<PAGE>

                                                                    Exhibit 10.1

                             NOVASTAR MORTGAGE, INC.
                                   as Seller,


                      NOVASTAR MORTGAGE FUNDING CORPORATION
                                   as Company,


                            FIRST UNION NATIONAL BANK
                          as Certificate Administrator

                                       and

                                  CITIBANK, N.A
                                   as Trustee





                        MORTGAGE LOAN PURCHASE AGREEMENT


                          Dated as of September 1, 2001

                    Fixed and Adjustable Rate Mortgage Loans

                 NovaStar Mortgage Funding Trust, Series 2001-2

        NovaStar Home Equity Loan Asset-Backed Certificate, Series 2001-2

<PAGE>


                                Table of Contents
                                -----------------

<TABLE>
<CAPTION>


                                                                                            Page
                                                                                            ----
<S>                                                                                         <C>
ARTICLE I DEFINITIONS .....................................................................    1
       Section 1.01 Definitions. ..........................................................    1
ARTICLE II SALE OF MORTGAGE LOANS AND RELATED PROVISIONS ..................................    2
       Section 2.01 Sale of Initial Mortgage Loans and MI Policies.........................    2
       Section 2.02 Conveyance of the Subsequent Mortgage Loans............................    5
       Section 2.03 Pre-Funding Account....................................................    9
       Section 2.04 Interest Coverage Account..............................................    9
ARTICLE III REPRESENTATIONS AND WARRANTIES; REMEDIES FOR BREACH ...........................    9
       Section 3.01 Seller Representations and Warranties..................................    9
       Section 3.02 Company Representations and Warranties.................................   23
       Section 3.03 [Reserved].............................................................   24
ARTICLE IV SELLER'S COVENANTS..............................................................   24
       Section 4.01 Covenants of the Seller................................................   24
       Section 4.02 Payment of Expenses....................................................   24
ARTICLE V CONDITIONS TO INITIAL MORTGAGE LOAN PURCHASE.....................................   25
       Section 5.01 Conditions of Company's Obligations....................................   25
ARTICLE VI INDEMNIFICATION BY THE SELLER  WITH RESPECT TO THE MORTGAGE LOANS...............   26
       Section 6.01 Indemnification With Respect to the Mortgage Loans.....................   26
       Section 6.02 Limitation on Liability of the Seller..................................   26
ARTICLE VII TERMINATION....................................................................   26
       Section 7.01 Termination............................................................   26
ARTICLE VIII MISCELLANEOUS PROVISIONS......................................................   28
       Section 8.01 Amendment..............................................................   28
       Section 8.02 Governing Law..........................................................   28
       Section 8.03 Notices................................................................   28
       Section 8.04 Severability of Provisions.............................................   29
       Section 8.05 Relationship of Parties................................................   29
       Section 8.06 Counterparts...........................................................   29
       Section 8.07 Further Agreements.....................................................   29
       Section 8.08 Intention of the Parties...............................................   30
       Section 8.09 Successors and Assigns; Assignment of Purchase Agreement...............   30
       Section 8.10 Survival...............................................................   31
       Section 8.11 Liability of the Trustee...............................................   31
</TABLE>

                                       i

<PAGE>

     THIS MORTGAGE LOAN PURCHASE AGREEMENT (this "Purchase Agreement"), dated as
of September 1, 2001, is made among NovaStar Mortgage, Inc. (the "Seller"),
NovaStar Mortgage Funding Corporation (the "Company"), First Union National Bank
(the "Certificate Administrator") and Citibank, N.A. (the "Trustee").

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

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

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

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

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

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

     WHEREAS, pursuant to the terms of the REMIC Interests Sale Agreement, the
Company will sell the Retained Certificates to NRFC;

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

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

                                    ARTICLE I

                                   DEFINITIONS

     Section 1.01      Definitions.
                       -----------

     For all purposes of this Purchase Agreement, except as otherwise expressly
provided herein or unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the meanings assigned to such terms in the
Definitions contained in Section 1.01 of the Pooling and Servicing Agreement,
dated as of September 1, 2001, among the Certificate Administrator, the Trustee,
the Company and NovaStar Mortgage, Inc. as seller and servicer (the "Servicer")
which is incorporated by reference herein. All other capitalized terms used
herein shall have the meanings specified herein.

<PAGE>

                                   ARTICLE II

                  SALE OF MORTGAGE LOANS AND RELATED PROVISIONS

     Section 2.01      Sale of Initial Mortgage Loans and MI Policies.
                       ----------------------------------------------

     (a) The Seller hereby sells, and the Company hereby purchases on the
Closing Date the Initial Mortgage Loans identified (and the related MI Policies)
on the Mortgage Loan Schedule annexed hereto as Exhibit 1, the proceeds thereof
and all rights under the Related Documents (including the related Mortgage
Files). The Initial Mortgage Loans consist of two groups of conventional,
residential first lien mortgage loans with fixed and adjustable interest rates,
the Group I Mortgage Loans and the Group II Mortgage Loans. The Initial Mortgage
Loans will have a Principal Balance as of the close of business on the Cut-off
Date, after giving effect to any payments due on or before such date whether or
not received, of approximately $465,500,000. The sale of the Initial Mortgage
Loans will take place on the Closing Date, subject to and simultaneously with
the deposit of the Initial Mortgage Loans and the Original Pre-Funded Amount and
the Interest Coverage Amount into the Trust Fund, the issuance of the Securities
by the Trustee and the sale of the Underwritten Certificates pursuant to the
Underwriting Agreement. The purchase price (the "Purchase Price") for the
Initial Mortgage Loans to be paid by the Company to the Seller on the Closing
Date shall consist of the following:

          (i) a payment in an amount equal to $786,030,000 representing the net
proceeds of the sale of the Underwritten Certificates, which payment shall be
paid to the Seller by wire transfer in immediately available funds on the
Closing Date by or on behalf of the Company, or as otherwise agreed by the
Company; and

          (ii) a payment in an amount equal to $20,000 representing the proceeds
of the sale of the Retained Certificates by the Company to NRFC pursuant to the
REMIC Interests Sale Agreement, which payment shall be paid to the Seller by
wire transfer in immediately available funds on the Closing Date by or on behalf
of the Company, or as otherwise agreed by the Company.

     (b) [Reserved]

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

          (i) the original Mortgage Note endorsed to "Citibank, N.A., as Trustee
of the NovaStar Mortgage Funding Trust, Series 2001-2, relating to the NovaStar
Home Equity Loan Asset-Backed Certificates, Series 2001-2";


                                       2

<PAGE>

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

          (iii) unless the Mortgage Loan is registered on the MERS System, an
original assignment (which may be included in one or more blanket assignments if
permitted by applicable law) of the Mortgage endorsed to "Citibank, N.A., as
Trustee of the NovaStar Mortgage Funding Trust, Series 2001-2, relating to the
NovaStar Home Equity Loan Asset-Backed Certificates, Series 2001-2", and
otherwise in recordable form;

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

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

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

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

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

     Promptly after the Closing Date in the case of an Initial Mortgage Loan or,
in the case of a Subsequent Mortgage Loan, promptly after the Subsequent
Transfer Date (or after the

                                       3

<PAGE>

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

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

     In connection with the assignment of any Initial Mortgage Loan registered
on the MERS System, promptly after the Closing Date, the Seller further agrees
that it will cause, at the Seller's own expense, the MERS System to indicate
that such Initial Mortgage Loan has been assigned by the Seller to the Trustee
in accordance with this Agreement for the benefit of the Certificateholders by
including in such computer files (a) the applicable Trustee code in the field
"[IDENTIFY THE FIELD NAME FOR TRUSTEE]" which identifies the Trustee and (b) the
code "NovaStar 2001-2" (or its equivalent) in the field "Pool Field" which
identifies the series of the Certificates issued in connection with such
Mortgage Loans.

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

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

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

                                       4

<PAGE>

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

     Section 2.02   Conveyance of the Subsequent Mortgage Loans.
                    -------------------------------------------

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

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

                                       5


<PAGE>

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

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

     The related Mortgage File for each Subsequent Mortgage Loan shall be
delivered to the Certificate Administrator, on behalf of the Trustee, two
Business Days prior to the related Subsequent Transfer Date.

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

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

     The purchase price paid by the Certificate Administrator, at the direction
of the Trustee, from amounts released from the Pre-Funding Account shall be
one-hundred percent

                                       6


<PAGE>

(100%) of the aggregate Principal Balances of the Subsequent Mortgage Loans so
transferred (as identified on the Mortgage Loan Schedule attached to the related
Subsequent Transfer Instrument provided by the Seller).

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

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

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

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

         (iv)  such sale and transfer shall not result in a material adverse tax
consequence to the Certificateholders;

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

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

                                       7

<PAGE>

     (c) The obligation of the Trustee to purchase a Subsequent Mortgage Loan
on any Subsequent Transfer Date is subject to the following conditions: (1) each
such Subsequent Mortgage Loan shall satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and this Purchase
Agreement; (2) the Seller shall not select such Subsequent Mortgage Loans in a
manner that it reasonably believes is adverse to the interests of the Majority
Certificateholders; (3) the Seller shall have delivered certain Opinions of
Counsel required pursuant to Section 2.02(b)(vi) hereof; (4) as of the related
Subsequent Cut-off Date, the Subsequent Mortgage Loans shall satisfy the
following criteria: (i) each Subsequent Mortgage Loan shall not be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date; (ii)
the remaining stated term to maturity of each Subsequent Mortgage Loan shall not
exceed 360 months; (iii) the lien securing each Subsequent Mortgage Loan shall
be first priority; (iv) each Subsequent Mortgage Loan shall have an outstanding
Principal Balance of at least $10,000; (v) each Subsequent Mortgage Loan shall
be underwritten in accordance with the Underwriting Guidelines; (vi) each
Subsequent Mortgage Loan shall have a Loan-to-Value Ratio of no more than 100%;
(vii) each Subsequent Mortgage Loan shall have a stated maturity of no later
than January 1, 2032; (viii) no Subsequent Mortgage Loan shall permit negative
amortization; (ix) each Subsequent Mortgage Loan shall either have a fixed
Mortgage Rate of at least 6% or, if an adjustable loan, a Gross Margin of at
least 3%; (x) a minimum of 65% of the Subsequent Mortgage Loans (by Subsequent
Cut-off Date Principal Balance) shall have an adjustable Mortgage Rate; (xi) the
weighted average Loan-to-Value Ratio of the Subsequent Mortgage Loans (by
Subsequent Cut-off Date Principal Balance) shall be no more than 87%; (xii)
approximately 97% of the Subsequent Mortgage Loans shall either (A) have a
Loan-to-Value Ratio of no more than 60% or (B) have a Loan-to-Value Ratio of
greater than 60% and be covered by an MI Policy; (xiii) the Subsequent Mortgage
Loans (by Subsequent Cut-off Date Principal Balance) shall have a weighted
average coupon of at least 9%; (xiv) pursuant to the Underwriting Guidelines, no
fewer than 35% of the Subsequent Mortgage Loans (by Subsequent Cut-off Date
Principal Balance) shall be AAA, ALT-A and AA credit risks, no fewer than 20% of
the Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal Balance)
shall be A and A- credit risks, and no more than 15% of the Subsequent Mortgage
Loans (by Subsequent Cut-off Date Principal Balance) shall be B, C, and C-
credit risks; (xv) no greater than 20% of such Subsequent Mortgage Loans (by
Subsequent Cut-off Date Principal Balance) shall be FICO Enhanced loans pursuant
to the Underwriting Guidelines; (xvi) no more than 15% of such Subsequent
Mortgage Loans (by Subsequent Cut-off Date Principal Balance) shall be FICO only
loans; (xvii) the Subsequent Mortgage Loans (by Subsequent Cut-off Date
Principal Balance) shall have a weighted average FICO score issued by a consumer
credit rating agency of at least 600; (xviii) at least 85% of such Subsequent
Mortgage Loans (by Subsequent Cut-off Date Principal Balance) shall be loans for
primary residences; (xix) no more than 50% of the Subsequent Mortgage Loans (by
Subsequent Cut-off Date Principal Balance) shall have stated loan documentation,
and no more than 15% of the Subsequent Mortgage Loans (by Subsequent Cut-off
Date Principal Balance shall have no loan documentation; (xx) at least 70% of
the Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal Balance)
shall be loans for single family residences; (xxi) no more than 60% of the
Subsequent Mortgage Loans (by Subsequent Cut-off Date Principal Balance) shall
be loans that are the subject of cash-out refinances.

                                       8


<PAGE>

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

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

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

     Section 2.03  Pre-Funding Account.
                   -------------------

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

     Section 2.04  Interest Coverage Account.
                   -------------------------

     (a) No later than the Closing Date, the Certificate Administrator will
establish and maintain, on behalf of the Trustee, pursuant to the Pooling and
Servicing Agreement the Interest Coverage Account. On the Closing Date, the
Trustee will deposit in the Interest Coverage Account the Interest Coverage
Amount from the net proceeds of the sale of the Underwritten Certificates.

                                  ARTICLE III

                         REPRESENTATIONS AND WARRANTIES;
                               REMEDIES FOR BREACH

     Section 3.01  Seller Representations and Warranties.
                   -------------------------------------

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

     (a) As to the Seller:

         (i)   The Seller (i) is a corporation duly organized, validly existing
and in good standing under the laws of the State of Virginia and (ii) is
qualified and in good standing as a foreign corporation to do business in each
jurisdiction where such qualification is necessary,

                                       9


<PAGE>

except where the failure so to qualify would not have a material adverse
effect on the Seller's ability to enter into this Purchase Agreement and each
Seller's Subsequent Transfer Instrument and to consummate the transactions
contemplated hereby and thereby;

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

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

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

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

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

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

                                       10

<PAGE>

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

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

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

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

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

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

         (iii)  No more than 5.00% and 4.00% of the Group I Mortgage Loans and
Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) were secured by condominium units; and no more than 14.00% and 16.00%
of the Group I Mortgage Loans and the Group II Initial Mortgage Loans,
respectively, (by Cut-off Date Principal Balance) were secured by properties in
planned unit developments;

         (iv)   As of the Cut-off Date, the remaining term of each Group I
Mortgage Loan is not more than 360 months and not less than 116 months and the
remaining term of each Group II Initial Mortgage Loan is not more than 360
months and not less than 116 months;

         (v)    No more than 47.00% and 47.00% of the Group I Mortgage Loans and
Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) have been the subject of cash-out refinances;

                                       11


<PAGE>

         (vi)   No more than 11.00% and 10.00% of the Group I Mortgage Loans
and Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) respectively, have been the subject of rate and term (no cash-out)
refinances;

         (vii)  No fewer than 43.00% and 43.00% of the Group I Mortgage Loans
and Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) are purchase money loans;

         (viii) No more than 17.00% and 14.00% of the Group I Mortgage Loans
and the Group II Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) are secured by Mortgaged Properties located in the State of
Florida; no more than 18.00% and 21.00% of the Group I Mortgage Loans and the
Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) are secured by Mortgaged Properties located in the State of California;
and no more than 9.00% and 7.00% of the Group I Mortgage Loans and the Group II
Initial Mortgage Loans, respectively, (by Cut-off Date Principal Balance) are
located in any other state;

         (ix)   The original Principal Balances of the Group I Mortgage Loans
(by Cut-off Date Principal Balance) ranged from $25,000 to $475,000,
respectively; the average outstanding Principal Balance of the Group I Mortgage
Loans is approximately $115,732; the original Principal Balances of the Group II
Initial Mortgage Loans (by Cut-off Date Principal Balance) ranged from $25,000
to $675,000, respectively; the average outstanding Principal Balance of the
Group II Initial Mortgage Loans is approximately $139,472;

         (x)    At least 76.00% and 77.00% of the Group I Mortgage Loans and the
Group II Initial Mortgage Loans, respectively, (by Cut-off Date Principal
Balance) were secured by a first lien on a parcel of real property improved by a
detached single family residence; no more than 6.00% and 3.00% of the Group I
Mortgage Loans and the Group II Initial Mortgage Loans, respectively, (by
Cut-off Date Principal Balance) were secured by a first lien on a parcel of real
estate improved by a two-to four-unit single family residence; and no more than
1.00% and 1.00% of the Group I Mortgage Loans and the Group II Initial Mortgage
Loans, respectively, (by Cut-off Date Principal Balance) were secured by a first
lien on a parcel of real estate improved by manufactured housing;

         (xi)   [Reserved];

         (xii)  The Mortgage Rates borne by the adjustable rate Group I Mortgage
Loans as of the Cut-off Date range from 7.50% and per annum to 13.00% per annum,
and the weighted average Mortgage Rate (by Cut-off Date Principal Balance) of
the adjustable rate Group I Mortgage Loans was 9.88%, per annum; the Mortgage
Rates borne by fixed rate Group I Mortgage Loans as of the Cut-off Date range
from 6.50% per annum to 13.00% per annum, and the weighted average Mortgage Rate
(by Cut-off Date Principal Balance) of the Group I Mortgage Loans was 9.88% per
annum; the Mortgage Rates borne by adjustable rate Group II Initial Mortgage
Loans as of the Cut-off Date range from 7.00% per annum to 12.00% per annum, and
the weighted average Mortgage Rate (by Cut-off Date Principal Balance) of the
Group II Initial Mortgage Loans was 9.75%, per annum; the Mortgage Rates borne
by fixed rate

                                       12


<PAGE>

Group II Initial Mortgage Loans as of the Cut-off Date range from 6.50%
per annum to 13.00% per annum, and the weighted average Mortgage Rate (by
Cut-off Date Principal Balance) of the Group II Initial Mortgage Loans was
10.25% per annum;

         (xiii)  Approximately 63.00% and 46.00% of the Group I Mortgage Loans
and the Group II Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) have a Loan-to-Value Ratio in excess of 80.00%; no Group I
Mortgage Loan or Group II Initial Mortgage Loan in the Mortgage Pool had a
Loan-to-Value Ratio at origination in excess of 100%; and the weighted average
Loan-to-Value Ratio (by Cut-off Date Principal Balance) of the Group I Mortgage
Loans and the Group II Mortgage Initial Mortgage Loans was equal to or less than
83.00% and 82.00%, respectively;

         (xiv)   All of the Initial Mortgage Loans are secured by first liens on
the related Mortgaged Property;

         (xv)    [Reserved]

         (xvi)   There is no valid offset, right of rescission, defense, claim

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

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

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

         (xix)   Each Mortgage is a valid and enforceable first lien on the
Mortgaged Property securing the related Mortgage Note and each Mortgaged
Property is owned by the Mortgagor in fee simple (except with respect to common
areas in the case of condominiums, PUDs and de minimis PUDs) subject only to (1)
                                            -- -------
the lien of nondelinquent current real property taxes and assessments, (2)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage, such
exceptions appearing of record being acceptable to mortgage lending institutions
generally or specifically reflected in the appraisal made in connection with the
origination of the related

                                       13


<PAGE>

Mortgage Loan or referred to in the lender's title insurance policy
delivered to the originator of the related Mortgage Loan and (3) other matters
to which like properties are commonly subject that do not materially interfere
with the benefits of the security intended to be provided by such Mortgage.
Immediately prior to the sale of such Mortgage Loan to the Company in the case
of an Initial Mortgage Loan and to the Trustee in the case of a Subsequent
Mortgage Loan pursuant to this Purchase Agreement, the Seller had full right to
sell and assign the same to the Company or the Trustee, as the case may be.
Immediately following the sale of such Mortgage Loan to the Company and the
Company's assignment and sale thereof of such Mortgage Loan to the Trustee in
the case of an Initial Mortgage Loan, the Trustee will have good title thereto
subject to no claims or liens. Immediately following the sale of such Mortgage
Loan to the Company and the Company's assignment and sale thereof to the Trustee
in the case of a Subsequent Mortgage Loan, the Trustee will have good title
thereto subject to no claims or liens;

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

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

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

                                       14


<PAGE>

         (xxiii)  All of the improvements which were included for the purpose of
determining the Appraised Value of the Mortgaged Property lie wholly within the
boundaries and building restriction lines of such property and no improvements
on adjoining properties encroach upon the Mortgaged Property;

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

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

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

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

         (xxviii) With respect to each Mortgage constituting a deed of trust,

either a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in such Mortgage or if
no duly qualified trustee has been properly designated and so serves, the
Mortgage contains satisfactory provisions for the appointment of such trustee by
the holder of the Mortgage at no cost or expense to such holder,

                                       15

<PAGE>

and no fees or expenses are or will become payable by the
Certificateholders to the trustee under the deed of trust, except in connection
with a trustee's sale after default by the Mortgagor;

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

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

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

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

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

                                       16


<PAGE>

default, breach, violation or event of acceleration; no foreclosure
action is threatened or has been commenced with respect to the Mortgage Loan;

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

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

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

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

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

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

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



                                       17


<PAGE>

         (xli)     91.97% and 92.37% of the adjustable rate Group I Mortgage
Loans and the adjustable rate Group II Initial Mortgage Loans, respectively, (by
Cut-off Date Principal Balance) are Convertible Mortgage Loans;

         (xlii)    Except with respect to no more than 1% of the Initial
Mortgage Loans (by Cut-off Date Principal Balance), none of the payments of
principal of or interest on or in respect of any Initial Mortgage Loans shall be
30 days or more but less than 60 days past due as of the Cut-off Date; except
with respect to no more than 0.5% of the Initial Mortgage Loans (by Cut-off Date
Principal Balance), none of the payments of principal or interest on or in
respect of any Initial Mortgage Loans shall be 60 days or more but less than 90
days past due as of the Cut-off Date; and no Initial Mortgage Loan was 90 days
or more past due as of the Cut-off Date (except that one Initial Mortgage Loan
was past 90 days due as of the Cut-off Date, such loan having been repurchased
by the Seller); (b) except as set forth in clause (a) above, no Initial Mortgage
Loan has been contractually delinquent for more than one monthly installment
period during the twelve months preceding the Cut-off Date; (c) except as set
forth in clause (a) above, all payments required to be made by the Mortgagor
under the terms of the Mortgage Note have been made and credited; and (d) to the
Seller's knowledge, there was no delinquent recording, tax or assessment lien
against the property subject to any Mortgage, except where such lien was being
contested in good faith and a stay had been granted against levying on the
property;

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

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

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

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

                                       18


<PAGE>

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

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

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

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

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

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

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

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


         (lv)      On the basis of a representation by the Mortgagor at the time
of origination of the Mortgage Loans, at least 92.00% and 94.00% of the Group I
Mortgage Loans

                                       19


<PAGE>

and Group II Initial Mortgage Loans, respectively, (by Cut-off Date
Principal Balance) will be secured by Mortgages on owner-occupied primary
residence properties;

         (lvi)     11.25% and 13.56% of the Group I Mortgage Loans and the Group
II Initial Mortgage Loans, respectively, (by Cut-off Date Principal Balance)
provide for a balloon payment and each Mortgage Note with respect to each such
Mortgage Loan requires monthly payments of principal based on 30 year
amortization schedules and have scheduled maturity dates of 15 years from the
due date of the first monthly payment;

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

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

         (lix)     None of the Group I Mortgage Loans are subject to the Home
Ownership and Equity Protection Act of 1994, as amended, or any comparable state
law; no proceeds from any Group I Mortgage Loan were used to finance any single
premium credit insurance policies; none of the Group I Mortgage Loans (by
Cut-off Date Principal Balance) require a mortgagor to pay a Prepayment Charge
if the mortgagor prepays a Mortgage Loan more than five years after the date the
Mortgage Loan was originated.

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

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

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

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

         (lxiv)    Each Mortgage Loan was originated by a mortgagee approved by
the Secretary of Housing and Urban Development pursuant to Sections 203 and 211
of the Act, a

                                       20


<PAGE>

savings and loan association, a savings bank, a commercial bank, credit
union, insurance company or similar institution which is supervised and examined
by a federal or state authority;

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

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

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

         (lxviii)  [Reserved]

         (lxix)    Approximately 99.00% of the Initial Mortgage Loans (by
Cut-Off Date Principal Balance) with a Loan-to-Value Ratio greater than 60% are
covered by an MI Policy issued by an MI Insurer;

         (lxx)     Each of the Initial Mortgage Loans that is identified on
Schedule 1 hereto is covered by a MI Policy issued by the MI Insurer;

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

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

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

     Upon discovery by the Seller or upon notice from the Company, the Trustee,
or the Certificate Administrator, as applicable, of a breach of any
representation or warranty in this subsection (b) with respect to any Mortgage
Loan or upon the occurrence of a Repurchase Event, which materially and
adversely affects the value of the related Mortgage Loan or the interests of

                                       21


<PAGE>

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

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

     Upon receipt by the Trustee of written notification, signed by a Servicing
Officer, of the deposit of such Repurchase Price or of such substitution of an
Eligible Substitute Mortgage Loan and deposit of any applicable Substitution
Adjustment Amount as provided above, the Certificate Administrator shall, on
behalf of the Trustee, cause to be released to the


                                       22

<PAGE>

Seller the related Mortgage File for the Mortgage Loan being repurchased or
substituted for and the Trustee shall execute and deliver such instruments of
transfer or assignment prepared by the Servicer, in each case without recourse,
as shall be necessary to vest in the Seller or its designee such Mortgage Loan
released pursuant hereto and thereafter such Mortgage Loan shall not be an asset
of the Trustee.

     It is understood and agreed that the obligation of the Seller to cure any
breach with respect to or to repurchase or substitute for, any Mortgage Loan as
to which such a breach has occurred and is continuing shall, except to the
extent provided in Section 5.01 of this Purchase Agreement, constitute the sole
remedy respecting such breach available to the Company, the Trustee, the
Certificateholders (or the Certificate Administrator on behalf of the Trustee
for the benefit of Certificateholders) against the Seller.

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

     Section 3.02  Company Representations and Warranties.
                   --------------------------------------

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

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

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

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

     (d) The consummation of the transactions contemplated by this Purchase
Agreement and the fulfillment of the terms hereof do not conflict with, result
in any breach of any of the terms and provisions of, or constitute (with or
without notice or lapse of time) a default under, the articles of incorporation
or bylaws of the Company, or any indenture, agreement or other instrument to
which the Company is a party or by which it is bound; nor

                                       23

<PAGE>

result in the creation or imposition of any Lien upon any of its properties
pursuant to the terms of any such indenture, agreement or other instrument
(other than pursuant to the Basic Documents); nor violate any law or, to the
best of the Company's knowledge, any order, rule or regulation applicable to the
Company of any court or of any federal or state regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over the
Company or its properties.

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

     Section 3.03  [Reserved]

                                   ARTICLE IV

                               SELLER'S COVENANTS

     Section 4.01  Covenants of the Seller.
                   -----------------------

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

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

     Section 4.02  Payment of Expenses.
                   -------------------

     (a) The Seller will pay on the Closing Date all expenses incident to the
performance of its obligations under this Purchase Agreement and the
Underwriting Agreement, including (i) the preparation, printing and any filing
of the preliminary prospectus, Prospectus Supplement and Prospectus (including
any schedules or exhibits and any document incorporated therein by reference)
originally filed and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Underwriter of this Purchase Agreement
and the Underwriting Agreement, the Pooling and Servicing Agreement and such
other documents as may be required in connection with the offering, purchase,
sale and delivery of the Certificates,


                                       24

<PAGE>

(iii) the preparation, issuance and delivery of the certificates for the Class A
Certificates to the Underwriter, including any charges of DTC, CEDEL, S.A. and
the Euroclear System in connection therewith; (iv) the qualification of the
Class A Certificates and Mezzanine Certificates under securities laws in
accordance with the provisions of Section 3(f) of the Underwriting Agreement,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriter in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto for delivery to potential
investors, (v) in addition to the initial printing and filing costs under (i)
above, the printing and delivery to the Underwriter of copies of each
preliminary prospectus and of the Prospectus and any amendments or supplements
thereto for delivery to potential investors, (vi) the fees and expenses of the
Trustee and the Certificate Administrator, including the fees and disbursements
of counsel for the Trustee and the Certificate Administrator in connection with
the Pooling and Servicing Agreement, the Purchase Agreement and the Certificates
and (vii) any fees payable in connection with the rating of the Certificates.

     (b) If the Underwriting Agreement is terminated by the Underwriter in
accordance with the provisions of Section 5 or Section 9(a)(i) thereof, the
Seller shall reimburse the Underwriter for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriter.

                                   ARTICLE V

                  CONDITIONS TO INITIAL MORTGAGE LOAN PURCHASE

     Section 5.01  Conditions of Company's Obligations.
                   -----------------------------------

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

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

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

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

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

                                       25


<PAGE>

                                   ARTICLE VI

                          INDEMNIFICATION BY THE SELLER

                       WITH RESPECT TO THE MORTGAGE LOANS

     Section 6.01  Indemnification With Respect to the Mortgage Loans.
                   --------------------------------------------------

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

     Section 6.02  Limitation on Liability of the Seller.
                   -------------------------------------

     None of the directors, officers, employees or agents of the Seller shall be
under any liability to the Company, it being expressly understood that all such
liability is expressly waived and released as a condition of, and as
consideration for, the execution of this Purchase Agreement. Except as and to
the extent expressly provided in the Basic Documents, the Seller shall not be
under any liability to the Trustee, the Certificate Administrator or the
Certificateholders. The Seller and any director, officer, employee or agent of
the Seller may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
hereunder.

                                  ARTICLE VII

                                   TERMINATION

     Section 7.01  Termination.
                   -----------

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

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

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

                                       26

<PAGE>

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

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

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

         (v)       either (A) a change in control of the Seller shall have
occurred other than in connection with and as a result of the issuance and sale
by the Seller or registered, publicly offered common stock; or (B) the
Underwriter determines in its sole discretion that any material adverse change
has occurred in the management of the Seller,

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

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

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

                                       27

<PAGE>

                                  ARTICLE VIII

                            MISCELLANEOUS PROVISIONS

     Section 8.01  Amendment.
                   ---------

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

     Section 8.02  Governing Law.
                   -------------

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

     Section 8.03  Notices.
                   -------

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

         (i)       if to the Seller:

                   NovaStar Mortgage, Inc.
                   1901 West 47th Place
                   Suite 105
                   Westwood, Kansas 66205
                   Attention: Scott F. Hartman

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

         (ii)      if to the Company:

                   NovaStar Mortgage Funding Corporation
                   1901 W. 47th Place
                   Suite 105
                   Westwood, Kansas 66205
                   Attention: Kelly Meinders

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


                                       28


<PAGE>

         (iii)     if to the Certificate Administrator:

                   First Union National Bank
                   12th Floor, 401 S. Tryon Street, NC 1179
                   Charlotte, North Carolina 28288-1179
                   Attention: Structured Finance Trust Services
                   (NovaStar Mortgage Funding Trust, Series 2001-2)

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

         (iv)      if to the Trustee:

                   Citibank, N.A.
                   111 Wall Street, 14th Floor
                   New York, NY  10005
                   Attention: Structured Finance Group
                   (NovaStar Mortgage Funding Trust, Series 2001-2)

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

     Section 8.04  Severability of Provisions.
                   --------------------------

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

     Section 8.05  Relationship of Parties.
                   -----------------------

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

     Section 8.06  Counterparts.
                   ------------

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

     Section 8.07  Further Agreements.
                   ------------------

     The Company and the Seller each agree to execute and deliver to the other
such additional documents, instruments or agreements as may be necessary or
appropriate to effectuate the purposes of this Purchase Agreement. Each of the
Company and the Seller agrees to use its

                                       29

<PAGE>


best reasonable efforts to take all actions necessary to be taken by it to cause
the Class A-1 Certificates to be rated "Aaa" by Moody's and "AAA" by S&P, the
Class A-2 Certificates to be rated "Aaa" by Moody's and "AAA" by S&P, the Class
A-3 Certificates to be rated "Aaa" by Moody's and "AAA" by S&P, the Class M-1
Certificates to be rated "Aa2" by Moody's and "AA" by S&P, the Class M-2
Certificates to be rated "A2" by Moody's and "A" by S&P, the Class M-3
Certificates to be rated "Baa2" by Moody's and "BBB" by S&P, and each party will
cooperate with the other in connection therewith.

     Section 8.08  Intention of the Parties.
                   ------------------------

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

     Section 8.09  Successors and Assigns; Assignment of Purchase Agreement.
                   --------------------------------------------------------

     This Purchase Agreement shall bind and inure to the benefit of and be
enforceable by the Seller, the Company, the Trustee, the Certificate
Administrator, and their respective successors and assigns. The obligations of
the Seller under this Purchase Agreement cannot be assigned or delegated to a
third party without the consent of the Company, which consent shall be at the
Company's discretion. The parties hereto acknowledge that (i) the Company is
acquiring the Initial Mortgage Loans for the purpose of selling them to the
Trustee, who will in turn pledge the Initial Mortgage Loans to the Trustee for
the benefit of the Certificateholders and (ii) the Company is acquiring the
Subsequent Mortgage Loans for the purpose of selling them to the Trustee, who
will hold the Subsequent Mortgage Loans for the benefit of the
Certificateholders. As an inducement to the Company and the Trustee to purchase
the Mortgage Loans, the Seller acknowledges and consents to (i) the assignment
by the Company to the Trustee of all of the Company's rights or remedies against
the Seller pursuant to this Purchase Agreement and to (ii) the enforcement or
exercise of any rights against the Seller pursuant to this Purchase Agreement by
the Company, the Certificate Administrator and the Trustee. Such enforcement of
a right or

                                       30

<PAGE>

remedy by the Company, the Trustee or the Certificate Administrator, as
applicable, shall have the same force and effect as if the right or remedy had
been enforced or exercised by the Company directly.

     Section 8.10  Survival.
                   --------

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

     Section 8.11  Liability of the Trustee. The Trustee is entering into the
                   ------------------------
Basic Documents to which it is a party solely as Trustee, hereunder and
thereunder, and not in its individual capacity, and all persons having any claim
against the Trustee by reason of the transactions contemplated by this Agreement
or any other Basic Document shall look only to the Trust Fund for payment or
satisfaction thereof.

                                       31


<PAGE>

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

                              NOVASTAR MORTGAGE, INC.
                              as Seller

                              By:
                                 -----------------------------------
                                 Name: Kelly Meinders
                                 Title: Vice President

                              NOVASTAR MORTGAGE FUNDING
                              CORPORATION
                              as Company

                              By:
                                 -----------------------------------
                                 Name: Kelly Meinders
                                 Title: Vice President

                              FIRST UNION NATIONAL BANK
                              as Certificate Administrator

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

                              CITIBANK, N.A.,
                              not in its individual capacity,
                              but solely as Trustee

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

                [Mortgage Loan Purchase Agreement Signature Page]



<PAGE>

                                    EXHIBIT 1

                         INITIAL MORTGAGE LOAN SCHEDULE


<PAGE>

                                  EXHIBIT 2(A)

                     SELLER'S SUBSEQUENT TRANSFER INSTRUMENT

     Pursuant to this Seller's Subsequent Transfer Instrument (the "Seller's
Instrument"), dated as of September 1, 2001, between NovaStar Mortgage, Inc. as
seller (the "Seller"), and NovaStar Mortgage Funding Corporation, as company
(the "Company"), and pursuant to the Mortgage Loan Purchase Agreement, dated as
of September 1, 2001 (the "Purchase Agreement"), among the Seller, the Company,
First Union National Bank, as Certificate Administrator (the "Certificate
Administrator") and Citibank, N.A., as Trustee (the "Trustee"), the Seller and
the Company agree to the sale by the Seller and the purchase by the Company of
the subsequent Mortgage Loans listed on the attached Mortgage Loan Schedule (the
"Subsequent Mortgage Loans") and the related MI Policies.

     Capitalized terms used and not defined herein have their respective
meanings as set forth in the definitions contained in the Pooling and Servicing
Agreement, dated as of September 1, 2001 (the "Pooling and Servicing
Agreement"), between the Trustee, the Certificate Administrator, the Company and
the Seller/Servicer which definitions are incorporated by reference herein. All
other capitalized terms used herein shall have the meanings specified herein.

     Section 1.  Conveyance of Subsequent Mortgage Loans.
                 ---------------------------------------

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

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


<PAGE>

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

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

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

     Section 2.  Representations and Warranties; Conditions Precedent.
                 ----------------------------------------------------

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

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

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

     Section 3.  Recordation of the Seller's Instrument.
                 --------------------------------------

     To the extent permitted by applicable law, this Seller's Instrument, or a
memorandum thereof if permitted under applicable law, is subject to recordation
in all appropriate public offices for real property records in all of the
counties or other comparable jurisdictions in which any or all of the properties
subject to the Mortgages are situated, and in any

                                       2

<PAGE>

other appropriate public recording office or elsewhere, such recordation to be
effected by the Servicer, but only when accompanied by an Opinion of Counsel to
the effect that such recordation materially and beneficially affects the
interests of the Certificateholders or is necessary for the administration or
servicing of the Mortgage Loans.

     Section 4.  Governing Law.
                 -------------

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

     Section 5.  Counterparts.
                 ------------

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

     Section 6.  Successors and Assigns.
                 ----------------------

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

                                       3

<PAGE>

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

                                       NOVASTAR MORTGAGE, INC.,
                                          as Seller

                                          By:
                                             ----------------------------------
                                             Name: Kelly Meinders
                                             Title: Vice President


                                       NOVASTAR MORTGAGE FUNDING
                                          CORPORATION,
                                          as Company

                                          By:
                                             ----------------------------------
                                             Name: Kelly Meinders
                                             Title: Vice President



                                       4

<PAGE>

       NOVASTAR HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2001-2

             ATTACHMENT A TO SELLER'S SUBSEQUENT TRANSFER INSTRUMENT

                               _________ __, 2001

A.   Profile of Subsequent Mortgage Loans:

         1.   Subsequent Cut-off Date:  ____ __, 2001

         2.   Subsequent Transfer Date: ____ __, 2001

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

         4.   Purchase Price:  100.00%

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

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


<PAGE>

                                  EXHIBIT 2(B)

                    COMPANY'S SUBSEQUENT TRANSFER INSTRUMENT

     Pursuant to this Company's Subsequent Transfer Instrument (the "Company's
Instrument"), dated as of _______ __, 2001, between NovaStar Mortgage Funding
Corporation, as company (the "Company"), and Citibank, N.A., as trustee (the
"Trustee"), and pursuant to the Mortgage Loan Purchase Agreement, dated as of
September 1, 2001 (the "Purchase Agreement"), among NovaStar Mortgage, Inc., as
seller (the "Seller"), the Company, First Union National Bank, as Certificate
Administrator ("Certificate Administrator"), and Citibank, N.A., as Trustee (the
"Trustee"), the Company and the Trustee agree to the sale by the Company and the
purchase by the Trustee of the subsequent Mortgage Loans listed on the attached
Mortgage Loan Schedule (the "Subsequent Mortgage Loans") and the related MI
Policies, and the pledge of the Subsequent Mortgage Loans by the Trustee.

     Capitalized terms used and not defined herein have their respective
meanings as set forth in the definitions contained in the Pooling and Servicing
Agreement, dated as of September 1, 2001 (the "Pooling and Servicing
Agreement"), between the Certificate Administrator, the Trustee, the Company and
the Servicer which definitions are incorporated by reference herein. All other
capitalized terms used herein shall have the meanings specified herein.

     Section 1.  Conveyance of Subsequent Mortgage Loans.
                 ---------------------------------------

     (a) The Company does hereby sell, transfer, assign, set over and convey to
the Trustee, without recourse, (i) all of its right, title and interest in and
to the Subsequent Mortgage Loans and the related MI Policies, all scheduled
payments of principal and interest on the Subsequent Mortgage Loans due after
the Subsequent Cut-off Date, and all other payments of principal and interest on
the Subsequent Mortgage Loans collected after the Subsequent Cut-off Date (minus
that portion of any such payment which is allocable to the period prior to the
Subsequent Cut-off Date); provided, however, that no scheduled payments of
principal and interest due on or before the Subsequent Cut-off Date and
collected after the Subsequent Cut-off Date shall belong to the Trustee pursuant
to the terms of this Company's Instrument and (ii) all of its right, title and
interest in and to the Seller's Subsequent Transfer Instrument, dated as of
______ __, 2001 (the "Seller's Instrument"), between the Seller and the Company.
The Company, contemporaneously with the delivery of this Company's Instrument,
has delivered or caused to be delivered to the Certificate Administrator each
item set forth in Section 2.02(b) of the Purchase Agreement with respect to such
Subsequent Mortgage Loans. The transfer to the Trustee by the Company of the
Subsequent Mortgage Loans identified on the attached Mortgage Loan Schedule and
the related MI Policies shall be absolute and is intended by the Company, the
Trustee, the Certificate Administrator and the Certificateholders to constitute
and to be treated as a sale by the Company.

     The parties hereto intend that the transactions set forth herein constitute
a sale by the Company to the Trustee on the Subsequent Transfer Date of all the
Company's right, title and interest in and to the Subsequent Mortgage Loans and
the related MI Policies, and other property

                                       1

<PAGE>

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

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

     Section 2.  Representations and Warranties; Conditions Precedent.
                 ----------------------------------------------------

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

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

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

     Section 3.  Grant from Trustee to Certificate Administrator.
                 -----------------------------------------------

     The Trustee, as trustee for the benefit of the Certificateholders, hereby
grants as of the Subsequent Transfer Date to the Certificate Administrator, to
secure all of the Trustee's obligations under the Pooling and Servicing
Agreement, all of the Trustee's right, title and interest in and to, whether now
existing or hereafter created, (a) the Subsequent Mortgage Loans, the related MI
Policies and the proceeds thereof and all rights under the Related Documents
(including the related Mortgage Files); (b) all funds on deposit from time to
time in the

                                       2

<PAGE>

Collection Account allocable to the Subsequent Mortgage Loans, excluding any
investment income from such funds; (c) all its rights under the Seller's
Instrument and this Company's Instrument; and (d) all present and future claims,
demands, causes and choses in action in respect of any or all of the foregoing
and all payments on or under, and all proceeds of every kind and nature
whatsoever in respect of, any or all of the foregoing and all payments on or
under, and all proceeds of every kind and nature whatsoever in the conversion
thereof, voluntary or involuntary, into cash or other liquid property, all cash
proceeds, accounts, accounts receivable, notes, drafts acceptances, checks,
deposit accounts, rights to payment of any and every kind, and other forms of
obligations and receivables, instruments and other property which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing.

     Section 4.  Recordation of Instrument.
                 -------------------------

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

     Section 5.  Governing Law.
                 -------------

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

     Section 6.  Counterparts.
                 ------------

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

     Section 7.  Successors and Assigns.
                 ----------------------

     This Company's Instrument shall inure to the benefit of and be binding upon
the Company and the Trustee and their respective successors and assigns. The
Certificate Administrator shall be an express third party beneficiary hereto.

                                       3

<PAGE>

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

                             NOVASTAR MORTGAGE FUNDING
                             CORPORATION,
                             as Company

                             By:
                                -----------------------------------
                                Name: Kelly Meinders
                                Title: Vice President

                             CITIBANK, N.A.
                             as Trustee

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


                             Acknowledged and Agreed:

                             FIRST UNION NATIONAL BANK,
                             as Certificate Administrator

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


                                        4