose the estimated fair values for its financial instruments. The basic assumptions used and the estimates disclosed represent management's best judgment of appropriate valuation methods. These estimates are based on pertinent information available to management. In certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors, and management's evaluation of those factors change. Although management uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique. Therefore, these fair value estimates are not necessarily indicative of the amounts that the Company would realize in a market transaction. F-25 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) The following fair values do not represent an estimate of the overall market value of the Company as a going concern, which would take into account future business opportunities.
1998 1997 -------------------- ---------------------- Carrying Fair Carrying Fair value value value value --------- -------- --------- ---------- Assets: Cash, cash equivalents and restricted cash $22,295 22,295 12,362 12,362 Mortgage-backed securities 6,195 6,213 3,851 3,935 Mortgage loans held for sale 34,217 34,217 49,431 49,431 Servicing rights 26,243 51,200 26,796 54,700 Investment 3,780 3,780 -- -- Liabilities: Subordinated note 3,901 3,901 -- -- Warehouse lines of credit 34,757 34,757 48,743 48,743 Servicing acquisition line of credit 4,212 4,212 5,462 5,462 Revolving credit facilities 36,281 36,281 5,699 5,699 ======= ======= ======= ======= Off-balance sheet instruments: Commitments to extend credit $ -- -- -- -- ======= ======= ======= =======
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value. (A) Cash, Cash Equivalents, and Restricted Cash Equivalents For cash, cash equivalents, and restricted cash, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instruments and their expected realization. (B) Mortgage-Backed Securities The fair value of the mortgage-backed securities is estimated based on bid quotations received from securities dealers. (C) Mortgage Loans Held for Sale For mortgage loans held for sale, fair value was estimated based on outstanding commitments from investors or current inventory yield requirements calculated on an aggregate basis. The fair market value of loans held for sale also includes the market value of commitments to extend credit to borrowers for which a preexisting investor sale commitment (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (D) SERVICING RIGHTS The estimated fair value was determined using a discounted cash flow valuation model incorporating prepayment, default, cost to service and interest rate assumptions to the underlying loans. This estimated fair value presented herein is not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions, valuation methodologies or both may have a material effect on the estimates of fair value. (E) WAREHOUSE LINES OF CREDIT, SERVICING ACQUISITION LINE OF CREDIT AND REVOLVING CREDIT FACILITY The estimated fair value of the warehouse lines of credit, servicing acquisition line of credit, and revolving credit facility, each of which are short-term liabilities, approximates their carrying values. (F) COMMITMENTS TO EXTEND CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of such commitments are included in mortgage loans held for sale in the preceding table and are considered in the calculation of the lower of cost or market calculations for mortgage loans held for sale. (G) OFF-BALANCE SHEET The Company uses a variety of off-balance sheet investment products as part of its risk management strategy and in its loan origination activities. The most frequently used off-balances sheet investment products are various types of interest rate swaps and forward rate agreements. Off-balance sheet investment products are typically classified as hedges. The Company does not enter into financial instruments for trading purposes. As of December 31, 1998 and 1997, the Company had no off-balance sheet investments outstanding. During 1998 the Company did not enter into any off-balance sheet investments. F-27 THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) (15) Segment Reporting In 1998, SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information became effective. SFAS No. 131 established standards for reporting information about operating segments. The Company adopted the requirements of SFAS No. 131 for the fiscal year ending December 31, 1998. The following table sets forth both information derived from the Company's consolidated statements of operations and reconciles the summary segment information for the consolidated statement of operations for each of the periods presented:
For the year For the year ended ended For the period For the period December 31, December 31, April 1, 1996 to January 1, 1996 to 1998 1997 December 31, 1996 March 31, 1996 -------------- ------------- ------------------- -------------------- Revenue: Mortgage banking(1) $ 67,567 44,645 23,473 6,828 Capital markets 3,484 -- -- -- Advisory services 1,490 -- -- -- --------- --------- --------- --------- Total 72,541 44,645 23,473 6,828 Expenses: (2) Mortgage banking(1) 59,169 39,116 20,953 5,626 Capital markets 60,379 -- -- -- Advisory services 2,114 -- -- -- --------- --------- --------- --------- Total 121,662 39,116 20,953 5,626 Earnings (loss) before non-operating interest expense and taxes: Mortgage banking (1) 8,398 5,529 2,520 1,202 Capital markets (56,895) -- -- -- Advisory services (624) -- -- -- --------- --------- --------- --------- Total (49,121) 5,529 2,520 1,202 Non-operating interest expense 3,267 758 221 57 --------- --------- --------- --------- Pretax income (loss) (52,388) 4,771 2,299 1,145 Provision for (benefit from) taxes (19,066) 2,329 1,144 840 --------- --------- --------- --------- Net income (loss) $ (33,322) 2,442 1,155 305 ========= ========= ========= =========
(1) Mortgage banking operations includes corporate administration expenses. (2) The Company recognized reorganization and recapitalization expenses of approximately $2,000 with approximately $1,700 reported in mortgage banking and $341 reported in capital markets. The following table sets forth information derived from the Company's consolidated balance sheet for the date presented: (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) December 31, December 31, 1998 1997 ----------- ----------- Assets: Mortgage banking $ 131,264 119,331 Capital markets 8,558 -- Advisory services 4,705 -- ---------- ----------- Total $ 144,527 119,331 ========== =========== Mortgage banking operations include corporate and administration assets. (16) Balance Sheet Classification The Company prepares its consolidated balance sheet using an unclassified balance sheet presentation as is customary in the mortgage banking industry. A classified presentation would have aggregated current assets, current liabilities, and net working capital as follows: 1998 1997 -------- -------- Current assets $ 49,980 63,363 Current liabilities 55,649 58,608 -------- -------- Net working capital (deficit) $ (5,669) 4,755 ======== ======== (17) Stock and Stock Option Plans As part of the spinoff the Company granted, to certain key employees, options to purchase common shares under the Key Employee Incentive Plan. On December 8, 1997, the Company granted 271,250 nonqualified stock options for an aggregate of six percent of the total shares outstanding of the Company at December 31, 1997. The non-qualified stock option plan provides for the right to purchase Common Stock at a specified price. The options vest ratably over five years and are contingent upon continued employment of the individual and other factors as set forth in the agreement. Compensation expense of $288 and $343 was recognized in the years ended December 31, 1998 and 1997, respectively. The Company also issued options under its employee stock purchase plan during December 1997. Employees exercised the right to purchase 138,352 shares at a purchase price of $9.15 per share. The Company incurred compensation expense of $750. No options under this plan were outstanding. (Continued) THE WMF GROUP, LTD Notes to Consolidated Financial Statements (dollars in thousands, except share and per share amounts) In 1997, the Company also issued 20,000 restricted shares under its Key Employee Deferred Compensation Plan. In 1998, the Company provided for the future issuance of an additional 118,000 restricted shares under this plan. Compensation cost for the restricted shares to be issued in the future is being recognized over the vesting period. The vesting period ranges from 13 months to five years. Issuance of the shares is contingent upon continued employment of the individual and other factors as set forth in the agreement. For 70,000 of these shares, vesting also is contingent upon the achievement of certain performance objectives. No options were granted prior to the fiscal year ended December 31, 1996. The following tables summarize the Company's stock option activity for the years ended December 31, 1998 and 1997:
Weighted Price Price Average range Average range exercise of stock exercise of stock 1998 price options 1997 price options ----------- --------- ------------ ----------- --------- ------------ Number of shares under stock options Granted 606,104 12.12 3.96-26.12 707,017 7.79 3.96-7.29 Exercised (126,073) 13.99 .25-26.12 (150,273) 8.81 4.88-9.15 Forfeited (15,429) 11.63 11.63 -- -- -- ----------- ------------ ----------- ------------ Outstanding at the end of the year 1,021,346 10.07 3.96 - 15 556,744 7.51 3.96-9.15 =========== ============ =========== ============
The weighted average fair value of options granted during the years ended December 31, 1998 and 1997 were $12.12 and $7.82 per share, respectively.
Options outstanding Options exercisable -------------------------------------------------- ------------------------------- Weighted Weighted Weighted Average Average Options Number of average life exercise Number of exercise outstanding options remaining price options price - ---------------------------- --------------- ---------------- --------------- -------------- -------------- Price range: $3.96 - 4.88 101,829 3.2 4.41 101,829 4.41 $6.00 - 6.92 226,667 5.3 6.26 136,667 6.44 $9.15 392,350 9.2 9.15 125,100 9.15 $11.25 - 11.63 93,500 9.3 11.59 16,700 11.63 $15 207,000 9.3 15.00 -- 15.00 ----------- -------------- $3.96 - 15 1,021,346 380,296 =========== ==============
At December 31, 1998, there were 195,748 additional shares available for grant under the Plans. The per share weighted-average fair value of stock options was $6.66 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) yield of 0 percent, risk-free interest rate of 4.75 percent, a volatility of 20 percent and an expected life of 9.2 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for certain of its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
- -------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------- Net income (loss) As reported $ (33,322) $2,442 - -------------------------------------------------------------------------------------------- Pro forma (34,154) 2,244 - -------------------------------------------------------------------------------------------- Net income (loss) per share As reported (6.38) 0.55 - -------------------------------------------------------------------------------------------- Pro forma (6.54) 0.50 - --------------------------------------------------------------------------------------------
Pro forma net income reflects only options granted since December 31, 1996. Therefore, the full impact of calculating compensations cost for stock options under SFAS 123 is not reflected in the proforma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years. (18) Earnings per share The following is the computation of the Company's basic and diluted earnings per share for the years ended December 31, 1998 and 1997, the period April 1, 1996 to December 31, 1996, and the period January 1, 1996 to March 31, 1996: (Continued)
1998 1997 ------------------------------------------- ---------------------------------------- Net Per share Net Per share loss Shares amount income Shares amount ------------ ------------------------------------------ ------------------------ Basic EPS $ (33,322) 5,224 (6.38) $ 2,442 4,272 $ 0.57 Effect of dilutive securities options -- -- -- -- 180 (.02) ------------ ----------- ----------- --------------- ---------- --------- Diluted EPS $ (33,322) 5,224 (6.38) $ 2,442 4,452 $ 0.55 ============ =========== =========== =============== ========== ========= Period April 1 to Period January 1 to December 31, 1996 March 31, 1996 --------------------------------------------- ------------------------------------- Net Per share Net Per share income Shares amount income Shares amount ------------ ------------------------------------------ ------------------------ Basic EPS $ 1,155 4,217 0.27 $ 305 4,217 $ 0.07 Effect of dilutive securities options -- -- -- -- -- -- ------------ ----------- ----------- --------------- ---------- --------- Diluted EPS $ 1,155 4,217 0.27 $ 305 4,217 $ 0.07 ============ =========== =========== =============== ========== =========
(19) Pro Forma Presentation (Unaudited) The unaudited pro forma income statement has been presented to reflect results of operations for the twelve months ended December 31, 1996 as if the acquisition of Holdings by NHP had occurred on January 1, 1996. The adjustments to the period April 1, 1996, to December 31, 1996, include (1) income from January 1, 1996, through March 31, 1996, of the acquired entity, and (2) an additional three months of amortization of the purchase accounting adjustments for the period January 1, 1996, through March 31, 1996. The following table summarizes these pro forma adjustments: (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data)
Historical ----------------------------------- Pro forma For the period For the period Three for the period April 1, 1996 to January 1, 1996 months year ended December 31, to March 31, additional December 31, 1996 1996 amortization 1996 -------------- ---------------- -------------- -------------- Revenue $ 23,473 6,828 -- 30,301 -------------- ---------------- -------------- -------------- Amortization/depreciation 3,982 551 575 5,108 Other expenses 18,336 5,972 -- 24,308 -------------- ---------------- -------------- -------------- Total 22,318 6,523 575 29,416 -------------- ---------------- -------------- -------------- Net income $ 1,155 305 (575) 885 ============== ================ ============== ==============
(20) Recapitalization Plan (A) Sale of Approximately $16.7 Million of Class A Stock to the Company's Major Shareholders On December 31, 1998, the Company's three largest shareholders purchased a total of 3,635,972 shares of a new class of capital stock called the Class A Non-Voting Convertible Preferred Stock ("Class A Stock") for an aggregate purchase price of approximately $16.7 million. On January 14, 1999, each outstanding share of Class A Stock was converted into one share of the Company's common stock, after the Federal Trade Commission informed the Company that it would not object to the conversion. As a result of the conversion, the Company's three largest shareholders received a total of 3,635,972 shares of common stock. Also as part of the transaction, the warrants to purchase 1,200,000 shares of common stock at a price of $11.25 per share that were received in connection with the financing of the purchase of $20,000 of the Company's subordinated notes by COMIT on September 4, 1998 were surrendered. In addition, the Company's three largest shareholders agreed to a stand-by purchase commitment, described below. The Company has applied the proceeds of the sale of shares of Class A Stock to partially repay the subordinated notes. (Continued) THE WMF GROUP, LTD. Notes to Consolidated Financial Statements (dollars in thousands, except share and per share data) Because of their participation in this transaction, the Company's three largest shareholders agreed not to exercise, transfer or acquire any rights during the rights offering. The Company's three largest shareholders further agreed to a standby commitment to purchase up to 664,028 shares of the Company's capital stock for up to $3,300 following the rights offering, as described below. (B) PUBLIC RIGHTS OFFERING The Company issued to all of its shareholders of record as of February 1, 1999, 1.072 transferable rights for each share of common stock held by them on that date. Each right entitled its holder to purchase one share of common stock for $5.00. The rights expired on March 8, 1999. Through the rights offering the Company sold a total of 1,482,271 shares of common stock for total proceeds of approximately $7,400. On March 19, 1999, the Company's three largest shareholders completed the purchase of a total of 664,028 shares of the Company's common stock pursuant to the standby commitment for total proceeds to the Company of approximately $3,300. The Company applied the proceeds form the rights offering first to repay the remaining subordinated notes held by COMIT. F-34 EX-10.5 2 EXHIBIT 10.5 CREDIT AND SECURITY AGREEMENT (SYNDICATED AGREEMENT) BETWEEN THE WMF GROUP, LTD, a Delaware corporation WMF WASHINGTON MORTGAGE CORP., a Delaware corporation WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation WMF PROCTOR LTD., a Michigan corporation THE ROBERT C.WILSON COMPANY, a Texas corporation THE ROBERT C. WILSON COMPANY-ARIZONA, an Arizona corporation WMF CARBON MESA ADVISORS, INC., a Delaware corporation AND RESIDENTIAL FUNDING CORPORATION, a Delaware corporation AND CERTAIN OTHER LENDERS PARTY THERETO Dated as of February 10, 1999 TABLE OF CONTENTS PAGE ---- 1. DEFINITIONS 1 1.1 Defined Terms 1 1.2 Other Definitional Provisions 25 2. THE CREDIT 25 2.1 The Warehousing Credit Limit 25 2.2 Swingline Commitment. 29 2.3 Procedures for Obtaining Warehousing Advances 29 2.4 The Servicing Facility Commitment 32 2.5 Procedures for Obtaining Servicing Facility Advances 33 2.6 The Term Loan Commitment 35 2.7 Funding of Advances; Non-Receipt of Funds by the Credit Agent 35 2.8 Notes 36 2.9 Interest Payments 37 2.10 Principal Payments 39 2.11 Expiration of Commitments 44 2.12 Fees 44 2.13 Miscellaneous Charges 47 2.14 Illegality 47 2.15 Interest Limitation 48 2.16 Billing and Payment 48 3. COLLATERAL. 49 3.1 Appointment of Collateral Agent 49 3.2 Delivery of Collateral 49 3.3 Grant of Security Interest 49 3.4 Release of Security Interest in Collateral 52 3.5 Delivery of Additional Collateral or Mandatory Prepayment 55 3.6 Release of Collateral 55 3.7 Collection and Servicing Rights 56 3.8 Collection of Receivables 56 3.9 Return of Collateral at Maturity 57 4. CONDITIONS PRECEDENT 57 4.1 Initial Advances 57 4.2 Each Advance 60 4.3 New Subsidiary Borrowers 61 4.4 New Fannie Mae Special Program Agreements 63 5. REPRESENTATIONS 64 5.1 Organization; Good Standing; Subsidiaries 64 5.2 Authorization and Enforceability 64 5.3 Approvals 65 5.4 Financial Condition 65 5.5 Litigation 66 5.6 Compliance with Laws 66 5.7 Regulation U 66 5.8 Investment Company Act 66 5.9 Payment of Taxes 66 5.10 Agreements 67 5.11 Title to Properties 67 5.12 ERISA 67 5.13 Eligibility 68 5.14 Place of Business 68 5.15 Special Representations Concerning Warehousing Collateral 68 5.16 Servicing 71 5.17 Special Representations Concerning Servicing Collateral 72 5.18 No Adverse Selection 73 5.19 Year 2000 Compliance 73 6. AFFIRMATIVE COVENANTS 73 6.1 Payment of Notes 73 6.2 Financial Statements and Other Reports 74 6.3 Maintenance of Existence; Conduct of Business 76 6.4 Compliance with Applicable Laws 77 6.5 Inspection of Properties and Books 77 6.6 Notice 77 6.7 Payment of Debt, Taxes, etc 78 6.8 Insurance 79 6.9 Closing Instructions 79 6.10 Subordination of Certain Indebtedness 79 6.11 Other Loan Obligations 79 6.12 Use of Proceeds of Advances 80 6.13 Special Affirmative Covenants Concerning Collateral 80 6.14 Repayment of Debt to PNC Bank, N.A. 82 7. NEGATIVE COVENANTS 82 7.1 Contingent Liabilities 82 7.2 Sale or Pledge of Servicing Contracts 82 7.3 Merger; Sale of Assets; Acquisitions 83 7.4 Defferal of Subordinated Debt 83 7.5 Loss of Eligibility 83 7.6 Debt to Adjusted Tangible Net Worth Ratio 83 7.7 Non-Warehouse Debt to Adjusted Tangible Net Worth 83 7.8 Minimum Adjusted Tangible Net Worth 84 7.9 Liquidity 84 7.10 Maximum Pass-Throughs 84 7.11 Minimum Nonrecourse Servicing Portfolio 84 7.12 Debt Service Coverage Ratio 84 7.13 Minimum Income 84 7.14 Debt Limitation 84 7.15 Acquisition of Recourse Servicing Contracts 85 7.16 Transactions with Affiliates 85 7.17 Gestation Facilities 85 7.18 Restricted Payments 85 7.19 Special Negative Covenants Concerning Collateral 85 8. DEFAULTS; REMEDIES 86 8.1 Events of Default. 86 8.2 Remedies. 90 8.3 Application of Proceeds. 95 8.4 Credit Agent Appointed Attorney-in-Fact 97 8.5 Right of Setoff 98 8.6 Sharing of Payments 98 9. THE CREDIT AGENT. 99 9.1 Appointment. 99 9.2 Duties of Credit Agent. 99 9.3 Standard of Care. 99 9.4 Delegation of Duties 100 9.5 Exculpatory Provisions 100 9.6 Reliance by Credit Agent 100 9.7 Non-Reliance on Credit Agent or Other Lenders 101 9.8 Credit Agent in Individual Capacity 102 9.9 Successor Credit Agent. 102 9.10 Agreements Regarding Servicing Collateral and Acknowledgment Agreements 102 10. NOTICES 103 11. REIMBURSEMENT OF EXPENSES; INDEMNITY 103 11.1 Reimbursement of Expenses and Indemnification by the Borrowers. 103 11.2 Indemnification by the Lenders. 104 12. FINANCIAL INFORMATION 105 13. MISCELLANEOUS 105 13.1 Terms Binding Upon Successors; Survival of Representations 105 13.2 Lenders in Individual Capacity 105 13.3 Participation and Assignments 106 13.4 Commitment Increases 107 13.5 Amendments 109 13.6 Operational Reviews 110 13.7 Governing Law 110 13.8 Relationship of the Parties 111 13.9 Severability 111 13.10 Counterparts 111 13.11 Consent to Credit References 111 13.12 Consent to Jurisdiction 112 13.13 Counterparts 112 13.14 Confidentiality of Information 112 13.15 WAIVER OF JURY TRIAL 113 13.16 Entire Agreement 113 EXHIBITS -------- Exhibit A-1 Form of Warehousing Promissory Note Exhibit A-2 Form of Sublimit Note Exhibit A-3 Form of Swingline Promissory Note Exhibit A-4 Form of Servicing Facility Promissory Note Exhibit A-5 Form of Term Loan Promissory Note Exhibit B (Intentionally Omitted) Exhibit C-MF Request for Advance Against Mortgage Loans Exhibit C-P&I P&I and Liquidity Advance Request Exhibit C-SER Servicing Facility Advance Request Exhibit D-MF/CONV/DUS Procedures and Documentation for Warehousing Conventional Multifamily, Health Care, Commercial and Fannie Mae DUS Mortgage Loans Exhibit D-MF/FHA Procedures and Documentation for Warehousing FHA Project Mortgage Loans and FHA Construction Mortgage Loans Exhibit D-MF/SFNMA Procedures and Documentation for Warehousing Special Fannie Mae Loans Exhibit E Schedule of Servicing Contracts Exhibit F Subordination of Debt Agreement Exhibit G Subsidiaries Exhibit H Legal Opinion Exhibit I-MF Officer's Certificate Exhibit J Schedule of Other Credit Agreements Exhibit K Funding Bank Agreement Exhibit L Collateral Agency Agreement Exhibit M Advance Certificate Exhibit N Terms Applicable to Guaranteed Obligations Exhibit O Borrower Addition Agreement Exhibit P Schedule of Subsidiary Borrowers Exhibit Q Schedule of Special Fannie Mae Program Agreements Exhibit R Schedule of Borrowers' Agency Approvals Exhibit S FHA Construction Loan to be Refinanced Exhibit T Litigation THIS CREDIT AND SECURITY AGREEMENT, dated as of February 10, 1999 by and among THE WMF GROUP, LTD., a Delaware corporation ("WMF Group"), WMF WASHINGTON MORTGAGE CORP., a Delaware corporation ("Washington"), WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation ("Huntoon"), WMF PROCTOR, LTD., a Michigan corporation ("Proctor"), THE ROBERT C. WILSON COMPANY, a Texas corporation ("Wilson"), THE ROBERT C. WILSON COMPANY-ARIZONA, an Arizona corporation ("Wilson-Arizona"), and WMF CARBON MESA ADVISORS, INC., a Delaware corporation ("Carbon Mesa"; WMF Group, Washington, Huntoon, Proctor, Wilson, Wilson-Arizona and Carbon Mesa are hereinafter collectively referred to as the "Borrowers"), having their principal office at 1593 Spring Hill Road, Suite 400, Vienna, VA 22182 and RESIDENTIAL FUNDING CORPORATION, a Delaware corporation ("RFC"), BANK UNITED, a federal savings bank ("Bank United") and LASALLE NATIONAL BANK, a national banking association ("LaSalle"; RFC, Bank United, LaSalle and any Additional Lender that may at any time hereafter become party hereto are hereafter referred to individually as a "Lender" and collectively as the "Lenders"), and RFC as credit agent for the Lenders (in such capacity, the "Credit Agent"). WHEREAS, the Borrowers and the Lenders desire to set forth herein the terms and conditions upon which the Lenders shall provide financing to the Borrowers; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. DEFINITIONS. 1.1 Defined Terms. Capitalized terms defined below or elsewhere in ------------- this Agreement (including the Exhibits hereto) shall have the following meanings: "Acknowledgment Agreement" has the meaning set forth in Section 8.2(j) ------------------------ hereof. "Additional Lender" means a Person admitted as a Lender under the ----------------- Agreement by an amendment hereto. "Adjusted Servicing Portfolio" means, for any Person, the Servicing ---------------------------- Portfolio of such Person, but excluding the principal balance of Mortgage Loans included in the Servicing Portfolio at such date, (a) which are past due for principal or interest for sixty (60) days or more, (b) which are Fannie Mae DUS Mortgage Loans or FHA co-insured Mortgage Loans, (c) which are serviced pursuant to Servicing Contracts that may be terminated without cause, (d) with respect to which such Person is obligated to repurchase or indemnify the holder of the Mortgage Loans as a result of defaults on the Mortgage Loans at any time during the term of such Mortgage Loans, (e) for which the Servicing Contracts are not owned by such Person free and clear of all Liens (other than in favor of the Lenders), or (f) which are serviced by the Borrowers for others under subservicing arrangements. "Adjusted Tangible Net Worth" means with respect to any Person at any --------------------------- date, the Tangible Net Worth of such Person at such date, excluding capitalized excess servicing fees and capitalized servicing rights, plus 1% ---- of the Adjusted Servicing Portfolio, and plus deferred taxes arising from ---- capitalized excess servicing fees and capitalized servicing rights. "Advance" means a disbursement by the Lenders under the Commitments ------- pursuant to Article 2 of this Agreement. "Advance Certificate" has the meaning set forth in Section 2.2 hereof. ------------------- "Advance Request" means a Servicing Facility Advance Request or a --------------- Warehousing Advance Request. "Affiliate" has the meaning set forth in Rule 12b-2 of the General --------- Rules and Regulations under the Exchange Act. "Agency Security" means a Mortgage-backed Security issued or --------------- guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. "Agreement" means this Credit and Security Agreement (Syndicated --------- Agreement), either as originally executed or as it may from time to time be supplemented, modified or amended. "Annual Debt Payments" means, as of the last day of any fiscal quarter -------------------- of WMF Group and its Subsidiaries, the sum of (a) the aggregate amount of scheduled principal payments required under this Agreement on the Term Loan Advances in the 4 fiscal quarters following such date, (b) the aggregate amount of scheduled principal payments on other Debt of WMF Group (and its Subsidiaries, on a consolidated basis) in the 4 fiscal quarters following such date, and (c) the amount of interest expense deducted in calculating net income for the 4 fiscal quarters ending on such date incurred on Debt of WMF Group (and its Subsidiaries, on a consolidated basis), other than (i) the Warehousing Advances and (ii) other Debt secured by Multifamily Mortgage Loans, Commercial Mortgage Loans and/or Mortgage-backed Securities covered by Purchase Commitments issued by Investors, to the extent such Debt does not exceed the Committed Purchase Price of such Mortgage Loans. "Appraisal" means a certificate of independent certified public --------- accountants or independent financial consultants selected by the Borrowers and reasonably satisfactory to the Credit Agent as to the Appraisal Value of all of the Pledged Servicing Contracts or the Nonrecourse Servicing Contracts acquired in any Servicing Acquisition, which shall evaluate such Servicing Contracts based upon reasonably determined categories of the Mortgage Loans contained therein and give effect to any subservicing agreement to which any such Mortgage Loan is or will be subject, which certificate shall be in form, substance and detail reasonably satisfactory to the Credit Agent. "Appraisal Value" means, at any date of determination, with respect to --------------- all of the Pledged Servicing Contracts or the Nonrecourse Servicing Contracts acquired in any Servicing Acquisition, the fair market value of the Borrowers' right to service Mortgage Loans pursuant to such Servicing Contracts, calculated as a percentage of the unpaid principal amount of each Mortgage Loan serviced pursuant thereto, as set forth in the most recent Appraisal. "Approved Custodian" means a pool custodian or other Person which is ------------------ deemed acceptable to the Credit Agent from time to time in its sole discretion to hold a Mortgage Loan for inclusion in a Mortgage Pool or to hold a Mortgage Loan as agent for an Investor who has issued a Purchase Commitment for such Mortgage Loan. "Balance Deficiency Fee" has the meaning set forth in Section 2.9(f) ---------------------- hereof. "Balance Funded Agreement" has the meaning set forth in Section 2.9(f) ------------------------ hereof. "Balance Funded Portion" has the meaning set forth in Section 2.9(f) ---------------------- hereof. "Balance Funded Rate" means, with respect to any Advance, the rate ------------------- provided for in the applicable Balance Funded Agreement. "Borrower Addition Agreement" means an agreement in the form of --------------------------- Exhibit O attached hereto, pursuant to which a wholly-owned Subsidiary of --------- WMF Group becomes a Borrower hereunder. "Borrowers" means WMF Group, Washington, Huntoon, Proctor, Wilson, --------- Wilson-Arizona, Carbon Mesa and any wholly-owned Subsidiaries of WMF Group listed on Exhibit P hereto. --------- "Business Day" means any day excluding Saturday or Sunday and ------------ excluding any day on which national banking associations are closed for business. "Calendar Quarter" shall mean the 3 month period beginning on any ---------------- January 1, April 1, July 1 or October 1. "Cash Collateral Account" means a demand deposit account maintained at ----------------------- the Funding Bank in the name of the Credit Agent for the benefit of the Lenders, and designated for receipt of the proceeds of the sale or other disposition of the Collateral. "Closing Date" means February 11, 1999. ------------ "Collateral" means any property or assets in which the Credit Agent is ---------- granted a Lien to secure the Obligations, including the property and assets of the Borrowers described in Section 3.3 hereof. "Collateral Agency Agreement" means the agreement dated as of the date --------------------------- hereof between the Borrowers, the Credit Agent, and the Collateral Agent substantially in the form of Exhibit L hereto, as the same may be amended --------- or modified from time to time. "Collateral Agent" means RFC, in its capacity as collateral agent for ---------------- the Credit Agent under the Collateral Agency Agreement. "Collateral Documents" has the meaning set forth in Section 2.3(a) -------------------- hereof. "Collateral Value" means (a) with respect to any Mortgage Loan as of ---------------- the date of determination, the lesser of (i) the amount of any Advance made against such Mortgage Loan under Section 2.1(c) hereof or (ii) the Fair Market Value of such Mortgage Loan; (b) in the event Pledged Mortgages have been exchanged for Agency Securities, the lesser of (i) the amount of any Advances outstanding against the Mortgage Loans backing such Agency Securities or (ii) the Fair Market Value of such Agency Securities; and (c) with respect to cash, the amount of such cash. "COMIT" means Commercial Mortgage Investment Trust, Inc., a Virginia ----- corporation and an Affiliate of the Borrowers. "Commercial Advance" means an Advance made against a Commercial ------------------ Mortgage Loan. "Commercial Mortgage Loan" means a Mortgage Loan secured by a Mortgage ------------------------ on a Commercial Property. "Commercial Property" means improved commercial real property that is ------------------- an income-producing property but is not a Multifamily Property or a Health Care Facility. "Commitment Fee" means the Warehousing Commitment Fee, the Term Loan -------------- Commitment Fee, or the Servicing Facility Commitment Fee. "Commitments" means, collectively, the Servicing Facility Commitments, ----------- the Term Loan Commitments and the Warehousing Commitments. "Committed Purchase Price" means for a Mortgage Loan the product of ------------------------ the Mortgage Note Amount multiplied by (a) the price (expressed as a percentage) as set forth in a Purchase Commitment for such Mortgage Loan or (b) in the event such Mortgage Loan is to be used to back an Agency Security, the price (expressed as a percentage) as set forth in a Purchase Commitment for such Agency Security. "Conventional Mortgage Loan" means a Multifamily Mortgage Loan or a -------------------------- Health Care Mortgage Loan other than a Fannie Mae DUS Mortgage Loan, an FHA Project Mortgage Loan, or an FHA Construction Mortgage Loan. "Credit Agent" means RFC, in its capacity as credit agent for the ------------ Lenders hereunder, and any successor pursuant to Section 9.9 hereof. "Debt" means, with respect to any Person, at any date (a) all ---- indebtedness or other obligations of such Person which, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of such Person at such date; and (b) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services; provided that for purposes of this Agreement, there shall be excluded from Debt at any date Fannie Mae Loan Loss Reserves (to the extent included as a liability on such Person's balance sheet), Subordinated Debt not due within one year of such date, deferred taxes arising from capitalized excess servicing fees and capitalized servicing rights and the deferred portion of any purchase price payable with respect to a Servicing Acquisition to the extent payment of said deferred portion by the Borrower is contingent upon the generation of minimum levels of income to the Borrower by the seller. "Debt Service Coverage Ratio" means, as of the last day of any fiscal --------------------------- quarter of WMF Group and its Subsidiaries, the ratio of Funds From Operations to Annual Debt Payments. "Default" means the occurrence of any event or existence of any ------- condition which, but for the giving of Notice, the lapse of time, or both, would constitute an Event of Default. "Default Rate" has the meaning set forth in Section 2.9(g) hereof. ------------ "Designated Bank" means any bank(s) designated from time to time by --------------- any Lender to receive Eligible Balances for the benefit of such Lender for the purposes of Section 2.9(f) hereof. "DUS Program" means Fannie Mae's Delegated Underwriting and Servicing ----------- Program. "Eligible Balances" means funds of or maintained by the Borrowers and ----------------- their Subsidiaries in accounts at a Lender or a Designated Bank, less balances to support float, reserve requirements, and such other reductions as may be imposed by governmental authorities or agreed between the Borrowers and such Lender from time to time. "Eligible Commercial Mortgage Loan" means a Commercial Mortgage Loan --------------------------------- which, unless otherwise agreed by the Credit Agent in sole and absolute discretion, satisfies each of the following conditions: (a) it is a First Mortgage Loan; (b) it is a Mortgage Loan as to which: (1) the Mortgage Note is payable or endorsed to the order of a Borrower; (2) each of the Mortgage Note and Mortgage is a legal, valid and binding obligation of the Borrower; (3) the Mortgage Note is an "instrument" within the meaning of Section 9-105 of the Uniform Commercial Code of all applicable jurisdictions; and (4) the Mortgage Note is denominated and payable only in United States dollars; (c) a Borrower owns such Mortgage Loan free and clear of any Lien (other than the Lien created hereunder); (d) neither such Mortgage Loan nor the related Collateral Documents contravene in any material respect any law, rule or regulation applicable thereto (including, without limitation, all laws, rules and regulations relating to usury) if any such contravention would impair the collectibility of such Mortgage Loan, and no party to the related Collateral Documents is in violation of any such law, rule or regulation (or procedures prescribed thereby) in any material respect if such violation would impair the collectibility of such Mortgage Loan or the performance by the Borrower or any obligor of its obligations with respect thereto; (e) the Mortgage Loan is not subject to any rights of setoff, counterclaim or defense in favor of the Mortgage Borrower or any other obligor thereon; (f) such Mortgage Loan complies with all representations and warranties set forth herein with respect thereto; (g) such Mortgage Loan has been underwritten in accordance with the Underwriting Guidelines; (h) the principal amount of such Mortgage Loan does not exceed Thirty Million Dollars ($30,000,000); (i) the LTV of such Mortgage Loan does not exceed eighty percent (80%); (j) the projected Property Debt Service Coverage Ratio of the related Mortgaged Property for the 12-month period beginning on the anticipated closing date thereof shall be not less than 1.20 to 1.00; (k) such Mortgage Loan is not a graduated payment Mortgage Loan, does not have a shared appreciation or other contingent interest feature, and provides for periodic payments of all accrued interest thereon on at least a monthly basis; (l) such Mortgage Loan has a final maturity of not more than 20 years and provides for monthly payments of principal and interest sufficient to repay the original principal amount of such Mortgage Loan over a period of 30 years (subject to adjustment in accordance with industry standards in the case of an adjustable rate Mortgage Loan); (m) the Commercial Property securing such Mortgage Loan is not a marina, golf course, automobile dealership, funeral home or other type of property specific to a particular business; (n) if either (i) the principal amount of such Mortgage Loan exceeds $25,000,000 or (ii) the owners or sponsors of the Mortgage Borrower, or any Person owned or controlled by any of them, have previously been debtors under the United States Bankruptcy Code or defaulted on Debt, the Mortgage Borrower is a Single Purpose Entity; and (o) neither the Borrowers nor any of their Affiliates has any ownership interest, right to acquire any ownership interest, or equivalent economic interest in such Commercial Property or the Mortgage Borrower. "Eligible Mortgage Pool" means a Mortgage Pool for which (a) an ---------------------- Approved Custodian has issued its initial certification (on the basis of which an Agency Security is to be issued), (b) there exists a Purchase Commitment covering such Agency Security, and (c) such Agency Security will be delivered to the Collateral Agent. "ERISA" means the Employee Retirement Income Security Act of 1974 and ----- all rules and regulations promulgated thereunder, as amended from time to time and any successor statute. "Event of Default" means any of the conditions or events set forth in ---------------- Section 8.1 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended ------------ from time to time, and any successor statute. "Existing Agreement Servicing Advances" means all "Advances" other ------------------------------------- than "Warehousing Advances" outstanding under the Existing Credit Agreement. "Existing Agreement Warehousing Advances" means all "Warehousing --------------------------------------- Advances" outstanding under the Existing Credit Agreement. "Existing Credit Agreement" means the Credit and Security Agreement ------------------------- (Syndicated Agreement) dated as of December 5, 1997, as amended, between WMF Group, Washington, Huntoon, Proctor, Wilson, Wilson-Arizona and Carbon Mesa, as borrowers, Residential Funding Corporation, Bank United and PNC Bank, N.A., as lenders, and Residential Funding Corporation as credit agent for the lenders. "Fair Market Value" means at any time for a Mortgage Loan or the ----------------- related Agency Security (if such Mortgage Loan is to be used to back an Agency Security), (a) if such Mortgage Loan or the related Agency Security is covered by a Purchase Commitment, the Committed Purchase Price, or (b) otherwise, the market price for such Mortgage Loan or Agency Security, determined by the Lender based on market data for similar Mortgage Loans or Agency Securities and such other criteria as the Lender deems appropriate. "Fannie Mae" means Fannie Mae, a corporation created under the laws of ---------- the United States, and any successor thereto. "Fannie Mae DUS Mortgage Loan" means a Multifamily Mortgage Loan under ---------------------------- Fannie Mae's DUS Program. "Fannie Mae Loan Loss Reserves" means reserves established by the ----------------------------- Borrowers to absorb estimated future losses related to Fannie Mae DUS Mortgage Loans sold by the Borrowers to Fannie Mae. "FHA" means the Federal Housing Administration and any successor --- thereto. "FHA Construction Mortgage Loan" means an FHA fully-insured Mortgage ------------------------------ Loan for the construction or substantial rehabilitation of a Multifamily Property or a Health Care Facility. "FHA Project Mortgage Loan" means an FHA fully insured Multifamily ------------------------- Mortgage Loan or an FHA fully insured Health Care Mortgage Loan. "Freddie Mac" means the Federal Home Loan Mortgage Corporation and any ----------- successor thereto. "FICA" means the Federal Insurance Contributions Act. ---- "FIRREA" means the Financial Institutions Reform, Recovery and ------ Enforcement Act of 1989, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "First Mortgage" means a Mortgage which constitutes a first Lien on -------------- the property covered thereby. "First Mortgage Loan" means a Mortgage Loan secured by a First ------------------- Mortgage. "Freddie Mac" means Freddie Mac, a corporation created under the laws ----------- of the United States, and any successor thereto. "Funding Bank" means The First National Bank of Chicago or any other ------------ bank designated from time to time by the Credit Agent. "Funding Bank Agreement" means the letter agreement substantially in ---------------------- the form of Exhibit K-1 hereto, or the letter agreement substantially in ----------- the form of Exhibit K-2 hereto. ----------- "Funds From Operations" means, as of the last day of any fiscal --------------------- quarter of WMF Group and its Subsidiaries, the sum of (a) the net income of WMF Group (and its Subsidiaries on a consolidated basis) for the 4 fiscal quarters ending on such date, plus (b) the amount of income tax expense ---- deducted in calculating such net income, minus (c) the amount of income ----- taxes actually paid by WMF Group and its Subsidiaries during such 4 fiscal quarters, plus (d) depreciation, amortization and other non-cash items ---- deducted in calculating such net income, minus (e) non-cash revenue ----- included in calculating such net income, minus (f) the amount of dividends ----- paid and other distributions made on the capital stock of WMF Group during such 4 fiscal quarters, plus (g) the amount of interest expense deducted in ---- calculating net income for the 4 fiscal quarters ending on such date incurred on Debt of WMF Group (and its Subsidiaries, on a consolidated basis), other than (i) the Warehousing Advances, and (ii) other Debt secured by Multifamily Mortgage Loans, Commercial Mortgage Loans and/or Mortgage-backed Securities covered by Purchase Commitments issued by Investors, to the extent such Debt does not exceed the Committed Purchase Price of such Mortgage Loans. "GAAP" means generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Gestation Agreement" means an agreement under which the Borrowers ------------------- agree to sell or finance (a) a Pledged Mortgage prior to the date of purchase by an Investor, or (b) a Mortgage Pool prior to the date the Agency Security is issued. "Ginnie Mae" means the Government National Mortgage Association, an ---------- agency of the United States government, and any successor thereto. "Government Servicing Contracts" means Servicing Contracts (a) ------------------------------ pursuant to which the Borrowers service FHA Project Mortgage Loans or FHA Construction Mortgage Loans or (b) between Ginnie Mae or Fannie Mae and any of the Borrowers. "Health Care Facility" means a retirement service center, a board and -------------------- care facility, an intermediate care facility, a nursing home or a hospital. "Health Care Mortgage Loan" means a Mortgage Loan secured by a ------------------------- Mortgage on a Health Care Facility. "Hedging Arrangements" means, with respect to any Person, any -------------------- agreements or other arrangement (including, without limitation, interest rate swap agreements, interest rate cap agreements and forward sale agreements) entered into by such Person to protect itself against changes in interest rates or the market value of assets. "HUD" means the Department of Housing and Urban Development and any --- successor thereto. "HUD 241 Program" means federal loan insurance to finance --------------- improvements, additions and equipment to multifamily rental housing and healthcare facilities pursuant to Section 241 of the National Housing Act, 12 U.S.C. (S)1715z-6. "HUD 241 Mortgage Loans" means Mortgage Loans that are insured by HUD ---------------------- under the HUD 241 Program and committed for purchase by an Investor pursuant to a Purchase Commitment. "Indemnified Liabilities" has the meaning set forth in Article 11 ----------------------- hereof. "Internal Revenue Code" means the Internal Revenue Code of 1986, or --------------------- any subsequent federal income tax law or laws, as any of the foregoing have been or may from time to time be amended. "Investor" means Fannie Mae, Freddie Mac or a financially responsible -------- private institution which is deemed acceptable by the Credit Agent from time to time in its sole discretion. "Lender" has the meaning set forth in the first paragraph of this ------ Agreement. "Letter of Credit" means a letter of credit issued by LaSalle for the ---------------- account of the Borrowers, for the benefit of Fannie Mae with respect to Fannie Mae's Loan Loss Reserve requirement or for any other corporate purpose of the Borrowers, except to the extent (a) LaSalle is holding separate collateral for the Borrowers' reimbursement obligations in respect thereof, or (b) after giving effect to the issuance of such Letter of Credit either (i) the Servicing Secured Obligations would exceed sixty-five percent (65%) of the Servicing Collateral Value or (ii) the sum of the outstanding principal balance of the Servicing Facility Advances, the amount available to be drawn under all Letters of Credit and the Letter of Credit Obligations would exceed the Servicing Facility Credit Limit. No letter of credit issued by LaSalle shall be a "Letter of Credit" hereunder unless the Credit Agent receives, within 1 Business Day after such letter of credit is issued, (A) a copy of such letter of credit, (B) a confirmation from LaSalle that LaSalle is not holding any separate collateral therefor, and (C) evidence satisfactory to the Credit Agent that the requirements of clause (b) above have been satisfied. "Letter of Credit Obligations" means the obligations of the Borrower ---------------------------- to reimburse LaSalle with respect to draws made under a Letter of Credit. "LIBOR" means, for each calendar week, the rate of interest per annum ----- which is equal to the arithmetic mean of the U.S. Dollar London Interbank Offered Rates for one (1) month periods of certain U.S. banks as of 11:00 a.m. London time on the first Business Day of each week on which the London Interbank market is open, as published by Bridge Information Services on its MoneyCenter system. LIBOR shall be rounded, if necessary, to the next higher one sixteenth of one percent (1/16)%. If such U.S. dollar LIBOR rates are not so offered or published for any period, then during such period LIBOR shall mean the London Interbank Offered Rate for one (1) month periods published on the first Business Day of each week on which the London Interbank market is open, in the Wall Street Journal in its regular column entitled "Money ----- Rates." ----- "Lien" means any lien, mortgage, deed of trust, pledge, security ---- interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Liquid Assets" means, with respect to any Person at any date, the ------------- following unrestricted and unencumbered assets owned by such Person on such date: cash, funds on deposit in any bank located in the United States, investment grade commercial paper, money market funds, marketable securities, the excess, if any, of Mortgage Loans and Agency Securities held for sale (valued in accordance with GAAP) over the outstanding aggregate principal amount of notes or other debt instruments against which such Mortgage Loans or Agency Securities are pledged as Collateral, and amounts available to be borrowed under the Servicing Facility (after giving effect to all applicable limitations set forth in Section 2.4(b) hereof) and other liquidity facilities available to the Borrowers. "Liquidity Advance" shall mean a Warehousing Advance used by the ----------------- Borrowers to fund advances required to be made by the Borrowers as master servicer of Mortgage-backed Securities (i) issued by Fannie Mae or (ii) backed by Commercial Mortgage Loans, provided such advance results in the creation of a Receivable pursuant to the applicable Servicing Contract. "Liquidity Rate" means a floating rate of interest equal to two -------------- percent (2.00%) per annum over LIBOR. The Liquidity Rate shall be adjusted on and as of the effective date of each weekly change in LIBOR. The Credit Agent's determination of the Liquidity Rate as of any date of determination shall be conclusive and binding, absent manifest error. "Loan Documents" means this Agreement, the Notes, the Collateral -------------- Agency Agreement, any agreement of the Borrowers relating to Subordinated Debt, and each other document, instrument or agreement executed by the Borrowers or any of their Subsidiaries in connection herewith or therewith, as any of the same may be amended, restated, renewed or replaced from time to time. "Majority Lenders" means at any date the Lenders holding not less than ---------------- 66.67% of the sum of the Term Loan Advances, the Servicing Facility Credit Limit or, if the Servicing Facility Commitments have expired or been terminated, the Servicing Facility Advances, and the Warehousing Credit Limit or, if the Warehousing Commitments have expired or been terminated, the Warehousing Advances. Notwithstanding the foregoing, if there are only two (2) Lenders holding Commitments or Advances, the term "Majority Lenders" shall, except for purposes of Sections 8.2(c) and 8.2(d), including both such Lenders. "Majority Servicing Facility Lenders" means at any date the Lenders ----------------------------------- holding not less than 66.67% of the Servicing Facility Credit Limit or, if the Servicing Facility Commitments have expired or been terminated, the Servicing Facility Advances. "Majority Term Loan Lenders" means at any date the Lenders holding not -------------------------- less than 66.67% of the outstanding principal balance of the Term Loan Advances. "Majority Warehousing Lenders" means at any date the Lenders holding ---------------------------- not less than 66.67% of the Warehousing Credit Limit or, if the Warehousing Commitments have expired or been terminated, the Warehousing Advances. Notwithstanding the foregoing, if there are only two (2) Lenders holding Warehousing Commitments or Warehousing Advances, the term "Majority Warehousing Lenders" shall, except for purposes of Section 3.8, include both such Lenders. "Maturity Date" means, for any Advance, the Warehousing Maturity Date, ------------- the Servicing Facility Maturity Date or the Term Loan Maturity Date, as applicable. "Margin Stock" has the meaning assigned to that term in Regulation U ------------ of the Board of Governors of the Federal Reserve System as in effect from time to time. "Maximum Servicing Facility Commitment" means, for any Lender at any ------------------------------------- date, that dollar amount designated as such opposite such Lender's name on the signature pages hereof, as the same may be reduced pursuant to Section 2.10(o) hereof or amended from time to time in accordance with this Agreement. "Maximum Term Loan Commitment" means, for any Lender at any date, that ---------------------------- dollar amount designated as such opposite such Lender's name on the signature pages hereof, as the same may be amended from time to time in accordance with this Agreement. "Maximum Warehousing Commitment" means, for any Lender at any date, ------------------------------ that dollar amount designated as such opposite such Lender's name on the signature pages hereof, as the same may be amended from time to time in accordance with this Agreement. "Miscellaneous Charges" has the meaning set forth in Section 2.13 --------------------- hereof. "Mortgage" means a mortgage or deed of trust on improved real -------- property. A Mortgage may be a First Mortgage or a Second Mortgage. "Mortgage-backed Securities" means securities that are secured or -------------------------- otherwise backed by Mortgage Loans. "Mortgage Borrower" means, with respect to a Mortgage Loan, the Person ----------------- to which such Mortgage Loan is made. "Mortgage Loan" means any loan evidenced by a Mortgage Note and ------------- secured by a Mortgage. The term "Mortgage Loan" shall include First Mortgage Loans and Second Mortgage Loans unless the context otherwise requires, and shall include each Special Fannie Mae Loan. "Mortgage Note" means a promissory note secured by one or more ------------- Mortgages. "Mortgage Note Amount" means, as of the date of determination, the -------------------- then outstanding unpaid principal amount of a Mortgage Note (whether or not an additional amount is available to be drawn thereunder). "Mortgage Pool" means a pool of one or more Pledged Mortgages on the ------------- basis of which there is to be issued a Mortgage-backed Security. "Multiemployer Plan" means a "multiemployer plan" as defined in ------------------ Section 4001(a)(3) of ERISA which is maintained for employees of the Borrowers or any Subsidiary of the Borrowers. "Multifamily Mortgage Loan" means a Mortgage Loan secured by a ------------------------- Mortgage on improved Multifamily Property. "Multifamily Property" means real property containing or which will -------------------- contain more than four (4) dwelling units. "Net Aggregate Shortfall" means on any given date for which a ----------------------- regularly scheduled pass-through payment is required to be made by the Borrowers to an Investor or the holders of Mortgaged-backed Securities, the excess of all (i) principal and interest payments due the Investor or holders in such payment over (ii) all principal and interest received for such monthly payment on the related Mortgage Loans. "Net Proceeds" means, with respect to the Rights Offering, any other ------------ issuance of Debt of any Borrower or equity securities of WMF Group after the Closing Date, or any sale of Servicing Contracts after the Closing Date, the aggregate amount of the proceeds thereof, net of the actual cash expenses paid by the Borrowers in connection therewith. "New Borrower" has the meaning set forth in Section 4.3 hereof. ------------ "Nonrecourse Servicing Contract" means a Servicing Contract under ------------------------------ which the Borrowers are not obligated to repurchase or indemnify the holder of Mortgage Loans as a result of a default on the Mortgage Loans occurring more than six months after the date of such Mortgage Loan; provided, that the Borrowers may be obligated to repurchase or indemnify the holder as a result of a breach of any customary representation or warranty made in connection with the non-recourse sale or servicing of such Mortgage Loans. "Nonrecourse Servicing Portfolio" means, for any Person, the Adjusted ------------------------------- Servicing Portfolio of such Person, but excluding the principal balance of Mortgage Loans serviced pursuant to Servicing Contracts other than Government Servicing Contracts included in the Adjusted Servicing Portfolio at such date. "Notes" has the meaning set forth in Section 2.8 hereof. ----- "Notices" has the meaning set forth in Article 10 hereof. ------- "Obligations" means any and all indebtedness, obligations and ----------- liabilities of the Borrowers to the Lenders, the Credit Agent and the Collateral Agent (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred), whether or not arising out of or related to the Loan Documents. "Officer's Certificate" means a certificate executed on behalf of the --------------------- Borrowers by the chief financial officer or the treasurer of WMF Group or by such other officer as may be acceptable to the Credit Agent and substantially in the form of Exhibit I-MF attached hereto. ------------ "Operating Account" means a demand deposit account maintained at the ----------------- Funding Bank in the name of the Borrowers and designated for funding that portion of each Mortgage Loan not funded by an Advance made against such Mortgage Loan and for returning any excess payment from an Investor for a Pledged Mortgage or Pledged Security. "Ordinary Warehousing Rate" means a floating rate of interest which is ------------------------- equal to one percent (1.00%) per annum over LIBOR. The Ordinary Warehousing Rate will be adjusted as of the effective date of each weekly change in LIBOR. The Credit Agent's determination of the Ordinary Warehousing Rate as of any date of determination shall be conclusive and binding, absent manifest error. "Participant" has the meaning set forth in Section 13.3 hereof. ----------- "Participation Certificate" means a participation certificate issued ------------------------- by an Investor, a pool custodian satisfactory to the Lenders or the Borrowers evidencing an undivided interest in a Pledged Mortgage or a Mortgage Pool consisting of Pledged Mortgages. "Percentage Share" means Servicing Facility Percentage Share, Term ---------------- Loan Percentage Share or Warehousing Percentage Share, as applicable. "Person" means and includes natural persons, corporations, limited ------ liability companies, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "P&I Advance" means a Warehousing Advance used by the Borrowers to ----------- make a regularly scheduled pass-through payment on Ginnie Mae Mortgage- backed Securities for which the Borrowers have a Net Aggregate Shortfall. "P&I Rate" means a floating rate of interest equal to one and one-half -------- percent (1.50%) per annum over LIBOR. The P&I Rate shall be adjusted on and as of the effective date of each weekly change in LIBOR. The Credit Agent's determination of the P&I Rate as of any date of determination shall be conclusive and binding, absent manifest error. "Plans" has the meaning set forth in Section 5.12 hereof. ----- "Pledged Mortgages" has the meaning set forth in Section 3.3(a) ----------------- hereof. "Pledged Securities" has the meaning set forth in Section 3.3(b) ------------------ hereof. "Pledged Servicing Contracts" means all Servicing Contracts in which --------------------------- the Credit Agent has a valid, perfected, first priority security interest to secure the Obligations, whether hereunder or under any other Loan Document. "Projected Net Operating Income" means, with respect to any Commercial ------------------------------ Property securing a Commercial Mortgage Loan, the following amount (determined for the 12 months following the date of the related Advance): PNOI = PFOR - VR - NOE, where "PNOI" means Projected Net Operating Income, "PFOR" means the ---- ---- projected amount of rent that would be paid by tenants of such related property assuming (a) full occupancy thereof and (b) an average rental rate equal to the lower of the actual current average rental rate for such property or the current market rental rate for comparable properties, "VR" -- means the projected amount of PFOR that will not be received as a result of vacancies, assuming a vacancy rate equal to the greater of the actual current vacancy rate for such property and the current market vacancy rate for comparable properties, and rent concessions agreed to with existing tenants, and "NOE" means the projected net --- operating expenses (i.e., total expenses minus interest expense) for such related property. "Property" means a Multifamily Property, a Health Care Facility or -------- other income-producing commercial property securing a Mortgage Loan. "Property Debt Service Coverage Ratio" means, at any date of ------------------------------------ determination for any Commercial Property that secures a Mortgage Loan pledged or to be pledged hereunder, the ratio of (a) the Projected Net Operating Income of the Commercial Property, to (b) projected interest expense and scheduled payments in respect of the Commercial Mortgage Loan for the 12 months after such date of determination. "Purchase Commitment" means a written commitment, in form and ------------------- substance satisfactory to the Credit Agent, issued in favor of the Borrowers by an Investor pursuant to which that Investor commits to purchase Mortgage Loans or Agency Securities. "Rating Agency" means a nationally recognized statistical rating ------------- organization that rates securities backed by Mortgage Loans. "Receivables" has the meaning set forth in Section 3.3(g) hereof. ----------- "Regulation D" means Regulation D of the Board of Governors of the ------------ Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Release Amount" has the meaning set forth in Section 3.4(g), 3.4(h) -------------- hereof. "Restricted Payments" means, collectively, all dividends or other ------------------- distributions of any nature (cash, securities, assets or otherwise), and all payments, by virtue of redemption or otherwise, on any class of equity securities (including, without limitation, warrants, options or rights therefor) issued by WMF Group, whether such securities are now or may hereafter be authorized or outstanding and any distribution in respect of any of the foregoing, whether directly or indirectly. "RFC" means Residential Funding Corporation, a Delaware corporation, --- and any successor thereto. "Rights Offering" means the rights to purchase common stock of WMF --------------- Group for $5.00 per share distributed to the holders of shares of Common Stock of WMF Group as of February 1, 1999, as described in the Prospectus filed on December 31, 1998, as amended through February 5, 1999, filed with the Securities and Exchange Commission. "Second Mortgage" means a Mortgage which constitutes a second Lien on --------------- the property covered thereby. "Second Mortgage Loan" means a Mortgage Loan secured by a Second -------------------- Mortgage. "Secured Parties" has the meaning set forth in Section 3.1 hereof. --------------- "Servicing Acquisition" means a transaction in which the Borrowers --------------------- acquire (a) Nonrecourse Servicing Contracts with respect to Multifamily Mortgage Loans, Health Care Mortgage Loans and/or Commercial Mortgage Loans in a bulk purchase, (b) all of the issued and outstanding capital stock (and, if applicable, securities convertible into or other rights to acquire such capital stock) of a corporation (or equivalent interests in a limited liability company, partnership or other entity) that owns, as its primary asset, such Nonrecourse Servicing Contracts, or (c) all or substantially all of the assets of such a corporation or other entity. "Servicing Acquisition Documents" means, with respect to any Servicing ------------------------------- Acquisition, the Servicing Purchase Agreement and all agreements, documents, and instruments executed and delivered in connection therewith. "Servicing Collateral" means (a) the Pledged Servicing Contracts, all -------------------- Collateral described in Sections 3.1(e) and 3.1(f), all Collateral described in Sections 3.1(g), 3.1(i), 3.1(j) and 3.1(k) hereof that constitutes proceeds of, or is related to, such Collateral, and any other property related to Pledged Servicing Contracts in which the Credit Agent has a security interest to secure the Obligations. "Servicing Collateral Value" means, as of the date of any -------------------------- determination, with respect to any Servicing Contracts, the Appraisal Value of such Servicing Contracts (adjusted to account for Servicing Contracts sold or Mortgage Loans repaid since the date of the most recent Appraisal in accordance with the methodology of such Appraisal); provided, that for -------- purposes of calculating the Servicing Collateral Value, the following Mortgage Loans shall be excluded: (i) Mortgage Loans on which any payment is more than sixty (60) days past due, (ii) Mortgage Loans in respect of which the borrowers have commenced foreclosure proceedings, (iii) Mortgage Loans in respect of which any obligor is the subject of a bankruptcy proceeding, (iv) Mortgage Loans serviced pursuant to Servicing Contracts with Affiliates of the Borrowers, including without limitation, WMFCC, or with special purpose entities created by Affiliates in connection with the securitization of Mortgage Loans; and (v) Servicing Contracts excluded in calculating the Adjusted Servicing Portfolio, other than pursuant to clause (b) of the definition thereof. "Servicing Contract" means, with respect to any Person, the ------------------ arrangement, whether or not in writing, pursuant to which such Person has the right to service Mortgage Loans. "Servicing Facility Advance" means a disbursement by the Lenders under -------------------------- the Servicing Facility Commitments pursuant to Section 2.4 of this Agreement. "Servicing Facility Advance Request" has the meaning set forth in ---------------------------------- Section 2.5 hereof. "Servicing Facility Commitment" has the meaning set forth in Section ----------------------------- 2.4(a) hereof. "Servicing Facility Commitment Fee" means a fee payable by the --------------------------------- Borrowers in consideration of the Lenders' agreement to make their respective Servicing Facility Advances hereunder. The amount of the Servicing Facility Commitment Fee is set forth in Section 2.12(b) hereof. "Servicing Facility Credit Limit" means at any date the sum of the ------------------------------- Maximum Servicing Facility Commitments of the Lenders at such date, with the initial Servicing Facility Credit Limit being Twenty-five Million Dollars ($25,000,000). "Servicing Facility Maturity Date" means the earliest of: (a) February -------------------------------- 10, 2002, as such date may be extended from time to time in writing by all of the Lenders holding Servicing Facility Advances or a Servicing Facility Commitment, and (b) the date the Servicing Facility Advances become due and payable pursuant to Section 8.2 below. "Servicing Facility Percentage Share" means, for any Lender at any ----------------------------------- date, that percentage which such Lender's Maximum Servicing Facility Commitment or, after the Servicing Facility Commitments have expired or been terminated, the aggregate outstanding principal balance of such Lender's Servicing Facility Advances, bears to the Servicing Facility Credit Limit or, after the Servicing Facility Commitments have expired or been terminated, the aggregate outstanding principal balance of all Servicing Facility Advances. "Servicing Facility Promissory Note" means the promissory note ---------------------------------- evidencing the Borrowers' Obligations to any Lender with respect to Servicing Facility Advances. "Servicing Facility Rate" means a floating rate of interest per annum ----------------------- equal to two and one-half percent (2.50%) per annum over LIBOR. The Servicing Facility Rate shall be adjusted on and as of the effective date of each weekly change in LIBOR. The Credit Agent's determination of the Servicing Facility Rate as of any date of determination shall be conclusive and binding, absent manifest error. "Servicing Portfolio" means, as to any Person, the unpaid principal ------------------- balance of Mortgage Loans whose Servicing Contracts are owned by such Person. "Servicing Purchase Agreement" means the principal agreement or ---------------------------- agreements pursuant to which the Borrowers make any Servicing Acquisition. "Servicing Secured Advances" means P&I Advances, Liquidity Advances, -------------------------- Term Loan Advances and Servicing Facility Advances. "Servicing Secured Obligations" means the sum of the aggregate ----------------------------- outstanding principal balance of all Servicing Secured Advances, the amount available to be drawn under all outstanding Letters of Credit and the Letter of Credit Obligations. "Single Purpose Entity" means a corporation, limited liability company --------------------- or limited partnership the organizational documents of which provide that such Person (i) was formed or organized solely for the purpose of owning or operating the Commercial Property securing a Commercial Mortgage Loan, (ii) will not engage in any business other than the ownership, operating and financing of such Commercial Property, (iii) will not own any assets other than those related to such Commercial Property and its financing, (iv) will not incur any liabilities other than the related Commercial Mortgage Loan and other liabilities permitted thereunder, (v) will maintain its own books, records and accounts separate and apart from those of any other Person, and (vi) will hold itself out as being a legal entity separate and distinct from any other Person. "Special Fannie Mae Advance" means an Advance made to Washington -------------------------- against Special Fannie Mae Loans. "Special Fannie Mae Loans" means advances made by Washington under any ------------------------ Special Fannie Mae Program Agreement and evidenced by one or more promissory notes in the possession of (a) the Collateral Agent or (b) Fannie Mae, provided that Fannie Mae has entered into a bailee agreement with the Credit Agent, in form and substance satisfactory to the Credit Agent, with respect to the Credit Agent's security interest in Washington's interest in such promissory note(s). "Special Fannie Mae Program Agreement" means any agreement between ------------------------------------ Washington and one or more borrowers and (if applicable) other obligors described on Exhibit Q hereto (as such Exhibit Q may be amended in --------- --------- accordance with Section 4.4 hereof) pursuant to which Washington makes Special Fannie Mae Loans to such borrowers secured by Mortgages on Multi- family Properties, provided that Fannie Mae has agreed, on terms satisfactory to the Credit Agent, to issue a Mortgage-backed Security or Securities in exchange for a one hundred percent (100%) participation in each such Special Fannie Mae Loan. "Statement Date" means the date of the most recent financial -------------- statements of WMF Group and its Subsidiaries, on a consolidated basis, delivered to the Lenders under the terms of this Agreement. "Subordinated Debt" means (a) all indebtedness of the Borrowers for ----------------- borrowed money which is effectively subordinated in right of payment to all other present and future Obligations either (i) pursuant to a Subordination of Debt Agreement in the form of Exhibit F hereto or (ii) otherwise on --------- terms acceptable to the Majority Lenders, and (b) solely for purposes of Section 7.4 hereof, all indebtedness of the Borrowers which is required to be subordinated by Section 4.1(b) or Section 6.10 hereof. "Subsidiary" means any corporation, association or other business ---------- entity in which more than fifty percent (50%) of the total voting power or shares of stock entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. "Swingline Advance" means Warehousing Advances made by the Swingline ----------------- Lender under Section 2.2 hereof. "Swingline Facility Amount" means the maximum amount of Swingline ------------------------- Advances to be outstanding from time to time, not to exceed the lesser of (i) Fifty Million Dollars ($50,000,000) or (ii) the then undisbursed portion of the Warehousing Credit Limit. "Swingline Lender" means RFC. ---------------- "Swingline Note" means the promissory note evidencing the Borrowers' -------------- Obligation to the Swingline Lender with respect to Swingline Advances. "Tangible Net Worth" means with respect to any Person at any date, the ------------------ excess of the total assets over total liabilities of such Person on such date, each to be determined in accordance with GAAP consistent with those applied in the preparation of the financial statements referred to in Section 4.1(a)(7) hereof, plus Fannie Mae Loan Loss Reserves and that portion of Subordinated Debt not due within one year of such date, provided that, for purposes of this Agreement, there shall be excluded from total assets advances or loans to shareholders, officers, employees or Affiliates, investments in Affiliates, assets pledged to secure any liabilities not included in the Debt of such Person, intangible assets and those other assets which would be deemed by HUD to be non-acceptable in calculating adjusted net worth in accordance with its requirements in effect as of such date, as such requirements appear in the "Audit Guide for Audit of Approved Non-Supervised Mortgagees" and other assets deemed unacceptable by the Credit Agent in its sole discretion. "Term Loan Advance" means an Advance made on the Closing Date pursuant ----------------- to Section 2.6 hereof. "Term Loan Credit Limit" means the sum of the Maximum Term Loan ---------------------- Commitments of the Lenders, which shall be Twenty-five Million Dollars ($25,000,000). "Term Loan Commitment Fee" means a fee payable by the Borrowers in ------------------------ consideration of the Lenders' making their respective Term Loan Advances hereunder. The amount of the Term Loan Commitment Fee is set forth in Section 2.12(d) hereof. "Term Loan Maturity Date" means the earliest of: (a) the close of ----------------------- business on February 10, 2004, as such date may be extended from time to time in writing by all of the Lenders holding Term Loan Advances, in their sole discretion, and (b) the date the Term Loan Advances become due and payable pursuant to Section 8.2 below. "Term Loan Percentage Share" means, for any Lender at any date, that -------------------------- percentage which such Lenders Maximum Term Loan Commitment or, after the Term Loan Advances have been made, the outstanding principal balance of such Lender's Term Loan Advance bears to the Term Loan Credit Limit or, after the Term Loan Advances have been made, the aggregate outstanding principal balance of all Term Loan Advances. "Term Loan Rate" means a floating rate of interest per annum equal to -------------- three percent (3.00%) per annum over LIBOR. The Term Loan Rate shall be adjusted on and as of the effective date of each weekly change in LIBOR. The Credit Agent's determination of the Term Loan Rate as of any date of determination shall be conclusive and binding, absent manifest error. "Trust Receipt" means a trust receipt in a form approved by the Credit ------------- Agent and pursuant to which the Collateral Agent may deliver any document relating to the Collateral to the Borrowers for correction or completion. "Underwriting Guidelines" means any underwriting guidelines adopted by ----------------------- the sponsor of any program approved by the Credit Agent for Eligible Commercial Mortgage Loans, as in effect from time to time, provided such underwriting guidelines have been approved by, or conform to the standards of, at least two Rating Agencies. "VA" means the U.S. Department of Veterans Affairs and any successor -- thereto. "Warehousing Advance" shall mean a disbursement by the Lenders under ------------------- the Warehousing Commitments pursuant to Section 2.1(a) of this Agreement or a Swingline Advance. "Warehousing Advance Request" has the meaning set forth in Section --------------------------- 2.3(a) hereof. "Warehousing Collateral" means all of the Collateral other than the ---------------------- Servicing Collateral and the Receivables. "Warehousing Commitment" has the meaning set forth in Section 2.1(a) ---------------------- hereof. "Warehousing Commitment Fee" means a fee payable by the Borrowers in -------------------------- consideration of the Lenders' issuance of their Warehousing Commitments. The amount of the Warehousing Commitment Fee, if any, is set forth in Section 2.12(a) hereof. "Warehousing Credit Limit" means at any date the sum of the Maximum ------------------------ Warehousing Commitments of the Lenders at such date, with the initial Warehousing Credit Limit being One Hundred Fifty Million Dollars ($150,000,000). "Warehousing Maturity Date" shall mean the earlier of: (a) the close ------------------------- of business on February 9, 2000, as such date may be extended from time to time in writing by all of the Lenders holding Warehousing Advances or a Warehousing Commitment, in their sole discretion, and (b) the date the Warehousing Advances become due and payable pursuant to Section 8.2 below. "Warehousing Percentage Share" means, for any Lender at any date, that ---------------------------- percentage which such Lender's Maximum Warehousing Commitment or, after the Warehousing Commitments have expired or been terminated, the aggregate outstanding principal balance of such Lender's Warehousing Advances, bears to the Warehousing Credit Limit or, after the Warehousing Commitments have expired or been terminated, the aggregate outstanding principal balance of all Warehousing Advances. "Warehousing Promissory Note" means the promissory note evidencing the --------------------------- Borrowers' Obligations to any Lender with respect to Warehousing Advances other than Swingline Advances. "Wire Disbursement Account" means a demand deposit account maintained ------------------------- at the Funding Bank in the name of the Credit Agent for the clearing of wire transfers requested by the Borrowers to fund the closing of Pledged Mortgages. "WMFCC" means WMF Capital Corp., a Delaware corporation and a wholly- ----- owned subsidiary of WMF Group. "Year 2000 Problem" means the risk that computer applications may not ----------------- be able to properly perform date-sensitive functions after December 31, 1999. 1.2 Other Definitional Provisions. ----------------------------- 1.2(a) Accounting terms not otherwise defined herein shall have the meanings given the terms under GAAP. 1.2(b) Defined terms may be used in the singular or the plural, as the context requires. 1.2(c) All references to time of day shall mean the then applicable time in Chicago, Illinois, unless expressly provided to the contrary. 2. THE CREDIT. 2.1 The Warehousing Credit Limit. ---------------------------- 2.1(a) Subject to the terms and conditions of this Agreement and provided no Default or Event of Default has occurred and is continuing, the Lenders agree, severally, and not jointly, from time to time during the period from the Closing Date, but not including, the Warehousing Maturity Date, to make Warehousing Advances to the Borrowers, pro rata in accordance with their respective Warehousing Percentage Shares, provided the total aggregate principal amount outstanding at any one time of all such Warehousing Advances shall not exceed the Warehousing Credit Limit. The obligation of each Lender to make Warehousing Advances up to its Maximum Warehousing Commitment is hereafter referred to as such Lender's "Warehousing Commitment." Within the Warehousing Credit Limit, the Borrowers may borrow, repay and reborrow. On the Closing Date, the Borrowers shall request, and the Lenders shall make, Warehousing Advances in an amount equal to the aggregate outstanding principal balance of the Existing Agreement Warehousing Advances, and such Warehousing Advances shall be applied to pay such Existing Agreement Warehousing Advances in full. All Warehousing Advances under this Agreement shall constitute a single indebtedness, and all of the Collateral shall be security for the Notes and for the performance of all the Obligations. Warehousing Advances shall be made to any Borrower, as shall be requested by the Borrowers, but each Warehousing Advance shall be deemed made to or for the benefit of all of the Borrowers, and the Borrowers, jointly and severally, shall be obligated to repay all Warehousing Advances made hereunder. With respect to its obligation to repay Warehousing Advances made to the other Borrowers, each Borrower agrees to the terms set forth in Exhibit N attached hereto and made a part hereof. --------- 2.1(b) Warehousing Advances shall be used by the Borrowers solely for the purpose of funding the acquisition or origination of Commercial Mortgage Loans, Health Care Mortgage Loans and Multifamily Mortgage Loans, except (i) in the case of P&I Advances, which may be used for the purpose of funding the Borrowers' obligations to make principal or interest payments to the holders of Ginnie Mae Mortgage- backed Securities backed by Mortgage Loans serviced by the Borrowers and for which the Borrowers have a Net Aggregate Shortfall, and (ii) in the case of Liquidity Advances, which may be used for the purpose of funding the Borrowers' obligation, as a master servicer of Mortgage-backed Securities issued by Fannie Mae or backed by Commercial Mortgage Loans, provided such advance results in the creation of a Receivable pursuant to the applicable Servicing Contract. All Warehousing Advances shall be made at the request of the Borrowers, in the manner hereinafter provided in Section 2.3, and all Warehousing Advances, except P&I Advances and Liquidity Advances, shall be made against the pledge of Mortgage Loans as Collateral therefor. The following limitations on the use of the Warehousing Advances shall be applicable: (1) No Warehousing Advance shall be made against a Mortgage Loan other than a Mortgage Loan secured by a Mortgage on real property located in one of the states of the United States or the District of Columbia. (2) No Warehousing Advance shall be made to any Borrower against Mortgage Loans other than Mortgage Loans of a type for which such Borrower has been approved by the Credit Agent. (3) No Warehousing Advance shall be made against a Mortgage Loan which is not covered by a Purchase Commitment for either the Mortgage Loan or the Agency Securities to be created on the basis of such Mortgage Loan. (4) No Warehousing Advance (other than Warehousing Advances made on the Closing Date to refinance Existing Agreement Warehousing Advances) shall be made against any Mortgage Loan other than an FHA Construction Mortgage Loan which was closed more than thirty (30) days prior to the date of the requested Advance. (5) Except for Warehousing Advances made against the Mortgage Loans described on Exhibit S hereto, no Warehousing --------- Advance shall be made against an FHA Construction Mortgage Loan or a Special Fannie Mae Loan unless (a) no lender other than the Lenders have made loans to the Borrowers against such FHA Construction Mortgage Loan or loans made under the related Special Fannie Mae Program Agreement, (b) the Collateral Agent has at one time had or will (as provided in Exhibit D-MF/FHA or ---------------- Exhibit D-MF/SFNMA, as applicable) obtain possession of the ------------------ related Mortgage Note and Collateral Documents, and (c) the related Mortgage Note is in the possession of a Person other than the Borrowers or an Affiliate of the Borrowers. (6) No Warehousing Advance shall be made against a Mortgage Loan, other than a HUD 241 Mortgage Loan or a Fannie Mae DUS Mortgage Loan, that is not a First Mortgage Loan. (7) The aggregate amount of Warehousing Advances outstanding at any one time against Second Mortgage Loans shall not exceed Fifteen Million Dollars ($15,000,000). (8) The aggregate amount of Warehousing Advances outstanding at any one time against Commercial Mortgage Loans shall not exceed Fifty Million Dollars ($50,000,000). (9) The aggregate amount of P&I Advances outstanding at any one time shall not exceed Five Million Dollars ($5,000,000). (10) The aggregate amount of Liquidity Advances outstanding at any one time shall not exceed Five Million Dollars ($5,000,000). 2.1(c) No Warehousing Advance shall exceed the following amount applicable to the type of Collateral at the time it is pledged: (1) A Warehousing Advance made against a Conventional Mortgage Loan pledged hereunder that is committed for purchase by Fannie Mae or Freddie Mac or against a Fannie Mae DUS Mortgage Loan pledged hereunder, the lesser of (i) the Mortgage Note Amount or (ii) the Committed Purchase Price. (2) A Warehousing Advance made against a Conventional Mortgage Loan pledged hereunder that is committed for purchase by an Investor other than Fannie Mae or Freddie Mac, ninety-eight percent (98%) of the lesser of (i) the Mortgage Note Amount or (ii) the Committed Purchase Price. (3) A Warehousing Advance made against an FHA Project Mortgage Loan, an FHA Construction Mortgage Loan or a HUD 241 Mortgage Loan pledged hereunder, the lesser of (i) the Mortgage Note Amount or (ii) the Committed Purchase Price. (4) A Warehousing Advance made against a Commercial Mortgage Loan pledged hereunder that is subject to a Purchase Commitment, ninety-five percent (95%) of the lesser of (i) the Mortgage Note Amount, or (ii) the Committed Purchase Price. (5) A Warehousing Advance made against a Special Fannie Mae Loan pledged hereunder, the lesser of (i) the Mortgage Note Amount or (ii) the Committed Purchase Price. (6) A P&I Advance made hereunder or a Liquidity Advance made hereunder to fund principal or interest payments under Mortgage-backed Securities, ninety percent (90%) of the related Net Aggregate Shortfall. (7) A Liquidity Advance made hereunder, other than a Liquidity Advance made to fund principal or interest payments under Mortgage-backed Securities, ninety (90%) of the amount of the Receivable that will be created by the related payment. (8) No P&I Advance or Liquidity Advance shall be made hereunder if, after giving effect to such Advance, the aggregate outstanding principal balance of the Servicing Secured Obligations would exceed sixty-five (65%) of the Servicing Collateral Value. 2.2 Swingline Commitment. On the terms and subject to the -------------------- conditions set forth herein, the Swingline Lender agrees that it may, from time to time to, but not including, the Maturity Date, agree to make Warehousing Advances requested by the Borrowers in amounts not to exceed the Swingline Facility Amount. Such Swingline Advances shall be evidenced by the Swingline Note. A Swingline Advance shall bear interest, from the date of such Swingline Advance, until paid in full, at the Ordinary Warehousing Rate. The Lenders hereby agree to purchase from the Swingline Lender an undivided participation interest in all outstanding Swingline Advances held by the Swingline Lender at any time in an amount equal to each Lender's Warehousing Percentage Share of such Swingline Advances. The Swingline Lender may at any time in its sole and absolute discretion (and shall no less frequently than weekly and upon the acceleration of the Obligations following an Event of Default) request the Lenders to make Warehousing Advances (each in principal amounts equal to their Warehousing Percentage Shares thereof) in the aggregate amount necessary to repay the outstanding Swingline Advances, and each Lender absolutely and unconditionally agrees to fund such Warehousing Advances, regardless of any Default or Event of Default or other condition which would otherwise excuse such Lender from funding Warehousing Advances; provided that no Lender shall be required to make Warehousing Advances to repay Swingline Advances which would cause such Lender's aggregate Warehousing Advances then outstanding to exceed the amount of such Lender's Maximum Warehousing Commitment. Each Lender's Warehousing Advances made pursuant to the preceding sentence shall be delivered directly to the Swingline Lender in immediately available funds at the office of the Credit Agent by 12:00 noon on the day of the request therefor by the Swingline Lender if such request is made on or before 11:00 a.m. or by 9:00 a.m. on the first (1st) Business Day following such request therefor if such request is made after 11:00 a.m. and shall be promptly applied against the outstanding Swingline Advances. At any time following the receipt of funds from all the Lenders, and no less than weekly, the Credit Agent shall deliver to each Lender a certificate in the form of Exhibit M attached hereto (the "Advance --------- Certificate"), certified by the Credit Agent. 2.3 Procedures for Obtaining Warehousing Advances. --------------------------------------------- 2.3(a) The Borrowers may obtain Warehousing Advances hereunder, subject to the satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof, upon compliance with the procedures set forth in this Section 2.3 and in the following described Exhibits, attached hereto and made a part hereof including the delivery of all documents listed in the following described Exhibits (the "Collateral Documents") to the Collateral Agent, as applicable to the type of Collateral being financed: (1) Conventional Mortgage Loans, Fannie Mae DUS Mortgage Loans and Commercial Mortgage Loans, as set forth in Exhibit D- ---------- MF/CONV/DUS hereto. ----------- (2) FHA Project Mortgage Loans, FHA Construction Mortgage Loans and HUD 241 Mortgage Loans, as set forth in Exhibit D- ---------- MF/FHA hereto. ------ (3) Special Fannie Mae Loans, as set forth in Exhibit D- --------- MF/SFNMA. -------- Requests for Warehousing Advances shall be initiated by the Borrowers by delivering to the Credit Agent, with a copy to the Collateral Agent, no later than one (1) Business Day prior to any Business Day that the Borrowers desire to borrow hereunder, a completed and signed request for a Warehousing Advance (a "Warehousing Advance Request") on the then current form approved by the Credit Agent. The current forms in use by the Credit Agent are Exhibit C-MF ------------ for Warehousing Advances, other than P&I Advances and Liquidity Advances, and Exhibit C-P&I for P&I Advances and Liquidity Advances. ------------- The Credit Agent shall have the right, on not less than three (3) Business Days' prior Notice to the Borrowers, to modify any of said Exhibits to conform to current legal requirements or Collateral Agent practices, and, as so modified, said Exhibits shall be deemed a part hereof. 2.3(b) The Collateral Agent shall have one (1) Business Day under ordinary circumstances to (i) examine the Collateral Documents (ii) reject Collateral that does not meet the requirements of this Agreement or, if applicable, the related Purchase Commitment and (iii) verify the Warehousing Advance amount. Before the Credit Agent funds any requested Warehousing Advance, the Credit Agent shall have received from the Collateral Agent Notice (telephonic followed by written notice) of the amount that may be advanced pursuant to Section 2.1(c). 2.3(c) The Borrowers shall hold in trust for the Lenders, and the Borrowers shall deliver to the Collateral Agent promptly upon request, or if the recorded Collateral Documents have not yet been returned from the recording office, immediately upon receipt by the Borrowers of such recorded Collateral Documents, and the Pledged Mortgage is not being held by an Investor for purchase or has not been redeemed from pledge, the following: (1) originals of the Collateral Documents for which copies are required to be delivered to the Collateral Agent pursuant to Exhibit D-MF/CONV/DUS, Exhibit D-MF/FHA --------------------- ---------------- or Exhibit D-MF/SFNMA, (2) the original lender's ALTA Policy of Title ------------------ Insurance or an equivalent thereto, (3) the environmental assessment, and (4) any other documents relating to a Pledged Mortgage which the Collateral Agent may request including, without limitation, certificates of casualty or hazard insurance, credit information on the maker of each such Mortgage Note, and other documents of all kinds which are customarily desired for inspection or transfer incidental to the purchase of any Mortgage Loan by an Investor or the issuance of a Mortgage-backed Security and any additional documents which are customarily executed by the seller of a Mortgage Note to an Investor. 2.3(d) Neither the Credit Agent nor any Lender shall incur any liability to the Borrowers in acting upon any telephonic notice referred to in this Agreement which the Credit Agent or such Lender believes in good faith to have been given by a duly authorized officer or other Person authorized to borrow on behalf of the Borrowers or for otherwise acting in good faith under this Section. Upon the funding of Warehousing Advances by the Lenders in accordance with this Agreement pursuant to any telephonic notice, the Borrowers shall have effected borrowings hereunder. A Warehousing Advance Request shall be irrevocable and the Borrowers shall be bound to accept a Warehousing Advance in accordance herewith, if such Warehousing Advance Request is not revoked prior to 10:00 a.m. on the date the Warehousing Advance is to be disbursed. 2.3(e) To make an Advance, the Credit Agent shall cause the Funding Bank to credit the Wire Disbursement Account upon compliance by the Borrowers with the terms of the Loan Documents. The Credit Agent shall determine in its sole discretion the method by which Advances and other amounts on deposit in the Wire Disbursement Account are disbursed by the Funding Bank to or for the account of the Borrowers. 2.3(f) If, pursuant to the authorization given by the Borrowers in the Funding Bank Agreement, for the purpose of financing a Mortgage Loan against which a Warehousing Advance has been made in accordance with a Warehousing Advance Request, the Credit Agent debits the Borrowers' Operating Account at the Funding Bank to the extent necessary to cover a wire to be initiated by the Credit Agent, and such debit or direction results in an overdraft, the Swingline Lender may make an additional Swingline Advance to fund such overdraft. 2.3(g) Upon an Event of Default, and without the necessity of prior demand or notice from the Credit Agent, the Borrowers authorizes the Credit Agent to cause the Funding Bank to charge the Borrowers' account for any Obligations due and owing the Lenders. 2.4 The Servicing Facility Commitment. --------------------------------- 2.4(a) Subject to the terms and conditions of this Agreement and provided no Default or Event of Default has occurred and is continuing, the Lenders agree from time to time during the period from the Closing Date, to, but not including, the Servicing Facility Maturity Date, to make Servicing Facility Advances to the Borrowers, provided the sum of (i) the total aggregate principal amount outstanding at any one time of all such Servicing Facility Advances, (ii) the amount available to be drawn under Letters of Credit, and (iii) the Letter of Credit Obligations, shall not exceed the Servicing Facility Credit Limit. The obligation of each Lender to make Servicing Facility Advances hereunder up to its Maximum Servicing Facility Commitment is hereinafter referred to as such Lender's "Servicing Facility Commitment." Within the Servicing Facility Credit Limit, the Borrowers may borrow, repay and reborrow. All Servicing Facility Advances under this Agreement shall constitute a single indebtedness, and all of the Collateral shall be security for the Servicing Facility Promissory Notes and for the performance of all the Obligations. Servicing Facility Advances shall be made to each Borrower, as shall be requested by the Borrowers, but each Servicing Facility Advance shall be deemed made to or for the benefit of all of the Borrowers, and all of the Borrowers, jointly and severally, shall be obligated to repay any Servicing Facility Advances made under the Servicing Facility Commitments. With respect to its obligation to repay Servicing Facility Advances made to the other Borrowers, each Borrower agrees to the terms set forth in Exhibit N attached hereto --------- and made a part hereof. 2.4(b) Servicing Facility Advances shall be used by the Borrowers solely for the purpose of (i) financing a part of the cost of a Servicing Acquisition; (ii) general working capital purposes; (iii) meeting Fannie Mae's Loan Loss Reserve requirements; or (iv) other corporate needs. Each Servicing Facility Advance shall be made at the request of the Borrowers, in the manner hereinafter provided in Section 2.5 hereof. The following limitations on Servicing Facility Advances shall be applicable: (1) No Servicing Facility Advance shall be made if, after giving effect thereto, (i) the aggregate outstanding principal balance of all Servicing Facility Advances, the amount available to be drawn under all Letters of Credit and the Letters of Credit Obligations would exceed the Servicing Facility Credit Limit, or (ii) the Servicing Secured Obligations would exceed sixty-five percent (65%) of the Servicing Collateral Value. (2) In calculating the Servicing Collateral Value for purposes of the foregoing clause (i), no Servicing Contracts being acquired in a Servicing Acquisition may be included unless the Collateral Agent shall have reviewed the documents and information described in Section 2.5(b) in connection with such Servicing Acquisition, and the same shall be in all respects satisfactory to the Collateral Agent. 2.5 Procedures for Obtaining Servicing Facility Advances. ---------------------------------------------------- 2.5(a) The Borrowers may obtain Servicing Facility Advances hereunder, subject to the satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof, upon compliance with the procedures set forth in this Section 2.5. Requests for Servicing Facility Advances shall be initiated by the Borrowers delivering to the Credit Agent, no later than two (2) Business Day prior to any Business Day on which the Borrowers desire to borrow hereunder, a completed and signed request for Servicing Facility Advances (a "Servicing Facility Advance Request") on the then current form approved by the Credit Agent. The current form in use by the Credit Agent is Exhibit C-SA attached hereto and made a part ------------ hereof. The Credit Agent shall have the right, on not less than three (3) Business Days' prior Notice to the Borrowers, to modify such Exhibits to conform to current legal requirements or Credit Agent practices, and, as so modified, said Exhibit shall be deemed a part hereof. 2.5(b) If the Servicing Contracts being acquired in a Servicing Acquisition will be included in calculating the Servicing Collateral Value for purposes of Section 2.4(b)(1) hereof, the Borrowers shall deliver the following documents, certificates and opinions related to any Servicing Acquisition to the Credit Agent on or prior to the date of any Servicing Facility Advance requested to finance such Servicing Acquisition: (1) the following documents with respect to the Nonrecourse Servicing Contracts to be acquired in such Servicing Acquisition: a counterpart of the Servicing Purchase Agreement and all other Servicing Acquisition Documents, duly executed by each party thereto; (2) an Appraisal of the Nonrecourse Servicing Contracts to be acquired in such Servicing Acquisition; (3) evidence satisfactory to the Credit Agent that all consents from and notices to Fannie Mae, Ginnie Mae, FHA, VA and other governmental agencies or Investors required for the Borrowers to assume the Servicing Contracts to be acquired and continue its business after the closing of such Servicing Acquisition, or for the Borrowers to acquire the Person to be acquired and for such Person (or the Borrowers, if such Person is to be merged with one of the Borrowers) to continue such Person's business after the closing of such Servicing Acquisition, have been obtained and given; (4) evidence satisfactory to the Credit Agent that such Servicing Facility Advances in such Servicing Acquisition and any additional funds delivered simultaneously to the sellers in such Servicing Acquisition will be sufficient to pay the purchase price under such Servicing Purchase Agreement in full; (5) Such UCC Financing statements or amendments as the Credit Agent, in its sole discretion, may request to perfect or continue the perfection of its security interest; (6) UCC, tax lien and judgment searches in the appropriate public records for the seller(s) in such Servicing Acquisition and any Person to be acquired in such Servicing Acquisition, which shall not have disclosed the existence of any prior Lien on the Servicing Contracts to be acquired by, or owned by the Person to be acquired by, the Borrowers; and (7) such further documents, instruments, opinions, certificates and evidence as the Credit Agent may reasonably request. Before any Servicing Facility Advances to fund any Servicing Acquisition are funded, the Collateral Agent shall have a reasonable time to examine the documents delivered to it hereunder in connection with the Servicing Acquisition to be funded, and may reject such of them as are not reasonably satisfactory to the Collateral Agent. 2.5(c) To make Servicing Facility Advances to fund a Servicing Acquisition, the Credit Agent shall cause the Funding Bank to disburse the amount thereof to the seller(s) in the Servicing Acquisition to be funded in accordance with the Servicing Facility Advance Request, together with any other funds required to pay the purchase price under such Servicing Purchase Agreement in full (other than any portion thereof to be paid after the effective date of transfer), upon compliance by the Borrowers with the terms of this Agreement. 2.6 The Term Loan Commitment. ------------------------ Term Loan Advances shall be made on the Closing Date, without any further action by the Borrowers, in an amount equal to the Term Loan Credit Limit, and applied to repay the Existing Agreement Servicing Advances. No Term Loan Advances shall be made after the Closing Date. 2.7 Funding of Advances; Non-Receipt of Funds by the Credit Agent. ------------------------------------------------------------- Except to the extent any requested Warehousing Advances are to be funded as Swingline Advances, the Credit Agent shall notify each Lender obligated to make an Advance no later than 11:00 a.m. on the date of the requested Advances of its receipt of the Advance Request and of its Percentage Share of such Advances. To make an Advance, each Lender shall, except as otherwise provided in Section 2.2, credit an account of the Credit Agent with the Funding Bank prior to 12:00 noon on the date of such Advance, and the Credit Agent shall make such Advance available to the Borrowers as provided in this Agreement. If the Credit Agent receives notice from a Lender that such Lender does not intend to make its Percentage Share of any Advance, neither the Credit Agent nor any other Lender shall have any obligation to fund such Lender's Percentage Share. Notwithstanding the foregoing, unless a Lender notifies the Credit Agent by 12:00 noon on the date of a proposed Advance that it does not intend to make its Percentage Share of such Advance at such time and on such date available to the Credit Agent, the Credit Agent may assume that such Lender will make such amount available to the Credit Agent to be advanced to the Borrowers, and in reliance on such assumption, the Credit Agent may, at its option, make a corresponding amount available to the Borrowers. 2.7(a) If the Credit Agent makes such corresponding amount available to the Borrowers and such amount is not made available to the Credit Agent by such Lender by close of business on the date of the Advance, such Lender shall pay such amount to the Credit Agent upon demand plus interest to the date of payment at the rate per annum equal to one percent (1%) per annum over the Federal Funds Rate. 2.7(b) If such Lender fails to pay as provided herein, the Borrowers shall pay such amount to the Credit Agent upon demand plus interest (at the rate applicable to the Borrowers for such Advance) to the date of repayment. 2.7(c) Nothing in this Subsection shall relieve any Lender from its obligation to fund its Percentage Share of any Advance, or prejudice any rights the Borrowers may have against any Lender as a result of such Lender's failure to make its Percentage Share of any Advance available to the Borrowers. 2.7(d) Any Lender failing to make an Advance when required pursuant to this Agreement shall, if no Default has occurred and is continuing, upon the request of the Borrowers delivered to such Lender and the Credit Agent, assign, pursuant to and in accordance with the provisions of Section 13.3 hereof, all of its rights and obligations under this Agreement and under the Notes to an assignee selected by the Borrowers in consideration for (i) the payment by such assignee to the assigning Lender of the principal of, and interest accrued and unpaid to the date of such assignment on, the Notes of such Lender, and (ii) the payment by the Borrowers to the assigning Lender of any and all other amounts owing to such Lender under any provision of this Agreement accrued and unpaid to the date of such assignment. The processing and recordation fee required under Section 13.3 hereof for such assignment shall be paid by the Borrowers. Notwithstanding anything to the contrary in this Section 2.7(d), in no event shall the replacement of any Lender result in a decrease or reallocation of the aggregate Commitments without the written consent of the Majority Lenders. 2.8 Notes. ----- 2.8(a) The Borrowers' Obligations in respect of Warehousing Advances other than P&I Advances, Liquidity Advances and Swingline Advances shall be evidenced by Warehousing Promissory Notes of the Borrowers in favor of each Lender holding a Warehousing Commitment, substantially in the form of Exhibit A-1 attached hereto. The ----------- Borrowers' Obligations in respect of P&I Advances and Liquidity Advances shall be evidenced by Sublimit Promissory Notes of the Borrowers' in favor of each Lender holding a Warehousing Commitment, substantially in the form of Exhibit A-2 attached hereto. The ----------- Borrowers' Obligations in respect of Swingline Advances shall be evidenced by a Swingline Note of the Borrowers in favor of the Swingline Lender in the form of Exhibit A-3 attached hereto. The ----------- Borrowers' Obligations in respect of the Servicing Facility Advances shall be evidenced by Servicing Facility Promissory Notes of the Borrowers in favor of each Lender holding a Servicing Facility Commitment, substantially in the form of Exhibit A-4 attached hereto. ----------- The Borrowers' Obligations in respect of the Term Loan Advances shall be evidenced by Term Loan Promissory Notes of the Borrowers in favor of each Lender, substantially in the form of Exhibit A-5 attached ----------- hereto. The Warehousing Promissory Notes, Sublimit Promissory Notes, Swingline Note, Servicing Facility Promissory Notes and Term Loan Promissory Notes are hereinafter collectively referred to as the "Notes." The terms "Warehousing Promissory Note," "Sublimit Promissory Note," "Servicing Facility Promissory Note," "Term Loan Promissory Note," "Swingline Note", "Note" or "Notes" shall include all extensions, renewals and modifications of the Notes and all substitutions therefor. All terms and provisions of the Notes are hereby incorporated herein. 2.8(b) Each Borrower, other than WMF Group, by its execution and delivery of this Agreement or, in the case of a New Borrower, a Borrower Addition Agreement, hereby (i) authorizes WMF Group to execute and deliver, and appoints WMF Group as its true and lawful attorney-in-fact for the purpose of executing and delivering, Notes on its behalf, and (ii) agrees to be bound by, and obligated pursuant to, each Note executed by WMF Group pursuant to this Agreement or any amendment hereto. The foregoing appointment of WMF Group is for the benefit of the Lenders and coupled with an interest, and shall be irrevocable for as long as any Commitment remains outstanding or any of the Obligations have not been irrevocably paid and discharged in full. 2.9 Interest Payments. ----------------- 2.9(a) Except as provided in Section 2.9(f) or Section 2.9(g), the unpaid amount of each Warehousing Advance, other than a P&I Advance and a Liquidity Advance, shall bear interest, from the date of such Advance until paid in full, at the Ordinary Warehousing Rate. 2.9(b) Except as provided in Section 2.9(f) or Section 2.9(g) hereof, the unpaid amount of each Term Loan Advance shall bear interest, from the date of such Advance until paid in full, at the Term Loan Rate. 2.9(c) Except as provided in Section 2.9(f) or Section 2.9(g) hereof, the unpaid amount of the Servicing Facility Advance shall bear interest, from the date of such Advance until paid in full, at the Servicing Facility Rate. 2.9(d) Except as provided in Section 2.9(f) or Section 2.9(g) hereof, the unpaid amount of each P&I Advance shall bear interest, from the date of such Advance until paid in full, at the P&I Rate. 2.9(e) Except as provided in Section 2.9(f) or Section 2.9(g) hereof, the unpaid amount of each Liquidity Advance shall bear interest, from the date of such Advance until paid in full, at the Liquidity Rate. 2.9(f) The Borrowers and any Lender may enter into an agreement (the "Balance Funded Agreement") pursuant to which the Borrowers agree to maintain Eligible Balances on deposit with such Lender or a Designated Bank in consideration of the funding of all or a portion of such Lender's Advances at a Balance Funded Rate. Prior to the end of any calendar month, the Borrowers may give written notice to any Lender with which it has a Balance Funded Agreement of the Borrowers' election to have a portion (the "Balance Funded Portion") of the principal amount of the Lender's Advances bear interest at a Balance Funded Rate during the next succeeding calendar month. In the event the Borrowers elect to have all or a portion of any Lender's Advances bear interest at a Balance Funded Rate, such Lender shall notify the Credit Agent no later than the first Business Day of the next succeeding month of the Balance Funded Portion of such Lender's Advances during such month and the Balance Funded Rate(s) applicable thereto. If the Eligible Balances maintained by the Borrowers with such Lender or Designated Bank during such month are less than the Balance Funded Portion, such Lender may charge and separately bill the Borrowers a deficiency fee (a "Balance Deficiency Fee"), the amount of which shall be set forth in the Balance Funded Agreement between the Borrowers and such Lender. 2.9(g) Upon Notice to the Borrowers, after the occurrence and during the continuation of an Event of Default, the Credit Agent may give Notice to the Borrowers that the unpaid amount of each Advance shall bear interest, until paid in full, at a rate of interest (the "Default Rate") equal to four percent (4%) per annum over the applicable rate provided in the applicable subsection of this Section 2.9 or, if no rate is applicable, the highest rate then applicable to any outstanding Advance. 2.9(h) If, for any reason, no interest is due on a Warehousing Advance, the Borrowers agree to pay to the Swingline Lender or the Lenders, as applicable, an administrative fee equal to one (1) day of interest on such Advance at the rate of one and one-half percent (1-1/2%) per annum. Administrative fees shall be due and payable in the same manner as interest is due and payable hereunder. 2.9(i) The floating rates of interest provided for in this Section 2.9 will be adjusted as of the effective date of each change in the applicable index. The Lender's determination of such rates as of any date of determination shall be conclusive and binding, absent manifest error. 2.9(j) All interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. 2.10 Principal Payments. ------------------ 2.10(a) The outstanding principal amount of all Warehousing Advances shall be payable in full on the Warehousing Maturity Date. 2.10(b) The outstanding principal amount of all Servicing Facility Advances shall be payable in full on the Servicing Facility Maturity Date. 2.10(c) The principal amount of each Lender's Term Loan Advance shall be payable in quarterly installments, due on the first day of each Calendar Quarter beginning April 1, 1999, in an amount equal to such Lender's Term Loan Percentage Share of Six Hundred Twenty-Five Thousand Dollars ($625,000). The remaining principal balance of the Term Loan Advances shall be payable on the Term Loan Maturity Date. 2.10(d) The Borrowers shall have the right to prepay the outstanding Advances in whole or in part, from time to time, without premium or penalty. Amounts prepaid on Warehousing Advances prior to the Warehousing Maturity Date and on Servicing Facility Advances prior to the Servicing Facility Maturity Date may be reborrowed, subject to the terms and conditions set forth in this Agreement. All prepayments of the Term Loan Advances shall be applied to the installments due thereon in the inverse order of their maturities. 2.10(e) All payments of outstanding Advances from the proceeds of the sale or other disposition of Pledged Mortgages and Pledged Securities shall be paid directly by the Investor to the Cash Collateral Account to be applied against any Obligations then due and payable. 2.10(f) The Borrowers shall be obligated to pay to the Credit Agent for the pro rata benefit of the Lenders, without the necessity of prior demand or notice from the Credit Agent, and the Borrowers authorize the Credit Agent to cause the Funding Bank to charge the Borrowers' Operating Account for the amount of, any outstanding Advance against a specific Pledged Mortgage upon the earliest occurrence of any of the following events: (1) For an FHA Construction Mortgage Loan, ninety (90) days elapse from the date of each Advance made against such Pledged Mortgage, and for any other Mortgage Loan other than a Pledged Mortgage to be exchanged for a Fannie Mae Mortgage-backed Security, ninety (90) days elapse from the date of the initial Advance made by the Credit Agent against such Pledged Mortgage, whether or not such Pledged Mortgage is included in an Eligible Mortgage Pool. (2) For Mortgage Loans other than Fannie Mae DUS Mortgage Loans to be exchanged for a Fannie Mae Mortgage- backed Security, forty-five (45) days elapse from the date the Pledged Mortgage was delivered to an Investor or an Approved custodian for examination and purchase, without the purchase being made or the Eligible Mortgage Pool being initially certified, or upon rejection of the Pledged Mortgage as unsatisfactory by an Investor or an Approved Custodian. (3) For a Fannie Mae DUS Mortgage Loan to be exchanged for a Fannie Mae Mortgage-backed Security, seventy-five (75) days elapse from the date such Fannie Mae DUS Mortgage Loan was delivered to Fannie Mae for examination and the issuance of a Pledged Security without the Pledged Security being issued, or upon rejection of the Pledged Mortgages as unsatisfactory by Fannie Mae. (4) On the date an Advance was made and the Pledged Mortgage which was to have been funded by such Advance is not closed and funded. (5) For a Conventional Multifamily Mortgage Loan, Fannie Mae DUS Mortgage Loan, FHA Project Mortgage Loan, HUD 241 Mortgage Loan, FHA Construction Mortgage Loan, Conventional Health Care Mortgage Loan, Commercial Mortgage Loan, or Special Fannie Mae Loan, one (1) Business Day elapses from the date an Advance was made against any Mortgage Loan, without receipt of those Collateral Documents relating to such Mortgage Loan required to be delivered on such date under Exhibit D- --------- MF/CONV/DUS, Exhibit D-MF/FHA or Exhibit D-MF SFNMA, or such ----------- ---------------- ------------------ Collateral Documents, upon examination by the Lender, are found not to be in compliance with the requirements of this Agreement or the related Purchase Commitment. (6) Ten (10) Business Days elapse from the date a Collateral Document was delivered to the Borrowers for correction or completion under a Trust Receipt, without being returned to the Lender. (7) Three (3) Business Days after the date on which the Credit Agent notifies the Borrowers that a Pledged Mortgage is determined to have been originated based on untrue, incomplete or inaccurate information, whether or not the Borrowers had knowledge of such misrepresentation or incorrect information, or that a Pledged Mortgage is defaulted and has remained in default for a period of sixty (60) days or more. (8) For a Pledged Mortgage against which an Advance was made on the basis of a Purchase Commitment, on the mandatory delivery date of the related Purchase Commitment if the specific Pledged Mortgage was not delivered under the Purchase Commitment prior to such mandatory delivery date, or if the Purchase Commitment is terminated. (9) Payment of any Lien prior to a Second Mortgage Loan is delinquent, and remains delinquent, for a period of sixty (60) days or more. (10) Upon sale, maturity or other disposition of the Pledged Mortgage or, if a Pledged Mortgage is included in an Eligible Mortgage Pool, upon sale or other disposition of the related Agency Securities. (11) On the date on which the Borrowers know, or have reason to know, or receives notice from the Credit Agent, that one or more of the representations and warranties set forth in Section 5.15 were inaccurate or incomplete in any material respect on any date when made or deemed made. (12) For a Warehousing Advance made to Washington against a Special Fannie Mae Loan, [30] days elapse from the date of the initial Advance made by the Credit Agent without the Pledged Security to be exchanged for a 100% participation in such Special Fannie Mae Loan having been issued, or upon any determination by Fannie Mae not to purchase such 100% participation. 2.10(g) The outstanding amount of any Advance made pursuant to Section 2.3(f) shall be payable in full within 1 Business Day after the date of such Advance . 2.10(h) The Borrowers shall give Notice to the Collateral Agent (telephonically, to be followed by written notice) of the Pledged Mortgages or Pledged Securities for which proceeds have been received. Upon receipt of such Notice, the Warehousing Advances against such Pledged Mortgages or the Pledged Securities shall be repaid and such Pledged Mortgages or Pledged Securities shall be considered to have been redeemed from pledge. The Credit Agent is entitled to rely upon the Borrowers' affirmation that deposits in the Cash Collateral Account represent payment from Investors for the purchase of Pledged Mortgages or Pledged Securities as specified by the Borrowers. In the event that the payment from an Investor for the purchase of Pledged Mortgages or Pledged Securities is less than the outstanding Warehousing Advances against such Pledged Mortgages or the Mortgage Loans backing Pledged Securities, the Credit Agent is authorized to cause the Funding Bank to charge the Borrowers' account for an amount equal to such deficiency. Provided no Default or Event of Default exists, the Credit Agent shall return any excess payment from an Investor for Pledged Mortgages or Pledged Securities to the Borrowers. 2.10(i) In addition to the payments required pursuant to Section 2.9(g), the Borrowers shall be obligated to pay to the Credit Agent, for the account of the Lenders, without the necessity of prior demand or notice from the Credit Agent, and the Borrowers authorize the Credit Agent to cause the Funding Bank to charge the Borrowers' Operating Account, if the principal amount of any Pledged Mortgage is prepaid in whole or in part while an Advance is outstanding against such Pledged Mortgage, for the amount of such prepayment, to be applied to such Advance. 2.10(j) For a period of not less than seven (7) consecutive days in each calendar month, there shall be no P&I Advances outstanding; and the Borrowers shall make such prepayments of the P&I Advances, and shall refrain from requesting P&I Advances, as necessary to comply with the foregoing requirement. 2.10(k) For a period of not less than seven (7) consecutive days in each one hundred eighty (180) day period, there shall be no Liquidity Advances outstanding; and the Borrowers shall make such prepayments of the Liquidity Advances, and shall refrain from requesting Liquidity Advances, as necessary to comply with the foregoing requirement. 2.10(l) If at any time the aggregate outstanding principal balance of all Servicing Secured Obligations exceeds sixty-five percent (65%) of the Servicing Collateral Value, the Borrowers shall prepay (i) first, the outstanding Servicing Facility Advances, (ii) second, the outstanding P&I Advances and Liquidity Advances, and (iii) third, the outstanding Term Loan Advances, in the amount of such excess. 2.10(m) Prior to the occurrence of an Event of Default and acceleration of all Warehousing Advances outstanding hereunder or termination of the Warehousing Commitments hereunder, amounts received by the Credit Agent as proceeds of the sale or other disposition of Pledged Mortgages or Pledged Securities, including without limitation, all such amounts from time to time deposited in the Cash Collateral Account, shall be applied: (1) in an amount equal to the Release Amount for such Pledged Mortgages or the Mortgage Loans backing such Pledged Securities, first, to the Swingline Advances until the same have been repaid in full, and second, to the other Warehousing Advances; and (2) the balance, if any, to the Borrowers. The application of funds allocated among the Lenders as set forth above shall be deemed to constitute (1) repayment, in part or in full, as applicable, of the Advances outstanding against the Pledged Mortgages or Pledged Securities sold, and (ii) a refunding of an amount of Swingline Advances equal to the portion of such proceeds applied to Swingline Advances (other than any Swingline Advances made against the Pledged Mortgages or Pledged Securities sold) as Advances made by the Lenders pursuant to Section 2.1. 2.10(n) Following the occurrence of an Event of Default and acceleration of any Obligations outstanding hereunder or termination of the commitments of the Lenders to make Advances hereunder, all amounts received by the Credit Agent on account of the Obligations shall be disbursed by the Credit Agent in accordance with the provisions of Section 8.3 hereof. 2.10(o) Upon the closing of the Rights Offering, the Company shall repay the outstanding Servicing Facility Advances in an amount equal to the sum of (i) the amount previously repaid to COMIT on Subordinated Debt, as permitted by Section 7.4 hereof, plus (ii) ---- twenty-five percent (25%) of the amount by which the Net Proceeds of the Rights Offering exceeds $20,000,000. Upon the closing of any other issuance of Debt of any Borrower or equity securities of WMF Group, or sale of any Servicing Contracts by any Borrower, the Company shall repay the outstanding Servicing Facility Advances in an amount equal to twenty-five percent (25%) of the Net Proceeds thereof. 2.11 Expiration of Commitments. Unless extended or terminated ------------------------- earlier as permitted hereunder, the Warehousing Commitments shall expire of their own term, and without the necessity of action by the Credit Agent or any Lender, at the close of business on the Warehousing Maturity Date,the Servicing Facility Commitments shall expire of their own term, and without the necessity of action by the Credit Agent or any Lender, at the close of business on the later to occur of the Servicing Facility Maturity Date, and the Term Loan Facility Commitments shall expire of their own term, and without the necessity of action by the Credit Agent or any Lender, at the close of business on the Closing Date. 2.12 Fees. The Borrowers shall pay the following fees: ---- 2.12(a) To each Lender, through the Credit Agent, a Warehousing Commitment Fee in the amount of 1/8% per annum of the amount of such Lender's Maximum Warehousing Commitment, which Warehousing Commitment Fee shall be paid quarterly in advance and shall be computed on the basis of a 365-day year and applied to the actual number of days elapsed in each Calendar Quarter. On the Closing Date, the Borrowers shall pay the prorated portion of the quarterly Warehousing Commitment Fee due from the Closing Date to the last day of the current Calendar Quarter. If any Lender increases its Maximum Warehousing Commitment, or if an Additional Lender becomes a party hereto, the Borrowers shall pay the Warehousing Commitment Fee on the amount of such increase or the amount of such Additional Lender's Maximum Warehousing Commitment from the effective date thereof to the last day of the current Calendar Quarter. In all other cases, the Borrowers shall make payments of the Warehousing Commitment Fee on the 1st day of each Calendar Quarter. If the Warehousing Maturity Date is other than the last day of a Calendar Quarter, the Borrowers shall pay the prorated portion of the Warehousing Commitment Fee due from the beginning of the then current Calendar Quarter to and including the Warehousing Maturity Date. The Borrowers shall not be entitled to a reduction in the amount of the Warehousing Commitment Fee in the event the amount of any Lender's Maximum Warehousing Commitment is reduced at the request of the Borrowers, or in the event that any Lender's Maximum Warehousing Commitment is terminated prior to its stated expiration date as a result of an Event of Default hereunder. If the commitments of the Lenders hereunder terminate prior to the Warehousing Maturity Date, the unpaid balance of the Warehousing Commitment Fee shall be due and payable in full on the date of such termination. 2.12(b) To each Lender, through the Credit Agent, a Servicing Facility Commitment Fee in the amount of (i) one-fourth of one percent (1/4%) per annum of such Lender's Percentage Share of the Servicing Facility Commitment, which Servicing Facility Commitment Fee shall be payable quarterly in advance until the Servicing Facility Maturity Date. Servicing Facility Commitment Fees shall be computed on the basis of a 365-day year and applied to the actual number of days elapsed in each Calendar Quarter. On the Closing Date, the Borrowers shall pay the prorated portion of the quarterly Servicing Facility Commitment Fee due from the Closing Date to the last day of the current Calendar Quarter. In all other cases, the Borrowers shall make quarterly payments of the Servicing Facility Commitment Fee on the first (1st) day of each Calendar Quarter. If the Servicing Facility Maturity Date is other than the last day of a Calendar Quarter, the Borrowers shall pay the prorated portion of the quarterly Servicing Facility Commitment Fee due from the beginning of the then current Calendar Quarter to and including the Servicing Facility Maturity Date, as applicable. The Borrowers shall not be entitled to a reduction in the amount of the Servicing Facility Commitment Fee in the event the amount of the Servicing Facility Credit Limit is reduced at the request of the Borrowers, or in the event that any Lender's Servicing Facility Commitment is terminated prior to its stated expiration date as a result of an Event of Default hereunder. If the Servicing Facility Commitments of the Lenders hereunder terminate prior to the Servicing Facility Maturity Date, the unpaid balance of the Servicing Facility Commitment Fee shall be due and payable in full on the date of such termination. 2.12(c) If the Servicing Facility Commitment is at any time reduced or terminated prior to the date set forth in clause (a) of the definition of Servicing Facility Maturity Date at the request of the Borrowers, the Borrowers shall pay to the Credit Agent, for the account of the Lenders holding Servicing Facility Commitments, a fee in the amount of one percent (1%) per annum (from the date of such termination or reduction until the date set forth in clause (a) of the definition of Servicing Facility Maturity Date herein) of the sum of the Servicing Facility Commitments or, if less, the amount of such reduction. The foregoing fee shall be due and payable on the effective date of such reduction or termination. 2.12(d) To each Lender, through the Credit Agent, a Term Loan Commitment Fee in the amount of one-fourth of one percent (1/4%) per annum of (i) on the Closing Date, such Lender's Maximum Term Loan Commitment, and (ii) thereafter, the unpaid principal amount of such Lender's Term Loan Advance outstanding on each annual anniversary of the Closing Date, which Term Loan Commitment Fee shall be computed on the basis of a 365-day year and applied to the actual number of days elapsed in each year. On the Closing Date, the Borrowers shall pay the Term Loan Commitment Fee due from the Closing Date to the day before the first annual anniversary thereof. Thereafter, the Borrowers shall pay the Term Loan Commitment Fee due for the following year, calculated as of each annual anniversary date, on the first Business Day of each Calendar Quarter. The Borrowers shall not be entitled to a refund of any portion of the Term Loan Commitment Fee in the event the Term Loan Advances are prepaid, either voluntarily by the Borrowers or as a result of an Event of Default. 2.12(e) To LaSalle, for its own account, fees in respect of each Letter of Credit in an amount not to exceed two percent (2.00%) per annum. 2.12(f) To the Credit Agent, for its own account, such fees as shall be separately agreed between the Borrowers and the Credit Agent. 2.13 Miscellaneous Charges. In addition to all fees payable pursuant --------------------- to Section 2.12 hereof, the Borrowers agree to reimburse the Credit Agent for miscellaneous charges and expenses (collectively, "Miscellaneous Charges") incurred by or on behalf of the Credit Agent in connection with the handling and administration of Advances, and to reimburse the Collateral Agent for Miscellaneous Charges incurred by or on behalf of the Collateral Agent in connection with the handling and administration of the Collateral. For the purposes hereof, Miscellaneous Charges shall include, but not be limited to, costs for UCC, tax lien and judgment searches conducted by the Credit Agent, filing fees, charges for wire transfers, check processing charges, charges for security delivery fees, charges for overnight delivery of Collateral, the Funding Bank's service charges and Designated Bank Charges. Miscellaneous Charges are due when incurred, but shall not be delinquent if paid within thirty (30) days after receipt of an invoice or an account analysis statement from the Credit Agent or the Collateral Agent, as the case may be. 2.14 Illegality. In the event that any Lender shall have determined ---------- (which determination shall be conclusive and binding absent manifest error) at any time that the introduction of, or any change in, any applicable law, rule, regulation, order or decree or in the interpretation or the administration thereof by any Person charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive (whether or not having the force of law) of any such Person, shall make it unlawful or impossible for such Lender to charge interest at the Balance Funded Rate based on the Borrowers' Eligible Balances as contemplated by this Agreement, then such Lender shall forthwith give Notice thereof to the Credit Agent and the Borrowers describing such illegality in reasonable detail. Upon the giving of such Notice, the obligation of such Lender to charge interest at the Balance Funded Rate based on the Borrowers' Eligible Balances shall be immediately suspended for the duration of such illegality, and with respect to Advances bearing interest at the Balance Funded Rate, each such Advance of such Lender shall bear interest at the applicable rate set forth in Section 2.9(a), (b), (c), (d), (e) or (g). If and when such illegality ceases to exist, such Lender shall notify the Credit Agent and the Borrowers thereof and such suspension shall cease. 2.15 Interest Limitation. All agreements between the Borrowers and ------------------- the Lenders are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of this Agreement or the Notes or otherwise, shall the amount paid or agreed to be paid to the Lenders for the use, forbearance, loaning or retention of the Advances exceed the maximum permissible under applicable law. If from any circumstances whatsoever, fulfillment of any provisions hereof, of the Notes, or of any other document securing this Agreement at any time given shall involve transcending the limit of validity prescribed by law, then, the obligation to be fulfilled shall automatically be reduced to the limit of such validity, and if from any circumstances the Lenders should ever receive as interest an amount which would exceed the highest lawful rate of interest, such amount which would be in excess of interest shall be applied to the reduction of the principal balance secured by the Notes and not to the payment of interest thereunder. This provision shall control every other provision of all agreements between the Borrowers and Lenders and shall also be binding upon and available to any subsequent holder of the Notes. 2.16 Billing and Payment. ------------------- 2.16(a) The Credit Agent shall on or before the fifth (5th) Business Day of each month deliver to the Borrowers billings for interest due and payable for the immediately preceding month on Advances. On or before the tenth (10th) Business Day of each month, the Borrowers shall pay to the Credit Agent the full amount of interest and fees billed for the immediately preceding month. 2.16(b) All payments made on account of the Obligations shall be made by the Borrowers to the Credit Agent for distribution to the Lenders, except for Balance Deficiency Fees, which shall be made directly to the applicable Lender, fees payable to the Credit Agent for its own account or for the account of the Collateral Agent, and Letter of Credit fees payable to LaSalle. All payments made on account of the Obligations shall be made without setoff or counterclaim, free and clear of and without deduction for any taxes, fees or other charges of any nature whatsoever imposed by any taxing authority, and must be received by the Credit Agent by 12:00 noon on the day of payment, it being expressly agreed and understood that if a payment is received after 12:00 noon by the Credit Agent such payment will be considered to have been made on the next succeeding Business Day and interest thereon shall be payable by the Borrowers at the then applicable rate during such extension. No principal payments resulting from the sale of Pledged Mortgages or Pledged Securities shall be deemed to have been received by the Credit Agent until the Collateral Agent has also received the Notice required under Section 2.9(i) hereof. All payments shall be made in lawful money of the United States of America in immediately available funds transferred via wire to accounts designated by the Credit Agent from time to time. If any payment required to be made by the Borrowers hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable on Advances so extended at the then applicable rate during such extension. 2.16(c) All amounts received by Credit Agent on account of the Obligations (except amounts received in respect of fees or expenses payable hereunder to the Credit Agent or the Collateral Agent for their own accounts or amounts payable to the Swingline Lender for Swingline Advances) shall be disbursed to the Lenders by wire transfer on the date of receipt if received by the Credit Agent by the applicable deadlines for payment thereof as specified in Section 2.16(b) hereof, or if received later, by 12:00 noon on the next succeeding Business Day, without any interest payable by the Credit Agent thereon. 3. COLLATERAL. 3.1 Appointment of Collateral Agent. Pursuant to the Collateral ------------------------------- Agency Agreement, RFC has been appointed as Collateral Agent to act as agent, bailee, and custodian for the exclusive benefit of itself, the Lenders, the Credit Agent and LaSalle, as issuer of the Letters of Credit (collectively, the "Secured Parties"), with respect to the Collateral. 3.2 Delivery of Collateral. As described in Section 2.3 hereof, and ---------------------- in the Collateral Agency Agreement, from time to time the Borrowers shall deliver Collateral or cause Collateral to be delivered to the Collateral Agent hereunder. 3.3 Grant of Security Interest. As security for the payment of the -------------------------- Notes, for the payment of the Letter of Credit Obligations and for the payment and performance of all of the other Obligations, the Borrowers hereby assign and transfer to the Credit Agent, for the benefit of the Secured Parties, all right, title and interest in and to, and grant a security interest to the Credit Agent, for the benefit of the Secured Parties, in, the following described property: 3.3(a) All Mortgage Loans, including all Mortgage Notes and Mortgages evidencing or securing such Mortgage Loans, which from time to time are delivered or caused to be delivered to the Collateral Agent (including delivery to a third party on behalf of the Collateral Agent), come into the possession, custody or control of any of the Lenders, the Credit Agent or the Collateral Agent for the purpose of assignment or pledge or in respect of which an Advance has been made by the Lenders hereunder, and with respect to the Special Fannie Mae Loans, the promissory notes evidencing the same and all of Washington's right, title and interest in and to the Special Fannie Mae Program Agreements, and all promissory notes and other agreements, documents and instruments executed and delivered pursuant thereto or in connection therewith, or otherwise relating thereto and referenced therein (the "Pledged Mortgages"). 3.3(b) All Mortgage-backed Securities and Participation Certificates which are from time to time created in whole or in part on the basis of the Pledged Mortgages or are delivered or caused to be delivered to, or are otherwise in the possession of the Collateral Agent or its agent, bailee or custodian as assignee, or pledged to the Collateral Agent, or for such purpose are registered by book-entry in the name of, the Collateral Agent (including delivery to or registration in the name of a third party on behalf of the Collateral Agent, the Credit Agent or any Lender) hereunder or in respect of which from time to time an Advance has been made by the Lenders hereunder (the "Pledged Securities"). 3.3(c) All commitments issued by the FHA to insure or guarantee any Mortgage Loans included in the Pledged Mortgages; all guaranties related to Pledged Securities; all Purchase Commitments held by the Borrowers covering the Pledged Mortgages or the Pledged Securities and all proceeds resulting from the sale thereof to Investors pursuant thereto; and all personal property, contract rights, servicing and servicing fees and income or other proceeds, amounts and payments payable to the Borrowers as compensation or reimbursement, accounts and general intangibles of whatsoever kind relating to the Pledged Mortgages, the Pledged Securities, said FHA commitments and the Purchase Commitments, and all other documents or instruments relating to the Pledged Mortgages and the Pledged Securities, including, without limitation, any interest of the Borrowers in any fire, casualty or hazard insurance policies and any awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value in any eminent domain proceeding as the same relate to the Pledged Mortgages. 3.3(d) All Servicing Contracts now owned or hereafter created or acquired by the Borrowers, other than Servicing Contracts pursuant to which any Borrower Services Mortgage Loans for WMFCC. 3.3(e) All rights of the Borrowers to receive payments under or by virtue of the Servicing Contracts described in Section 3.3(d) and the related Acknowledgment Agreements, whether as servicing fees, servicing income, damages, amounts payable upon the cancellation or termination of any such Servicing Contract, interests on the foregoing, or otherwise. 3.3(f) Any agreement pursuant to which any Servicing Contract described in Section 3.3(d) or the stock of any Person that owned (at the time of acquisition or at any time thereafter) or owns any such Servicing Contract was acquired or is sold by the Borrowers, and all documents executed or delivered in connection with any such acquisition or sale. 3.3(g) All accounts or general intangibles owned by the Company for the payment of money against (i) FHA under an FHA mortgage insurance policy insuring payment of, or any other Person under any other agreement (including a Servicing Contract) relating to, all or part of a defaulted Mortgage Loan repurchased by the Company from an investor or out of a pool of Mortgage Loans serviced by the Company or being serviced by the Company, (ii) obligors and their accounts, Fannie Mae, Freddie Mac, Ginnie Mae or any other investor under a Servicing Contract covering, or out of the proceeds of any sale of or foreclosure sale in respect of, any Mortgage Loan (A) repurchased by the Company out of a pool of Mortgage Loans serviced by the Company, or (B) being serviced by the Company, for the reimbursement of real estate taxes or assessments, or casualty or liability insurance premiums, paid by the Company in connection with Mortgage Loans, and (iii) obligors and their accounts, or Fannie Mae, Freddie Mac, Ginnie Mae, or any other investor under or in respect of any Mortgage Loans serviced by the Company for repayment of advances made by the Company to cover shortages in principal and interest payments. 3.3(h) All right, title and interest of the Company in and to any Hedging Arrangements entered into to protect the Company against changes in the value of the Collateral, including, without limitation, all rights to payment arising under such Hedging Arrangements. 3.3(i) All right, title and interest of the Borrowers in and to all escrow accounts, documents, instruments, files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records (including all information, records, tapes, data, programs, discs and cards necessary or helpful in the administration or servicing of the Collateral) and other information and data of the Borrowers relating to the Collateral. 3.3(j) All now existing or hereafter acquired cash delivered to or otherwise in the possession of the Credit Agent, the Collateral Agent, any Lender or their agents, bailee or custodian or designated on the books and records of the Borrowers as assigned and pledged to the Credit Agent, including, without limitation, all cash deposited in the Cash Collateral Account. 3.3(k) All cash and non-cash proceeds of the Collateral, including all dividends, distributions and other rights in connection with, and all additions to, modifications of and replacements for, the Collateral, and all products and proceeds of the Collateral, together with whatever is receivable or received when the Collateral or proceeds thereof are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including, without limitation, all rights to payment with respect to any cause of action affecting or relating to the Collateral or proceeds thereof. The grant of the security interest under Sections 3.3(d) and 3.3(e) above is subject and subordinate to the rights of Fannie Mae or Ginnie Mae, as applicable, in and to any Servicing Contracts to which Fannie Mae or Ginnie Mae is a party. The Lenders acknowledge that (i) each Borrower is entitled to servicing income with respect to a given Mortgage Pool only as long as such Borrower is an issuer in good standing, (ii) upon either Borrower's loss of issuer status, the Lenders' rights to servicing income related to the affected Mortgage Pool(s) also terminate, and (iii) the pledge of rights to servicing income conveys no rights (such as the right to become a substitute servicer or issuer) that are not otherwise specifically provided for in the applicable Ginnie Mae or Investor guide. 3.4 Release of Security Interest in Collateral. ------------------------------------------ 3.4(a) Pledged Mortgages shall be released from the Credit Agent's security interest only against payment to the Credit Agent of the Release Amount in connection with such Pledged Mortgages. 3.4(b) If Pledged Mortgages are to be transferred to a pool custodian or to Freddie Mac or Fannie Mae for inclusion in a Mortgage Pool, the Credit Agent's security interest in such Pledged Mortgages shall be released only against payment to the Credit Agent of the Release Amount in connection with such Pledged Mortgages. If the Credit Agent's security interest in the Pledged Mortgages comprising the Mortgage Pool is not released prior to the issuance of the Mortgage-backed Security or Participation Certificate, then the Mortgage-backed Security or Participation Certificate, when issued, shall be a Pledged Security. The Credit Agent's security interest shall continue in such Pledged Mortgages and the Pledged Security. The Credit Agent shall be entitled to possession of such Pledged Security in the manner provided below. 3.4(c) If Pledged Mortgages are transferred to an Approved Custodian and included in an Eligible Mortgage Pool, the Credit Agent's security interest in the Pledged Mortgages comprising the Eligible Mortgage Pool shall be released upon the issuance of the Agency Security, which shall be a Pledged Security. The Credit Agent's security interest in such Pledged Security shall be released only against payment to the Credit Agent of the Release Amount in connection with the Pledged Mortgages backing such Pledged Security. The Credit Agent shall be entitled to possession of such Pledged Security in the manner provided below. 3.4(d) The Collateral Agent shall have the exclusive right to the possession of the Pledged Securities or, if the Pledged Securities are issued in book-entry form or issued in certificated form and delivered to a clearing corporation (as such term is defined in the Uniform Commercial Code of Minnesota) or its nominee, the Credit Agent shall have the right to have the Pledged Securities registered in the name of a securities intermediary (as such term is defined in the Uniform Commercial Code of Minnesota) in an account containing only customer securities and credited to an account of the Credit Agent, and the Credit Agent shall have the right to cause delivery of the Pledged Securities to be made to the Investor or the Pledged Securities credited to the account of the Investor or the Investor's designee only against payment therefor. The Borrowers acknowledge that the Credit Agent may enter into one or more standing arrangements with other financial institutions with respect to Pledged Securities issued in book entry form or issued in certificated form and delivered to a clearing corporation, pursuant to which such Pledged Securities are registered in the name of such financial institution, as agent or securities intermediary for the Credit Agent, and the Borrowers agree upon request of the Lender, to execute and deliver to such other financial institutions the Borrowers' written concurrence in any such standing arrangements. 3.4(e) Prior to the occurrence of an Event of Default, the Borrowers may redeem a Pledged Mortgage or Pledged Security from the Credit Agent's security interest by notifying the Credit Agent of its intention to redeem such Pledged Mortgage or Pledged Security from pledge and either (a) paying, or causing an Investor to pay, to the Credit Agent, for application to prepayment of the principal balance of the Notes, the Release Amount in connection with such Pledged Mortgage or Pledged Security, or (b) delivering substitute Collateral which, in addition to being acceptable to the Collateral Agent in its sole discretion will, when included with the Collateral, result in a Collateral Value of all Warehousing Collateral held by the Collateral Agent which is at least equal to the aggregate outstanding Warehousing Advances (other than P&I Advances and Liquidity Advances). 3.4(f) Following the occurrence of a Default or Event of Default, unless otherwise instructed by the Majority Lenders, the Credit Agent may, with no liability to the Borrowers, the Secured Parties or any Person, continue to release its security interest in any Pledged Mortgage or Pledged Security against payment of the Release Amount in connection with such Pledged Mortgage or Pledged Security. Following the occurrence of a Default or Event of Default, at the direction of all the Lenders and with no liability to Borrowers, the Secured Parties or any Person, the Credit Agent shall refuse to release its security interest in any item of Collateral and shall instruct the Collateral Agent to cease the delivery of Collateral to the Borrowers or any Person. 3.4(g) The Release Amount in connection with any Pledged Mortgage shall be (i) prior to the occurrence of an Event of Default and the receipt by the Credit Agent of instructions from the Majority Lenders to exercise its remedies as provided in Section 8.2(c) hereof, the principal amount of the Warehousing Advances made against such Pledged Mortgage, and (ii) from and after the occurrence and during the continuance of an Event of Default and receipt by the Credit Agent of instructions from the Majority Lenders to exercise its remedies as provided in Section 8.2(c) hereof, the Committed Purchase Price of such Pledged Mortgage or, if there is no Purchase Commitment therefor, the amount paid to the Credit Agent in a commercially reasonable disposition thereof. 3.4(h) Servicing Contracts included in the Servicing Collateral (but not the proceeds thereof) shall be released from the Credit Agent's security interest in connection with any sale of such Servicing Contracts permitted pursuant to Section 7.2 hereof. 3.5 Delivery of Additional Collateral or Mandatory Prepayment. At --------------------------------------------------------- any time that the aggregate Collateral Value of the Pledged Mortgages and Pledged Securities then pledged hereunder is less than the aggregate amount of the Warehousing Advances then outstanding hereunder, the Credit Agent may request, and the Borrowers shall within two (2) Business Days after Notice by the Credit Agent (a) deliver to the Collateral Agent for pledge hereunder additional Mortgage Loans and/or cash, with a Collateral Value sufficient to cover the difference between the Collateral Value of the Pledged Mortgages and Pledged Securities and the aggregate amount of Warehousing Advances outstanding hereunder, and/or (b) repay the Warehousing Advances in an amount sufficient to reduce the aggregate balance thereof outstanding to or below the Collateral Value of the Pledged Mortgages and Pledged Securities hereunder. 3.6 Release of Collateral. --------------------- 3.6(a) The Collateral Agent may deliver documents relating to the Collateral to the Borrowers for correction or completion pursuant to a Trust Receipt and Section 4.3 of the Collateral Agency Agreement. 3.6(b) Prior to the occurrence of an Event of Default, upon delivery by the Borrowers to the Collateral Agent of shipping instructions pursuant to Exhibit D-MF/CONV/DUS, Exhibit D-MF/FHA or --------------------- ---------------- Exhibit D-MF/SFNMA, the Collateral Agent will transmit Pledged ------------------ Mortgages or Pledged Securities and all related loan documents or pool documents to the applicable Investor, Approved Custodian or other party in accordance with Section 4.4 of the Collateral Agency Agreement. 3.6(c) Upon receipt of Notice from the Borrowers under Section 2.9(i) hereof, and repayment of the Release Amount with respect to a Pledged Mortgage or a Mortgage Loan backing a Pledged Security identified by the Borrowers, any Collateral Documents relating to the redeemed Pledged Mortgage or Mortgage Loan backing a Pledged Security which have not been delivered to an Investor or Approved Custodian shall be released by the Collateral Agent to the Borrowers. 3.7 Collection and Servicing Rights. So long as no Event of Default ------------------------------- shall have occurred and be continuing, the Borrowers shall be entitled to service and receive and collect directly all sums payable to the Borrowers in respect of the Collateral other than proceeds of any Purchase Commitment or proceeds of the sale of any Collateral. Following the occurrence of any Event of Default, the Credit Agent or its designee shall thereafter be entitled to service and receive and collect all sums payable to the Borrowers in respect of the Collateral, and in such case (a) the Credit Agent or its designee in its sole discretion may, in its own name, in the name of the Borrowers or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so, (b) the Borrowers shall, if the Credit Agent so requests, forthwith pay to the Credit Agent at its office designated by Notice hereunder, all amounts thereafter received by the Borrowers upon or in respect of any of the Collateral, advising the Credit Agent as to the source of such funds, and (c) all amounts so received and collected by the Credit Agent shall be held by it in the Cash Collateral Account as part of the Collateral. 3.8 Collection of Receivables. ------------------------- 3.8(a) From and after the occurrence of an Event of Default, whether or not such Event of Default shall have been cured or waived for other purposes, the Credit Agent may, and at the direction of the Majority Warehousing Lenders shall, require the Company to, and thereupon the Company shall, require that all payments in respect of Receivables (i) if made by check or other payment item, be made to a post office box under the exclusive control of the Credit Agent or its designees (the "Lock Box"), and (ii) if made by wire transfer or other method of inter-bank funds transfer, be made by transfer to a deposit account at a bank acceptable to the Credit Agent (the "Lock Box Bank") under the exclusive control of the Credit Agent (the "Lock Box Account"). The Company may not modify or revoke any such requirement or modify any agreement relating to the Lock Box or the Lock Box Account without the consent of the Credit Agent. The Credit Agent or its designee shall cause all checks or payment items received in the Lock Box to be deposited into the Lock Box Account. 3.8(b) Following the occurrence and during the continuance of an Event of Default, the Credit Agent may hold all amounts on deposit in the Lock Box Account as Collateral for the Obligations, withdraw all amounts on deposit in the Lock Box Account and apply such amounts to the Obligations as provided in Section 8.3 below or, with the consent of the Majority Warehousing Lenders, deposit such amounts into the Operating Account. Prior to the occurrence of an Event of Default, or after all Events of Default that have occurred have been cured or waived in accordance with this Agreement, the Credit Agent shall transfer all amounts deposited into the Lock Box Account into the Operating Account. 3.9 Return of Collateral at Maturity. If (a) the Commitments shall -------------------------------- have expired or been terminated, (b) no Advances, interest or other Obligations shall be outstanding and unpaid, and (c) no Letters of Credit remain outstanding and no Letter of Credit Obligations remain unpaid, the Credit Agent shall release its security interest and the Collateral Agent shall deliver all Collateral in its possession to the Borrowers at the Borrowers' expense. The receipt of the Borrowers for any Collateral released or delivered to the Borrowers pursuant to any provision of this Agreement shall be a complete and full acquittance for the Collateral so returned, and the Secured Parties shall thereafter be discharged from any liability or responsibility therefor. 4. CONDITIONS PRECEDENT. 4.1 Initial Advances. The obligation of the Lenders to make the ---------------- initial Advance under this Agreement is subject to the satisfaction, in the sole discretion of the Credit Agent, on or before the date thereof, of the following conditions precedent: 4.1(a) The Credit Agent shall have received the following, all of which must be satisfactory in form and content to the Credit Agent, in its sole discretion: (1) This Agreement duly executed by all parties hereto. (2) The Notes duly executed by the Borrowers. (3) The Collateral Agency Agreement duly executed by all parties thereto. (4) The Borrowers' articles of incorporation as certified by the Secretary of State of the State of each Borrowers' incorporation, bylaws certified by the corporate secretary of each Borrower, or a Certificate of each of the Borrowers stating that there have been no change in either its articles of incorporation or bylaws since those delivered in connection with the Existing Credit Agreement, and certificates of good standing dated no less recently than thirty (30) days prior to the date of this Agreement for each Borrower. (5) A resolution of the board of directors of each of the Borrowers, certified as of the date of this Agreement by each of the Borrowers' corporate secretary, authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, and all other instruments or documents to be delivered by the Borrowers pursuant to this Agreement. (6) A certificate of the Borrowers' corporate secretary as to the incumbency and authenticity of the signatures of the officers of the Borrowers executing this Agreement and the other Loan Documents and each Advance Request and all other instruments or documents to be delivered pursuant hereto (the Credit Agent being entitled to rely thereon until a new such certificate has been furnished to the Credit Agent). (7) A favorable written opinion of counsel to the Borrowers, dated as of the date of this Agreement and substantially in the form of Exhibit H attached hereto, addressed --------- to the Credit Agent and the Lenders. (8) With respect to each Special Fannie Mae Program Agreement described on Exhibit Q hereto, to the extent --------- not previously delivered pursuant to the Existing Credit Agreement, (i) an executed copy of such Special Fannie Mae Program Agreement, (ii) executed copies of the promissory note(s) evidencing the Special Fannie Mae Loans made thereunder, (iii) an executed copy of the Fannie Mae Special Pool Purchase Contract relating thereto, and (iv) an executed original of a bailee agreement with respect to any of the promissory notes described in clause (ii) above that have been delivered to Fannie Mae, in form and substance satisfactory to the Credit Agent. (9) Uniform Commercial Code, tax lien and judgment searches of the appropriate public records in the jurisdictions where each Borrower has an office, which search shall not have disclosed the existence of any prior Lien on the Collateral other than in favor of the Credit Agent or as permitted hereunder. (10) Executed financing statements or amendments to financing statements previously filed against the Borrowers, in recordable form covering the Collateral and ready for filing in all jurisdictions required by the Credit Agent. (11) Copies of the certificates, documents or other written instruments which evidence the Borrowers' eligibility described in Section 5.13 hereof, all in form and substance satisfactory to the Credit Agent. (12) Copies of the Borrowers' errors and omissions insurance policy or mortgage impairment insurance policy and blanket bond coverage policy, or certificates in lieu of policies, all in form and content satisfactory to the Credit Agent, showing compliance by the Borrowers as of the date of this Agreement with the related provisions of Section 6.8 hereof. (13) Evidence that all accounts necessary into which Advances will be funded have been established at the Funding Bank and receipt of a fully executed Funding Bank Agreement. 4.1(b) All directors, officers and shareholders of the Borrowers, all Affiliates of the Borrowers or of any Subsidiary of the Borrowers, to whom or to any of whom the Borrowers shall be indebted as of the date of this Agreement, which indebtedness has a term of more than one (1) year or is in excess of Five Hundred Thousand Dollars ($500,000) shall have subordinated such indebtedness to the Obligations, by executing a Subordination of Debt Agreement, in the form of Exhibit F hereto; and the Credit Agent shall have received an --------- executed copy of any such Subordination of Debt Agreement, certified by the corporate secretary of the Borrowers to be true and complete and in full force and effect as of the date of the Advance. 4.1(c) After giving effect to the application of all Advances made on the Closing Date, all of the Borrowers' "Obligations" (as defined in the Existing Credit Agreement) shall have been repaid in full and the Credit Agent shall have received satisfactory evidence thereof. 4.2 Each Advance. The obligation of the Lenders to make the initial ------------ and each subsequent Advance under this Agreement is subject to the satisfaction, in the sole discretion of the Credit Agent, as of the date of each such Advance, of the following additional conditions precedent: 4.2(a) The Borrowers shall have delivered to the Credit Agent the original Advance Request, and the Borrowers shall have delivered to the Collateral Agent a copy of the Advance Request, and the Collateral Documents, called for under, and shall have satisfied the procedures set forth in, Section 2.3 hereof and the applicable Exhibits hereto described in that Section, according to the type of the requested Advance. All items delivered to the Credit Agent or the Collateral Agent, as the case may be, shall be satisfactory to the Credit Agent or the Collateral Agent, in form and content, and the Credit Agent or the Collateral Agent, as the case may be, may reject such of them as do not meet the requirements of this Agreement or of the related Purchase Commitment. 4.2(b) The Collateral Agent shall have given telephonic notice to the Credit Agent of the Mortgage Loans against which Advances may be made, followed by a Loans Warehoused Report as provided for and defined in the Collateral Agency Agreement. 4.2(c) The Credit Agent shall have received evidence satisfactory to it as to the making and/or continuation of any book entry or the due filing and recording in all appropriate offices of all financing statements and other instruments as may be necessary to perfect the security interest of the Credit Agent in the Collateral under the Uniform Commercial Code or other applicable law. 4.2(d) The representations and warranties of the Borrowers contained in Article 5 hereof shall be accurate and complete in all material respects as if made on and as of the date of each Advance. 4.2(e) The Borrowers shall have performed all agreements to be performed by them hereunder, and after giving effect to the requested Advance, there shall exist no Default or Event of Default hereunder. 4.2(f) The Borrowers shall not have incurred any material liabilities, direct or contingent, other than in the ordinary course of its business, since the Statement Date. 4.2(g) The Credit Agent shall have received from counsel for the Borrowers, if requested by the Credit Agent in its sole discretion, an updated opinion, in form and substance satisfactory to the Credit Agent, addressed to the Credit Agent and the Lenders and dated as of the date of such Advance, covering such of the matters as the Credit Agent may reasonably request. Delivery of an Advance Request by the Borrowers shall be deemed a representation by the Borrowers that all conditions set forth in this Section 4.2 shall have been satisfied as of the date of such Advance. 4.3 New Subsidiary Borrowers. WMF Group may, at any time, amend ------------------------ Exhibit P to add any direct or indirect Subsidiary of WMF Group as a --------- Borrower hereunder (provided, that the addition of such Subsidiary as a Borrower would not result in a breach of Section 8.1(n) hereof); provided, that the effectiveness of any such amendment to Exhibit P, and of --------- the addition of any such direct or indirect Subsidiary of WMF Group as a Borrower hereunder, shall be subject to the following conditions precedent: 4.3(a) The Credit Agent shall have received the following, all of which must be in form and content satisfactory to the Credit Agent, in its sole discretion: (1) A Borrower Addition Agreement, duly executed by WMF Group (on behalf of the Borrowers) and the wholly-owned Subsidiary to be added as a Borrower hereunder (the "New Borrower"). (2) Certified copies of the New Borrower's articles of incorporation and bylaws or other organizational documents, and certificates of good standing dated no less recently than thirty (30) days prior to the date of the Borrower Addition Agreement. (3) A copy of resolutions of the board of directors or other governing authority of the New Borrower, certified as of the date of the Borrower Addition Agreement by its corporate secretary (or the equivalent), authorizing the execution, delivery and performance of the Borrower Addition Agreement (and thereby the assumption of the Obligations under the Loan Documents) and all other instruments or documents to be delivered by the New Borrower pursuant to this Agreement and the Borrower Addition Agreement (including, without limitation, the Notes contemplated pursuant to Section 4.3(b)). (4) A certificate of the corporate secretary (or the equivalent) of the New Borrower, as to the incumbency and authenticity of the signatures of the officers of the New Borrower executing the Borrower Addition Agreement, and all other instruments or documents to be delivered by such New Borrower pursuant to the Borrower Addition Agreement and this Agreement (the Credit Agent being entitled to rely thereon until a new such certificate has been furnished to the Credit Agent). (5) A tax, lien and judgment search of the appropriate public records for the New Borrower in the States where its chief executive office is located, including a search of Uniform Commercial Code financing statements, which search shall not have disclosed the existence of any prior Lien on the Collateral other than in favor of the Credit Agent, for the benefit of the Secured Parties, or as permitted hereunder. (6) Executed financing statements in recordable form naming the New Borrower as debtor, covering the Collateral and ready for filing in all jurisdictions required by the Credit Agent. (7) Copies of the certificates, documents or other written instruments which evidence the New Borrower's status as a mortgagee, seller, servicer or issuer with HUD, Ginnie Mae and the applicable Investors all in form and substance satisfactory to the Lender. (8) Copies of the New Borrower's errors and omissions insurance policy or mortgage impairment insurance policy and blanket bond coverage policy, or certificates in lieu of such policies or naming the new Borrower as an insured under the existing Borrowers' policies, all in form and content satisfactory to the Credit Agent, showing compliance by the New Borrower as of the date of the Borrower Addition Agreement with the related provisions of Section 6.8 hereof. (9) Funding Bank Agreements in the forms attached to this Agreement, executed by the New Borrower. 4.3(b) The representations and warranties of the Borrowers contained in Article 5 hereof shall be accurate and complete in all material respects as if made on and as of the date of, and after giving effect to, the Borrower Addition Agreement. 4.3(c) The Borrowers shall have performed all agreements to be performed by them hereunder, and after giving effect to the addition of the New Borrower hereunder, there shall exist no Default or Event of Default hereunder. 4.3(d) The Borrowers shall not have incurred any material liabilities, direct or contingent, other than in the ordinary course of their business, since the Statement Date. 4.3(e) If requested by the Credit Agent, the Lenders shall have received from counsel for the Borrowers an updated opinion, in form and substance satisfactory to the Credit Agent, addressed to the Credit Agent and the Lenders and dated as of the date of the Borrower Addition Agreement, covering such of the matters set forth on Exhibit H hereto as the Credit Agent may reasonably request. --------- Each of the Borrowers (including, without limitation, any Borrower that becomes a party hereto pursuant to a Borrower Addition Agreement) hereby authorizes WMF Group, on behalf of the Borrowers, to execute and deliver Borrower Addition Agreements on behalf of all of the Borrowers. 4.4 New Fannie Mae Special Program Agreements. Washington may, at ----------------------------------------- any time with the prior written consent of the Credit Agent, amend Exhibit ------- Q to add any Special Fannie Mae Program Agreement thereto; provided, that - the effectiveness of any such amendment to Exhibit Q, and the obligation of --------- the Lenders to make Warehousing Advances against Special Fannie Mae Loans made thereunder, shall be subject to the following conditions precedent: 4.4(a) The representations and warranties of the Borrowers contained in Article 5 hereof shall be accurate and complete in all material respects as if made on and as of the date of, and after giving effect to, the amendment to Exhibit Q hereto. --------- 4.4(b) The Borrowers shall have performed all agreements to be performed by them hereunder, and there shall exist no Default or Event of Default hereunder. 4.4(c) The Borrowers shall not have incurred any material liabilities, direct or contingent, other than in the ordinary course of their business, since the Statement Date. 4.4(d) If requested by any Lender holding a Warehousing Commitment, the Lenders shall have received from counsel for the Borrowers an updated opinion, in form and substance satisfactory to the Credit Agent, addressed to the Credit Agent and the Lenders and dated the date of the amendment to Exhibit Q hereto, --------- covering such matters relating to the Special Fannie Mae Program Agreement and related documents as any Lender may reasonably request. The Credit Agent shall promptly notify the other Lenders holding Warehousing Commitments of any such amendment to Exhibit Q. --------- 5. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant to the Lenders, as of the date of this Agreement and as of the date of each Advance Request and the making of each Advance, that: 5.1 Organization; Good Standing; Subsidiaries. Each of the Borrowers ----------------------------------------- and each Subsidiary of the Borrowers is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the full legal power and authority to own its property and to carry on its business as currently conducted and is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on the business, operations, assets or financial condition of the Borrowers or any such Subsidiary. For the purposes hereof, good standing shall include qualification for any and all licenses and payment of any and all taxes required in the jurisdiction of its incorporation and in each jurisdiction in which the Borrowers, transacts business. The Borrowers have no Subsidiaries except as set forth on Exhibit G hereto. Exhibit G sets forth --------- --------- with respect to each such Subsidiary, its name, address, place of incorporation, each state in which it is qualified as a foreign corporation, and the percentage ownership of its capital stock by the Borrowers. 5.2 Authorization and Enforceability. The Borrowers have the power -------------------------------- and authority to execute, deliver and perform this Agreement, the Notes and all other Loan Documents to which the Borrowers are a party and to make the borrowings hereunder. The execution, delivery and performance by the Borrowers of this Agreement, the Notes and all other Loan Documents to which the Borrowers are a party and the making of the borrowings hereunder and thereunder, have been duly and validly authorized by all necessary corporate action on the part of the Borrowers (none of which actions has been modified or rescinded, and all of which actions are in full force and effect) and do not and will not conflict with or violate any provision of law, of any judgments binding upon the Borrowers, or of the articles of incorporation or by-laws of the Borrowers, conflict with or result in a breach of or constitute a default or require any consent under, or result in the creation of any Lien upon any property or assets of the Borrowers other than the Lien on the Collateral granted hereunder, or result in or require the acceleration of any indebtedness of the Borrowers pursuant to any agreement, instrument or indenture to which the Borrowers are a party or by which the Borrowers or their property may be bound or affected. This Agreement, the Notes, the Collateral Agency Agreement and all other Loan Documents contemplated hereby or thereby constitute legal, valid, and binding obligations of the Borrowers, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other such laws affecting the enforcement of creditors' rights generally and general principles of equity. 5.3 Approvals. The execution and delivery of this Agreement, the --------- Notes and all other Loan Documents and the performance of the Borrowers' obligations hereunder and thereunder and validity and enforceability hereof and thereof do not require any license, consent, approval or other action of any state or federal agency or governmental or regulatory authority other than those which have been obtained and remain in full force and effect. 5.4 Financial Condition. The balance sheet of WMF Group and its ------------------- Subsidiaries, on a consolidated basis, as of the Statement Date, and the related statements of income and changes in stockholders' equity for the fiscal period ended on the Statement Date, heretofore furnished to each Lender, fairly present the financial condition of WMF Group and its Subsidiaries as of the Statement Date and the results of its operations for the fiscal period ended on the Statement Date. The Borrowers had, on the Statement Date, no known material liabilities, direct or indirect, fixed or contingent, matured or unmatured, or liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against in, said balance sheet and related statements, and at the present time there are no material unrealized or anticipated losses from any loans, advances or other commitments of the Borrowers except as heretofore disclosed to the Lenders in writing. Said financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. Since the Statement Date, there has been no material adverse change in the business, operations, assets or financial condition of the Borrowers (and their Subsidiaries), nor are the Borrowers aware of any state of facts which (with or without notice or lapse of time or both) would or could result in any such material adverse change. 5.5 Litigation. Except as set forth on Exhibit T hereto, there are ---------- --------- no actions, claims, suits or proceedings pending or, to the knowledge of the Borrowers, threatened or reasonably anticipated against or affecting the Borrowers or any Subsidiary of the Borrowers in any court or before any arbitrator or before any government commission, board, bureau or other administrative agency which, if adversely determined, may reasonably be expected to result in any material and adverse change in the business, operations, assets or financial condition of the Borrowers as a whole, or which would affect the validity or enforceability of this Agreement, the Notes or any other Loan Document. 5.6 Compliance with Laws. None of the Borrowers and none of their -------------------- Subsidiaries is in violation of any provision of any law, or of any judgment, award, rule, regulation, order, decree, writ or injunction of any court or public regulatory body or authority which might have a material adverse effect on the business, operations, assets or financial condition of the Borrowers and their Subsidiaries as a whole or which would affect the validity or enforceability of this Agreement, the Notes or any other Loan Document. 5.7 Regulation U. The Borrowers are not engaged principally, or as ------------ one of their important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of any Advances made hereunder will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. 5.8 Investment Company Act. None of the Borrowers is an "investment ---------------------- company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5.9 Payment of Taxes. The Borrowers and each of their Subsidiaries ---------------- have filed or caused to be filed all federal, state and local income, excise, property and other tax returns with respect to the operations of the Borrowers and their Subsidiaries which are required to be filed, all such returns are true and correct, and the Borrowers and each of their Subsidiaries have paid or caused to be paid all taxes as shown on such returns or on any assessment, including, but not limited to, all FICA payments and withholding taxes, if appropriate, to the extent that such taxes have become due. The amounts reserved as a liability for income and other taxes payable in the financial statements described in Section 5.4 hereof are sufficient pursuant to GAAP for payment of all unpaid federal, state and local income, excise, property and other taxes, whether or not disputed, of the Borrowers and their Subsidiaries accrued for or applicable to the period and on the dates of such financial statements and all years and periods prior thereto and for which either Borrower or any of their Subsidiaries may be liable in their own right or as transferee of the assets of, or as successor to, any other Person. No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. 5.10 Agreements. None of the Borrowers and none of their ---------- Subsidiaries, except WMFCC, is a party to any agreement, instrument or indenture or subject to any restriction materially and adversely affecting its business, operations, assets or financial condition, except as disclosed in the financial statements described in Section 5.4 hereof. None of the Borrowers and none of their Subsidiaries, except WMFCC, is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, instrument, or indenture which default could have a material adverse effect on the business, operations, properties or financial condition of the Borrowers and their Subsidiaries as a whole. No holder of any indebtedness of any of the Borrowers or any of their Subsidiaries has given notice of any asserted default thereunder, and no liquidation or dissolution of any of the Borrowers or of any of their Subsidiaries, and no receivership, insolvency, bankruptcy, reorganization or other similar proceedings relative to any of the Borrowers, any of their Subsidiaries or any of their properties, is pending or threatened. 5.11 Title to Properties. Each of the Borrowers and each Subsidiary ------------------- of the Borrowers has good, valid, insurable (in the case of real property) and marketable title to all of its properties and assets (whether real or personal, tangible or intangible) reflected on the financial statements described in Section 5.4 hereof, except for such properties and assets as have been disposed of since the date of such financial statements as no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business, and all such properties and assets are free and clear of all Liens except as disclosed in such financial statements. 5.12 ERISA. All plans ("Plans") of a type described in Section 3(3) ----- of ERISA in respect of which any of the Borrowers or any Subsidiary of the Borrowers is an "Employer," as defined in Section 3(5) of ERISA, are in substantial compliance with ERISA, and none of such Plans is insolvent or in reorganization, has an accumulated or waived funding deficiency within the meaning of Section 412 of the Internal Revenue Code, and none of the Borrowers and none of their Subsidiaries has incurred any material liability (including any material contingent liability) to or on account of any such Plan pursuant to Sections 4062, 4063, 4064, 4201 or 4204 of ERISA; and no proceedings have been instituted to terminate any such Plan, and no condition exists which presents a material risk to any of the Borrowers or any of their Subsidiaries of incurring a liability to or on account of any such Plan pursuant to any of the foregoing Sections of ERISA. No Plan or trust forming a part thereof has been terminated since September 1, 1974. 5.13 Eligibility. The Borrowers are approved and qualified and in ----------- good standing as a lender or seller/servicer, as set forth in Exhibit R --------- attached hereto, and meet all requirements applicable to its status as such. 5.14 Place of Business. The chief executive office and principal ----------------- place of business of WMF Group and Washington is 1593 Spring Hill Road, Suite 400, Vienna, Virginia 22182. The chief executive office and principal place of business of Huntoon is 379 Thornall Street, Edison, New Jersey 08837. The chief executive office and principal place of business of Proctor is 3883 Telegraph Road, Suite 210, Bloomfield Hills, Michigan 48302. The principal place of business of Wilson is 19 Briar Hollow Lane, Suite 200, Houston, Texas 77027. The principal place of business of Wilson-Arizona is 5080 N. 40th Street, Suite 105, Phoenix, Arizona 85018. The principal place of business of Carbon Mesa is 11755 Wilshire Boulevard, Suite 1900, Los Angeles, California 90025. 5.15 Special Representations Concerning Warehousing Collateral. The --------------------------------------------------------- Borrowers hereby represent and warrant to the Lenders, as of the date of this Agreement and as of the date of each Advance Request and the making of each Advance, that: 5.15(a) The applicable Borrower is the legal and equitable owner and holder, free and clear of all Liens (other than Liens granted hereunder), of the Pledged Mortgages and the Pledged Securities. All Pledged Mortgages, Pledged Securities and Purchase Commitments have been duly authorized and validly issued to the Borrowers, and all of the foregoing items of Collateral comply with all of the requirements of this Agreement, and have been and will continue to be validly pledged or assigned to the Credit Agent, subject to no other Liens. 5.15(b) Each Borrower has, and will continue to have, the full right, power and authority to pledge the Collateral pledged and to be pledged by it hereunder. 5.15(c) Any Mortgage Loan and any related document included in the Pledged Mortgages (1) has been duly executed and delivered by the parties thereto at a closing held not more than thirty (30) days prior to the date of the initial Warehousing Advance Request for such Mortgage Loan, except with respect to a Warehousing Advance Request for a Special Fannie Mae Advance or the Warehousing Advance Request made for Warehousing Advances to refinance Existing Agreement Warehousing Advances, (2) has been made in compliance with all applicable requirements of the Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, the federal Truth-In-Lending Act and all other applicable laws and regulations, (3) is and will continue to be valid and enforceable in accordance with its terms, without defense or offset, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, receivership, moratorium or other laws affecting the enforcement of creditors' rights and by general principles of equity (regardless of whether such enforcement is considered in a proceeding at law or in equity), (4) has not been modified or amended except in writing, which writing is part of the Collateral Documents, nor any requirements thereof waived, (5) has been evaluated or appraised in accordance with Title XI of FIRREA and industry standards, and (6) complies and will continue to comply with the terms of this Agreement and the related Purchase Commitment. Except for FHA Construction Mortgage Loans and Special Fannie Mae Loans, each Mortgage Loan has been fully advanced in the face amount thereof. Each First Mortgage is a first Lien on the premises described therein and each Second Mortgage is a second Lien on the premises described therein, and has or will have a title insurance policy, in American Land Title Association form or equivalent thereof, from a recognized title insurance company, insuring the priority of the Lien of the Mortgage and meeting the usual requirements of Investors purchasing such Mortgage Loans. Each premises securing a Pledged Mortgage is free and clear of all tax liens and assessments (except for Liens for taxes and assessments not yet delinquent or accruing interest or penalties). 5.15(d) No default has occurred and is continuing for more than sixty (60) days under any Mortgage Loan included in the Pledged Mortgages without the Advance against such Pledged Mortgage having been repaid in accordance with Section 2.10(f)(7) hereof; provided, however, that, with respect to Pledged Mortgages which have already been pledged as Collateral hereunder, if any default has occurred, the Borrowers will promptly notify the Credit Agent. 5.15(e) The Borrowers have complied and will continue to comply with all laws, rules and regulations in respect of the FHA insurance of each Mortgage Loan included in the Pledged Mortgages designated by the Borrowers as an FHA insured Mortgage Loan, and such insurance is and will continue to be in full force and effect. 5.15(f) Each premises securing a Pledged Mortgage is insured by an "all-risks" or "fire and extended perils" insurance policy issued by an insurer satisfactory to the Lender, and all such insurance policies (1) name and will continue to name the applicable Borrower and its successors and assigns as the insured under a standard mortgagee clause, (2) are and will continue to be in full force and effect, and (3) afford and will continue to afford insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance from time to time available. 5.15(g) Pledged Mortgages secured by premises located in a special flood hazard area designated as such by the Director of the Federal Emergency Management Agency are and shall continue to be covered by special flood insurance under the National Flood Insurance Program. Pledged Mortgages that are Commercial Mortgage Loans have insurance covering earthquake risk from an insurer and on terms and conditions satisfying the requirements of Standard & Poor's Ratings Service for inclusion in a Commercial Mortgage-backed Security. 5.15(h) Each FHA insured Mortgage Loan pledged hereunder meets all applicable governmental requirements for such insurance. Each Pledged Mortgage against which an Advance is made on the basis of a Purchase Commitment meets all requirements of such Purchase Commitment. The Borrowers shall assure that Pledged Mortgages which are intended to be used in the formation of Mortgage-backed Securities or asset-backed securities shall comply or, prior to the formation of any such Mortgage-backed Security or asset-backed securities, shall comply with the requirements of the governmental instrumentality, department or agency issuing or guaranteeing such Mortgage-backed Security or at least one Investor that purchases similar Mortgage Loans for securitization and two Rating Agencies. 5.15(i) For Pledged Mortgages which will be used to back Ginnie Mae Mortgage-backed Securities, the applicable Borrower has received from Ginnie Mae a Confirmation Notice or Confirmation Notices for Request Additional Commitment Authority and for Request Pool Numbers, and there remains available thereunder a commitment on the part of Ginnie Mae sufficient to permit the issuance of Ginnie Mae Mortgage-backed Securities in an amount at least equal to the amount of such Pledged Mortgages designated by the Borrowers as the Mortgage Loans to be used to back such Ginnie Mae Mortgage-backed Securities; each such Confirmation Notice is in full force and effect; each of such Pledged Mortgages has been assigned by the Borrowers to one of such Pool Numbers and a portion of the available Ginnie Mae Commitment has been allocated thereto by the Borrowers, in an amount at least equal to such Pledged Mortgages; and each such assignment and allocation has been reflected in the books and records of the Borrowers. 5.15(j) At the time of any Advance to Washington against a Special Fannie Mae Loan, (i) the related Special Fannie Mae Program Agreement and the promissory note(s) evidencing such Special Fannie Mae Loan are in full force and effect and constitute the legal, valid and binding obligations of the parties thereto, enforceable against such parties in accordance with their terms, (ii) all of the Mortgages and pledges of Mortgage Notes securing such Special Fannie Mae Loans under the related Special Fannie Mae Program Agreement are in full force and effect, constitute the legal, valid and binding obligations of the parties thereto, enforceable against such parties in accordance with their terms, and, in the case of Mortgages, constitute valid, perfected first priority Liens on the underlying property, subject only to Liens specified as exceptions in the original title insurance policy related thereto and Liens in favor of Washington in connection with the same Special Fannie Mae Program Agreement, and in the case of pledges of Mortgage Notes, constitute a valid, perfected first priority Lien on such Mortgage Notes, which is in turn secured by valid, perfected, first priority Liens on the underlying property, subject only to Liens specified in the original file policy related thereto; and (iii) such Special Fannie Mae Loan is or was made, and each of Washington and the borrower(s) and other obligor(s) is, in compliance with all terms of the related Special Fannie Mae Program Agreement and the FNMA Special Pool Purchase Contract related thereto. 5.16 Servicing. Attached hereto as Exhibit E is a true and complete --------- --------- list of the Borrowers' Servicing Portfolio. All of the Borrowers' Servicing Contracts are in full force and effect and, except as otherwise indicated, are unencumbered by Liens. No default or event which, with notice or lapse of time or both, would become a default, exists under any such Servicing Contract. 5.17 Special Representations Concerning Servicing Collateral. The ------------------------------------------------------- Borrowers hereby represent and warrant to the Lenders, as of the Closing Date and as of the date of each Servicing Facility Advance Request or Warehousing Advance Request for a P&I Advance or a Liquidity Advance, and the making of each such Advance, that: 5.17(a) A Borrower is the legal and equitable owners and holders, free and clear of all Liens (other than Liens granted hereunder), of each Pledged Servicing Contract, and the Pledged Servicing Contracts have been and will continue to be validly pledged or assigned to the Credit Agent, subject to no other Liens. 5.17(b) The Borrower that owns each Pledged Servicing Contracts has, and will continue to have, the full right, power and authority to pledge such Pledged Servicing Contract, subject to the rights of Fannie Mae, Ginnie Mae or any applicable Investor. 5.17(c) All of the servicing rights under the Servicing Contracts included in the calculation of Servicing Collateral Value constitute direct, primary servicing rights. 5.17(d) Each Pledged Servicing Contract is in full force and effect, each Pledged Servicing Contract is legal, valid and enforceable in accordance with its terms and no default or event which, with notice or lapse of time or both, would become a default, exists under any Pledged Servicing Contract. 5.17(e) Each right to the payment of money under the Pledged Servicing Contracts is genuine and enforceable in accordance with its terms against the parties obligated to pay the same ("Obligor"), except as limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity, which terms have not been modified or waived in any material respect or to any material extent. 5.17(f) To the best of the Borrowers' knowledge, the amount represented by the Borrowers to the Credit Agent as owing by an Obligor under each Mortgage Loan being serviced under a Pledged Servicing Contract is the correct amount actually and unconditionally owing by such Obligor. 5.17(g) To the best of the Borrowers' knowledge, no Obligor has any defense, set off, claim or counterclaim against the Borrowers or any Subsidiary of the Borrowers which can be asserted against the Credit Agent or the Lenders, whether in any proceeding to enforce the Credit Agent's security interest in the related Pledged Servicing Contracts or otherwise. 5.17(h) The Borrowers have not sold, assigned or otherwise transferred any rights associated with the Mortgage Loans being serviced under any Pledged Servicing Contract, including, without limitation, any rights to place escrow deposits with respect thereto. 5.17(i) Except for Acknowledgment Agreements, no consent of any Obligor or any other Person is required for the grant of a security interest in favor of the Credit Agent, for the benefit of the Secured Parties, in any of the Servicing Collateral including, without limitation, the Pledged Servicing Contracts, or any computer software being utilized by the Borrowers pursuant to license, lease or otherwise, other than consents which have been obtained, nor will any consent need to be obtained upon the occurrence of an Event of Default for the Credit Agent to exercise its rights with respect to any of the Servicing Collateral except as set forth in the Acknowledgment Agreements. 5.18 No Adverse Selection. The Borrowers have not selected the -------------------- Collateral in a manner so as to affect adversely the Lenders' interests. 5.19 Year 2000 Compliance. The Borrowers have conducted a -------------------- comprehensive review and assessment of the Borrowers' computer applications and made inquiry of the Borrowers' key suppliers, vendors, customers, and Investors with respect to the Year 2000 Problem and, based on that review and inquiry, the Borrowers do not believe the Year 2000 Problem will result in a material adverse change in the Borrowers' business condition (financial or otherwise), operations, properties or prospects, or ability to pay the Obligations. 6. AFFIRMATIVE COVENANTS. The Borrowers hereby covenant and agree with the Lenders that, so long as any of the Commitments are outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, the Borrowers shall: 6.1 Payment of Notes. Punctually pay or cause to be paid all ---------------- Obligations payable hereunder and under the Notes in accordance with the terms hereof and thereof. 6.2 Financial Statements and Other Reports. Deliver to each Lender: -------------------------------------- 6.2(a) As soon as available and in any event within forty- five (45) days after the end of each month, statements of income and changes in stockholders' equity of WMF Group and its Subsidiaries on a consolidated basis for the immediately preceding month and for the period from the beginning of the fiscal year to the end of such month, and the related balance sheet as of the end of the immediately preceding month, all in reasonable detail and certified as to the fairness of presentation by the chief financial officer of WMF Group, subject, however, to year-end audit adjustments. 6.2(b) As soon as available and in any event within ninety (90) days after the close of each fiscal year of WMF Group, statements of income, changes in stockholders' equity and cash flow of WMF Group and its Subsidiaries on a consolidated basis for such year, and the related balance sheet as of the end of such year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail and accompanied by an opinion (which opinion shall not be qualified due to possible failure to take all appropriate steps to successfully address the Year 2000 Problem) in form and substance satisfactory to the Lenders and prepared by independent certified public accountants of recognized standing selected by WMF Group and reasonably satisfactory to the Lenders as to said financial statements and a certificate signed by the chief financial officer of WMF Group stating that said financial statements fairly present the financial condition and results of operations of WMF Group and its Subsidiaries as of the end of, and for, such fiscal year. 6.2(c) Together with each delivery of financial statements required in Section 6.2(a) for the last month of any fiscal quarter, and each delivery of financial statements required in Section 6.2(b), an Officer's Certificate substantially in the form of Exhibit I-MF ------------ hereto: (1) setting forth in reasonable detail all calculations necessary to show that the Borrowers are in compliance with the requirements of Sections 7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14 and 7.16 hereof as of the end of such month or year (or, if the Borrowers are not in compliance, showing the extent of non-compliance and specifying the period of non-compliance and what actions the Borrowers have taken, are taking or propose to take with respect thereto); (2) certifying that the Borrowers were, as of the end of the period, in compliance and in good standing with applicable HUD, Ginnie Mae, or Investor net worth requirements; (3) certifying that the representation set forth in Section 5.19 hereof is true and correct as of the date of such certificate or, if such representation is not true and correct as of such date, specifying the nature of the problem and what action the Borrowers have taken, is taking or proposes to take with respect thereto; and (4) stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and conditions of the Borrowers and their Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as of the date of the Officer's Certificate, of any Default or Event of Default or if any Default or Event of Default existed or exists, specifying the nature and period of the existence thereof and what action the Borrowers have taken, are taking and propose to take with respect thereto. 6.2(d) As soon as available and in any event within forty- five (45) days after the end of each month, a consolidated report (the "Servicing Portfolio Report") as of the end of the month detailing, as to all Mortgage Loans the servicing rights to which are owned by the Borrowers (specified by investor type, recourse and non-recourse) regardless of whether such Mortgage Loans are Pledged Mortgages and which report shall indicate Mortgage Loans which (A) are current and in good standing, (B) are more than 30, 60 or 90 days past due, respectively, (C) are the subject of pending bankruptcy or foreclosure proceedings, (D) are excluded in calculating the Adjusted Servicing Portfolio for any of the reasons listed in clauses (a) - (f) of the definition thereof, or (E) have been converted (through foreclosure or other proceedings in lieu thereof) by the Borrowers into real estate owned by the Borrowers. 6.2(e) As soon as available and in any event within forty- five (45) days after the end of each fiscal quarter of the Borrowers, a consolidated report (the "Loan Production Report") as of the end of the fiscal quarter, presenting the total dollar volume and the number of Mortgage Loans originated or purchased during the fiscal year, specified by property type and loan type or Investor (e.g. FHA, Ginnie Mae, Fannie Mae, Freddie Mac, etc.) 6.2(f) Reports in respect of the Pledged Mortgages, Pledged Securities and Pledged Servicing Contracts, in such detail and at such times as any Lender in its discretion may reasonably request at any time or from time to time. 6.2(g) As of the last day of June and December of each year (to be delivered with the financial statements required under Sections 6.2(a) and (b), respectively, as of such dates), and at any time at the request of the Credit Agent, an Appraisal of the Pledged Servicing Contracts; if the Borrowers shall at any time fail to obtain an Appraisal required by this Section 6.2(g), the Credit Agent may obtain such Appraisal, and the Borrowers shall reimburse the Credit Agent for its costs and expenses incurred in connection therewith. 6.2(h) As soon as available and in any event within forty- five (45) days after the end of each Calendar Quarter, a valuation of the Pledged Servicing Contracts prepared by the Borrowers using the methodology used in the most recent Appraisal thereof. 6.2(i) Copies of all regular or periodic financial and other reports, if any, which the Borrowers shall file with the Securities and Exchange Commission or any governmental agency successor thereto and copies of any audits completed by HUD, Ginnie Mae, Fannie Mae or Freddie Mac. Copies of the Mortgage Bankers' Financial Reporting Forms (Freddie Mac Form 1055/Fannie Mae Form 1002) which the Borrowers shall have filed with Fannie Mae or Freddie Mac, in such detail and at such times as any Lender may reasonably request. 6.2(j) From time to time, with reasonable promptness, such further information regarding the business, operations, properties or financial condition of the Borrowers as any Lender may reasonably request. 6.3 Maintenance of Existence; Conduct of Business. Preserve and --------------------------------------------- maintain their corporate existence in good standing and all of its rights, privileges, licenses and franchises necessary or desirable in the normal conduct of their business, including, without limitation, their eligibility as lender, seller/servicer and issuer described under Section 5.13 hereof or in any Borrower Addition Agreement; conduct their businesses in an orderly and efficient manner; maintain a net worth of acceptable assets as required for maintaining each Borrower's eligibility as lender, seller/servicer and issuer described under Section 5.13 hereof or in any Borrower Addition Agreement; and make no change in the nature or character of their businesses or engage in any business in which they were not engaged on the date of this Agreement or, in the case of any New Borrower acquired by the Borrowers in a Servicing Acquisition, on the date the Borrowers' acquisition of such New Borrower was approved by the Lenders hereunder. Notwithstanding anything in this Agreement to the contrary, it shall not be deemed a change in the nature or character of their businesses for any of the Borrowers, directly or indirectly through any existing or prospective Subsidiary, to engage as a principal in (i) mortgage loan securitizations in the primary and secondary markets, (ii) mortgage asset management, and (iii) services with respect to mortgage banking generally, with respect to the financing, managing and sale of real property, and with respect to collateralized mortgage obligations. 6.4 Compliance with Applicable Laws. Comply with the requirements of ------------------------------- all applicable laws, rules, regulations and orders of any governmental authority, a breach of which could materially adversely affect their business, operations, assets, or financial condition, except where contested in good faith and by appropriate proceedings. 6.5 Inspection of Properties and Books. Permit authorized ---------------------------------- representatives of the Credit Agent, the Collateral Agent, any Lender or any Participant to discuss the business, operations, assets and financial condition of the Borrowers and their Subsidiaries with their officers and employees and to examine their books of account and make copies or extracts thereof, all at such reasonable times as the Credit Agent, the Collateral Agent, any Lender or any Participant may request; provided, that prior to the occurrence of a Default or an Event of Default, the Borrowers shall have no obligation to permit any such visitation or examination on less than two (2) Business Days notice from the Credit Agent, the Collateral Agent, any Lender or any Participant. The Borrowers will provide their accountants with a copy of this Agreement promptly after the execution hereof and will instruct its accountants to answer candidly any and all questions that the officers of the Credit Agent, the Collateral Agent, any Lender or any Participant or any authorized representative of the Credit Agent, the Collateral Agent, any Lender or any Participant may address to them in reference to the financial condition or affairs of the Borrowers and their Subsidiaries. The Borrowers may have their representatives in attendance at any meetings between the officers or other representatives of the Credit Agent, the Collateral Agent, any Lender or any Participant and the Borrowers' accountants held in accordance with this authorization. 6.6 Notice. Give Notice to the Credit Agent, promptly after the ------ Borrowers have actual or constructive notice thereof, of (a) any action, suit or proceeding instituted by or against any Borrower or any of their Subsidiaries in any federal or state court or before any commission or other regulatory body (federal, state or local, domestic or foreign) which action, suit or proceeding has at issue in excess of Five Hundred Thousand Dollars ($500,000), or any such proceedings threatened against any Borrower or any of their Subsidiaries in a writing containing the details thereof that the Borrowers reasonably determine is likely to be instituted unless settled, (b) the filing, recording or assessment of any federal, state or local tax Lien against any Borrower, any of their Subsidiaries or any of their assets, (c) the occurrence of any Event of Default hereunder or the occurrence of any Default and continuation thereof for five (5) days, (d) the suspension, revocation or termination of any Borrower's eligibility, in any respect, as approved lender, seller/servicer or issuer as described under Section 5.13 hereof or in any Borrower Addition Agreement, (e) the transfer, loss or termination (other than termination resulting from repayment of one or more Mortgage Loan in whole) of any Servicing Contract to which any Borrower or any of their Subsidiaries is a party, or which is held for the benefit of any Borrower or any of their Subsidiaries, and the reason for such transfer, loss or termination, if known to any Borrower, if the unpaid principal balance of the Mortgage Loans serviced pursuant to all such Servicing Contracts transferred, lost or terminated since the date of the most recent appraisal or valuation delivered pursuant to Section 6.2(g) or 6.2(h) hereof exceeds five percent (5%) of the Servicing Portfolio as of the date of such appraisal or valuation, and (f) any other action, event or condition of any nature which may lead to or result in a material adverse effect upon the business, operations, assets, or financial condition of the Borrowers and their Subsidiaries or which, with or without notice or lapse of time or both, would constitute a default under any other agreement, instrument or indenture to which any Borrower or any of their Subsidiaries is a party or to which any Borrower or any of their Subsidiaries, their properties, or assets may be subject. 6.7 Payment of Debt, Taxes, etc. Pay and perform all obligations and --------------------------- indebtedness of any Borrower, and cause to be paid and performed all obligations and indebtedness of their Subsidiaries, except WMFCC, promptly and in accordance with the terms thereof and pay and discharge or cause to be paid and discharged promptly all taxes, assessments and governmental charges or levies imposed upon any Borrower or any of their Subsidiaries, except WMFCC, or upon their respective income, receipts or properties before the same shall become past due, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such properties or any part thereof; provided, however, that any Borrower and any of their Subsidiaries shall not be required to pay taxes, assessments or governmental charges or levies or claims for labor, materials or supplies for which the Borrowers or their Subsidiaries shall have obtained an adequate bond or adequate insurance or which are being contested in good faith and by proper proceedings which are being reasonably and diligently pursued and for which proper reserves have been created. 6.8 Insurance. Maintain (a) errors and omissions insurance or --------- mortgage impairment insurance and blanket bond coverage, with such companies and in such amounts as satisfy prevailing requirements applicable to a lender, seller/servicer and issuer described under Section 5.13 hereof, and (b) liability insurance and fire and other hazard insurance on its properties, with responsible insurance companies approved by the Credit Agent, in such amounts and against such risks as is customarily carried by similar businesses operating in the same vicinity; and within thirty (30) days after Notice from the Credit Agent, obtain such additional insurance as the Credit Agent shall reasonably require, all at the sole expense of the Borrowers. Copies of such policies shall be furnished to the Credit Agent without charge upon request of the Credit Agent. 6.9 Closing Instructions. Indemnify and hold the Secured Parties -------------------- harmless from and against any loss, including reasonable attorneys' fees and costs, attributable to the failure of a title insurance company, agent or approved attorney to comply with the disbursement or instruction letter or letters of the Borrowers relating to any Mortgage Loan. The Collateral Agent shall have the right to pre-approve the closing instructions of the Borrowers to the title insurance company, agent or attorney in any case where the Mortgage Loan to be created at settlement is intended to be pledged as Collateral pursuant hereto. 6.10 Subordination of Certain Indebtedness. Cause any indebtedness ------------------------------------- of any Borrower incurred after the date of this Agreement to any shareholder, director or officer of any Borrower, or to any Affiliate of any Borrower or of any Subsidiary of any Borrower, which indebtedness has a term of more than one (1) year or is in excess of Five Hundred Thousand Dollars ($500,000), to be subordinated to all Obligations by the execution of a Subordination of Debt Agreement in the form of Exhibit F hereto and deliver to the Credit Agent an executed --------- copy of said Agreement, certified by the corporate secretary of the applicable Borrower to be true and complete and in full force and effect. 6.11 Other Loan Obligations. Perform all material obligations under ---------------------- the terms of each loan agreement, note, mortgage, security agreement or debt instrument by which any Borrower is bound or to which any of their property is subject, and promptly notify the Credit Agent in writing of a declared default under or the termination, cancellation, reduction or nonrenewal of any of its other lines of credit or agreements with any other lender. Exhibit J hereto is a true and complete list of all such lines of --------- credit or agreements as of the date hereof and the Borrowers hereby agree to give the Credit Agent at least thirty (30) days Notice before entering into any additional lines of credit or agreements. 6.12 Use of Proceeds of Advances. Use the proceeds of each Advance --------------------------- solely for the purpose set forth in Section 2.1(b), Section 2.4(b) or Section 2.6 for Advances of that type. 6.13 Special Affirmative Covenants Concerning Collateral. --------------------------------------------------- 6.13(a) Warrant and defend the right, title and interest of the Secured Parties in and to the Collateral against the claims and demands of all Persons whomsoever. 6.13(b) Service or cause to be serviced all Mortgage Loans in accordance with the standard requirements of the issuers of Purchase Commitments covering the same, all applicable HUD, Fannie Mae and Freddie Mac requirements and, with respect to Mortgage Loans not intended for sale to Fannie Mae or Freddie Mac or to back a Ginnie Mae Mortgage-backed Security, the Rating Agencies, including without limitation taking all actions necessary to enforce the obligations of the obligors under such Mortgage Loans. The Borrowers shall service or cause to be serviced all Mortgage Loans backing Pledged Securities in accordance with applicable governmental requirements and requirements of issuers of Purchase Commitments covering the same. The Borrowers shall hold all escrow funds collected in respect of Pledged Mortgages, Mortgage Loans backing Pledged Securities and Mortgage Loans serviced pursuant to Pledged Servicing Contracts in trust, without commingling the same with non-custodial funds, and apply the same for the purposes for which such funds were collected. 6.13(c) Execute and deliver to the Credit Agent such Uniform Commercial Code financing statements with respect to the Collateral as the Credit Agent may request. The Borrowers shall also execute and deliver to the Credit Agent and obtain the execution and delivery by Fannie Mae, Ginnie Mae and/or other Investors Acknowledgment Agreements in the forms from time to time promulgated by Fannie Mae, Ginnie Mae and/or other Investors, as applicable, and acceptable to the Credit Agent, with respect to the Pledged Servicing Contracts. The Borrowers shall also execute and deliver to the Credit Agent such further instruments of sale, pledge or assignment or transfer, and such powers of attorney, as may be reasonably requested by the Credit Agent, and shall do and perform all matters and things necessary or desirable to be done or observed, for the purpose of effectively creating, maintaining and preserving the security and benefits intended to be afforded the Secured Parties under this Agreement and the other Loan Documents. The Credit Agent shall have all the rights and remedies of a secured party under the Uniform Commercial Code of Minnesota or any other applicable law in addition to all rights provided for herein and in the other Loan Documents. 6.13(d) Notify the Collateral Agent within two (2) Business Days of any default under, or of the termination of, any Purchase Commitment relating to any Pledged Mortgage, Eligible Mortgage Pool or Pledged Security. 6.13(e) Promptly comply in all respects with the terms and conditions of all Purchase Commitments, and all extensions, renewals and modifications or substitutions thereof or thereto. The Borrowers will cause to be delivered to the Investor the Pledged Mortgages and Pledged Securities to be sold under each Purchase Commitment not later than three (3) Business Days prior to the mandatory delivery date thereof. 6.13(f) Maintain, at their principal office or in a regional office approved by the Credit Agent, or in the office of a computer service bureau engaged by the Borrowers and approved by the Credit Agent, and, upon request, shall make available to the Collateral Agent, the originals, or copies in any case where the originals have been delivered to the Collateral Agent or to an Investor, of its Mortgage Notes and Mortgages included in Pledged Mortgages, Mortgage-backed Securities delivered to the Collateral Agent as Pledged Securities, Purchase Commitments, and all related Mortgage Loan documents and instruments, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other information and data relating to the Collateral. 6.13(g) Promptly provide the Credit Agent with copies of any amendment, supplement, restatement or other modification of any Special Fannie Mae Program Agreement, the promissory note(s) evidencing the Special Fannie Mae Loans made thereunder, or the Fannie Mae Special Pool Purchase Contract related thereto. 6.14 Repayment of Debt to PNC Bank, N.A. The Borrowers will, on or ----------------------------------- before March 27, 1999, repay in full all of their outstanding Debt to PNC Bank, N.A., terminate all outstanding lending commitments from PNC Bank, N.A., and obtain the release of all Liens on their assets in favor of PNC Bank, N.A. (including, without limitation, the termination of any financing statements filed to perfect those Liens). 7. NEGATIVE COVENANTS. The Borrowers hereby covenant and agree with the Lenders that, so long as the commitments of the Lenders are outstanding or there remain any Obligations to be paid or performed, the Borrowers shall not, either directly or indirectly, without the prior written consent of all the Lenders: 7.1 Contingent Liabilities. Assume, guarantee, endorse, or otherwise ---------------------- become contingently liable for the obligation of any Person, except another Borrower, and except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, for liability for breaches of representations and warranties made by any Borrower in connection with the sale of Mortgage Loans in the ordinary course of business, provided such representations and warranties are typical of non-recourse sales of similar Mortgage Loans, for liability as a result of sales of Mortgage Loans to RFC pursuant to the Master Purchase Agreement (Bridge Mortgage Loans) dated as of September 22, 1997 by and between Washington, Huntoon and Proctor, as sellers, and RFC, as purchaser, and for liability as a result of the sale of Fannie Mae DUS Mortgage Loans with recourse in the ordinary course of the Borrowers' businesses. 7.2 Sale or Pledge of Servicing Contracts. Sell, pledge or grant a ------------------------------------- security interest in any existing or future Servicing Contracts of any Borrower or acquired in any Servicing Acquisition other than to the Credit Agent for the benefit of the Secured Parties, or omit to take any action required to keep all such Servicing Contracts in full force and effect; provided, however, that if no Default or Event of Default has occurred and is continuing, (a) servicing on individual Mortgage Loans may be sold concurrently with and incidental to the sale of such Mortgage Loans (with servicing released) in the ordinary course of the Borrowers' business, and (b) Servicing Contracts may be sold by the Borrowers or any Subsidiary of the Borrowers in the ordinary course of business as long as (i) after giving effect to any such sale, the requirements of Section 7.11 will be satisfied, and (ii) after giving effect to any prepayments of Servicing Facility Advances made with the proceeds of such sale, no further prepayments will be required pursuant to Section 2.10(l) hereof. 7.3 Merger; Sale of Assets; Acquisitions. Liquidate, dissolve, ------------------------------------ consolidate or merge or sell any substantial part of its assets, or acquire any substantial part of the assets of another, other than acquisition of (a) Nonrecourse Servicing Contracts acquired in the ordinary course of the Borrowers' business, and (b) the stock or assets of a Person engaged principally in the mortgage banking business and acquired in a Servicing Acquisition. For purposes of this Section 7.3, "mortgage banking business" shall mean business activities relating to (i) mortgage loan securitizations in the primary and secondary markets, (ii) mortgage asset management, and (iii) services with respect to the financing, managing and sale of real property, and with respect to collateralized mortgage obligations. 7.4 Deferral of Subordinated Debt. Except for the repayment of ----------------------------- Subordinated Debt owed to COMIT in an amount not to exceed $4,000,000 (principal, accrued interest and other amounts) on or before the date the Rights Offering closes, pay in advance of the stated maturity thereof any Subordinated Debt of the Borrowers or, if a Default or Event of Default hereunder shall have occurred, make any payment of any kind thereafter on such Subordinated Debt, until all Obligations have been paid and performed in full and any applicable preference period has expired. 7.5 Loss of Eligibility. Take any action that would cause any ------------------- Borrower to lose all or any part of its status as an eligible lender, seller/servicer and issuer as described under Section 5.13 hereof or in any Borrower Addition Agreement. 7.6 Debt to Adjusted Tangible Net Worth Ratio. Permit the ratio of ----------------------------------------- Debt (excluding, for this purpose only, Debt arising under the Hedging Arrangements, to the extent of assets arising under the same Hedging Arrangements) to Adjusted Tangible Net Worth of WMF Group (and its Subsidiaries, on a consolidated basis) at any time to exceed 15 to 1. 7.7 Non-Warehouse Debt to Adjusted Tangible Net Worth. Permit the ------------------------------------------------- ratio of Debt (excluding, for this purpose only, (a) Debt arising under Hedging Arrangements, to the extent of assets arising under the same Hedging Arrangements, (b) Warehousing Advances, and (c) other Debt secured by Multifamily Mortgage Loans, Commercial Mortgage Loans and/or Mortgage- backed Securities covered by Purchase Commitments issued by Investors, to the extent such Debt does not exceed the Committed Purchase Price of such Mortgage Loans) to Adjusted Tangible Net Worth of WMF Group (and its Subsidiaries, on a consolidated basis) at any time to exceed 1.25 to 1. 7.8 Minimum Adjusted Tangible Net Worth. Permit Adjusted Tangible ----------------------------------- Net Worth of WMF Group (and its Subsidiaries, on a consolidated basis) at any time (a) from the Closing Date to and including June 30, 1999, to be less than Thirty-Five Million Dollars ($35,000,000); and (b) thereafter, to be less than Fifty Million Dollars ($50,000,000). 7.9 Liquidity. Permit the Liquid Assets of WMF Group (and its --------- Subsidiaries, on a consolidated basis) at any time to be less than the greater of (a) twenty-five percent (25%) of Tangible Net Worth or (b) Five Million Dollars ($5,000,000). 7.10 Maximum Pass-Throughs. Permit the ratio (expressed as a --------------------- percentage) of (a) the aggregate cumulative outstanding amount of advances to or on behalf of defaulting mortgagors paid or required to have been paid by the Borrowers and their Subsidiaries on Mortgage Loans and Mortgage-backed Securities to (b) Tangible Net Worth of WMF Group (and its Subsidiaries, on a consolidated basis) at any time to exceed forty percent (40%). 7.11 Minimum Nonrecourse Servicing Portfolio. Permit the Nonrecourse --------------------------------------- Servicing Portfolio of the Borrowers to be less than Five Billion Dollars ($5,000,000,000). 7.12 Debt Service Coverage Ratio. Permit the Debt Service Coverage --------------------------- Ratio, measured as of the last day of any fiscal quarter ending on or after September 30, 1999, to be less than 1.50 to 1.00. 7.13 Minimum Income. Permit the net income of WMF Group (and its -------------- Subsidiaries, on a consolidated basis, excluding, for measurement periods ending on or before March 31, 2000, WMFCC) for any period of four (4) consecutive fiscal quarters, to be less than One Dollar ($1). 7.14 Debt Limitation. Permit Debt (excluding, for this purpose only, --------------- (a) Debt arising under Hedging Arrangements, to the extent of assets under the same Hedging Arrangements, (b) Warehousing Advances, (c) other Debt secured by Multifamily Mortgage Loans, Commercial Mortgage Loans or Mortgage-backed Securities covered by Purchase Commitments issued by Investors, to the extent such Debt does not exceed the Committed Purchase Price of such Mortgage Loans, (d) Subordinated Debt, and (e) Debt of Subsidiaries of WMF Group that are not Borrowers, provided such Debt is not guaranteed by, secured by the assets of, or otherwise supported by, any Borrower) of WMF Group (and its Subsidiaries, on a consolidated basis) to exceed One Hundred Million Dollars ($100,000,000). 7.15 Acquisition of Recourse Servicing Contracts. Acquire or enter ------------------------------------------- into, or permit any Subsidiary to acquire or enter into, Servicing Contracts under which any Borrower or Subsidiary is obligated to repurchase or indemnify the holder of the Mortgage Loans as a result of defaults on the Mortgage Loans at any time during the term of such Mortgage Loans (other than those Servicing Contracts that are customarily recognized in the trade as non-recourse but that may contain repurchase or indemnification obligations related to breaches of usual and customary representations and warranties made in connection with the non-recourse sale and servicing of the Mortgage Loans serviced thereunder). 7.16 Transactions with Affiliates. Directly or indirectly (a) make ---------------------------- any loan, advance, extension of credit or capital contribution to any of its Affiliates, (b) transfer, sell, pledge, assign or otherwise dispose of any of its assets to or on behalf of such Affiliates, (c) merge or consolidate with or purchase or acquire assets from such Affiliates, or (d) pay management fees to or on behalf of such Affiliates; provided, that nothing in this Section 7.16 shall restrict transactions between the Borrowers. Provided that no Default or Event of Default has occurred or is continuing at the time any transfer or investment is made, this Section 7.16 does not prohibit investments by WMF Group in an aggregate amount not to exceed Ten Million Dollars ($10,000,000) in COMIT. 7.17 Gestation Facilities. Directly or indirectly sell or finance -------------------- Pledged Mortgages under any Gestation Agreements. 7.18 Restricted Payments. Make any Restricted Payment if, either ------------------- before or after giving effect thereto, a Default or Event of Default will have occurred and be continuing. 7.19 Special Negative Covenants Concerning Collateral. ------------------------------------------------ 7.19(a) The Borrowers shall not amend or modify, or waive any of the terms and conditions of, or settle or compromise any claim in respect of, any Pledged Mortgages or Pledged Securities. 7.19(b) The Borrowers shall not sell, assign, transfer or otherwise dispose of, or grant any option with respect to, or pledge or otherwise encumber (except pursuant to this Agreement or as permitted herein), any of the Collateral or any interest therein. 7.19(c) The Borrowers shall not make any compromise, adjustment or settlement in respect of any of the Collateral or accept other than cash in payment or liquidation of the Collateral. 7.19(d) At any time that a Special Fannie Mae Advance is outstanding against any Special Fannie Mae Loan, Washington shall not amend, supplement, restate or otherwise modify the related Special Fannie Mae Program Agreement, the promissory note(s) evidencing such Special Fannie Mae Loans or the Fannie Mae Special Pool Purchase Contract related thereto. 8. DEFAULTS; REMEDIES. 8.1 Events of Default. The occurrence of any of the following ----------------- conditions or events shall be an event of default ("Event of Default"): 8.1(a) Failure to pay the principal of any Advance when due, whether at stated maturity, by acceleration, or otherwise; or failure to pay any installment of interest on any Advance or any other amount due under this Agreement within ten (10) days after the due date; or failure to pay, within any applicable grace period, the principal or interest on any other indebtedness of the Borrowers due the Lenders; or 8.1(b) Failure of any Borrower or any of their Subsidiaries, except WMFCC, to pay, or any default in the payment of any principal or interest on, any other indebtedness or contingent obligations in an aggregate amount of One Million Dollars ($1,000,000) or more within any period of grace provided; breach or default with respect to any other material term of any other indebtedness or of any loan agreement, mortgage, indenture or other agreement relating thereto, if the effect of such breach or default is to cause, or to permit the holder or holders thereof (or a trustee on behalf of such holder or holders) to cause, indebtedness of any Borrower or any of their Subsidiaries, except WMFCC, in the aggregate amount of One Million Dollars ($1,000,000) or more to become or be declared due prior to its stated maturity (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 8.1(c) Failure of the Borrowers to perform or comply with any term or condition applicable to them contained in Sections 6.3, 6.12, 6.13 and 6.14, or in any Section of Article 7 of this Agreement; provided, however, that no Event of Default shall be deemed to occur as a result of a breach of Section 6.13 or Section 7.19 hereof relating to particular Pledged Mortgages if the Borrowers deliver to the Lender the Release Amount for each Pledged Mortgage affected by such breach within one (1) Business Day after the earliest of (i) receipt by the Borrowers of Notice from the Lender of such breach, (ii) receipt by the Lender of Notice from the Borrowers of such breach, or (iii) the date the Borrowers should have notified the Lender of such breach pursuant to Section 6.6(c) hereof; or 8.1(d) (1) Any of the Borrowers' representations or warranties made or deemed made herein or in any other Loan Document shall be inaccurate or incomplete in any material respect on the date as of which made or deemed made, or (2) any of the Borrowers' representations or warranties made or deemed made in any statement or certificate at any time given by any Borrower in writing pursuant hereto or thereto shall be inaccurate or incomplete in any material respect on the date as of which made or deemed made and, if such inaccuracy or incompleteness was unintentional, the same has not been cured within ten (10) days after (i) receipt by the Borrowers of Notice thereof from the Credit Agent, (ii) receipt by the Credit Agent of Notice thereof from the Borrowers, or (iii) the date the Borrowers should have notified the Credit Agent thereof pursuant to Section 6.6(c); or 8.1(e) The Borrowers shall default in the performance of or compliance with any term contained in this Agreement or any other Loan Document other than those referred to above in Subsections 8.1(a), 8.1(c) or 8.1(d) and such default shall not have been remedied or waived within thirty (30) days after the earliest of (i) receipt by the Borrowers of Notice from the Credit Agent of such default, (ii) receipt by the Credit Agent of Notice from the Borrowers of such default, or (iii) the date the Borrowers should have notified the Credit Agent of such default pursuant to Section 6.6(c); or 8.1(f) (1) A court having jurisdiction shall enter a decree or order for relief in respect of any Borrower or any of their Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law in respect of any Borrower or any of their Subsidiaries now or hereafter in effect, which decree or order is not stayed; any Borrower or any of their Subsidiaries shall consent to the entry of any such decree or order; or a filing of a voluntary case under any applicable bankruptcy, insolvency or other similar law in respect of any Borrower or any of their Subsidiaries has occurred; or any other similar relief shall be granted under any applicable federal or state law; or (2) the filing of an involuntary case in respect of any Borrower or any of their Subsidiaries under any applicable bankruptcy, insolvency or other similar law; or a decree or order of a court having jurisdiction for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Borrower or any of their Subsidiaries, or over all or a substantial part of their respective property, shall have been entered; or the involuntary appointment of an interim or permanent receiver, trustee or other custodian of any Borrower or any of their Subsidiaries for all or a substantial part of their respective property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of any Borrower or any of their Subsidiaries, and the continuance of any such events in Subsection (2) above for sixty (60) days unless dismissed, bonded off or discharged; or 8.1(g) Any Borrower or any of their Subsidiaries shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; the making by any Borrower or any of their Subsidiaries of any assignment for the benefit of creditors; or the inability or failure of any Borrower or any of their Subsidiaries other than WMFCC, or the admission by any Borrower or any of their Subsidiaries other than WMFCC in writing of its inability, to pay its debts as such debts become due; or 8.1(h) Failure of any Borrower or any of their Subsidiaries to perform any contractual obligations which it may have to repurchase Mortgage Loans if such obligations in the aggregate exceed One Million Dollars ($1,000,000); or 8.1(i) Any money judgment, writ or warrant of attachment, or similar process involving in any case an amount in excess of Five Hundred Thousand Dollars ($500,000) shall be entered or filed against any Borrower, any of their Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or 8.1(j) Any order, judgment or decree shall be entered against any Borrower decreeing the dissolution or split up of any Borrower and such order shall remain undischarged or unstayed for a period in excess of twenty (20) days; or 8.1(k) Any Plan maintained by any Borrower or any of their Subsidiaries shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by an appropriate United States district court to administer any Plan, or the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan if as of the date thereof such Borrower's or Subsidiary's liability (after giving effect to the tax consequences thereof) to the Pension Benefit Guaranty Corporation (or any successor thereto) for unfunded guaranteed vested benefits under the Plan exceeds the then current value of assets accumulated in such Plan by more than Twenty-Five Thousand Dollars ($25,000) (or in the case of a termination involving any Borrower or any of their Subsidiaries as a "substantial employer" (as defined in Section 4001(a)(2) of ERISA) the withdrawing employer's proportionate share of such excess shall exceed such amount); or 8.1(l) Any Borrower or any of their Subsidiaries as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding Twenty-Five Thousand Dollars ($25,000); or 8.1(m) Any Borrower or any of their Subsidiaries shall purport to disavow its obligations hereunder or under any other Loan Document, or shall contest the validity or enforceability hereof or thereof; or the Credit Agent's security interest on any portion of the Collateral shall become unenforceable or otherwise impaired; provided that, subject to the Majority Lenders' approval, no Event of Default shall occur as a result of such impairment if all Advances made against any such Collateral shall be paid in full within ten (10) days of the date of such impairment; or 8.1(n) WMF Group shall cease to own, directly or indirectly, at least 51% of each class of the capital stock of any other Borrower or any Subsidiary that has granted a Lien to secure the Obligations; or 8.1(o) The Rights Offering shall not have closed, or WMF Group shall not have received at least $20,000,000 in Net Proceeds therefrom, on or before May 31, 1999; or 8.1(p) A material adverse change occurs, or is reasonably likely to occur, in the business condition (financial or otherwise), operations, properties or prospects of the Borrowers, or in the ability of the Borrowers to repay their Obligations; or 8.1(q) Any Lien for any taxes, assessments or other governmental charges (i) is filed against the Borrowers or any of their properties, or is otherwise enforced against the Borrowers or any portion of their Collateral, or (ii) obtains priority that is equal or greater than the priority of the Lender's security interest in any of the Collateral; or 8.1(r) The Warehousing Maturity Date shall occur. 8.2 Remedies. -------- 8.2(a) If a Lender shall have knowledge of a Default or an Event of Default, it shall forthwith give Notice thereof to the Credit Agent. If the Credit Agent shall have knowledge of a Default or an Event of Default, it shall forthwith give Notice thereof to each Lender and to the Borrowers. The Credit Agent shall not be deemed to have knowledge or Notice of the occurrence of a Default or an Event of Default unless the Credit Agent has received Notice thereof from a Lender or the Borrowers . 8.2(b) Upon the occurrence of any Event of Default described in Sections 8.1(f) or 8.1(g) with respect to any Borrower, the Commitment shall automatically be terminated and all unpaid principal amounts of and accrued interest on the Notes and all other Obligations shall automatically become due and payable, without presentment, demand or other requirements of any kind, all of which are hereby expressly waived by the Borrowers. 8.2(c) Upon the occurrence of any Event of Default, other than those described in Sections 8.1(f) and 8.1(g) with respect to any Borrower, the Majority Lenders may, by Notice to the Borrowers, terminate the Commitments and/or declare all Obligations to be immediately due and payable, whereupon the same shall forthwith become due and payable, together with all accrued interest thereon, and the obligation of the Lenders to make any Advances shall thereupon terminate. 8.2(d) Upon the occurrence of any Event of Default, the Credit Agent, on behalf of the Secured Parties, may also do any of the following: (1) Foreclose upon or otherwise enforce its security interest in and Lien on the Collateral to secure all payments and performance of the Obligations in any manner permitted by law or provided for hereunder. (2) Notify all obligors in respect of Collateral that the Collateral has been assigned to the Credit Agent, for the benefit of the Secured Parties, and that all payments thereon are to be made directly to the Credit Agent or such other party as may be designated by the Credit Agent; settle, compromise, or release, in whole or in part, any amounts owing on the Collateral, any such obligor or any Investor or any portion of the Collateral, on terms acceptable to the Credit Agent; enforce payment and prosecute any action or proceeding with respect to any and all Collateral; and where any such Collateral is in default, foreclose on and enforce security interests in such Collateral by any available judicial procedure or without judicial process and sell property acquired as a result of any such foreclosure. (3) Act, or contract with a third party to act, as servicer or subservicer of each item of Collateral requiring servicing and perform all obligations required in connection with the Pledged Mortgages, the Pledged Securities, the Pledged Servicing Contracts and related Purchase Commitments, such third party's fees to be paid by the Borrowers. (4) Require the Borrowers to assemble the Collateral and/or books and records relating thereto and make such available to the Credit Agent at a place to be designated by the Credit Agent. (5) Enter onto property where any Collateral or books and records relating thereto are located and take possession thereof with or without judicial process; and obtain access to the Borrowers' data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner the Credit Agent deems necessary for the purpose of effectuating its rights under this Agreement and any other Loan Document. (6) Prior to the disposition of the Collateral, prepare it for disposition in any manner and to the extent the Credit Agent deems appropriate. (7) Exercise all rights and remedies of a secured creditor under the Uniform Commercial Code of Minnesota or other applicable law, including, but not limited to, selling or otherwise disposing of the Collateral, or any part thereof, at one or more public or private sales, whether or not such Collateral is present at the place of sale, for cash or credit or future delivery, on such terms and in such manner as the Credit Agent may determine, including, without limitation, sale pursuant to any applicable Purchase Commitment. If notice is required under such applicable law, the Credit Agent will give the Borrowers not less than ten (10) days' notice of any such public sale or of the date after which any private sale may be held. The Borrowers agree that ten (10) days' notice shall be reasonable notice. The Credit Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Credit Agent until the selling price is paid by the purchaser thereof, but the Credit Agent shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. The Credit Agent may, however, instead of exercising the power of sale herein conferred upon it, proceed by a suit or suits at law or in equity to collect all amounts due upon the Collateral or to foreclose the pledge and sell the Collateral or any portion thereof under a judgment or decree of a court or courts of competent jurisdiction, or both. (8) Proceed against the Borrowers on the Notes. The Credit Agent shall follow the instructions of the Majority Lenders in exercising or not exercising its rights under this Section 8.2(d), but (i) the Credit Agent shall have no obligation to take or not to take any action which it believes may expose it to any liability, and (ii) the Credit Agent may, but shall be under no obligation to, await instructions from the Majority Lenders before exercising or not exercising its rights under this Section 8.2(d). 8.2(e) Neither the Credit Agent nor any other Secured Party shall incur any liability as a result of the sale or other disposition of the Collateral, or any part thereof, at any public or private sale or disposition. The Borrowers hereby waive (to the extent permitted by law) any claims it may have against the Credit Agent and the other Secured Parties arising by reason of the fact that the price at which the Collateral may have been sold at such private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the outstanding Advances and the unpaid interest accrued thereon, even if the Credit Agent accepts the first offer received and does not offer the Collateral to more than one offeree, provided such sale was commercially reasonable in all other respects. Any sale of Collateral pursuant to the terms of a Purchase Commitment, or any other disposition of Collateral arranged by any Borrower, whether before or after the occurrence of an Event of Default, shall be deemed to have been made in a commercially reasonable manner. 8.2(f) The Borrowers acknowledge that Mortgage Loans and Mortgage-backed Securities are collateral of a type which is customarily sold on a recognized market. The Borrowers waive any right they may have to prior notice of the sale of any Pledged Mortgage or Pledged Security, and agrees that any Lender may purchase any Pledged Mortgages or Pledged Securities at a private sale of such Collateral. 8.2(g) The Borrowers specifically waive and release (to the extent permitted by law) any equity or right of redemption, all rights of redemption, stay or appraisal which the Borrowers have or may have under any rule of law or statute now existing or hereafter adopted, and any right to require the Credit Agent or any of the Secured Parties to (1) proceed against any Person, (2) proceed against or exhaust any of the Collateral or pursue their rights and remedies as against the Collateral in any particular order, or (3) pursue any other remedy in their power. The Credit Agent shall not be required to take any steps necessary to preserve any rights of the Borrowers against holders of mortgages prior to the Lien of any Mortgage included in the Collateral or to preserve rights against prior parties. 8.2(h) The Credit Agent and/or the Lenders may, but shall not be obligated to, advance any sums or do any act or thing necessary to uphold and enforce the Lien and priority of, or the security intended to be afforded by, any Mortgage included in the Collateral, including, without limitation, payment of delinquent taxes or assessments and insurance premiums. All advances, charges, costs and expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Credit Agent or any Lender in exercising any right, power or remedy conferred by this Agreement, or in the enforcement hereof, together with interest thereon at the Default Rate from the time of payment until repaid, shall become a part of the principal balance outstanding hereunder and under the Notes. 8.2(i) No failure on the part of the Credit Agent or any other Secured Party to exercise, and no delay in exercising, any right, power or remedy provided hereunder, at law or in equity shall operate as a waiver thereof; nor shall any single or partial exercise by the Credit Agent or any other Secured Party of any right, power or remedy provided hereunder, at law or in equity preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Without intending to limit the foregoing, all defenses based on the statute of limitations are hereby waived by the Borrowers to the extent permitted by law. The remedies herein provided are cumulative and are not exclusive of any remedies provided at law or in equity. 8.2(j) The Borrowers acknowledge that the Borrowers and the Credit Agent may from time to time hereafter enter into, agreements ("Acknowledgment Agreements") with Fannie Mae, Ginnie Mae or any other Investor in order to obtain the consent of Fannie Mae, Ginnie Mae or such other Investor to the assignment of and security interest granted in the Pledged Servicing Contracts. The Borrowers further acknowledge that the Acknowledgment Agreements may contain certain provisions concerning the enforcement by the Credit Agent of its security interest, for the benefit of the Secured Parties, in the Servicing Contracts subject thereto. The Borrowers agree that the disposition of their rights in any Pledged Servicing Contract pursuant to the terms of the applicable Acknowledgment Agreement shall be deemed commercially reasonable within the meaning of Section 9-504(3) of the Uniform Commercial Code of Minnesota. The Borrowers hereby waive any claims they might otherwise have against the Credit Agent or the other Secured Parties as a result of the Credit Agent's compliance with the terms of any Acknowledgment Agreement. 8.2(k) The Credit Agent is hereby granted a license or other right to use, without charge, the Borrowers' computer programs, other programs, labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral, and the Borrowers' rights under all licenses and all other agreements related to the foregoing shall insure to the Credit Agent's benefit until the Obligations and the Letter of Credit Obligations are paid in full and no Letters of Credit are outstanding. 8.3 Application of Proceeds. The proceeds of any sale, disposition ----------------------- or other enforcement of the Credit Agent's security interest in all or any part of the Collateral shall be applied by the Credit Agent as follows: 8.3(a) In the case of the proceeds of the Warehousing Collateral and Receivables: First, to the payment of the costs and expenses of ----- such sale or enforcement, including reasonable compensation to the Credit Agent's and Collateral Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of the Credit Agent and Collateral Agent in connection therewith; Second, to the payment of the costs and expenses of ------ such sale or enforcement, including reasonable compensation to the Lenders' agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of any Lender in connection therewith; Third, to the Swingline Lender, in an amount equal ----- to the amount of accrued interest, or accrued fees charged in lieu of interest pursuant to a Balance Funded Agreement, owed to the Swingline Lender in respect of Swingline Advances, until paid in full; Fourth, to the Swingline Lenders until the principal ------ amount of all Swingline Advances outstanding are paid in full; Fifth, to the Lenders holding Warehousing Advances, ----- pro rata in accordance with the amount of accrued interest, or accrued fees charged in lieu of interest pursuant to a Balance Funded Agreement, owed to each of them in respect to Warehousing Advances, until such interest and fees are paid in full; Sixth, to the Lenders holding Warehousing Advances, ----- pro rata in accordance with their respective Warehousing Percentage Shares, until the principal amounts of all Warehousing Advances outstanding are paid in full; Seventh, to the Lenders holding Warehousing Advances, ------- pro rata in accordance with their respective Warehousing Percentage Shares, until all fees and other Obligations accrued by or due each Lender, the Credit Agent and the Collateral Agent are paid in full; Eighth, to the Lenders, for application to the ------ Obligations owed to each of them in respect of the Servicing Facility Advances and the Term Loan Advances, as set forth in clauses Third and Fourth of Section 8.2(b) ----- ------ hereof; Ninth, to LaSalle, for application to the Letter of ----- Credit Obligations and to hold as separate collateral for any future Letter of Credit Obligations, in the amount notified by LaSalle to the Credit Agent; Tenth, to the remaining Obligations; and ----- Finally, to the payment to the Borrowers, or to their ------- successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 8.3(b) In the case of the proceeds of the Servicing Collateral: First, to the payment of the costs and expenses of ----- such sale or enforcement, including reasonable compensation to the Credit Agent's and Collateral Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of the Credit Agent and Collateral Agent in connection therewith; Second, to the payment of the costs and expenses of ------ such sale or enforcement, including reasonable compensation to the Lenders' agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of any Lender in connection therewith; Third, to the Lenders holding Servicing Facility ----- Advances and/or Term Loan Advances, pro rata in accordance with the amount of accrued interest, or accrued fees charged in lieu of interest pursuant to a Balance Funded Agreement, owed to each of them in respect of Term Loan Advances and Servicing Facility Advances, until such interest and fees are paid in full; Fourth, to the Lenders holding Servicing Facility ------ Advances and/or Term Loan Advances, pro rata in accordance with their respective Servicing Facility Percentage Shares and Term Loan Servicing Facility Percentage Shares and Term Loan Percentage Shares, until the principal amount of all Term Loan Advances and Servicing Facility Advances outstanding are paid in full; Fifth, to the Lenders holding Servicing Facility ----- Advances and/or Term Loan Advances, pro rata in accordance with their respective Percentage Shares, until all fees and other Obligations accrued by or due each Lender, the Credit Agent and the Collateral Agent are paid in full; Sixth, to LaSalle, for application to the Letter of ----- Credit Obligations and to hold as separate collateral for any future Letter of Credit Obligations, in the amount notified by LaSalle to the Credit Agent; Seventh, to the Lenders, for application to the ------- Obligations owed to each of them in respect of Warehousing Advances, as set forth in clauses Third, Fourth, Fifth and Sixth of Section ----- ------ ----- ----- 8.3(a) hereof; Eighth, to the remaining Obligations; and ------ Finally, to the payment to the Borrowers, or to their ------- successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 8.3(c) If the proceeds of any such sale, disposition or other enforcement are insufficient to cover the costs and expenses of such sale, as aforesaid, and the payment in full of all Obligations, the Borrowers shall remain liable for any deficiency. 8.4 Credit Agent Appointed Attorney-in-Fact. The Credit Agent is --------------------------------------- hereby appointed the attorney-in-fact of the Borrowers, with full power of substitution, for the purpose of carrying out the provisions hereof and taking any action and executing any instruments which the Credit Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Credit Agent shall have the right and power to give notices of its security interest in the Collateral to any Person, either in the name of the Borrowers or in its own name, to endorse all Pledged Mortgages or Pledged Securities payable to the order of the Borrowers, to change or cause to be changed the book-entry registration or name of subscriber or Investor on any Pledged Security, or to receive, endorse and collect all checks made payable to the order of either Borrower representing any payment on account of the principal of or interest on, or the proceeds of sale of, any of the Pledged Mortgages or Pledged Securities and to give full discharge for the same. Except to the extent the Credit Agent is granted the power to take any action covered by the foregoing power of attorney prior to the occurrence of an Event of Default under the Loan Documents, the Lenders agree that the Credit Agent shall not exercise the foregoing power of attorney prior to the occurrence of an Event of Default. 8.5 Right of Setoff. The Borrowers hereby grant to the Credit Agent, --------------- to each Lender and to any assignee or Participant of any Lender a right of setoff, to secure the repayment of the Obligations and (in the case of LaSalle) the Letter of Credit Obligations, upon any and all monies, securities, or other property of the Borrowers, and the proceeds thereof, now or hereafter held or received by or in transit to such Person, from or for the account of the Borrowers, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and all deposits (general or special, time or demand, provisional or final) and credits of the Borrowers and any and all claims of the Borrowers against such Person at any time existing. Upon the occurrence and during the continuance of any Event of Default, the Credit Agent, each Lender and any assignee or Participant of any Lender is hereby authorized, at any time and from time to time, without notice, to setoff and to appropriate or apply any and all items hereinabove described against and on account of the Obligations and (in the case of LaSalle) the Letter of Credit Obligations, irrespective of whether or not the Lenders shall have made any demand hereunder and whether or not said Obligations or Letter of Credit Obligations shall have matured. 8.6 Sharing of Payments. If upon the occurrence of an Event of ------------------- Default and acceleration of the Obligations any Lender shall hold or receive and retain any payment, whether by setoff, application of deposit balance or security, or otherwise, in respect of the Obligations, then such Lender shall purchase from the other Lenders for cash and at face value and without recourse, such participation in the Obligations held by them as shall be necessary to cause such payment to be shared with each of them as provided in Section 8.3 hereof; provided, that if such payment or part thereof is thereafter recovered from such purchasing Lender, the related purchases from the other Lenders shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest thereon unless the purchasing Lender is required to pay interest on such amounts to the Person recovering such payment, in which case with interest thereon, computed at the same rate, and on the same basis, as the interest that the purchasing Lender is required to pay. If any Lender receives a payment from the Borrowers not in respect of the Obligations, but relating to another relationship of such Lender and the Borrowers, such Lender may apply the payment first to the indebtedness arising out of the other relationship and then against the Obligations as provided for above. 9. THE CREDIT AGENT. 9.1 Appointment. Each Lender hereby irrevocably designates and ----------- appoints the Credit Agent as the agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes the Credit Agent to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Credit Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. The Credit Agent hereby accepts such appointment and agrees to act in accordance with this Agreement. 9.2 Duties of Credit Agent. The provisions of the Loan Documents set ---------------------- forth the exclusive duties of the Credit Agent and no implied duties or obligations shall be read into the Loan Documents against the Credit Agent. The Credit Agent shall not be bound in any way by any agreement or contract other than the Loan Documents and any other agreement to which it is a party. 9.3 Standard of Care. The Credit Agent shall act in accordance with ---------------- customary standards for those engaged as agents of commercial loan transactions in similar capacities. Without limiting the generality of the foregoing: 9.3(a) The Credit Agent shall not be required to ascertain or inquire as to the performance or observance of any of the conditions or agreements to be performed or observed by any other party, except as specifically provided in the Loan Documents. The Credit Agent disclaims any responsibility for the validity or accuracy of the recitals to this Agreement and any representations and warranties contained herein, unless specifically identified as recitals, representations or warranties of the Credit Agent. 9.3(b) The Credit Agent shall have no responsibility for ascertaining the value, collectibility, insurability, enforceability, effectiveness or suitability of any Collateral, the title of any party therein, the validity or adequacy of the security afforded thereby, or the validity of this Agreement (except as to Credit Agent's authority to enter into this Agreement and to perform its obligations hereunder). 9.3(c) No provision of this Agreement shall require the Credit Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if, in its sole judgment, it shall believe that repayment of such funds or adequate indemnity against such risk or liability is not assured to it. 9.3(d) The Credit Agent is not responsible for preparing or filing any reports or returns relating to federal, state or local income taxes with respect to this Agreement, other than for the Credit Agent's compensation or for reimbursement of expenses. 9.4 Delegation of Duties. The Credit Agent may execute any of its -------------------- duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Credit Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 9.5 Exculpatory Provisions. Neither the Credit Agent nor any of its ---------------------- respective officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (a) liable for any action taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (b) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrowers or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Credit Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the Loan Documents or for any failure of the Borrowers to perform their obligations under any Loan Document. The Credit Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents or to inspect the properties, books or records of the Borrowers or any of their Subsidiaries. 9.6 Reliance by Credit Agent. The Credit Agent shall be entitled to ------------------------ rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certification, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrowers), independent accountants and other experts selected by the Credit Agent. The Credit Agent may deem and treat the payee of any Note as the owner thereof for all purposes. As to the Lenders: (a) the Credit Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Majority Lenders or all of the Lenders, as appropriate, and/or it shall first be indemnified to its satisfaction by the Lenders ratably in accordance with their respective Percentage Shares against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any action (except for liabilities and expenses resulting from the Credit Agent's gross negligence or willful misconduct), and (b) the Credit Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of the Majority Lenders or all of the Lenders, as appropriate, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 9.7 Non-Reliance on Credit Agent or Other Lenders. Each Lender --------------------------------------------- expressly acknowledges that neither the Credit Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Lender and that no act by the Credit Agent hereafter taken, including any review of the affairs of the Borrowers, shall be deemed to constitute any representation or warranty by the Credit Agent to any Lender. Each Lender represents to the Credit Agent that it has, independently and without reliance upon the Credit Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrowers and made its own decision to enter into and make Advances under the Credit Agreement. Each Lender also represents that it will, independently and without reliance upon the Credit Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrowers. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Credit Agent hereunder, the Credit Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial or other condition or creditworthiness of the Borrowers or any Subsidiary which may come into the possession of the Credit Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.8 Credit Agent in Individual Capacity. The Credit Agent may make ----------------------------------- loans to, accept deposits from and generally engage in any kind of business with the Borrowers as though the Credit Agent was not the Credit Agent hereunder. With respect to the Advances made or renewed by it and any Note issued to it, the Credit Agent shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not the Credit Agent, and the terms "Lender" and "Lenders" shall include the Credit Agent in its individual capacity. 9.9 Successor Credit Agent. The Credit Agent may resign as such at ---------------------- any time upon giving thirty (30) days Notice to the Borrowers and the Lenders. The Credit Agent may be removed immediately with cause or at any time upon thirty (30) days Notice from the Majority Lenders to the Credit Agent and the Borrowers. Upon Notice of such resignation or removal, the Majority Lenders may appoint a successor Credit Agent (which successor Credit Agent, assuming that no Default or Event of Default exists, shall be reasonably acceptable to the Borrowers). The date on which the Borrowers, the Collateral Agent and Lenders have received Notice from such successor of its acceptance of appointment as the Credit Agent shall constitute the effective date of resignation or removal of the resigning or removed the Credit Agent. If no successor Credit Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment within the allotted time period, then, upon five (5) days' Notice to the Borrowers, the resigned or removed Credit Agent may, on behalf of the Lenders, appoint a successor. Upon the effective date of resignation or removal of the resigning or removed Credit Agent, such successor will thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the resigning or removed Credit Agent, but the resigning or removed Credit Agent shall not be discharged from any liability as a result of its or its directors', officers', agents', or employees' gross negligence or willful misconduct in the performance of its duties and obligations under this Agreement prior to the effective date of its resignation or removal. Upon the effective date of its resignation or removal, the Credit Agent shall assign all of its right, title and security interest in and to all Collateral to its successor, without recourse, warranty or representation, express or implied. 9.10 Agreements Regarding Servicing Collateral and Acknowledgment ------------------------------------------------------------ Agreements. Each Lender (including each Lender becoming a party hereto as ---------- an Additional Lender pursuant to Section 13.4) hereby agrees (a) to benefit under this Agreement with respect to the Servicing Collateral and under each Acknowledgment Agreement exclusively by and through the Credit Agent, (b) to authorize the Credit Agent or its agent to act exclusively for such Lender with respect to the Acknowledgment Agreements and persons (other than the Borrowers) party thereto, and (c) that all terms of the Acknowledgment Agreements shall be binding on such Lender as if it had executed the same. The provisions of clause (c) of the preceding sentence shall not be effective with respect to any Acknowledgment Agreement, other than Acknowledgment Agreements in the forms promulgated by Fannie Mae and Freddie Mac as of the date of this Agreement, unless the Credit Agent's execution and delivery of such Acknowledgment Agreement is consented to by all of the Lenders. 10. NOTICES. All notices, demands, consents, requests and other communications required or permitted to be given or made hereunder (collectively, "Notices") shall, except as otherwise expressly provided hereunder, be in writing and shall be delivered in person or telecopied, or mailed, first class or delivered by overnight courier, return receipt requested, postage prepaid, addressed to the respective party hereto at its address set forth opposite the name of such party on the signature pages of this Agreement or, as to any such party, at such other address as may be designated by it in a Notice to the other. All Notices shall be conclusively deemed to have been properly given or made when duly delivered, in person, by telecopy or by overnight courier, or if mailed, on the date of receipt as noted on the return receipt. 11. REIMBURSEMENT OF EXPENSES; INDEMNITY. 11.1 Reimbursement of Expenses and Indemnification by the Borrowers. -------------------------------------------------------------- The Borrowers shall: (a) pay a documentation production fee of Five Thousand Dollars ($5,000) to the Credit Agent in connection with the preparation and negotiation of this Agreement; (b) pay all reasonable out- of-pocket costs and expenses of the Credit Agent and the Collateral Agent, including, without limitation, reasonable fees and disbursements of counsel (including the fees and service charges of Dorsey & Whitney LLP, special counsel to the Credit Agent, and allocated costs of internal counsel), in connection with the preparation, negotiation, amendment, enforcement and administration of this Agreement, the Notes, and other Loan Documents and the making and repayment of the Advances and the payment of interest thereon; (c) indemnify, pay, and hold harmless the Lenders and any holder of the Notes from and against, any and all present and future stamp, documentary and other similar taxes with respect to the foregoing matters and save the Lenders and the holder or holders of the Notes harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes; (d) indemnify, pay and hold harmless the Credit Agent, the Collateral Agent and each Lender and any of their respective officers, directors, employees or agents and any subsequent holder of the Notes (collectively called the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, judgments, suits, and reasonable costs, expenses and disbursements of any kind or nature whatsoever (including without limitation, the reasonable fees and disbursements of counsel of the Indemnitees (including allocated costs of internal counsel) in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto) which may be imposed upon, incurred by or asserted against such Indemnitees in any manner relating to or arising out of this Agreement, the Notes, or any other Loan Document or any of the transactions contemplated hereby or thereby (the "Indemnified Liabilities"); provided, however, that the Borrowers shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities arising from any action or inaction by the Borrowers explicitly directed by the Credit Agent or by any Lender in writing, or the gross negligence or willful misconduct of such Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless as set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrowers shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. The agreement of the Borrowers contained in this Subsection (d) shall survive the expiration or termination of this Agreement and the payment in full of the Notes. Reasonable attorneys' fees and disbursements incurred in enforcing, or on appeal from, a judgment pursuant hereto shall be recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. As to Subsection (d), each Indemnitee shall use its best efforts to give Borrowers' notice of any such investigative, administrative or judicial proceeding, and the Borrowers shall have the right to consult in the defense of or the negotiation relating to any such matter at Borrowers' expense. 11.2 Indemnification by the Lenders. The Lenders agree to indemnify ------------------------------ each of the Credit Agent and the Collateral Agent in its respective capacity as such (to the extent not reimbursed by the Borrowers, and without limiting the obligation of the Borrowers to do so), ratably according to the respective amounts of their Percentage Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Credit Agent or the Collateral Agent in any way relating to or arising out of the Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Credit Agent or the Collateral Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Credit Agent's or the Collateral Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Obligations and the termination of this Agreement. Attorneys' fees and disbursements incurred in enforcing, or on appeal from, a judgment pursuant hereto shall be recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. 12. FINANCIAL INFORMATION. All financial statements and reports furnished to the Credit Agent or the Lenders hereunder shall be prepared in accordance with GAAP, applied on a basis consistent with that applied in preparing the financial statements as at the end of and for the last fiscal year ended (except to the extent otherwise required to conform to good accounting practice). 13. MISCELLANEOUS. 13.1 Terms Binding Upon Successors; Survival of Representations. The ---------------------------------------------------------- terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. All representations, warranties, covenants and agreements herein contained on the part of the Borrowers shall survive the making of any Advance and the execution of the Notes, and shall be effective so long as any Lender's commitment is outstanding hereunder or there remain any Obligations to be paid or performed. 13.2 Lenders in Individual Capacity. The Lenders and their ------------------------------ Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrowers or any Subsidiary of the Borrowers regardless of the capacity of the Lenders hereunder. The Lenders may disclose to the other Lenders information regarding other relationships which they may have with the Borrowers and the Borrowers hereby consent to these disclosures. 13.3 Participation and Assignments. This Agreement and the ----------------------------- Obligations of the Borrowers may not be assigned by the Borrowers. Any Lender may, subject to the limitations set forth below, assign or transfer, in whole or in part, this Agreement and the other Loan Documents and further may sell participations in all or any part of its Advances or Maximum Commitment or any other interest in the Obligations or any of its obligations hereunder to another Person, in which event: (a) in the case of an assignment, upon consent of the Credit Agent and, with respect to any assignment made except after the occurrence and during the continuance of an Event of Default, the Borrowers (which consent of the Borrowers shall not be unreasonably withheld), the assignee shall have, to the extent of such assignment (unless otherwise provided thereby), the same rights and benefits as it would have if it were a "Lender" hereunder, and, if the assignee has expressly assumed, for the benefit of the Borrowers, such Lender's obligations hereunder, such Lender shall be relieved of its obligations hereunder to the extent of such assignment and assumption, provided that the Credit Agent shall have no obligation to consent to there being more than a total of ten (10) Lenders (a Participant is not a Lender); and (b) in the case of a participation, the participating Person's (a "Participant") rights against the Lender from whom it has purchased such participation in respect of such participation are those set forth in the agreement executed by such Lender in favor of the Participant relating thereto. In the case of any sale of a participation by any Lender, such Lender shall remain solely responsible to the other parties hereto for the performance of such Lender's obligations under the Loan Documents, whether or not such Lender shall remain the holder of any Note, such Lender shall retain all voting rights with respect to such Note, the Advances hereunder and the Lender's Maximum Commitment, and the Borrowers, the Credit Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. Each such Participant shall enter into an agreement with the Participating Lender under which such Participant agrees (a) to the benefit under this Agreement with respect to the Servicing Collateral and under the Acknowledgment Agreements exclusively by and through the Credit Agent, (b) to authorize the Credit Agent or its agent to act exclusively for such Participant with respect to the Acknowledgment Agreements and the parties thereto (other than the Borrowers), and (c) that all terms of the Acknowledgment Agreements shall be binding upon such Participant as if it had executed the same. Nothing contained herein shall in any manner or to any extent affect the right of any Lender to assign its Note and its right to receive and retain payments on its Note provided such Lender remains primarily and directly liable pursuant to the terms and conditions of this Agreement to keep, observe and perform all of its obligations under this Agreement, and all such assignments shall be treated, considered and administered as a sale of a participation and not as an assignment and shall be subject to and governed by the provisions of this Section. Notwithstanding the other provisions of this Section 13.3, (a) no Lender shall assign or transfer its Warehousing Advances or Maximum Warehousing Commitment if the portion of such Lender's Maximum Warehousing Commitment held by it (after giving effect to all such assignments) would be less than Fifteen Million Dollars ($15,000,000), or if the Maximum Warehousing Commitment or, if the Warehousing Commitments have expired or been terminated, Warehousing Advances of the assignee Lender would be less than Fifteen Million Dollars ($15,000,000), and (b) no Lender may assign or transfer its Servicing Facility Advances, Maximum Servicing Facility Commitment, Term Loan Advances or Maximum Term Loan Commitment if the portion of the sum of such Lender's Maximum Servicing Facility Commitment or, if the Servicing Facility Commitments have expired or been terminated, Servicing Facility Advances, and Maximum Term Loan Commitment, or, after the Term Loan Advances have been made, Term Loan Advances held by it (after giving effect to all such assignments) would be less than Ten Million Dollars ($10,000,000) or if the sum of such amounts of the assignee Lender would be less than Ten Million Dollars ($10,000,000). On the closing date of any assignment by any Lender of any portion of its Commitments or Advances, such Lender shall pay to the Credit Agent an assignment fee in the amount of Two Thousand Five Hundred Dollars ($2,500). Any Lender may furnish any information concerning the Borrowers in the possession of such Lender from time to time to Affiliates of such Lender and to assignees and Participants (including prospective assignees and Participants) and the Borrowers hereby consent to the provision of such information. 13.4 Commitment Increases. -------------------- 13.4(a) At any time and from time to time after the Closing Date, the Warehousing Credit Limit may be increased, either temporarily or permanently, by either an Additional Lender establishing a Maximum Commitment or by one or more then existing Lender ("Increase Lender") increasing its Maximum Warehousing Commitment (each such increase by either means, a "Commitment Increase"); provided that no Commitment Increase shall become effective unless and until (i) the Borrowers, the Credit Agent and the Additional Lender or the Increase Lender shall have executed and delivered an amendment with respect to such Commitment Increase, and (ii) if, after giving effect thereto, the Warehousing Credit Limit would exceed Three Hundred Thousand Dollars ($300,000,000), such Commitment Increase shall have been consented to by each of the other Lenders holding Warehousing Commitments. Prior to the effective date ("Effective Date") of any Commitment Increase, the Borrowers shall issue a promissory note to the Additional Lender, or against surrender of its existing Note to an Increase Lender, in the amount of such Lender's Maximum Warehousing Commitment after giving effect to such Commitment Increase. Such new promissory note or notes shall constitute a "Warehousing Note" or "Warehousing Notes" for the purposes of the Loan Documents. 13.4(b) On the Effective Date of any such Commitment Increase, if such Commitment Increase is permanent, the Credit Agent shall recompute the Warehousing Percentage Share for each Lender based on the new Warehousing Credit Limit which results from the Commitment Increase, and within two (2) Business Days, the Credit Agent shall request Warehousing Advances from or shall direct prepayments to each Lender so that the total amount of all then outstanding Warehousing Advances are shared pro rata with each Lender. In the case of a temporary Commitment Increase, notwithstanding anything to the contrary set forth in this Agreement: (1) Warehousing Advances during the period of such temporary Commitment Increase (the "Temporary Increase Period") shall be made by the Lenders holding Warehousing Commitments (i) ratably, based on (A) their respective Maximum Warehousing Commitments, without giving effect to such temporary Commitment Increase, until such amounts are fully advanced, and (ii) thereafter, by the Additional Lender(s) or Increase Lender(s) only, up to the amount of its or their Maximum Warehousing Commitment(s); and (2) As long as the maturity of the Warehousing Commitments has not been accelerated pursuant to Section 8.2 of the Agreement, payments received by the Credit Agent in respect of the principal amount of Warehousing Advances outstanding shall be applied first, to Warehousing Advances made by the Additional Lender(s) or the Increase Lender(s) to the extent the outstanding principal balance thereof exceeds the permanent Maximum Warehousing Commitment of such Lender(s), and thereafter, to the remaining Warehousing Advances outstanding, ratably among the Lenders holding Warehousing Commitments. On the date any temporary Commitment Increase expires, the amount by which the outstanding principal balance of Warehousing Advances exceeds the Warehousing Credit Limit (as reduced by the expiration of the temporary increase) shall be due and payable to the Additional Lender(s) or Increase Lender(s). 13.5 Amendments. ---------- 13.5(a) This Agreement may not be amended or terms or provisions hereof waived unless such amendment or waiver is in writing and signed by the Majority Lenders, the Credit Agent and the Borrowers; provided, however, that (i) without the prior written consent of one hundred percent (100%) of the Lenders, no amendment or waiver shall: (1) reduce the principal of, or rate of interest or fees on, the Advances or any Lender's Maximum Servicing Facility Commitment or Maximum Warehousing Commitment, (2) except as provided in Section 13.4 hereof, modify the Warehousing Credit Limit, the Servicing Facility Credit Limit or the Term Loan Credit Limit, (3) except as expressly contemplated by Sections 13.3 and 13.4 hereof, modify any Lender's Percentage Share of the Warehousing Credit Limit, Term Loan Credit Limit or Servicing Facility Credit Limit, (4) modify the definition of "Majority Lenders," "Majority Warehousing Lenders," "Majority Servicing Facility Lenders" or "Majority Term Loan Lenders," (5) modify any of the provisions of this Agreement relating to the sharing of payments or proceeds of Collateral among the Lenders, (6) modify Section 11.1(c) or Section 11.1(d) hereof, (7) amend any of the definitions related to the foregoing provisions, or (8) release any of the Servicing Collateral except in connection with a sale of Servicing Contracts permitted pursuant to Section 7.2 of the Agreement, or (9) amend this Section; (ii) without the prior written consent of the Lenders holding one hundred percent (100%) of Servicing Facility Commitments or, if the Servicing Facility Commitments have expired or been terminated, the Servicing Facility Advances, (1) change the amount or time for payment of any Servicing Facility Advance or amount payable in respect thereof or any Servicing Facility Commitment or (2) amend any of the definitions relating to the foregoing provisions; (iii) without the prior written consent of the Lenders holding one hundred percent (100%) of the Term Loan Commitments or, after the Term Loans have been made, the Term Loan Advances, (1) change the amount of time for payment of any Term Loan Advances or installment thereof, or (2) amend any of the definitions relating to the foregoing provisions; or (iv) without the prior written consent of the Lenders holding one hundred percent (100%) of the Warehousing Commitments or, if the Warehousing Commitments have expired or been terminated, the Warehousing Advances, (1) change the amount or time for payment of any Warehousing Advance or amount payable in respect thereof or any Warehousing Commitment, (2) release any of the Warehousing Collateral except in connection with the sale of Pledged Mortgages or Pledged Securities in the ordinary course of business or (3) amend any of the definitions related to the foregoing. It is expressly agreed and understood that the failure by the Majority Lenders to elect to accelerate amounts outstanding hereunder or to terminate the obligation of the Lenders to make Advances hereunder shall not constitute an amendment or waiver of any term or provision of this Agreement. 13.5(b) The Borrowers hereby agree that they shall, upon requesting any amendment of this Agreement or any other Loan Document or any waiver of any material term or provision of this Agreement or any other Loan Document (except an extension of the Maturity Date), pay at the time of such request a modification fee (1) to the Credit Agent in a minimum amount of One Thousand Dollars ($1,000) or such greater amount as may be specified in the Amendment or waiver, and (2) to each Lender (except any Lender which becomes party to the Agreement by virtue of such amendment) in a minimum amount of Five Hundred Dollars ($500) or such greater amount as may be specified in the Amendment or waiver. The payment of such modification fees shall be in addition to and shall not limit the Borrowers' reimbursement obligations pursuant to Article 11 hereof, and any other fee or charge imposed by the Credit Agent or the Lenders as a condition to any amendment. 13.6 Operational Reviews. From time to time upon request, the ------------------- Borrowers shall permit the Credit Agent, any Lender or their representative access to its premises and records for the purpose of conducting a review of the Borrowers' general mortgage business methods, policies, and procedures, auditing loan files and reviewing financial and operational aspects of the Borrowers' business. 13.7 Governing Law. This Agreement and the other Loan Documents ------------- shall be governed by the laws of the State of Minnesota, without reference to its principles of conflicts of laws. 13.8 Relationship of the Parties. This Agreement provides for the --------------------------- making of Advances by the Lenders, in their capacities as lenders, to the Borrowers, in their capacity as borrowers, and for the payment of interest and repayment of principal by the Borrowers to the Lenders, and for the payment of certain fees by the Borrowers to the Lenders, the Credit Agent and the Collateral Agent. The relationship between the Secured Parties and the Borrowers is limited to that of creditor/secured party, on the one hand, and debtor, on the other hand. The provisions herein for compliance with financial covenants and delivery of financial statements are intended solely for the benefit of the Secured Parties to protect their interests in assuring payments of interest and repayment of principal and payment of certain fees, and nothing contained in this Agreement shall be construed as permitting or obligating any Secured Party to act as a financial or business advisor or consultant to the Borrowers, as permitting or obligating any Secured Party to control the Borrowers or to conduct the Borrowers' operations, as creating any fiduciary obligation on the part of the Lenders to the Borrowers, or as creating any joint venture, agency, or other relationship between or among any parties hereto other than as explicitly and specifically stated in this Agreement. The Borrowers acknowledge that they have had the opportunity to obtain the advice of experienced counsel of its own choosing in connection with the negotiation and execution of this Agreement and to obtain the advice of such counsel with respect to all matters contained herein. The Borrowers further acknowledge that they are experienced with respect to financial and credit matters and has made their own independent decisions to apply to the Lenders for credit and to execute and deliver this Agreement. 13.9 Severability. If any provision of this Agreement shall be ------------ declared to be illegal or unenforceable in any respect, such illegal or unenforceable provision shall be and become absolutely null and void and of no force and effect as though such provision were not in fact set forth herein, but all other covenants, terms, conditions and provisions hereof shall nevertheless continue to be valid and enforceable. 13.10 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 13.11 Consent to Credit References. The Borrowers hereby consent to ---------------------------- the disclosure of information regarding the Borrowers and their relationships with the Lenders to Persons making credit inquiries to the Lenders. This consent is revocable by the Borrowers at any time upon Notice to the Lenders as provided in Section 10 hereof. 13.12 Consent to Jurisdiction. The Borrowers, the Credit Agent and ----------------------- each of the Lenders hereby agree that any action or proceeding under the Loan Documents, the Notes or any document delivered pursuant hereto may be commenced against it in any court of competent jurisdiction within the State of Minnesota, by service of process by first class registered or certified mail, return receipt requested, addressed to such Person at its address last designated under the Notices provisions herein. The Borrowers, the Credit Agent and each of the Lenders agree that any such suit, action or proceeding arising out of or relating to this Agreement or any other such document may be instituted in the Hennepin County, State District Court or in the United States District Court for the District of Minnesota at the option of the Credit Agent; and the Borrowers, the Credit Agent and each of the Lenders hereby waive any objection to the jurisdiction or venue of any such court with respect to, or the convenience of any court as a forum for, any such suit, action or proceeding. Nothing herein shall affect the right of the Credit Agent or any Lender to accomplish service of process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrowers in any other jurisdiction or court. 13.13 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 13.14 Confidentiality of Information. The Lenders shall use their ------------------------------ usual and customary efforts (as applied to public companies) to assure that information about the Borrowers and their operations, affairs and financial condition not generally disclosed to the public or to trade and other creditors that is furnished to the Lenders pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Lenders and the Borrowers, and shall not be divulged to any Person other than the Lenders, their Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Credit Agent, the Collateral Agent and the Lenders hereunder and under the other Loan Documents or otherwise in connection with litigation involving the Borrowers, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 13.3 hereof, provided that the assignee, participant or prospective assignee or participant agrees to be bound by the terms of this Section 13.14 and (d) as may otherwise be required or requested by any applicable law, rule, regulation or judicial process, the opinion of the applicable Lender's counsel concerning the making of such disclosure to be binding on the parties hereto. The Lenders shall not incur any liability to the Borrowers by reason of any disclosure permitted by this Section 13.14. 13.15 WAIVER OF JURY TRIAL. THE BORROWERS, THE CREDIT AGENT AND EACH -------------------- OF THE LENDERS HEREBY (a) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (b) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY THE BORROWERS, THE CREDIT AGENT AND EACH OF THE LENDERS, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT OF A JURY TRIAL WOULD OTHERWISE ACCRUE. THE CREDIT AGENT, THE LENDERS AND THE BORROWERS ARE HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF THE FOREGOING WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE CREDIT AGENT, THE BORROWERS AND EACH OF THE LENDERS HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF ANY OF THEM, RESPECTIVELY, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY OF THE UNDERSIGNED THAT THE CREDIT AGENT, THE BORROWERS OR ANY OF THE LENDERS WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. 13.16 Entire Agreement. This Agreement, the Notes and the other Loan ---------------- Documents represent the final agreement among the parties hereto and thereto with respect to the subject matter hereof and thereof, and may not be contradicted by evidence of prior or contemporaneous oral agreements among such parties. There are no oral agreements among the parties with respect to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BORROWERS: THE WMF GROUP, LTD., a Delaware corporation By:____________________ Its:___________________ WMF WASHINGTON MORTGAGE CORP., a Delaware corporation By:____________________ Its:___________________ WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation By:____________________ Its:___________________ WMF PROCTOR, LTD., a Michigan By:____________________ Its:___________________ THE ROBERT C. WILSON COMPANY, a Texas corporation By:____________________ Its:___________________ THE ROBERT C. WILSON COMPANY-ARIZONA, an Arizona corporation By:____________________ Its:___________________ WMF CARBON MESA ADVISORS, INC. a Delaware corporation By:____________________ Its:___________________ Notice Address: The WMF Group, Ltd. 1593 Spring Hill Road, Suite 400 Vienna, VA 22182 Attention: Michael D. Ketcham, CFO Telecopier No.: (703) 610-1459 STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared ________________________________, the of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared __________________________________________________, the of WMF WASHINGTON MORTGAGE CORP., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared _____________________________________________________, the of WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared _______________________________________________, the of WMF PROCTOR, LTD., a Michigan corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) )ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared ____________________________________________________, the of THE ROBERT C. WILSON COMPANY, a Texas corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared _______________________________________________, the of THE ROBERT C. WILSON COMPANY-ARIZONA, an Arizona corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, 1999, before me, a Notary Public, personally appeared _________________________________________________, the of WMF CARBON MESA ADVISORS, INC., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expire: CREDIT AGENT: RESIDENTIAL FUNDING CORPORATION, a Delaware corporation By:______________ Its: Director Notice Address: 4800 Montgomery Lane Suite 300 Bethesda, Maryland 20814 Attention: Lisa Carlson, Managing Telecopier No.: (301) 215-7212 LENDERS: Maximum Warehousing RESIDENTIAL FUNDING CORPORATION, Commitment: $115,500,000 a Delaware corporation By:______________ Maximum Servicing Facility Its: Director Commitment: $ 7,500,000 Notice Address: Maximum Term Loan 4800 Montgomery Lane Commitment: $ 7,500,000 Suite 300 Bethesda, Maryland 20814 Attention: Lisa Carlson, Managing Telecopier No.: (301) 215-7212 STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, _____ before me, a Notary Public, personally appeared _____________________________________________, the Director of RESIDENTIAL FUNDING CORPORATION, a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: Maximum Warehousing BANK UNITED Commitment: $34,500,000 a federal savings bank By:_________________ Maximum Servicing Facility Its:________________ Commitment: $ 5,000,000 Notice Address: 8000 Towers Crescent Dr., Suite 1350 Maximum Term Loan Vienna, VA 22182 Commitment: $ 5,000,000 Attention: Sonya S. Faivre Regional Director Telecopier No.: (703) 760-7846 STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, _____ before me, a Notary Public, personally appeared ________________________________________________, the of BANK UNITED, a federal savings bank, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: Maximum Warehousing LASALLE NATIONAL BANK Commitment: $0 a federal savings bank By:_______________ Maximum Servicing Facility Its:______________ Commitment: $12,500,000 Notice Address: 135 S. LaSalle, Suite 362 Maximum Term Loan Chicago, IL 60603 Commitment: $12,500,000 Attention: Lisa Mun Telecopier No.: (312) 904-2903 STATE OF _______________ ) ) ss COUNTY OF ______________ ) On _________________, _____ before me, a Notary Public, personally appeared ____________________________________________, the of LASALLE NATIONAL BANK, a federal savings bank, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: EX-10.6 3 EXHIBIT 10.6 WAREHOUSING PROMISSORY NOTE --------------------------- $__________________ Date: February 10, 1999 FOR VALUE RECEIVED, the undersigned, THE WMF GROUP, LTD., a Delaware corporation; WMF WASHINGTON MORTGAGE CORP., a Delaware corporation; WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation; WMF PROCTOR, LTD., a Michigan corporation; THE ROBERT C. WILSON COMPANY, a Texas corporation; THE ROBERT C. WILSON-ARIZONA COMPANY, an Arizona corporation and WMF CARBON MESA ADVISORS, INC., a Delaware corporation (herein collectively called the "Borrowers", and individually as "Co-Borrower"), hereby promise to pay to the order of, a _____________________________ (the "Lender" or, together with its successors and assigns, the "Holder") at the offices of RESIDENTIAL FUNDING CORPORATION (the "Credit Agent") at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437, or at such other place as the Holder may designate from time to time, the principal sum of Dollars ($___________) or so much thereof as may be outstanding from time to time pursuant to the Warehousing Credit and Security Agreement described below, and to pay interest on said principal sum or such part thereof as shall remain unpaid from time to time, from the date of each Advance until repaid in full, and all other fees and charges due under the Agreement, at the rates and at the times set forth in the Agreement. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. This Note is given to evidence an actual warehousing line of credit in the above amount and is one of the Warehousing Promissory Notes referred to in that certain Credit and Security Agreement (Syndicated Agreement) (the "Agreement") dated the date hereof by and among the Borrowers, the Lenders named therein, and the Credit Agent, as credit agent for the Lenders, as the same may be amended or supplemented from time to time, and is entitled to the benefits thereof. Reference is hereby made to the Agreement (which is incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a description of the Collateral, a statement of the covenants and agreements, a statement of the rights and remedies and securities afforded thereby and other matters contained therein. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given them in the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. Should this Note be placed in the hands of attorneys for collection, the Borrowers agree to pay, in addition to principal and interest, fees and charges due under the Agreement, any and all costs of collecting this Note, including reasonable attorneys' fees and expenses. The Borrowers hereby waive demand, notice, protest and presentment. The promises and agreements herein shall be construed to be and are hereby declared to be the joint and several promises and agreements of each Co-Borrower and shall constitute the joint and several obligation of each Co-Borrower and shall be fully binding upon and enforceable against each Co-Borrower. The release of any party to this Note shall not affect or release the joint and several liability of any other party. The Lender may at its option enforce this Note against one or all of the Co-Borrower, and the Lender shall not be required to resort to enforcement against each Co-Borrower and the failure to proceed against or join each Co-Borrower shall not affect the joint and several liability of each Co-Borrower. This Note shall be construed and enforced in accordance with the laws of the State of Minnesota, without reference to its principles of conflicts of law. IN WITNESS WHEREOF, the Borrowers have executed this Note as of the day and year first above written. THE WMF GROUP, LTD., a Delaware corporation (on behalf of the Borrowers) By:_________________ Its:________________ STATE OF _______________ ) ) ss COUNTY OF ______________ ) On ______________________, before me, a Notary Public, personally appeared ________________________________, the of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires: EX-10.7 4 EXHIBIT 10.7 TERM LOAN FACILITY PROMISSORY NOTE ---------------------------------- $__________________ Date: February 10, 1999 FOR VALUE RECEIVED, the undersigned, THE WMF GROUP, LTD., a Delaware corporation; WMF WASHINGTON MORTGAGE CORP., a Delaware corporation; WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation; WMF PROCTOR, LTD., a Michigan corporation; THE ROBERT C. WILSON COMPANY, a Texas corporation; THE ROBERT C. WILSON-ARIZONA COMPANY, an Arizona corporation and WMF CARBON MESA ADVISORS, INC., a Delaware corporation (herein collectively called the "Borrowers", and individually as "Co-Borrower"), hereby promise to pay to the order of, a _____________________________ (the "Lender" or, together with its successors and assigns, the "Holder") at the offices of RESIDENTIAL FUNDING CORPORATION (the "Credit Agent") at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437, or at such other place as the Holder may designate from time to time, the principal sum of Dollars ($___________) or so much thereof as may be outstanding from time to time pursuant to the Warehousing Credit and Security Agreement described below, and to pay interest on said principal sum or such part thereof as shall remain unpaid from time to time, from the date of each Advance until repaid in full, and all other fees and charges due under the Agreement, at the rates and at the times set forth in the Agreement. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. This Note is given to evidence an actual line of credit in the above amount and is one of the Term Loan Facility Promissory Notes referred to in that certain Credit and Security Agreement (Syndicated Agreement) (the "Agreement") dated the date hereof by and among the Borrowers, the Lenders named therein, and the Credit Agent, as credit agent for the Lenders, as the same may be amended or supplemented from time to time, and is entitled to the benefits thereof. Reference is hereby made to the Agreement (which is incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a description of the Collateral, a statement of the covenants and agreements, a statement of the rights and remedies and securities afforded thereby and other matters contained therein. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given them in the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. Should this Note be placed in the hands of attorneys for collection, the Borrowers agree to pay, in addition to principal and interest, fees and charges due under the Agreement, any and all costs of collecting this Note, including reasonable attorneys' fees and expenses. The Borrowers hereby waive demand, notice, protest and presentment. The promises and agreements herein shall be construed to be and are hereby declared to be the joint and several promises and agreements of each Co-Borrower and shall constitute the joint and several obligation of each Co-Borrower and shall be fully binding upon and enforceable against each Co-Borrower. The release of any party to this Note shall not affect or release the joint and several liability of any other party. The Lender may at its option enforce this Note against one or all of the Co-Borrower, and the Lender shall not be required to resort to enforcement against each Co-Borrower and the failure to proceed against or join each Co-Borrower shall not affect the joint and several liability of each Co-Borrower. This Note shall be construed and enforced in accordance with the laws of the State of Minnesota, without reference to its principles of conflicts of law. IN WITNESS WHEREOF, the Borrowers have executed this Note as of the day and year first above written. THE WMF GROUP, LTD., a Delaware corporation (on behalf of the Borrowers) By:________________ Its:_______________ STATE OF _______________ ) ) ss COUNTY OF ______________ ) On ______________________, before me, a Notary Public, personally appeared __________________________________________, the of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. _______________________________ Notary Public (SEAL) My Commission Expires: EX-10.8 5 EXHIBIT 10.8 SERVICING FACILITY PROMISSORY NOTE ---------------------------------- $__________________Date: February 10, 1999 FOR VALUE RECEIVED, the undersigned, THE WMF GROUP, LTD., a Delaware corporation; WMF WASHINGTON MORTGAGE CORP., a Delaware corporation; WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation; WMF PROCTOR, LTD., a Michigan corporation; THE ROBERT C. WILSON COMPANY, a Texas corporation; THE ROBERT C. WILSON-ARIZONA COMPANY, an Arizona corporation and WMF CARBON MESA ADVISORS, INC., a Delaware corporation (herein collectively called the "Borrowers", and individually as "Co-Borrower"), hereby promise to pay to the order of , a _____________________________ (the "Lender" or, together with its successors and assigns, the "Holder") at the offices of RESIDENTIAL FUNDING CORPORATION (the "Credit Agent") at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437, or at such other place as the Holder may designate from time to time, the principal sum of Dollars ($___________) or so much thereof as may be outstanding from time to time pursuant to the Warehousing Credit and Security Agreement described below, and to pay interest on said principal sum or such part thereof as shall remain unpaid from time to time, from the date of each Advance until repaid in full, and all other fees and charges due under the Agreement, at the rates and at the times set forth in the Agreement. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. This Note is given to evidence an actual line of credit in the above amount and is one of the Servicing Facility Promissory Notes referred to in that certain Credit and Security Agreement (Syndicated Agreement) (the "Agreement") dated the date hereof by and among the Borrowers, the Lenders named therein, and the Credit Agent, as credit agent for the Lenders, as the same may be amended or supplemented from time to time, and is entitled to the benefits thereof. Reference is hereby made to the Agreement (which is incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a description of the Collateral, a statement of the covenants and agreements, a statement of the rights and remedies and securities afforded thereby and other matters contained therein. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given them in the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. Should this Note be placed in the hands of attorneys for collection, the Borrowers agree to pay, in addition to principal and interest, fees and charges due under the Agreement, any and all costs of collecting this Note, including reasonable attorneys' fees and expenses. The Borrowers hereby waive demand, notice, protest and presentment. The promises and agreements herein shall be construed to be and are hereby declared to be the joint and several promises and agreements of each Co-Borrower and shall constitute the joint and several obligation of each Co-Borrower and shall be fully binding upon and enforceable against each Co-Borrower. The release of any party to this Note shall not affect or release the joint and several liability of any other party. The Lender may at its option enforce this Note against one or all of the Co-Borrower, and the Lender shall not be required to resort to enforcement against each Co-Borrower and the failure to proceed against or join each Co-Borrower shall not affect the joint and several liability of each Co-Borrower. This Note shall be construed and enforced in accordance with the laws of the State of Minnesota, without reference to its principles of conflicts of law. IN WITNESS WHEREOF, the Borrowers have executed this Note as of the day and year first above written. THE WMF GROUP, LTD., a Delaware corporation (on behalf of the Borrowers) By:___ Its:__ STATE OF _______________ ) ) ss COUNTY OF ______________ ) On ______________________, before me, a Notary Public, personally appeared ________________________________, the of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. - ----------------------------------- Notary Public (SEAL) My Commission Expires: EX-10.9 6 EXHIBIT 10.9 SWINGLINE PROMISSORY NOTE ------------------------- $50,000,000 Date: February 10, 1999 FOR VALUE RECEIVED, the undersigned, THE WMF GROUP, LTD., a Delaware corporation, WMF WASHINGTON MORTGAGE CORP., a Delaware corporation; WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation; WMF PROCTOR, LTD., a Michigan corporation; THE ROBERT C. WILSON COMPANY, a Texas corporation; THE ROBERT C. WILSON-ARIZONA COMPANY, an Arizona corporation and WMF CARBON MESA ADVISORS, INC., a Delaware corporation (herein called the "Borrowers", and individually as "Co-Borrowers"), hereby promises to pay to the order of RESIDENTIAL FUNDING CORPORATION, a Delaware corporation (the "Lender" or, together with its successors and assigns, the "Holder") at the offices of RESIDENTIAL FUNDING CORPORATION (the "Credit Agent") at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437, or at such other place as the Holder may designate from time to time, the principal sum of Fifty Million Dollars ($50,000,000) or so much thereof as may be outstanding from time to time pursuant to the Warehousing Credit and Security Agreement described below, and to pay interest on said principal sum or such part thereof as shall remain unpaid from time to time, from the date of each Advance until repaid in full, and all other fees and charges due under the Agreement, at the rate and at the times set forth in the Agreement. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. This Note is given to evidence an actual warehouse line of credit in the above amount and is the Swingline Note referred to in that certain Credit and Security Agreement (Syndicated Agreement) (the "Agreement") dated the date hereof by and among the Borrowers, the Lenders named therein, and the Credit Agent, as credit agent for the Lenders, as the same may be amended or supplemented from time to time, and is entitled to the benefits thereof. Reference is hereby made to the Agreement (which is incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a description of the Collateral, a statement of the covenants and agreements, a statement of the rights and remedies and securities afforded thereby and other matters contained therein. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given them in the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. Should this Note be placed in the hands of attorneys for collection, the Borrowers agree to pay, in addition to principal and interest, fees and charges due under the Agreement, any and all costs of collecting this Note, including reasonable attorneys' fees and expenses. The Borrowers hereby waive demand, notice, protest and presentment. The promises and agreements herein shall be construed to be and are hereby declared to be the joint and several promises and agreements of each Co-Borrower and shall constitute the joint and several obligation of each Co-Borrower and shall be fully binding upon and enforceable against each Co-Borrower. The release of any party to this Note shall not affect or release the joint and several liability of any other party. The Lender may at its option enforce this Note against one or all of the Co-Borrower, and the Lender shall not be required to resort to enforcement against each Co-Borrower and the failure to proceed against or join each Co-Borrower shall not affect the joint and several liability of each Co-Borrower. This Note shall be construed and enforced in accordance with the laws of the State of Minnesota, without reference to its principles of conflicts of law. IN WITNESS WHEREOF, the Borrowers have executed this Note as of the day and year first above written. THE WMF GROUP, LTD., a Delaware corporation (on behalf of the Borrowers) By:___________________ Its:__________________ STATE OF _______________ ) ) ss COUNTY OF ______________ ) On ______________________, before me, a Notary Public, personally appeared ________________________________, the ______________________ of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ______________________________ Notary Public (SEAL) My Commission Expires:_____________ EX-10.10 7 EXHIBIT 10.10 SUBLIMIT PROMISSORY NOTE ------------------------ $__________________ Date: February 10, 1999 FOR VALUE RECEIVED, the undersigned, THE WMF GROUP, LTD., a Delaware corporation; WMF WASHINGTON MORTGAGE CORP., a Delaware corporation; WMF/HUNTOON, PAIGE ASSOCIATES LIMITED, a Delaware corporation; WMF PROCTOR, LTD., a Michigan corporation; THE ROBERT C. WILSON COMPANY, a Texas corporation; THE ROBERT C. WILSON-ARIZONA COMPANY, an Arizona corporation and WMF CARBON MESA ADVISORS, INC., a Delaware corporation (herein collectively called the "Borrowers", and individually as "Co-Borrower"), hereby promise to pay to the order of, a _____________________________ (the "Lender" or, together with its successors and assigns, the "Holder") at the offices of RESIDENTIAL FUNDING CORPORATION (the "Credit Agent") at 8400 Normandale Lake Blvd., Suite 600, Minneapolis, Minnesota 55437, or at such other place as the Holder may designate from time to time, the principal sum of Dollars ($___________) or so much thereof as may be outstanding from time to time pursuant to the Warehousing Credit and Security Agreement described below, and to pay interest on said principal sum or such part thereof as shall remain unpaid from time to time, from the date of each Advance until repaid in full, and all other fees and charges due under the Agreement, at the rates and at the times set forth in the Agreement. All payments hereunder shall be made in lawful money of the United States and in immediately available funds. This Note is given to evidence an actual line of credit in the above amount and is one of the Sublimit Promissory Notes referred to in that certain Credit and Security Agreement (Syndicated Agreement) (the "Agreement") dated the date hereof by and among the Borrowers, the Lenders named therein, and the Credit Agent, as credit agent for the Lenders, as the same may be amended or supplemented from time to time, and is entitled to the benefits thereof. Reference is hereby made to the Agreement (which is incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a description of the Collateral, a statement of the covenants and agreements, a statement of the rights and remedies and securities afforded thereby and other matters contained therein. Capitalized terms used herein, unless otherwise defined herein, shall have the meanings given them in the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. Should this Note be placed in the hands of attorneys for collection, the Borrowers agree to pay, in addition to principal and interest, fees and charges due under the Agreement, any and all costs of collecting this Note, including reasonable attorneys' fees and expenses. The Borrowers hereby waive demand, notice, protest and presentment. The promises and agreements herein shall be construed to be and are hereby declared to be the joint and several promises and agreements of each Co-Borrower and shall constitute the joint and several obligation of each Co-Borrower and shall be fully binding upon and enforceable against each Co-Borrower. The release of any party to this Note shall not affect or release the joint and several liability of any other party. The Lender may at its option enforce this Note against one or all of the Co-Borrower, and the Lender shall not be required to resort to enforcement against each Co-Borrower and the failure to proceed against or join each Co-Borrower shall not affect the joint and several liability of each Co-Borrower. This Note shall be construed and enforced in accordance with the laws of the State of Minnesota, without reference to its principles of conflicts of law. IN WITNESS WHEREOF, the Borrowers have executed this Note as of the day and year first above written. THE WMF GROUP, LTD., a Delaware corporation (on behalf of the Borrowers) By:____________________________ Its:___________________________ STATE OF _______________ ) ) ss COUNTY OF ______________ ) On ______________________, before me, a Notary Public, personally appeared ________________________________, the of THE WMF GROUP, LTD., a Delaware corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. - ----------------------------------- Notary Public (SEAL) My Commission Expires: EX-10.18 8 EXHIBIT 10.18 EXHIBIT 10.18 FORM OF REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of _______ __, 1997 between THE WMF GROUP, LTD., a Delaware corporation (the "COMPANY"), and CAPRICORN INVESTORS II, L.P., a Delaware limited partnership (the "PURCHASER"). Terms not otherwise defined herein have the meanings stated in the Purchase Agreement (as defined below). RECITALS A. The Company and the Purchaser have entered into the Purchase Agreement dated as of November 17, 1997 (as amended or modified from time to time, the "PURCHASE AGREEMENT"). B. Pursuant to the Purchase Agreement, the Purchaser is purchasing the Shares. The Shares are collectively referred to herein as the "REGISTRABLE SHARES". C. The Company and the Purchaser desire to enter into this Agreement to provide for the registration under the Securities Act of the disposition of the Registrable Shares and certain other matters. The execution and delivery of this Agreement is a condition precedent to the respective obligations of the parties on the Closing Date pursuant to Section 3.1(j) of the Purchase Agreement. AGREEMENT The parties agree as follows: SECTION 1. DEMAND REGISTRATION RIGHTS. (a) From and after the Closing Date (the "COMMENCEMENT DATE") and to and including the date that is the fourth anniversary of the Commencement Date, subject to extension pursuant to Section 4 (as so extended from time to time, the "TERMINATION DATE"), on one or more occasions when the Company shall have received the written request of the Purchaser, any pledgee of Registrable Shares from the Purchaser or holders of at least 100,000 Registrable Shares in the aggregate (as such number of shares may be adjusted in the event of any change in the Registerable Shares by reason of stock dividends, split-ups, reverse split-ups, mergers, recapitalizations, subdivisions, conversions, B-1 exchanges of shares or the like) that shall have been acquired directly or indirectly from the Purchaser and to which rights under this Section 1 shall have been assigned pursuant to Section 13(a) (each such person, when requesting registration under this Section 1 or under Section 2 and thereafter in connection with any such registration, being hereinafter referred to as a "REGISTERING STOCKHOLDER"), the Company shall give written notice of the receipt of such request to each potential Registering Stockholder; it being understood that, without prior notice to the Company, the Company shall not be deemed to have knowledge of the existence of any pledgee of Registrable Shares. The Company shall, as expeditiously as possible and in good faith, include in a Registration Statement the number of Registrable Shares (the "TRANSACTION REGISTRABLE SHARES") that the Registering Stockholders shall have specified by written notice received by the Company not later than 10 Business Days after the Company shall have given such written notice to the Registering Stockholders pursuant to this Section 1(a). (b) If the requested registration pursuant to this Section 1 shall involve an underwritten offering, (1) no other securities of the Company, including securities to be offered for the account of the Company or any person other than a Registering Stockholder, shall be included in the Registration Statement and (2) the Registering Stockholder initiating a request for registration of Registrable Shares pursuant to this Section 1 shall select (with the consent of the Company, not to be unreasonably withheld) the managing underwriter in connection with the offering and any additional investment bankers and managers to be used in connection with the offering. (c) Notwithstanding anything herein to the contrary: (1) the Company shall not be required to prepare and file pursuant to this Section 1 a Registration Statement including less than 100,000 Registrable Shares in the aggregate (as such number of shares may be adjusted in the event of any change in the Registerable Shares by reason of stock dividends, split-ups, reverse split-ups, mergers, recapitalizations, subdivisions, conversions, exchanges of shares or the like); (2) subject to the following clause (3), the Company shall not be required to prepare and file pursuant to this Section 1 more than seven Registration Statements, PROVIDED that a Registration Statement shall be deemed not to have been prepared and filed if the same does not become effective; and (3) if a requested registration pursuant to this Section 1 shall involve an underwritten offering, and if the managing underwriter shall advise the Company and the Registering Stockholders in writing that, in its opinion, the number of Transaction Registrable Shares proposed to be included in the registration is so great as to adversely affect the offering, including the price at which the Transaction Registrable Shares could be sold, the Company will include in the registration the maximum number of securities which it is so advised can be sold without the adverse effect, allocated pro rata among all Registering Stockholders on the basis of the relative number of Transaction Registrable Shares that each Registering Stockholder B-2 has duly requested to be included in the registration; PROVIDED, that if 10% or more of the Transaction Registrable Shares requested to be registered by the Registering Stockholder initiating a request for registration of Registrable Shares pursuant to this Section 1 are so excluded from any registration and an investment banking firm of recognized national standing shall advise the Company that the number of the Transaction Registerable Shares requested to be registered by such Registering Stockholder, at the time of the request and in light of the market conditions then prevailing, did not exceed the number that would have an adverse effect on the offering of such Transaction Registrable Shares, including the price of which such Transaction Registrable Shares could be sold, there shall be provided one additional registration under the preceding clause (2) in respect of each such exclusion. SECTION 2. PIGGY-BACK REGISTRATION RIGHTS. (a) From and after the Commencement Date to and including the date that is the fourth anniversary of the Commencement Date, if the Company shall determine to register or qualify by a registration statement filed under the Securities Act and under any applicable state securities laws, any offering of any Equity Securities of the Company, other than an offering with respect to which a Registering Stockholder shall have requested a registration pursuant to Section 1, the Company shall give notice of such determination to each potential Registering Stockholder and each other person having rights with respect to the registration under the Securities Act of the disposition of securities of the Company about which the Company has knowledge; it being understood that without prior notice to the Company, the Company shall not be deemed to have knowledge of the existence of any pledgee of Registrable Shares. The Company shall, as expeditiously as possible and in good faith, include in the registration statement the number of Registrable Shares (the "TRANSACTION REGISTRABLE SHARES") that the Registering Stockholders shall have specified by written notice received by the Company not later than 30 Business Days after the Company shall have given such written notice to the Registering Stockholders pursuant to this Section 2(a). (b) Notwithstanding anything herein to the contrary: (1) the Company shall not be required by this Section 2 to include any Registrable Shares owned by Registering Stockholders in a registration statement on Form S-4 or S-8 (or any successor form) or a registration statement filed in connection with an exchange offer or other offering of securities solely to the then existing stockholders of the Company; and (2) if a registration pursuant to this Section 2 involves an underwritten offering, the Company shall select the managing underwriter for the offering and any additional investment bankers and managers to be used in connection with the offering, and if the managing underwriter advises the Company in writing that, in its opinion, the number of securities requested to be included in the registration is so great as to adversely affect the offering, including the price at which the securities B-3 could be sold, the Company will include in the registration the maximum number of securities which it is so advised can be sold without the adverse effect, allocated as follows: (A) FIRST, all securities proposed to be registered by the Company for its own account; (B) SECOND, all securities proposed to be registered by the Company pursuant to the exercise by any person other than a Registering Stockholder of a "demand" right requesting the registration of shares of Common Stock in accordance with an agreement substantially similar to the provisions of Section 1; (C) THIRD, all Transaction Registrable Shares duly requested to be included in the registration, allocated pro rata among all Registering Stockholders on the basis of the relative number of Transaction Registrable Shares that each Registering Stockholder has duly requested to be included in the registration; and (D) FOURTH, any other securities proposed to be registered by the Company other than for its own account, including, without limitation, securities proposed to be registered by the Company pursuant to the exercise by any person other than a Registering Stockholder of a "piggy-back" right requesting the registration of shares of Common Stock in accordance with an agreement substantially similar to this Section 2; PROVIDED, HOWEVER, that in no event will the number of Registrable Shares included in a registration pursuant to this Section 2 be reduced to less than 10% of the aggregate number of securities included in the registration. SECTION 3. REGISTRATION PROVISIONS. With respect to each registration pursuant to this Agreement: (a) Notwithstanding anything herein to the contrary, the Company shall not be required to include in any registration any of the Registrable Shares owned by a Registering Stockholder (1) if the Company shall deliver to the Registering Stockholder an opinion, satisfactory in form, scope and substance to the Registering Stockholder and addressed to the Registering Stockholder by legal counsel satisfactory to the Registering Stockholder, to the effect that the distribution of such Registrable Shares proposed by the Registering Stockholder is exempt from registration under the Securities Act and all applicable state securities laws or (2) if such Registering Stockholder or any underwriter of such Registrable Shares shall fail to furnish to the Company the information in respect of the distribution of the shares that may be required under this Agreement to be furnished by the Registering Stockholder or the underwriter to the Company. (b) The Company shall make available for inspection by each Registering Stockholder participating in the registration, each underwriter of Transaction B-4 Registrable Shares owned by the Registering Stockholder and their respective accountants, counsel and other representatives all financial and other records, pertinent corporate documents and properties of the Company as shall be reasonably necessary to enable them to exercise their due diligence responsibility in connection with each registration of Transaction Registrable Shares owned by the Registering Stockholder, and shall cause the Company's officers, directors and employees to supply all information reasonably requested by any such person in connection with such registration; PROVIDED that records and documents which the Company determines, in good faith, after consultation with counsel for the Company and counsel for the Registering Stockholder or underwriter, as the case may be, to be confidential and which it notifies such persons are confidential shall not be disclosed to them, except in each case to the extent that (1) the disclosure of such records or documents is necessary to avoid or correct a misstatement or omission in the Registration Statement, (2) the disclosure of such records or documents to an agency, bureau, commission, court, department, official, political subdivision or other instrumentality of any government, whether federal, state, county or local, domestic or foreign (each, a "GOVERNMENTAL BODY") having jurisdiction over such person is necessary or appropriate or (3) the disclosure of such records or documents may otherwise be required by applicable laws, rules, regulations, ordinances, judgments, rulings, orders, awards, recommendation or other official action of any Governmental Body having jurisdiction over such person. Each Registering Stockholder shall, after determining that disclosure of any records or documents may be necessary or advisable in the circumstances referenced in the proviso to the preceding sentence, give notice to the Company, and allow the Company, at the Company's expense, to undertake appropriate action and to prevent disclosure of any such records or documents deemed confidential. (c) Each Registering Stockholder shall furnish, and shall cause each underwriter of Transaction Registrable Shares owned by the Registering Stockholder to be distributed pursuant to the registration to furnish, to the Company in writing promptly upon the request of the Company the additional information regarding the Registering Stockholder or the underwriter, the contemplated distribution of the Transaction Registrable Shares and the other information regarding the proposed distribution by the Registering Stockholder and the underwriter that shall be required in connection with the proposed distribution by the applicable securities laws of the United States of America and the states thereof in which the Transaction Registrable Shares are contemplated to be distributed. The information furnished by any Registering Stockholder or any underwriter shall be certified by the Registering Stockholder or the underwriter, as the case may be, and shall be stated to be specifically for use in connection with the registration. (d) The Company shall prepare and file with the Securities and Exchange Commission the Registration Statement, including the Prospectus, and each amendment thereof or supplement thereto, under the Securities Act and as required under any applicable state securities laws, on the form that is then required or available for use by the Company to permit each Registering Stockholder, upon the effective date of the Registration Statement, to use the Prospectus in connection with the contemplated distribution by the Registering Stockholder of the Transaction Registrable Shares requested B-5 to be so registered. A registration pursuant to Section 1 shall be effected pursuant to Rule 415 (or any similar provision then in force) under the Securities Act if the manner of distribution contemplated by the Registering Stockholder shall include an offering on a delayed or continuous basis. The Company shall furnish to each Registering Stockholder drafts of the Registration Statement and the Prospectus and each amendment thereof or supplement thereto for its timely review prior to the filing thereof with the Securities and Exchange Commission. If any Registration Statement refers to any Registering Stockholder by name or otherwise as the holder of any securities of the Company but such reference is not required by the Securities Act or any similar federal statute then in force, then the Registering Stockholder shall have the right to require the deletion of such reference. The Company shall deliver to each Registering Stockholder, without charge, one executed copy of the Registration Statement and each amendment or post-effective amendment thereof and one copy of each document incorporated therein by reference. If the registration shall have been initiated solely by the Company or shall not have been initiated by a Registering Stockholder, the Company shall not be obligated to prosecute the registration, and may withdraw the Registration Statement at any time prior to the effectiveness thereof, if the Company shall determine in good faith not to proceed with the offering of securities included in the Registration Statement. In all other cases, the Company shall use its best efforts to cause the Registration Statement to become effective and, as soon as practicable after the effectiveness thereof, shall deliver to each Registering Stockholder evidence of the effectiveness and as many copies of the Prospectus and each amendment thereof or supplement thereto as the Registering Stockholder may reasonably request. The Company consents to the use by each Registering Stockholder of each Prospectus and each amendment thereof and supplement thereto in connection with the distribution, in accordance with this Agreement, of the Transaction Registrable Shares owned by the Registering Stockholder. In addition, if necessary for resale by the Registering Stockholders, the Company shall qualify or register in such states as may be reasonably requested by each Registering Stockholder the Transaction Registrable Shares of the Registering Stockholder that shall have been included in the Registration Statement; PROVIDED that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any state in which it is not subject to process or qualified as of the date of the request. The Company shall advise the Purchaser and each Registering Stockholder in writing, promptly after the occurrence of any of the following, of (1) the filing of the Registration Statement or any Prospectus, or any amendment thereof or supplement thereto, with the Securities and Exchange Commission, (2) the effectiveness of the Registration Statement and any post-effective amendment thereto, (3) the receipt by the Company of any communication from the Securities Exchange Commission with respect to the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto, including, without limitation, any stop order suspending the effectiveness thereof, any comments with respect thereto and any requests for amendments or supplements and (4) the receipt by the Company of any notification with respect to the suspension of the qualification of Transaction Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. B-6 (e) The Company shall use its best efforts to cause the Registration Statement and the Prospectus to remain effective or current, as the case may be, including the filing of necessary amendments, post-effective amendments and supplements, and shall furnish copies of such amendments, post- effective amendments and supplements to the Registering Stockholders, so as to permit the Registering Stockholders to distribute the Transaction Registrable Shares owned by them in their respective manner of distribution during their respective contemplated periods of distribution, but in no event longer than six consecutive months from the effective date of the Registration Statement; PROVIDED that the period shall be increased by the number of days that any Registering Stockholder shall have been required by Section 4 to refrain from disposing under the registration of the Transaction Registrable Shares owned by the Registering Stockholder. During such respective contemplated periods of distribution, the Company shall comply with the provisions of the Securities Act applicable to it with respect to the disposition of all Transaction Registrable Shares that shall have been included in the Registration Statement in accordance with their respective contemplated manner of disposition by the Registering Stockholders set forth in the Registration Statement, the Prospectus or the supplement, as the case may be. The Company shall not be deemed to have used its best efforts to cause the Registration Statement to remain effective during the applicable period if it voluntarily takes any action (other than an action required under applicable law or taken pursuant to and in accordance with Section 4) that would result in the Registering Stockholders not being able to dispose of the Transaction Registrable Shares during their respective contemplated periods of distribution in accordance with their respective contemplated manner of disposition. The Company shall notify each Registering Stockholder, at any time when a prospectus with respect to the Transaction Registrable Shares is required to be delivered under the Securities Act, when the Company becomes aware of the happening of any event as a result of which the Prospectus (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the Prospectus or any preliminary prospectus, in light of the circumstances under which they were made) not misleading and, as promptly as practicable thereafter, prepare and file with the Securities and Exchange Commission an amendment or supplement to the Registration Statement or the Prospectus so that, as thereafter delivered to the purchasers of such Transaction Registrable Shares, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company shall make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment. Notwithstanding anything in the foregoing to the contrary, if, in the opinion of counsel for the Company, there shall have arisen any legal impediment to the offer of the Transaction Registrable Shares made by the Prospectus or if any legal action or administrative proceeding shall have been instituted or threatened or any other claim shall have been made relating to the offer made by the Prospectus or against any of the parties involved in the offer, the Company may at any time upon written notice to each Registering Stockholder (1) terminate the effectiveness of the Registration Statement or (2) withdraw from the Registration Statement the Transaction Registrable Shares owned by the Registering Stockholder; PROVIDED that, promptly after those matters B-7 shall be resolved to the satisfaction of counsel for the Company, then, pursuant to Section 1 or 2, as the case may be, the Company shall cause the registration of Transaction Registrable Shares formerly covered by the Registration Statement that were removed from registration by the action of the Company. (f) If requested by any Registering Stockholder or an underwriter of Transaction Registrable Shares owned by the Registering Stockholder, the Company shall as promptly as practicable prepare and file with the Securities and Exchange Commission an amendment or supplement to the Registration Statement or the Prospectus containing such information as the Registering Stockholder or the underwriter requests to be included therein, including, without limitation, information with respect to the Transaction Registrable Shares being sold by the Registering Stockholder to the underwriter, the purchase price being paid therefor by such underwriter and other terms of the underwritten offering of the Transaction Registrable Shares to be sold in such offering. (g) Each Registering Stockholder shall report to the Company distributions made by the Registering Stockholder of Transaction Registrable Shares pursuant to the Prospectus and, upon written notice by the Company that an event has occurred as a result of which an amendment or supplement to the Registration Statement or the Prospectus is required, the Registering Stockholder shall cease further distributions pursuant to the Prospectus until notified by the Company of the effectiveness of the amendment or supplement. Each Registering Stockholder shall distribute Transaction Registrable Shares only in accordance with the manner of distribution contemplated by the Prospectus with respect to the Transaction Registrable Shares owned by the Registering Stockholder. Each Registering Stockholder, by participating in a registration pursuant to this Agreement, acknowledges that the remedies of the Company at law for failure by the Registering Stockholder to comply with the undertaking contained in this paragraph (g) would be inadequate and that the failure would not be adequately compensable in damages and would cause irreparable harm to the Company, and therefore agrees that undertakings made by the Registering Stockholder in this paragraph (g) may be specifically enforced. (h) If the registration is made pursuant to Section 2 and the registration involves an underwritten offering, in whole or in part, the Company may require the Transaction Registrable Shares owned by the Registering Stockholders to be included in such underwriting on the same terms and conditions as shall be applicable to the other securities being sold through underwriters in the registration. In that event, the Registering Stockholders shall be parties to the related underwriting agreement. (i) If the registration involves an underwritten offering, (1) at the request of one or more of the Registering Stockholders or the Company, the Company and the requesting Registering Stockholders shall enter into an appropriate underwriting agreement with respect to the Registrable Shares of the Registering Stockholders containing terms and provisions customary in agreements of that nature, including, without limitation, provisions with respect to expenses substantially the same as those set forth in Section 5 and provisions with respect to indemnification and contribution substantially the same as those B-8 set forth in Section 6, (2) the Company shall make such representations and warranties, and deliver such certificates with respect thereto, to each Registering Stockholder owning the Transaction Registrable Shares included in such underwritten offering and each underwriter of such Transaction Registrable Shares, and in each case in such form, substance and scope, as are customarily made by issuers to underwriters in primary underwritten offerings, (3) the Company shall obtain and deliver to each such Registering Stockholder and underwriter opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, substance and scope) shall be reasonably satisfactory to the managing underwriter in such offering) addressed to such Registering Stockholder and underwriter with respect to matters customarily covered by such opinions requested in underwritten offerings and such other matters as may reasonably be requested by such Registering Stockholder or underwriter, (4) the Company shall obtain and deliver to each such Registering Stockholder and underwriter "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accounts of any subsidiary of the Company or of any business of the Company for which financial statements and financial data are, or required to be, included in the Registration Statement), addressed to such Registering Stockholder and underwriter, in customary form and substance, with respect to matters customarily covered by "cold comfort" letters in connection with primary underwritten offerings, and (5) the Company shall prepare or obtain, and deliver to each such Registering Stockholder and underwriter, such other documents as may reasonably be requested by such Registering Stockholder or underwriter. (j) Prior to sales of Transaction Registrable Shares under the Registration Statement, the Company shall cooperate with each Registering Stockholder and each underwriter of Transaction Registrable Shares owned by the Registering Stockholder to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing such Transaction Registrable Shares, and to enable such Transaction Registrable Shares to be in such denominations and registered in such names as the Registering Stockholder or the underwriter may request. (k) The Company shall use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to its securityholders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first calendar month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act. (l) The Company shall take all action required to cause the Transaction Registrable Shares to be listed on each national securities exchange on which the Common Stock shall then be listed, if any, and to be qualified for inclusion in the NASDAQ/National Market System or the NASDAQ/SmallCap Market, as the case may be, if the Common Stock is then so qualified. (m) For the purposes of this Agreement, the following terms shall have the following meanings: B-9 (1) "BUSINESS DAY" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close; (2) "PROSPECTUS" means (A) the prospectus relating to the Transaction Registrable Shares owned by the Registering Stockholders included in a Registration Statement, (B) if a prospectus relating to the Transaction Registrable Shares shall be filed with the Securities and Exchange Commission pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, such prospectus, and (C) in the event of any amendment or supplement to the prospectus after the effective date of the Registration Statement, then from and after the effectiveness of the amendment or the filing with the Securities and Exchange Commission of the supplement, the prospectus as so amended or supplemented; (3) "REGISTRATION STATEMENT" means (A) a registration statement filed by the Company in accordance with Section 3(d), including exhibits and financial statements thereto, in the form in which it shall become effective, the documents incorporated by reference therein pursuant to Item 12 of Form S-3 (or any similar provision or forms then in force) under the Securities Act and information deemed to be a part of such registration statement pursuant to paragraph (b) of Rule 430A (or any similar provision then in force) and (B) in the event of any amendment thereto after the effective date of the registration statement, then from and after the effectiveness of the amendment, the registration statement as so amended; and (4) information "CONTAINED", "INCLUDED" or "STATED" in a Registration Statement or a Prospectus (or other references of like import) includes information incorporated by reference. SECTION 4. BLACKOUT PROVISIONS. (a) By delivery of written notice to any of the Purchaser, the Registering Stockholders and the other holders of Registrable Shares, stating which one or more of the following limitations shall apply to the addressee of such written notice, the Company may (1) postpone effecting a registration under this Agreement pursuant to this Section 4 on one occasion during any period of nine consecutive months, (2) require such addressee to refrain from disposing of Transaction Registrable Shares under the registration or (3) require such addressee to refrain from otherwise disposing of any Registrable Shares owned by such addressee (whether pursuant to Rule 144 or 144A under the Securities Act or otherwise), in each case for a reasonable time specified in the notice but not exceeding 90 days (which period may not be extended or renewed). (b) The Company may postpone effecting a registration or apply to any person specified in clauses (2) and (3) of paragraph (a) above any of the limitations specified in such clauses if (1) an investment banking firm of recognized national standing B-10 shall advise the Company and the Registering Stockholders in writing that effecting the registration or the disposition by such person of Registrable Shares, as the case may be, would materially and adversely affect an offering of Equity Securities of the Company the preparation of which had then been commenced or (2) the Company is in possession of material non-public information the disclosure of which during the period specified in such notice the Company reasonably believes would not be in the best interests of the Company. (c) If the Company shall take any action pursuant to paragraph (a) above, the period during which the Registering Stockholders may exercise their respective rights under Sections 1 and 2 shall be extended by one day beyond the Commencement Date for each day that, pursuant to this Section 4, the Company postpones effecting a registration, requires any person to refrain from disposing of Transaction Registrable Shares under a registration or otherwise requires any person to refrain from disposing of Registrable Shares. SECTION 5. EXPENSES. (a) The Company shall bear all expenses of the following in connection with the registration of Transaction Registrable Shares pursuant to this Agreement, whether or not any related Registration Statement shall become effective: (1) preparing, printing and filing each Registration Statement and Prospectus and each qualification or notice required to be filed under federal and state securities laws or the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"); (2) all fees and expenses of complying with federal and state securities laws and the rules and regulations of the NASD; (3) furnishing to each Registering Stockholder one executed copy of the related Registration Statement and the number of copies of the related Prospectus that may be required by Sections 3(d) and 3(e) to be so furnished, together with a like number of copies of each amendment, post-effective amendment or supplement; (4) performing its obligations under Sections 3(d) and 3(i); (5) printing and issuing share certificates, including the transfer agent's fees, in connection with each distribution so registered; (6) preparing audited financial statements required by the Securities Act and the rules and regulations thereunder to be included in the Registration Statement and preparing audited financial statements for use in connection with the registration other than audited financial statements required by the Securities Act and the rules and regulations thereunder; B-11 (7) internal expenses of the Company (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties); (8) premiums or other expenses relating to liability insurance required by the Company or underwriters of the Registering Stockholders; (9) fees and disbursements of underwriters of the Registering Stockholders customarily paid by issuers or sellers of securities; (10) listing of the Registrable Shares on national securities exchanges and inclusion of the Registrable Shares on the NASDAQ/National Market System or the NASDAQ/SmallCap Market, as the case may be; and (11) fees and expenses of any special experts retained by the Company in connection with the registration. (b) The Registering Stockholders shall bear all other expenses incident to the distribution by the respective Registering Stockholders of the Registrable Shares owned by them in connection with a registration pursuant to this Agreement, including, without limitation, the selling expenses of the Registering Stockholders (but excluding the expenses referred to in paragraph (a)(9) above), commissions, underwriting discounts, insurance, fees of counsel for the Registering Stockholders and their underwriters. SECTION 6. INDEMNIFICATION (a) The Company shall indemnify and hold harmless each Registering Stockholder participating in a registration pursuant to this Agreement, each underwriter of Transaction Registrable Shares owned by the Registering Stockholder to be distributed pursuant to the registration, each partner in the Registering Stockholder, the officers and directors of the Registering Stockholder and the underwriter and each person, if any, who controls the Registering Stockholder, any partner in the Registering Stockholder or the underwriter within the meaning of Section 15 (or any successor provision) of the Securities Act, and their respective successors, against all claims, losses, damages and liabilities to third parties (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement or the Prospectus or other document incident thereto or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each such Registering Stockholder and each other person indemnified pursuant to this Section 6(a) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; PROVIDED that the Company shall not be liable in any case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by the Registering Stockholder or the underwriter of such B-12 Transaction Registrable Shares specifically for use in the Registration Statement or the Prospectus. (b) Each Registering Stockholder, by participating in a registration pursuant to this Agreement, thereby agrees to indemnify and to hold harmless the Company and its officers and directors and each person, if any, who controls any of them within the meaning of Section 15 (or any successor provision) of the Securities Act, and their respective successors, against all claims, losses, damages and liabilities to third parties (or actions in respect thereof) arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement or the Prospectus or other document incident thereto or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company and each other person indemnified pursuant to this Section 6(b) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action; PROVIDED that this Section 6(b) shall apply only if (and only to the extent that) the statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by the Registering Stockholder specifically for use in the Registration Statement or the Prospectus, PROVIDED, FURTHER, that in no event shall the liability of a Registering Stockholder hereunder be greater in amount than the dollar amount of the proceeds received by the Registering Stockholder upon the sale of the Registrable Shares giving rise to such indemnification obligations. (c) If any action or proceeding (including any governmental investigation or inquiry) shall be brought, asserted or threatened against any person indemnified under this Section 6, the indemnified person shall promptly notify the indemnifying party in writing, and the indemnifying party shall assume the defense of the action or proceeding, including the employment of counsel satisfactory to the indemnified person and the payment of all expenses. The indemnified person shall have the right to employ separate counsel in any action or proceeding and to participate in the defense of the action or proceeding, but the fees and expenses of that counsel shall be at the expense of the indemnified person unless: (1) the indemnifying party shall have agreed to pay those fees and expenses; or (2) the indemnifying party shall have failed to assume the defense of the action or proceeding or shall have failed to employ counsel reasonably satisfactory to the indemnified person in the action or proceeding; or (3) the named parties to the action or proceeding (including any impleaded parties) include both the indemnified person and the indemnifying party, and the indemnified person shall have been advised by counsel that there may be one or more legal defenses available to the indemnified person that are different from or additional to those available to the indemnifying party (in which case, if the B-13 indemnified person notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action or proceeding on behalf of the indemnified person; it being understood, however, that the indemnifying party shall not, in connection with any one action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the indemnified person, which firm shall be designated in writing by the indemnified person). The indemnifying party shall not be liable for any settlement of any action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the indemnifying party shall indemnify and hold harmless the indemnified person from and against any loss or liability by reason of the settlement or judgment. (d) If the indemnification provided for in this Section 6 is unavailable to an indemnified person (other than by reason of exceptions provided in this Section 6) in respect of losses, claims, damages, liabilities or expenses referred to in this Section 6, then each applicable indemnifying party, in lieu of indemnifying the indemnified person, shall contribute to the amount paid or payable by the indemnified person as a result of the losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified person on the other in connection with the statements or omissions which resulted in the losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified person on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified person and by these persons' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 6(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding sentence. The amount paid or payable by a person as a result of the losses, claims, damages, liabilities and expenses shall be deemed to include any legal or other fees or expenses reasonably incurred by the person in connection with investigating or defending any action or claim. Notwithstanding in the foregoing to the contrary, no Registering Stockholder or underwriter of Transaction Registrable Shares owned by the Registering Stockholder shall be required to contribute any amount in excess of the amount by which (1) in the case of the Registering Stockholder, the net proceeds received by the Registering Stockholder the sale of Transaction Registrable Shares or (2) in the case of the underwriter, the total price at which such Transaction Registrable Shares purchased by it and distributed to the public were offered to the public exceeds, in any such case, the B-14 amount of any damages that the Registering Stockholder or underwriter, as the case may be, has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission. No person guilty of fraudulent representation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (e) Each Registering Stockholder participating in a registration pursuant to Section 1 shall cause each underwriter of any Transaction Registrable Shares owned by the Registering Stockholder to be distributed pursuant to the registration to agree in writing on terms reasonably satisfactory to the Company to indemnify and to hold harmless the Company and its officers and directors and each person, if any, who controls any of them within the meaning of Section 15 (or any successors provision) of the Securities Act, and their respective successors, against all claims, losses, damages and liabilities to third parties (or actions in respect thereof) arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement or the Prospectus or other document incident thereto or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and to reimburse the Company and each other person indemnified pursuant to the agreement for any legal or any other expense reasonably incurred in connection with investigating or defending any claim, loss, damage, liability or action; PROVIDED that the agreement shall apply only if (and only to the extent that) the statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by the underwriter specifically for use in the Registration Statement or the Prospectus. SECTION 7. TRANSFER RESTRICTIONS. (a) The Purchaser acknowledges that the Company will issue and sell the Registrable Shares to the Purchaser in reliance upon the exemption afforded by Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering. The Purchaser represents that (1) it will acquire the Registrable Shares for investment and without any view toward distribution of any of the Registrable Shares to any other person and (2) it will not sell or otherwise dispose of the Registrable Shares except in compliance with the registration requirements or exemption provisions under the Securities Act. (b) Except as provided to the contrary in this Section 7, each certificate for Registrable Shares, and any certificate issued in exchange therefor or upon conversion, exercise or transfer thereof, shall bear legends substantially to the effect stated in clauses (1) and (2) below: (1) "The shares of Common Stock represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold, transferred or otherwise disposed of except in compliance with said Act." B-15 (2) "The shares of Common Stock represented by this certificate are subject to the restrictions stated in the Registration Rights Agreement dated as of __________, 1997, a copy of which is on file at the office of the Secretary of the Company." (c) The legend stated in Section 7(b)(1) shall be removed by delivery of one or more substitute certificates without such legend if either (1) such substitute instruments or certificates are issued in connection with a sale that is registered under the Securities Act or (2) the holder thereof shall have delivered to the Company a copy of a letter from the staff of the Securities and Exchange Commission or an opinion of counsel, in form and substance reasonably satisfactory to the Company, to the effect that the legend is not required for purposes of the Securities Act. (d) The legend stated in Section 7(b)(2) shall be removed by delivery of one or more substitute certificates without such legend at such time as the related securities are no longer subject to this Agreement. SECTION 8. EXEMPT SALES. (a) The Company shall make all filings with the Securities and Exchange Commission required by paragraph (c) of Rule 144 (or any similar provision then in force) under the Securities Act to permit the sale of Registrable Shares by any holder thereof (other than an Affiliate of the Company) to satisfy the conditions of Rule 144 (or any similar provision then in force). The Company shall, promptly upon the written request of the holder of Registrable Shares, deliver to such holder a written statement as to whether the Company has complied with all such filing requirements. (b) If any of the Registrable Shares are then eligible for sale by the holder thereof pursuant to Rule 144A (or any similar provision then in force) under the Securities Act, the Company shall, promptly upon the written request of such holder, furnish to such holder and each prospective purchaser of such Registrable Shares identified by such holder in such written request, the information required by paragraph (d)(4) of Rule 144A (or any similar provision then in force) to permit the sale of such Registrable Shares to satisfy the conditions of Rule 144A (or any similar provision then in force). (c) Prior to sales of Registrable Shares proposed to be sold pursuant to an exemption from the registration requirements of the Securities Act, the Company shall, subject to Section 6(d), cooperate with the Purchaser and each other holder of Registrable Shares to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing such Registrable Shares. SECTION 9. MERGER, CONSOLIDATION, EXCHANGE, ETC. In the event, directly or indirectly, (1) the Company shall merge with and into, or consolidate with, or consummate a share exchange pursuant to Subchapter IX of the Delaware General Corporation Law (or successor provisions or statutes) with, any other person, or (2) any person shall merge with B-16 and into, or consolidate, the Company and the Company shall be the surviving corporation of such merger or consolidation and, in connection with such merger or consolidation, all or part of the Registrable Shares shall be changed into or exchanged for stock or other securities of any other person, then, in each such case, proper provision shall be made so that such other person shall be bound by the provisions of this Agreement and the term "Company" shall thereafter be deemed to refer to such other person. SECTION 10. OTHER AGREEMENTS. The Company, on behalf of itself and its Affiliates (other than a Registering Stockholder), agrees (1) not to effect any public sale or distribution of any securities similar to the Registrable Shares being registered pursuant to this Agreement or any securities convertible into or exchangeable or exercisable for such Registrable Shares during the 14 days prior to, and during the 90-day period beginning on, the effective date of the Registration Statement (except (x) on Form S-4 or Form S-8 (or comparable form) or (y) as part of the Registration Statement; PROVIDED that with respect to clause (y) in the case of a registration pursuant to Section 1 the Registering Stockholder initiating the registration consents to such inclusion), or the commencement of a public distribution of Registrable Shares; (2) not to enter into any agreement inconsistent with any provision of this Agreement; (3) that any agreement entered into after the date of this Agreement pursuant to which the Company issues or agrees to issue any privately placed securities shall contain a provision under which holders of such securities agree not to effect any public sale or distribution of any of the securities during the periods described in clause (1) of this Section 10, in each case including a sale in a Rule 144 Transaction (except as part of any such registration, if permitted); PROVIDED that the provisions of this Section 10 shall not prevent the conversion or exchange of any securities pursuant to their terms into or for other securities. SECTION 11. NOTICES. All notices, requests and other communications to any party under this Agreement shall be in writing. Communications may be made by telecopy or similar writing. Each communication shall be given to the party at its address stated on the signature pages of this Agreement or at any other address as the party may specify for this purpose by notice to the other party. Each communication shall be effective (1) if given by telecopy, when the telecopy is transmitted to the proper address and the receipt of the transmission is confirmed, (2) if given by mail, 72 hours after the communication is deposited in the mails properly addressed with first class postage prepaid or (3) if given by any other means, when delivered to the proper address and a written acknowledgement of delivery is received. SECTION 12. NO WAIVERS; REMEDIES. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver of the right, power or privilege. A single or partial exercise of any right, power or privilege shall not preclude any other or further exercise of the right, power or privilege or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement shall be cumulative and not exclusive of any rights or remedies provided by law. B-17 SECTION 13. AMENDMENTS, ETC. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by a party to this Agreement from any provision of this Agreement, shall be effective unless it shall be in writing and signed and delivered by the other party to this Agreement, and then it shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 14. SUCCESSORS AND ASSIGNS. (a) Each holder of Registrable Shares may assign to any transferee of Registrable Shares its rights and delegate to the transferee its obligations under this Agreement, including, without limitation, the rights of assignment pursuant to this Section 14; PROVIDED that such transferee assignee shall accept such rights and assume such obligations for the benefit of the Company by written instrument, in form and substance reasonably satisfactory to the Company. Thereafter, without any further action by any person, all references in this Agreement to the holder of such Registrable Securities, and all comparable references, shall be deemed to be references to the transferee, and the transferor shall be released from each obligation or liability under this Agreement with respect to the Registrable Shares so transferred. (b) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns pursuant to Section 3(a). SECTION 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. SECTION 16. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if all signatures were on the same instrument. SECTION 17. SEVERABILITY OF PROVISIONS. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of the prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of the provision in any other jurisdiction. SECTION 18. HEADINGS AND REFERENCES. Section headings in this Agreement are included for the convenience of reference only and do not constitute a part of this Agreement for any other purpose. References to parties and sections in this Agreement are references to the parties to or the sections of this Agreement, as the case may be, unless the context shall require otherwise. SECTION 19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding of the parties and supersedes all prior agreements or understandings with respect to the subject matters of this Agreement. B-18 SECTION 20. SURVIVAL. Except as otherwise specifically provided in this Agreement, each representation, warranty or covenant of each party contained in to this Agreement shall remain in full force and effect, notwithstanding any investigation or notice to the contrary or any waiver by the other party of a related condition precedent to the performance by such other party of an obligation under this Agreement. SECTION 21. EXCLUSIVE JURISDICTION. Each party (1) agrees that any Action with respect to this Agreement or transactions contemplated by this Agreement shall be brought exclusively in the courts of the State of New York or of the United States of America for the Southern District of New York, (2) accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of those courts, (3) irrevocably waives any objection, including, without limitation, any objection to the laying of venue or based on the grounds of FORUM NON CONVENIENS, which it may now or hereafter have to the bringing of any action in those jurisdictions; PROVIDED, HOWEVER, that each party may assert in an Action in any other jurisdiction or venue each mandatory defense, third-party claim or similar claim that, if not so asserted in such Action, may not be asserted in an original Action in the courts referred to in clause (1) above. SECTION 22. WAIVER OF JURY TRIAL. Each party waives any right to a trial by jury in any Action to enforce or defend any right under this Agreement or any amendment, instrument, document or agreement delivered, or which in the future may be delivered, in connection with this Agreement and agrees that any Action shall be tried before a court and not before a jury. SECTION 23. NON-RECOURSE. No recourse under this Agreement shall be had against any "controlling person" (within the meaning of Section 20 of the Exchange Act) of the Purchaser or the stockholders, directors, officers, employees, agents and Affiliates of the Purchaser or such controlling persons, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any Regulation, it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise be incurred by such controlling person, stockholder, director, officer, employee, agent or Affiliate, as such, for any obligations of the Purchaser under this Agreement or any other Transaction Document or for any claim based on, in respect of or by reason of such obligations or their creation. SECTION 24. AFFILIATE. Nothing contained in this Agreement shall constitute the Purchaser an "affiliate" of any of the Company and its Subsidiaries within the meaning of Rule 13e-3 under the Exchange Act. ---------------------------- [Intentionally Left Blank] B-19 IN WITNESS WHEREOF, the parties have executed and delivered this Registration Rights Agreement as of the date first written above in New York, New York. THE WMF GROUP, LTD. By:__________________________________________ Name: Title: Address: 1593 Spring Hill Road Suite 400 Vienna, Virginia 22182 Telecopy: (703) 610-1400 CAPRICORN INVESTORS II, L.P. BY: CAPRICORN HOLDINGS, LLC, ITS GENERAL PARTNER By:__________________________________________ Name: Title: Address: 30 East Elm Street Greenwich, Connecticut 06830 Telecopy: (203) 861-6671 S-1 B-20 EX-23 9 EXHIBIT 23 The Board of Directors The WMF Group. Ltd. We consent to the incorporation by reference in the registration statements (No.333-41613 and No.333-61653) on Form S-8 of The WMF Group, Ltd. of our report dated March 5, 1999, except for note 20 which is as of March 19, 1999, relating to the consolidated balance sheets of The WMF Group, Ltd. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended, which report appears in the December 31, 1998 Form 10-K of The WMF Group, Ltd. KPMG LLP Washington, D.C. March 31, 1999 EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K CONSOLIDATED FINANCIALS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 22,295 12,362 6,195 3,851 2,588 2,631 0 0 0 0 49,980 63,363 5,011 2,299 0 0 144,527 119,331 55,649 58,608 0 0 0 0 0 0 53 50 27,325 38,775 144,527 119,331 0 0 72,541 44,645 0 0 98,083 30,952 7,954 5,910 1,128 729 17,764 2,283 (52,388) 4,771 (19,066) 2,329 (33,322) 2,442 0 0 0 0 0 0 (33,322) 2,442 (6.38) .57 (6.38) .55
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