FINANCIAL GUARANTY INSURANCE POLICY

OBLIGATIONS:   $300,000,000                 POLICY NUMBER:  26328
               NovaStar Home Equity Loan
               Asset-Backed Bonds, Series 1998-1

     MBIA Insurance Corporation (the "Insurer"), in consideration
of the payment of the premium and subject to the terms of this
Financial Guaranty Insurance Policy (this "Policy"), hereby
unconditionally and irrevocably guarantees to any Owner that an
amount equal to each full and complete Insured Payment will be
received by First Union National Bank, or its successor, as
indenture trustee for the Owners (the "Indenture Trustee"), on
behalf of the Owners from the Insurer, for distribution by the
Indenture Trustee to each Owner of each Owner's proportionate
share of the Insured Payment.  The Insurer's obligations
hereunder with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured
Payment are received by the Indenture Trustee, whether or not
such funds are properly applied by the Indenture Trustee. 
Insured Payments shall be made only at the time set forth in this
Policy and no accelerated Insured Payments shall be made
regardless of any acceleration of the Obligations, unless such
acceleration is at the sole option of the Insurer.

     Notwithstanding the foregoing paragraph, this Policy does
not cover shortfalls, if any, attributable to the liability of
the Issuer or the Indenture Trustee for withholding taxes, if any
(including interest and penalties in respect of any such
liability).  This Policy does not cover, and Insured Payments
shall not include, any Prepayment Interest Shortfalls, any Relief
Act Shortfalls or any Carry-Forward Amounts.

     The Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a
Business Day by the Fiscal Agent (as described below) of (i) a
certified copy of the order requiring the return of a preference
payment, (ii) an opinion of counsel satisfactory to the Insurer
that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Insurer,
irrevocably assigning to the Insurer all rights and claims of the
Owner relating to or arising under the Obligations against the
debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Insurer as agent for
such Owner in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the
Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business  Day, they will be
deemed to be received on the following Business Day.  Such
payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the
Obligations to such receiver or trustee in bankruptcy, in which
case such payment shall be disbursed to such Owner.

     The Insurer will pay any other amount payable hereunder no
later than 12:00 noon New York City time on the later of the
Payment Date on which the related Deficiency Amount is due or the
second Business Day following receipt in New York, New York on a
Business Day by State Street <PAGE> Bank and Trust Company, N.A., as
Fiscal Agent for the Insurer or any successor fiscal agent
appointed by the Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day.  If any such
Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder
it shall be deemed not to have been received by the Fiscal Agent
for purposes of this paragraph, and the Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended Notice.

     Insured Payments due hereunder unless otherwise stated
herein will be disbursed by the Fiscal Agent to the Indenture
Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such
Insured Payment and legally available therefor.

     The Fiscal Agent is the agent of the Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts
of the Fiscal Agent or any failure of the Insurer to deposit or
cause to be deposited, sufficient funds to make payments due
under this Policy.

     Subject to the terms of the Agreement, the Insurer shall be
subrogated to the rights of each Owner to receiver payments under
the Obligations to the extent of any payment by the Insurer
hereunder.

     As used herein, the following terms shall have the following
meanings:

     "Agreement" means the Indenture dated as of April 1, 1998
between the NovaStar Mortgage Funding Trust, Series 1998-1, as
Issuer, and the Indenture Trustee, without regard to any
amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Insurer.

     "Business Day" means any day other than a Saturday, a Sunday
or a day on which the Insurer or banking institutions in New York
City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement or the principal office of
the Insurer is located are authorized or obligated by law or
executive order to close.

     "Deficiency Amount" means (a) with respect to each Payment
Date prior to the Final Scheduled Payment Date, an amount equal
to the sum of (i) the excess, if any, of the Interest Payment
Amount (net of any Prepayment Interest Shortfalls, to the extent
not covered by the  Servicer by Compensating Interest, and any
Relief Act Shortfalls for such Payment Date) over the Available



<PAGE> 




Funds for such Payment Date and (ii) any Subordination Deficit;
(b) with respect to the Final Scheduled Payment Date, an amount
equal to the sum of (i) the excess, if any, of the Interest
Payment Amount (net of any Prepayment Interest Shortfalls, to the
extent not covered by the Servicer by Compensating Interest, and
any Relief Act Shortfalls for such Payment Date) over the
Available Funds for such Payment Date and (ii) the excess, if
any, of the Bond Principal Balance of all Outstanding Bonds due
on such Final Scheduled Payment Date over Available Funds not
used to pay the Interest Payment Amount (net of any Prepayment
Interest Shortfalls, to the extent not covered by the Servicer by
Compensating Interest, and any Relief Act Shortfalls for such
Payment Date) for such Final Scheduled Payment Date; and (c) for
any date on which the acceleration of the Bonds has been directed
or consented to by the Insurer pursuant to Section 5.02 of the
Indenture, an amount equal to the excess, if any, of the sum of
the Bond Principal Balance of the Bonds, together with accrued
and unpaid interest thereon through the date of payment of such
accelerated Bonds, over the Available Funds for such date of
payment.

     "Insured Payment" means (i) as of any Payment Date, any
Deficiency Amount and (ii) any Preference Amount.

     "Notice" means the telephonic or telegraphic notice,
promptly confirmed in writing by telecopy substantially in the
form of Exhibit A attached hereto, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be
due and owing on the applicable Payment Date.

     "Owner" means each Bondholder (as defined in the Agreement)
of an Obligation who, on the applicable Payment Date, is entitled
under the terms of the applicable Obligations to payment
thereunder.

     "Preference Amount" means any amount previously distributed
to an Owner on the Obligations that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.

     "Relief Act Shortfalls" means for any Payment Date, any
shortfalls relating to the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, or similar legislation or regulations.

     Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the
Agreement as of the date of execution of this Policy, without
giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved
in writing by the Insurer.

     Any  notice hereunder or service of process on the Fiscal
Agent may be made at the address listed below for the Fiscal
Agent or such other address as the Insurer shall specify in
writing to the Indenture Trustee.

     The notice address of the Fiscal Agent is 15th Floor, 61
Broadway, New York, New York 10006 Attention: Municipal Registrar
and Paying Agency, or such other address as the Fiscal Agent
shall specify to the Indenture Trustee in writing.




<PAGE> 




     THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL
BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.

     The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.

     This Policy is not cancelable for any reason.  The premium
on this Policy is not refundable for any reason including
payment, or provision being made for payment, prior to maturity
of the Obligations.

     IN WITNESS WHEREOF, the Insurer has caused this Policy to be
executed and attested this 30th day of April, 1998.

                                   MBIA INSURANCE CORPORATION


                                   ______________________________
                                   President



                                   ______________________________
                                   Assistant Secretary




<PAGE> 





                            EXHIBIT A

                 TO FINANCIAL GUARANTY INSURANCE
                      POLICY NUMBER:  26328
                 NOTICE UNDER FINANCIAL GUARANTY
                 INSURANCE POLICY NUMBER:  26328

State Street Bank and Trust Company, N.A., as Fiscal Agent
  for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention:  Municipal Registrar and
  Paying Agency

MBIA Insurance Corporation
113 King Street
Armonk, NY 10504

     The undersigned, a duly authorized officer of [NAME OF
TRUSTEE], as indenture trustee (the "Indenture Trustee"), hereby
certifies to State Street Bank and Trust Company, N.A. (the
"Fiscal Agent") and MBIA Insurance Corporation (the "Insurer"),
with reference to Financial Guaranty Insurance Policy Number:
26328 (the "Policy") issued by the Insurer in respect of the
$300,000,000 NovaStar Mortgage Funding Trust Home Equity Loan
Asset-Backed Bonds, Series 1998-1 (the "Obligations"), that:

          (i)  the Indenture Trustee is the indenture trustee
     under the Indenture dated as of April 1, 1998, between the
     NovaStar Mortgage Funding Trust, Series 1998-1, as Issuer
     and the Indenture Trustee, as indenture trustee for the
     Owners;

          (ii) the amount due under clause (a) of the definition
     of Deficiency Amount for the Payment Date occurring on
     [__________] (the "Applicable Payment Date") is $[_______]
     (and the amounts due under sub-clauses (i) and (ii) of
     clause (a) are $[______] and $[_______] respectively);

          (iii)     the amount due under clause (b) of the
     definition of Deficiency Amount for the Applicable Payment
     Date is $[_________];

          (iv) the amount due under clause (c) of the definition
     of Deficiency Amount for the Applicable Payment Date is
     $[_________];

          (v)  the sum of the amounts listed in paragraphs (ii),
     (iii) and (iv) above is $[_____] (the "Deficiency Amount");




<PAGE> 




          (vi) the amount of previously distributed payments on
     the Obligations that is recoverable and sought to be
     recovered as a voidable preference by a trustee in
     bankruptcy pursuant to the Bankruptcy Code in accordance
     with a final nonappealable order of a court having competent
     jurisdiction is $[__________] (the "Preference Amount");

          (vii)     the total Insured Payment due is $[________],
     which amount equals the sum of the Deficiency Amount and the
     Preference Amount;

          (viii)    the Indenture Trustee is making a claim under
     and pursuant to the terms of the Policy for the dollar
     amount of the Insured Payment set forth in (v) above to be
     applied to the payment of the Deficiency Amount for the
     Applicable Payment Date in accordance with the Agreement and
     for the dollar amount of the Insured Payment set forth in
     (vi) above to be applied to the payment of any Preference
     Amount; and

          (ix) the Indenture Trustee directs that payment of the
     Insured Payment be made to the following account by bank
     wire transfer of federal or other immediately available
     funds in accordance with the terms of the Policy: 
     [INDENTURE TRUSTEE'S ACCOUNT NUMBER].

     Any capitalized terms used in this Notice and not otherwise
defined herein shall have the meaning assigned thereto in the
Policy.

Any Person Who Knowingly And With Intent To Defraud Any Insurance
Company Or Other Person Files An Application For Insurance Or
Statement Of Claim Containing Any Materially False Information,
Or Conceals For The Purpose Of Misleading, Information Concerning
Any Fact Material Thereto, Commits A Fraudulent Insurance Act,
Which Is A Crime, And Shall Also Be Subject To A Civil Penalty
Not To Exceed Five Thousand Dollars And The Stated Value Of The
Claim For Each Such Violation.

     IN WITNESS WHEREOF, the Indenture Trustee has executed and
delivered this Notice under the Policy as of the [____] day of
[_________], [____].

                         [NAME OF TRUSTEE], as Indenture Trustee


                         By   __________________________________
                         Title  ________________________________