<PAGE>   1
                                                                    EXHIBIT 10.2

                                 FORM OF MASTER
                            SUB-SERVICING AGREEMENT



                           LONG BEACH MORTGAGE COMPANY
                                 Master Servicer

                                       and

                           AMERIQUEST MORTGAGE COMPANY
                                  Sub-Servicer

                    -----------------------------------------

                         MASTER SUB-SERVICING AGREEMENT
                           Dated as of April 18, 1997
                    -----------------------------------------

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                           LONG BEACH MORTGAGE COMPANY
                                 Master Servicer

                                       and

                           AMERIQUEST MORTGAGE COMPANY
                                  Sub-Servicer

                    -----------------------------------------

                         MASTER SUB-SERVICING AGREEMENT
                           Dated as of April 18, 1997
                    -----------------------------------------

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                                TABLE OF CONTENTS

SECTION                                                                     PAGE

                                    ARTICLE I

                                   DEFINITIONS

1.01. Defined Terms .......................................................... 2
      Accepted Servicing Practices ........................................... 2
      Adjustable Rate Mortgage Loan .......................................... 2
      Adjustment Date ........................................................ 2
      Advance Account ........................................................ 2
      Affiliate .............................................................. 2
      Agreement .............................................................. 2
      Assignment ............................................................. 2
      Available Distribution Amount .......................................... 3
      Balloon Loan ........................................................... 3
      Bankruptcy Code ........................................................ 3
      Bankruptcy Loss ........................................................ 3
      Business Day ........................................................... 3
      Certificate Insurer .................................................... 3
      Code ................................................................... 3
      Collection Account ..................................................... 3
      Cut-off Date ........................................................... 4
      DCR .................................................................... 4
      Debt Service Reduction ................................................. 4
      Deficient Valuation .................................................... 4
      Deleted Mortgage Loan .................................................. 4
      Delinquent ............................................................. 4
      Depository Institution ................................................. 4
      Determination Date ..................................................... 4
      Directly Operate ....................................................... 4
      Due Date ............................................................... 5
      Due Period ............................................................. 5
      Eligible Account ....................................................... 5
      FDIC ................................................................... 5
      Fitch .................................................................. 5
      FHLMC .................................................................. 5
      Final Recovery Determination ........................................... 5
      FNMA ................................................................... 5
      Gross Margin ........................................................... 5
      Independent ............................................................ 6
      Independent Contractor ................................................. 6
      Index .................................................................. 6


                                       i
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SECTION                                                                     PAGE

Insurance Proceeds ..........................................................  6
Late Collections ............................................................  6
Liquidation Event ...........................................................  7
Liquidation Proceeds ........................................................  7
Loan-to-Value Ratio .........................................................  7
Master Servicer .............................................................  7
Master Servicing Fee ........................................................  7
Master Servicing Agreement ..................................................  7
Maximum Mortgage Rate .......................................................  7
Minimum Mortgage Rate .......................................................  7
Modification Schedule .......................................................  7
Monthly Payment .............................................................  8
Moody's .....................................................................  8
Mortgage ....................................................................  8
Mortgage File ...............................................................  8
Mortgage Loan ...............................................................  8
Mortgage Loan Schedule ......................................................  8
Mortgage Note ............................................................... 10
Mortgage Rate ............................................................... 10
Mortgaged Property .......................................................... 10
Mortgagor ................................................................... 10
Net Mortgage Rate ........................................................... 10
New Lease ................................................................... 10
Nonrecoverable P&I Advance .................................................. 10
Nonrecoverable Servicing Advance ............................................ 10
Officers' Certificate ....................................................... 11
Opinion of Counsel .......................................................... 11
Origination Closing Date .................................................... 11
Origination Closing Notice .................................................. 11
Originator .................................................................. 11
Owner ....................................................................... 11
Periodic Rate Cap ........................................................... 11
Permitted Investments ....................................................... 11
Person ...................................................................... 12
P&I Advance ................................................................. 12
Policy ...................................................................... 13
Prepayment Interest Shortfall ............................................... 13
Prepayment Period ........................................................... 13
Prepayment Premium .......................................................... 13
Principal Prepayment ........................................................ 13
Purchase Price .............................................................. 13
Qualified Substitute Mortgage Loan .......................................... 13
Rating Agencies ............................................................. 13


                                       ii
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SECTION                                                                     PAGE

Realized Loss ............................................................... 13
Refinanced Mortgage Loan .................................................... 15
Relief Act .................................................................. 15
REMIC ....................................................................... 15
REMIC Provisions ............................................................ 15
Remittance Report ........................................................... 15
Rents from Real Property .................................................... 15
REO Account ................................................................. 15
REO Disposition ............................................................. 15
REO Imputed Interest ........................................................ 15
REO Principal Amortization .................................................. 15
REO Property ................................................................ 16
Request for Release ......................................................... 16
Residential Dwelling ........................................................ 16
Sale Closing Date ........................................................... 16
Sale Closing Notice ......................................................... 16
Scheduled Principal Balance ................................................. 16
Servicing Account ........................................................... 17
Servicing Advances .......................................................... 17
Servicing Fee ............................................................... 17
Servicing Fee Rate .......................................................... 17
Servicing File .............................................................. 17
Servicing Officer ........................................................... 17
S&P ......................................................................... 18
Stated Principal Balance .................................................... 18
Sub-Servicer ................................................................ 18
Sub-Servicer Event of Default ............................................... 18
Sub-Servicer Remittance Date ................................................ 19
Sub-Servicing Fee ........................................................... 19
Sub-Servicing Fee Rate ...................................................... 19
Uninsured Cause ............................................................. 19
Value ....................................................................... 19

                                   ARTICLE II

                         DELIVERY OF ORIGINATION CLOSING
                        NOTICES AND SALE CLOSING NOTICES;
              DELIVERY OF SERVICING FILES; SET-UP AND RELEASE FEES;
                         REPRESENTATIONS OF SUB-SERVICER

2.01 Closing Notices ........................................................ 20
2.02 Delivery of Servicing Files ............................................ 20
2.03 Possession of Servicing Files .......................................... 20


                                      iii
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SECTION                                                                     PAGE

2.04 Set-Up Fee: Serving Release Fee......................................... 21
2.04 Representations and Warranties of Sub-Servicer ......................... 21
2.05 Representations and Warranties of the Master Servicer .................. 23

                                   ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

3.01. Sub-Servicer to Act as Sub-Servicer ................................... 26
3.02. Collection of Certain Mortgage Loan Payments .......................... 28
3.03. Collection of Taxes, Assessments and Similar Items;  Servicing Accounts 28
3.04. Collection Account .................................................... 29
3.05. Withdrawals from the Collection Account ............................... 30
3.06. Investment of Funds in the Collection Account ......................... 32
3.07. Maintenance of Hazard Insurance and Errors and Omissions
      and Fidelity Coverage ................................................. 33
3.08. Enforcement of Due-On-Sale Clauses; Assumption Agreements ............. 34
3.09. Realization Upon Defaulted Mortgage Loans ............................. 35
3.10. Cooperation; Release of Mortgage Files ................................ 37
3.11. Sub-Servicing Compensation ............................................ 38
3.12. Reports; Collection Account Statements ................................ 38
3.13. Statement as to Compliance ............................................ 39
3.14. Independent Public Accountants' Servicing Report ...................... 39
3.15. Access to Certain Documentation ....................................... 39
3.16. Title, Management and Disposition of REO Property ..................... 40
3.17. Obligations of the Sub-Servicer and the Master Servicer in Respect of
      Prepayment Interest Shortfalls ........................................ 43
3.18. Obligations of the Sub-Servicer in Respect of Mortgage Rates and Monthly
      Payments .............................................................. 43
3.19. Obligations of the Sub-Servicer and the Master Servicer in Respect of
      Servicing Advances .................................................... 44
3.20. Notice of Withdrawals ................................................. 44

                                   ARTICLE IV

                                     REPORTS

4.01. Remittance Reports; P&I Advances; Reimbursement of P&I Advances........ 45
4.04. Allocation of Realized Losses.......................................... 46

                                    ARTICLE V


                                       iv
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SECTION                                                                     PAGE

                    THE MASTER SERVICER AND THE SUB-SERVICER

5.02. Merger or Consolidation of Parties..................................... 47
5.04. Term................................................................... 48
5.05. Rights of the Master Servicer in Respect of the Sub-Servicer........... 49
5.06. Further Assurances..................................................... 49
5.07. Sales of Mortgage Loans................................................ 49

                                   ARTICLE VI

                                     DEFAULT

6.01. Sub-Servicer Events of Default......................................... 51

                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

7.01. Amendment.............................................................. 53
7.02. Confidentiality........................................................ 53
7.03. Recordation of Agreement; Counterparts................................. 53
7.04. Governing Law.......................................................... 53
7.05. Notices................................................................ 53
7.06. Severability of Provisions............................................. 54
7.08. Article and Section References......................................... 54


Exhibits

Exhibit A      Mortgage Loan File
Exhibit B-1    Request for Release
Exhibit B-2    Request for Release Mortgage Loans paid in full
Exhibit C      Form of Origination Closing Notice
Exhibit D      Form of Sale Closing Notice
Exhibit E      Form of Modification Schedule
Exhibit F      Employees of Sub-Servicer's Servicing Division (Section 7.02)
Exhibit G      Reports

Schedule 1     Mortgage Loan Schedule


                                       v
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                  This Master Sub-Servicing Agreement, is dated and effective as
of April 18, 1997, between LONG BEACH MORTGAGE COMPANY, a Delaware corporation,
as Master Servicer, and AMERIQUEST MORTGAGE COMPANY, a Delaware corporation, as
Sub-Servicer.

                             PRELIMINARY STATEMENT:

                  The Sub-Servicer has agreed to service for the Master Servicer
Mortgage Loans owned by the Master Servicer and Mortgage Loans sold by the
Master Servicer on a servicing retained basis.

                  The Sub-Servicer and the Master Servicer wish to prescribe the
management, servicing and control of the Mortgage Loans by the Sub-Servicer.

                  In consideration of the mutual agreements herein contained,
the Master Servicer and the Sub-Servicer agree as follows:

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                                      -2-


                                    ARTICLE I

                                   DEFINITIONS

                  SECTION 1.01. Defined Terms.

                  Whenever used in this Agreement, including, without
limitation, in the Preliminary Statement hereto, the following words and
phrases, unless the context otherwise requires, shall have the meanings
specified in this Article. Unless otherwise specified, all calculations
described herein shall be made on the basis of a 360-day year consisting of
twelve 30-day months.

                  "Accepted Servicing Practices": The servicing standards set
forth in Section 3.01.

                  "Adjustable Rate Mortgage Loan": A Mortgage Loan that bears
interest at a rate which adjusts from time to time in accordance with the terms
of the Mortgage Note.

                  "Adjustment Date": With respect to each Adjustable Rate
Mortgage Loan, the first day of the month in which the Mortgage Rate of a
Mortgage Loan changes pursuant to the related Mortgage Note. The first
Adjustment Date following the Cut-off Date as to each Adjustable Rate Mortgage
Loan is set forth in the Mortgage Loan Schedule.

                  "Advance Account": The account or accounts of the Master
Servicer designated by the Master Servicer to the SubServicer from which the
Sub-Servicer shall withdraw funds to make payments on behalf of the Master
Servicer in respect of Prepayment Interest Shortfalls, Servicing Advances and
P&I Advances required to be made by the Master Servicer pursuant to the terms of
this Agreement. The Master Servicer shall designate the Sub-Servicer as an
authorized signatory in respect of withdrawals from each such Advance Account.

                  "Affiliate": With respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect to
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.

                  "Agreement": This Agreement and all amendments hereof and
supplements hereto.

                  "Assignment": An assignment of Mortgage, notice of transfer or
equivalent instrument, in recordable form, which is sufficient under the laws of
the jurisdiction wherein the related Mortgaged Property is located to reflect of
record the sale of the Mortgage, which assignment, notice of transfer or
equivalent instrument may be in the form of one or more blanket assignments
covering Mortgages secured by Mortgaged Properties located in the same county,
if permitted by law.

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                                      -3-


                  "Available Distribution Amount": With respect to any
Sub-Servicer Remittance Date, an amount equal to (1) the sum of (a) the
aggregate of the amounts on deposit in the Collection Account as of the close of
business on the related Determination Date, (b) the aggregate of any amounts
received in respect of an REO Property withdrawn from any REO Account and
deposited in the Collection Account for such Sub-Servicer Remittance Date
pursuant to Section 3.16, (c) the aggregate of any amounts deposited in the
Collection Account by or on behalf of the Master Servicer in respect of
Prepayment Interest Shortfalls for such Sub-Servicer Remittance Date pursuant to
Section 3.17 and (d) the aggregate of any P&I Advances made by or on behalf of
the Master Servicer for such Sub-Servicer Remittance Date pursuant to Section
4.01, reduced by (2) (i) Monthly Payments on the Mortgage Loans received from a
Mortgagor on or prior to the Determination Date but due during any Due Period
subsequent to the related Due Period, (ii) Principal Prepayments on the Mortgage
Loans received after the related Prepayment Period (together with any interest
payments received with such Principal Prepayments to the extent they represent
the payment of interest accrued on the Mortgage Loans during a period subsequent
to the related Prepayment Period), (iii) Liquidation Proceeds and Insurance
Proceeds received in respect of the Mortgage Loans after the related Prepayment
Period, and (iv) amounts reimbursable or payable to the Master Servicer pursuant
to Section 3.05 or Section 3.06.

                  "Balloon Loan": Any Mortgage Loan that by its terms provides
for an amortization schedule extending beyond its stated maturity.

                  "Bankruptcy Code": The Bankruptcy Reform Act of 1978 (Title 11
of the United States Code), as amended.

                  "Bankruptcy Loss": With respect to any Mortgage Loan, a
Realized Loss resulting from a Deficient Valuation or Debt Service Reduction.

                  "Business Day": Any day other than a Saturday, a Sunday or a
day on which banking or savings and loan institutions in the State of California
or the State of New York or in the city in which the Owner is located are
authorized or obligated by law or executive order to be closed.

                  "Certificate Insurer": The issuer of any Policy.

                  "Code": The Internal Revenue Code of 1986.

                  "Collection Account": The account or accounts created and
maintained, or caused to be created and maintained, by the Sub-Servicer pursuant
to Section 3.04, which shall be entitled (a) prior to the Sale Closing Date for
any Mortgage Loan, "Ameriquest Mortgage Company, as Sub-Servicer for Long Beach
Mortgage Company" and (b) on and after the Sale Closing Date for any Mortgage
Loan, "Ameriquest Mortgage Company, as Sub-Servicer for Long Beach Mortgage
Company, as Master Servicer, for the benefit of [Owner] and [Certificate
Insurer]". The Collection Account must be an Eligible Account.

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                                      -4-


                  "Cut-off Date": With respect to each Mortgage Loan, the first
day of the month in which the Origination Closing Date or the Sale Closing Date,
as the case may be, occurs.

                  "DCR": Duff & Phelps Credit Rating Co. or its successor in
interest.

                  "Debt Service Reduction": With respect to any Mortgage Loan, a
reduction in the scheduled Monthly Payment for such Mortgage Loan by a court of
competent jurisdiction in a proceeding under the Bankruptcy Code, except such a
reduction resulting from a Deficient Valuation.

                  "Deficient Valuation": With respect to any Mortgage Loan, a
valuation of the related Mortgaged Property by a court of competent jurisdiction
in an amount less than the then outstanding principal balance of the Mortgage
Loan, which valuation results from a proceeding initiated under the Bankruptcy
Code.

                  "Deleted Mortgage Loan": A Mortgage Loan replaced or to be
replaced by a Qualified Substitute Mortgage Loan.

                  "Delinquent": A Mortgage Loan is Delinquent if any Monthly
Payment due thereon is not made by the close of business on the Determination
Date of the month succeeding the month in which such Monthly Payment was due. A
Mortgage Loan is 60 days Delinquent if such Monthly Payment has not been
received by the close of business on the Determination Date of the second month
succeeding the month in which such Monthly Payment was due. A Mortgage Loan is
90 days Delinquent if such Monthly Payment has not been received by the close of
business on the Determination Date of the third month succeeding the month in
which such Monthly Payment was due.

                  "Depository Institution": Any depository institution or trust
company that (a) is incorporated under the laws of the United States of America
or any State thereof, (b) is subject to supervision and examination by federal
or state banking authorities and (c) has outstanding unsecured commercial paper
or other short-term unsecured debt obligations (or, in the case of a depository
institution that is the principal subsidiary of a holding company, such holding
company has unsecured commercial paper or other short-term unsecured debt
obligations) that are rated P-1 by Moody's and A-1 by S&P (or comparable ratings
if Moody's and S&P are not the Rating Agencies).

                  "Determination Date": With respect to each Sub-Servicer
Remittance Date, the 15th day of the calendar month in which such Sub-Servicer
Remittance Date occurs or, if such 15th day is not a Business Day, the Business
Day immediately preceding such 15th day.

                  "Directly Operate": With respect to any REO Property, the
furnishing or rendering of services to the tenants thereof, the management or
operation of such REO Property, the holding of such REO Property primarily for
sale to customers, the performance of any

<PAGE>   12
                                      -5-


construction work thereon or any use of such REO Property in a trade or business
conducted by a REMIC holding an REO Property other than through an Independent
Contractor; provided, however, that the Owner (or the Sub-Servicer, or the
Master Servicer, on behalf of the Owner) shall not be considered to Directly
Operate an REO Property solely because the Owner (or the SubServicer, or the
Master Servicer, on behalf of the Owner) establishes rental terms, chooses
tenants, enters into or renews leases, deals with taxes and insurance, or makes
decisions as to repairs or capital expenditures with respect to such REO
Property.

                  "Due Date": With respect to each Sub-Servicer Remittance Date,
the first day of the calendar month in which such Sub-Servicer Remittance Date
occurs, which is the day of the month on which the Monthly Payment is due on a
Mortgage Loan, exclusive of any days of grace.

                  "Due Period": With respect to any Sub-Servicer Remittance
Date, the period commencing on the second day of the month immediately preceding
the month in which such Sub-Servicer Remittance Date occurs and ending on the
related Due Date.

                  "Eligible Account": Any of (i) an account or accounts
maintained with a Depository Institution, (ii) an account or accounts the
deposits in which are fully insured by the FDIC or (iii) a trust account or
accounts maintained with the trust department of a federal or state chartered
depository institution or trust company acting in its fiduciary capacity.
Eligible Accounts may bear interest.

                  "FDIC": Federal Deposit Insurance Corporation or any successor
thereto.

                  "Fitch": Fitch Investors Services, L.P. or its successor in
interest.

                  "FHLMC": Federal Home Loan Mortgage Corporation or any
successor thereto.

                  "Final Recovery Determination": With respect to any defaulted
Mortgage Loan or any REO Property, a determination made by the Sub-Servicer that
all Insurance Proceeds, Liquidation Proceeds and other payments or recoveries
which the Sub-Servicer, in its reasonable good faith judgment, expects to be
finally recoverable in respect thereof have been so recovered. The SubServicer
shall maintain records, prepared by a Servicing Officer, of each Final Recovery
Determination made thereby.

                  "FNMA": Federal National Mortgage Association or any successor
thereto.

                  "Gross Margin": With respect to each Adjustable Rate Mortgage
Loan, the fixed percentage set forth in the related Mortgage Note that is added
to the Index on each Adjustment Date in accordance with the terms of the related
Mortgage Note used to determine the Mortgage Rate for such Mortgage Loan.

                  "Independent": When used with respect to any specified Person,
any such Person who (a) is in fact independent of the Sub-Servicer or the Master
Servicer and their respective

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                                      -6-


Affiliates, (b) does not have any direct financial interest in or any material
indirect financial interest in the Sub-Servicer or the Master Servicer or any
Affiliate thereof, and (c) is not connected with the Sub-Servicer or the Master
Servicer or any Affiliate thereof as an officer, employee, promoter,
underwriter, trustee, partner, director or Person performing similar functions;
provided, however, that a Person shall not fail to be Independent of the
Sub-Servicer or the Master Servicer or any Affiliate thereof merely because such
Person is the beneficial owner of 1% or less of any class of securities issued
by the Sub-Servicer or the Master Servicer or any Affiliate thereof, as the case
may be.

                  "Independent Contractor": Either (i) any Person (other than
the Sub-Servicer or the Master Servicer) that would be an "independent
contractor" with respect to any REMIC within the meaning of Section 856(d)(3) of
the Code if such REMIC were a real estate investment trust (except that the
ownership tests set forth in that section shall be considered to be met by any
Person that owns, directly or indirectly, 35 percent or more of any class of
pass-through certificates in connection with such REMIC), so long as such REMIC
does not receive or derive any income from such Person and provided that the
relationship between such Person and such REMIC is at arm's length, all within
the meaning of Treasury Regulation Section 1.856-4(b)(5), or (ii) any other
Person (including the Sub-Servicer and the Master Servicer) if an Opinion of
Counsel has been obtained to the effect that the taking of any action in respect
of any REO Property by such Person, subject to any conditions therein specified,
that is otherwise herein contemplated to be taken by an Independent Contractor
will not cause such REO Property to cease to qualify as "foreclosure property"
within the meaning of Section 860G(a)(8) of the Code (determined without regard
to the exception applicable for purposes of Section 860D(a) of the Code), or
cause any income realized in respect of such REO Property to fail to qualify as
Rents from Real Property.

                  "Index": As to each Adjustable Rate Mortgage Loan, the index
for the adjustment of the Mortgage Rate set forth in the related Mortgage Note.

                  "Insurance Proceeds": Proceeds of any title policy, hazard
policy or other insurance policy covering a Mortgage Loan, to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the Mortgagor in accordance with the procedures that the
Sub-Servicer would follow in servicing mortgage loans held for its own account,
subject to the terms and conditions of the related Mortgage Note and Mortgage.

                  "Late Collections": With respect to any Mortgage Loan and any
Due Period, all amounts received subsequent to the Determination Date
immediately following such Due Period, whether as late payments of Monthly
Payments or as Insurance Proceeds, Liquidation Proceeds or otherwise, which
represent late payments or collections of principal and/or interest due (without
regard to any acceleration of payments under the related Mortgage and Mortgage
Note) but delinquent for such Due Period and not previously recovered.

                  "Liquidation Event": With respect to any Mortgage Loan, any of
the following events: (i) such Mortgage Loan is paid in full; (ii) a Final
Recovery Determination is made as to such Mortgage Loan; or (iii) such Mortgage
Loan is removed from the terms of this Agreement by

<PAGE>   14
                                      -7-


reason of its being purchased, sold or replaced. With respect to any REO
Property, either of the following events: (i) a Final Recovery Determination is
made as to such REO Property; or (ii) such REO Property is removed from the
terms of this Agreement.

                  "Liquidation Proceeds": The amount (other than Insurance
Proceeds or amounts received in respect of the rental of any REO Property prior
to REO Disposition) received by the Sub-Servicer in connection with (i) the
taking of all or a part of a Mortgaged Property by exercise of the power of
eminent domain or condemnation, (ii) the liquidation of a defaulted Mortgage
Loan through a trustee's sale, foreclosure sale or otherwise, or (iii) the
repurchase, substitution or sale of a Mortgage Loan or an REO Property pursuant
to or as contemplated by this Agreement or a Master Servicing Agreement.

                  "Loan-to-Value Ratio": As of any date of determination, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at such date and the denominator of which
is the Value of the related Mortgaged Property.

                  "Master Servicer": Long Beach Mortgage Company or any
successor thereto, in its capacity as Master Servicer hereunder.

                  "Master Servicing Fee": With respect to each Mortgage Loan
that has been included in a Sale Closing Notice and for any calendar month, an
amount equal to one month's interest (or in the event of any payment of interest
which accompanies a Principal Prepayment in full or in part made by the
Mortgagor during such calendar month, interest for the number of days covered by
such payment of interest) at the rate equal to the related Servicing Fee Rate
minus the related Sub-Servicing Fee Rate on the same principal amount on which
interest on such Mortgage Loan accrues for such calendar month.

                  "Master Servicing Agreement": With respect to any Mortgage
Loan, an agreement pursuant to which the Master Servicer is the master servicer
and the Sub-Servicer is the sub-servicer of such Mortgage Loan.

                  "Maximum Mortgage Rate": With respect to each Mortgage Loan,
the percentage set forth in the related Mortgage Note as the maximum Mortgage
Rate thereunder.

                  "Minimum Mortgage Rate": With respect to each Mortgage Loan,
the percentage set forth in the related Mortgage Note as the minimum Mortgage
Rate thereunder.

                  "Modification Schedule": A schedule setting forth certain
terms in connection with the servicing of any Mortgage Loans sold by the
Originator (other than such loans sold servicing released) including any
modifications to the obligations of the Sub-Servicer hereunder with respect to
such Mortgage Loans, which shall include, but not be limited to, the information
set forth on Exhibit E hereto and which shall be attached to the related Sale
Closing Notice delivered on the related Sale Closing Date.

<PAGE>   15
                                      -8-


                  "Monthly Payment": With respect to any Mortgage Loan, the
scheduled monthly payment of principal and interest on such Mortgage Loan which
is payable by the related Mortgagor from time to time under the related Mortgage
Note, determined: (a) after giving effect to (i) any Deficient Valuation and/or
Debt Service Reduction with respect to such Mortgage Loan and (ii) any reduction
in the amount of interest collectible from the related Mortgagor pursuant to the
Relief Act; (b) without giving effect to any extension granted or agreed to by
the Sub-Servicer pursuant to Section 3.02; and (c) on the assumption that all
other amounts, if any, due under such Mortgage Loan are paid when due.

                  "Moody's": Moody's Investors Service, Inc. or its successor in
interest.

                  "Mortgage": The mortgage, deed of trust or other instrument
creating a first lien on, or first priority security interest in, a Mortgaged
Property securing a Mortgage Note.

                  "Mortgage File": The mortgage documents listed on Exhibit A
pertaining to a particular Mortgage Loan and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.

                  "Mortgage Loan": Each mortgage loan the servicing of which
becomes subject to this Agreement upon delivery by the Master Servicer to the
Sub-Servicer of an Origination Closing Notice, as provided in Section 2.01.

                  "Mortgage Loan Schedule": With respect to each Origination
Closing Notice and Sale Closing Notice, the schedule of Mortgage Loans to be
prepared by the Originator and attached thereto on the Origination Closing Date
or Sale Closing Date, as the case may be (and attached to this Agreement as
Schedule 1) which schedule (as amended from time to time to reflect the addition
of any Qualified Substitute Mortgage Loans, the deletion of any Deleted Loan and
the sale of any Mortgage Loan servicing released) shall set forth the following
information with respect to each Mortgage Loan covered by such Origination
Closing Notice or Sale Closing Notice:

         (i)      the Originator's Mortgage Loan identifying number;

         (ii)     the Mortgagor's name;

         (iii)    the street address of the Mortgaged Property including the
                  state and zip code;

         (iv)     a code indicating whether the Mortgaged Property is
                  owner-occupied;

         (v)      the type of Residential Dwelling constituting the Mortgaged
                  Property;

         (vi)     the original months to maturity;

         (vii)    the Loan-to-Value Ratio at origination;

<PAGE>   16
                                      -9-


         (viii)   the Mortgage Rate in effect immediately following the Cut-off
                  Date;

         (ix)     the date on which the first Monthly Payment was due on the
                  Mortgage Loan;

         (x)      the stated maturity date;

         (xi)     the amount of the Monthly Payment due on the first Due Date
                  after the Cut-off Date;

         (xii)    the last Due Date on which a Monthly Payment was actually
                  applied to the unpaid Stated Principal Balance;

         (xiii)   the original principal amount of the Mortgage Loan;

         (xiv)    the Scheduled Principal Balance of the Mortgage Loan as of the
                  close of business on the Cut-off Date;

         (xv)     the Gross Margin;

         (xvi)    a code indicating the purpose of the Mortgage Loan (i.e.,
                  purchase financing, rate/term refinancing, cash-out
                  refinancing);

         (xvii)   the Maximum Mortgage Rate;

         (xviii)  the Minimum Mortgage Rate;

         (xix)    the Mortgage Rate at origination;

         (xx)     the Periodic Rate Cap and the maximum first Adjustment Date
                  Mortgage Rate adjustment;

         (xxi)    a code indicating the documentation program (i.e., Full
                  Documentation, Fast Trac, QuickCredit, QuickCredit Fast Trac,
                  Stated Income, INSTA Credit, INSTA Credit Fast Trac);

         (xxii)   the first Adjustment Date immediately following the Cut-off
                  Date;

         (xxiii)  the risk grade;

         (xxiv)   the Value of the Mortgaged Property; and

         (xxv)    the sale price of the Mortgaged Property, if applicable.

                  The Mortgage Loan Schedule shall set forth the following
information, as of the

<PAGE>   17
                                      -10-


Cut-off Date with respect to the related Mortgage Loans in the aggregate: (1)
the number of Mortgage Loans; (2) the current principal balance of the Mortgage
Loans; (3) the weighted average Mortgage Rate of the Mortgage Loans; and (4) the
weighted average maturity of the Mortgage Loans. The Mortgage Loan Schedule
shall be amended from time to time by the Master Servicer in accordance with the
provisions of this Agreement. With respect to any Qualified Substitute Mortgage
Loan, Cut-off Date shall refer to the related Cut-off Date for such Mortgage
Loan, determined in accordance with the definition of Cut-off Date herein.

                  "Mortgage Note": The original executed note or other evidence
of the indebtedness of a Mortgagor under a Mortgage Loan.

                  "Mortgage Rate": With respect to each Mortgage Loan, the
annual rate at which interest accrues on such Mortgage Loan from time to time in
accordance with the provisions of the related Mortgage Note. With respect to
each Mortgage Loan that becomes an REO Property, as of any date of
determination, the annual rate determined in accordance with the immediately
preceding sentence as of the date such Mortgage Loan became an REO Property.

                  "Mortgaged Property": The underlying property securing a
Mortgage Loan, including any REO Property.

                  "Mortgagor": The obligor on a Mortgage Note.

                  "Net Mortgage Rate": With respect to any Mortgage Loan (or the
related REO Property) as of any date of determination, a per annum rate of
interest equal to the then applicable Mortgage Rate for such Mortgage Loan minus
the Servicing Fee Rate.

                  "New Lease": Any lease of REO Property entered into on behalf
of a REMIC, including any lease renewed or extended on behalf of a REMIC, if the
REMIC has the right to renegotiate the terms of such lease.

                  "Nonrecoverable P&I Advance": Any P&I Advance previously made
or proposed to be made in respect of a Mortgage Loan or REO Property that, in
the good faith business judgment of the Sub-Servicer or the Master Servicer,
will not or, in the case of a proposed P&I Advance, would not be ultimately
recoverable from related Late Collections, Insurance Proceeds or Liquidation
Proceeds on such Mortgage Loan or REO Property as provided herein.

                  "Nonrecoverable Servicing Advance": Any Servicing Advance
previously made or proposed to be made in respect of a Mortgage Loan or REO
Property that, in the good faith business judgment of the Sub-Servicer or the
Master Servicer, will not or, in the case of a proposed Servicing Advance, would
not be ultimately recoverable from related Late Collections, Insurance Proceeds
or Liquidation Proceeds on such Mortgage Loan or REO Property as provided
herein.

                  "Officers' Certificate": A certificate signed by the Chairman
of the Board, the Vice Chairman of the Board, the President or a vice president
(however denominated), and by the

<PAGE>   18
                                      -11-


Treasurer, the Secretary, or one of the assistant treasurers or assistant
secretaries of the Sub-Servicer or the Master Servicer, as applicable.

                  "Opinion of Counsel": A written opinion of counsel, who may,
without limitation, be salaried counsel for the SubServicer or the Master
Servicer acceptable to the Owner and the Certificate Insurer, if any, except
that any opinion of counsel relating to (a) the qualification of a REMIC as a
REMIC or (b) compliance with the REMIC Provisions must be an opinion of
Independent counsel.

                  "Origination Closing Date": The date of origination or
purchase by the Originator of any Mortgage Loan.

                  "Origination Closing Notice": A notification, in the form
attached as Exhibit C, from the Master Servicer to the Sub-Servicer of the
Origination Closing Date for certain Mortgage Loans.

                  "Originator": Long Beach Mortgage Company, or any successor
thereto, in its capacity as originator or purchaser of residential mortgage
loans.

                  "Owner": As of any date of determination and any Mortgage
Loan, the owner thereof, which, in the case of a Mortgage Loan deposited into a
trust, shall be the trustee for the benefit of the holders of interests in the
trust.

                  "Periodic Rate Cap": With respect to each Adjustable Rate
Mortgage Loan and any Adjustment Date therefor, the fixed percentage set forth
in the related Mortgage Note, which is the maximum amount by which the Mortgage
Rate for such Mortgage Loan may increase or decrease (without regard to the
Maximum Mortgage Rate or the Minimum Mortgage Rate) on such Adjustment Date from
the Mortgage Rate in effect immediately prior to such Adjustment Date.

                  "Permitted Investments": Any one or more of the following
obligations or securities acquired at a purchase price of not greater than par,
regardless of whether issued by the Sub-Servicer, the Master Servicer, the Owner
or any of their respective Affiliates:

                           (i) direct obligations of, or obligations fully
         guaranteed as to timely payment of principal and interest by, the
         United States or any agency or instrumentality thereof, provided such
         obligations are backed by the full faith and credit of the United
         States, provided, however, that any obligation of, or guaranteed by,
         FHLMC or FNMA, other than a senior debt or a mortgage participation or
         pass-through certificate guaranteed by FHLMC or FNMA shall be a
         Permitted Investment only if, at the time of investment, such
         investment is acceptable to the Certificate Insurer, if any.

                           (ii) demand and time deposits in, certificates of
         deposit of, or bankers' acceptances (which shall each have an original
         maturity of not more than 90 days and, in the case of bankers'
         acceptances, shall in no event have an original maturity of more than

<PAGE>   19
                                      -12-


         365 days or a remaining maturity of more than 30 days) denominated in
         United States dollars and issued by, any Depository Institution;

                           (iii) demand and time deposits in, certificates of
         deposit of, or bankers' acceptances issued by, any Depository
         Institution;

                           (iv) repurchase obligations with respect to any
         security described in clause (i) above entered into with a Depository
         Institution (acting as principal);

                           (v) securities bearing interest or sold at a discount
         that are issued by any corporation incorporated under the laws of the
         United States of America or any state thereof and that are rated by
         each Rating Agency in its highest long-term unsecured rating categories
         at the time of such investment or contractual commitment providing for
         such investment;

                           (vi) commercial paper (including both
         non-interest-bearing discount obligations and interest-bearing
         obligations payable on demand or on a specified date not more than 30
         days after the date of acquisition thereof) that is rated by each
         Rating Agency in its highest short-term unsecured debt rating available
         at the time of such investment;

                           (vii) units of money market funds that have been
         rated "P-1" by Moody's and "AAAm" by S&P; and

                           (viii) if previously confirmed in writing to the
         Owner, any other demand, money market or time deposit, or any other
         obligation, security or investment, as may be acceptable to the Rating
         Agencies and the Certificate Insurer, if any, under a related Master
         Servicing Agreement;

provided that no instrument described hereunder shall evidence either the right
to receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provide a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations.

                  "Person": Any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

                  "P&I Advance": As to any Mortgage Loan or REO Property, any
advance made by or on behalf of the Master Servicer in respect of any
Sub-Servicer Remittance Date pursuant to Section 4.01.

                  "Policy": Any certificate guaranty insurance policy insuring
certain payments on obligations backed by any Mortgage Loans.

<PAGE>   20
                                      -13-


                  "Prepayment Interest Shortfall": With respect to any
Sub-Servicer Remittance Date, for each Mortgage Loan that was during the related
Prepayment Period the subject of a Principal Prepayment in full or in part that
was applied by the Sub-Servicer to reduce the outstanding principal balance of
such loan on a date preceding the Due Date in the succeeding Prepayment Period,
an amount equal to interest at the applicable Net Mortgage Rate on the amount of
such Principal Prepayment for the number of days commencing on the date on which
the prepayment is applied and ending on the last day of the related Prepayment
Period. The obligations of the Sub-Servicer and the Master Servicer in respect
of any Prepayment Interest Shortfall are set forth in Section 3.17.

                  "Prepayment Period": With respect to any Sub-Servicer
Remittance Date, the calendar month preceding the calendar month in which such
Sub-Servicer Remittance Date occurs.

                  "Prepayment Premium": With respect to any Prepayment Period,
any prepayment premium, penalty or charge collected by the Sub-Servicer from a
Mortgagor in connection with any Principal Prepayment pursuant to the terms of
the related Mortgage Note.

                  "Principal Prepayment": Any payment of principal made by the
Mortgagor on a Mortgage Loan which is received in advance of its scheduled Due
Date and which is not accompanied by an amount of interest representing the full
amount of scheduled interest due on any Due Date in any month or months
subsequent to the month of prepayment.

                  "Purchase Price": With respect to any Mortgage Loan or REO
Property to be repurchased or purchased by the Originator or the Master Servicer
in connection with a breach of representations and warranties or a clean-up call
pursuant to the terms of a Master Servicing Agreement, the purchase price
required to be paid by the Originator or Master Servicer.

                  "Qualified Substitute Mortgage Loan": A mortgage loan
substituted by the Originator for a Mortgage Loan deleted pursuant to the terms
of a Master Servicing Agreement.

                  "Rating Agencies": With respect to a Master Servicing
Agreement, DCR, Fitch, Moody's and S&P or their successors. If such agencies or
their successors are no longer in existence, "Rating Agencies" shall be such
nationally recognized statistical rating agencies, or other comparable Persons,
designated in such Master Servicing Agreement, notice of which designation shall
be given to the Sub-Servicer by the Master Servicer pursuant to the related
Modification Schedule.

                  "Realized Loss": With respect to each Mortgage Loan as to
which a Final Recovery Determination has been made an amount (not less than
zero) equal to (i) the unpaid principal balance of such Mortgage Loan as of the
commencement of the calendar month in which the Final Recovery Determination was
made, plus (ii) accrued interest from the Due Date as to which interest was last
paid by the Mortgagor through the end of the calendar month in which such Final
Recovery Determination was made, calculated in the case of each calendar month
during such

<PAGE>   21
                                      -14-


period (A) at an annual rate equal to the annual rate at which interest was then
accruing on such Mortgage Loan and (B) on a principal amount equal to the Stated
Principal Balance of such Mortgage Loan as of the close of business on the
Sub-Servicer Remittance Date during such calendar month, plus (iii) any amounts
previously withdrawn from the Collection Account in respect of such Mortgage
Loan pursuant to Sections 3.05(viii) and 3.09(b), minus (iv) the proceeds, if
any, received in respect of such Mortgage Loan during the calendar month in
which such Final Recovery Determination was made, net of amounts that are
payable therefrom to the Master Servicer with respect to such Mortgage Loan
pursuant Section 3.05(iii).

                  With respect to any REO Property as to which a Final Recovery
Determination has been made an amount (not less than zero) equal to (i) the
unpaid principal balance of the related Mortgage Loan as of the date of
acquisition of such REO Property, plus (ii) accrued interest from the Due Date
as to which interest was last paid by the Mortgagor in respect of the related
Mortgage Loan through the end of the calendar month immediately preceding the
calendar month in which such REO Property was acquired, calculated in the case
of each calendar month during such period (A) at an annual rate equal to the
annual rate at which interest was then accruing on the related Mortgage Loan and
(B) on a principal amount equal to the Stated Principal Balance of the related
Mortgage Loan as of the close of business on the Sub-Servicer Remittance Date
during such calendar month, plus (iii) REO Imputed Interest for such REO
Property for each calendar month commencing with the calendar month in which
such REO Property was acquired and ending with the calendar month in which such
Final Recovery Determination was made, plus (iv) any amounts previously
withdrawn from the Collection Account in respect of the related Mortgage Loan
pursuant to Sections 3.05(viii) and 3.09(b), minus (v) the aggregate of all P&I
Advances and Servicing Advances (in the case of Servicing Advances, without
duplication of amounts netted out of the rental income, Insurance Proceeds and
Liquidation Proceeds described in clause (vi) below) made by or on behalf of the
Master Servicer in respect of such REO Property or the related Mortgage Loan for
which the Master Servicer has been or, in connection with such Final Recovery
Determination, will be reimbursed pursuant to Section 3.16 out of rental income,
Insurance Proceeds and Liquidation Proceeds received in respect of such REO
Property, minus (vi) the total of all net rental income, Insurance Proceeds and
Liquidation Proceeds received in respect of such REO Property that has been, or
in connection with such Final Recovery Determination, will be transferred to the
Collection Account pursuant to Section 3.16.

                  With respect to each Mortgage Loan which has become the
subject of a Deficient Valuation, the difference between the principal balance
of the Mortgage Loan outstanding immediately prior to such Deficient Valuation
and the principal balance of the Mortgage Loan as reduced by the Deficient
Valuation.

                  With respect to each Mortgage Loan which has become the
subject of a Debt Service Reduction, the portion, if any, of the reduction in
each affected Monthly Payment attributable to a reduction in the Mortgage Rate
imposed by a court of competent jurisdiction. Each such Realized Loss shall be
deemed to have been incurred on the Due Date for each affected Monthly Payment.

<PAGE>   22
                                      -15-


                  "Refinanced Mortgage Loan": A Mortgage Loan the proceeds of
which were not used to purchase the related Mortgaged Property.

                  "Relief Act": The Soldiers' and Sailors' Civil Relief Act of
1940, as amended.

                  "REMIC": A "real estate mortgage investment conduit" within
the meaning of Section 860D of the Code.

                  "REMIC Provisions": Provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at Section
860A through 860G of the Code, and related provisions, and proposed, temporary
and final regulations and published rulings, notices and announcements
promulgated thereunder, as the foregoing may be in effect from time to time.

                  "Remittance Report": A report in form and substance acceptable
to the Owner on a magnetic disk or tape prepared by the Sub-Servicer pursuant to
Section 4.01 with such additions, deletions and modifications as agreed to by
the Owner and the SubServicer, which report may be in the form of ALLTEL-CPI
S-50Y.

                  "Rents from Real Property": With respect to any REO Property,
gross income of the character described in Section 856(d) of the Code as being
included in the term "rents from real property."

                  "REO Account": The account or accounts maintained, or caused
to be maintained, by the Sub-Servicer in respect of an REO Property pursuant to
Section 3.16.

                  "REO Disposition": The sale or other disposition of an REO
Property on behalf of the Owner.

                  "REO Imputed Interest": As to any REO Property, for any
calendar month during which such REO Property was at any time part of a REMIC,
one month's interest at the applicable Net Mortgage Rate on the Stated Principal
Balance of such REO Property (or, in the case of the first such calendar month,
of the related Mortgage Loan if appropriate) as of the close of business on the
Sub-Servicer Remittance Date in such calendar month.

                  "REO Principal Amortization": With respect to any REO
Property, for any calendar month, the excess, if any, of (a) the aggregate of
all amounts received in respect of such REO Property during such calendar month,
whether in the form of rental income, sale proceeds (including, without
limitation, that portion of the termination price paid in connection with a
purchase of all of the Mortgage Loans and REO Properties pursuant to a Master
Servicing Agreement that is allocable to such REO Property) or otherwise, net of
any portion of such amounts (i) payable pursuant to Section 3.16(c) in respect
of the proper operation, management and maintenance of such REO Property or (ii)
payable or reimbursable to the Master Servicer or the Sub-Servicer pursuant to
Section 3.16(d) for unpaid Master Servicing Fees or Sub-Servicing Fees in
respect of the related Mortgage Loan and unreimbursed Servicing Advances and P&I
Advances

<PAGE>   23
                                      -16-


in respect of such REO Property or the related Mortgage Loan, over (b) the REO
Imputed Interest in respect of such REO Property for such calendar month.

                  "REO Property": A Mortgaged Property acquired by the
Sub-Servicer or the Master Servicer on behalf of the Owner through foreclosure
or deed-in-lieu of foreclosure, as described in Section 3.16.

                  "Request for Release": A release signed by a Servicing
Officer, in the form of Exhibit B-1 or Exhibit B-2 attached hereto.

                  "Residential Dwelling": Any one of the following: (i) a
detached one-family dwelling, (ii) a detached two- to four-family dwelling,
(iii) a one-family dwelling unit in a FNMA eligible condominium project, or (iv)
a detached one-family dwelling in a planned unit development, none of which is a
co-operative, mobile or manufactured home (as defined in 42 United States Code,
Section 5402(6)).

                  "Sale Closing Date": The date of the closing of the sale of a
Mortgage Loan by the Originator servicing retained.

                  "Sale Closing Notice": A notification, in the form attached as
Exhibit D, from the Master Servicer to the Sub- Servicer of the Sale Closing
Date for certain Mortgage Loans.

                  "Scheduled Principal Balance": With respect to any Mortgage
Loan: (a) as of the Cut-off Date, the outstanding principal balance of such
Mortgage Loan as of such date, net of the principal portion of all unpaid
Monthly Payments, if any, due on or before such date; (b) as of any Due Date
subsequent to the Cut-off Date up to and including the Due Date in the calendar
month in which a Liquidation Event occurs with respect to such Mortgage Loan,
the Scheduled Principal Balance of such Mortgage Loan as of the Cut-off Date,
minus the sum of (i) the principal portion of each Monthly Payment due on or
before such Due Date but subsequent to the Cut-off Date, whether or not
received, (ii) all Principal Prepayments received before such Due Date but after
the Cut-off Date, (iii) the principal portion of all Liquidation Proceeds and
Insurance Proceeds received before such Due Date but after the Cut-off Date, net
of any portion thereof that represents principal due (without regard to any
acceleration of payments under the related Mortgage and Mortgage Note) on a Due
Date occurring on or before the date on which such proceeds were received and
(iv) any Realized Loss incurred with respect thereto as a result of a Deficient
Valuation occurring before such Due Date, but only to the extent such Realized
Loss represents a reduction in the portion of principal of such Mortgage Loan
not yet due (without regard to any acceleration of payments under the related
Mortgage and Mortgage Note) as of the date of such Deficient Valuation; and (c)
as of any Due Date subsequent to the occurrence of a Liquidation Event with
respect to such Mortgage Loan, zero. With respect to any REO Property: (a) as of
any Due Date subsequent to the date of its acquisition on behalf of the Owner up
to and including the Due Date in the calendar month in which a Liquidation Event
occurs with respect to such REO Property, an amount (not less than zero) equal
to the Scheduled Principal Balance of the related Mortgage Loan as of the Due
Date in the calendar month in which such REO Property was acquired, minus the

<PAGE>   24
                                      -17-


aggregate amount of REO Principal Amortization, if any, in respect of such REO
Property for all previously ended calendar months; and (b) as of any Due Date
subsequent to the occurrence of a Liquidation Event with respect to such REO
Property, zero.

                  "Servicing Account": The account or accounts created and
maintained pursuant to Section 3.03.

                  "Servicing Advances": The reasonable "out-of-pocket" costs and
expenses incurred by the Sub-Servicer in connection with a default, delinquency
or other unanticipated event in the performance of its servicing obligations,
including, but not limited to, the cost of (i) the preservation, restoration and
protection of a Mortgaged Property, (ii) any enforcement or judicial
proceedings, including foreclosures, in respect of a particular Mortgage Loan,
(iii) the management (including reasonable fees in connection therewith) and
liquidation of any REO Property, and (iv) the performance of its obligations
under Sections 3.01, 3.02, 3.07, 3.09 and 3.16. The Master Servicer shall not be
required to make any Servicing Advance in respect of a Mortgage Loan or REO
Property that, in the good faith business judgment of the Sub-Servicer or the
Master Servicer would be a Nonrecoverable Servicing Advance.

                  "Servicing Fee": With respect to each Mortgage Loan and for
any calendar month, an amount equal to the servicing fee payable to the Master
Servicer pursuant to the terms of any related Master Servicing Agreement.

                  "Servicing Fee Rate": With respect to each Mortgage Loan, the
rate per annum at which the Servicing Fee is calculated pursuant to the terms of
any related Master Servicing Agreement, as set forth on the related Modification
Schedule.

                  "Servicing File": With respect to each Mortgage Loan, the
items pertaining to a particular Mortgage Loan which the Owner shall deliver to
the Sub-Servicer, which shall include (i) a hard copy of the Mortgage Note, the
Mortgage (including the legal description of the Mortgaged Property), the hazard
insurance policy, the flood insurance policy (if any), information relating to
any holdback and a letter to the escrow agent assigning any holdback to the
Sub-Servicer, together with any riders or endorsements for any of the foregoing;
and (ii) a copy of each other document, in microfilm medium, in the Mortgage
File for such Mortgage Loan that is necessary for the servicing or enforcement
of the Mortgage Loan. The Servicing File shall also include any additional
documents related to the Mortgage Loan as the Sub-Servicer obtains or as may
come into the Sub-Servicer's possession from time to time which are necessary to
properly service the Mortgage Loan.

                  "Servicing Officer": Any officer of the Sub-Servicer involved
in, or responsible for, the administration and servicing of Mortgage Loans,
whose name and specimen signature appear on a list of servicing officers
furnished by the Sub-Servicer to the Owner (and the Master Servicer, if not the
Owner) on the first Origination Closing Date and each Sale Closing Date, as such
lists may from time to time be amended.

<PAGE>   25
                                      -18-


                  "S&P": Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc., or its successor in interest.

                  "Stated Principal Balance": With respect to any Mortgage Loan:
(a) as of any date of determination up to but not including the Sub-Servicer
Remittance Date on which the proceeds, if any, of a Liquidation Event with
respect to such Mortgage Loan would be distributed, the Scheduled Principal
Balance of such Mortgage Loan as of the Cut-off Date, as shown in the Mortgage
Loan Schedule, minus the sum of (i) the principal portion of each Monthly
Payment due on a Due Date subsequent to the Cut-off Date, to the extent received
from the Mortgagor or advanced by or on behalf of the Master Servicer and
distributed pursuant to Section 3.04(b) on or before such date of determination,
(ii) all Principal Prepayments received after the Cut-off Date, to the extent
distributed pursuant to Section 3.04(b) on or before such date of determination,
(iii) all Liquidation Proceeds and Insurance Proceeds applied by the
Sub-Servicer as recoveries of principal in accordance with the provisions of
Section 3.09, to the extent distributed pursuant to Section 3.04(b) on or before
such date of determination, and (iv) any Realized Loss incurred with respect
thereto as a result of a Deficient Valuation made during or prior to the
Prepayment Period for the most recent Sub-Servicer Remittance Date coinciding
with or preceding such date of determination; and (b) as of any date of
determination coinciding with or subsequent to the Sub-Servicer Remittance Date
on which the proceeds, if any, of a Liquidation Event with respect to such
Mortgage Loan would be distributed, zero. With respect to any REO Property: (a)
as of any date of determination up to but not including the Sub-Servicer
Remittance Date on which the proceeds, if any, of a Liquidation Event with
respect to such REO Property would be distributed, an amount (not less than
zero) equal to the Stated Principal Balance of the related Mortgage Loan as of
the date on which such REO Property was acquired on behalf of the Owner, minus
the sum of (i) if such REO Property was acquired before the SubServicer
Remittance Date in any calendar month, the principal portion of the Monthly
Payment due on the Due Date in the calendar month of acquisition, to the extent
advanced by or on behalf of the Master Servicer and distributed pursuant to
Section 3.04(b) on or before such date of determination, and (ii) the aggregate
amount of REO Principal Amortization in respect of such REO Property for all
previously ended calendar months, to the extent distributed pursuant to Section
3.04(b) on or before such date of determination; and (b) as of any date of
determination coinciding with or subsequent to the Sub-Servicer Remittance Date
on which the proceeds, if any, of a Liquidation Event with respect to such REO
Property would be distributed, zero.

                  "Sub-Servicer": Ameriquest Mortgage Company or it successor in
interest hereunder, in its capacity as Sub- Servicer.

                  "Sub-Servicer Event of Default": One or more of the events
described in Section 6.01.

                  "Sub-Servicer Remittance Date": 3:00 p.m. New York time on the
later to occur of (i) the 18th day of each calendar month or, if such 18th day
is not a Business Day, the Business Day immediately succeeding such 18th day and
(ii) the third Business Day following each Determination Date.

<PAGE>   26
                                      -19-


                  "Sub-Servicing Fee": With respect to each Mortgage Loan and
for any calendar month, an amount equal to one month's interest (or in the event
of any payment of interest which accompanies a Principal Prepayment in full or
in part made by the Mortgagor during such calendar month, interest for the
number of days covered by such payment of interest) at the applicable
Sub-Servicing Fee Rate on the same principal amount on which interest on such
Mortgage Loan accrues for such calendar month.

                  "Sub-Servicing Fee Rate": 0.45% per annum.

                  "Uninsured Cause": Any cause of damage to a Mortgaged Property
such that the complete restoration of such property is not fully reimbursable by
the hazard insurance policies required to be maintained pursuant to Section
3.07.

                  "Value": With respect to any Mortgaged Property, the lesser of
(i) the value thereof as determined by an appraisal made for the originator of
the Mortgage Loan at the time of origination of the Mortgage Loan by an
appraiser who met the minimum requirements of FNMA and FHLMC, and (ii) the
purchase price paid for the related Mortgaged Property by the Mortgagor with the
proceeds of the Mortgage Loan, provided, however, in the case of a Refinanced
Mortgage Loan, such value of the Mortgaged Property is based solely upon the
value determined by an appraisal made for the originator of such Refinanced
Mortgage Loan at the time of origination of such Refinanced Mortgage Loan by an
appraiser who met the minimum requirements of FNMA and FHLMC.

<PAGE>   27
                                      -20-


                                   ARTICLE II

                         DELIVERY OF ORIGINATION CLOSING
                        NOTICES AND SALE CLOSING NOTICES;
              DELIVERY OF SERVICING FILES; SET-UP AND RELEASE FEES;
                         REPRESENTATIONS OF SUB-SERVICER

                  SECTION 2.01. Closing Notices.

                  Upon the delivery by the Master Servicer to the Sub-Servicer
of an Origination Closing Notice, together with a Mortgage Loan Schedule and a
copy of the Mortgage and Mortgage Note (any or all of which may be by facsimile
transmission), each related Mortgage Loan shall become subject to the terms of
this Agreement.

                  The Master Servicer shall provide the Sub-Servicer reasonable
prior notice of each Sale Closing Date, together with a preliminary Mortgage
Loan Schedule of the Mortgage Loans to be sold on such date. The Master Servicer
shall deliver to the SubServicer on each Sale Closing Date a Sale Closing
Notice, together with a final Mortgage Loan Schedule and a Modification
Schedule. Upon receipt of such Sale Closing Notice, the Sub-Servicer shall mark
its books and records to reflect the sale of such Mortgage Loans to the Owner
and establish a Collection Account and a Servicing Account (if applicable) as
designated in such Modification Schedule.

                  All original documents relating to the Mortgage Loans that are
not delivered to the Owner are and shall be held by the Sub-Servicer on behalf
of the Master Servicer in trust for the benefit of the Owner.

<PAGE>   28
                                      -21-


                  SECTION 2.02. Delivery of Servicing Files.

                  The Master Servicer shall cause to be delivered to the
Sub-Servicer, within 10 days after each Origination Closing Date, the Servicing
File with respect to each Mortgage Loan, together with a list of the documents
included therein, and the SubServicer, within 15 Business Days of the date of
such delivery (or as soon thereafter as is reasonably practicable), will (a)
acknowledge its receipt of each such Servicing File and provide the Master
Servicer with an itemization of any exceptions to such list of documents or
records included in such Servicing File and (b) provide the Master Servicer with
an itemization of any other documents or records not included in such Servicing
File that are reasonably necessary to carry out its servicing obligations
hereunder. The Master Servicer shall make a good faith effort to assist the
Sub-Servicer in obtaining each such missing document or record.

                  SECTION 2.03. Possession of Servicing Files.

                  The contents of each Servicing File delivered to the
Sub-Servicer shall be held in trust by the Sub-Servicer on behalf of the Master
Servicer for the benefit of the Owner as the owner thereof, and the
Sub-Servicer's possession of the contents of each Servicing File so delivered is
for the sole purpose of servicing the related Mortgage Loan. The Sub-Servicer
may, in accordance with Accepted Servicing Practices, maintain the Servicing
Files at one or more locations other than its principal place of business, and
shall inform the Master Servicer and the Owner of each such location. The
Sub-Servicer shall release its custody of the contents of any Servicing File
only in accordance with written instructions from the Master Servicer or the
Owner. Upon request of the Master Servicer, the Sub-Servicer shall, at the
Master Servicer's expense, deliver to the Master Servicer a copy of any document
contained in any Servicing File.

                  SECTION 2.04. Set-Up Fee; Servicing Release Fee.

                  The Originator shall pay the Sub-Servicer a set-up fee of
$10.00 for each Mortgage Loan listed on an Origination Closing Notice, upon
delivery of each such Origination Closing Notice, and a servicing release fee of
$25.00 for each Mortgage Loan sold by the Originator servicing released, on the
related Sale Closing Date for each such Mortgage Loan. The Originator shall also
pay the Sub-Servicer the servicing release fee upon termination of the
Sub-Servicer as sub-servicer for any Mortgage Loans pursuant to Section 3.01(c)
hereof. Such fees shall be payable from the Originator's own funds.

                  SECTION 2.04. Representations and Warranties of Sub-Servicer.

                  (a) The Sub-Servicer hereby represents and warrants to the
Master Servicer that as of the date this Agreement and as of each Origination
Closing Date and Sale Closing Date:

                           (i) The Sub-Servicer is a corporation duly organized,
         validly existing and in good standing under the laws of the State of
         Delaware and is duly authorized and

<PAGE>   29
                                      -22-


         qualified to transact any and all business contemplated by this
         Agreement to be conducted by the Sub-Servicer in any state in which a
         Mortgaged Property is located or is otherwise not required under
         applicable law to effect such qualification and, in any event, is in
         compliance with the doing business laws of any such State, to the
         extent necessary to ensure its ability to enforce each Mortgage Loan
         and to service the Mortgage Loans in accordance with the terms of this
         Agreement;

                           (ii) The Sub-Servicer has the full power and
         authority to conduct its business as presently conducted by it and to
         execute, deliver and perform, and to enter into and consummate, all
         transactions contemplated by this Agreement. The Sub-Servicer has duly
         authorized the execution, delivery and performance of this Agreement,
         has duly executed and delivered this Agreement, and this Agreement,
         assuming due authorization, execution and delivery by the Master
         Servicer, constitutes a legal, valid and binding obligation of the
         Sub-Servicer enforceable against it in accordance with its terms except
         as the enforceability thereof may be limited by bankruptcy, insolvency,
         reorganization or similar laws affecting the enforcement of creditor's
         rights generally and by general principles of equity;

                           (iii) The execution and delivery of this Agreement by
         the Sub-Servicer, the servicing of the Mortgage Loans by the
         Sub-Servicer hereunder, the consummation by the Sub-Servicer of any
         other of the transactions herein contemplated, and the fulfillment of
         or compliance with the terms hereof are in the ordinary course of
         business of the SubServicer and will not (A) result in a breach of any
         term or provision of the charter or by-laws of the Sub-Servicer or (B)
         conflict with, result in a breach, violation or acceleration of, or
         result in a default under, the terms of any other material agreement or
         instrument to which the Sub-Servicer is a party or by which it may be
         bound, or any statute, order or regulation applicable to the
         Sub-Servicer of any court, regulatory body, administrative agency or
         governmental body having jurisdiction over the Sub-Servicer; and the
         Sub-Servicer is not a party to, bound by, or in breach or violation of
         any indenture or other agreement or instrument, or subject to or in
         violation of any statute, order or regulation of any court, regulatory
         body, administrative agency or governmental body having jurisdiction
         over it, which materially and adversely affects or, to the
         Sub-Servicer's knowledge, would in the future materially and adversely
         affect, (x) the ability of the Sub-Servicer to perform its obligations
         under this Agreement or (y) the business, operations, financial
         condition, properties or assets of the Sub-Servicer taken as a whole;

                           (iv) The Sub-Servicer is an approved seller/servicer
         for FNMA or FHLMC in good standing and is a HUD approved mortgagee
         pursuant to Section 203 of the National Housing Act. No event has
         occurred, including but not limited to a change in insurance coverage,
         that would make the Sub-Servicer unable to comply with HUD eligibility
         requirements or that would require notification to HUD;

                           (v) The Sub-Servicer does not believe, nor does it
         have any reason or cause to believe, that it cannot perform each and
         every covenant made by it and contained

<PAGE>   30
                                      -23-


         in this Agreement;

                           (vi) There are no actions or proceedings against, or
         investigations known to it of, the Sub-Servicer before any court,
         administrative or other tribunal (A) that might prohibit its entering
         into this Agreement, (B) seeking to prevent the consummation of the
         transactions contemplated by this Agreement or (C) that might prohibit
         or materially and adversely affect the performance by the Sub-Servicer
         of its obligations under, or validity or enforceability of, this
         Agreement; and

                           (vii) No consent, approval, authorization or order of
         any court or governmental agency or body is required for the execution,
         delivery and performance by the Sub-Servicer of, or compliance by the
         Sub-Servicer with, this Agreement or the consummation by it of the
         transactions contemplated by this Agreement, except for such consents,
         approvals, authorizations or orders, if any, that have been obtained
         prior to the date of this Agreement.

                  (b) The representations and warranties set forth in Section
2.04(a) shall survive the execution and delivery of the Agreement and any
Origination Closing Date. The Sub-Servicer shall indemnify the Master Servicer
and hold it harmless against any losses, damages, penalties, fines, forfeitures,
legal fees and related costs, judgments, and other costs and expenses resulting
from any claim, demand, defense or assertion arising from, or resulting from a
breach of the Servicer's representations and warranties contained in Section
2.04(a). Such indemnification shall survive any termination or resignation of
the Sub-Servicer and any termination of this Agreement.

                  Upon discovery by the Sub-Servicer or the Master Servicer of a
breach of any of the representations and warranties of the Sub-Servicer set
forth in Section 2.04(a) which could materially and adversely affect the
interests of the Master Servicer, the party discovering such breach shall give
prompt written notice to the other party. Within 30 days of the earlier of the
SubServicer's discovery or the Sub-Servicer's receipt of written notice of such
a breach of the representations and warranties contained in Section 2.04(a), the
Sub-Servicer shall cure such breach in all material respects; provided that if
(i) the SubServicer is in good faith attempting to remedy such breach, (ii) the
Master Servicer will not be materially and adversely affected thereby and (iii)
the Sub-Servicer delivers an Officer's Certificate to the Master Servicer prior
to the expiration of the aforesaid 30-day period outlining the actions to be
taken by the Sub-Servicer to remedy such breach and setting forth an anticipated
date by which such remedy shall be completed, then such cure period may be
extended by the Master Servicer, in its sole discretion, for an additional
period. Any failure by the Sub-Servicer to cure a breach as provided in this
Section 2.04(b) shall constitute an Event of Default under Section 6.01.

                  SECTION 2.05. Representations and Warranties of the Master
Servicer.

                  (a) The Master Servicer hereby represents and warrants to the
Sub-Servicer that as of the date this Agreement and as of each Origination
Closing Date and Sale Closing Date:

<PAGE>   31
                                      -24-


                           (i) The Master Servicer is a corporation duly
         organized, validly existing and in good standing under the laws of the
         State of Delaware;

                           (ii) The Master Servicer has the full power and
         authority to conduct its business as presently conducted by it and to
         execute, deliver and perform, and to enter into and consummate, all
         transactions contemplated by this Agreement. The Master Servicer has
         duly authorized the execution, delivery and performance of this
         Agreement, has duly executed and delivered this Agreement, and this
         Agreement, assuming due authorization, execution and delivery by the
         Sub-Servicer, constitutes a legal, valid and binding obligation of the
         Master Servicer enforceable against it in accordance with its terms
         except as the enforceability thereof may be limited by bankruptcy,
         insolvency, reorganization or similar laws affecting the enforcement of
         creditor's rights generally and by general principles of equity;

                           (iii) The execution and delivery of this Agreement by
         the Master Servicer, the consummation by the Master Servicer of any
         other of the transactions herein contemplated, and the fulfillment of
         or compliance with the terms hereof are in the ordinary course of
         business of the Master Servicer and will not (A) result in a breach of
         any term or provision of the charter or by-laws of the Master Servicer
         or (B) conflict with, result in a breach, violation or acceleration of,
         or result in a default under, the terms of any other material agreement
         or instrument to which the Master Servicer is a party or by which it
         may be bound, or any statute, order or regulation applicable to the
         Master Servicer of any court, regulatory body, administrative agency or
         governmental body having jurisdiction over the Master Servicer; and the
         Master Servicer is not a party to, bound by, or in breach or violation
         of any indenture or other agreement or instrument, or subject to or in
         violation of any statute, order or regulation of any court, regulatory
         body, administrative agency or governmental body having jurisdiction
         over it, which materially and adversely affects or, to the Master
         Servicer's knowledge, would in the future materially and adversely
         affect, (x) the ability of the Master Servicer to perform its
         obligations under this Agreement or (y) the business, operations,
         financial condition, properties or assets of the Master Servicer taken
         as a whole;

                           (iv) The Master Servicer does not believe, nor does
         it have any reason or cause to believe, that it cannot perform each and
         every covenant made by it and contained in this Agreement;

                           (v) There are no actions or proceedings against, or
         investigations known to it of, the Master Servicer before any court,
         administrative or other tribunal (A) that might prohibit its entering
         into this Agreement, (B) seeking to prevent the consummation of the
         transactions contemplated by this Agreement or (C) that might prohibit
         or materially and adversely affect the performance by the Master
         Servicer of its obligations under, or validity or enforceability of,
         this Agreement; and

                           (vi) No consent, approval, authorization or order of
         any court or

<PAGE>   32
                                      -25-


         governmental agency or body is required for the execution, delivery and
         performance by the Master Servicer of, or compliance by the Master
         Servicer with, this Agreement or the consummation by it of the
         transactions contemplated by this Agreement, except for such consents,
         approvals, authorizations or orders, if any, that have been obtained
         prior to the date of this Agreement.

                  (b) The representations and warranties set forth in Section
2.05(a) shall survive the execution and delivery of the Agreement and any
Origination Closing Date. The Master Servicer shall indemnify the Sub-Servicer
and hold it harmless against any losses, damages, penalties, fines, forfeitures,
legal fees and related costs, judgments, and other costs and expenses resulting
from any claim, demand, defense or assertion arising from, or resulting from a
breach of the Master Servicer's representations and warranties contained in
Section 2.05(a). Such indemnification shall survive any termination or
resignation of the Sub-Servicer and any termination of this Agreement.

                  Upon discovery by the Sub-Servicer or the Master Servicer of a
breach of any of the representations and warranties of the Master Servicer set
forth in Section 2.05(a) which could materially and adversely affect the
interests of the Sub-Servicer, the party discovering such breach shall give
prompt written notice to the other party. Within 30 days of the earlier of the
Master Servicer's discovery or the Master Servicer's receipt of written notice
of such a breach of the representations and warranties contained in Section
2.05(a), the Master Servicer shall cure such breach in all material respects;
provided that if (i) the Master Servicer is in good faith attempting to remedy
such breach, (ii) the Sub-Servicer will not be materially and adversely affected
thereby and (iii) the Master Servicer delivers an officer's certificate to the
Sub-Servicer prior to the expiration of the aforesaid 30-day period outlining
the actions to be taken by the Master Servicer to remedy such breach and setting
forth an anticipated date by which such remedy shall be completed, then such
cure period may be extended by the Sub-Servicer, in its sole discretion, for an
additional period.

<PAGE>   33
                                      -26-


                                   ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

                  SECTION 3.01. Sub-Servicer to Act as Sub-Servicer.

                  (a) The Sub-Servicer shall service and administer the Mortgage
Loans on behalf of the Master Servicer and in the best interests of and for the
benefit (as determined by the Sub-Servicer in its reasonable judgment) of the
Owner and the Certificate Insurer, if any, in accordance with the terms of this
Agreement and the respective Mortgage Loans and, to the extent consistent with
such terms, in the same manner in which it services and administers similar
mortgage loans for its own portfolio, giving due consideration to customary and
usual standards of practice of mortgage lenders and loan servicers administering
similar mortgage loans but without regard to:

                           (i) any relationship that the Sub-Servicer, the
         Master Servicer or any Affiliate of the Sub-Servicer or the Master
         Servicer may have with the related Mortgagor;

                           (ii) the ownership of any interest in any Mortgage
         Loan by the Sub-Servicer or any Affiliate of the Sub-Servicer; or

                           (iv) the Sub-Servicer's right to receive compensation
         for its services hereunder or with respect to any particular
         transaction.

To the extent consistent with the foregoing, the Sub-Servicer shall also seek to
maximize the timely and complete recovery of principal and interest on the
Mortgage Notes. Subject only to the above-described servicing standards and the
terms of this Agreement and of the respective Mortgage Loans, the Sub-Servicer
shall have full power and authority to do or cause to be done any and all things
in connection with such servicing and administration which it may deem necessary
or desirable. Without limiting the generality of the foregoing, the Sub-Servicer
in its own name may, when it believes it appropriate in its best judgment in
accordance with the servicing standards set forth above, to execute and deliver,
on behalf of the Owner, and upon notice to the Owner, any and all instruments of
satisfaction or cancellation, or of partial or full release or discharge, and
all other comparable instruments, with respect to the Mortgage Loans and the
Mortgaged Properties and to institute foreclosure proceedings or obtain a
deed-in-lieu of foreclosure so as to convert the ownership of such properties,
and to hold or cause to be held title to such properties, on behalf of the
Owner. The Sub-Servicer shall service and administer the Mortgage Loans in
accordance with applicable state and federal law and shall provide to the
Mortgagors any reports required to be provided to them thereby. The Sub-Servicer
shall also comply in the performance of this Agreement with all reasonable rules
and requirements of each insurer under any standard hazard insurance policy.
Subject to Section 3.10, the Sub-Servicer may request, and the Master Servicer
shall use reasonable efforts to furnish or cause to be furnished, any special or
limited powers of attorney and other documents necessary or appropriate to
enable the Sub-Servicer to carry out its

<PAGE>   34
                                      -27-


servicing and administrative duties hereunder and the Master Servicer hereby
grants to the Sub-Servicer a power of attorney to carry out such duties. Neither
the Master Servicer nor the Owner shall be liable for the actions of the
Sub-Servicer under such powers of attorney.

                  In accordance with the servicing standards set forth above,
the Sub-Servicer shall withdraw from the Advance Account and advance funds as
necessary for the purpose of effecting the timely payment of taxes and
assessments on the Mortgaged Properties, which advances shall be Servicing
Advances reimbursable in the first instance from related collections from the
Mortgagors pursuant to Section 3.03, and further as provided in Section 3.05.
Notwithstanding anything to the contrary herein, the Sub-Servicer shall only be
entitled to withdraw amounts from the Advance Account for any such Servicing
Advance if it has given the Master Servicer one Business Days prior written
notice by facsimile transmission specifying the amount and timing of such
Advance. Any cost incurred by the Sub-Servicer or the Master Servicer in
effecting the timely payment of taxes and assessments on a Mortgaged Property
shall not, for the purpose of calculating distributions to the Owner, be added
to the unpaid principal balance of the related Mortgage Loan, notwithstanding
that the terms of such Mortgage Loan so permit.

                  Notwithstanding anything in this Agreement to the contrary,
the Sub-Servicer may not make any future advances with respect to a Mortgage
Loan (except as provided in Section 4.01) and the Sub-Servicer shall not (unless
the Mortgagor is in default with respect to the Mortgage Loan or such default
is, in the judgment of the Sub-Servicer, reasonably foreseeable) (i) permit any
modification with respect to any Mortgage Loan that would change the Mortgage
Rate, reduce or increase the principal balance (except for reductions resulting
from actual payments of principal) or change the final maturity date on such
Mortgage Loan or (ii) permit any modification, waiver or amendment of any term
of any Mortgage Loan that would, if such Mortgage Loan were an asset of a trust
fund with respect to which a REMIC election has been made, both (A) effect an
exchange or reissuance of such Mortgage Loan under Section 1001 of the Code (or
final, temporary or proposed Treasury regulations promulgated thereunder) and
(B) cause such REMIC to fail to qualify as a REMIC under the Code or the
imposition of any tax on "prohibited transactions" or "contributions after the
startup date" under the REMIC Provisions. Notwithstanding the foregoing, prior
to the Sale Closing Date for any Mortgage Loan, the Sub-Servicer shall not
permit any modification with respect to any such Mortgage Loan that is subject
to a security interest granted by the Originator, without the consent of the
Originator.

                  (b) The Sub-Servicer may not delegate its responsibilities
under this Agreement. This Agreement is between the Sub-Servicer and the Master
Servicer alone, and any Owner (other than the Originator) and any Certificate
Insurer shall not be deemed parties hereto and shall have no claims, rights,
obligations, duties or liabilities with respect to the Sub-Servicer except as
set forth in Section 3.01(c). The Master Servicer shall be solely liable for all
fees owed by it to the Sub-Servicer, irrespective of whether the Master
Servicer's compensation is sufficient to pay such fees.

                  (c) In the event the Master Servicer shall for any reason no
longer be the master servicer with respect to any Mortgage Loans (including by
reason of the occurrence of a Master Servicer event of default under a Master
Servicing Agreement), the Owner of such Mortgage Loans or its designee may
thereupon assume all of the rights and obligations of the Master Servicer with
respect to such Mortgage Loans under this Agreement, unless the Owner elects to
terminate this Agreement with respect to such Mortgage Loans. Any such
termination by the Owner shall be

<PAGE>   35
                                      -28-


without fee payable by the Owner to the Sub-Servicer. Upon any such assumption,
the Owner, its designee or the successor servicer for the Owner shall be deemed
to have assumed all of the Master Servicer's interest herein with respect to
such Mortgage Loans and to have replaced the Master Servicer as a party to this
Agreement with respect to such Mortgage Loans to the same extent as if this
Agreement had been assigned to the assuming party, except that (i) the Master
Servicer shall not thereby be relieved of any liability or obligations under
this Agreement and (ii) none of the Owner, its designee or any successor Master
Servicer shall be deemed to have assumed any liability or obligation of the
Master Servicer that arose before it ceased to be the Master Servicer.

                  SECTION 3.02. Collection of Certain Mortgage Loan Payments.

                  The Sub-Servicer shall make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans, and
shall, to the extent such procedures shall be consistent with this Agreement,
follow such collection procedures as it would follow with respect to mortgage
loans comparable to the Mortgage Loans and held for its own account. Consistent
with the foregoing, the Sub-Servicer may in its discretion (i) waive any late
payment charge or, if applicable, penalty interest, and (ii) extend the due
dates for the Monthly Payments due on a Mortgage Note for a period of not
greater than 180 days; provided that any extension pursuant to clause (ii) above
shall not affect the amortization schedule of any Mortgage Loan for purposes of
any computation hereunder.

<PAGE>   36
                                      -29-


                  SECTION 3.03. Collection of Taxes, Assessments and Similar
Items; Servicing Accounts.

                  The Sub-Servicer shall establish and maintain, or cause to be
established and maintained, one or more accounts (the "Servicing Accounts"),
into which all collections from the Mortgagors for the payment of taxes,
assessments, hazard insurance premiums and comparable items for the account of
the Mortgagors ("Escrow Payments") shall be deposited and retained. Servicing
Accounts shall be Eligible Accounts. The Sub-Servicer shall deposit in the
Servicing Account on a daily basis all Escrow Payments collected on account of
the Mortgage Loans for the purpose of effecting the timely payment of any such
items as required under the terms of this Agreement. Withdrawals of amounts from
a Servicing Account may be made only to (i) effect timely payment of taxes,
assessments, hazard insurance premiums, and comparable items; (ii) reimburse the
Master Servicer out of related collections for any advances made pursuant to
Section 3.01 (with respect to taxes and assessments) and Section 3.07 (with
respect to hazard insurance); (iii) refund to Mortgagors any sums as may be
determined to be overages; (iv) pay interest, if required and as described
below, to Mortgagors on balances in the Servicing Account; or (v) clear and
terminate the Servicing Account at the termination of the SubServicer's
obligations and responsibilities in respect of the Mortgage Loans under this
Agreement. As part of its servicing duties, the Sub-Servicer shall pay to the
Mortgagors interest on funds in Servicing Accounts, to the extent required by
law and, to the extent that interest earned on funds in the Servicing Accounts
is insufficient, to pay such interest from its or their own funds, which amount
shall be reimbursed by the Master Servicer to the Sub-Servicer promptly after
demand therefor. To the extent that a Mortgage does not provide for Escrow
Payments, the Sub-Servicer shall determine that any such payments are made by
the Mortgagor at the time they first become due. The Sub-Servicer assumes full
responsibility for the timely payment of all such bills and shall effect timely
payments of all such bills irrespective of the Mortgagor's faithful performance
in the payment of same or the making of the Escrow Payments and shall withdraw
from the Advance Account and make advances to effect such payments.

                  SECTION 3.04. Collection Account.

                  (a) The Sub-Servicer shall establish and maintain, or cause to
be established and maintained, one or more accounts (such account or accounts,
the "Collection Account"), held in trust for the benefit of the Owner. On behalf
of the Owner, the Sub-Servicer shall deposit or cause to be deposited on a daily
basis, as and when received or as otherwise required hereunder, the following
payments and collections received or made by it subsequent to the related
Origination Closing Date:

                           (i) all payments on account of principal, including
         Principal Prepayments, on the Mortgage Loans;

                           (ii) all payments on account of interest (net of the
         related Sub-Servicing Fee and, if the Originator is not the Owner, net
         of the Master Servicing Fee) on

<PAGE>   37
                                      -30-


         each Mortgage Loan;

                           (iii) all Insurance Proceeds and Liquidation
         Proceeds;

                           (iv) any amounts received from the Master Servicer
         pursuant to Section 3.06 in connection with any losses realized on
         Permitted Investments with respect to funds held in the Collection
         Account;

                           (v) any P&I Advances, as required pursuant to Section
         4.01;

                           (vi) any amounts required to be deposited pursuant to
         Section 3.16(d) or (f) in connection with any REO Property;

                           (vii) any amounts required to be deposited pursuant
         to Section 3.17 in connection with any Prepayment Interest Shortfalls;

                           (viii) any amounts required to be deposited by the
         Sub-Servicer pursuant to the second paragraph of Section 3.07(a) in
         respect of any blanket policy deductibles; and

                           (ix) if the Originator is the Owner, payments in the
         nature of late payment charges, demand fees, modification or assumption
         fees and Prepayment Premiums.

                  The foregoing requirements for deposit in the Collection
Accounts shall be exclusive, it being understood and agreed that, without
limiting the generality of the foregoing, if the Originator is not the Owner,
payments in the nature of late payment charges, demand fees, modification or
assumption fees and Prepayment Premiums shall not be deposited by the
Sub-Servicer in the Collection Account and shall be paid by the Sub-Servicer,
together with the Master Servicing Fee, as additional compensation to the Master
Servicer. Insufficient funds charges need not be deposited in the Collection
Account and shall be retained by the SubServicer. In the event the Sub-Servicer
shall deposit in the Collection Account any amount not required to be deposited
therein, it may at any time withdraw such amount from the Collection Account,
any provision herein to the contrary notwithstanding.

                  (b) The Sub-Servicer shall deliver to the Owner as directed by
the Master Servicer in immediately available funds on or before 3:00 p.m. New
York time (i) on the Sub-Servicer Remittance Date, that portion of the Available
Distribution Amount for the related Sub-Servicer Remittance Date then on deposit
in the Collection Account, and (ii) on each Business Day as of the commencement
of which the balance on deposit in the Collection Account exceeds $75,000
following any withdrawals pursuant to the next succeeding sentence, the amount
of such excess, but only if the Collection Account constitutes an Eligible
Account solely pursuant to clause (ii) of the definition of "Eligible Account."
If the balance on deposit in the Collection Account exceeds $75,000 as of the
commencement of business on any Business Day and the Collection

<PAGE>   38
                                      -31-


Account constitutes an Eligible Account solely pursuant to clause (ii) of the
definition of "Eligible Account," the Sub-Servicer shall, on or before 3:00 p.m.
New York time on such Business Day, withdraw from the Collection Account any and
all amounts payable or reimbursable to itself or the Master Servicer pursuant to
Section 3.05 and shall pay such amounts to the Persons entitled thereto.

                  (c) Funds in the Collection Account may be invested in
Permitted Investments in accordance with the provisions set forth in Section
3.06. The Sub-Servicer shall give notice to the Master Servicer of the location
of the Collection Account maintained by it when established and prior to any
change thereof.

                  SECTION 3.05. Withdrawals from the Collection Account.

                  The Sub-Servicer shall, from time to time, make withdrawals
from the Collection Account for any of the following purposes or as described in
Section 4.01:

                           (i) to remit funds required to be so remitted
         pursuant to Section 3.04(b);

                           (ii) subject to Section 3.16(d) and Section 4.01, to
         reimburse the Master Servicer for P&I Advances, but only to the extent
         of amounts received which represent Late Collections (net of the
         related Servicing Fees) of Monthly Payments on Mortgage Loans with
         respect to which such P&I Advances were made in accordance with the
         provisions of Section 4.01;

                           (iii) subject to Sections 3.09(d) and 4.01, (a) to
         pay the Master Servicer and the Sub-Servicer any unpaid Master
         Servicing Fees and Sub-Servicing Fees, (b) to pay to the Master
         Servicer any unreimbursed Servicing Advances with respect to each
         Mortgage Loan, but only to the extent of any Late Collections,
         Liquidation Proceeds and Insurance Proceeds received with respect to
         such Mortgage Loan, and (c) to pay to the Master Servicer any
         Nonrecoverable Servicing Advances with respect to the final liquidation
         of a Mortgage Loan, but only to the extent that Late Collections,
         Liquidation Proceeds and Insurance Proceeds received with respect to
         such Mortgage Loan are insufficient to reimburse the Master Servicer
         for Servicing Advances;

                           (iv) to pay to the Master Servicer as servicing
         compensation (in addition to the Master Servicing Fee), within 45 days
         after receipt by the Sub-Servicer of each monthly bank statement in
         respect of the Collection Account, any interest or investment income
         earned on funds deposited in the Collection Account;

                           (v) to pay to any Person who has purchased a Mortgage
         Loan servicing released, repurchased a Mortgage Loan or substituted a
         Qualified Substitute Mortgage Loan in exchange for a Deleted Mortgage
         Loan, all amounts received thereon subsequent to the date of purchase
         or substitution, as the case may be;

<PAGE>   39
                                      -32-


                           (vi) subject to Section 4.01, to reimburse the Master
         Servicer for any P&I Advance previously made which the Sub-Servicer or
         the Master Servicer has determined to be a Nonrecoverable P&I Advance;

                           (vii) to reimburse the Master Servicer or any other
         Person entitled to reimbursement for expenses incurred in connection
         with the Mortgage Loans to the extent provided in any related Master
         Servicing Agreement;

                           (viii) to pay, or to reimburse the Master Servicer
         for advances in respect of, expenses incurred in connection with any
         Mortgage Loan pursuant to Section 3.09(b); and

                           (ix) to clear and terminate the Collection Account
         upon termination of this Agreement.

                  The Sub-Servicer shall keep and maintain separate accounting,
on a Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Collection Account pursuant to subclauses (ii), (iii), (iv),
(v), (vii) and (viii) above.

                  SECTION 3.06. Investment of Funds in the Collection Account.

                  (a) The Master Servicer may instruct any depository
institution maintaining the Collection Account to invest the funds in such
Collection Account in one or more Permitted Investments bearing interest or sold
at a discount, and maturing, unless payable on demand, no later than the
Business Day immediately preceding the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement. All such Permitted
Investments shall be held to maturity, unless payable on demand. Any investment
of funds in the Collection Account shall be made in the name of the Owner (in
its capacity as such) or in the name of a nominee of the Owner. The Owner shall
be entitled to sole possession over each such investment, and any certificate or
other instrument evidencing any such investment shall be delivered directly to
the Owner or its agent, together with any document of transfer necessary to
transfer title to such investment to the Owner or its nominee. In the event
amounts on deposit in the Collection Account are at any time invested in a
Permitted Investment payable on demand, the Owner shall be obligated (hereunder
and under the Master Servicing Agreement) to:

                           (x) consistent with any notice required to be given
         thereunder, demand that payment thereon be made on the last day such
         Permitted Investment may otherwise mature hereunder in an amount equal
         to the lesser of (1) all amounts then payable thereunder and (2) the
         amount required to be withdrawn on such date; and

                           (y) demand payment of all amounts due thereunder
         promptly upon determination by the Owner that such Permitted Investment
         would not constitute a Permitted Investment in respect of funds
         thereafter on deposit in

<PAGE>   40
                                      -33-


         the Collection Account.

                  (b) All income and gain realized from the investment of funds
deposited in the Collection Account and the REO Account held by the Sub-Servicer
shall be for the benefit of the Master Servicer and shall be subject to its
withdrawal in accordance with Section 3.05. The Master Servicer shall deposit in
the Collection Account the amount of any loss of principal incurred in respect
of any such Permitted Investment made with funds in such accounts immediately
upon realization of such loss.

                  (c) Except as otherwise expressly provided in this Agreement,
if any default occurs in the making of a payment due under any Permitted
Investment, or if a default occurs in any other performance required under any
Permitted Investment, the Owner may take such action as may be appropriate to
enforce such payment or performance, including the institution and prosecution
of appropriate proceedings.

<PAGE>   41
                                      -34-


                  SECTION 3.07. Maintenance of Hazard Insurance and Errors and
                                Omissions and Fidelity Coverage.

                  (a) The Sub-Servicer shall cause to be maintained for each
Mortgage Loan fire insurance with extended coverage on the related Mortgaged
Property in an amount which is at least equal to the least of (i) the current
principal balance of such Mortgage Loan, (ii) the amount necessary to fully
compensate for any damage or loss to the improvements that are a part of such
property on a replacement cost basis and (iii) the maximum insurable value of
the improvements which are part of such Mortgaged Property, in each case in an
amount not less than such amount as is necessary to avoid the application of any
coinsurance clause contained in the related hazard insurance policy. The
Sub-Servicer shall also cause to be maintained fire insurance with extended
coverage on each REO Property in an amount which is at least equal to the lesser
of (i) the maximum insurable value of the improvements which are a part of such
property and (ii) the outstanding principal balance of the related Mortgage Loan
at the time it became an REO Property, plus accrued interest at the Mortgage
Rate, and related Servicing Advances. The Sub-Servicer will comply in the
performance of this Agreement with all reasonable rules and requirements of each
insurer under any such hazard policies. Any amounts to be collected by the
Sub-Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the property subject to the related Mortgage or amounts
to be released to the Mortgagor in accordance with the procedures that the
Sub-Servicer would follow in servicing loans held for its own account, subject
to the terms and conditions of the related Mortgage and Mortgage Note) shall be
deposited in the Collection Account, subject to withdrawal pursuant to Section
3.05, if received in respect of a Mortgage Loan, or in the REO Account, subject
to withdrawal pursuant to Section 3.16, if received in respect of an REO
Property. Any cost incurred by the Sub-Servicer in maintaining any such
insurance shall be paid by a Servicing Advance from the Advance Account. It is
understood and agreed that no earthquake or other additional insurance is to be
required of any Mortgagor other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. If the Mortgaged Property or REO Property is at any time
in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards and flood insurance has been
made available, the Sub-Servicer will cause to be maintained a flood insurance
policy in respect thereof. Such flood insurance shall be in an amount equal to
the lesser of (i) the unpaid principal balance of the related Mortgage Loan and
(ii) the maximum amount of such insurance available for the related Mortgaged
Property under the national flood insurance program (assuming that the area in
which such Mortgaged Property is located is participating in such program).

                  In the event that the Sub-Servicer shall obtain and maintain a
blanket policy with an insurer having a General Policy Rating of A:X or better
in Best's Key Rating Guide (or such other rating that is comparable to such
rating) insuring against hazard losses on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations as set forth in the
first two sentences of this Section 3.07, it being understood and agreed that
such policy may contain a deductible clause, in which case the Sub-Servicer
shall, in the event that there shall not have been maintained on the related
Mortgaged Property or REO Property a policy complying with the first

<PAGE>   42
                                      -35-


two sentences of this Section 3.07, and there shall have been one or more losses
which would have been covered by such policy, deposit to the Collection Account
from its own funds the amount not otherwise payable under the blanket policy
because of such deductible clause. In connection with its activities as
administrator and servicer of the Mortgage Loans, the Sub-Servicer agrees to
prepare and present, on behalf of itself, the Master Servicer, the Owner and any
Certificate Insurer, claims under any such blanket policy in a timely fashion in
accordance with the terms of such policy.

                  (b) The Sub-Servicer shall keep in force during the term of
this Agreement a policy or policies of insurance covering errors and omissions
for failure in the performance of the Sub-Servicer's obligations under this
Agreement, which policy or policies shall be in such form and amount that would
meet the requirements of FNMA or FHLMC if it were the purchaser of the Mortgage
Loans, unless the Sub-Servicer has obtained a waiver of such requirements from
FNMA or FHLMC. The Sub-Servicer shall also maintain a fidelity bond in the form
and amount that would meet the requirements of FNMA or FHLMC, unless the
Sub-Servicer has obtained a waiver of such requirements from FNMA or FHLMC. The
Sub-Servicer shall be deemed to have complied with this provision if an
Affiliate of the Sub-Servicer has such errors and omissions and fidelity bond
coverage and, by the terms of such insurance policy or fidelity bond, the
coverage afforded thereunder extends to the Sub-Servicer. Any such errors and
omissions policy and fidelity bond shall by its terms not be cancelable without
thirty days' prior written notice to the Master Servicer and the Owner.

<PAGE>   43
                                      -36-


                  SECTION 3.08. Enforcement of Due-On-Sale Clauses; Assumption
                                Agreements.

                  The Sub-Servicer will, to the extent it has actual knowledge
of any conveyance or prospective conveyance of any Mortgaged Property by any
Mortgagor (whether by absolute conveyance or by contract of sale, and whether or
not the Mortgagor remains or is to remain liable under the Mortgage Note and/or
the Mortgage), exercise its rights to accelerate the maturity of such Mortgage
Loan under the "due-on-sale" clause, if any, applicable thereto; provided,
however, that the Sub-Servicer shall not exercise any such rights if prohibited
by law from doing so. If the Sub-Servicer reasonably believes it is unable under
applicable law to enforce such "due-on-sale" clause, or if any of the other
conditions set forth in the proviso to the preceding sentence apply, the
Sub-Servicer will enter into an assumption and modification agreement from or
with the person to whom such property has been conveyed or is proposed to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, to the extent permitted by applicable state law, the Mortgagor remains
liable thereon. The Sub-Servicer is also authorized to enter into a substitution
of liability agreement with such person, pursuant to which the original
Mortgagor is released from liability and such person is substituted as the
Mortgagor and becomes liable under the Mortgage Note, provided that no such
substitution shall be effective unless such person satisfies the underwriting
criteria of the Sub-Servicer and has a credit risk rating at least equal to that
of the original Mortgagor. In connection with any assumption or substitution,
the Sub-Servicer shall apply such underwriting standards and follow such
practices and procedures as shall be normal and usual in its general mortgage
servicing activities and as it applies to other mortgage loans owned solely by
it. The Sub-Servicer shall not take or enter into any assumption and
modification agreement, however, unless (to the extent practicable in the
circumstances) it shall have received confirmation, in writing, of the continued
effectiveness of any applicable hazard insurance policy. Any fee collected by
the Sub-Servicer in respect of an assumption, modification or substitution of
liability agreement shall be paid to the Master Servicer. In connection with any
such assumption, no material term of the Mortgage Note (including but not
limited to the related Mortgage Rate and the amount of the Monthly Payment) may
be amended or modified, except as otherwise required pursuant to the terms
thereof. The Sub-Servicer shall notify the Master Servicer and the Owner that
any such substitution, modification or assumption agreement has been completed
by forwarding to the Owner the executed original of such substitution,
modification or assumption agreement, which document shall be added to the
related Mortgage File and shall, for all purposes, be considered a part of such
Mortgage File to the same extent as all other documents and instruments
constituting a part thereof.

                  Notwithstanding the foregoing paragraph or any other provision
of this Agreement, the Sub-Servicer shall not be deemed to be in default, breach
or any other violation of its obligations hereunder by reason of any assumption
of a Mortgage Loan by operation of law or by the terms of the Mortgage Note or
any assumption which the Sub-Servicer may be restricted by law from preventing,
for any reason whatever. For purposes of this Section 3.08, the term
"assumption" is deemed to also include a sale of the Mortgaged Property subject
to the Mortgage that is not accompanied by an assumption or substitution of
liability agreement.

<PAGE>   44
                                      -37-


                  SECTION 3.09. Realization Upon Defaulted Mortgage Loans.

                  (a) The Sub-Servicer shall use its best efforts, consistent
with Accepted Servicing Practices, to foreclose upon or otherwise comparably
convert the ownership of properties securing such of the Mortgage Loans as come
into and continue in default and as to which no satisfactory arrangements can be
made for collection of delinquent payments pursuant to Section 3.02. The Master
Servicer shall be responsible for all costs and expenses incurred by the
Sub-Servicer in any such proceedings as provided in Section 3.19; provided,
however, that such costs and expenses will be recoverable as Servicing Advances
by the Master Servicer as contemplated by Sections 3.05 and 3.16. The foregoing
is subject to the provision that, in any case in which Mortgaged Property shall
have suffered damage from an Uninsured Cause, the Master Servicer shall not be
required to expend its own funds toward the restoration of such property unless
it shall determine in its discretion that such restoration will increase the
proceeds of liquidation of the related Mortgage Loan after reimbursement of the
Master Servicer for such expenses.

                  (b) Notwithstanding the foregoing provisions of this Section
3.09 or any other provision of this Agreement, with respect to any Mortgage Loan
as to which the Sub-Servicer has received actual notice of, or has actual
knowledge of, the presence of any toxic or hazardous substance on the related
Mortgaged Property, the Sub-Servicer shall not, on behalf of the Owner, either
(i) obtain title to such Mortgaged Property as a result of or in lieu of
foreclosure or otherwise, or (ii) otherwise acquire possession of, or take any
other action with respect to, such Mortgaged Property, if, as a result of any
such action, the Master Servicer, the Owner or the Certificate Insurer would be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or "operator" of such Mortgaged Property within the meaning of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended from time to time, or any comparable law, unless the Sub-Servicer has
also previously determined, based on its reasonable judgment and a report
prepared by a Person who regularly conducts environmental audits using customary
industry standards, that:

                           (1) such Mortgaged Property is in compliance with
         applicable environmental laws or, if not, that it would be in the best
         economic interest of the Owner to take such actions as are necessary to
         bring the Mortgaged Property into compliance therewith; and

                           (2) there are no circumstances present at such
         Mortgaged Property relating to the use, management or disposal of any
         hazardous substances, hazardous materials, hazardous wastes, or
         petroleum-based materials for which investigation, testing, monitoring,
         containment, clean-up or remediation could be required under any
         federal, state or local law or regulation, or that if any such
         materials are present for which such action could be required, that it
         would be in the best economic interest of the Owner to take such
         actions with respect to the affected Mortgaged Property.

<PAGE>   45
                                      -38-


                  The cost of the environmental audit report contemplated by
this Section 3.09 shall be withdrawn by the Sub-Servicer from the Advance
Account and advanced by the Sub- Servicer, subject to the Master Servicer's
right to be reimbursed therefor from the Collection Account as provided in
Section 3.05(viii), such right being prior to the rights of the Owner to receive
any amount in the Collection Account received in respect of the affected
Mortgage Loan or other Mortgage Loans.

                  If the Sub-Servicer determines, as described above, that it is
in the best economic interests of the Owner to take such actions as are
necessary to bring any such Mortgaged Property into compliance with applicable
environmental laws, or to take such action with respect to the containment,
clean-up or remediation of hazardous substances, hazardous materials, hazardous
wastes or petroleum-based materials affecting any such Mortgaged Property, then
the Sub-Servicer shall take such action as it deems to be in the best economic
interests of the Owner. The cost of any such compliance, containment, cleanup or
remediation shall be withdrawn by the Sub-Servicer from the Advance Account and
advanced by the Sub-Servicer, subject to the Master Servicer's right to be
reimbursed therefor in accordance with the preceding paragraph.

                  (c) Intentionally deleted.

                  (d) Proceeds received in connection with any Final Recovery
Determination, as well as any recovery resulting from a partial collection of
Insurance Proceeds or Liquidation Proceeds, in respect of any Mortgage Loan,
will be applied in the following order of priority: first, to reimburse the
Master Servicer for any related unreimbursed Servicing Advances and P&I
Advances, pursuant to Section 3.05(ii) or (iii); second, to accrued and unpaid
interest on the Mortgage Loan, to the date of the Final Recovery Determination,
or to the Due Date prior to the Sub-Servicer Remittance Date on which such
amounts are to be distributed if not in connection with a Final Recovery
Determination; and third, as a recovery of principal of the Mortgage Loan. If
the amount of the recovery so allocated to interest is less than the full amount
of accrued and unpaid interest due on such Mortgage Loan, the amount of such
recovery will be allocated by the Sub-Servicer as follows: first, to unpaid
Master Servicing Fees and Sub-Servicing Fees; and second, to the balance of the
interest then due and owing. The portion of the recovery so allocated to unpaid
Master Servicing Fees and Sub-Servicing Fees shall be reimbursed to the Master
Servicer and the Sub-Servicer pursuant to Section 3.05(iii). The portion of the
recovery allocated to interest (net of unpaid Master Servicing Fees and
Sub-Servicing Fees) and the portion of the recovery allocated to principal of
the Mortgage Loan shall be applied as follows: first, to reimburse the Master
Servicer for any related unreimbursed P&I Advances and Servicing Advances in
accordance with Section 3.05, and second, as part of the amounts to be
transferred as part of the Available Distribution Amount in accordance with
Section 3.04(b).

                  SECTION 3.10. Cooperation; Release of Mortgage Files.

                  (a) Upon the payment in full of any Mortgage Loan, or the
receipt by the Sub-Servicer of a notification that payment in full shall be
escrowed in a manner customary for such purposes, the Sub-Servicer will
immediately notify the Master Servicer, the Owner and any

<PAGE>   46
                                      -39-


Certificate Insurer by a certification in the form of Exhibit B-2 (which
certification shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be
deposited in the Collection Account pursuant to Section 3.04 have been or will
be so deposited) of a Servicing Officer and shall request delivery to it of the
Mortgage File. The Master Servicer shall use its reasonable efforts to obtain
prompt release of the related Mortgage File to the Sub-Servicer. No expenses
incurred by the Sub-Servicer in connection with any instrument of satisfaction
or deed of reconveyance shall be chargeable to the Collection Account or to the
Master Servicer.

                  (b) From time to time and as appropriate for the servicing or
foreclosure of any Mortgage Loan, including, for this purpose, collection under
any insurance policy relating to the Mortgage Loans, the Master Servicer shall,
upon request of the Sub-Servicer and its delivery to the Master Servicer and the
Owner of a Request for Release in the form of Exhibit B-l, use it reasonable
efforts to obtain a release of the related Mortgage File to the Sub-Servicer,
and to obtain from the Owner, at the direction of the Sub-Servicer, execution of
such documents as shall be necessary to the prosecution of any such proceedings.
Such Request for Release shall obligate the Sub-Servicer to return each and
every document previously requested from the Mortgage File to the Owner when the
need therefor by the Sub-Servicer no longer exists, unless the Mortgage Loan has
been liquidated and the Liquidation Proceeds relating to the Mortgage Loan have
been deposited in the Collection Account or the Mortgage File or such document
has been delivered to an attorney, or to a public trustee or other public
official as required by law, for purposes of initiating or pursuing legal action
or other proceedings for the foreclosure of the Mortgaged Property either
judicially or nonjudicially, and the Sub-Servicer has delivered, or caused to be
delivered, to the Master Servicer and the Owner an additional Request for
Release certifying as to such liquidation or action or proceedings. Upon the
request of the Owner or the Certificate Insurer, the Sub-Servicer shall provide
notice to the Owner and the Certificate Insurer of the name and address of the
Person to which such Mortgage File or such document was delivered and the
purpose or purposes of such delivery. The Master Servicer shall use its
reasonable efforts to obtain from the Owner release of any outstanding Requests
for Release with respect to such Mortgage Loan upon its receipt of a certificate
of a Servicing Officer stating that such Mortgage Loan was liquidated and that
all amounts received or to be received in connection with such liquidation that
are required to be deposited into the Collection Account have been so deposited,
or that such Mortgage Loan has become an REO Property.

                  (c) The Master Servicer shall use its reasonable efforts, upon
delivery to the Master Servicer and the Owner of written certification of a
Servicing Officer, to cause the Owner to execute and deliver to the Sub-Servicer
any court pleadings, requests for trustee's sale or other documents necessary to
the foreclosure or trustee's sale in respect of a Mortgaged Property or to any
legal action brought to obtain judgment against any Mortgagor on the Mortgage
Note or Mortgage or to obtain a deficiency judgment, or to enforce any other
remedies or rights provided by the Mortgage Note or Mortgage or otherwise
available at law or in equity. Each such certification shall include a request
that such pleadings or documents be executed by the Owner and a statement as to
the reason such documents or pleadings are required and that the execution and
delivery thereof by the Owner will not invalidate or otherwise affect the lien
of the Mortgage,

<PAGE>   47
                                      -40-


except for the termination of such a lien upon completion of the foreclosure or
trustee's sale.

                  SECTION 3.11. Sub-Servicing Compensation.

                  As compensation for the activities of the Sub-Servicer
hereunder, the Sub-Servicer shall be entitled to the SubServicing Fee with
respect to each Mortgage Loan payable solely from payments of interest in
respect of such Mortgage Loan. In addition, the Sub-Servicer shall be entitled
to recover unpaid Sub-Servicing Fees out of Insurance Proceeds or Liquidation
Proceeds to the extent permitted by Section 3.05(iii) and out of amounts derived
from the operation and sale of an REO Property to the extent permitted by
Section 3.16. The right to receive the Sub-Servicing Fee may not be transferred
in whole or in part except in connection with the transfer of all of the
Sub-Servicer's responsibilities and obligations under this Agreement.

                  The Sub-Servicer shall be required to pay, without
reimbursement, all expenses incurred by it in connection with its servicing
activities hereunder to the extent this Agreement does not specifically provide
for the payment of such expense by means of reimbursement by the Master Servicer
from its own funds.

                  SECTION 3.12. Reports; Collection Account Statements.

                  Not later than fifteen days after each Sub-Servicer Remittance
Date, the Sub-Servicer shall forward to the Master Servicer, the Owner and any
Certificate Insurer a statement prepared by the Sub-Servicer setting forth the
status of the Collection Account as of the close of business on such
Sub-Servicer Remittance Date and showing, for the period covered by such
statement, the aggregate amount of deposits into and withdrawals from the
Collection Account of each category of deposit specified in Section 3.04(a) and
each category of withdrawal specified in Section 3.05. Such statement may be in
the form of the then current FNMA Monthly Accounting Report for its Guaranteed
Mortgage Pass-Through Program with appropriate additions and changes, and shall
also include information as to the aggregate of the outstanding principal
balances of all of the Mortgage Loans as of the last day of the calendar month
immediately preceding such Sub-Servicer Remittance Date.

                  SECTION 3.13. Statement as to Compliance.

                  The Sub-Servicer will deliver to the Owner, the Master
Servicer and any Certificate Insurer on or before April 1 of each calendar year
commencing in 1998, an Officers' Certificate stating, as to each signatory
thereof, that (i) a review of the activities of the Sub-Servicer during the
preceding year and of performance under this Agreement has been made under such
officers' supervision and (ii) to the best of such officers' knowledge, based on
such review, the Sub-Servicer has fulfilled all of its obligations under this
Agreement throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof.

                  SECTION 3.14. Independent Public Accountants' Servicing
Report.

<PAGE>   48
                                      -41-


                  Not later than April 1 of each calendar year commencing in
1998, the Sub-Servicer, at its expense, shall cause a nationally recognized firm
of independent certified public accountants to furnish to the Sub-Servicer a
report stating that (i) it has obtained a letter of representation regarding
certain matters from the management of the Sub-Servicer which includes an
assertion that the Sub-Servicer has complied with certain minimum residential
mortgage loan servicing standards, identified in the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage Bankers Association of
America, with respect to the servicing of residential mortgage loans during the
most recently completed fiscal year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that may be appropriate. Immediately upon receipt of such report, the
Sub-Servicer shall furnish a copy of such report to the Owner, the Master
Servicer, any Certificate Insurer and each Rating Agency.

<PAGE>   49
                                      -42-


                  SECTION 3.15. Access to Certain Documentation.

                  The Sub-Servicer shall provide to the Office of Thrift
Supervision, the FDIC, and any other federal or state banking or insurance
regulatory authority that may exercise authority over any holder of any
ownership interest in a Mortgage Loan, access to the documentation regarding the
Mortgage Loans required by applicable laws and regulations. Such access shall be
afforded without charge, but only upon reasonable request and during normal
business hours at the offices of the Sub-Servicer designated by it. In addition,
access to the documentation regarding the Mortgage Loans will be provided to any
Owner, the Certificate Insurer, the Master Servicer and to any Person identified
to the Sub-Servicer as a prospective owner of an interest in a Mortgage Loan,
upon reasonable request during normal business hours at the offices of the
Sub-Servicer designated by it at the expense of the Person requesting such
access.

                  SECTION 3.16. Title, Management and Disposition of REO
Property.

                  (a) The deed or certificate of sale of any REO Property shall
be taken in the name of the Owner, or its nominee. In the case of any Mortgage
Loan that is an asset of a trust fund with respect to which a REMIC election has
been made, the Sub-Servicer, on behalf of such REMIC, shall either sell any REO
Property within two years after such REMIC acquires ownership of such REO
Property for purposes of Section 860G(a)(8) of the Code or request from the
Internal Revenue Service, not later than 60 days before the day on which the
two-year grace period would otherwise expire, an extension of the two-year grace
period, unless the Sub-Servicer had delivered to the Owner and any other Person
specified by the Owner an Opinion of Counsel, addressed to the Owner, any such
other Person and the Certificate Insurer, if any, to the effect that the holding
by such REMIC of such REO Property subsequent to two years after its acquisition
will not result in the imposition on such REMIC of taxes on "prohibited
transactions" thereof, as defined in Section 860F of the Code, or cause such
REMIC to fail to qualify as a REMIC under Federal law at any time that any
pass-through certificates relating thereto are outstanding. The Sub-Servicer
shall manage, conserve, protect and operate each REO Property for the Owner
solely for the purpose of its prompt disposition and sale in a manner which does
not cause such REO Property to fail to qualify as "foreclosure property" within
the meaning of Section 860G(a)(8) of the Code or result in the receipt by such
REMIC or of any "income from non-permitted assets" within the meaning of Section
860F(a)(2)(B) of the Code, or any "net income from foreclosure property" which
is subject to taxation under the REMIC Provisions.

                  (b) The Sub-Servicer shall segregate and hold all funds
collected and received in connection with the operation of any REO Property
separate and apart from its own funds and general assets and shall establish and
maintain, or cause to be established and maintained, with respect to REO
Properties an account held in trust for the Master Servicer for the benefit of
the Owner and the Certificate Insurer, if any (the "REO Account"), which shall
be an Eligible Account. The Sub-Servicer shall be permitted to allow the
Collection Account to serve as the REO Account, subject to separate ledgers for
each REO Property. The Sub-Servicer shall pay to the Master Servicer any
interest income paid on funds deposited in the REO Account.

<PAGE>   50
                                      -43-


                  (c) The Sub-Servicer shall have full power and authority,
subject only to the specific requirements and prohibitions of this Agreement, to
do any and all things in connection with any REO Property as are consistent with
the manner in which the Sub-Servicer manages and operates similar property owned
by the Sub-Servicer or any of its Affiliates, all on such terms and for such
period as the Sub-Servicer deems to be in the best interests of Owner. In
connection therewith, the Sub-Servicer shall deposit, or cause to be deposited
on a daily basis, all revenues received by it with respect to an REO Property
and shall withdraw therefrom funds necessary for the proper operation,
management and maintenance of such REO Property including, without limitation:

                           (i) all insurance premiums due and payable in respect
         of such REO Property;

                           (ii) all real estate taxes and assessments in respect
         of such REO Property that may result in the imposition of a lien
         thereon; and

                           (iii) all costs and expenses necessary to maintain
         such REO Property.

To the extent that amounts on deposit in the REO Account with respect to an REO
Property are insufficient for the purposes set forth in clauses (i) through
(iii) above with respect to such REO Property, the Sub-Servicer shall withdraw
from the Advance Account and advance such amount as is necessary for such
purposes if, but only if, the Sub-Servicer would make such advances if the
Sub-Servicer owned the REO Property and in the Sub-Servicer's judgment, the
payment of such amounts will be recoverable from the rental or sale of the REO
Property.

                  Notwithstanding the foregoing, if the REO Property is held by
a REMIC, the Sub-Servicer shall not:

                           (i) authorize the Owner to enter into, renew or
         extend any New Lease with respect to any REO Property, if the New Lease
         by its terms will give rise to any income that does not constitute
         Rents from Real Property;

                           (ii) authorize any amount to be received or accrued
         under any New Lease other than amounts that will constitute Rents from
         Real Property;

                           (iii) authorize any construction on any REO Property,
         other than the completion of a building or other improvement thereon,
         and then only if more than ten percent of the construction of such
         building or other improvement was completed before default on the
         related Mortgage Loan became imminent, all within the meaning of
         Section 856(e)(4)(B) of the Code; or

                           (iv) authorize any Person to Directly Operate any REO
         Property on any date more than 90 days after its date of acquisition by
         the Owner;

<PAGE>   51
                                      -44-


unless, in any such case, the Sub-Servicer has obtained an Opinion of Counsel,
provided to the Owner and the Certificate Insurer, if any, to the effect that
such action will not cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code at any time that
it is held by a REMIC, in which case the Sub-Servicer may take such actions as
are specified in such Opinion of Counsel.

                  The Sub-Servicer may contract with any Independent Contractor
for the operation and management of any REO Property, provided that:

                           (i) the terms and conditions of any such contract
         shall not be inconsistent herewith;

                           (ii) any such contract shall require, or shall be
         administered to require, that the Independent Contractor pay all costs
         and expenses incurred in connection with the operation and management
         of such REO Property, including those listed above and remit all
         related revenues (net of such costs and expenses) to the Sub-Servicer
         as soon as practicable, but in no event later than thirty days
         following the receipt thereof by such Independent Contractor;

                           (iii) none of the provisions of this Section 3.16(c)
         relating to any such contract or to actions taken through any such
         Independent Contractor shall be deemed to relieve the Sub-Servicer of
         any of its duties and obligations to the Master Servicer for the
         benefit of the Owner and the Certificate Insurer, if any, with respect
         to the operation and management of any such REO Property; and

                           (iv) the Sub-Servicer shall be obligated with respect
         thereto to the same extent as if it alone were performing all duties
         and obligations in connection with the operation and management of such
         REO Property.

The Sub-Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Sub-Servicer by such
Independent Contractor, and nothing in this Agreement shall be deemed to limit
or modify such indemnification. The Sub-Servicer shall be solely liable for all
fees owed by it to any such Independent Contractor, irrespective of whether the
Sub-Servicer's compensation pursuant to Section 3.16 is sufficient to pay such
fees.

                  (d) In addition to the withdrawals permitted under Section
3.05, the Sub-Servicer may from time to time make withdrawals from the REO
Account for any REO Property: (i) to pay itself and the Master Servicer any
Sub-Servicing Fees and Master Servicing Fees in respect of the related Mortgage
Loan; and (ii) to reimburse the Master Servicer for unreimbursed Servicing
Advances and P&I Advances made in respect of such REO Property or the related
Mortgage Loan. On the Business Day prior to each SubServicer Remittance Date,
the Sub-Servicer shall withdraw from each REO Account maintained by it and
deposit in the Collection

<PAGE>   52
                                      -45-


Account, the income from the related REO Property received during the prior
calendar month, net of any withdrawals made pursuant to Section 3.16(c) or this
Section 3.16(d).

                  (e) Subject to the time constraints set forth in Section
3.16(a), each REO Disposition shall be carried out by the Sub-Servicer at such
price and upon such terms and conditions as the Sub-Servicer shall deem
necessary or advisable, as shall be normal and usual in its Accepted Servicing
Practices.

                  (f) The proceeds from the REO Disposition, net of any amount
required by law to be remitted to the Mortgagor under the related Mortgage Loan
and net of any payment or reimbursement to the Master Servicer or the
Sub-Servicer as provided above, shall be deposited in the Collection Account in
accordance with Section 3.04(a) one Business Day before the Sub-Servicer
Remittance Date in the month following the receipt thereof for remittance on the
related Sub-Servicer Remittance Date in accordance with Section 3.04. Any REO
Disposition of a property held by a REMIC shall be for cash only (unless changes
in the REMIC Provisions made subsequent to the Startup Day allow a sale for
other consideration).

                  (g) The Sub-Servicer shall file information returns with
respect to the receipt of mortgage interest received in a trade or business,
reports of foreclosures and abandonments of any Mortgaged Property and
cancellation of indebtedness income with respect to any Mortgaged Property as
required by Sections 6050H, 6050J and 6050P of the Code, respectively. Such
reports shall be in form and substance sufficient to meet the reporting
requirements imposed by such Sections 6050H, 6050J and 6050P of the Code.

                  SECTION 3.17. Obligations of the Sub-Servicer and the Master
                                Servicer in Respect of Prepayment Interest
                                Shortfalls.

                  With respect to each Mortgage Loan that has been the subject
of a Sale Closing Notice, the Sub-Servicer shall, on the Business Day prior to
each Sub-Servicer Remittance Date, withdraw from the Advance Account and deposit
in the Collection Account an amount equal to the excess of (a) the lesser of (i)
the aggregate of the Prepayment Interest Shortfalls for the related SubServicer
Remittance Date resulting solely from Principal Prepayments in full during the
related Prepayment Period and (ii) the amount of the Servicing Fee for the
related Prepayment Period over (b) the amount of the Master Servicing Fee
remaining in the Collection Account on such date, if any. The amount so
withdrawn from the Advance Account, together with the amount set forth in (b)
above, if any, shall be paid to the Owner pursuant to Section 3.04(b) in respect
of Prepayment Interest Shortfalls without any right of reimbursement therefor to
the Master Servicer from any source.

<PAGE>   53
                                      -46-


                  SECTION 3.18. Obligations of the Sub-Servicer in Respect of
                                Mortgage Rates and Monthly Payments.

                  In the event that a shortfall in any collection on or
liability with respect to any Mortgage Loan results from or is attributable to
adjustments to Mortgage Rates of Adjustable Rate Mortgage Loans, Monthly
Payments or Stated Principal Balances that were made by the Sub-Servicer in a
manner not consistent with the terms of the related Mortgage Note and this
Agreement, the Sub-Servicer, upon discovery or receipt of notice thereof,
immediately shall deliver to the Owner from its own funds the amount of any such
shortfall and shall indemnify and hold harmless the Owner, the Master Servicer,
the Certificate Insurer, if any, and any successor sub-servicer in respect of
any such liability. Such indemnities shall survive the termination or discharge
of this Agreement. Notwithstanding the foregoing, this Section 3.18 shall not
limit the ability of the Sub-Servicer to seek recovery of any such amounts from
the related Mortgagor under the terms of the related Mortgage Note, as permitted
by law.

                  SECTION 3.19. Obligations of the Sub-Servicer and the Master
                                Servicer in Respect of Servicing Advances.

                  With respect to each Servicing Advance that the Sub-Servicer
has determined, in accordance with Accepted Servicing Practices, is required to
be made pursuant to the terms of this Agreement, the Sub-Servicer shall withdraw
such amount from the Advance Fund and pay such amount to the appropriate Person.
Notwithstanding anything to the contrary herein, the Sub-Servicer shall only be
entitled to withdraw amounts from the Advance Account for any such Servicing
Advance if it has given the Master Servicer one Business Days prior written
notice by facsimile transmission specifying the amount and timing of such
advance. The Master Servicer shall be entitled to reimbursement for any such
amounts withdrawn and paid in respect of Servicing Advances in accordance with
Section 3.05 and 3.16

                  Notwithstanding anything herein to the contrary, no Servicing
Advance shall be required to be made hereunder by the Master Servicer, and the
Sub-Servicer shall not make withdrawals from the Advance Account in respect
thereof, if such Servicing Advance would, if made, constitute a Nonrecoverable
Servicing Advance. The determination by the Sub-Servicer or the Master Servicer
that the Sub-Servicer has made a Nonrecoverable Servicing Advance or that any
proposed Servicing Advance, if made, would constitute a Nonrecoverable Servicing
Advance shall be evidenced by an Officers' Certificate of the Sub-Servicer or
the Master Servicer, as the case may be, delivered to the other and to the Owner
and the Certificate Insurer, if any.

                  SECTION 3.20. Notice of Withdrawals.

                  Not less than one Business Day prior to any withdrawal from
the Advance Account permitted by this Agreement, the Sub-Servicer shall notify
the Master Servicer, by confirmed facsimile, of the amount of the withdrawal to
be made.

<PAGE>   54
                                      -47-


                                   ARTICLE IV

                                     REPORTS

                  SECTION 4.01. Remittance Reports; P&I Advances; Reimbursement
                                of P&I Advances.

                  (a) On the Business Day following each Determination Date, the
Sub-Servicer shall deliver to the Master Servicer, the Owner and the Certificate
Insurer, if any, by facsimile transmission (or by such other means as the Master
Servicer shall direct from time to time) a Remittance Report with respect to the
related Sub-Servicer Remittance Date. On the same date, the Sub-Servicer shall
forward to the Owner by overnight mail a computer readable magnetic tape
containing the information set forth in such Remittance Report with respect to
the related Sub-Servicer Remittance Date. Such Remittance Report will include
(i) the amount of P&I Advances to be made by the Master Servicer in respect of
the related Sub-Servicer Remittance Date, the aggregate amount of P&I Advances
outstanding after giving effect to such P&I Advances, the aggregate amount
of Nonrecoverable P&I Advances in respect of such Sub-Servicer Remittance Date
the aggregate amount to be withdrawn from the Advance Account for such
Remittance Date pursuant to Section 3.17 in respect of Prepayment Interest 
Shortfalls and (ii) such other information with respect to the Mortgage Loans 
as the Master Servicer and the Owner may reasonably request. In addition to the
Remittance Report, the Sub-Servicer also shall deliver to the Master Servicer
for no additional charge the reports described in Exhibit G at such times set
forth herein.

                  (b) P&I Advances will only be required to be made in respect
of Mortgage Loans that have been subject to a Sale Closing Notice. The amount of
P&I Advances to be made by the Master Servicer for any Sub-Servicer Remittance
Date shall equal, subject to Section 4.01(d), the sum of (i) the aggregate
amount of Monthly Payments other than Balloon Payments (with each interest
portion thereof net of the related Servicing Fee), due on the related Due Date
in respect of the Mortgage Loans, which Monthly Payments were delinquent as of
the close of business on the related Determination Date and (ii) with respect to
each REO Property, which REO Property was acquired during or prior to the
related Prepayment Period and as to which REO Property an REO Disposition did
not occur during the related Prepayment Period, an amount equal to the excess,
if any, of the REO Imputed Interest on such REO Property for the most recently
ended calendar month, over the net income from such REO Property transferred to
the Collection Account pursuant to Section 3.16 for distribution on such
Sub-Servicer Remittance Date.

                  On the Business Day prior to the Sub-Servicer Remittance Date,
the Sub-Servicer shall withdraw from the Advance Account and deposit in the
Collection Account an amount equal to the excess of (i) the aggregate amount of
P&I Advances, if any, to be made in respect of the Mortgage Loans and REO
Properties for the related Sub-Servicer Remittance Date over (ii) funds held in
the Collection Account for future distribution. The amount so withdrawn from the
Advance Account, together with the amount set forth in (ii) above, shall be paid
to the Owner pursuant to Section 3.04(b) in respect of P&I Advances. The
Sub-Servicer will cause to be made an appropriate entry in the records of
Collection Account that amounts held for future distribution have been, as
permitted by this Section 4.01, used by the Sub-Servicer in discharge of any
such P&I Advance. Any amounts held for future distribution and so used shall be
appropriately reflected in the Sub-Servicer's records and may, at the discretion
of the Master Servicer, be replaced at any

<PAGE>   55
                                      -48-


time by the Master Servicer by deposit in the Collection Account.

                  (c) The obligation of the Master Servicer to make such P&I
Advances is mandatory, notwithstanding any other provision of this Agreement but
subject to (d) below, and, with respect to any Mortgage Loan or REO Property,
shall continue until a Final Recovery Determination in connection therewith or,
in the case of any Mortgage Loan or REO Property held by the REMIC, the removal
thereof from the related trust fund, except as otherwise provided in this
Section.

                  (d) Notwithstanding anything herein to the contrary, no P&I
Advance shall be required to be made hereunder by the Master Servicer, and the
Sub-Servicer shall not make withdrawals from the Advance Account in respect
thereof, if such P&I Advance would, if made, constitute a Nonrecoverable P&I
Advance. The determination by the Sub-Servicer or the Master Servicer that the
Sub-Servicer has made a Nonrecoverable P&I Advance or that any proposed P&I
Advance, if made, would constitute a Nonrecoverable P&I Advance, shall be
evidenced by an Officers' Certificate of the Sub-Servicer or the Master
Servicer, as the case may be, delivered to the other and to the Owner and the
Certificate Insurer, if any.

                  SECTION 4.04. Allocation of Realized Losses.

                  (a) Prior to each Determination Date, the Sub-Servicer shall
determine as to each Mortgage Loan and REO Property: (i) the total amount of
Realized Losses, if any, incurred in connection with any Final Recovery
Determinations made during the related Prepayment Period and (ii) the respective
portions of such Realized Losses allocable to interest and allocable to
principal. Prior to each Determination Date, the Sub-Servicer shall also
determine as to each Mortgage Loan: (i) the total amount of Realized Losses, if
any, incurred in connection with any Deficient Valuations made during the
related Prepayment Period; and (ii) the total amount of Realized Losses, if any,
incurred in connection with Debt Service Reductions in respect of Monthly
Payments due during the related Due Period. The information described in the two
preceding sentences that is to be supplied by the Sub-Servicer shall be
evidenced by an Officers' Certificate delivered to the Owner, the Master
Servicer and the Certificate Insurer, if any, by the Sub-Servicer prior to the
Determination Date immediately following the end of (i) in the case of
Bankruptcy Losses allocable to interest, the Due Period during which any such
Realized Loss was incurred, and (ii) in the case of all other Realized Losses,
the Prepayment Period during which any such Realized Loss was incurred.

<PAGE>   56
                                      -49-


                                    ARTICLE V

                    THE MASTER SERVICER AND THE SUB-SERVICER

                  SECTION 5.01. Certain Liability.

                  The Master Servicer and the Sub-Servicer each shall be liable
to the other in accordance herewith only to the extent of the obligations
specifically imposed by this Agreement upon them in their respective capacities
hereunder and undertaken hereunder by the each herein.

                  SECTION 5.02. Merger or Consolidation of Parties.

                  Subject to the following paragraph, each of the Master
Servicer and the Sub-Servicer will keep in full effect its existence, rights and
franchises as a corporation under the laws of the jurisdiction of its
incorporation. Each will obtain and preserve its qualification to do business as
a foreign corporation in each jurisdiction in which such qualification is or
shall be necessary to protect the validity and enforceability of this Agreement
or any of the Mortgage Loans and to perform its respective duties under this
Agreement.

                  Either of the Master Servicer and the Sub-Servicer may be
merged or consolidated with or into any Person, or transfer all or substantially
all of its assets to any Person, in which case any Person resulting from any
merger or consolidation to which the Master Servicer or the Sub-Servicer shall
be a party, or any Person succeeding to the business of the Master Servicer or
the Sub-Servicer, shall be the successor of the Master Servicer or the
Sub-Servicer, as the case may be, hereunder, without the execution or filing of
any paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding; provided, however, that the successor or
surviving Person to the Sub-Servicer shall be qualified to service mortgage
loans on behalf of FNMA or FHLMC; and provided further that, if any Mortgage
Loans or REO Property is an asset of a trust fund with respect to which a REMIC
election has been made, the Rating Agencies' ratings and shadow ratings of the
debt instruments issued by the REMIC in effect immediately prior to such merger
or consolidation will not be qualified, reduced or withdrawn as a result thereof
(as evidenced by a letter to such effect from the Rating Agencies) and the
Certificate Insurer, if any, shall have given its prior written consent, which
consent shall not be unreasonably withheld or delayed.

<PAGE>   57
                                      -50-


                  SECTION 5.03. Limitation on Liability; Indemnification.

                  Neither the Master Servicer (including, without limitation,
its directors, officers, employees and agents) nor the Sub-Servicer (including,
without limitation, its directors, officers, employees and agents) shall be
under any liability to the other any action taken or for refraining from the
taking of any action in good faith pursuant to this Agreement, or for errors in
judgment; provided, however, that this provision shall not protect the Master
Servicer or any such person or the Sub-Servicer or any such person against any
breach of warranties, representations or covenants made herein, or against any
specific liability imposed on the Master Servicer or the Sub-Servicer pursuant
hereto, or against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties hereunder. The
Sub-Servicer (and its directors, officers, employees and agents) shall be
indemnified and held harmless by the Master Servicer against any loss, liability
or expense incurred in connection with any legal action relating to this
Agreement or the Mortgage Loans other than any loss, liability or expense
incurred by reason of the willful misfeasance, bad faith or gross negligence of
the Sub-Servicer in the performance of its duties hereunder or by reason of its
reckless disregard of its obligations and duties hereunder. The Master Servicer
(and its directors, officers, employees and agents) shall be indemnified and
held harmless by the Sub-Servicer against any loss, liability or expense
incurred by reason of the willful misfeasance, bad faith or gross negligence of
the Sub-Servicer in the performance of its duties hereunder or by reason of its
reckless disregard of its obligations and duties hereunder.

                  SECTION 5.04. Term.

                  The term of this Agreement shall commence on the date hereof
and shall expire on the third anniversary of the date hereof; provided, however,
that either party hereto may earlier terminate this Agreement at any time after
the date that is the first anniversary of the date hereof upon six months notice
given to the other no earlier than such first anniversary. During the term of
this Agreement, the Originator shall be obligated to deliver to the Sub-Servicer
for servicing pursuant to this Agreement all mortgage loans originated by the
Originator on or after April 1, 1997. The Sub-Servicer shall be obligated to
accept all such mortgage loans unless (a) the servicing of any such mortgage
loans would not be permissible under applicable law or (b) the characteristics
of the related loan programs are incompatible with the Sub-Servicer's then
existing data processing systems. Upon the expiration or earlier termination of
this Agreement and the request of either party, the sub-servicing of the
Mortgage Loans shall be transferred to the Master Servicer or to a successor
sub-servicer designated by the Master Servicer, subject to the consent of the
owner (other than the Originator). The Sub-Servicer shall cooperate with the
Master Servicer in making any such transfer of sub-servicing hereunder. If the
consent of any Owner or other Person is required in connection with any early
termination by the Sub-Servicer, the Master Servicer shall use its best efforts
to obtain such consent of the Owner or such Person.

                  The Sub-Servicer shall not assign or transfer any of its
rights, benefits or privileges hereunder to any other Person, or delegate to or
subcontract with, or authorize or appoint any other Person to perform any of the
duties, covenants or obligations to be performed by the Sub-Servicer

<PAGE>   58
                                      -51-


hereunder. If, pursuant to any provision hereof, the duties of the Sub-Servicer
are transferred to a successor master servicer, the entire amount of the
Sub-Servicing Fee and other compensation payable to the SubServicer pursuant
hereto shall thereafter be payable to such successor master servicer.

                  Notwithstanding the foregoing, the Sub-Servicer may be
terminated without cause or the payment of any fee if the Master Servicer is no
longer the Master Servicer with respect to any or all of the Mortgage Loans. In
addition, the Sub-Servicer may be terminated without cause or the payment of any
fee if any Certificate Insurer or Rating Agency under any Master Servicing
Agreement requires such termination.

                  SECTION 5.05. Rights of the Master Servicer in Respect of the
Sub-Servicer.

                  The Sub-Servicer shall afford the Master Servicer, the Owner
(and any other Persons designated by the Owner) and the Certificate Insurer,
upon reasonable notice, during normal business hours, access to all records
maintained by the Sub-Servicer in respect of the Sub-Servicer's rights and
obligations hereunder and access to officers of the Sub-Servicer responsible for
such obligations. Upon request, the Sub-Servicer shall furnish to each such
Person its most recent financial statements and such other information relating
to the Sub-Servicer's capacity to perform its obligations under this Agreement
as it possesses. The delivery of such information may be conditioned upon the
agreement of each such Person that, to the extent such information is not
otherwise available to the public, such Person shall not disseminate any
information obtained pursuant to the preceding two sentences without the
Sub-Servicer's written consent, except as required pursuant to this Agreement or
to the extent that it is appropriate to do so (i) in working with legal counsel,
auditors, taxing authorities or other governmental agencies or (ii) pursuant to
any law, rule, regulation, order, judgment, writ, injunction or decree of any
court or governmental authority having jurisdiction over any such Person and
such Person's agreement to use its best efforts to assure the confidentiality of
any such disseminated non-public information.

                  SECTION 5.06. Further Assurances.

                  (a) The Sub-Servicer agrees to deliver such additional reports
or information and take such further actions as the Owner, the Master Servicer
or the Certificate Insurer, if any, may, from time to time, reasonably request
in order to effectuate the purposes and to carry out the terms of this
Agreement. If the Sub-Servicer is so requested to deliver such additional
reports or information or take such further actions and such items are not
generally produced or such action are not generally taken by the Sub-Servicer in
the normal course of its business, the Sub-Servicer and the Master Servicer
shall negotiate in good faith to reimburse the Sub-Servicer for its additional
related costs.

                  (b) The parties hereto agree that to the extent changes in the
Sub-Servicer's servicing practices required by third party Owners or the Master
Servicer's loan programs result in significant additional costs to the
Sub-Servicer, the parties shall negotiate in good faith to compensate the
Sub-Servicer for the Master Servicer's allocable share of such costs.

<PAGE>   59
                                      -52-


                  SECTION 5.07. Sales of Mortgage Loans.

                  The Sub-Servicer and the Originator agree that with respect to
some or all of the Mortgage Loans, the Originator intends to effect whole loan
sales and/or securitizations on a servicing retained basis.

                  With respect to each such sale, the Sub-Servicer agrees:

                  (1)      to cooperate fully with the Originator and any
                           prospective purchaser with respect to all reasonable
                           requests and due diligence procedures;

                  (2)      if required by the purchaser, to execute agreements
                           modifying or replacing this Agreement, provided that
                           the Sub-Servicer is given an opportunity to review
                           and reasonably negotiate in good faith and within the
                           time constraints of the whole loan sale and/or
                           securitization closing, the content of such documents
                           not specifically referenced or provided for herein;

                  (3)      to deliver to the Originator for inclusion in any
                           prospectus or other offering material such publicly
                           available information regarding the Sub-Servicer, its
                           financial condition and its mortgage loan
                           delinquency, foreclosure and loss experience
                           substantially in the form and scope set forth in the
                           Prospectus Supplement dated January 22, 1997 to
                           Prospectus dated October 18, 1996 relating to Asset
                           Backed Floating Rate Certificates, Series 1997-LB1,
                           and to deliver to the Originator any similar
                           nonpublic, unaudited financial information, in which
                           case the Originator shall bear the cost of having
                           such information audited by certified public
                           accountants if the Originator desires such an audit,
                           or as is otherwise reasonably requested by the
                           Originator and which the Sub-Servicer is capable of
                           providing without unreasonable effort or expense, and
                           to indemnify the Originator for material
                           misstatements contained in such information;

                  (4)      to deliver to the Originator and to any Person
                           designated by the Originator, at the Originator's
                           expense, such statements and audit letters of
                           reputable, certified public accounts pertaining to
                           information provided by the SubServicer pursuant to
                           clause 3 above as shall be reasonably requested by
                           the Originator;

                  (5)      to deliver to the Originator, and to any Person
                           designated by the Originator, such in-house opinions
                           of counsel as are customarily delivered by
                           originators or servicers, as the case may be, in
                           connection with whole loan sales or securitizations,
                           as the case may be, it being understood that the cost
                           of any opinions of outside special counsel that may
                           be required for such whole loan sales or
                           securitizations, as the case may be, shall be the
                           responsibility of the

<PAGE>   60
                                      -53-


                           Originator; 

                  (6)      to cooperate fully with the Originator and any
                           prospective purchaser with respect to the preparation
                           of Mortgage Loan documents and other documents with
                           respect to servicing requirements reasonably
                           requested by the Rating Agencies and credit
                           enhancers; and

                  (7)      in the event that the Master Servicer has agreed in
                           connection with a whole loan sale or securitization
                           of any Mortgage Loan to indemnify or otherwise be
                           responsible to a purchaser for losses and expenses
                           arising from the simple negligence of the servicer of
                           such loan, the Sub-Servicer similarly shall indemnify
                           and hold the Master Servicer harmless from any
                           losses and expenses incurred by the Sub-Servicer's
                           simple, negligence in servicing such loan; provided,
                           however, that the Master Servicer will use its best
                           efforts to negotiate a gross, rather than a simple,
                           negligence services standard in documents evidencing
                           all whole loan sales and securitizations.


<PAGE>   61
                                      -54-


                                   ARTICLE VI

                                     DEFAULT

                  SECTION  6.01. Sub-Servicer Events of Default.

                  (a) "Sub-Servicer Event of Default," wherever used herein,
means any one of the following events:

                           (i) any failure by the Sub-Servicer to remit to the
                  Owner any payment required to be made under the terms of this
                  Agreement which continues unremedied for a period of one
                  Business Day after the date upon which written notice of such
                  failure (which may be by facsimile), requiring the same to be
                  remedied, shall have been given to the SubServicer by the
                  Master Servicer, the Owner, the Certificate Insurer, if any,
                  or any other Person; or

                           (ii) any failure on the part of the Sub-Servicer duly
                  to observe or perform in any material respect any other of the
                  covenants or agreements on the part of the Sub-Servicer
                  contained in this Agreement, or the breach by the SubServicer
                  of any representation and warranty contained in Section 2.04,
                  which continues unremedied for a period of 30 days after the
                  earlier of (i) the date on which written notice of such
                  failure, requiring the same to be remedied, shall have been
                  given to the Sub-Servicer by the Master Servicer, the Owner,
                  the Certificate Insurer, if any, or any other Person and (ii)
                  actual knowledge of such failure by a Servicing Officer of the
                  Sub-Servicer; or

                           (iii) a decree or order of a court or agency or
                  supervisory authority having jurisdiction in the premises in
                  an involuntary case under any present or future federal or
                  state bankruptcy, insolvency or similar law or the appointment
                  of a conservator or receiver or liquidator in any insolvency,
                  readjustment of debt, marshalling of assets and liabilities or
                  similar proceeding, or for the winding-up or liquidation of
                  its affairs, shall have been entered against the Sub-Servicer
                  and such decree or order shall have remained in force
                  undischarged or unstayed for a period of 90 days; or

                           (iv) the Sub-Servicer shall consent to the
                  appointment of a conservator or receiver or liquidator in any
                  insolvency, readjustment of debt, marshalling of assets and
                  liabilities or similar proceedings of or relating to it or of
                  or relating to all or substantially all of its property; or

                           (v) the Sub-Servicer shall admit in writing its
                  inability to pay its debts generally as they become due, file
                  a petition to take advantage of any applicable insolvency or
                  reorganization statute, make an assignment for the benefit of
                  its creditors, or voluntarily suspend payment of its
                  obligations; or

<PAGE>   62
                                      -55-


If a Sub-Servicer Event of Default described in clauses (i) through (v) of this
Section shall occur, then, and in each and every such case, so long as such
Sub-Servicer Event of Default shall not have been remedied, the Master Service
may by notice in writing to the Sub-Servicer terminate all of the rights and
obligations of the Sub-Servicer in its capacity as Sub-Servicer under this
Agreement, to the extent permitted by law, and in and to the Mortgage Loans and
the proceeds thereof. The Sub-Servicer agrees promptly (and in any event no
later than ten Business Days subsequent to such notice) to provide the Master
Servicer or other successor sub-servicer with all documents and records
requested by it to enable it to assume the Sub-Servicer's functions under this
Agreement, and to transfer within one Business Day to the Master Servicer or
other successor sub-servicer for administration by it of all cash amounts which
at the time shall be or should have been credited by the Sub-Servicer to the
Collection Account held by or on behalf of the Sub-Servicer, any REO Account or
Servicing Account held by or on behalf of the Sub-Servicer or thereafter be
received with respect to the Mortgage Loans or any REO Property serviced by the
Sub-Servicer (provided, however, that the SubServicer shall continue to be
entitled to receive all amounts accrued or owing to it under this Agreement on
or prior to the date of such termination, whether in respect of Sub-Servicing
Fees or otherwise).

<PAGE>   63
                                      -56-


                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

                  SECTION 7.01. Amendment.

                  This Agreement may be amended from time to time upon the
written consent of both parties hereto.

                  SECTION 7.02. Confidentiality.

                  The Sub-Servicer agrees that no employee in its servicing
division listed on Exhibit F attached hereto shall, directly or indirectly,
disclose to any employee of the Sub-Servicer outside such division any
information regarding the Mortgage Loans being serviced hereunder or the
activities of such division, the Originator, the Master Servicer or any Owner in
connection with origination, servicing or sale of such loans, except as required
by law or pursuant to legal process.

                  SECTION 7.03. Recordation of Agreement; Counterparts.

                  To the extent permitted by applicable law, this Agreement is
subject to recordation in all appropriate public offices for real property
records in all 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 Sub-Servicer at its expense, but only with the consent of the
Master Servicer.

                  For the purpose of facilitating the recordation of this
Agreement as herein provided and for other purposes, this Agreement may be
executed simultaneously in any number of counterparts, each of which
counterparts shall be deemed to be an original, and such counterparts shall
constitute but one and the same instrument.

                  SECTION 7.04. Governing Law.

                  This Agreement 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.

<PAGE>   64
                                      -57-


                  SECTION 7.05. Notices.

                  All directions, demands and notices hereunder shall be in
writing and shall be deemed to have been duly given when received if personally
delivered at or mailed by first class mail, postage prepaid, or by express
delivery service or delivered in any other manner specified herein, to (a) in
the case of the Master Servicer, ______________________________ ______________
(fax number: (___) ___-____), or such other address or fax number as may
hereafter be furnished to the Sub-Servicer in writing by the Master Servicer,
(b) in the case of the Sub-Servicer,
____________________________________________ (fax number (___) ___-____), or
such other address or fax number as may hereafter be furnished to the Master
Servicer in writing by the Sub-Servicer, (c) in the case of the Owner, the
address and/or fax number of the Owner maintained in the records of the
Sub-Servicer or such other address or fax number as may hereafter be furnished
to the Sub-Servicer by the Owner and (d) in the case of the Certificate Insurer,
the address and/or fax number of the Certificate Insurer maintained in the
records of the Sub-Servicer or such other address or fax number as may hereafter
be furnished to the Sub-Servicer by the Certificate Insurer. A copy of any
notice required to be transmitted by facsimile hereunder also shall be mailed to
the appropriate party in the manner set forth above.

                  SECTION 7.06. Severability of Provisions.

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

                  SECTION 7.08. Article and Section References.

                  All article and section references used in this Agreement,
unless otherwise provided, are to articles and sections in this Agreement.

<PAGE>   65
                                      -58-


                  IN WITNESS WHEREOF, the Master Servicer and the Sub-Servicer
have caused their names to be signed hereto by their respective officers
thereunto duly authorized, in each case as of the day and year first above
written.


                                        LONG BEACH MORTGAGE
                                             COMPANY,
                                        as Master Servicer


                                        By:________________________________
                                        Name:
                                        Title:



                                        AMERIQUEST MORTGAGE
                                        COMPANY
                                        as Sub-Servicer


                                         By:_______________________________
                                         Name:
                                         Title:

<PAGE>   66

                                   EXHIBIT B-1

                               REQUEST FOR RELEASE
                             (for Trustee/Custodian)

Loan Information

         Name of Mortgagor:   _________________________________

         Master Servicer
         Loan No.:            _________________________________

Trustee/Custodian

         Name:      _________________________________

         Address:             _________________________________


         Trustee/Custodian
         Mortgage File No.:   _________________________________

Depositor

          Name:               _________________________________

         Address:             _________________________________

         Certificates:        _________________________________
                              Certificates, Series 1997-___.

<PAGE>   67
                                       -2-


                  The undersigned Sub-Servicer hereby acknowledges that it has
received from _______________________, [as Master Servicer on behalf of
______________] as Trustee for the Holders of ________________________
Certificates, Series 1997-___, the documents referred to below (the
"Documents"). All capitalized terms not otherwise defined in this Request for
Release shall have the meanings given them in the Master Sub-Servicing
Agreement, dated as of ________ 1, 1997, between the Sub-Servicer and the Master
Servicer (the "Master Sub-Servicing Agreement").

( )      Mortgage Note dated _______________, 19__, in the original principal
         sum of $__________, made by _____________________, payable to, or
         endorsed to the order of, the Trustee.

( )      Mortgage recorded on _________________________ as instrument no.
         ____________________ in the County Recorder's Office of the County of
         _________________, State of __________________ in book/reel/docket
         _________________ of official records at page/image _____________.

( )       Deed of Trust recorded on ___________________ as instrument no.
         ________________ in the County Recorder's Office of the County of
         _________________, State of ____________________ in book/reel/docket
         _________________ of official records at page/image ______________.

( )      Assignment of Mortgage or Deed of Trust to the Trustee, recorded on
         ___________________ as instrument no. _________ in the County
         Recorder's Office of the County of _______________, State of
         _______________________ in book/reel/docket ____________ of official
         records at page/image ____________.

( )      Other documents, including any amendments, assignments or other
         assumptions of the Mortgage Note or Mortgage.

( )      ______________________________________________

( )      ______________________________________________

( )      ______________________________________________

( )      ______________________________________________

                  The undersigned Sub-Servicer hereby acknowledges and agrees as
follows:

                  (1) The Sub-Servicer shall hold and retain possession of the
         Documents in trust for the benefit of the Trustee, solely for the
         purposes provided in the Agreement.

                  (2) The Sub-Servicer shall not cause or permit the Documents
         to become subject

<PAGE>   68
                                      -3-


         to, or encumbered by, any claim, liens, security interest, charges,
         writs of attachment or other impositions nor shall the Sub-Servicer
         assert or seek to assert any claims or rights of setoff to or against
         the Documents or any proceeds thereof.

                  (3) The Sub-Servicer shall return each and every Document
         previously requested from the Mortgage File to the Trustee when the
         need therefor no longer exists, unless the Mortgage Loan relating to
         the Documents has been liquidated and the proceeds thereof have been
         remitted to the Collection Account and except as expressly provided in
         the Agreement.

                  (4) The Documents and any proceeds thereof, including any
         proceeds of proceeds, coming into the possession or control of the
         Sub-Servicer shall at all times be earmarked for the account of the
         Trustee, and the Sub-Servicer shall keep the Documents and any proceeds
         separate and distinct from all other property in the Sub-Servicer's
         possession, custody or control.

Dated:

                                        AMERIQUEST MORTGAGE COMPANY

                                        By:________________________________
                                        Name:______________________________
                                        Title:_____________________________

<PAGE>   69

                                   EXHIBIT B-2


                               REQUEST FOR RELEASE
                          [Mortgage Loans Paid in Full]

                     OFFICERS' CERTIFICATE AND TRUST RECEIPT
                      ________________________ CERTIFICATES
                                 SERIES 1997-___


____________________________________________________ HEREBY CERTIFIES THAT
HE/SHE IS AN OFFICER OF THE SUB-SERVICER, HOLDING THE OFFICE SET FORTH BENEATH
HIS/HER SIGNATURE, AND HEREBY FURTHER CERTIFIES AS FOLLOWS:

WITH RESPECT TO THE MORTGAGE LOANS DESCRIBED IN THE ATTACHED SCHEDULE:

ALL PAYMENTS OF PRINCIPAL, PREMIUM (IF ANY), AND INTEREST HAVE BEEN MADE.

LOAN NUMBER:_______________________         BORROWER'S NAME:__________

COUNTY:____________________________

WE HEREBY CERTIFY THAT ALL AMOUNTS RECEIVED IN CONNECTION WITH SUCH PAYMENTS,
WHICH ARE REQUIRED TO BE DEPOSITED IN THE COLLECTION ACCOUNT PURSUANT TO SECTION
3.04 OF THE MASTER SUB-SERVICING AGREEMENT, HAVE BEEN OR WILL BE CREDITED.


____________________________________                 DATED:_____________________

/  /   VICE PRESIDENT

/  /   ASSISTANT VICE PRESIDENT

<PAGE>   70

                                    EXHIBIT E

                          FORM OF MODIFICATION SCHEDULE

1.       Parties to and Date of Master Servicing Agreement

2.       Title of Collection Account

3.       Title of Servicing Account

4.       Name and Notice Address of Owner (Trustee)

5.       Name and Notice Address of Certificate Insurer

6.       Name and Notice Address of Rating Agencies

7.       Cut-off Date

8.       Sale Closing Date

9.       Sub-Servicer Remittance Date

10.      Wiring/Account Instructions for Owner

11.      Servicing Fee Rate

12.      Master Servicing Fee Rate

13.      Other

<PAGE>   71

STATE OF ________ )
                                    ) ss.:
COUNTY OF ________  )



                  On the ____ day of April 1997, before me, a notary public in
and for said State, personally appeared ________________, known to me to be
[the] [a] [an] _________________________ of LONG BEACH MORTGAGE COMPANY, one of
the corporations that executed the within instrument, and also known to me to be
the person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.


                                             ______________________________
                                                       Notary Public

[Notarial Seal]

<PAGE>   72

STATE OF ________  )
                                    ) ss.:
COUNTY OF _________ )


                  On the ____ day of April 1997, before me, a notary public in
and for said State, personally appeared _____________, known to me to be [the]
[a] [an] ______________________________, of AMERIQUEST MORTGAGE COMPANY, one of
the corporations that executed the within instrument, and also known to me to be
the person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.




                                                  ______________________________
                                                            Notary Public

[Notarial Seal]