SCHEDULE
 
                             TO THE 

                         MASTER AGREEMENT

                   DATED AS OF APRIL 30, 1998 

                             BETWEEN

       MERRILL LYNCH CAPITAL SERVICES, INC., a corporation
               organized under the laws of Delaware
                           ("PARTY A")

                               and

     NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-1, a Trust 
               organized under the laws of Delaware
                           ("PARTY B")

                              PART 1

                      TERMINATION PROVISIONS
In this Agreement:-

(a)  "SPECIFIED ENTITY" means in relation to Party A for the
purpose of:-

Section 5(a)(v),    Not Applicable
Section 5(a)(vi),   Not Applicable
Section 5(a)(vii),  Not Applicable
Section 5(b)(iv),   Not Applicable

     in relation to Party B for the purpose of:-

Section 5(a)(v),    Not Applicable
Section 5(a)(vi),   Not Applicable
Section 5(a)(vii),  Not Applicable
Section 5(b)(iv),   Not Applicable

(b)  "SPECIFIED TRANSACTION" will have the meaning specified in
Section 14 of this Agreement unless another meaning is specified
here:  No change from Section 14.

(c)  The "CROSS DEFAULT" provisions of Section 5(a)(vi) will
apply to Party A and to Party B.

If such provisions apply:-

"SPECIFIED INDEBTEDNESS" will have the meaning specified in
Section 14 of this Agreement unless another meaning is specified
here:  No change from Section 14.

"THRESHOLD AMOUNT" means, in respect of Party A, U.S. $35,000,000
or its equivalent in other currencies, and in respect of Party B,
U.S. $35,000,000 or its equivalent in other currencies.

(d)  The "CREDIT EVENT UPON MERGER" provisions of Section
5(b)(iv) will apply to Party A and Party B.  Notwithstanding
Section 5(b)(iv) of this Agreement, "Credit Event Upon Merger"
means that a Designated Event (as defined below) occurs with
respect to a party, any Credit Support Provider of such party or
any Specified Entity of such party and such action does not
constitute an event described in Section 5(a)(viii) but that, in
the reasonable opinion of the other party, the creditworthiness
of the successor, surviving or transferee entity taking into
account any applicable Credit Support Document (which will be the
Affected Party) is materially weaker than that of its
predecessor, immediately prior to the occurrence of the
Designated Event.  For purposes hereof, a Designated Event means
that, after the Trade Date of a Transaction:




<PAGE> 




     (i)  the party consolidates or amalgamates with, or merges
          with or into, or transfers all or substantially all its
          assets (or any substantial part of the assets
          comprising the business conducted by that party as of
          the Trade Date of that Transaction) to, or receives all
          or substantially all the assets and obligations of,
          another entity;

     (ii) any person or entity acquires directly or indirectly
          the beneficial ownership of equity securities having
          the power to elect a majority of the board of directors
          of the party; or

    (iii) the party enters into any agreement providing for any
          of the foregoing.

(e)  The "AUTOMATIC EARLY TERMINATION" provision of Section 6(a)
will not apply to Party A or to Party B.

(f)  PAYMENTS ON EARLY TERMINATION.  For the purpose of Section
6(e) of this Agreement:-

     (i)  Market Quotation will apply.

     (ii) The Second Method will apply.

(g)  "TERMINATION CURRENCY" means United States Dollars.

(h)  ADDITIONAL TERMINATION EVENT will not apply.







                             PART 2 

                       TAX REPRESENTATIONS 

(a)  PAYER REPRESENTATIONS.  For the purpose of Section 3(e) of
this Agreement, Party A will make the following representation
and Party B will make the following representation:-

     It is not required by any applicable law, as modified by the
     practice of any relevant governmental revenue authority, of
     any Relevant Jurisdiction to make any deduction or
     withholding for or on account of any Tax from any payment
     (other than interest under Section 2(e), 6(d)(ii) or 6(e) of
     this Agreement) to be made by it to the other party under
     this Agreement.  In making this representation, it may rely
     on (i) the accuracy of any representations made by the other
     party pursuant to Section 3(f) of this Agreement, (ii) the
     satisfaction of the agreement contained in Section 4(a)(i)
     or 4(a)(iii) of this Agreement and the accuracy and
     effectiveness of any document provided by the other party
     pursuant to Section 4(a)(i) or 4(a)(iii) of this Agreement
     and (iii) the satisfaction of the agreement of the other
     party contained in Section 4(d) of this Agreement, provided
     that it shall not be a breach of this representation where
     reliance is placed on clause (ii) and the other party does
     not deliver a form or document under Section 4(a)(iii) by
     reason of material prejudice to its legal or commercial
     position.

(b)  PAYEE REPRESENTATIONS.  For the purpose of Section 3(f) of
this Agreement, Party A and Party B make the representations
specified below:-

     (i)  The following representation WILL NOT apply to Party A
          and WILL NOT apply to Party B:-

          It is fully eligible for the benefits of the "Business
          Profits" or "Industrial and Commercial Profits"
          provision, as the case may be, the "Interest" provision
          or the "Other Income" provision (if any) of the
          Specified Treaty with respect to any payment described
          in such provisions and received or to be received by it
          in connection with this Agreement and no such payment
          is attributable to a trade or business carried on by it
          through a permanent establishment in the Specified
          Jurisdiction.
          






<PAGE> 




                              PART 3

                    DOCUMENTS TO BE DELIVERED


For the purpose of Sections 4(a)(i) and (ii) of this Agreement,
each party agrees to deliver the following documents as
applicable:-

(a)  Tax forms, documents or certificates to be delivered are:-
None.

(b)  Other Documents to be delivered are:-

Party Required                          Date by   Covered by Section 
to deliver          Form/Document/      which to be         3(d)
Document            Certificate         Delivered    Representation

Party A/     Annual audited financial        Promptly after   Yes.
Party B.     statements (in the case of      request.
             Party A, of its Credit Support 
             Provider) prepared in accordance 
             with generally accepted accounting 
             principles in the country in which 
             the party is organized.

Party A/     Quarterly unaudited financial   Promptly after   Yes.
Party B.     statements (in the case of      request.
             Party A, of its Credit Support 
             Provider) prepared in accordance 
             with generally accepted accounting 
             principles in the country in which 
             the party is organized.

Party A/     A duly executed copy of the     At execution      No.
Party B.     Credit Support Document         hereof.
             specified in Part 4 of the 
             Schedule.

Party A.     Opinion of inside counsel in    At the            No.
             respect of this Agreement and   execution of 
             Party A's Credit Support        this 
             Document.                       Agreement.








<PAGE> 




                             PART 4

                          MISCELLANEOUS

(a)  ADDRESSES FOR NOTICES:  For the purpose of Section 12(a) of
this Agreement:-

Address for notices or communications to Party A:-

Address:            Merrill Lynch World Headquarters, World
                    Financial Center, North Tower, 22nd Floor,
                    250 Vesey Street, New York, New York 
                    10281-1322
Attention:          Swap Group
Telex No.:          6716341        Answerback:    MLB SCTR
Facsimile No.:      212 449-1788   Telephone No.: 212 449-0291

(For all purposes)

Additionally, a copy of all notices pursuant to Sections 5, 6 and
7 as well as any changes to Party B's address, telephone number
or facsimile number should be sent to:

          CICG Counsel
          Merrill Lynch World Headquarters, World Financial
          Center, North Tower, 23rd Floor 250 Vesey Street, New
          York, New York  10281-1323
          Attention:     Swaps Legal
          Facsimile No.: 212 449-6993

Address for notices or communications to Party B:-

NovaStar Mortgage Funding Trust, Series 1998-1
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
ATTN:  Corporate Trust Administration
Facsimile: (302) 651-1576,

with copies to:

First Union National Bank
230 South Tryon Street, NC 1179
Charlotte, North Carolina 28288
ATTN:  Corporate Trust Administration
Facsimile:  (704) 383-6039; and

MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
ATTN:     Insured Portfolio Mgmt -SF (NovaStar Mortgage Funding
          Trust, Series 1998-1)
Facsimile: (914) 765-3810

(For all purposes)

(b)  PROCESS AGENT.  For the purpose of Section 13(c):-

Party A appoints as its Process Agent:  Not Applicable

Party B appoints as its Process Agent:  Not Applicable

(c)  OFFICES.  The provisions of Section 10(a) will apply to this
Agreement.




<PAGE> 




(d)  MULTIBRANCH PARTY.  For the purpose of Section 10(c) of this
Agreement:

Party A is not a Multibranch Party.

Party B is not a Multibranch Party.

(e)  CALCULATION AGENT.  The Calculation Agent is Party A, unless
otherwise specified in a Confirmation in relation to the relevant
Transaction.

(f)  CREDIT SUPPORT DOCUMENT. Details of any Credit Support
Document:-

Party A:-  Guarantee of Merrill Lynch & Co., Inc. ("ML & Co.") in
the form attached hereto as Exhibit A.

Party B:-  The Swap Policy (as defined below) and the Indenture,
dated as of April 1, 1998 (the "Indenture"), between Party B and
First Union National Bank, as Indenture Trustee.

(g)  CREDIT SUPPORT PROVIDER.  

Credit Support Provider means in relation to Party A, ML & Co.

Credit Support Provider means in relation to Party B, Not
Applicable.

(h)  GOVERNING LAW.  This Agreement will be governed by and
construed in accordance with the laws of the State of New York
without reference to choice of law doctrine.

(i)  NETTING OF PAYMENTS.  Subparagraph (ii) of Section 2(c) of
this Agreement will not apply to all Transactions under this
Agreement following 15 days prior notice from one party to the
other.
 
(j)  "AFFILIATE" will have the meaning specified in Section 14 of
this Agreement.


                             PART 5 

                        OTHER PROVISIONS 

(1)  Section 3 of the Agreement is hereby amended by adding at
the end thereof the following subsection (g):

     "(g) ELIGIBLE SWAP PARTICIPANT.  It is an "eligible swap
     participant" within the meaning of Part 35.1(b)(2) of the
     General Regulations under the Commodity Exchange Act."

(2)  Notwithstanding the provisions of Section 7, Party A may
assign and delegate its rights and obligations under any
Transaction to any subsidiary of ML & Co. organized under the
laws of any State of the United States of America  effective upon
delivery to Party B of an assumption by such subsidiary and  a
Guarantee of the obligations of such subsidiary in the form of
Exhibit A hereto.

(3)  Without affecting the provisions of this Agreement requiring
the calculation of certain net payment amounts, all payments
under this Agreement will be made without setoff or counterclaim;
provided, however, that upon the designation or deemed
designation of any Early Termination Date, in addition to and not
in limitation of any other right or remedy (including any right
to setoff, counterclaim, or otherwise withhold payment) under
applicable law:

     the non-Defaulting Party or non-Affected Party (in either
     case, "X") may set off any sum or obligation  arising under
     this Agreement (whether matured or unmatured) owed or due by
     the Defaulting Party or Affected Party (in either case, "Y")
     to X against any sum or obligation arising under this
     Agreement  (whether matured or unmatured) owed or due by X
     (the "Original Obligation") to Y, and, for this purpose, may
     convert one currency into another.  Any such setoff shall
     automatically satisfy and discharge the Original Obligation
     and the obligation so set off and, if the Original
     Obligation exceeds the sum or obligation to be set off
     against, the Original Obligation shall be novated and
     replaced by an obligation to pay Y only the excess of the
     Original Obligation over such sum or obligation.

(4)  If by reason of the time difference between the cities in
which payments are to be made, it is not possible for
simultaneous payments to be made on any date on which both
parties are required to make payments hereunder, either party may
at its option and in its sole discretion notify the other party
that payments on that date are to be made in escrow.  In this
case deposit of the payment due earlier on that date shall be
made by 2:00 p.m. (local time at the place for the earlier
payment) on that date with an escrow agent selected by the
notifying party, accompanied by irrevocable payment instruction
(i) to release the deposited payment to the intended recipient
upon receipt by the escrow agent of <PAGE> the required deposit of the
corresponding payment from the other party on the same date
accompanied by irrevocable payment instructions to the same
effect or (ii) if the required deposit of the corresponding
payment is not made on that same date, to return the payment
deposited to the party that paid it in escrow.  The party that
elects to have payments made in escrow shall pay the costs of the
escrow arrangements and shall cause those arrangements to provide
that the intended recipient of the payment due to be deposited
first shall be entitled to interest on that deposited payment for
each day in the period of its deposit at the rate offered by the
escrow agent for that day for overnight deposits in the relevant
currency in the office where it holds that deposited payment (at
11:00 a.m. local time on that day) if that payment is not
released by 5:00 p.m. local time on the date it is deposited for
any reason other than the intended recipient's failure to make
the escrow deposit it is required to make hereunder in a timely
fashion.

(5)  Party B acknowledges and agrees that (i) Party A is acting
solely in the capacity of an arm's-length contractual
counterparty with respect to this Agreement and any Transaction
hereunder, (ii) Party A is not acting as a financial advisor or
fiduciary of Party B (or in any similar capacity) with respect to
this Agreement and any Transaction hereunder and (iii) any advice
given by Party A under or in connection with this Agreement or
any Transaction is and will be merely incidental to the provision
of Party A's services hereunder and does not and will not serve
as a primary basis of any investment decision by Party B. Party B
represents to Party A (which representation shall be deemed to be
repeated by Party B on each date on which a Transaction is
entered into) that its decision to enter into each Transaction
has been based solely on the independent evaluation of Party B
and its representatives.





                             PART 6 

                         MBIA PROVISIONS

          The following provisions shall apply to any
Transactions to which the Interest Rate Swap Insurance Policy
issued on April 30, 1998 (the "Swap Policy") by MBIA Insurance
Corporation ("MBIA"), for the account of Party B, as principal,
and for the benefit of Party A, as beneficiary, relates ("Insured
Transactions").

     (i)  Designation of Early Termination Date.  Notwithstanding
          anything to the contrary in Section 6 of this
          Agreement, if any:

          (A)  Event of Default in respect of any Insured
               Transaction under this Agreement occurs, or

          (B)  any Termination Event in respect of any Insured
               Transaction under this Agreement occurs (other
               than the Additional Termination Event described at
               (iii) below),

          then, in either case, neither Party A nor Party B shall
          designate an Early Termination Date in respect of any
          such Insured Transaction unless:

          (Y)  MBIA has failed to pay any payment due to Party A
               under the terms and conditions of the Swap Policy;
               or

          (Z)  MBIA has otherwise consented in writing to such
               designation.

     (ii) MBIA-directed termination.  If any Event of Default
          under this Agreement occurs with respect to Party B as
          the Defaulting Party, then MBIA (so long as it has not
          failed to pay any payment due to Party A under the
          terms and conditions of the Swap Policy) shall have the
          right (but not the obligation) upon notice to Party A
          and Party B to designate an Early Termination Date with
          respect to Party B with the same effect as if such
          designation were made by Party A.  For purposes of the
          foregoing sentence, an Event of Default with respect to
          Party B shall be considered to be continuing,
          notwithstanding any payment by MBIA under the Swap
          Policy.  The parties acknowledge that, except as the
          Swap Policy may be otherwise endorsed, unless MBIA
          designates an Early Termination Date (as opposed to
          merely consenting to such designation by one of the
          parties) pursuant to its right to do so hereunder
          payments due from Party B because an Early Termination
          Date has been designated will not be insured.




<PAGE> 




   (iii)  Additional Termination Event.  Additional Termination
          Events will apply.  The following shall constitute an
          Additional Termination Event:

          (A)  MBIA fails to meet its payment obligations under
               the Swap Policy and such failure is continuing
               with respect to MBIA under the Swap Policy; or

          (B)  MBIA fails at any time during the term of this
               Agreement to have (a) a claim paying ability
               rating of at least A- or higher from Standard &
               Poor's Ratings Services, a division of The
               McGraw-Hill Companies, Inc. or (b) a financial
               strength rating of at least A3 or higher from
               Moody's Investors Service, Inc.; provided,
               however, that additionally:

               (X)  an Event of Default has occurred or is
                    continuing with respect to Party B as the
                    Defaulting Party; or

               (Y)  a Termination Event has occurred or is
                    continuing with respect to Party B.

               For the purpose of the foregoing Termination
               Event, the "Affected Party" shall be Party B.

          (C)  The long-term senior unsecured debt rating of
               Party A's Credit Support Provider from:

               (a)  S&P is withdrawn, suspended or falls to or
                    below "A-"; or

               (b)  Moody's is withdrawn, suspended or falls to
                    or below "A3"; and

               Party A has not, within 30 days executed a
               collateral agreement with Party B, MBIA and a
               third-party collateral agent providing for the
               collateralization of Party A's obligations under
               the Agreement as measured by the estimated
               Settlement Amount, such amount to be established
               by Party A monthly and on demand, collateral to be
               marked-to-market weekly; provided that the
               collateral, collateral levels, collateral agent
               and terms of such collateral agreement must all be
               reasonably satisfactory to MBIA, it being
               understood that cash and United States treasury
               and agency securities shall be deemed reasonably
               satisfactory to MBIA (a "Collateral Agreement").

               For the purpose of the foregoing Termination
               Event, the "Affected Party" shall be Party A.

          (D)  The long-term senior unsecured debt rating of
               Party A's Credit Support Provider from (a) S&P is
               withdrawn, suspended or falls to or below "BBB+";
               or (b) from Moody's is withdrawn, suspended or
               falls to or below "Baa1."

               For the purpose of the foregoing Termination
               Event, the "Affected Party" shall be Party A. 

     (iv) No suspension of payments.  Notwithstanding Section
          2(a)(iii) of this Agreement, Party A shall not suspend
          any payments due under an Insured Transaction under
          Section 2(a)(iii) unless:

          (A)  MBIA is in default in respect of any payment
               obligations under the Swap Policy; or

          (B)  MBIA has not provided to Party A, in accordance
               with the terms of this Agreement, any ministerial
               notices (including, and limited to, wire
               instructions for payments) required by this
               Agreement to be provided by Party B to Party A,
               which notices Party B has failed to provide, and
               Party A has given three (3) Business Days' notice
               to MBIA of such failure.

     (v)  Collateral.  If the long term senior unsecured debt
          rating of Party A's Credit Support Provider from:

          (a)  S&P is withdrawn, suspended or falls to or below
               "A-"; or




<PAGE> 




          (b)  Moody's is withdrawn, suspended or falls to or
               below "A3"; and

          then Party A will, within 30 days, execute a Collateral
          Agreement with Party B, MBIA and a third-party
          collateral agent.

     (vi) Replacement.  Party A agrees that if Party B or MBIA
          has a right to designate an Early Termination Date
          pursuant to Part 6 (iii)(C) or (D) above, then, upon
          the request of MBIA or Party B with the consent of
          MBIA, Party A shall procure a replacement Transaction
          at its own expense (and at no expense to Party B) with
          a swap counterparty on the same terms as this Agreement
          mutatis mutandis, or else with such amendments to the
          terms of this Agreement as have been approved by S&P,
          Moody's and MBIA.

    (vii) Representations and agreements.  Each party agrees that
          each of its representations and agreements in this
          Agreement is expressly made to and for the benefit of
          MBIA.

   (viii) Third-party beneficiary.  Party A and Party B hereby
          each acknowledge and agree that MBIA shall be an
          express third-party beneficiary (and not merely an
          incidental third-party beneficiary) of this Agreement
          and the obligations of such party under any Insured
          Transaction, and as such, entitled to enforce the
          Agreement and the terms of any such Insured Transaction
          against such party on its own behalf and/or on behalf
          of the holders of the Bonds (as defined in the
          Indenture referenced above) and otherwise shall be
          afforded all remedies available hereunder or otherwise
          afforded by law against the parties hereto to redress
          any damage or loss incurred by MBIA including, but not
          limited to, fees (including professional fees), costs
          and expenses incurred by MBIA which are related to, or
          resulting from any breach by such party of its
          obligations hereunder.

     (ix) Policy coverage.  Party A and Party B hereby each
          acknowledge and agree that MBIA's obligation with
          respect to Insured Transactions shall be limited to the
          terms of the Swap Policy.  Notwithstanding Section 2(e)
          or any other provision of this Agreement, MBIA shall
          not have any obligation to pay interest on any amount
          payable by Party B under this Agreement.

     (x)  Subrogation.  Notwithstanding any other term of this
          Agreement, Party A and Party B hereby acknowledge that
          to the extent of payments made by MBIA to Party A under
          the Swap Policy, MBIA shall be fully subrogated to the
          rights of Party A against Party B under the Insured
          Transaction to which such payments relate, including,
          but not limited to, the right to receive payment from
          Party B and the enforcement of any remedies. 
          Notwithstanding any other term of this Agreement, Party
          A hereby agrees to assign to MBIA its right to receive
          payment from Party B under any Insured Transactional
          the extent of any payment thereunder by MBIA to Party
          A.  Party B hereby acknowledges and consents to the
          assignment by Party A to MBIA of any rights and
          remedies that Party A has under any Insured Transaction
          or any other document executed in connection herewith.

     (xi) Isolation of Insured Transactions in designating an
          Early Termination Date.  Notwithstanding Section 6 of
          this Agreement, any designation of an Early Termination
          Date in respect of the Insured Transactions by MBIA or
          by Party A with the consent of MBIA pursuant to
          paragraph (i) above shall apply only to the Insured
          Transactions and not to any other Transaction under
          this Agreement, unless Party A shall designate an Early
          Termination Date in respect of such other Transaction. 
          Nothing contained in this paragraph (xi) shall affect
          the rights of Party A under this Agreement to designate
          an Early Termination Date in respect of any Transaction
          other than the Insured Transactions, which designation
          shall not apply to the Insured Transactions unless
          expressly provided in such designation and unless MBIA
          shall have designated, or consented to the designation
          by Party A of, an Early Termination Date in respect of
          the Insured Transactions in accordance with paragraph
          (i) above.




<PAGE> 




    (xii) No netting.  Notwithstanding Section 2(c) of this
          Agreement, in no event shall either Party A or Party B
          be entitled to net its payment obligations in respect
          of the Insured Transactions against the payment
          obligations of the other party in respect of other
          Transactions under this Agreement if such Transactions
          are not Insured Transactions, nor may either Party A or
          Party B net the payment obligations of the other party
          under Transactions that are not Insured Transactions
          against the payment obligations of such party under
          Insured Transactions, it being the intention of the
          parties that their payment obligations under Insured
          Transactions be treated separate and apart from all
          other Transactions.  Section 6(e) of this Agreement
          shall apply to all Insured Transactions with the same
          effect as if the Insured Transactions constituted a
          single master agreement.  Notwithstanding Section 6(e)
          of this Agreement, the amount payable under Section
          6(e) of this Agreement upon the termination of any
          Insured Transaction shall be determined without regard
          to any Transactions other than the Insured
          Transactions, it being the intention of the parties
          that their payment obligations under the Insured
          Transactions be treated separate and apart from all
          other Transactions unless otherwise specified in such
          other Transaction and agreed to in writing by MBIA.

   (xiii) No set-off or counterclaim.  In no event shall either
          Party A or Party B be entitled to:

          (A)  set-off its payment obligations in respect of an
               Insured Transaction against the payment
               obligations of the other party (whether by
               counterclaim or otherwise) if such obligations are
               not Insured Transactions, or

          (B)  net the payment obligations of the other party
               that are not with respect to Insured Transactions
               against the payment obligations of such party
               under Insured Transactions,

               it being the intention of the parties that their
               payment obligations under Insured Transactions be
               treated separate and apart from all other
               obligations.  Notwithstanding Section 6(e) of this
               Agreement, the amount payable under Section 6(e)
               of this Agreement upon the termination of any
               Insured Transaction shall be determined without
               regard to any obligation other than those under
               the Insured Transactions, it being the intention
               of the parties that their payment obligations
               under the Insured Transactions be treated separate
               and apart from all other obligations unless
               otherwise specified in such other obligation and
               agreed to in writing by MBIA.

   (xiv)  Expenses.  Party B agrees to reimburse MBIA immediately
          and unconditionally upon demand for all reasonable
          expenses incurred by MBIA in connection with the
          issuance of the Swap Policy and the enforcement by MBIA
          of Party B's obligations under this Agreement and any
          other documents executed in connection with the
          execution and delivery of this Agreement, including,
          but not limited to, fees (including professional fees),
          costs and expenses incurred by MBIA which are related
          to, or resulting from any breach by Party B of its
          obligations hereunder.

     (xv) Transfers/Assignments.  Notwithstanding Section 7 of
          the Agreement, no Insured Transaction may be assigned
          by either Party A or Party B without the prior written
          consent of MBIA.  However Party A may make such an
          assignment to an affiliate of Party A without MBIA's
          prior written consent, if Party A (or the entity
          currently guaranteeing the obligations of Party A, if
          any) provides a guaranty of the Swap, as assigned,
          acceptable to MBIA (it being understood that a guaranty
          substantially in the form of the guaranty delivered to
          MBIA by Party A's Credit Support Provider in connection
          with the execution of this Agreement shall be
          acceptable).

    (xvi) Amendments/waivers.  Section 9(b) of the Agreement is
          hereby amended by (A) adding the words "or any Credit
          Support Document" after the word "Agreement" in the
          first line thereof and (B) adding the phrase "and MBIA"
          following the words "parties" in the third line
          thereof.




<PAGE> 




   (xvii) Notices.  A copy of each notice or other communication
          between the parties with respect to this Agreement must
          be forwarded to MBIA.

  (xviii) "Reference Market Makers."  The definition of
          "Reference Market-makers" set forth in Section 12 of
          the Agreement shall be amended in its entirety to read
          as follows:

          "Reference Market-makers" means four (4) leading
          dealers in the relevant swap market selected by the
          party determining a Market Quotation in good faith (a)
          from among dealers of the highest credit standing which
          satisfy all the criteria that such party applies
          generally at the time in deciding whether to offer or
          to make an extension of credit and (b) to the extent
          practicable, from among dealers having an office in the
          same city.  The rating classification assigned to any
          outstanding long-term senior debt securities issued by
          such dealers shall be at least (1) "Aa" or higher as
          determined by Moody's Investors Service Inc., (2) "AA"
          or higher as determined by Standard & Poor's Ratings
          Services, a division of The McGraw-Hill Companies, Inc.
          or (3) an equivalent investment grade rating determined
          by a nationally-recognized rating service acceptable to
          both parties, provided, however, that, in any case, if
          Market Quotations cannot be determined by four (4) such
          dealers, the party making the determination of the
          Market Quotation may designate, with the consent of the
          other party and MBIA, one (1) or more leading dealers
          whose long-term senior debt bears a lower investment
          grade rating.

<PAGE>

                            Attachment A

              GUARANTEE OF MERRILL LYNCH & CO., INC.


     FOR VALUE RECEIVED, receipt of which is hereby acknowledged,
MERRILL LYNCH & CO., INC., a corporation duly organized and
existing under the laws of the State of Delaware ("ML & CO."),
hereby unconditionally guarantees to NOVASTAR MORTGAGE FUNDING
TRUST, SERIES 1998-1 (the "Company"), its successors and
permitted assigns, the due and punctual payment of any and all
amounts payable by Merrill Lynch Capital Services, Inc., a
corporation organized under the laws of the State of Delaware
("MLCS"), under the terms of the Master Agreement between the
Company and MLCS, dated as of April 30, 1998 (the "Agreement"),
including, in case of default, expenses of collection, interest
on any amount due, when and as the same shall become due and
payable, whether on the scheduled payment dates, at maturity,
upon declaration of termination or otherwise, according to the
terms thereof.  In case of the failure of MLCS punctually to make
any such payment, ML & Co. hereby agrees to make such payment, or
cause such payment to be made, promptly upon demand made by the
Company to ML & Co.; provided, however that delay by the Company
in giving such demand shall in no event affect ML & Co.'s
obligations under this Guarantee.  This Guarantee shall remain in
full force and effect or shall be reinstated (as the case may be)
if at any time any payment guaranteed hereunder, in whole or in
part, is rescinded or must otherwise be returned by the Company
upon the insolvency, bankruptcy or reorganization of MLCS or
otherwise, all as though such payment had not been made.

     ML & Co. hereby agrees that its obligations hereunder shall
be unconditional, irrespective of the validity, regularity or
enforceability of the Agreement; the absence of any action to
enforce the same; any waiver or consent by the Company concerning
any provisions thereof; the rendering of any judgment against
MLCS or any action to enforce the same; or any other
circumstances that might otherwise constitute a legal or
equitable discharge of a guarantor or a defense of a guarantor. 
ML & Co. covenants that this guarantee will not be discharged
except by complete payment of the amounts payable under the
Agreement.  This Guarantee shall continue to be effective if MLCS
merges or consolidates with or into another entity, loses its
separate legal identity or ceases to exist.

     ML & Co. hereby waives diligence; presentment; protest;
notice of protest, acceleration, and dishonor; filing of claims
with a court in the event of insolvency or bankruptcy of MLCS;
all demands whatsoever, except as noted in the first paragraph
hereof; and any right to require a proceeding first against MLCS. 
ML & Co.  further waives any right of subrogation to the rights
of the Company until such time as all obligations of MLCS to the
Company under the Agreement have been discharged in full.

     ML & Co. hereby certifies and warrants that this Guarantee
constitutes the valid obligation of ML & Co. and complies with
all applicable laws.

     This Guarantee shall be governed by, and construed in
accordance with, the laws of the State of New York.

     This Guarantee may be terminated at any time by notice by ML
& Co. to the Company given in accordance with the notice
provisions of the Agreement, effective upon receipt of such
notice by the Company or such later date as may be specified in
such notice; provided, however, that this Guarantee shall
continue in full force and effect with respect to any obligation
of MLCS under the Agreement entered into prior to the
effectiveness of such notice of termination.
 
     This Guarantee becomes effective concurrent with the
effectiveness of the Agreement, according to its terms.

     IN WITNESS WHEREOF, ML & Co. has caused this Guarantee to be
executed in its corporate name by its duly authorized
representative.

                                   MERRILL LYNCH & CO., INC.

                                   By:_________________________
                                   Name:
                                   Title:
                                   Date:_________________________

<PAGE>

                          Attachment B

FAX:           302 651 1576

DATE:          APRIL 30, 1998

TO:            NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-1 C/O
               WILMINGTON TRUST COMPANY

ATTENTION:     EMMETT HARMON

FROM:          MERRILL LYNCH CAPITAL SERVICES, INC.

RE:            CAP TRANSACTION - REFERENCE 98DL1431

Dear Sirs:

     The purpose of this communication is to confirm the terms
and conditions of the transaction entered into between Merrill
Lynch Capital Services, Inc. ("MLCS") and NovaStar Mortgage
Funding Trust, Series 1998-1 ("Counterparty") on the Trade Date
specified below (the "Transaction"). This communication
constitutes a "Confirmation" as referred to in the Agreement
specified below.

     THIS FACSIMILE TRANSMISSION WILL BE THE ONLY WRITTEN
COMMUNICATION REGARDING THIS TRANSACTION EXCHANGED BETWEEN US,
UNLESS YOU REQUEST THAT WE SIGN HARD COPY VERSIONS OF THIS
CONFIRMATION. PLEASE CONTACT THE INDIVIDUAL INDICATED IN THE LAST
PARAGRAPH OF THIS LETTER TO RECEIVE SUCH COPIES.

     PLEASE SIGN AND RETURN THIS CONFIRMATION AT YOUR EARLIEST
CONVENIENCE. BECAUSE OF THE IMPORTANCE OF CONFIRMING TRANSACTIONS
PROMPTLY AND ACCURATELY, WE REGRET THAT ANY CONFIRMATIONS WHICH
ARE NOT SIGNED AND RETURNED WITHIN TEN DAYS MAY RESULT IN A DELAY
IN PAYMENTS.

     The definitions and provisions contained in the 1991 ISDA
Definitions, as published by the International Swaps and
Derivatives Association, Inc. (the "Definitions") are
incorporated into this Confirmation. For these purposes, all
references in those Definitions to a "Swap Transaction" shall be
deemed to apply to the Transaction referred to herein. In the
event of any inconsistency between the Definitions and this
Confirmation, the terms of this Confirmation shall govern.

     1. This Confirmation supplements, forms part of, and is
subject to, the ISDA Master Agreement dated as of April 30, 1998,
as amended and supplemented from time to time (the "Agreement"),
between you and us. All provisions contained in the Agreement
govern this Confirmation except as expressly modified below.

     2. The terms of the particular Transaction to which this
Confirmation relates are as follows:

Type of Transaction:          Rate Cap Transaction

Notional Amount:              USD 45,000,000.00


<PAGE> 




Trade Date:                   30 April 1998

Effective Date:               30 April 1998

Termination Date:             3 April 2001

Fixed Amounts: 

     Fixed Rate Payer:        Counterparty

     Fixed Rate Payer
     Payment Dates:           3 January, 3 April, 3 July and 3
                              October in each year, commencing on
                              3 July 1998, and ending on the
                              Termination Date, inclusive,
                              subject to adjustment in accordance
                              with the Modified Following
                              Business Day Convention 

     Fixed Rate:              0.74% per annum

     Fixed Rate Day
     Count Fraction:          Actual/360

Floating Amounts: 

     Floating Rate Payer:     MLCS

     Cap Rate:                6.5% per annum

     Floating Rate for 
     initial Calculation 
     Period:                  5.70703%

     Floating Rate Payer
     Payment Dates:           3 January, 3 April, 3 July and 3
                              October in each year, commencing on
                              3 July 1998, and ending on the
                              Termination Date, inclusive,
                              subject to adjustment in accordance
                              with the Modified Following
                              Business Day Convention 

     Floating Rate Option:    USD-LIBOR-BBA

     Designated Maturity:     Three months

     Floating Rate Day 
     Count Fraction:          Actual/360

     Reset Dates:             The first day of each Floating Rate
                              Payer Calculation Period

     Rate Cut-off Dates:      Inapplicable

     Method of Averaging:     Inapplicable

     Compounding:             Inapplicable




<PAGE> 




          Compounding Dates:  Inapplicable

Calculation Agent:            MLCS 

Business Days:                New York and London
          
     3. Account Details:


     Payments to MLCS:        Bankers Trust Company
                              New York, NY
                              ABA: 021001033
                              A/C #00-811-874
                              Ref: Merrill Lynch Capital
                              Services, Inc.

     Payments to 
     Counterparty:            Please advise


Please confirm that the foregoing correctly sets forth the terms
of our agreement by executing this 
Confirmation and returning it to us by facsimile transmission on
(212) 449 - 6219, attention: Keith Doree, telephone: (212)
449-7412.

                         Yours sincerely, 

                         MERRILL LYNCH CAPITAL SERVICES, INC.


                         By:________________________________
                              Authorized Signatory
Accepted and confirmed as
of the Trade Date written above:

NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-1
BY WILMINGTON TRUST COMPANY


By: /s/ Emmett R. Harmon
       Name:  Emmett R. Harmon
       Title:  Vice President

<PAGE>
                           Attachment C

FAX:           302 651 1576

DATE:          APRIL 30, 1998

TO:            NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-1 C/O
               WILMINGTON TRUST COMPANY

ATTENTION:     EMMETT HARMON

FROM:          MERRILL LYNCH CAPITAL SERVICES, INC.

RE:            CAP TRANSACTION - REFERENCE 98DL1432

Dear Sirs:

     The purpose of this communication is to confirm the terms
and conditions of the transaction entered into between Merrill
Lynch Capital Services, Inc. ("MLCS") and NovaStar Mortgage
Funding Trust, Series 1998-1 ("Counterparty") on the Trade Date
specified below (the "Transaction"). This communication
constitutes a "Confirmation" as referred to in the Agreement
specified below.

     THIS FACSIMILE TRANSMISSION WILL BE THE ONLY WRITTEN
COMMUNICATION REGARDING THIS TRANSACTION EXCHANGED BETWEEN US,
UNLESS YOU REQUEST THAT WE SIGN HARD COPY VERSIONS OF THIS
CONFIRMATION. PLEASE CONTACT THE INDIVIDUAL INDICATED IN THE LAST
PARAGRAPH OF THIS LETTER TO RECEIVE SUCH COPIES.

     PLEASE SIGN AND RETURN THIS CONFIRMATION AT YOUR EARLIEST
CONVENIENCE. BECAUSE OF THE IMPORTANCE OF CONFIRMING TRANSACTIONS
PROMPTLY AND ACCURATELY, WE REGRET THAT ANY CONFIRMATIONS WHICH
ARE NOT SIGNED AND RETURNED WITHIN TEN DAYS MAY RESULT IN A DELAY
IN PAYMENTS.

     The definitions and provisions contained in the 1991 ISDA
Definitions, as published by the International Swaps and
Derivatives Association, Inc. (the "Definitions") are
incorporated into this Confirmation. For these purposes, all
references in those Definitions to a "Swap Transaction" shall be
deemed to apply to the Transaction referred to herein. In the
event of any inconsistency between the Definitions and this
Confirmation, the terms of this Confirmation shall govern.

     1. This Confirmation supplements, forms part of, and is
subject to, the ISDA Master Agreement dated as of April 30, 1998,
as amended and supplemented from time to time (the "Agreement"),
between you and us. All provisions contained in the Agreement
govern this Confirmation except as expressly modified below.

     2. The terms of the particular Transaction to which this
Confirmation relates are as follows:

Type of Transaction:          Rate Cap Transaction

Notional Amount:              USD 30,000,000.00



<PAGE>




Trade Date:                   30 April 1998

Effective Date:               30 April 1998

Termination Date:             21 April 2001

Fixed Amounts: 

     Fixed Rate Payer:        Counterparty

     Fixed Rate Payer
     Payment Dates:           21 January, 21 April, 21 July and
                              21 October in each year, commencing
                              on 21 July 1998, and ending on the
                              Termination Date, inclusive,
                              subject to adjustment in accordance
                              with the Modified Following
                              Business Day Convention 

     Fixed Rate:              1.01% per annum

     Fixed Rate Day
     Count Fraction:          Actual/360

Floating Amounts: 

     Floating Rate Payer:     MLCS

     Cap Rate:                6% per annum

     Floating Rate for 
     initial Calculation 
     Period:                  5.6875%

     Floating Rate Payer
     Payment Dates:           21 January, 21 April, 21 July and
                              21 October in each year, commencing
                              on 21 July 1998, and ending on the
                              Termination Date, inclusive,
                              subject to adjustment in accordance
                              with the Modified Following
                              Business Day Convention 

     Floating Rate Option:    USD-LIBOR-BBA

     Designated Maturity:     Three months

     Floating Rate Day 
     Count Fraction:          Actual/360

     Reset Dates:             The first day of each Floating Rate
                              Payer Calculation Period

     Rate Cut-off Dates:      Inapplicable

     Method of Averaging:     Inapplicable




<PAGE>




     Compounding:             Inapplicable

     Compounding Dates:       Inapplicable

Calculation Agent:            MLCS 

Business Days:                New York and London
          
     3. Account Details:

     Payments to MLCS:        Bankers Trust Company
                              New York, NY
                              ABA: 021001033
                              A/C #00-811-874
                              Ref: Merrill Lynch Capital
                              Services, Inc.

     Payments to 
     Counterparty:            Please Advise


Please confirm that the foregoing correctly sets forth the terms
of our agreement by executing this Confirmation and returning it
to us by facsimile transmission on (212) 449 - 6219, attention:
Keith Doree, telephone: (212) 449-7412.

                         Yours sincerely, 

                         MERRILL LYNCH CAPITAL SERVICES, INC.


                         By:________________________________
                              Authorized Signatory
Accepted and confirmed as
of the Trade Date written above:

NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-1
BY WILMINGTON TRUST COMPANY


By:  /s/ Emmett R. Harmon
       Name:  Emmett R. Harmon
       Title: Vice President