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          THIS MORTGAGE LOAN PURCHASE AGREEMENT (this "Purchase Agreement"),
dated as of September 1, 2003, is made among NovaStar Mortgage, Inc. (the
"Seller"), NovaStar Mortgage Funding Corporation (the "Company"), Wachovia Bank,
National Association (the "Custodian") and JPMorgan Chase Bank (the "Trustee").

                          W I T N E S S E T H  T H A T:

          WHEREAS, pursuant to the terms of this Purchase Agreement, the Seller
will sell the Closing Date Mortgage Loans and the related MI Policies to the
Company on the Closing Date;

          WHEREAS, pursuant to the terms of the Pooling and Servicing Agreement,
the Company will transfer the Closing Date Mortgage Loans and the related MI
Policies, and assign all of its rights under the Purchase Agreement, to the
Trustee, without recourse, on the Closing Date;

          WHEREAS, pursuant to the terms of the Pooling and Servicing Agreement,
the Trustee will issue the Certificates;

          WHEREAS, pursuant to the terms of the Pooling and Servicing Agreement,
the Trustee will transfer to the Company the Certificates;

          WHEREAS, pursuant to the terms of the Underwriting Agreement, the
Company will sell the Underwritten Certificates to the Underwriters;

          WHEREAS, pursuant to the terms of the REMIC Interests Sale Agreement,
the Company will sell the Class X Certificates, Class O Certificates, the Class
P Certificates and Residual Certificates to NovaStar Certificates Financing
Corporation ("NCFC");

          WHEREAS, pursuant to the terms of the Pooling and Servicing Agreement,
the Servicer will service the Mortgage Loans; and

          WHEREAS, pursuant to the terms of the Converted Loan Purchase
Agreement, the Converted Loan Purchaser will purchase the Converted Mortgage
Loans from the Trustee.

                                    ARTICLE I

                                   DEFINITIONS

          Section 1.01 Definitions.

          For all purposes of this Purchase Agreement, except as otherwise
expressly provided herein or unless the context otherwise requires, capitalized
terms not otherwise defined herein shall have the meanings assigned to such
terms in the Definitions contained in Appendix A to the Pooling and Servicing
Agreement, dated as of September 1, 2003, among the Custodian, the Trustee, the
Company and NovaStar Mortgage, Inc. as seller and servicer (the "Servicer")
which is incorporated by reference herein. All other capitalized terms used
herein shall have the meanings specified herein.

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                                   ARTICLE II

                  SALE OF MORTGAGE LOANS AND RELATED PROVISIONS

          Section 2.01 Sale of Closing Date Mortgage Loans and MI Policies.

          (a) The Seller hereby sells, and the Company hereby purchases on the
Closing Date the Closing Date Mortgage Loans identified (and the related MI
Policies) on the Mortgage Loan Schedule annexed hereto as Exhibit 1, the
proceeds thereof and all rights under the Related Documents (including the
related Mortgage Files). The Closing Date Mortgage Loans consist of a pool of
two groups of conventional, residential first lien mortgage loans with fixed and
adjustable interest rates, the Group I Mortgage Loans and the Group II Mortgage
Loans, and a group of residential first and second lien mortgage loans with
fixed and adjustable interest rates, the Group III Mortgage Loans. The Closing
Date Mortgage Loans will have a Principal Balance as of the close of business on
the Cut-off Date, after giving effect to any payments due on or before such date
whether or not received, of approximately $750,296,584. The sale of the Closing
Date Mortgage Loans will take place on the Closing Date, subject to and
simultaneously with the deposit of the Closing Date Mortgage Loans and the
Original Pre-Funded Amount into the Trust Fund, the issuance of the Certificates
by the Trustee and the sale of the Underwritten Certificates pursuant to the
Underwriting Agreement. The purchase price (the "Purchase Price") for the
Closing Date Mortgage Loans to be paid by the Company to the Seller on the
Closing Date is the unpaid principal balance of the Closing Date Mortgage Loans
less any unreimbursed advances plus accrued and unpaid interest plus any costs
and damages incurred in connection with the violation of any Closing Date
Mortgage Loan of any predatory or abusive lending law. The Purchase Price shall
consist of the following:

               (i) a payment in an amount equal to $1,473,635,156 representing
the net proceeds of the sale of the Underwritten Certificates, which payment
shall be paid to the Seller by wire transfer in immediately available funds on
the Closing Date by or on behalf of the Company, or as otherwise agreed by the
Company; and

               (ii) a payment in an amount equal to $[15,000,000] representing
the proceeds of the sale of the Class O Certificates, the Class P and Class X
Certificates by the Company to NCFC pursuant to the REMIC Interests Sale
Agreement, which payment shall be paid to the Seller by wire transfer in
immediately available funds on the Closing Date by or on behalf of the Company,
or as otherwise agreed by the Company.

          (b) [Reserved]

          (c) In connection with such conveyances by the Seller, the Seller
shall on behalf of and at the direction of the Company deliver to, and deposit
with the Custodian on behalf of the Trustee, on or before the Closing Date in
the case of a Closing Date Mortgage Loan and two Business Days prior to the
related Subsequent Transfer Date in the case of a Subsequent Mortgage Loan, the
following documents or instruments with respect to each Mortgage Loan (the
"Mortgage File"):

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               (i) the original Mortgage Note endorsed to "JPMorgan Chase Bank,
as Trustee of the NovaStar Mortgage Funding Trust, Series 2003-3, relating to
the NovaStar Home Equity Loan Asset-Backed Certificates, Series 2003-3";

               (ii) the original Mortgage with evidence of recording thereon,
or, if the original Mortgage has not yet been returned from the public recording
office, a copy of the original Mortgage certified by the Seller or the public
recording office in which such original Mortgage has been recorded and if the
Mortgage Loan is registered on the MERS System, such Mortgage shall include
thereon a statement that it is a MOM Loan and shall include the MIN for such
Mortgage Loan;

               (iii) unless the Mortgage Loan is registered on the MERS System,
an original assignment (which may be included in one or more blanket assignments
if permitted by applicable law) of the Mortgage endorsed to "JPMorgan Chase
Bank, as Trustee of the NovaStar Mortgage Funding Trust, Series 2003-3, relating
to the NovaStar Home Equity Loan Asset-Backed Certificates, Series 2003-3", and
otherwise in recordable form;

               (iv) originals of any intervening assignments of the Mortgage
showing an unbroken chain of title from the originator thereof to the Person
assigning it to the Trustee (or to MERS, if the Mortgage Loan is registered on
the MERS System, and noting the presence of a MIN, if the Mortgage Loan is
registered on the MERS System), with evidence of recording thereon, or, if the
original of any such intervening assignment has not yet been returned from the
public recording office, a copy of such original intervening assignment
certified by the Seller or the public recording office in which such original
intervening assignment has been recorded;

               (v) the original policy of title insurance (or a commitment for
title insurance, if the policy is being held by the title insurance company
pending recordation of the Mortgage);

               (vi) true and correct copy of each assumption, modification,
consolidation or substitution agreement, if any, relating to the Mortgage Loan;
and

               (vii) an executed copy of the notice of assignment and
acknowledgement of assignment with respect to the Mortgage Loans covered by the
MI Policies.

          If a material defect in any Mortgage File is discovered which may
materially and adversely affect the value of the related Mortgage Loan, or the
interests of the Trustee (as pledgee of the Mortgage Loans), or the
Certificateholders in such Mortgage Loan, including if any document required to
be delivered to the Custodian has not been delivered (provided that a Mortgage
File will not be deemed to contain a defect for an unrecorded assignment under
clause (i) above for 180 days following submission of the assignment if the
Seller has submitted such assignment for recording pursuant to the terms of the
following paragraph), the Seller shall cure such defect, repurchase the related
Mortgage Loan at the Repurchase Price or substitute an Eligible Substitute
Mortgage Loan for the related Mortgage Loan upon the same terms and conditions
set forth in Section 3.01 hereof as to the Closing Date Mortgage Loans and the
Subsequent Mortgage Loans and Section 2.02(c) hereof as to the Subsequent
Mortgage Loans for breaches of representations and warranties.

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          Promptly after the Closing Date in the case of a Closing Date Mortgage
Loan or, in the case of a Subsequent Mortgage Loan, promptly after the
Subsequent Transfer Date (or after the date of transfer of any Eligible
Substitute Mortgage Loan), the Seller at its own expense shall complete and
submit for recording in the appropriate public office for real property records
each of the assignments referred to in clause (i) above, with such assignment
completed in favor of the Trustee, excluding any Mortgage Loan that is
registered on the MERS System if MERS is identified on the Mortgage or on a
properly recorded assignment of Mortgage as the mortgagee of record. While such
assignment to be recorded is being recorded, the Custodian shall retain a
photocopy of such assignment. If any assignment is lost or returned unrecorded
to the Custodian because of any defect therein, the Seller is required to
prepare a substitute assignment or cure such defect, as the case may be, and the
Seller shall cause such substitute assignment to be recorded in accordance with
this paragraph.

          In instances where an original Mortgage or any original intervening
assignment of Mortgage is not, in accordance with clause (ii) or (iv) above,
delivered by the Seller to the Custodian, on behalf of the Trustee, prior to or
on the Closing Date in the case of a Closing Date Mortgage Loan or, in the case
of a Subsequent Mortgage Loan, prior to or on the Subsequent Transfer Date, the
Seller will deliver or cause to be delivered the originals of such documents to
the Custodian, on behalf of the Trustee, promptly upon receipt thereof.

          In connection with the assignment of any Closing Date Mortgage Loan
registered on the MERS System, promptly after the Closing Date, the Seller
further agrees that it will cause, at the Seller's own expense, the MERS System
to indicate that such Closing Date Mortgage Loan has been assigned by the Seller
to the Trustee in accordance with this Agreement for the benefit of the
Certificateholders by including in such computer files (a) the applicable
Trustee code in the field "Trustee" which identifies the Trustee and (b) the
code "NovaStar 2003-3" (or its equivalent) in the field "Pool Field" which
identifies the series of the Certificates issued in connection with such
Mortgage Loans.

          Effective on the Closing Date, the Company hereby acknowledges its
acceptance of all right, title and interest to the Closing Date Mortgage Loans
and other property, existing on the Closing Date and thereafter created and
conveyed to it pursuant to this Section 2.01.

          The Trustee, as assignee or transferee of the Company, shall be
entitled to all scheduled principal payments due after the Cut-off Date, all
other payments of principal due and collected after the Cut-off Date, and all
payments of interest on the Closing Date Mortgage Loans. No scheduled payments
of principal due on or before the Cut-off Date and collected after the Cut-off
Date shall belong to the Company pursuant to the terms of this Purchase
Agreement. The Pooling and Servicing Agreement shall provide that any late
payment charges collected in connection with a Mortgage Loan shall be paid to
the Servicer as provided therein.

          (d) The parties hereto intend that the transactions set forth herein
constitute a sale by the Seller to the Company on the Closing Date of all the
Seller's right, title and interest in and to the Closing Date Mortgage Loans and
other property as and to the extent described above. In the event the
transactions set forth herein shall be deemed not to be a sale, the Seller
hereby grants to the Company as of the Closing Date a security interest in all
of the Seller's right, title and interest in, to and under the Closing Date
Mortgage Loans and such other property, to secure

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all of the Seller's obligations hereunder and this Purchase Agreement shall
constitute a security agreement under applicable law and in such event, the
parties hereto acknowledge that the Custodian, in addition to holding the
Closing Mortgage Loans on behalf of the Trustee for the benefit of the
Certificateholders, holds the Closing Date Mortgage Loans as designee of the
Company. The Seller agrees to take or cause to be taken such actions and to
execute such documents, including without limitation the filing of all necessary
UCC-1 financing statements filed in the Commonwealth of Virginia (which shall
have been submitted for filing as of the Closing Date and each Subsequent
Transfer Date, as applicable), any continuation statements with respect thereto
and any amendments thereto required to reflect a change in the name or corporate
structure of the Seller, as are necessary to perfect and protect the interests
of the Company and their respective assignees in each Closing Date Mortgage Loan
and the proceeds thereof and the interests of the Trustee and its assignees in
each Subsequent Mortgage Loan and the proceeds thereof. The Company agrees to
take or cause to be taken such actions and to execute such documents, including
without limitation the filing of all necessary UCC-1 financing statements, and
continuation statements with respect thereto and any amendments thereto as are
necessary to perfect and protect the interests of the Trustee and its assignees
in each Closing Date Mortgage Loan.

          Section 2.02 Conveyance of the Subsequent Mortgage Loans.

          (a) Subject to the conditions set forth in paragraph (b) below in
consideration of the Trustee's delivery on the related Subsequent Transfer Dates
of all or a portion of the balance of funds in the Pre-Funding Account, the
Seller shall on any Subsequent Transfer Date sell, transfer, assign, set over
and convey, without recourse, to the Company, who shall then sell, transfer,
assign, set over and convey, without recourse, to the Trustee, but subject to
the other terms and provisions of this Purchase Agreement, all of the right,
title and interest of the Seller in and to (i) the Subsequent Mortgage Loans
(and the related MI Policies) identified on the related Mortgage Loan Schedule
attached to the related Subsequent Transfer Instrument delivered by the Seller
on such Subsequent Transfer Date, (ii) principal due and interest accruing on
the Subsequent Mortgage Loans after the related Subsequent Cut-off Date and (i)
with respect to such Subsequent Mortgage Loans all items to be delivered
pursuant to Section 2.01(c) above and the other items in the related Mortgage
Files; provided, however, that the Seller reserves and retains all right, title
and interest in and to principal received and interest accruing on the
Subsequent Mortgage Loans prior to the related Subsequent Cut-off Date. The
transfer by the Seller to the Company, and by the Company to the Trustee, of the
Subsequent Mortgage Loans identified on each Mortgage Loan Schedule attached to
the related Subsequent Transfer Instrument shall be absolute and is intended by
the Trustee, the Company and the Seller to constitute and to be treated as a
sale of the Subsequent Mortgage Loans by the Seller to the Company, and a sale
of the Subsequent Mortgage Loans by the Company to the Trustee.

          In the event such transactions shall be deemed not to be a sale, the
Seller hereby grants to the Company as of each Subsequent Transfer Date a
security interest in all of the Seller's right, title and interest in, to and
under the related Subsequent Mortgage Loans and such other property, to secure
all of the Seller's obligations hereunder, and this Purchase Agreement shall
constitute a security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Custodian, in addition to holding the
Subsequent Mortgage Loans and the related MI Policies on behalf of the Trustee
for the benefit of the Certificateholders, holds the

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Subsequent Mortgage Loans and the related MI Policies as designee of the
Company. The Seller agrees to take or cause to be taken such actions and to
execute such documents, including without limitation the filing of all necessary
UCC-1 financing statements filed in the Commonwealth of Virginia (which shall be
submitted for filing as of the related Subsequent Transfer Date), any
continuation statements with respect thereto and any amendments thereto required
to reflect a change in the name or corporate structure of the Seller or the
filing of any additional UCC-1 financing statements due to a change in the state
of incorporation of the Seller as are necessary to perfect and protect the
interests of the Company and its assignees in the Subsequent Mortgage Loans.

          In the event such transactions shall be deemed not to be a sale, the
Company hereby grants to the Trustee as of each Subsequent Transfer Date a
security interest in all of the Company's right, title and interest in, to and
under the related Subsequent Mortgage Loans and such other property, to secure
all of the Company's obligations hereunder, and this Purchase Agreement shall
constitute a security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Custodian, in addition to holding the
Subsequent Mortgage Loans and the related MI Policies on behalf of the Trustee
for the benefit of the Certificateholders, holds the Subsequent Mortgage Loans
and the related MI Policies as designee of the Trustee. The Company agrees to
take or cause to be taken such actions and to execute such documents, including
without limitation, the filing of all necessary UCC-1 financing statements filed
in the State of Delaware (which shall be submitted for filing as of the related
Subsequent Transfer Date), any continuation statements with respect thereto and
any amendments thereto required to reflect a change in the name or corporate
structure of the Company or the filing of any additional UCC-1 financing
statements due to a change in the state of incorporation of the Company as are
necessary to perfect and protect the interests of the Trustee and its assignees
in Subsequent Mortgage Loans.

          The related Mortgage File for each Subsequent Mortgage Loan shall be
delivered to the Custodian, on behalf of the Trustee, prior to the related
Subsequent Transfer Date.

          The Trustee on each Subsequent Transfer Date shall acknowledge by
signing receipt thereof its acceptance of all right, title and interest to the
related Subsequent Mortgage Loans and other property, existing on the Subsequent
Transfer Date and thereafter created, conveyed to it pursuant to this Section
2.02.

          The Trustee, as trustee of the Trust Fund, shall be entitled to all
scheduled principal payments due after each Subsequent Cut-off Date, all other
payments of principal due and collected after each related Subsequent Cut-off
Date, and all payments of interest on the Subsequent Mortgage Loans, minus that
portion of any such payment which is allocable to the period prior to the
related Subsequent Cut-off Date. No scheduled payments of principal due on or
before the related Subsequent Cut-off Date and collected after the related
Subsequent Cut-off Date shall belong to the Trust Fund pursuant to the terms of
this Purchase Agreement.

          The purchase price paid by the Trustee, at the direction of the
Servicer and on behalf of the Trustee, from amounts released from the
Pre-Funding Account shall be one-hundred percent (100%) of the aggregate
Principal Balances of the Subsequent Mortgage Loans

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so transferred (as identified on the Mortgage Loan Schedule attached to the
related Subsequent Transfer Instrument provided by the Seller).

          (b) The Seller shall transfer to the Company, who shall transfer to
the Trustee, the Subsequent Mortgage Loans and the other property and rights
related thereto described in Section 2.02(a) above, and the Trustee shall cause
to be released funds from the related Pre-Funding Account, only upon the
satisfaction of each of the following conditions on or prior to the related
Subsequent Transfer Date:

               (i) the Seller shall have provided the Company, and the Company
shall have provided the Trustee, with a timely Addition Notice, which notice
shall be given no fewer than four Business Days prior to the related Subsequent
Transfer Date and shall designate the Subsequent Mortgage Loans to be sold to
the Company and then to the Trustee and the aggregate Principal Balances of such
Subsequent Mortgage Loans as of the related Subsequent Cut-off Date and any
other information reasonably requested by the Trustee with respect to the
Subsequent Mortgage Loans;

               (ii) the Seller shall have delivered to the Company, who shall
have delivered to the Trustee, who shall have delivered to the Custodian, a duly
executed Subsequent Transfer Instrument substantially in the form of Exhibit
2(A) or 2(B), as applicable, (A) confirming the satisfaction of each condition
precedent and representations specified in this Section 2.02(b), Section 2.02(c)
and in the related Subsequent Transfer Instrument and (B) including a Mortgage
Loan Schedule attached thereto listing the Subsequent Mortgage Loans;

               (iii) as of each Subsequent Transfer Date, as evidenced by
delivery of the Seller's Subsequent Transfer Instrument in the form of Exhibit
2(A) and the Company's Subsequent Transfer Instrument is the form of Exhibit
2(B), neither the Seller nor the Company shall be insolvent or have been made
insolvent by such transfers, nor shall they be aware of any pending insolvency;

               (iv) such sale and transfer (i) does not cause any REMIC created
under the Pooling and Servicing Agreement to fail to qualify as a REMIC and (ii)
is not a prohibited transaction within the meaning of Section 860F(a)(2) of the
Code or a contribution resulting in a tax under Section 860G(d) of the Code,
both as evidenced by an Opinion of Counsel provided for the Trustee at the
expense of the Seller;

               (v) the Pre-Funding Period shall not have terminated; and

               (vi) the Seller shall have delivered to the Custodian, the
Trustee, and the Rating Agencies Opinions of Counsel addressed to the Rating
Agencies, the Trustee and the Custodian with respect to the transfers of the
Subsequent Mortgage Loans substantially in the form of the Opinion of Counsel
delivered to the Custodian, the Trustee and the Rating Agencies on the Closing
Date (1) regarding certain corporate matters and (2) confirming the existence of
a true sale which may be contained in such opinion delivered on the Closing
Date.

          (c) The obligation of the Trustee to purchase a Subsequent Mortgage
Loan on each Subsequent Transfer Date on or prior to October 6, 2003 is subject
to the following conditions: (1) each such Subsequent Mortgage Loan shall
satisfy the representations and

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warranties specified in the related Subsequent Transfer Instrument and this
Purchase Agreement; (2) the Seller shall not select such Subsequent Mortgage
Loans in a manner that it reasonably believes is adverse to the interests of the
Majority Certificateholders; (3) the Seller shall have delivered certain
Opinions of Counsel required pursuant to Section 2.02(b)(iv) and (vi) hereof;
(4) as of the related Subsequent Cut-off Date, the Mortgage Loans (the Closing
Date Mortgage Loans and the Subsequent Mortgage Loans together) shall satisfy
the following criteria: (i) each Mortgage Loan shall not be 60 or more days
contractually delinquent as of the related Subsequent Cut-off Date; (ii) the
weighted average remaining stated term to maturity of the Mortgage Loans shall
not exceed 350 months; (iii) no more than 3.70% of the Mortgage Loans are
secured by second liens on the related Mortgaged Property; (iv) each Mortgage
Loan shall have an outstanding Principal Balance of at least $10,000; (v) each
Mortgage Loan shall be underwritten in accordance with the Underwriting
Guidelines; (vi) each Mortgage Loan shall have a Loan-to-Value Ratio of no more
than 100%; (vii) each Mortgage Loan shall have a stated maturity of no later
than December 1, 2033; (viii) no Mortgage Loan shall permit negative
amortization; (ix) each Mortgage Loan shall either have a fixed Mortgage Rate of
at least 4.00% or, if an adjustable loan, a Gross Margin of at least 1.00%; (x)
no more than 39.75% of the Mortgage Loans shall have a fixed Mortgage Rate; (xi)
the weighted average Loan-to-Value Ratio of the Mortgage Loans shall be no more
than 80.50%; (xii) no less than 51% of the Mortgage Loans shall either (A) have
a Loan-to Value Ratio of no more than 60% or (B) have a Loan-to-Value Ratio of
greater than 60% and be covered by an MI Policy which will insure losses to the
extent that the uninsured exposure of the related Mortgage Loan is reduced to an
amount equal to 55% or 51% of the lesser of the appraised value or purchase
price, as the case may be, of the related Mortgaged Property, in each case, at
the time of the applicable effective date of the MI Policy; (xiii) the Mortgage
Loans shall have a weighted average coupon of at least 6.98%; (xiv) pursuant to
the Underwriting Guidelines, no fewer than 50% of the Mortgage Loans shall be
AAA, A+, ALT-A, AA and M1 credit risks, no fewer than 10% of the Mortgage Loans
shall be A, A- and M2 credit risks, and no more than 15% of the Mortgage Loans
shall be B, B-, C, C-, M3 and M4 credit risks; (xv) no greater than 10% of such
Mortgage Loans shall be FICO Enhanced loans pursuant to the Underwriting
Guidelines; (xvi) no more than 10% of the Mortgage Loans shall be FICO only
loans; (xvii) the Mortgage Loans shall have a weighted average FICO score issued
by a consumer credit rating agency of at least 648; (xviii) at least 95% of the
Mortgage Loans shall be loans for primary residences; (xix) no more than 40% of
the Mortgage Loans shall have stated loan documentation, and no more than 15.95%
of the Mortgage Loans shall have no loan documentation; (xx) at least 74.60% of
the Mortgage Loans shall be loans for single family residences; (xxi) no more
than 56.80% of the Mortgage Loans shall be loans that are the subject of
cash-out refinances; (xxii) the ratings agencies shall have consented either in
writing or verbally to the transfer of the Mortgage Loans; (xxiii) at least
72.50% of the Mortgage Loans shall have prepayment penalties; (xxiv) no more
than 28.50% of the Mortgage Loans may be located in the state of California;
(xxv) the Mortgage Loans with adjustable mortgage rates must have a weighted
gross margin of at least 5.60%, a weighted average initial rate cap of no less
than 2.90%, a weighted average periodic rate cap of at least 1.00% and a
weighted average maximum rate of no less than 13.90%; (xxvi) the average loan
amount for the Mortgage Loans must be at least $130,000, but no greater than
$150,000; (xxvii) no more than 0.25% of the Mortgage Loans greater than 30 days
delinquent; (xxviii) no more than 17.2% of the Mortgage Loans may be first-lien
mortgage loans with second liens originated

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at the same time as the first lien; and (xxix) no more than 5% of the Mortgage
Loans may be fixed rate balloon loans.

          The obligation of the Trustee to purchase a Subsequent Mortgage Loan
on any Subsequent Transfer Date after October 6, 2003 is subject to the
following conditions: (1) each such Subsequent Mortgage Loan shall satisfy the
representations and warranties specified in the related Subsequent Transfer
Instrument and this Purchase Agreement; (2) the Seller shall not select such
Subsequent Mortgage Loans in a manner that it reasonably believes is adverse to
the interests of the Majority Certificateholders; (3) the Seller shall have
delivered certain Opinions of Counsel required pursuant to Section 2.02(b)(iv)
and (vi) hereof; (4) as of the related Subsequent Cut-off Date, the Subsequent
Mortgage Loans shall satisfy the following criteria: (i) each Subsequent
Mortgage Loan shall not be 60 or more days contractually delinquent as of the
related Subsequent Cut-off Date; (ii) the remaining stated term to maturity of
each Subsequent Mortgage Loan shall not exceed 360 months; (iii) approximately
95.5% of the Subsequent Mortgage Loans are secured by first liens on the related
Mortgaged Property; (iv) each Subsequent Mortgage Loan shall have an outstanding
Principal Balance of at least $10,000; (v) each Subsequent Mortgage Loan shall
be underwritten in accordance with the Underwriting Guidelines; (vi) each
Subsequent Mortgage Loan shall have a Loan-to-Value Ratio of no more than 100%;
(vii) each Subsequent Mortgage Loan shall have a stated maturity of no later
than December 1, 2033; (viii) no Subsequent Mortgage Loan shall permit negative
amortization; (ix) each Subsequent Mortgage Loan shall either have a fixed
Mortgage Rate of at least 4.00% or, if an adjustable loan, a Gross Margin of at
least 1.00%; (x) a minimum of 55% of the Subsequent Mortgage Loans (by
Subsequent Cut-off Date Principal Balance) shall have an adjustable Mortgage
Rate; (xi) the weighted average Loan-to-Value Ratio of the Subsequent Mortgage
Loans (by Subsequent Cut-off Date Principal Balance) shall be no more than
81.25%; (xii) no less than 50% of the Subsequent Mortgage Loans shall either (A)
have a Loan-to Value Ratio of no more than 60% or (B) have a Loan-to-Value Ratio
of greater than 60% and be covered by an MI Policy which will insure losses to
the extent that the uninsured exposure of the related Subsequent Mortgage Loan
is reduced to an amount equal to 55% or 51% of the lesser of the appraised value
or purchase price, as the case may be, of the related Mortgaged Property, in
each case, at the time of the applicable effective date of the MI Policy; (xiii)
the Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal Balance)
shall have a weighted average coupon of at least 6.85%; (xiv) pursuant to the
Underwriting Guidelines, no fewer than 50% of the Subsequent Mortgage Loans (by
Subsequent Cut-off Date Principal Balance) shall be AAA, A+, ALT-A, AA and M1
credit risks, no fewer than 10% of the Subsequent Mortgage Loans (by Subsequent
Cut-off Date Principal Balance) shall be A, A- and M2 credit risks, and no more
than 15% of the Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal
Balance) shall be B, B-, C, C-, M3 and M4 credit risks; (xv) the Subsequent
Mortgage Loans (by Subsequent Cut-off Date Principal Balance) shall have a
weighted average FICO score issued by a consumer credit rating agency of at
least 640; (xvi) at least 87% of such Subsequent Mortgage Loans (by Subsequent
Cut-off Date Principal Balance) shall be loans for primary residences; (xvii) no
more than 45% of the Subsequent Mortgage Loans (by Subsequent Cut-off Date
Principal Balance) shall have stated loan documentation, and no more than 20% of
the Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal Balance
shall have no loan documentation; (xviii) at least 70% of the Subsequent
Mortgage Loans (by Subsequent Cut-off Date Principal Balance) shall be loans for
single family residences; (xix) no more than 70% of the Subsequent Mortgage
Loans (by Subsequent Cut-off Date Principal Balance) shall be loans that are the
subject of cash-out

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refinances; (xx) the ratings agencies shall have consented either in writing or
verbally to the transfer of the Subsequent Mortgage Loans; and (xxi) at least
67% of the Subsequent Mortgage Loans shall have prepayment penalties.

          The acceptance of the Subsequent Mortgage Loans by the Trustee is
subject to the Seller receiving a written or verbal consent from each of the
Rating Agencies that states that the addition of such Subsequent Mortgage Loans
will not cause the Rating Agencies to downgrade any of their ratings on the
Underwritten Certificates.

          Notwithstanding the foregoing, Subsequent Mortgage Loans with
characteristics varying from those set forth above may be purchased by the
Trustee and included in the Trust Fund, if (i) the Trustee is provided with
written confirmation that the aggregate credit risk of such Subsequent Mortgage
Loans is similar to that of the Closing Date Mortgage Loans and (ii) the Seller
receives and provides to the Trustee a written consent from each of the Rating
Agencies that states that the addition of such Subsequent Mortgage Loans will
not cause the Rating Agencies to downgrade any of their ratings of the
Underwritten Certificates.

          (d) Within five Business Days after the end of the Funding Period, the
Seller shall deliver to the Rating Agencies, the Trustee and the Custodian a
copy of the updated Mortgage Loan Schedule including the Subsequent Mortgage
Loans in electronic format.

          Section 2.03 Pre-Funding Account.

          (a) No later than the Closing Date, the Trustee will establish and
maintain the Pre-Funding Account pursuant to the Pooling and Servicing
Agreement. On the Closing Date, the Seller will deposit in the Pre-Funding
Account the Original Pre-Funded Amount from the net proceeds of the sale of the
Underwritten Certificates.

                                  ARTICLE III

                         REPRESENTATIONS AND WARRANTIES;
                               REMEDIES FOR BREACH

          Section 3.01 Seller Representations and Warranties.

          The Seller hereby represents and warrants to the Company and the
Trustee as of the date hereof, as of the Closing Date (or if otherwise specified
below, as of the date so specified) and as of each Subsequent Transfer Date:

          (a) As to the Seller:

               (i) The Seller (i) is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Virginia and
(ii) is qualified and in good standing as a foreign corporation to do business
in each jurisdiction where such qualification is necessary, except where the
failure so to qualify would not have a material adverse effect on the Seller's
ability to enter into this Purchase Agreement and each Seller's

                                       10

<PAGE>

Subsequent Transfer Instrument and to consummate the transactions contemplated
hereby and thereby;

               (ii) The Seller has the power and authority to make, execute,
deliver and perform its obligations under this Purchase Agreement and each
Seller's Subsequent Transfer Instrument and all of the transactions contemplated
under this Purchase Agreement and each Seller's Subsequent Transfer Instrument,
and has taken all necessary corporate action to authorize the execution,
delivery and performance of this Purchase Agreement each Seller's Subsequent
Transfer Instrument;

               (iii) The Seller is not required to obtain the consent of any
other Person or any consent, approval or authorization from, or registration or
declaration with, any governmental authority, bureau or agency in connection
with the execution, delivery, performance, validity or enforceability of this
Purchase Agreement or any Seller's Subsequent Transfer Instrument, except for
such consents, approvals or authorization, or registration or declaration, as
shall have been obtained or filed, as the case may be;

               (iv) The execution and delivery of this Purchase Agreement and
each Seller's Subsequent Transfer Instrument and the performance of the
transactions contemplated hereby by the Seller will not violate any provision of
any existing law or regulation or any order or decree of any court applicable to
the Seller or any provision of the certificate of incorporation or bylaws of the
Seller, or constitute a material breach of any mortgage, indenture, contract or
other agreement to which the Seller is a party or by which the Seller may be
bound;

               (v) No litigation or administrative proceeding of or before any
court, tribunal or governmental body is currently pending, or to the knowledge
of the Seller threatened, against the Seller or any of its properties or with
respect to this Purchase Agreement or any Seller's Subsequent Transfer
Instrument, the Certificates which in the opinion of the Seller has a reasonable
likelihood of resulting in a material adverse effect on the transactions
contemplated by this Purchase Agreement or any Seller's Subsequent Transfer
Instrument;

               (vi) This Purchase Agreement and each Seller's Subsequent
Transfer Instrument constitute the legal, valid and binding obligations of the
Seller, enforceable against the Seller in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
affecting the enforcement of creditors' rights in general and except as such
enforceability may be limited by general principles of equity (whether
considered in a proceeding at law or in equity);

               (vii) This Purchase Agreement constitutes a valid transfer and
assignment to the Company of all right, title and interest of the Seller in and
to the Cut-off Date Principal Balance of the Closing Date Mortgage Loans, all
monies due or to become due with respect thereto, and all proceeds of such
Cut-off Date Principal Balance of the Closing Date Mortgage Loans, and this
Purchase Agreement and the related Seller's Subsequent Transfer Instrument
constitutes a valid transfer and assignment to the Trustee of all right, title
and interest of the Seller in and to the Subsequent Cut-off Date Principal
Balance of the Subsequent

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<PAGE>

Mortgage Loans, all monies due or to become due with respect thereto, and all
proceeds of such Subsequent Cut-off Date Principal Balance of the Subsequent
Mortgage Loans;

               (viii) The Seller is not in default with respect to any order or
decree of any court or any order or regulation of any federal, state or
governmental agency, which default might have consequences that would materially
and adversely affect the condition (financial or other) or operations of the
Seller or its properties or might have consequences that would materially
adversely affect its performance hereunder; and

               (ix) The Servicer or any Subservicer who will be servicing any
Mortgage Loan pursuant to the Pooling and Servicing Agreement or a Subservicing
Agreement is qualified to do business in all jurisdictions in which its
activities as Servicer or Subservicer of the Mortgage Loans serviced by it
require such qualifications except where failure to be so qualified will not
have a material adverse effect on such servicing activities.

          (b) As to each Closing Date Mortgage Loan as of the Closing Date and
with respect to each Subsequent Mortgage Loan as of the Subsequent Transfer
Date, except as otherwise expressly stated:

               (i) The information set forth on the Mortgage Loan Schedule with
respect to each Closing Date Mortgage Loan is true and correct in all material
respects as of the Closing Date, and with respect to each Subsequent Mortgage
Loan is true and correct in all material respects as of the related Subsequent
Transfer Date, and the information regarding the Closing Date Mortgage Loans and
the Subsequent Mortgage Loans on the computer diskette or tape delivered to the
Trustee prior to the Closing Date or Subsequent Transfer Date, as applicable, is
true and accurate in all material respects and describes the same Mortgage Loans
as the Mortgage Loans on the Mortgage Loan Schedule;

               (ii) The Mortgage Loans are not being transferred with any intent
to hinder, delay or defraud any creditors;

               (iii) No more than 5.95%, 5.26% and 9.12% of the Closing Date
Mortgage Loans in Group I, Closing Date Mortgage Loans in Group II and Closing
Date Mortgage Loans in Group III, respectively, (by Cut-off Date Principal
Balance) were secured by condominium units; and no more than 11.75%, 21.89% and
17.89% of the Closing Date Mortgage Loans in Group I, Closing Date Mortgage
Loans in Group II and the Closing Date Mortgage Loans in Group III,
respectively, (by Cut-off Date Principal Balance) were secured by properties in
planned unit developments;

               (iv) As of the Cut-off Date, the remaining term of each Group I
Closing Date Mortgage Loan is not more than 360 months and not less than 117
months, the remaining term of each Group II Closing Date Mortgage Loan is not
more than 360 months and not less than 177 months and the remaining term of each
Group III Closing Date Mortgage Loan is not more than 360 months and not less
than 173 months;

               (v) No more than 59.20%, 55.86% and 27.05% of the Closing Date
Mortgage Loans in Group I, Closing Date Mortgage Loans in Group II and Closing
Date

                                       12

<PAGE>

Mortgage Loans in Group III, respectively, (by Cut-off Date Principal Balance)
have been the subject of cash-out refinances;

               (vi) No more than 10.87%, 14.97% and 8.81% of the Closing Date
Mortgage Loans in Group I, Closing Date Mortgage Loans in Group II and Closing
Date Mortgage Loans in Group III, respectively, (by Cut-off Date Principal
Balance) respectively, have been the subject of rate and term (no cash-out)
refinances;

               (vii) No fewer than 29.93%, 29.17% and 64.14% of the Closing Date
Mortgage Loans in Group I Closing Date Mortgage Loans in Group III and Closing
Date Mortgage Loans in Group III, respectively, (by Cut-off Date Principal
Balance) are purchase money loans;

               (viii) No more than 25.80%, 50.08% and 36.86% of the Closing Date
Mortgage Loans in Group I, the Closing Date Mortgage Loans in Group II and
Closing Date Mortgage Loans in Group III, respectively, (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in the State of
California; no more than 15.59%, 7.53% and 9.31% of the Closing Date Mortgage
Loans in Group I, Closing Date Mortgage Loans in Group II and the Closing Date
Mortgage Loans in Group III, respectively, (by Cut-off Date Principal Balance)
are secured by Mortgaged Properties located in the State of Florida; no more
than 6.82% of the Closing Date Mortgage Loans in Group III (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in the State of
Texas; no more than 5.65% of the Closing Date Mortgage Loans in Group II (by
Cut-off Date Principal Balance) are secured by Mortgaged Properties located in
the State of Virginia; no more than 5.66% of the Closing Date Mortgage Loans in
Group III (by Cut-off Date Principal Balance) are secured by Mortgaged
Properties located in the State of Nevada; and no more than 4.30%, 4.66% and
4.26% of the Closing Date Mortgage Loans in Group I, Closing Date Mortgage Loans
in Group II and the Closing Date Mortgage Loans in Group III, respectively, (by
Cut-off Date Principal Balance) are located in any other state;

               (ix) The outstanding Principal Balances of the Closing Date
Mortgage Loans in Group I (by Cut-off Date Principal Balance) ranged from
$39,739 to $439,673, the average outstanding Principal Balance of the Closing
Date Mortgage Loans in Group I is approximately $143,533; the original Principal
Balances of the Closing Date Mortgage Loans in Group II (by Cut-off Date
Principal Balance) ranged from $58,957 to $908,980, the average outstanding
Principal Balance of the Closing Date Mortgage Loans in Group II is
approximately $364,563, the Original Principal Balance of the Closing Date
Mortgage Loans in Group III (by Cut-off Date Principal Balance) ranged from
$10,495 to $499,526 and the average outstanding Principal Balance of the Closing
Date Mortgage Loans in Group III is approximately $55,408;

               (x) Approximately 75.78%, 71.26% and 25.81% of the Closing Date
Mortgage Loans in Group I, Closing Date Mortgage Loans in Group II and Closing
Date Mortgage Loans in Group III, respectively (by Cut-off Date Principal
Balance) were secured by a first lien on a parcel of real property improved by a
detached single family residence; no more than 6.52%, 1.59% and 0% of the
Closing Date Mortgage Loans in Group I, the Closing Date Mortgage Loans in Group
II and the Closing Date Mortgage Loans in Group III, respectively,

                                       13

<PAGE>

(by Cut-off Date Principal Balance) were secured by a first lien on a parcel of
real estate improved by a multi-unit residence;

               (xi) All points and fees related to each Mortgage Loan were
disclosed in writing to the borrower in accordance with applicable state and
federal law. No borrower was charged "points and fees" (whether or not financed)
in an amount greater than 5% of the principal amount of such loan, such 5%
limitation calculated in accordance with the Lender Letter. All fees and charges
(including finance charges) and whether or not financed, assessed, collected or
to be collected with the origination and servicing of each Mortgage Loan has
been disclosed in writing to the borrower in accordance with applicable state
and federal law and regulation;

               (xii) The Mortgage Rates borne by the adjustable rate Closing
Date Mortgage Loans in Group I as of the Closing Date range from 3.990% and per
annum to 10.550% per annum, and the weighted average Mortgage Rate (by Cut-off
Date Principal Balance) of the adjustable rate Closing Date Mortgage Loans in
Group I was 6.965%, per annum; the Mortgage Rates borne by fixed rate Closing
Date Mortgage Loans in Group I as of the Closing Date range from 4.250% per
annum to 11.500% per annum, and the weighted average Mortgage Rate (by Cut-off
Date Principal Balance) of the Closing Date Mortgage Loans in Group I was 6.754%
per annum; the Mortgage Rates borne by adjustable rate Closing Date Mortgage
Loans in Group II as of the Closing Date range from 4.625% per annum to 11.125%
per annum, and the weighted average Mortgage Rate (by Cut-off Date Principal
Balance) of the adjustable rate Closing Date Mortgage Loans in Group II was
6.637%, per annum; the Mortgage Rates borne by fixed rate Closing Date Mortgage
Loans in Group II as of the Closing Date range from 4.875% per annum to 9.990%
per annum, and the weighted average Mortgage Rate (by Cut-off Date Principal
Balance) of the Closing Date Mortgage Loans in Group II was 6.197% per annum;
the Mortgage Rates borne by adjustable rate Closing Date Mortgage Loans in Group
III as of the Closing Date range from 4.250% per annum to 9.750% per annum, and
the weighted average Mortgage Rate (by Cut-off Date Principal Balance) of the
adjustable rate Closing Date Mortgage Loans in Group III was 6.607% per annum;
the Mortgage Rates borne by fixed rate Closing Date Mortgage Loans in Group III
as of the Closing Date range from 4.875% per annum to 14.000% per annum and the
weighted average Mortgage Rate (by Cut-off Date Principal Balance) of the
Closing Date Mortgage Loans in Group III was 10.170% per annum.

               (xiii) Approximately 41.49%, 38.51% and 79.87% of the Closing
Date Mortgage Loans in Group I, the Closing Date Mortgage Loans in Group II, and
the Closing Date Mortgage Loans in Group III, respectively, (by Cut-off Date
Principal Balance) have a Loan-to-Value Ratio in excess of 80%; no Group I
Closing Date Mortgage Loan, Group II Closing Date Mortgage Loan or Group III
Closing Date Mortgage Loan in the Mortgage Pool had a Loan-to-Value Ratio at
origination in excess of 100%; and the weighted average Loan-to-Value Ratio (by
Cut-off Date Principal Balance) of the Closing Date Mortgage Loans in Group I,
the Group II Mortgage Closing Date Mortgage Loans and the Closing Date Mortgage
Loans in Group III was equal to or less than 79.79%, 78.58% and 92.35%,
respectively;

               (xiv) Approximately 100.00%, 100.00% and 35.93% of the Closing
Date Mortgage Loans in Group I, the Closing Date Mortgage Loans in Group II and
the Closing Date Mortgage Loans in Group III, respectively, are secured by first
liens on the related

                                       14

<PAGE>

Mortgaged Property; and approximately 64.07% of the Closing Date Mortgage Loans
in Group III are secured by second liens on the related Mortgaged Property;

               (xv) The weighted average Loan-to-Value Ratio of the Closing Date
Mortgage Loans in Group I secured by first liens is approximately 79.79%; the
weighted average Loan-to-Value Ratio of the Closing Date Mortgage Loans in Group
II secured by first liens is approximately 78.58%; the weighted average
Loan-to-Value Ratio of the Closing Date Mortgage Loans in Group III secured by
first liens is approximately 79.47%; the weighted average combined Loan-to-Value
Ratio of the Closing Date Mortgage Loans in Group III secured by first and
second liens is approximately 92.35%; the weighted average combined
Loan-to-Value Ratio of all of the Closing Date Mortgage Loans in both Group I,
Group II and Group III is approximately 80.33%; the net weighted average coupon
of the Closing Date Mortgage Loans is approximately 6.973%;

               (xvi) There is no valid offset, right of rescission, defense,
claim or counterclaim of any obligor under any Mortgage Note or Mortgage,
including the obligation of the Mortgagor to pay the unpaid principal of or
interest on such Mortgage Note, and any applicable right of rescission has
expired, nor will the operation of any of the terms of such Mortgage Note or
Mortgage, or the exercise of any right thereunder, render either the Mortgage
Note or the Mortgage unenforceable, in whole or in part, or subject to any right
of rescission, set-off, recoupment, counterclaim or defense, including, without
limitation, the defense of usury, and no such right of rescission, set-off,
recoupment, counterclaim or defense has been asserted with respect thereto, and,
to the best of Seller's knowledge, no Mortgagor of the applicable Mortgage was a
debtor in any state or federal bankruptcy or insolvency proceeding;

               (xvii) There are no mechanics' liens or claims for work, labor or
material affecting any Mortgaged Property which are or may be a lien prior to,
or equal with, the lien of such Mortgage, except those which are insured against
by the title insurance policy referred to in clause (xix) below;

               (xviii) As of the Closing Date in the case of an Cut-off Date
Mortgage Loan or as of the related Subsequent Cut-off Date in the case of a
Subsequent Mortgage Loan, each Mortgaged Property is free of material damage and
is in good repair and there is no proceeding pending or threatened for the total
or partial condemnation of any Mortgage Property;

               (xix) Each Mortgage is a valid and enforceable first or second
lien on the Mortgaged Property securing the related Mortgage Note and each
Mortgaged Property is owned by the Mortgagor in fee simple (except with respect
to common areas in the case of condominiums, PUDs and de minimis PUTDs) subject
only to (1) the lien of nondelinquent current real property taxes and
assessments, (2) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of recording of such
Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally or specifically reflected in the appraisal made
in connection with the origination of the related Mortgage Loan or referred to
in the lender's title insurance policy delivered to the originator of the
related Mortgage Loan and (3) other matters to which like properties are
commonly subject that do not materially interfere with the benefits of the
security

                                       15

<PAGE>

intended to be provided by such Mortgage. Immediately prior to the sale of such
Mortgage Loan to the Company in the case of a Closing Date Mortgage Loan and to
the Trustee in the case of a Subsequent Mortgage Loan pursuant to this Purchase
Agreement, the Seller had full right to sell and assign the same to the Company
or the Trustee, as the case may be. Immediately following the sale of such
Mortgage Loan to the Company and the Company's assignment and sale thereof of
such Mortgage Loan to the Trustee in the case of a Closing Date Mortgage Loan,
the Trustee will have good title thereto subject to no claims or liens,
including delinquent tax or assessment liens. Immediately following the sale of
such Mortgage Loan to the Company and the Company's assignment and sale thereof
to the Trustee in the case of a Subsequent Mortgage Loan, the Trustee will have
good title thereto subject to no claims or liens;

               (xx) Each Mortgage Loan at origination complied in all material
respects with applicable local, state and federal laws, including, without
limitation, usury, equal credit opportunity, real estate settlement procedures,
the Truth In Lending Act of 1968, as amended, all applicable predatory and
abusive lending laws and disclosure laws and consummation of the transactions
contemplated hereby, including without limitation, the receipt of interest by
the owner of such Mortgage Loan or the Holders of Certificates secured thereby,
will not violate any such laws. Each Mortgage Loan is being serviced in all
material respects in accordance with applicable state and federal laws,
including, without limitation, the Truth In Lending Act of 1968, as amended, and
other consumer protection laws, real estate settlement procedures, usury, equal
credit opportunity and disclosure laws;

               (xxi) Neither the Seller nor any prior holder of any Mortgage has
impaired, waived, altered or modified the Mortgage or Mortgage Notes in any
material respect (except that a Mortgage Loan may have been modified by a
written instrument which has been recorded, if necessary to protect the
interests of the owner of such Mortgage Loan or the Certificates, and which has
been delivered to the Trustee); satisfied, canceled or subordinated such
Mortgage in whole or in part; released the applicable Mortgaged Property in
whole or in part from the lien of such Mortgage; or executed any instrument of
release, cancellation or satisfaction with respect thereto;

               (xxii) A lender's policy of title insurance (on an ALTA or CLTA
form) or binder, or other assurance of title customary in the relevant
jurisdiction insuring the first lien priority of the Mortgage Loan in an amount
at least equal to the original Principal Balance of each such Mortgage Loan or a
commitment binder or commitment to issue the same was effective on the date of
the origination of each Mortgage Loan, each such policy is valid and remains in
full force and effect, and each such policy was issued by a title insurer
qualified to do business in the jurisdiction where the Mortgaged Property is
located, which policy insures the Seller and successor owners of indebtedness
secured by the insured Mortgage as to the first priority lien of the Mortgage as
applicable. The Seller is, and such successor owners will be, the sole insured
under such lender's title insurance policy; no claims have been made under such
mortgage title insurance policy; no prior holder of the applicable Mortgage,
including the Seller, has done, by act or omission, anything which would impair
the coverage of such mortgage title insurance policy; and each such policy,
binder or assurance contains all applicable endorsements;

               (xxiii) All of the improvements which were included for the
purpose of determining the Appraised Value of the Mortgaged Property lie wholly
within the

                                       16

<PAGE>

boundaries and building restriction lines of such property and no improvements
on adjoining properties encroach upon the Mortgaged Property;

               (xxiv) No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation, subdivision
law or ordinance, except where the failure to comply would not have a material
adverse effect on the market value of the Mortgaged Property. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy and fire underwriting certificates, have been made or obtained from
the appropriate authorities and the Mortgaged Property is lawfully occupied
under applicable law except where the failure to comply would not have a
material adverse effect on the market value of the Mortgaged Property;

               (xxv) Each Mortgage Note and the applicable Mortgage are genuine,
and each is the legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium, receivership and other similar laws
relating to creditors' rights generally or by equitable principles (regardless
of whether such enforcement is considered in a proceeding in equity or at law).
All parties to the Mortgage Note and the Mortgage had legal capacity to execute
the Mortgage Note and the Mortgage and each Mortgage Note and Mortgage has been
duly and properly executed by such parties;

               (xxvi) The proceeds of the Mortgage Loans have been fully
disbursed, there is no requirement for future advances thereunder and any and
all requirements as to completion of any on-site or off-site improvements and as
to disbursement of any escrow funds therefor have been complied with. All costs,
fees and expenses incurred in making, closing or recording the Mortgage Loans
were paid and the Mortgagor is not entitled to any refund of amounts paid or due
under the Mortgage Note;

               (xxvii) Each Mortgage contains customary and enforceable
provisions that render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including (i) in the case of a Mortgage designated as a deed of trust,
by trustee's sale, and (ii) otherwise by judicial foreclosure or if applicable,
non-judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and
foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the
proper procedures, the holder of the Mortgage Loan will be able to deliver good
and merchantable title to the property, subject to any applicable rights of
redemption;

               (xxviii) With respect to each Mortgage constituting a deed of
trust, either a trustee, duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in such
Mortgage or if no duly qualified trustee has been properly designated and so
serves, the Mortgage contains satisfactory provisions for the appointment of
such trustee by the holder of the Mortgage at no cost or expense to such holder,
and no fees or expenses are or will become payable by the Certificateholders to
the trustee under the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;

                                       17

<PAGE>

               (xxix) There exist no deficiencies with respect to escrow
deposits and payments, if such are required, for which customary arrangements
for repayment thereof cannot be made, and no escrow deficits or payments of
other charges or payments due the Seller have been capitalized under the
Mortgage or the applicable Mortgage Note;

               (xxx) The Mortgage Note is not and has not been secured by any
collateral, pledged account or other security other than real estate securing
the Mortgagor's obligations and no Mortgage Loan is secured by more than one
Mortgaged Property;

               (xxxi) As of the Closing Date in the case of a Closing Date
Mortgage Loan and as of the related Subsequent Transfer Date in the case of a
Subsequent Mortgage Loan, the improvements upon each Mortgaged Property are
covered by a valid and existing hazard insurance policy substantially acceptable
to FNMA and acceptable to the Seller which policy provides for fire extended
coverage and such other hazards as are customary in the area where the Mortgaged
Property is located representing coverage in an amount not less than the lesser
of (A) the maximum insurable value of the improvements securing such Mortgage
Loan and (B) the outstanding Principal Balance of the related Mortgage Loan; if
the improvement on the Mortgaged Property is a condominium unit, it is included
under the coverage afforded by a blanket policy for the condominium project. All
individual insurance policies contain a standard mortgagee clause naming the
Seller or the original holder of the Mortgage, and its successors in interest,
as mortgagee, and the Seller has received no notice that any premiums due and
payable thereon have not been paid; the Mortgage obligates the Mortgagor
thereunder to maintain all such insurance at the Mortgagor's cost and expense,
and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage
to obtain and maintain such insurance at the Mortgagor's cost and expense and to
seek reimbursement therefor from the Mortgagor. There has been no act or
omission which would impair the coverage of any such policy, the benefits of the
endorsement provided for herein, or the validity and binding effect of either;

               (xxxii) If the Mortgaged Property is in an area identified in the
Federal Register by the Federal Emergency Management Agency as having special
flood hazards, a flood insurance policy in a form meeting the requirements of
the current guidelines of the Flood Insurance Administration is in effect with
respect to such Mortgaged Property with a generally acceptable carrier in an
amount representing coverage not less than the least of (A) the outstanding
Principal Balance of the Mortgage Loan, (B) the minimum amount required to
compensate for damage or loss on a replacement cost basis and (C) the maximum
amount of flood coverage that is available under federal law;

               (xxxiii) Except for the Mortgage Loan referred to in clause (xii)
as being delinquent, there is no material monetary default, breach, violation or
event of acceleration existing under the Mortgage or the applicable Mortgage
Note; and no material event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a material default,
breach, violation or event of acceleration, and neither the Seller, any of its
affiliates nor any servicer or subservicer of any related Mortgage Loan has
waived any default, breach, violation or event of acceleration; no foreclosure
action is threatened or has been commenced with respect to the Mortgage Loan;

                                       18

<PAGE>

               (xxxiv) Each Mortgage Loan is being serviced by the Servicer;

               (xxxv) There is no obligation on the part of the Seller or any
other party to make any payments with respect to the related Mortgage Loan in
addition to the Monthly Payments required to be made by the applicable
Mortgagor;

               (xxxvi) Any future advances made prior to the Cut-off Date in the
case of a Closing Date Mortgage Loan and as of the related Subsequent Transfer
Date in the case of a Subsequent Mortgage Loan, with respect to any Mortgage
Loan have been consolidated with the outstanding principal amount secured by
such Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term reflected on the Mortgage Loan Schedule.
The consolidated principal amount does not exceed the original principal amount
of the Mortgage Loan. The Mortgage Note with respect to any Mortgage Loan does
not permit or obligate the Servicer to make future advances to the Mortgagor at
the option of the Mortgagor;

               (xxxvii) The Seller has caused or will cause to be performed any
and all acts required to preserve the rights and remedies of the Company and the
Trustee evidencing an interest in the Mortgage Loans in any insurance policies
applicable to the Mortgage Loans including, without limitation, any necessary
notifications of insurers, assignments of policies or interests therein, and
establishments of coinsured, joint loss payee and mortgagee rights in favor of
Trustee;

               (xxxviii) Except as set forth in clause (xlii), there are no
defaults by the Mortgagor in complying with the terms of any Mortgage, and all
taxes, governmental assessments, insurance premiums, water, sewer and municipal
charges which previously became due and owing have been paid, or, if required by
the terms of the Mortgage Loan, an escrow of funds has been established in an
amount sufficient to pay for every such item which remains unpaid and which has
been assessed, but is not yet due and payable. Except for (A) payments in the
nature of escrow payments and (B) interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage proceeds to the day which
precedes by one month the Due Date of the first installment of principal and
interest, including, without limitation, taxes and insurance payments, the
Servicer has not advanced funds, or induced, solicited or knowingly received any
advance of funds by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required by the Mortgage;

               (xxxix) At the time of origination, each Mortgaged Property was
the subject of an appraisal which conforms to the underwriting requirements of
the related originator; and the Mortgage File contains an appraisal of the
applicable Mortgaged Property;

               (xl) None of the Mortgage Loans are graduated payment Mortgage
Loans or growth equity Mortgage Loans;

               (xli) 88.67%, 89.12% and 92.45% of the adjustable rate Group I
Closing Date ARM Mortgage Loans, the adjustable rate Group II Closing Date ARM
Mortgage Loans and the adjustable rate Group III Closing Date ARM Mortgage
Loans, respectively, (by Cut-off Date Principal Balance) are Convertible
Mortgage Loans;

                                       19

<PAGE>

               (xlii) (a) Except with respect to no more than 0.06%, 0% and 0%
of the Closing Date Mortgage Loans in Group I, the Closing Date Mortgage Loans
in Group II and the Closing Date Mortgage Loans in Group III, respectively, none
of the payments of principal of or interest on or in respect of any Closing Date
Mortgage Loans (by Cut-off Date Principal Balance) shall be 30 days or more but
less than 60 days past due as of the Cut-off Date; none of the payments of
principal or interest on or in respect of any Closing Date Mortgage Loans shall
be 60 days or more but less than 90 days past due as of the Cut-off Date; and no
Closing Date Mortgage Loan was 90 days or more past due as of the Cut-off Date;
(b) except as set forth in clause (a) above, all payments required to be made by
the Mortgagor under the terms of the Mortgage Note have been made and credited;
and (c) to the Seller's knowledge, there was no delinquent recording, tax or
assessment lien against the property subject to any Mortgage, except where such
lien was being contested in good faith and a stay had been granted against
levying on the property;

               (xliii) Upon payment of the Purchase Price for the Mortgage Loans
by the Company or the Trustee, as applicable, pursuant to this Purchase
Agreement, the Seller has transferred to the Company in the case of a Closing
Date Mortgage Loan and to the Trustee in the case of a Subsequent Mortgage Loan,
good and marketable title to each Mortgage Note and Mortgage free and clear of
any and all liens, claims, encumbrances, participation interests, equities,
pledges, charges or security interests of any nature and has or had full right
and authority, subject to no participation of or agreement with any other
person, to sell and assign the same, and following the sale of each Closing Date
Mortgage Loan, the Company or the Trustee, as applicable, will own such Mortgage
Loan free and clear of any encumbrance, equity interest, participation interest,
lien, pledge, charge, claim or security interest;

               (xliv) The Seller acquired any right, title and interest in and
to the Mortgage Loans in good faith and without notice of any adverse claim;

               (xlv) The Mortgage Note, the Mortgage, the related Assignment of
Mortgage and any other documents required to be delivered by the Seller have
been delivered to the Custodian. The Custodian is in possession of a complete,
true and accurate Mortgage File in accordance with Section 2.01 hereof.
Substantially all Mortgage Loans have monthly payments due on the first day of
each month and each Mortgage Loan had an original term to maturity of no greater
than 30 years;

               (xlvi) Each Mortgage Loan contains a due-on-sale provision,
although each Mortgage Loan may be assumable if permitted by the Servicer under
certain circumstances;

               (xlvii) Each of the Mortgage and the Assignment of Mortgage is in
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;

               (xlviii) The Mortgagor has not notified the Seller, and the
Seller has no knowledge of any relief requested or allowed to the Mortgagor
under the Soldiers' and Sailors' Civil Relief Act of 1940 other than as
disclosed pursuant to the Prospectus Supplement;

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<PAGE>

               (xlix) To the best of the Seller's knowledge, there exists no
violation of any local, state, or federal environmental law, rule or regulation
in respect of the Mortgaged Property which violation has or could have a
material adverse effect on the market value of such Mortgaged Property. The
Seller has no knowledge of any pending action or proceeding directly involving
the related Mortgaged Property in which compliance with any environmental law,
rule or regulation is in issue; and, to the best of the Seller's knowledge,
nothing further remains to be done to satisfy in full all requirements of each
such law, rule or regulation constituting a prerequisite to the use and
employment of such Mortgaged Property;

               (l) Each Mortgage Loan conforms, and all such Mortgage Loans in
the aggregate conform, to the description thereof set forth in the Prospectus
and Prospectus Supplement in all material respects;

               (li) Each Mortgage Loan is in compliance with the anti-predatory
lending eligibility requirements of Fannie Mae's Selling Guide;

               (lii) Immediately prior to the transfer to the Company or the
Trustee, as applicable, the Seller had good and marketable title thereto, and
the Seller is the sole owner of beneficial title to and holder of the Mortgage
Loan. The Seller is conveying the same to the Company or the Trustee, as
applicable, free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests of any
nature and has full right and authority to sell and assign the same pursuant to
this Purchase Agreement, except for liens which will be released simultaneously
with such conveyance;

               (liii) For each Mortgage Loan, the related Mortgage File contains
a true, accurate and correct copy of each of the documents and instruments
required to be included therein;

               (liv) The Servicer meets all applicable requirements under the
Pooling and Servicing Agreement, is properly qualified to service each Mortgage
Loan and has been servicing each Mortgage Loan prior to the Cut-off Date or the
related Subsequent Cut-off Date, as the case may be;

               (lv) No instrument of release or waiver has been executed in
connection with the Mortgage Loans, and no Mortgagor has been released, in whole
or in part from its obligations in connection with a Mortgage Loan except in
connection with an assumption agreement which has been delivered to the Trustee;

               (lvi) On the basis of a representation by the Mortgagor at the
time of origination of the Mortgage Loans, at least 94.41%, 97.49% and 99.94% of
the Closing Date Mortgage Loans in Group I, Closing Date Mortgage Loans in Group
II and Closing Date Mortgage Loans in Group III, respectively, (by Cut-off Date
Principal Balance) will be secured by Mortgages on owner-occupied primary
residence properties;

               (lvii) 2.53%, 1.34% and 47.78% of the Closing Date Mortgage Loans
in Group I, Closing Date Mortgage Loans in Group II and the Closing Date
Mortgage Loans in Group III, respectively, (by Cut-off Date Principal Balance)
provide for a balloon payment and each Mortgage Note with respect to each such
Mortgage Loan requires monthly

                                       21

<PAGE>

payments of principal based on 30 year amortization schedules and have scheduled
maturity dates of 15 years from the due date of the first monthly payment;

               (lviii) No Mortgage Loan was originated based on an appraisal of
the related Mortgaged Property made prior to completion of construction of the
improvements thereon;

               (lix) None of the Mortgage Loans is a "buy down" mortgage loan;

               (lx) [Reserved]

               (lxi) No Mortgage Loan is a "High Cost Home Loan" as defined in
the Georgia Fair Lending Act, as amended (the "Georgia Act"). No Mortgage Loan
secured by owner occupied real property or an owner occupied manufactured home
located in the State of Georgia was originated (or modified) on or after October
1, 2002 through and including March 6, 2003;

               (lxii) None of the Mortgage Loans are subject to the Home
Ownership and Equity Protection Act of 1994, as amended, or any comparable state
law; none of the Mortgage Loans are "section 32" loans or "high cost" loans as
defined by applicable predatory and abusive lending laws; no proceeds from any
Mortgage Loan were used to finance any single premium credit insurance policies;
none of the Mortgage Loans (by Cut-off Date Principal Balance) require a
mortgagor to pay a Prepayment Charge if the mortgagor prepays a Mortgage Loan
more than five years after the date the Mortgage Loan was originated;

               (lxiii) None of the Mortgage Loans originated in the State of New
York are "high cost" as defined in New York Banking Law Section 6-1;

               (lxiv) No borrower was encouraged or required to select a
Mortgage Loan product offered by the Mortgage Loan's originator which is a
higher cost product designed for less creditworthy borrowers, unless at the time
of the Mortgage Loan's origination, such borrower did not qualify taking into
account credit history and debt to income ratios for a lower cost credit product
then offered by the Mortgage Loan's originator or any affiliate of the Mortgage
Loan's originator;

               (lxv) The methodology used in underwriting the extension of
credit for each Mortgage Loan employs objective mathematical principles which
relate the borrower's income, assets and liabilities to the proposed payment and
such underwriting methodology does not rely on the extent of the borrower's
equity in the collateral as the principal determining factor in approving such
credit extension. Such underwriting methodology confirmed that at the time of
origination (application/approval) the borrower had a reasonable ability to make
timely payments on the Mortgage Loan;

               (lxvi) Approximately 73.60% of the Closing Date Mortgage Loans
are subject to prepayment penalty charges;

                                       22

<PAGE>

               (lxvii) With respect to any Mortgage Loan that contains a
provision permitting imposition of a premium upon a prepayment prior to
maturity: (i) prior to the loan's origination, the borrower agreed to such
premium in exchange for a monetary benefit, including but not limited to a rate
or fee reduction, (ii) prior to the loan's origination, the borrower was offered
the option of obtaining a mortgage loan that did not require payment of such a
premium, (iii) the prepayment premium is disclosed to the borrower in the loan
documents pursuant to applicable state and federal law, and (iv) notwithstanding
any state or federal law to the contrary, the Servicer shall not impose such
prepayment premium in any instance when the mortgage debt is accelerated as the
result of the borrower's default in making the loan payments;

               (lxviii) No borrower was required to purchase any credit life,
disability, accident or health insurance product as a condition of obtaining the
extension of credit. No borrower obtained a prepaid single premium credit life,
disability, accident or health insurance policy in connection with the
origination of the Mortgage Loan; No proceeds from any Mortgage Loan were used
to purchase single premium credit insurance policies as part of the origination
of, or as a condition to closing, such Mortgage Loan;

               (lxix) All points and fees related to each Mortgage Loan in Group
I were disclosed in writing to the borrower in accordance with applicable state
and federal law and regulation. Except in the case of a Mortgage Loan in Group I
in an original principal amount of less than $60,000 which would have resulted
in an unprofitable origination, no borrower was charged "points and fees"
(whether or not financed) in an amount greater than 5% of the principal amount
of such loan, such 5% limitation is calculated in accordance with Fannie Mae's
anti-predatory lending requirements as set forth in the Fannie Mae Selling
Guide;

               (lxx) All fees and charges (including finance charges) and
whether or not financed, assessed, collected or to be collected in connection
with the origination and servicing of each Mortgage Loan has been disclosed in
writing to the borrower in accordance with applicable state and federal law and
regulation;

               (lxxi) The Servicer will transmit full-file credit reporting data
for each Mortgage Loan in Group I pursuant to Fannie Mae Guide Announcement
95-19 and that for each Mortgage Loan in Group I, Servicer agrees it shall
report one of the following statuses each month as follows: new origination,
current, delinquent (30-, 60-, 90-days, etc.), foreclosed, or charged-off;

               (lxxii) No Group I Mortgage Loan secured by a single-family
residence has a Principal Balance at origination in excess of $322,700; no Group
I Mortgage Loan secured by a two-family residence has a Principal Balance at
origination in excess of $371,450; no Group I Mortgage Loan secured by a
three-family residence has a Principal Balance at origination in excess of
$457,500; and no Group I Mortgage Loan secured by a four-family residence has a
Principal Balance at origination in excess of $500,000;

               (lxxiii) No selection procedure reasonably believed by the Seller
to be adverse to the interests of the Certificateholders was utilized in
selecting the Mortgage Loans;

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<PAGE>

               (lxxiv) The terms of the Mortgage Note related to each Adjustable
Rate Mortgage Loan provide that, following an initial period of two or three
years following the month in which such Mortgage Loan was originated and
semiannually or annually thereafter (each such date, an "Adjustment Date"), the
Mortgage Rate on such Mortgage Loan will be adjusted to equal the sum of (a) the
related Index and (b) a fixed percentage amount specified in the related
Mortgage Note (each, a "Gross Margin"); provided, however, that the Mortgage
Rate generally will not increase or decrease by the related Periodic Rate Cap,
and will not increase above a specified maximum Mortgage Rate over the life of
the Adjustable Rate Mortgage Loan (the "Maximum Mortgage Rate") or decrease
below a specified minimum Mortgage Rate over the life of the Adjustable Rate
Mortgage Loan (the "Minimum Mortgage Rate");

               (lxxv) None of the Closing Date Mortgage Loans (by Cut-off Date
Principal Balance) are negative amortization loans, and none of the Subsequent
Mortgage Loans shall be negative amortization loans;

               (lxxvi) No material misrepresentation, fraud or similar
occurrence with respect to a Mortgage Loan has taken place on the part of the
Seller, its affiliates or employees or any other person involved in the
origination of the Mortgage Loan or in the application for any insurance,
including, but not limited to the MI Policy, in relation to such Mortgage Loan;

               (lxxvii) Each Mortgage Loan was originated by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to Sections
203 and 211 of the Act, a savings and loan association, a savings bank, a
commercial bank, credit union, insurance company or similar institution which is
supervised and examined by a federal or state authority;

               (lxxviii) With respect to each Mortgage Loan secured by
manufactured housing, such manufactured housing is permanently affixed to a
foundation and constitutes real estate under applicable state law;

               (lxxix) No Mortgage Loans are date of payment or simple interest
loans;

               (lxxx) The sale, transfer, assignment and conveyance of Mortgage
Loans by the Seller pursuant to this Purchase Agreement is not subject to and
will not result in any tax, fee or governmental charge payable by the Company,
the Custodian or the Trustee to any federal, state or local government
("Transfer Taxes") other than Transfer Taxes which have or will be paid by the
Seller as due;

               (lxxxi) Each Mortgage Loan is a "qualified mortgage" within
Section 860G(a)(3) of the Code;

               (lxxxii) Approximately 48.62% of the Closing Date Mortgage Loans
(by Cut-off Date Principal Balance) with a Loan-to-Value Ratio greater than 60%
are covered by an MI Policy issued by an MI Insurer;

                                       24

<PAGE>

               (lxxxiii) Approximately 44.99% of the Closing Date Mortgage Loans
that are identified on Schedule 1 hereto are covered by a MI Policy issued by
the MI Insurer;

               (lxxxiv) All requirements for the valid transfer of each MI
Policy, including any assignments or notices required in each MI Policy, have
been satisfied;

               (lxxxv) As of the Closing Date with respect to each Closing Date
Mortgage Loan that is subject to a MI Policy and as of each Subsequent Transfer
Date with respect to each Subsequent Mortgage Loan that is subject to a MI
Policy, the Seller is unaware of any existing circumstances which would cause
the MI Insurer to deny a claim with respect to such Mortgage Loan;

               (lxxxvi) All appraisals of the Mortgage Loans by the Seller are
full URAR/1004 appraisals; and

               (lxxxvii) All Prepayment Charges are enforceable and were
originated in compliance with all applicable federal, state, and local laws.

          Upon discovery by the Seller or upon notice from the Company, the
Trustee, or the Custodian, as applicable, of a breach of any representation or
warranty in subsection (a) of this Section which materially and adversely
affects the interests of the Certificateholders the Seller shall, within 45 days
of its discovery or its receipt of notice of such breach, either (i) cure such
breach in all material respects or (ii) to the extent that such breach is with
respect to a Mortgage Loan or a Related Document, either (A) repurchase such
Mortgage Loan from the Trustee at the Repurchase Price, or (B) substitute one or
more Eligible Substitute Mortgage Loans for such Mortgage Loan, in each case in
the manner and subject to the conditions and limitations set forth below.

          Upon discovery by the Seller or upon notice from the Company, the
Trustee, or the Custodian, as applicable, of a breach of any representation or
warranty in this subsection (b) with respect to any Mortgage Loan or upon the
occurrence of a Repurchase Event, which materially and adversely affects the
value of the related Mortgage Loan or the interests of any Certificateholders or
of the Company or the Trustee in such Mortgage Loan (notice of which shall be
given to the Company and the Trustee by the Seller, if it discovers the same)
the Seller shall, within 90 days after the earlier of its discovery or receipt
of notice thereof, either cure such breach or Repurchase Event in all material
respects or either (i) repurchase such Mortgage Loan from the Trustee at the
Repurchase Price, or (ii) substitute one or more Eligible Substitute Mortgage
Loans for such Mortgage Loan, in each case in the manner and subject to the
conditions set forth below. The Repurchase Price for any such Mortgage Loan
repurchased by the Seller shall be deposited or caused to be deposited by the
Servicer in the Collection Account maintained by it pursuant to Section 3.06 of
the Pooling and Servicing Agreement.

          In the event that the Seller elects to substitute an Eligible
Substitute Mortgage Loan or Loans for a Deleted Mortgage Loan pursuant to this
Section 3.01, the Seller shall deliver to the Custodian on behalf of the
Trustee, with respect to such Eligible Substitute Mortgage Loan or Loans, the
original Mortgage Note and all other documents and agreements as are required by

                                       25

<PAGE>

Section 2.01 hereof, with the Mortgage Note endorsed as required by such Section
2.01 hereof. No substitution will be made in any calendar month after the
Determination Date for such month. Monthly Payments due with respect to Eligible
Substitute Mortgage Loans in the month of substitution shall not be part of the
Trust Fund and will be retained by the Servicer and remitted by the Servicer to
the Seller on the next succeeding Payment Date. For the month of substitution,
distributions to the Payment Account pursuant to the Pooling and Servicing
Agreement will include the Monthly Payment due on a Deleted Mortgage Loan for
such month and thereafter the Seller shall be entitled to retain all amounts
received in respect of such Deleted Mortgage Loan. The Servicer shall amend or
cause to be amended the Mortgage Loan Schedule to reflect the removal of such
Deleted Mortgage Loan and the substitution of the Eligible Substitute Mortgage
Loan or Loans and the Servicer shall deliver the amended Mortgage Loan Schedule
to the Custodian and the Trustee. Upon such substitution, the Eligible
Substitute Mortgage Loan or Loans shall be subject to the terms of this Purchase
Agreement and the Pooling and Servicing Agreement in all respects, the Seller
shall be deemed to have made the representations and warranties with respect to
the Eligible Substitute Mortgage Loan contained herein set forth in this Section
3.01(b), to the extent set forth in the definition of "Eligible Substitute
Mortgage Loan", as of the date of substitution, and the Seller shall be
obligated to repurchase or substitute for any Eligible Substitute Mortgage Loan
as to which a Repurchase Event has occurred as provided herein. In connection
with the substitution of one or more Eligible Substitute Mortgage Loans for one
or more Deleted Mortgage Loans, the Servicer will determine the amount (such
amount, a "Substitution Adjustment Amount"), if any, by which the aggregate
principal balance of all such Eligible Substitute Mortgage Loans as of the date
of substitution is less than the aggregate principal balance of all such Deleted
Mortgage Loans (after application of the principal portion of the Monthly
Payments due in the month of substitution that are to be distributed to the
Payment Account in the month of substitution). The Seller shall pay the amount
of such shortfall to the Servicer for deposit into the Collection Account on the
day of substitution, without any reimbursement therefor.

          Upon receipt by the Trustee of written notification, signed by a
Servicing Officer, of the deposit of such Repurchase Price or of such
substitution of an Eligible Substitute Mortgage Loan and deposit of any
applicable Substitution Adjustment Amount as provided above, the Custodian
shall, on behalf of the Trustee, cause to be released to the Seller the related
Mortgage File for the Mortgage Loan being repurchased or substituted for and the
Trustee shall execute and deliver such instruments of transfer or assignment
prepared by the Servicer, in each case without recourse, as shall be necessary
to vest in the Seller or its designee such Mortgage Loan released pursuant
hereto and thereafter such Mortgage Loan shall not be an asset of the Trustee.

          It is understood and agreed that the obligation of the Seller to cure
any breach with respect to or to repurchase or substitute for, any Mortgage Loan
as to which such a breach has occurred and is continuing shall, except to the
extent provided in Section 6.01 of this Purchase Agreement, constitute the sole
remedy respecting such breach available to the Company, the Trustee, the
Certificateholders or the Custodian against the Seller.

          It is understood and agreed that the representations and warranties
set forth in this Section 3.01 shall survive delivery of the respective Mortgage
Files to the Custodian on behalf of the Trustee.

                                       26

<PAGE>

          Section 3.02 Company Representations and Warranties.

          The Company hereby represents and warrants to the Seller and the
Trustee as of the date hereof and as of the Closing Date that:

          (a) The Company is duly organized and validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority to own its properties and to conduct its business as such
properties are currently owned and such business is presently conducted.

          (b) The Company is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its property
or the conduct of its business shall require such qualifications and in which
the failure to so qualify would have a material adverse effect on the business,
properties, assets or condition (financial or other) of the Company and the
ability of the Company to perform under this Purchase Agreement.

          (c) The Company has the power and authority to execute and deliver
this Purchase Agreement and to carry out its terms; the Company has full power
and authority to purchase the property to be purchased from the Seller and the
Company has duly authorized such purchase by all necessary corporate action; and
the execution, delivery and performance of this Purchase Agreement have been
duly authorized by the Company by all necessary corporate action.

          (d) The consummation of the transactions contemplated by this Purchase
Agreement and the fulfillment of the terms hereof do not conflict with, result
in any breach of any of the terms and provisions of, or constitute (with or
without notice or lapse of time) a default under, the articles of incorporation
or bylaws of the Company, or any indenture, agreement or other instrument to
which the Company is a party or by which it is bound; nor result in the creation
or imposition of any Lien upon any of its properties pursuant to the terms of
any such indenture, agreement or other instrument (other than pursuant to the
Basic Documents); nor violate any law or, to the best of the Company's
knowledge, any order, rule or regulation applicable to the Company of any court
or of any federal or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the Company or its
properties.

          (e) The Company (A) is a solvent entity and is paying its debts as
they become due and (B) after giving effect to the transfer of the Mortgage
Loans, will be a solvent entity and will have sufficient resources to pay its
debts as they become due.

          Section 3.03 [Reserved]

                                   ARTICLE IV

                               SELLER'S COVENANTS

                                       27

<PAGE>

          Section 4.01 Covenants of the Seller.

          The Seller hereby covenants as of the date hereof and as of the
Closing Date that, except for the transfer hereunder, on and after the Closing
Date, the Seller will not sell, pledge, assign or transfer to any other Person,
or grant, create, incur or assume any Lien on, any Mortgage Loan, whether now
existing or hereafter created, or any interest therein; the Seller will notify
the Custodian and the Trustee of the existence of any such Lien on any Mortgage
Loan immediately upon discovery thereof; and the Seller will defend the right,
title and interest of the Trustee, on its own behalf and as assignee of the
Company, in, to and under the Mortgage Loans, whether now existing or hereafter
created, against all claims of third parties claiming through or under the
Seller.

          In the event that the Custodian or the Trustee receives actual notice
of any Transfer Taxes arising out of the transfer, assignment and conveyance of
the Mortgage Loans, on written demand by the Custodian, or upon the Seller's
otherwise being given notice thereof by the Custodian, the Seller shall pay any
and all such Transfer Taxes (it being understood that the Holders of the
Certificates, the Company, the Custodian and the Trustee shall have no
obligation to pay such Transfer Taxes).

          Section 4.02 Payment of Expenses.

          (a) The Seller will pay on the Closing Date all expenses incident to
the performance of its obligations under this Purchase Agreement and the
Underwriting Agreement, including (i) the preparation, printing and any filing
of the preliminary prospectus, Prospectus Supplement and Prospectus (including
any schedules or exhibits and any document incorporated therein by reference)
originally filed and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Purchase
Agreement and the Underwriting Agreement, the Pooling and Servicing Agreement
and such other documents as may be required in connection with the offering,
purchase, sale and delivery of the Certificates, (iii) the preparation, issuance
and delivery of the certificates for the Class A Certificates, Mezzanine
Certificates and Class B Certificates to the Underwriters, including any charges
of DTC, CEDEL, S.A. and the Euroclear System in connection therewith; (iv) the
qualification of the Class A Certificates, Mezzanine Certificates and Class B
Certificates under securities laws in accordance with the provisions of Section
3(f) of the Underwriting Agreement, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the preparation of the Blue Sky Survey and any supplement
thereto for delivery to potential investors, (v) in addition to the initial
printing and filing costs under (i) above, the printing and delivery to the
Underwriters of copies of each preliminary prospectus and of the Prospectus and
any amendments or supplements thereto for delivery to potential investors, (vi)
the fees and expenses of the Trustee and the Custodian, including the fees and
disbursements of counsel for the Trustee and the Custodian in connection with
the Pooling and Servicing Agreement, the Purchase Agreement and the Certificates
and (vii) any fees payable in connection with the rating of the Certificates.

          (b) If the Underwriting Agreement is terminated by the Underwriters in
accordance with the provisions of Section 5 or Section 9(a)(i) thereof, the
Seller shall reimburse

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<PAGE>

the Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.

                                   ARTICLE V

                CONDITIONS TO CLOSING DATE MORTGAGE LOAN PURCHASE

          Section 5.01 Conditions of Company's Obligations.

          The Company's obligations to purchase the Closing Date Mortgage Loans
which each accepts for purchase hereunder shall be subject to each of the
following conditions:

               (i) the Mortgage File for each Closing Date Mortgage Loan shall
have been delivered in accordance with this Purchase Agreement;

               (ii) the representations and warranties set forth in Section
3.01(b) hereof with respect to each Closing Date Mortgage Loan shall be true as
of the Closing Date;

               (iii) the Underwriters or their affiliates shall have had an
opportunity to perform a due diligence review of each Mortgage Loan; and

               (iv) the Seller shall have provided to the Underwriters or their
affiliates such other documents which are then required to have been delivered
under this Purchase Agreement or which are reasonably requested by the
Underwriters or their affiliates, which other documents may include UCC
financing statements, a favorable opinion or opinions of counsel with respect to
matters which are reasonably requested by the Underwriters, and/or an Officers'
Certificate.

                                   ARTICLE VI

                          INDEMNIFICATION BY THE SELLER
                       WITH RESPECT TO THE MORTGAGE LOANS

          Section 6.01 Indemnification With Respect to the Mortgage Loans.

          The Seller shall indemnify and hold harmless the Company, Trustee and
the Custodian from and against any loss, liability or expense arising from the
breach by the Seller of its representations and warranties in Section 3.01 of
this Purchase Agreement which materially and adversely affects the value of any
Mortgage Loan or the Company's assignees' interest in any Mortgage Loan or from
the failure by the Seller to perform its obligations under this Purchase
Agreement in any material respect.

          Section 6.02 Limitation on Liability of the Seller.

          None of the directors, officers, employees or agents of the Seller
shall be under any liability to the Company, it being expressly understood that
all such liability is expressly waived and released as a condition of, and as
consideration for, the execution of this Purchase Agreement. Except as and to
the extent expressly provided in the Basic Documents, the Seller

                                       29

<PAGE>

shall not be under any liability to the Trustee, the Custodian or the
Certificateholders. The Seller and any director, officer, employee or agent of
the Seller may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
hereunder.

                                   ARTICLE VII

                                   TERMINATION

          Section 7.01 Termination.

          (a) Except as provided in Section 7.01(b) hereof, the respective
obligations and responsibilities of the Seller, the Company, the Trustee and the
Custodian created hereby shall terminate, except for the Seller's indemnity
obligations as provided herein, upon the termination of the Trust Fund pursuant
to the terms of the Pooling and Servicing Agreement.

          (b) The Company may terminate this Purchase Agreement, by notice to
the Seller, at any time at or prior to the Closing Date:

               (i) if the Underwriting Agreement is terminated by the
Underwriters pursuant to the terms of the Underwriting Agreement or if there has
been, since the time of execution of this Purchase Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the financial condition, earnings, business affairs
or business prospects of the Seller, whether or not arising in the ordinary
course of business, or

               (ii) if there has occurred any material adverse change in the
financial markets in the United States, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Underwriters, impracticable to market the Class A
Certificates, Mezzanine Certificates and Class B Certificates or to enforce
contracts for the sale of the Class A Certificates, Mezzanine Certificates and
Class B Certificates, or

               (iii) if trading in any securities of the Seller has been
suspended or limited by the Commission or the New York Stock Exchange, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the NASDAQ National Market System has been suspended or limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc. or
any other governmental authority,

               (iv) if a banking moratorium has been declared by either federal
or New York authorities,

               (v) either (A) a change in control of the Seller shall have
occurred other than in connection with and as a result of the issuance and sale
by the Seller or registered,

                                       30

<PAGE>

publicly offered common stock; or (B) the Underwriters determine in their sole
discretion that any material adverse change has occurred in the management of
the Seller,

               (vi) there is (A) a material breach by the Seller of any
representation and warranty contained in this Purchase Agreement or the
Underwriting Agreement other than a representation or warranty relating to
particular Mortgage Loans, and the Underwriters have reason to believe in good
faith either that such breach is not curable within two (2) days or that such
breach may not have been cured in all material respects at the expiration of two
(2) days following discovery thereof by the Seller or (B) a failure by the
Seller to make any payment payable by it under this Purchase Agreement or (C)
any other failure by the Seller to observe and perform in any material respect
its material covenants, agreements and obligations with the Company, including
without limitation those contained in this Purchase Agreement, and the Company
has reason to believe in good faith that such failure may not have been cured in
all material respects at the expiration of two (2) days following discovery
thereof by the Seller, or

               (vii) the Seller fails to provide written notification to the
Underwriters of any change in its loan origination, acquisition or appraisal
guidelines or practices, or the Seller, without the prior consent of the
Underwriters (which shall not be unreasonably withheld), amends in any material
respect its loan origination, acquisition or appraisal guidelines or practices.

          If this Purchase Agreement is terminated pursuant to this Section
7.01(b), such termination shall be without liability of any party to any other
party except as provided in Section 4.02 hereof.

                                  ARTICLE VIII

                            MISCELLANEOUS PROVISIONS

          Section 8.01 Amendment.

          This Purchase Agreement may be amended from time to time by the
Seller, the Company, the Trustee and the Custodian by written agreement signed
by the Seller, the Company, the Trustee and the Custodian.

          Section 8.02 Governing Law.

          This Purchase Agreement shall be governed by and construed in
accordance with the laws of the State of New York and the obligations, rights
and remedies of the parties hereunder shall be determined in accordance with
such laws.

          Section 8.03 Notices.

          All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by registered mail, postage prepaid, addressed as follows:

                                       31

<PAGE>

               (i)   if to the Seller:

                     NovaStar Mortgage, Inc.
                     8140 Ward Parkway
                     Suite 300
                     Kansas City, Missouri 64114
                     Attention: Scott F. Hartman

or, such other address as may hereafter be furnished to the Company in writing
by the Seller.

               (ii)  if to the Company:

                     NovaStar Mortgage Funding Corporation
                     8140 Ward Parkway
                     Suite 300
                     Kansas City, Missouri 64114
                     Attention: Matt Kaltenrieder

or such other address as may hereafter be furnished to the Seller in writing by
the Company.

               (iii) if to the Custodian:

                     Wachovia Bank, National Association
                     4527 Metropolitan Court, Suite C
                     Frederick, Maryland 21704
                     Attention: Edward Aquino

or such other address as may hereafter be furnished to the Seller in writing by
the Custodian.

               (iv)  if to the Trustee:

                     JPMorgan Chase Bank
                     4 New York Plaza, 6th Floor
                     New York, NY 10004-2477
                     Attention: Institutional Trust Services (NovaStar Mortgage
                                Funding Trust, Series 2003-3)

or such other address as may hereafter be furnished to the Seller in writing by
the Trustee.

          Section 8.04 Severability of Provisions.

          If any one or more of the covenants, agreements, provisions or terms
of this Purchase Agreement shall be held invalid for any reason whatsoever, then
such covenants, agreements, provisions or terns shall be deemed severable from
the remaining covenants, agreements, provisions or terms of this Purchase
Agreement and shall in no way affect the validity or enforceability of the other
provisions of this Purchase Agreement.

                                       32

<PAGE>

          Section 8.05 Relationship of Parties.

          Nothing herein contained shall be deemed or construed to create a
partnership or joint venture between the parties hereto, and the services of the
Seller shall be rendered as an independent contractor and not as agent for the
Company.

          Section 8.06 Counterparts.

          This Purchase Agreement may be executed in two or more counterparts
and by the different parties hereto on separate counterparts, each of which,
when so executed, shall be deemed to be an original and such counterparts
together shall constitute one and the same agreement.

          Section 8.07 Further Agreements.

          The Company and the Seller each agree to execute and deliver to the
other such additional documents, instruments or agreements as may be necessary
or appropriate to effectuate the purposes of this Purchase Agreement. Each of
the Company and the Seller agrees to use its best reasonable efforts to take all
actions necessary to be taken by it to cause the Class A-1 Certificates to be
rated "Aaa" by Moody's and "AAA" by S&P and Fitch, the Class A-2A Certificates
to be rated "Aaa" by Moody's and "AAA" by S&P and Fitch, the Class A-2B
Certificates to be rated "Aaa" by Moody's and "AAA" by S&P and Fitch, the Class
A-2C Certificates to be rated "Aaa" by Moody's and "AAA" by S&P and Fitch, the
Class A-3 Certificates to be rated "Aa1" by Moody's and "AAA" by S&P and Fitch,
the Class M-1 Certificates to be rated "Aa2" by Moody's and "AA" by S&P and
Fitch, the Class M-2 Certificates to be rated "A2" by Moody's and "A" by S&P and
Fitch, the Class M-3 Certificates to be rated "A3" by Moody's and "A-" by S&P
and Fitch, the Class B-1 Certificates to be rated "Baa1" by Moody's and "BBB+"
by S&P and Fitch, the Class B-2 Certificates to be rated "Baa2" by Moody's and
"BBB" by S&P and Fitch and the Class P Certificates to be rated "AAA" by S&P and
Fitch, and each party will cooperate with the other in connection therewith.

          Section 8.08 Intention of the Parties.

          It is the intention of the parties that (i) the Company is purchasing
on the Closing Date, and the Seller is selling on the Closing Date, the Closing
Date Mortgage Loans, rather than the Company providing to the Seller a loan
secured by the Closing Date Mortgage Loans on the Closing Date, and (ii) the
Trustee is purchasing on the Closing Date, and the Company is selling on the
Closing Date, the Closing Date Mortgage Loans, rather than the Trustee providing
to the Company a loan secured by the Closing Date Mortgage Loans, (iii) the
Company will be purchasing on each Subsequent Transfer Date, and the Seller will
be selling on each Subsequent Transfer Date, the related Subsequent Mortgage
Loans, rather than the Company providing to the Seller a loan secured by the
related Subsequent Mortgage Loans on each Subsequent Transfer Date, and (iv) the
Trustee will be purchasing on each Subsequent Transfer Date, and the Company
will be selling on each Subsequent Transfer Date, the related Subsequent
Mortgage Loans, rather than the Trustee providing to the Company a loan secured
by the related Subsequent Mortgage Loans on each Subsequent Transfer Date.
Accordingly, the parties hereto each intend to treat these transactions as (i) a
sale by the Seller, and a purchase by the Company,

                                       33

<PAGE>

of the Closing Date Mortgage Loans on the Closing Date, and (ii) a sale by the
Company, and a purchase by the Trustee, of the Closing Date Mortgage Loans on
the Closing Date, (iii) a sale by the Seller, and a purchase by the Company, of
the related Subsequent Mortgage Loans on each Subsequent Transfer Date, and (iv)
a sale by the Company, and a purchase by the Trustee, of the related Subsequent
Mortgage Loans on each Subsequent Transfer Date.

          Section 8.09 Successors and Assigns; Assignment of Purchase Agreement.

          This Purchase Agreement shall bind and inure to the benefit of and be
enforceable by the Seller, the Company, the Trustee, the Custodian, and their
respective successors and assigns. The obligations of the Seller under this
Purchase Agreement cannot be assigned or delegated to a third party without the
consent of the Company, which consent shall be at the Company's discretion. The
parties hereto acknowledge that (i) the Company is acquiring the Closing Date
Mortgage Loans for the purpose of selling them to the Trustee, who will hold the
Closing Date Mortgage Loans in trust for the benefit of the Certificateholders
and (ii) the Company is acquiring the Subsequent Mortgage Loans for the purpose
of selling them to the Trustee, who will hold the Subsequent Mortgage Loans for
the benefit of the Certificateholders. As an inducement to the Company and the
Trustee to purchase the Mortgage Loans, the Seller acknowledges and consents to
(i) the assignment by the Company to the Trustee of all of the Company's rights
or remedies against the Seller pursuant to this Purchase Agreement and to (ii)
the enforcement or exercise of any rights against the Seller pursuant to this
Purchase Agreement by the Company and the Trustee. Such enforcement of a right
or remedy by the Trustee, shall have the same force and effect as if the right
or remedy had been enforced or exercised by the Company directly.

          Section 8.10 Survival.

          The representations and warranties made herein by the Seller and the
provisions of Article V hereof shall survive the purchase of the Mortgage Loans
hereunder.

          Section 8.11 Liability of the Trustee.

          The Trustee is entering into the Basic Documents to which it is a
party solely as Trustee, hereunder and thereunder, and not in its individual
capacity, and all persons having any claim against the Trustee by reason of the
transactions contemplated by this Agreement or any other Basic Document shall
look only to the Trust Fund for payment or satisfaction thereof.

                                       34

<PAGE>

          IN WITNESS WHEREOF, the Seller, the Company, the Custodian and the
Trustee have caused their names to be signed to this Mortgage Loan Purchase
Agreement by their respective officers thereunto duly authorized as of the day
and year first above written.

                                        NOVASTAR MORTGAGE, INC.
                                        as Seller


                                        By: /s/ Matt Kaltenrieder
                                            ------------------------------------
                                        Name: Matt Kaltenrieder
                                        Title: Vice President


                                        NOVASTAR MORTGAGE FUNDING CORPORATION
                                        as Company


                                        By: /s/ Matt Kaltenrieder
                                            ------------------------------------
                                        Name: Matt Kaltenrieder
                                        Title: Vice President


                                        WACHOVIA BANK, NATIONAL ASSOCIATION
                                        as Custodian


                                        By: /s/ Edwin Aquino
                                            ------------------------------------
                                        Name: Edwin Aquino
                                        Title: Vice President


                                        JPMORGAN CHASE BANK,
                                        not in its individual capacity,
                                        but solely as Trustee


                                        By: /s/ Jennifer H. McCourt
                                            ------------------------------------
                                        Name: Jennifer H. McCourt
                                        Title: Vice President

              [Signature Page to Mortgage Loan Purchase Agreement]

<PAGE>

                                    EXHIBIT 1

                       CLOSING DATE MORTGAGE LOAN SCHEDULE

                      [On File with Dewey Ballantine LLP]

                                        2

<PAGE>

                                  EXHIBIT 2(A)

                     SELLER'S SUBSEQUENT TRANSFER INSTRUMENT

          Pursuant to this Seller's Subsequent Transfer Instrument (the
"Seller's Instrument"), dated as of September 1, 2003, between NovaStar
Mortgage, Inc. as seller (the "Seller"), and NovaStar Mortgage Funding
Corporation, as company (the "Company"), and pursuant to the Mortgage Loan
Purchase Agreement, dated as of September 1, 2003 (the "Purchase Agreement"),
among the Seller, the Company, Wachovia Bank, National Association, as Custodian
(the "Custodian") and JPMorgan Chase Bank, as Trustee (the "Trustee"), the
Seller and the Company agree to the sale by the Seller and the purchase by the
Company of the subsequent Mortgage Loans listed on the attached Mortgage Loan
Schedule (the "Subsequent Mortgage Loans") and the related MI Policies.

          Capitalized terms used and not defined herein have their respective
meanings as set forth in the definitions contained in the Pooling and Servicing
Agreement, dated as of September 1, 2003 (the "Pooling and Servicing
Agreement"), between the Trustee, the Custodian, the Company and the
Seller/Servicer which definitions are incorporated by reference herein. All
other capitalized terms used herein shall have the meanings specified herein.

          Section 1. Conveyance of Subsequent Mortgage Loans.

          (a) The Seller does hereby sell, transfer, assign, set over and convey
to the Company, without recourse, all of its right, title and interest in and to
the Subsequent Mortgage Loans and the related MI Policies, all scheduled
payments of principal and interest on the Subsequent Mortgage Loans due after
the Subsequent Cut-off Date, and all other payments of principal and interest on
the Subsequent Mortgage Loans collected after the Subsequent Cut-off Date (minus
that portion of any such payment which is allocable to the period prior to the
Subsequent Cut-off Date); provided, however, that no scheduled payments of
principal and interest due on or before the Subsequent Cut-off Date and
collected after the Subsequent Cut-off Date shall belong to the Company pursuant
to the terms of this Seller's Instrument. The Seller, contemporaneously with the
delivery of this Seller's Instrument, has delivered or caused to be delivered to
the Custodian, at the direction of the Company, each item set forth in Section
2.02(b) of the Purchase Agreement with respect to such Subsequent Mortgage Loans
and the related MI Policies. The transfer to the Company by the Seller of the
Subsequent Mortgage Loans identified on the attached Mortgage Loan Schedule
shall be absolute and is intended by the Seller, the Company, the Custodian, the
Trustee and the Certificateholders to constitute and to be treated as a sale by
the Seller.

          The parties hereto intend that the transactions set forth herein
constitute a sale by the Seller to the Company on the Subsequent Transfer Date
of all the Seller's right, title and interest in and to the Subsequent Mortgage
Loans and the related MI Policies, and other property as and to the extent
described above. In the event the transactions set forth herein shall be deemed
not to be a sale, the Seller hereby grants to the Company as of the Subsequent
Transfer Date a security interest in all of the Seller's right, title and
interest in, to and under the Subsequent Mortgage Loans, and such other
property, to secure all of the Seller's obligations hereunder, and this Purchase
Agreement shall constitute a security agreement under applicable

<PAGE>

law, and in such event, the parties hereto acknowledge that the Custodian, in
addition to holding the Subsequent Mortgage Loans and the related MI Policies on
behalf of the Trustee for the benefit of the Certificateholders, holds the
Subsequent Mortgage Loans and the related MI Policies as designee and agent of
the Company. The Seller agrees to take or cause to be taken such actions and to
execute such documents, including without limitation the filing of all necessary
UCC-1 financing statements filed in the State of Maryland (which shall be
submitted for filing as of the Subsequent Transfer Date), any continuation
statements with respect thereto and any amendments thereto required to reflect a
change in the name or corporate structure of the Seller or the filing of any
additional UCC-1 financing statements due to the change in the state of
incorporation of the Seller as are necessary to perfect and protect the
interests of the Company and its assignees in each Subsequent Mortgage Loan, the
related MI Policies and the proceeds thereof.

          (b) The expenses and costs relating to the delivery of the Subsequent
Mortgage Loans, this Seller's Instrument and such other items required under the
Mortgage Loan Purchase Agreement shall be borne by the Seller.

          (c) Additional terms of the sale are set forth on Attachment A hereto.

          Section 2. Representations and Warranties; Conditions Precedent.

          (a) The Seller hereby affirms the representations and warranties set
forth in Section 3.01 of the Purchase Agreement that relate to the Seller and
the Subsequent Mortgage Loans as of the date hereof. The Seller hereby confirms
that each of the conditions set forth in Section 2.02(b) of the Purchase
Agreement are satisfied as of the date hereof and further represents and
warrants that each Subsequent Mortgage Loan complies with the requirements of
this Seller's Instrument and Section 2.02(c) of the Purchase Agreement.

          (b) The Seller is solvent, is able to pay its debts as they become due
and has capital sufficient to carry on its business and its obligations
hereunder; it will not be rendered insolvent by the execution and delivery of
this Seller's Instrument or by the performance of its obligations hereunder nor
is it aware of any pending insolvency; no petition of bankruptcy (or similar
insolvency proceeding) has been filed by or against the Seller prior to the date
hereof;

          (c) All terms and conditions of the Purchase Agreement are hereby
ratified and confirmed; provided, however, that in the event of any conflict the
provisions of this Seller's Instrument shall control over the conflicting
provisions of the Purchase Agreement.

          Section 3. Recordation of the Seller's Instrument.

          To the extent permitted by applicable law, this Seller's Instrument,
or a memorandum thereof if permitted under applicable law, is subject to
recordation in all appropriate public offices for real property records in all
of the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer, but only when accompanied by an Opinion of Counsel to the effect that
such recordation materially and beneficially affects the interests of the
Certificateholders or is necessary for the administration or servicing of the
Mortgage Loans.

                                        2

<PAGE>

          Section 4. Governing Law.

          This Seller's Instrument shall be construed in accordance with the
laws of the State of New York and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws, without
giving effect to principles of conflicts of law.

          Section 5. Counterparts.

          This Seller's Instrument may be executed in one or more counterparts
and by the different parties hereto on separate counterparts, each of which,
when so executed, shall be deemed to be an original; such counterparts,
together, shall constitute one and the same instrument.

          Section 6. Successors and Assigns.

          This Seller's Instrument shall inure to the benefit of and be binding
upon the Seller and the Company and their respective successors and assigns. The
Custodian and the Trustee shall be express third party beneficiaries hereto.

          IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Seller's Instrument as of the day and year first written above.

                                        NOVASTAR MORTGAGE, INC.,
                                        as Seller


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                        NOVASTAR MORTGAGE FUNDING CORPORATION,
                                        as Company


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        3

<PAGE>

       NOVASTAR HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2003-3

             ATTACHMENT A TO SELLER'S SUBSEQUENT TRANSFER INSTRUMENT

                                            , 2003
                               ---------- --

A.   Profile of Subsequent Mortgage Loans:

          1. Subsequent Cut-off Date:             , 2003
                                      --------- --

          2. Subsequent Transfer Date:            , 2003
                                       -------- --

          3. Aggregate Principal Balance of the Subsequent Mortgage Loans as of
the Subsequent Cut-off Date: $
                              ------------

          4. Purchase Price: 100.00%

B.   As to all the Subsequent Mortgage Loans the subject of this Instrument:

     I.   Longest stated term to maturity:            360 months
     II.  Minimum Mortgage Rate:                          %
                                                      ----
     III. Maximum Mortgage Rate:                          %
                                                      ----
     IV.  WAC of all Mortgage Loans:                      %
                                                      ----
     V.   WAM of all Mortgage Loans:                      %
                                                      ----
     VI.  Largest Principal Balance:                  $
                                                       -------
     VII. Non-owner occupied Mortgaged Properties:        %
                                                      ----
     VIII. California zip code concentration:             %
                                                      ----
     IX.  Condominiums:                                   %
                                                      ----
     X.   Single-family:                                  %
                                                      ----
     XI.  Weighted average term since origination:        months
                                                      ----
     XII. Mortgage Loans Covered by MI Policies:          %
                                                      ----

<PAGE>

                                  EXHIBIT 2(B)

                    COMPANY'S SUBSEQUENT TRANSFER INSTRUMENT

          Pursuant to this Company's Subsequent Transfer Instrument (the
"Company's Instrument"), dated as of             , 2002, between NovaStar
                                     --------- --
Mortgage Funding Corporation, as company (the "Company"), and JPMorgan Chase
Bank, as trustee (the "Trustee"), and pursuant to the Mortgage Loan Purchase
Agreement, dated as of September 1, 2003 (the "Purchase Agreement"), among
NovaStar Mortgage, Inc., as seller (the "Seller"), the Company, Wachovia Bank,
National Association, as Custodian ("Custodian"), and JPMorgan Chase Bank, as
Trustee (the "Trustee"), the Company and the Trustee agree to the sale by the
Company and the purchase by the Trustee of the subsequent Mortgage Loans listed
on the attached Mortgage Loan Schedule (the "Subsequent Mortgage Loans") and the
related MI Policies, and the pledge of the Subsequent Mortgage Loans by the
Trustee.

          Capitalized terms used and not defined herein have their respective
meanings as set forth in the definitions contained in the Pooling and Servicing
Agreement, dated as of September 1, 2003 (the "Pooling and Servicing
Agreement"), between the Custodian, the Trustee, the Company and the Servicer
which definitions are incorporated by reference herein. All other capitalized
terms used herein shall have the meanings specified herein.

          Section 1. Conveyance of Subsequent Mortgage Loans.

          (a) The Company does hereby sell, transfer, assign, set over and
convey to the Trustee, without recourse, (i) all of its right, title and
interest in and to the Subsequent Mortgage Loans and the related MI Policies,
all scheduled payments of principal and interest on the Subsequent Mortgage
Loans due after the Subsequent Cut-off Date, and all other payments of principal
and interest on the Subsequent Mortgage Loans collected after the Subsequent
Cut-off Date (minus that portion of any such payment which is allocable to the
period prior to the Subsequent Cut-off Date); provided, however, that no
scheduled payments of principal and interest due on or before the Subsequent
Cut-off Date and collected after the Subsequent Cut-off Date shall belong to the
Trustee pursuant to the terms of this Company's Instrument and (ii) all of its
right, title and interest in and to the Seller's Subsequent Transfer Instrument,
dated as of          , 2003 (the "Seller's Instrument"), between the Seller and
            ------ --
the Company. The Company, contemporaneously with the delivery of this Company's
Instrument, has delivered or caused to be delivered to the Custodian each item
set forth in Section 2.02(b) of the Purchase Agreement with respect to such
Subsequent Mortgage Loans. The transfer to the Trustee by the Company of the
Subsequent Mortgage Loans identified on the attached Mortgage Loan Schedule and
the related MI Policies shall be absolute and is intended by the Company, the
Trustee, the Custodian and the Certificateholders to constitute and to be
treated as a sale by the Company.

          The parties hereto intend that the transactions set forth herein
constitute a sale by the Company to the Trustee on the Subsequent Transfer Date
of all the Company's right, title and interest in and to the Subsequent Mortgage
Loans and the related MI Policies, and other property as and to the extent
described above. In the event the transactions set forth herein shall be deemed
not to be a sale, the Company hereby grants to the Trustee as of the Subsequent
Transfer Date a security interest in all of the Company's right, title and
interest in, to and under the

<PAGE>

Subsequent Mortgage Loans, and such other property, to secure all of the
Company's obligations hereunder, and this Company's Instrument shall constitute
a security agreement under applicable law, and in such event, the parties hereto
acknowledge that the Custodian on behalf of the Trustee, in addition to holding
the Subsequent Mortgage Loans and the related MI Policies for the benefit of the
Certificateholders, holds the Subsequent Mortgage Loans and the related MI
Policies as designee and agent of the Trustee. The Company agrees to take or
cause to be taken such actions and to execute such documents, including without
limitation the filing of all necessary UCC-1 financing statements filed in the
State of Delaware (which shall be submitted for filing as of the Subsequent
Transfer Date), any continuation statements with respect thereto and any
amendments thereto required to reflect a change in the name or corporate
structure of the Company or the filing of any additional UCC-1 financing
statements due to the change in the state of incorporation of the Company as are
necessary to perfect and protect the interests of the Trustee and its assignees
in each Subsequent Mortgage Loan, the related MI Policies and the proceeds
thereof.

          (b) The expenses and costs relating to the delivery of the Subsequent
Mortgage Loans, this Company's Instrument and such other items required under
the Purchase Agreement shall be borne by the Company.

          Section 2. Representations and Warranties; Conditions Precedent.

          (a) The Company hereby affirms the representations and warranties set
forth in Section 3.02 of the Purchase Agreement that relate to the Company as of
the date hereof.

          (b) The Company is solvent, is able to pay its debts as they become
due and has capital sufficient to carry on its business and its obligations
hereunder; it will not be rendered insolvent by the execution and delivery of
this Company's Instrument or by the performance of its obligations hereunder nor
is it aware of any pending insolvency; no petition of bankruptcy (or similar
insolvency proceeding) has been filed by or against the Company prior to the
date hereof;

          (c) All terms and conditions of the Purchase Agreement are hereby
ratified and confirmed; provided, however, that in the event of any conflict the
provisions of this Company's Instrument shall control over the conflicting
provisions of the Mortgage Loan Purchase Agreement.

          Section 3. Recordation of Instrument.

          To the extent permitted by applicable law, this Company's Instrument,
or a memorandum thereof if permitted under applicable law, is subject to
recordation in all appropriate public offices for real property records in all
of the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer, but only when accompanied by an Opinion of Counsel to the effect that
such recordation materially and beneficially affects the interests of the
Certificateholders or is necessary for the administration or servicing of the
Mortgage Loans.

          Section 4. Governing Law.

<PAGE>

          This Company's Instrument shall be construed in accordance with the
laws of the State of New York and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws, without
giving effect to principles of conflicts of law.

          Section 5. Counterparts.

          This Company's Instrument may be executed in one or more counterparts
and by the different parties hereto on separate counterparts, each of which,
when so executed, shall be deemed to be an original; such counterparts,
together, shall constitute one and the same instrument.

          Section 6. Successors and Assigns.

          This Company's instrument shall inure to the benefit of and be binding
upon the Company, the Custodian and the Trustee and their respective successors
and assigns.

<PAGE>

          IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Company's Instrument as of the day and year first written above.

                                        NOVASTAR MORTGAGE FUNDING CORPORATION,
                                        as Company


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                        JPMORGAN CHASE BANK, not in its
                                        individual capacity but solely as
                                        Trustee


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                        WACHOVIA BANK, NATIONAL ASSOCIATION,
                                        as Custodian


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title: