<PAGE>

                                                                     EXHIBIT 4.5


                           NOVASTAR MORTGAGE, INC.,
                           as Servicer and as Seller

                    NOVASTAR MORTGAGE FUNDING CORPORATION,
                                  as Company

                    _____________________________________,
                         as Certificate Administrator

                                      and

                    _____________________________________,
                                  as Trustee

                        POOLING AND SERVICING AGREEMENT

                        Dated as of __________________

                                  relating to

               NOVASTAR MORTGAGE FUNDING TRUST, SERIES _________
     NOVASTAR HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES ________
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
<S>                                                                                                          <C>
ARTICLE I Definitions........................................................................................

    Section 1.01. Defined Terms..............................................................................
    Section 1.02. Accounting.................................................................................
    Section 1.03. Allocation of Certain Interest Shortfalls..................................................

ARTICLE II Conveyance Of Mortgage Loans; Original Issuance Of Certificates...................................

    Section 2.01. Conveyance of Mortgage Loans and MI Policies...............................................
    Section 2.02. Acceptance of Mortgage Loans by Certificate Administrator on behalf of the
                   Trustee...................................................................................
    Section 2.03. epurchase or Substitution of Mortgage Loans by the Seller..................................
    Section 2.04. cknowledgement of Trustee..................................................................
    Section 2.05. Representations, Warranties and Covenants of the Servicer..................................
    Section 2.06. Representations and Warranties of the Company..............................................
    Section 2.07. Issuance of Certificates...................................................................
    Section 2.08. Conveyance of the Subsequent Mortgage Loans................................................
    Section 2.09. Miscellaneous REMIC Provisions.............................................................

ARTICLE III Administration And Servicing Of The Mortgage Loans...............................................

    Section 3.01. Servicer to Assure Servicing...............................................................
    Section 3.02. Subservicing Agreements Between Servicer and Subservicers..................................
    Section 3.03. Successor Subservicers.....................................................................
    Section 3.04. Liability of the Servicer..................................................................
    Section 3.05. Assumption or Termination of Subservicing Agreements by the Certificate
                   Administrator.............................................................................
    Section 3.06. Collection of Mortgage Loan Payments.......................................................
    Section 3.07. Withdrawals from the Collection Account....................................................
    Section 3.08. Collection of Taxes, Assessments and Similar Items; Servicing Accounts.....................
    Section 3.09. Access to Certain Documentation and Information Regarding the Mortgage Loans...............
    Section 3.10. Maintenance of Hazard Insurance and Fidelity Coverage......................................
    Section 3.11. Due-on-Sale Clauses; Assumption Agreements.................................................
    Section 3.12. Realization Upon Defaulted Mortgage Loans..................................................
    Section 3.13. Certificate Administrator to Cooperate; Release of Mortgage Files..........................
    Section 3.14. Servicing Compensation.....................................................................
    Section 3.15. Annual Statements of Compliance............................................................
    Section 3.16. Annual Independent Public Accountants' Servicing Report....................................
    Section 3.17. Optional Purchase of Defaulted Mortgage Loans..............................................
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                                                          <C>
    Section 3.18. Information Required by the Internal Revenue Service Generally and Reports of
                   Foreclosures and Abandonments of Mortgaged Property.......................................
    Section 3.19. Purchase of Converted Mortgage Loans.......................................................
    Section 3.20. [Reserved].................................................................................
    Section 3.21. Servicing and Administrating of the MI Policies............................................
    Section 3.22. Determination Date Reports.................................................................
    Section 3.23. dvances....................................................................................
    Section 3.24. Compensating Interest Payments.............................................................

ARTICLE IV Flow Of Funds.....................................................................................

    Section 4.01. Distributions..............................................................................
    Section 4.02. Payment Account and Distribution Account...................................................
    Section 4.03. Statements.................................................................................
    Section 4.04. Pre-Funding Account........................................................................
    Section 4.05. Interest Coverage Account..................................................................
    Section 4.06. Allocation of Realized Losses..............................................................

ARTICLE V The Certificates...................................................................................

    Section 5.01. The Certificates...........................................................................
    Section 5.02. Registration of Transfer and Exchange of Certificates......................................
    Section 5.03. Mutilated, Destroyed, Lost or Stolen Certificates..........................................
    Section 5.04. Persons Deemed Owners......................................................................
    Section 5.05. Appointment of Paying Agent................................................................

ARTICLE VI The Servicer And The Company......................................................................

    Section 6.01. Liability of the Servicer and the Company..................................................
    Section 6.02. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer
                   or the Company............................................................................
    Section 6.03. Limitation on Liability of the Servicer and Others.........................................
    Section 6.04. Servicer Not to Resign.....................................................................
    Section 6.05. Delegation of Duties.......................................................................
    Section 6.06. Servicer to Pay Trustee's, and Certificate Administrator's Fees and Expenses;
                   Indemnification...........................................................................

ARTICLE VII Default..........................................................................................

    Section 7.01. Servicing Default..........................................................................
    Section 7.02. Certificate Administrator to Act; Appointment of Successor.................................
    Section 7.03. Waiver of Defaults.........................................................................
    Section 7.04. Notification to Certificateholders.........................................................
    Section 7.05. Survivability of Servicer Liabilities......................................................

ARTICLE VIII The Trustee And The Certificate Administrator...................................................

    Section 8.01. Duties of the Trustee and the Certificate Administrator....................................
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                                          <C>
    Section 8.02. Rights of Trustee and Certificate Administrator............................................
    Section 8.03. Individual Rights of Trustee and Certificate Administrator.................................
    Section 8.04. Trustee's and Certificate Administrator's Disclaimer.......................................
    Section 8.05. Notice of Servicing Default................................................................
    Section 8.06. [Reserved].................................................................................
    Section 8.07. Compensation and Indemnity.................................................................
    Section 8.08. Replacement of Trustee or Certificate Administrator........................................
    Section 8.09. Successor Trustee or Certificate Administrator by Merger...................................
    Section 8.10. Appointment of Co-Trustee or Separate Trustee..............................................
    Section 8.11. Eligibility; Disqualification..............................................................
    Section 8.12. [Reserved].................................................................................
    Section 8.13. Representations and Warranties.............................................................
    Section 8.14. Directions to Trustee and Certificate Administrator........................................
    Section 8.15. The Agents.................................................................................
    Section 8.16. Reports by the Certificate Administrator; Trust Fiscal Year................................

ARTICLE IX [Reserved]


ARTICLE X REMIC Administration...............................................................................

    Section 10.01. REMIC Administration......................................................................
    Section 10.02. Prohibited Transactions and Activities....................................................

ARTICLE XI Termination.......................................................................................

    Section 11.01. Termination...............................................................................
    Section 11.02. Additional Termination Requirements.......................................................

ARTICLE XII Miscellaneous Provisions.........................................................................

    Section 12.01. Amendment.................................................................................
    Section 12.02. Recordation of Agreement; Counterparts....................................................
    Section 12.03. Limitation on Rights of Certificateholders................................................
    Section 12.04. Governing Law; Jurisdiction...............................................................
    Section 12.05. Notices...................................................................................
    Section 12.06. Severability of Provisions................................................................
    Section 12.07. Article and Section References............................................................
    Section 12.08. Further Assurances........................................................................
    Section 12.09. Benefits of Agreement.....................................................................
    Section 12.10. Acts of Certificateholders................................................................
</TABLE>

Appendix A        Definitions

                                      iii
<PAGE>

     This Pooling and Servicing Agreement, dated as of _______________ (this
"Agreement"), among NOVASTAR MORTGAGE, INC., as servicer (the "Servicer")") and
 ---------                                                     --------
as seller (the "Seller"), NOVASTAR MORTGAGE FUNDING CORPORATION, as company (the
                ------
"Company __________________________, as certificate administrator (the
"Certificate Administrator") and ________________________________, as trustee
 -------------------------
(the "Trustee").
      -------

                                   ARTICLE I

                                  DEFINITIONS

     Section 1.01.  Defined Terms.
                    -------------

          For all purposes of this 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 attached hereto as Appendix A, which is incorporated by reference
herein. All other capitalized terms used herein shall have the meanings
specified herein.

     Section 1.02.  Accounting.
                    ----------

          Unless otherwise specified, all calculations in respect of interest on
the Class A-1 Certificates, the Class AIO Certificates and the Mezzanine
Certificates shall be made on the basis of the actual number of days elapsed on
the basis of a 360-day year and all other calculations of interest described
herein shall be made on the basis of a 360-day year consisting of twelve 30-day
months. The Class O Certificates are not entitled to distributions in respect of
interest and, accordingly, will not accrue interest. Unless otherwise specified
herein, for the purpose of any definition or calculation, whenever amounts are
required to be netted, subtracted or added or any distributions are taken into
account such definition or calculation and any related definitions or
calculations shall be determined without duplication of such functions.

     Section 1.03.  Allocation of Certain Interest Shortfalls.
                    -----------------------------------------

          For purposes of calculating the amount of the REMIC Monthly Interest
Distributable Amount for the Class A-1 Certificates, the Mezzanine Certificates
and the Class AIO Certificates for any Distribution Date, (1) the aggregate
amount of any Prepayment Interest Shortfalls and any Relief Act Shortfalls
incurred in respect of the Mortgage Loans for any Distribution Date shall be
allocated on a pro rata basis based on, and to the extent of, the gross REMIC
Monthly Interest Distributable Amount for each such Class, among the Class A-1
Certificates, the Mezzanine Certificates and the Class AIO Certificates and (2)
the aggregate amount of any Available Funds Cap Carryforward Amounts incurred
for any Distribution Date shall be allocated to the Class AIO Certificates to
the extent of the gross REMIC Monthly Interest Distributable Amount for that
Class, after deduction of any Prepayment Interest Shortfalls and any Relief Act
Shortfalls.

          All Prepayment Interest Shortfalls and Relief Act Shortfalls on the
Lower-Tier REMIC Regular Interests shall be allocated on each Distribution Date
among the Lower-Tier
<PAGE>

REMIC Regular Interests in the proportion that Prepayment Interest Shortfalls
and Relief Act Shortfalls are allocated to the related Upper-Tier REMIC regular
interests.

                                  ARTICLE II

                         CONVEYANCE OF MORTGAGE LOANS;
                       ORIGINAL ISSUANCE OF CERTIFICATES

     Section 2.01.  Conveyance of Mortgage Loans and MI Policies.
                    --------------------------------------------

          The Company, concurrently with the execution and delivery hereof, does
hereby transfer, assign, set over and otherwise convey in trust to the Trustee
without recourse for the benefit of the Certificateholders all the right, title
and interest of the Company, including any security interest therein for the
benefit of the Company, in and to (i) each Initial Mortgage Loan identified on
the Mortgage Loan Schedule, including the related Cut-off Date Principal
Balance, all interest accruing thereon on and after the Cut-off Date and all
collections in respect of interest and principal due after the Cut-off Date;
(ii) property which secured each such Mortgage Loan and which has been acquired
by foreclosure or deed in lieu of foreclosure; (iii) its interest in any
insurance policies in respect of the Mortgage Loans; (iv) its interest in the MI
Policies; (v) the rights of the Company under the Purchase Agreement; (vi) all
other assets included or to be included in the Trust Fund; and (vii) all
proceeds of any of the foregoing.  Such assignment includes all interest and
principal due to the Company or the Servicer after the Cut-off Date with respect
to the Mortgage Loans.

          In connection with such transfer and assignment, the Seller, on behalf
of the Company, does hereby deliver to, and deposit with the Certificate
Administrator, as the Trustee's designated agent, the following documents or
instruments with respect to each Initial Mortgage Loan so transferred and
assigned and the Seller, on behalf of the Company, shall, in accordance with
Section 2.09, deliver or caused to be delivered to the Certificate
Administrator, as the Trustee's designated agent, with respect to each
Subsequent Mortgage Loan, the following documents or instruments (with respect
to each Mortgage Loan, a "Mortgage File"):
                          -------------

          (i)   the original Mortgage Note endorsed to "____________________, as
     Trustee pursuant to the Agreement dated as of _______________, relating to
     the NovaStar Home Equity Loan Asset-Backed Certificates, Series ________";

          (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;

          (iii) an original assignment (which may be included in one or more
     blanket assignments if permitted by applicable law) of the Mortgage
     endorsed to "_______________________, as Trustee pursuant to the Agreement
     dated as of ___________________, relating to the NovaStar Home Equity Loan
     Asset-Backed Certificates, Series ___________", and otherwise in recordable
     form;

                                       2
<PAGE>

          (iv)  originals of any intervening assignments of the Mortgage, 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)  with respect to each Mortgage Loan insured by a MI Policy, a
     certificate of insurance or other evidence of such MI Policy; and

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

          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 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 (iii) 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 or 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 of the Purchase Agreement as to the Initial Mortgage Loans and the
Subsequent Mortgage Loans and Section 2.02(c) of the Purchase Agreement 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 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 (iii) above, with such assignment
completed in favor of the Trustee. 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

                                       3
<PAGE>

documents to the Certificate Administrator, on behalf of the Trustee, promptly
upon receipt thereof.

          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 the Purchase Agreement. Any
late payment charges collected in connection with a Mortgage Loan shall be paid
to the Servicer as provided in Section 3.15(b) hereof.

          The parties hereto intend that the transactions set forth herein
constitute a sale by the Company to the Trust on the Closing Date of all the
Company'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 Company
hereby grants to the Trustee as of the Closing Date a security interest in all
of the Company's right, title and interest in, to and under the Initial Mortgage
Loans and such other property, to secure all of the Company's obligations
hereunder and this 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 and the State of Kansas (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 or
the filing of any additional UCC-1 financing statements due to the change in the
principal office of the Seller, as are necessary to perfect and protect the
interests of the Company and its respective assignees in each Initial Mortgage
Loan and the proceeds thereof and the interests of the Trust and its assignees
in each Subsequent Mortgage Loan and the proceeds thereof.

     Section 2.02.  Acceptance of Mortgage Loans by Certificate Administrator on
                    ------------------------------------------------------------
behalf of the Trustee.
---------------------

          (a) The Certificate Administrator, on behalf of the Trustee,
acknowledges receipt of, subject to the review described below and any
exceptions it notes pursuant to the procedures described below, the documents
(or certified copies thereof) referred to in Section 2.01 hereof and declares
that it holds and will continue to hold those documents and any amendments,
replacements or supplements thereto and all other assets of the Trust Fund in
trust for the use and benefit of all present and future Certificateholders. No
later than 45 days after the Closing Date and each Subsequent Transfer Date (or,
with respect to any Eligible Substitute

                                       4
<PAGE>

Mortgage Loan, within 5 Business Days after the receipt by the Certificate
Administrator, on behalf of the Trustee, thereof and, with respect to any
documents received beyond 45 days after the Closing Date, promptly thereafter),
the Certificate Administrator, on behalf of the Trustee, agrees, for the benefit
of the Certificateholders, to review each Mortgage File delivered to it and to
execute and deliver, or cause to be executed and delivered, to the Seller an
initial certification in the form annexed hereto as Exhibit F-1. In conducting
such review, the Certificate Administrator, on behalf of the Trustee, will
ascertain whether all required documents described in Section 2.01 hereof have
been executed and received and whether those documents relate, determined on the
basis of the Mortgagor name, original principal balance and loan number, to the
Mortgage Loans it has received, as identified in Exhibit B to this Agreement, as
supplemented (provided, however, that with respect to those documents described
              --------  -------
in subclause (vii) of such section, the Certificate Administrator's obligations
shall extend only to documents actually delivered pursuant to such subclause).
In performing any such review, the Certificate Administrator, on behalf of the
Trustee, may conclusively rely on the purported due execution and genuineness of
any such document and on the purported genuineness of any signature thereon. If
the Certificate Administrator, on behalf of the Trustee, finds that any document
constituting part of the Mortgage File not to have been executed or received, or
to be unrelated to the Mortgage Loans identified in Exhibit B or Attachment B to
Exhibit 2 of the Purchase Agreement or to appear to be defective on its face,
the Certificate Administrator, on behalf of the Trustee, shall promptly notify
the Seller of such finding and the Seller's obligation to cure such defect or
repurchase or substitute for the related Mortgage Loan.

          (b) No later than 180 days after the Closing Date, the Certificate
Administrator, on behalf of the Trustee, will review, for the benefit of the
Certificateholders, the Mortgage Files and will execute and deliver or cause to
be executed and delivered to the Seller, a final certification in the form
annexed hereto as Exhibit F-2.  In conducting such review, the Certificate
Administrator, on behalf of the Trustee, will ascertain whether an original of
each document described in subclauses (ii)-(iv) of Section 2.01 hereof required
to be recorded has been returned from the recording office with evidence of
recording thereon or a certified copy has been obtained from the recording
office. If the Certificate Administrator, on behalf of the Trustee, finds any
document constituting part of the Mortgage File has not been received, or to be
unrelated, determined on the basis of the Mortgagor name, original principal
balance and loan number, to the Mortgage Loans identified in Exhibit B or
Attachment B to Exhibit 2 of the Purchase Agreement or to appear defective on
its face, the Certificate Administrator, on behalf of the Trustee, shall
promptly notify the Seller of such finding and the Seller's obligation to cure
such defect or repurchase or substitute for the related Mortgage Loan.

          (c) Upon deposit of the Repurchase Price in the Collection Account and
notification of the Certificate Administrator, on behalf of the Trustee, by a
certification signed by a Servicing Officer (which certification shall include a
statement to the effect that the Repurchase Price has been deposited in the
Collection Account), the Certificate Administrator, on behalf of the Trustee,
shall cause to be released to the Seller the related Mortgage File and shall
cause to be executed and delivered all instruments of transfer or assignment,
without recourse, furnished to it by the Seller as are necessary to vest in the
Seller title to and rights under the related Mortgage Loan. Such purchase shall
be deemed to have occurred on the date on which certification of the deposit of
the Repurchase Price in the Payment Account was received by the Trustee.  The

                                       5
<PAGE>

Certificate Administrator, on behalf of the Trustee, shall amend the applicable
Mortgage Loan Schedule to reflect such repurchase and shall promptly notify the
Servicer, and the Rating Agencies of such amendment.  The Trustee agrees to
provide the Certificate Administrator with such power of attorneys as are
necessary for the Certificate Administrator to fulfill its obligations under
this Section 2.03 and otherwise under the Basic Documents.

     Section 2.03.  Repurchase or Substitution of Mortgage Loans by the Seller.
                    ----------------------------------------------------------

          (a) Upon discovery or receipt of written notice of any materially
defective document in, or that a document is missing from, a Mortgage File or of
the breach by the Seller of any representation, warranty or covenant under the
Purchase Agreement in respect of any Mortgage Loan which materially adversely
affects the value of such Mortgage Loan or the interest therein of the
Certificateholders, the Certificate Administrator shall promptly notify the
Seller and the Servicer of such defect, missing document or breach and request
that the Seller deliver such missing document or cure such defect or breach
within 90 days from the date the Seller was notified of such missing document,
defect or breach, and if the Seller does not deliver such missing document or
cure such defect or breach in all material respects during such period, the
Certificate Administrator shall enforce the Seller's obligation under the
Purchase Agreement and cause the Seller to repurchase such Mortgage Loan from
the Trust Fund at the Repurchase Price on or prior to the Determination Date
following the expiration of such 90 day period; provided that, in connection
with any such breach that could not reasonably have been cured within such 90
day period, if the Seller shall have commenced to cure such breach within such
90 day period, the Seller shall be permitted to proceed thereafter diligently
and expeditiously to cure the same within the additional period provided under
the Purchase Agreement.

          (b) The Repurchase Price for the repurchased Mortgage Loan shall be
deposited in the Collection Account, and the Certificate Administrator, upon
receipt of written certification from the Servicer of such deposit, shall
release to the Seller the related Mortgage File and the Certificate
Administrator or the Trustee, as applicable, shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as the
Seller shall furnish to it and as shall be necessary to vest in the Seller any
Mortgage Loan released pursuant hereto and the Certificate Administrator shall
have no further responsibility with regard to such Mortgage File (it being
understood that the Certificate Administrator shall have no responsibility for
determining the sufficiency of such assignment for its intended purpose).  In
lieu of repurchasing any such Mortgage Loan as provided above, the Seller may
cause such Mortgage Loan to be removed from the Trust Fund (in which case it
shall become a Deleted Mortgage Loan) and substitute one or more Eligible
Substitute Mortgage Loans in the manner and subject to the limitations set forth
in Section 2.03(d). It is understood and agreed that the obligation of the
Seller to cure or to repurchase (or to substitute for) any Mortgage Loan as to
which a document is missing, a material defect in a constituent document exists
or as to which such a breach has occurred and is continuing shall constitute the
sole remedy against the Seller respecting such omission, defect or breach
available to the Trustee or the Certificate Administrator on behalf of the
Certificateholders.

          (c) Within 90 days of the earlier of discovery by the Servicer or
receipt of notice by the Servicer of the breach of any representation, warranty
or covenant of the Servicer

                                       6
<PAGE>

set forth in Section 2.05 which materially and adversely affects the interests
of the Certificateholders in any Mortgage Loan, the Servicer shall cure such
breach in all material respects.

          (d) Any substitution of Eligible Substitute Mortgage Loans for Deleted
Mortgage Loans made pursuant to Section 2.03(a) must be effected prior to the
last Business Day that is within two years after the Closing Date.  As to any
Deleted Mortgage Loan for which the Seller substitutes an Eligible Substitute
Mortgage Loan or Loans, such substitution shall be effected by the Seller
delivering to the Certificate Administrator, for such Eligible Substitute
Mortgage Loan or Loans, the Mortgage Note, the Mortgage, the Assignment to the
Trustee, and such other documents and agreements, with all necessary
endorsements thereon, as are required by Section 2.01, together with an
Officers' Certificate providing that each such Eligible Substitute Mortgage Loan
satisfies the definition thereof and specifying the Substitution Adjustment
Amount (as described below), if any, in connection with such substitution.  The
Certificate Administrator shall acknowledge receipt for such Eligible Substitute
Mortgage Loan or Loans and, within ten Business Days thereafter, shall review
such documents as specified in Section 2.02 and deliver to the Servicer, with
respect to such Eligible Substitute Mortgage Loan or Loans, a certification
substantially in the form attached hereto as Exhibit F-1, with any applicable
exceptions noted thereon.  Within one year of the date of substitution, the
Certificate Administrator shall deliver to the Servicer a certification
substantially in the form of Exhibit F-2 hereto with respect to such Eligible
Substitute Mortgage Loan or Loans, with any applicable exceptions noted thereon.
Monthly Payments due with respect to Eligible Substitute Mortgage Loans in the
month of substitution are not part of the Trust Fund and will be retained by the
Seller.  For the month of substitution, distributions to Certificateholders will
reflect the collections and recoveries in respect of such Deleted Mortgage Loan
in the Due Period preceding the month of substitution and the Seller shall
thereafter be entitled to retain all amounts subsequently received in respect of
such Deleted Mortgage Loan.  The Seller shall give or cause to be given written
notice to the Certificateholders that such substitution has taken place, shall
amend the Mortgage Loan Schedule to reflect the removal of such Deleted Mortgage
Loan from the terms of this Agreement and the substitution of the Eligible
Substitute Mortgage Loan or Loans and shall deliver a copy of such amended
Mortgage Loan Schedule to the Certificate Administrator.  Upon such substitution
by the Seller, such Eligible Substitute Mortgage Loan or Loans shall constitute
part of the Mortgage Pool and shall be subject in all respects to the terms of
this Agreement and the Purchase Agreement, including all applicable
representations and warranties thereof included in the Purchase Agreement as of
the date of substitution.

          For any month in which the Seller substitutes one or more Eligible
Substitute Mortgage Loans for one or more Deleted Mortgage Loans, the Servicer
will determine the amount (the "Substitution Adjustment Amount"), if any, by
                                ------------------------------
which the aggregate Repurchase Price of all such Deleted Mortgage Loans exceeds
the aggregate, as to each such Eligible Substitute Mortgage Loan, of the
principal balance thereof as of the date of substitution, together with one
month's interest on such principal balance at the applicable Net Mortgage Rate.
On the date of such substitution, the Seller will deliver or cause to be
delivered to the Servicer for deposit in the Collection Account an amount equal
to the Substitution Adjustment Amount, if any, and the Certificate
Administrator, upon receipt of the related Eligible Substitute Mortgage Loan or
Loans and certification by the Servicer of such deposit, shall release to the
Seller the

                                       7
<PAGE>

related Mortgage File or Files and the Certificate Administrator or the Trustee,
as applicable, shall execute and deliver such instruments of transfer or
assignment, in each case without recourse, as the Seller shall deliver to it and
as shall be necessary to vest therein any Deleted Mortgage Loan released
pursuant hereto.

          In addition, the Seller shall obtain at its own expense and deliver to
the Certificate Administrator an Opinion of Counsel to the effect that such
substitution will not cause (a) any federal tax to be imposed on the Trust Fund,
including without limitation, any federal tax imposed on "prohibited
transactions" under Section 860F(a)(1) of the Code or on "contributions after
the startup date" under Section 860G(d)(1) of the Code, or (b) any REMIC to fail
to qualify as a REMIC at any time that any Certificate is outstanding. If such
Opinion of Counsel can not be delivered, then such substitution may only be
effected at such time as the required Opinion of Counsel can be given.

          (e) Upon discovery by the Seller, the Servicer, the Certificate
Administrator or the Trustee that any Mortgage Loan does not constitute a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code, the
party discovering such fact shall within two Business Days give written notice
thereof to the other parties.  In connection therewith, the Seller or the
Company, as the case may be, shall repurchase or, subject to the limitations set
forth in Section 2.03(d), substitute one or more Eligible Substitute Mortgage
Loans for the affected Mortgage Loan within 90 days of the earlier of discovery
or receipt of such notice with respect to such affected Mortgage Loan.  Such
repurchase or substitution shall be made by the Seller.  Any such repurchase or
substitution shall be made in the same manner as set forth in Section 2.03(a).
The Certificate Administrator on behalf of the Trustee shall reconvey to the
Seller,  the Mortgage Loan to be released pursuant hereto in the same manner,
and on the same terms and conditions, as it would a Mortgage Loan repurchased
for breach of a representation or warranty.

     Section 2.04.  Acknowledgement of Trustee.
                    --------------------------

          The Trustee acknowledges that in the event that any of (i) the
transfer of the Initial Mortgage Loans and the MI Policies from the Seller to
the Company is determined to constitute a financing, or (ii) the transfer of the
Subsequent Mortgage Loans from the Seller to the Trustee is determined to
constitute a financing, then in each case the Certificate Administrator, on
behalf of the Trustee, and the Trustee hold the Initial Mortgage Loans, the MI
Policies and the Subsequent Mortgage Loans as the designee and bailee of the
Company, subject, however, in each case, to a prior lien in favor of the
Certificate holders pursuant to the terms of this Agreement.

     Section 2.05.  Representations, Warranties and Covenants of the Servicer.
                    ---------------------------------------------------------

          The Servicer hereby represents, warrants and covenants to the Trustee,
for the benefit of each of the Trustee and the Certificateholders and to the
Company that as of the Closing Date or as of such date specifically provided
herein:

          (i) The Servicer is a corporation duly organized, validly existing and
     in good standing under the laws of the State of Virginia and has the
     corporate power to own its assets and to transact the business in which it
     is currently engaged. The Servicer is duly

                                       8
<PAGE>

     qualified to do business as a foreign corporation and is in good standing
     in each jurisdiction in which the character of the business transacted by
     it or properties owned or leased by it requires such qualification 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
     Servicer or the validity or enforceability of the Mortgage Loans;

          (ii)  The Servicer has the corporate power and authority to make,
     execute, deliver and perform this Agreement and all of the transactions
     contemplated under this Agreement, and has taken all necessary corporate
     action to authorize the execution, delivery and performance of this
     Agreement. When executed and delivered, this Agreement will constitute the
     legal, valid and binding obligation of the Servicer enforceable in
     accordance with its terms, except as enforcement of such terms may be
     limited by bankruptcy, insolvency or similar laws affecting the enforcement
     of creditors' rights generally and by the availability of equitable
     remedies;

          (iii) The Servicer is not required to obtain the consent of any other
     Person or any consent, license, 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 Agreement, except for such consent, license,
     approval 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 Agreement and the performance
     of the transactions contemplated hereby by the Servicer will not violate
     any provision of any existing law or regulation or any order or decree of
     any court applicable to the Servicer or any provision of the certificate of
     incorporation or bylaws of the Servicer, or constitute a material breach of
     any mortgage, indenture, contract or other agreement to which the Servicer
     is a party or by which the Servicer may be bound; and

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

          The foregoing representations and warranties shall survive any
termination of the Servicer hereunder.

     Section 2.06.  Representations and Warranties of the Company.
                    ---------------------------------------------

          The Company represents and warrants to the Trust and the Trustee on
behalf of the Certificateholders as follows:

          (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

                                       9
<PAGE>

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 hereunder.

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

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

     Section 2.07.  Issuance of Certificates.
                    ------------------------

          The Trustee acknowledges the assignment to the Trustee of the Mortgage
Loans and the delivery to the Certificate Administrator, on behalf of the
Trustee of the Mortgage Files, subject to the provisions of Sections 2.01 and
2.02, together with the assignment to it of all other assets included in the
Trust Fund, receipt of which is hereby acknowledged.  Concurrently with such
assignment and delivery and in exchange therefor, the Trustee, pursuant to the
written request of the Company executed by an officer of the Company, has
executed, and authenticated and delivered to or upon the order of the Company,
the Certificates in authorized denominations.  The interests evidenced by the
Certificates, constitute the entire beneficial ownership interest in the Trust
Fund.

     Section 2.08.  Conveyance of the Subsequent Mortgage Loans.
                    -------------------------------------------

          The Trustee, or the Certificate Administrator on behalf of the
Trustee, shall purchase the Subsequent Mortgage Loans as set forth in Section
2.02 of the Purchase Agreement.

                                      10
<PAGE>

     Section 2.09.  Miscellaneous REMIC Provisions.
                    ------------------------------

          (a) The Certificate Administrator as agent of the Trustee shall elect
that each of the Lower-Tier REMIC and the Upper-Tier REMIC shall be treated as a
REMIC under Section 860D of the Code. Any inconsistencies or ambiguities in this
Agreement or in the administration of this Agreement shall be resolved in a
manner that preserves the validity of such REMIC elections. The assets of the
Lower-Tier REMIC shall include the Mortgage Loans, the Accounts (other than the
Non-REMIC Accounts), any REO Property, and any proceeds of the foregoing. The
Lower-Tier REMIC Regular Interests (as defined below) shall constitute the
assets of the Upper-Tier REMIC.

          (b) The Lower-Tier REMIC will be evidenced by (x) Lower-Tier Interest
1, Lower-Tier Interest 2, Lower-Tier Interest 3, Lower-Tier Interest 4, Lower-
Tier Interest 5, and Lower-Tier Interest 6 (the "Lower-Tier REMIC Regular
                                                 ------------------------
Interests"), which will be uncertificated and non-transferable and are hereby
---------
designated as the "regular interests" in the Lower-Tier REMIC and (y) the Class
RL Certificate, which is hereby designated as the single "residual interest" in
the Lower-Tier REMIC (the Lower-Tier REMIC Regular Interests, together with the
Class RL Certificate, the "Lower-Tier REMIC Interests").  The Lower-Tier REMIC
                           --------------------------
Regular Interests shall be recorded on the records of the Lower-Tier REMIC as
being issued to and held by the Trustee on behalf of the Upper-Tier REMIC.

          The Lower-Tier REMIC Interests will have the following designations
and Lower-Tier Pass-Through Rates, and distributions of principal, interest and
Realized Losses thereon shall be allocated to the Certificates in the following
manner:

  Lower-Tier      Initial     Pass-Through   Allocation of   Allocation of
  Interests       Balance         Rate       Principal (3)    Interest (4)
  ---------       -------         ----       -------------    ------------

      1        $_________          (1)            A1            A1, AIO

      2        $_________          (1)            M1            M1, AIO

      3        $_________          (1)            M2            M2, AIO

      4        $_________          (1)            M3            M3, AIO

      5        $_________ (6)      (1)             O              AIO

      6            (2)             (2)            (2)              P

   Class RL        (5)             (5)            (5)             (5)

_________________
(1)  The Lower-Tier Pass-Through Rate on these Lower-Tier REMIC Regular
     Interests shall at any time of determination equal the Weighted Average
     Mortgage Rate of the Mortgage Loans.
(2)  Lower-Tier REMIC Interest 6 is entitled to distributions of all Prepayment
     Charges.  It is not entitled to any other distributions of principal or
     interest.

                                      11
<PAGE>

(3)  Distributions of principal and Realized Losses from the Lower-Tier REMIC
     Interests will be allocated to the related Upper-Tier REMIC Interests in
     the amounts and priorities provided for such Upper-Tier REMIC Interests in
     Section 4.1.
(4)  Distributions of interest from the Lower-Tier REMIC Interests will be
     allocated to the related Upper-Tier REMIC Interests in the amounts and
     priorities provided for such Upper-Tier REMIC Interests in Section 4.1.
(5)  On each Distribution Date, available funds, if any, remaining in the Lower-
     Tier REMIC after payments of interest and principal, as designated above,
     will be distributed to the Class RL Certificate.  It is expected that there
     shall not be any distributions on the Class RL Certificate.
(6)  Notional Principal Amount

          (c) The Class A-1, Class AIO, Class M-1, Class M-2, Class M-3, Class O
and Class P Certificates are hereby designated as "regular interests" with
respect to the Upper-Tier REMIC (the "Upper-Tier REMIC Regular Interests") and
                                      ----------------------------------
the Class RU Certificate is hereby designated as the single "residual interest"
with respect to the Upper-Tier REMIC. On each Distribution Date, available
funds, if any, remaining in the Upper-Tier REMIC after payments of interest and
principal as designated herein shall be distributed to the Class RU
Certificates.

          (d) For federal income tax purposes, the "latest possible maturity
date" for each of the Lower-Tier REMIC Regular Interests and Upper-Tier REMIC
Regular Interests is hereby set to be the Distribution Date of ___________.

                                  ARTICLE III

                         ADMINISTRATION AND SERVICING
                             OF THE MORTGAGE LOANS

     Section 3.01.  Servicer to Assure Servicing.
                    ----------------------------

          (a) The Servicer shall supervise, or take such actions as are
necessary to ensure, the servicing and administration of the Mortgage Loans and
any REO Property in accordance with this Agreement and its normal servicing
practices, which generally shall conform to the standards of an institution
prudently servicing mortgage loans for its own account and shall have full
authority to do anything it reasonably deems appropriate or desirable in
connection with such servicing and administration. The Servicer may perform its
responsibilities relating to servicing through other agents or independent
contractors, but shall not thereby be released from any of its responsibilities
as hereinafter set forth. Subject to Section 3.06(b), the authority of the
Servicer, in its capacity as Servicer, and any Subservicer acting on its behalf,
shall include, without limitation, the power to (i) consult with and advise any
Subservicer regarding administration of a related Mortgage Loan, (ii) approve
any recommendation by a Subservicer to foreclose on a related Mortgage Loan,
(iii) supervise the filing and collection of insurance claims and take or cause
to be taken such actions on behalf of the insured Person thereunder as shall be
reasonably necessary to prevent the denial of coverage thereunder, and (iv)
effectuate foreclosure or other conversion of the ownership of the Mortgaged
Property securing a related Mortgage Loan, including the employment of
attorneys, the institution of legal proceedings, the collection of deficiency
judgments, the acceptance of compromise proposals and any other matter
pertaining to a delinquent Mortgage Loan. The authority of the Servicer shall
include, in addition, the power on behalf of the Certificateholders, the
Trustee, or any of them to

                                      12
<PAGE>

(i) execute and deliver customary consents or waivers and other instruments and
documents, (ii) consent to transfer of any related Mortgaged Property and
assumptions of the related Mortgage Notes and Mortgages (in the manner provided
in this Agreement) and (iii) collect any Insurance Proceeds and Liquidation
Proceeds. Without limiting the generality of the foregoing, the Servicer and any
Subservicer acting on its behalf may, and is hereby authorized, and empowered by
the Trustee when the Servicer believes it is reasonably necessary in its best
judgment in order to comply with its servicing duties hereunder, to execute and
deliver, on behalf of itself, the Certificateholders, the Trustee, or any of
them, any instruments of satisfaction, cancellation, partial or full release,
discharge and all other comparable instruments, with respect to the related
Mortgage Loans, the insurance policies and the accounts related thereto, and the
Mortgaged Properties. The Servicer may exercise this power in its own name or in
the name of a Subservicer.

          The Servicer, in such capacity, may not consent to the placing of a
lien senior to that of the Mortgage on the related Mortgaged Property.

          The relationship of the Servicer (and of any successor to the Servicer
as servicer under this Agreement) to the Trust and the Trustee under this
Agreement is intended by the parties to be that of an independent contractor and
not that of a joint venturer, partner or agent.

          (b) Notwithstanding the provisions of Subsection 3.01(a), the Servicer
shall not take any action inconsistent with the interests of the Trustee, or the
Certificateholders or with the rights and interests of the Trustee, or the
Certificateholders under this Agreement.

          (c) The Certificate Administrator shall furnish or shall cause the
Trustee to furnish the Servicer with any powers of attorney and other documents
in form as provided to it necessary or appropriate to enable the Servicer to
service and administer the related Mortgage Loans and REO Property and the
Certificate Administrator and the Trustee shall not be liable for the actions of
the Servicer or any Subservicers under such powers of attorney.

     Section 3.02.  Subservicing Agreements Between Servicer and Subservicers.
                    ---------------------------------------------------------

          (a) The Servicer may enter into Subservicing Agreements with
Subservicers for the servicing and administration of the Mortgage Loans and for
the performance of any and all other activities of the Servicer hereunder. Each
Subservicer shall be either (i) an institution the accounts of which are insured
by the FDIC or (ii) another entity that engages in the business of originating
or servicing mortgage loans comparable to the Mortgage Loans, and in either case
shall be authorized to transact business in the state or states in which the
related Mortgaged Properties it is to service are situated, if and to the extent
required by applicable law to enable the Subservicer to perform its obligations
hereunder and under the Subservicing Agreement. Any Subservicing Agreement
entered into by the Servicer shall include the provision that such Agreement may
be immediately terminated (i) (x) with cause and without any termination fee by
the Servicer hereunder and/or (y) without cause, in which case the Servicer
shall be solely responsible for any termination fee or penalty resulting
therefrom and (ii) at the option of the Trustee upon the termination or
resignation of the Servicer hereunder, in which case the Servicer shall be
solely responsible for any termination fee or penalty resulting therefrom. In
addition,

                                      13
<PAGE>

each Subservicing Agreement shall provide for servicing of the Mortgage Loans
consistent with the terms of this Agreement. The Servicer and the Subservicers
may enter into Subservicing Agreements and make amendments to the Subservicing
Agreements or enter into different forms of Subservicing Agreements providing
for, among other things, the delegation by the Servicer to a Subservicer of
additional duties regarding the administration of the Mortgage Loans; provided,
however, that any such amendments or different forms shall be consistent with
and not violate the provisions of this Agreement, and that no such amendment or
different form shall be made or entered into which could be reasonably expected
to be materially adverse to the interests of the Certificateholders, without the
consent of the Certificateholders holding at least 51% of the aggregate Voting
Rights.

          (b) As part of its servicing activities hereunder, the Servicer, for
the benefit of the Trustee, and the Certificateholders, shall enforce the
obligations of each Subservicer under the related Subservicing Agreement. Such
enforcement, including, without limitation, the legal prosecution of claims,
termination of Subservicing Agreements and the pursuit of other appropriate
remedies, shall be in such form and carried out to such an extent and at such
time as the Servicer, in its good faith business judgment, would require were it
the owner of the related Mortgage Loans. The Servicer shall pay the costs of
such enforcement at its own expense, but shall be reimbursed therefor only (i)
from a general recovery resulting from such enforcement only to the extent, if
any, that such recovery exceeds all amounts due in respect of the related
Mortgage Loan or (ii) from a specific recovery of costs, expenses or attorneys'
fees against the party against whom such enforcement is directed.

     Section 3.03.  Successor Subservicers.
                    ----------------------

          The Servicer shall be entitled to terminate any Subservicing Agreement
that may exist in accordance with the terms and conditions of such Subservicing
Agreement and without any limitation by virtue of this Agreement; provided,
however, that upon termination, the Servicer shall either act as servicer of the
related Mortgage Loans or enter into an appropriate contract with a successor
Subservicer reasonably acceptable to the Certificate Administrator on behalf of
the Trustee, pursuant to which such successor Subservicer will be bound by all
relevant terms of the related Subservicing Agreement pertaining to the servicing
of such Mortgage Loans.

     Section 3.04.  Liability of the Servicer.
                    -------------------------

          (a) Notwithstanding any Subservicing Agreement, any of the provisions
of this Agreement relating to agreements or arrangements between the Servicer
and a Subservicer or reference to actions taken through a Subservicer or
otherwise, the Servicer shall under all circumstances remain obligated and
primarily liable to the Certificate Administrator, the Trustee, the
Certificateholders for the servicing and administering of the Mortgage Loans and
any REO Property in accordance with this Agreement. The obligations and
liability of the Servicer shall not be diminished by virtue of Subservicing
Agreements or by virtue of indemnification of the Servicer by any Subservicer,
or any other Person. The obligations and liability of the Servicer shall remain
of the same nature and under the same terms and conditions as if the Servicer
alone were servicing and administering the related Mortgage Loans. The Servicer
shall, however, be entitled to enter into indemnification agreements with any
Subservicer or other

                                      14
<PAGE>

Person and nothing in this Agreement shall be deemed to limit or modify such
indemnification. For the purposes of this Agreement, the Servicer shall be
deemed to have received any payment on a Mortgage Loan on the date the
Subservicer received such payment.

          (b) Any Subservicing Agreement that may be entered into and any
transactions or services relating to the Mortgage Loans involving a Subservicer
in its capacity as such and not as an originator shall be deemed to be between
the Subservicer and the Servicer alone, and the Certificate Administrator, the
Trustee and the Certificateholders shall not be deemed parties thereto and shall
have no claims, rights, obligations, duties or liabilities with respect to the
Subservicer except as set forth in Section 3.15.

     Section 3.05.  Assumption or Termination of Subservicing Agreements by the
                    -----------------------------------------------------------
Certificate Administrator.
-------------------------

          (a) If the Certificate Administrator or its designee as the successor
Servicer, shall assume the servicing obligations of the Servicer in accordance
with Section 7.02 below, the Certificate Administrator, to the extent necessary
to carry out the provisions of Section 7.02 with respect to the Mortgage Loans,
shall succeed to all of the rights and obligations of the Servicer under each of
the Subservicing Agreements.  In such event, the Certificate Administrator or
its designee as the successor Servicer shall be deemed to have assumed all of
the Servicer's rights and obligations therein and to have replaced the Servicer
as a party to such Subservicing Agreements to the same extent as if such
Subservicing Agreements had been assigned to the Certificate Administrator or
its designee as a successor Servicer, except that the Certificate Administrator
or its designee as a successor Servicer shall not be deemed to have assumed any
obligations or liabilities of the Servicer arising prior to such assumption or
as a result of the Certificate Administrator's terminating any Subservicer upon
the Certificate Administrator becoming successor Servicer and the Servicer shall
not thereby be relieved of any liability or obligations under such Subservicing
Agreements arising prior to such assumption or as a result of the Certificate
Administrator's terminating any Subservicer upon the Certificate Administrator
becoming successor Servicer.

          (b) The Certificate Administrator may terminate any Subservicer upon
becoming successor Servicer.

          (c) In the event that the Certificate Administrator or its designee as
successor Servicer assumes the servicing obligations of the Servicer under
Section 7.02, upon the request of the Certificate Administrator or such designee
as successor Servicer, the Servicer shall at its own expense deliver to the
Certificate Administrator, or at its written request to such designee, originals
or, if originals are not available, photocopies of all documents, files and
records, electronic or otherwise, relating to the Subservicing Agreements and
the related Mortgage Loans or REO Property then being serviced and an accounting
of amounts collected and held by it, if any, and will otherwise cooperate and
use its reasonable efforts to effect the orderly and efficient transfer of the
Subservicing Agreements, or responsibilities hereunder to the Certificate
Administrator, or at its written request to such designee as successor Servicer.

                                      15
<PAGE>

     Section 3.06.  Collection of Mortgage Loan Payments.
                    ------------------------------------

          (a) The Servicer will coordinate and monitor remittances by
Subservicers to it with respect to the Mortgage Loans in accordance with this
Agreement.

          (b) The Servicer shall make its best reasonable efforts to collect or
cause to be collected all payments required under the terms and provisions of
the Mortgage Loans and shall follow, and use its best reasonable efforts to
cause Subservicers to follow, collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account to the extent such procedures shall be consistent with this Agreement.
Consistent with the foregoing, the Servicer or the related Subservicer may in
its discretion (i) waive or permit to be waived any late payment charge,
prepayment charge, assumption fee, or any penalty interest in connection with
the prepayment of a Mortgage Loan and (ii) suspend or reduce or permit to be
suspended or reduced regular monthly payments for a period of up to six months,
or arrange or permit an arrangement with a Mortgagor for a scheduled liquidation
of delinquencies; provided, however, that the Servicer or the related
Subservicer may permit the foregoing only if it believes, in good faith, that
recoveries of Monthly Payments will be maximized; provided further, however,
with respect to Mortgage Loans insured by an MI Policy, that the Servicer may
not without the prior written consent of the MI Insurer permit any waiver,
modification or variance which would (a) change the loan rate, (b) forgive any
payment of principal or interest, (c) lessen the lien priority or (d) extend the
final maturity date of a Mortgage Loan past 12 months after the original
maturity date on such Mortgage Loan.  In the event the Servicer or related
Subservicer shall consent to the deferment of the due dates for payments due on
a Mortgage Note, the Servicer shall nonetheless make an Advance or shall cause
the related Subservicer to make an advance to the same extent as if such
installment were due, owing and delinquent and had not been deferred through
liquidation of the Mortgaged Property; provided, however, that the obligation of
the Servicer or the related Subservicer to make an Advance shall apply only to
the extent that the Servicer believes, in good faith, that such advances are not
Nonrecoverable Advances.

          (c) Within five Business Days after the Servicer has determined that
all amounts which it expects to recover from or on account of a Liquidated
Mortgage Loan have been recovered and that no further Liquidation Proceeds will
be received in connection therewith, the Servicer shall provide to the
Certificate Administrator a certificate of a Servicing Officer that such
Mortgage Loan became a Liquidated Mortgage Loan as of the date of such
determination.

          (d) The Servicer shall establish a segregated account in the name of
the Trustee (the "Collection Account"), which shall be an Eligible Account, in
                  ------------------
which the Servicer shall deposit or cause to be deposited any amounts
representing payments on and any collections in respect of the Mortgage Loans
received by it after the Cut-Off Date or, with respect to the Subsequent
Mortgage Loans, the Subsequent Cut-off Date (other than in respect of the
payments referred to in the following paragraph) within two Business Days
following receipt thereof, including the following payments and collections
received or made by it (without duplication):

          (i) all payments of principal or interest on the Mortgage Loans
     received by the Servicer directly from Mortgagors or from the respective
     Subservicer;

                                      16
<PAGE>

          (ii)  the aggregate Repurchase Price of the Mortgage Loans purchased
     by the Servicer pursuant to Section 3.18 or by the Converted Loan
     Purchaser, pursuant to Section 3.20;

          (iii) Net Liquidation Proceeds;

          (iv)  all proceeds of any Mortgage Loans repurchased by the Seller
     pursuant to the Purchase Agreement, and all Substitution Adjustment Amounts
     required to be deposited in connection with the substitution of an Eligible
     Substitute Mortgage Loan pursuant to the Purchase Agreement;

          (v)   Insurance Proceeds, other than Net Liquidation Proceeds, and MI
     Insurance Proceeds resulting from any insurance policy maintained on a
     Mortgaged Property;

          (vi)  any Advance and any Compensating Interest payments;

          (vii) any other amounts received by the Servicer, including all
     Foreclosure Profits, assumption fees, prepayment penalties and any other
     fees that are required to be deposited in the Collection Account pursuant
     to this Agreement.

provided, however, that with respect to each Due Period, the Servicer shall be
permitted to retain from payments in respect of interest on the Mortgage Loans,
the Servicing Fee for such Due Period. The foregoing requirements respecting
deposits to the Collection Account are exclusive, it being understood that,
without limiting the generality of the foregoing, the Servicer need not deposit
in the Collection Account late payment charges payable by Mortgagors, as further
described in Section 3.15, or amounts received by the Subservicer for the
accounts of Mortgagors for application towards the payment of taxes, insurance
premiums, assessments and similar items.  In the event any amount not required
to be deposited in the Collection Account is so deposited, the Servicer may at
any time (prior to being terminated under this Agreement) withdraw such amount
from the Collection Account, any provision herein to the contrary
notwithstanding.  The Servicer shall keep records that accurately reflect the
funds on deposit in the Collection Account that have been identified by it as
being attributable to the Mortgage Loans and shall hold all collections in the
Collection Account for the benefit of the Trustee, and the Certificateholders,
as their interests may appear.

          Funds in the Collection Account may be invested in Eligible
Investments, but shall not be commingled with the Servicer's own funds or
general assets or with funds respecting payments on mortgage loans or with any
other funds not related to the Certificates. Income earned on such Eligible
Investments shall be for the account of the Servicer.

          (e) The Servicer will require each Subservicer to hold all funds
constituting collections on the Mortgage Loans, pending remittance thereof to
the Servicer, in one or more accounts in the name of the Trustee meeting the
requirements of an Eligible Account, and such funds shall not be invested.  The
Subservicer shall segregate and hold all funds collected and received pursuant
to each Mortgage Loan separate and apart from any of its own funds and

                                      17
<PAGE>

general assets and any other funds. Each Subservicer shall make remittances to
the Servicer no later than one Business Day following receipt thereof and the
Servicer shall deposit any such remittances received from any Subservicer within
one Business Day following receipt by the Servicer.

     Section 3.07.  Withdrawals from the Collection Account.
                    ---------------------------------------

          (a)   The Servicer shall, from time to time as provided herein, make
withdrawals from the Collection Account of amounts on deposit therein pursuant
to Section 3.06 that are attributable to the Mortgage Loans for the following
purposes (without duplication):

          (i)   to deposit in the Payment Account, by the Servicer Remittance
     Date prior to each Distribution Date, all collections on the Mortgage Loans
     required to be distributed from the Payment Account on a Distribution Date;

          (ii)  to the extent deposited to the Collection Account, to reimburse
     itself or the related Subservicer for previously unreimbursed expenses
     incurred in maintaining individual insurance policies pursuant to Section
     3.11, or Liquidation Expenses, paid pursuant to Section 3.13, such
     withdrawal right being limited to amounts received on particular Mortgage
     Loans (other than any Repurchase Price in respect thereof) which represent
     late recoveries of the payments for which such advances were made, or from
     related Liquidation Proceeds;

          (iii) to pay to itself out of each payment received on account of
     interest on a Mortgage Loan as contemplated by Section 3.15, an amount
     equal to the related Servicing Fee (to the extent not retained pursuant to
     Section 3.06);

          (iv)  to pay to itself or the Seller, with respect to any Mortgage
     Loan or property acquired in respect thereof that has been purchased by the
     Seller, the Servicer or other entity, all amounts received thereon and not
     required to be distributed to Certificateholders as of the date on which
     the related Repurchase Price is determined;

          (v)   to reimburse the Servicer or any Subservicer for any
     unreimbursed Advance of its own funds or any unreimbursed advance of such
     Subservicer's own funds, the right of the Servicer or a Subservicer to
     reimbursement pursuant to this subclause (v) being limited to amounts
     received on a particular Mortgage Loan (including, for this purpose, the
     Repurchase Price therefor, Insurance Proceeds and Liquidation Proceeds)
     which represent late payments or recoveries of the principal of or interest
     on such Mortgage Loan respecting which such Advance or advance was made;

          (vi)  to reimburse the Servicer or any Subservicer from Insurance
     Proceeds or Liquidation Proceeds relating to a particular Mortgage Loan for
     amounts expended by the Servicer or such Subservicer pursuant to Section
     3.13 in good faith in connection with the restoration of the related
     Mortgage Property which was damaged by the uninsured cause or in connection
     with the liquidation of such Mortgage Loan;

                                      18
<PAGE>

          (vii)  to reimburse the Servicer or any Subservicer for any
     unreimbursed Nonrecoverable Advance previously made, and otherwise not
     reimbursed pursuant to this Subsection 3.07(a);

          (viii) to withdraw any other amount deposited in the Collection
     Account that was not required to be deposited therein pursuant to Section
     3.06;

          (ix)   to reimburse the Servicer for costs associated with the
     environmental report specified in Section 3.13(c);

          (x)    to clear and terminate the Collection Account upon a
     termination pursuant to Section 7.08;

          (xi)   to pay to the Servicer income earned on Eligible Investments in
     the Collection Account;

          (xii)  to pay to the MI Insurer the monthly MI Premiums due under each
     MI Policy from payments received (or Advances made) on account of interest
     due on the related Mortgage Loan; and

          (xiii) to make an Advance with respect to a delinquent Mortgage Loan
     from funds held in the Collection Account as contemplated by Section 3.24,
     provided that the amount withdrawn for such an Advance is immediately
     deposited into the Payment Account.

Withdrawals made pursuant to clause (xii) shall be made on a first priority
basis.  In connection with withdrawals pursuant to clauses (ii), (iii), (iv),
(v) and (vi), the Servicer's entitlement thereto is limited to collections or
other recoveries on the related Mortgage Loan, and the Servicer shall keep and
maintain separate accounting, on a Mortgage Loan by Mortgage Loan basis, for the
purpose of justifying any withdrawal from the Collection Account pursuant to
such clauses.

          (b)    Notwithstanding the provisions of this Section 3.07, the
Servicer may, but is not required to, allow the Subservicers to deduct from
amounts received by them or from the related account maintained by a
Subservicer, prior to deposit in the Collection Account, any portion to which
such Subservicers are entitled as reimbursement of any reimbursable Advances
made by such Subservicers.

     Section 3.08.  Collection of Taxes, Assessments and Similar Items;
                    ---------------------------------------------------
Servicing Accounts.
------------------

          (a)    The Servicer shall establish and maintain or cause the related
Subservicer to establish and maintain, one or more Servicing Accounts. The
Servicer or a Subservicer will deposit and retain therein all collections from
the Mortgagors for the payment of taxes, assessments, insurance premiums, or
comparable items as agent of the Mortgagors.

          (b)    The deposits in the Servicing Accounts shall be held in trust
by the Servicer or a Subservicer (and its successors and assigns) in the name of
the Trustee. Such Servicing Accounts shall be Eligible Accounts and, if
permitted by applicable law, invested in

                                      19
<PAGE>

Eligible Investments held in trust by the Servicer or a Subservicer as described
above and maturing, or be subject to redemption or withdrawal, no later than the
date on which such funds are required to be withdrawn, and in no event later
than 45 days after the date of investment; withdrawals of amounts from the
Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the Servicer
or a Subservicer for any advances made with respect to such items, to refund to
any Mortgagors any sums as may be determined to be overages, to pay interest, if
required, to Mortgagors on balances in the Servicing Accounts or to clear and
terminate the Servicing Accounts at or any time after the termination of this
Agreement. Amounts received from Mortgagors for deposit into the Servicing
Accounts shall be deposited in the Servicing Accounts by the Servicer within two
days of receipt. The Servicer shall advance from its own funds amounts needed to
pay items payable from the Servicing Accounts if the Servicer reasonably
believes that such amounts are recoverable from the related Mortgagor. The
Servicer shall comply with all laws relating to the Servicing Accounts,
including laws relating to payment of interest on the Servicing Accounts. If
interest earned by the Servicer on the Servicing Accounts is not sufficient to
pay required interest on the Servicing Accounts, the Servicer shall pay the
difference from its own funds. The Servicing Accounts shall not be the property
of the Trust.

     Section 3.09.  Access to Certain Documentation and Information Regarding
                    ------------------------------------------------------------
the Mortgage Loans.
------------------

          The Servicer shall provide, and shall cause any Subservicer to
provide, to the Certificate Administrator and the Trustee, access to the
documentation regarding the related Mortgage Loans and REO Property and to the
Certificateholders, the FDIC, and the supervisory agents and examiners of the
FDIC (to which the Certificate Administrator and the Trustee shall also provide)
access to the documentation regarding the related Mortgage Loans required by
applicable regulations, such access being afforded without charge but only upon
reasonable request and during normal business hours at the offices of the
Servicer or the Subservicers that are designated by these entities; provided,
however, that, unless otherwise required by law, the Certificate Administrator,
and the Trustee shall not be required to provide access to such documentation if
the provision thereof would violate the legal right to privacy of any Mortgagor;
provided, further, however, that the Certificate Administrator and the Trustee,
shall coordinate their requests for such access so as not to impose an
unreasonable burden on, or cause an unreasonable interruption of, the business
of the Servicer or any Subservicer. The Servicer, the Subservicers, the Trustee
and the Certificate Administrator shall allow representatives of the above
entities to photocopy any of the documentation and shall provide equipment for
that purpose at a charge that covers their own actual out-of-pocket costs.

     Section 3.10.  Maintenance of Hazard Insurance and Fidelity Coverage.
                    -----------------------------------------------------

          (a) The Servicer shall maintain and keep, or cause each Subservicer to
maintain and keep, with respect to each Mortgage Loan and each REO Property, in
full force and effect hazard insurance (fire insurance with extended coverage)
equal to at least the lesser of the Principal Balance of the Mortgage Loan (or
the combined Principal Balance owing on such Mortgage Loan and any mortgage loan
senior to such Mortgage Loan) or the current replacement cost of the Mortgaged
Property, and containing a standard mortgagee clause, provided, however,

                                      20
<PAGE>

that the amount of hazard insurance may not be less than the amount necessary to
prevent loss due to the application of any co-insurance provision of the related
policy. Unless applicable state law requires a higher deductible, the deductible
on such hazard insurance policy may be no more than $1,500 or 1% of the
applicable amount of coverage, whichever is less. In the case of a condominium
unit or a unit in a planned unit development, the required hazard insurance
shall take the form of a multi-peril policy covering the entire condominium
project or planned unit development, in an amount equal to at least 100% of the
insurable value based on replacement cost. If the Servicer shall obtain and
maintain a blanket policy consistent with its general mortgage servicing
activities insuring against hazard losses on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations as set forth in this
Section 3.11(a), it being understood and agreed that such policy may contain a
deductible clause, in which case the Servicer shall, in the event that there
shall not have been maintained on the related Mortgaged Property a policy
complying with this Section 3.11(a) and there shall have been a loss which would
have been covered by such policy, deposit in the Collection Account the amount
not otherwise payable under the blanket policy because of such deductible clause
without any right of reimbursement. Any such deposit by the Servicer shall be
made on the last Business Day of the Due Period in the month in which payments
under any such policy would have been deposited in the Collection Account. In
connection with its activities as servicer of the Mortgage Loans, the Servicer
agrees to present, on behalf of itself, the Trust, and the Trustee, claims under
any such blanket policy.

          (b) Any amounts collected by the Servicer or a Subservicer under any
such hazard insurance policy (other than amounts to be applied to the
restoration or repair of the Mortgaged Property or amounts released to the
Mortgagor in accordance with the Servicer's or a Subservicer's normal servicing
procedures, the Mortgage Note, the Mortgage or applicable law) shall be
deposited in the Collection Account.

          (c) Any cost incurred by a Servicer or a Subservicer in maintaining
any such individual hazard insurance policies shall not be added to the amount
owing under the Mortgage Loan for the purpose of calculating monthly
distributions to Certificateholders, notwithstanding that the terms of the
Mortgage Loan so permit. Such costs of maintaining individual hazard insurance
policies shall be recoverable by the Servicer or a Subservicer out of related
late payments by the Mortgagor or out of Insurance Proceeds or Liquidation
Proceeds or by the Servicer from the Repurchase Price, to the extent permitted
by Section 3.07.

          (d) No earthquake or other additional insurance is to be required of
any Mortgagor or maintained on property acquired with respect to a Mortgage
other than pursuant to such applicable laws and regulations as shall at any time
be in force and shall require such additional insurance. When, at the time of
origination of the Mortgage Loan or at any subsequent time, the Mortgaged
Property is located in a federally designated special flood hazard area, the
Servicer shall use its best reasonable efforts to cause with respect to the
Mortgage Loans and each REO Property flood insurance (to the extent available
and in accordance with mortgage servicing industry practice) to be maintained.
Such flood insurance shall cover the Mortgaged Property, including all items
taken into account in arriving at the Appraised Value on which the Mortgage Loan
was based, and shall be in an amount equal to the lesser of (i) the Principal
Balance of the related Mortgage Loan and (ii) the minimum amount required under
the terms of

                                      21
<PAGE>

coverage to compensate for any damage or loss on a replacement cost basis, but
not more than the maximum amount of such insurance available for the related
Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program). Unless applicable state
law requires a higher deductible, the deductible on such flood insurance may not
exceed $1,500 or 1% of the applicable amount of coverage, whichever is less.

          (e) If insurance has not been maintained complying with Subsections
3.11 (a) and (d) and there shall have been a loss which would have been covered
by such insurance had it been maintained, the Servicer shall pay, or cause the
related Subservicer to pay, for any necessary repairs without any right of
reimbursement.

          (f) The Servicer shall present, or cause the related Subservicer to
present, claims under any related hazard insurance or flood insurance policy.

          (g) The Servicer shall obtain and maintain at its own expense, and
shall cause each Subservicer to obtain and maintain at its own expense, and for
the duration of this Agreement, a blanket fidelity bond and an errors and
omissions insurance policy covering the Servicer's and such Subservicer's
officers, employees and other persons acting on its behalf in connection with
its activities under this Agreement. The amount of coverage shall be consistent
with industry standards but in an amount not less than presently maintained by
the Servicer. The Servicer shall promptly notify the Certificate Administrator
and the Trustee of any material change in the terms of such bond or policy. The
Servicer shall provide annually to the Certificate Administrator and the Trustee
a certificate of insurance that such bond and policy are in effect. If any such
bond or policy ceases to be in effect, the Servicer shall, to the extent
possible, give the Certificate Administrator and the Trustee ten days' notice
prior to any such cessation and shall use its reasonable best efforts to obtain
a comparable replacement bond or policy, as the case may be. Any amounts
relating to the Mortgage Loans collected under such bond or policy shall be
deposited in the Collection Account.

     Section 3.11.  Due-on-Sale Clauses; Assumption Agreements.
                    ------------------------------------------

          (a) In any case in which the Servicer is notified by any Mortgagor or
Subservicer that a Mortgaged Property relating to a Mortgage Loan has been or is
about to be conveyed by the Mortgagor, the Servicer shall enforce, or shall
instruct such Subservicer to enforce, any due-on-sale clause contained in the
related Mortgage to the extent permitted under the terms of the related Mortgage
Note and by applicable law.  The Servicer or the related Subservicer may
repurchase a Mortgage Loan at the Repurchase Price when the Servicer requires
acceleration of the Mortgage Loan, but only if the Servicer is satisfied, as
evidenced by an Officer's Certificate delivered to the Certificate Administrator
and the Trustee, that such Mortgage Loan is in default or default is reasonably
foreseeable.  If the Servicer reasonably believes that such due-on-sale clause
cannot be enforced under applicable law or if the Mortgage Loan does not contain
a due-on-sale clause, the Servicer is authorized, and may authorize any
Subservicer, to consent to a conveyance subject to the lien of the Mortgage,
and, with the consent of the MI Insurer, if applicable, to take or enter into an
assumption agreement from or with the Person to whom such property has been or
is about to be conveyed, pursuant to which such

                                      22
<PAGE>

Person becomes liable under the related Mortgage Note and unless prohibited by
applicable state law, on condition, however, that the related Mortgage Loan
shall continue to be covered by a hazard policy. In connection with any such
assumption, no material term of the related Mortgage Note may be changed. The
Servicer shall notify the Certificate Administrator and the Trustee, whenever
possible, before the completion of such assumption agreement, and shall forward
to the Certificate Administrator the original copy of such assumption agreement,
which copy shall be added by the Certificate Administrator to the related
Mortgage File and which shall, for all purposes, be considered a part of such
Mortgage File to the same extent as all other documents and instruments
constituting a part thereof.

          (b) Notwithstanding the foregoing paragraph or any other provision of
this Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Mortgage Loan by operation of law or any conveyance by the Mortgagor of the
related Mortgaged Property or assumption of a Mortgage Loan which the Servicer
reasonably believes it may be restricted by law from preventing, for any reason
whatsoever or if the exercise of such right would impair or threaten to impair
any recovery under any applicable insurance policy.

     Section 3.12.  Realization Upon Defaulted Mortgage Loans.
                    -----------------------------------------

          (a) The Servicer shall, or shall direct the related Subservicer to,
foreclose upon or otherwise comparably convert the ownership of properties
securing any Mortgage Loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments pursuant to Section 3.06, except that the Servicer shall not, and shall
not direct the related Subservicer to, foreclose upon or otherwise comparably
convert a Mortgaged Property if there is evidence of toxic waste or other
environmental hazards thereon unless the Servicer follows the procedures in
Subsection (c) below.  In connection with such foreclosure or other conversion,
the Servicer in conjunction with the related Subservicer, if any, shall use its
best reasonable efforts to preserve REO Property and to realize upon defaulted
Mortgage Loans in such manner as to maximize the receipt of principal and
interest by the Certificateholders, taking into account, among other things, the
timing of foreclosure and the considerations set forth in Subsection 3.13(b).
The foregoing is subject to the proviso that the Servicer shall not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of any property unless it determines in good faith (i) that such
restoration or foreclosure will increase the proceeds of liquidation of the
Mortgage Loan to Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it either through
Liquidation Proceeds (respecting which it shall have priority for purposes of
reimbursements from the Collection Account pursuant to Section 3.07) or through
Insurance Proceeds (respecting which it shall have similar priority).  The
Servicer shall be responsible for all costs and expenses constituting
Liquidation Expenses incurred by it in any such proceedings; provided, however,
that it shall be entitled to reimbursement thereof (as well as its normal
servicing compensation) as set forth in Section 3.07.  Any income from or other
funds (net of any income taxes) generated by REO Property shall be deemed for
purposes of this Agreement to be Liquidation Proceeds.

                                      23
<PAGE>

          Any subsequent collections with respect to any Liquidated Mortgage
Loan shall be deposited to the Collection Account. For purposes of determining
the amount of any Liquidation Proceeds or Insurance Proceeds, or other
unscheduled collections, the Servicer may take into account any estimated
additional Liquidation Expenses expected to be incurred in connection with the
related defaulted Mortgage Loan.

          In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
shall be issued to the Trustee and held by the Certificate Administrator, who
shall hold the same on behalf of Trustee and the Trust in accordance with the
Agreement.  Notwithstanding any such acquisition of title and cancellation of
the related Mortgage Loan, such Mortgaged Property shall (except as otherwise
expressly provided herein) be considered to be an outstanding Mortgage Loan held
as an asset of the Trust until such time as such property shall be sold.

          (b) The Servicer shall not acquire any real property (or any personal
property incident to such real property) on behalf of the Trust Fund except in
connection with a default or reasonably foreseeable default of a Mortgage Loan.
In the event that the Servicer acquires any real property (or personal property
incident to such real property) on behalf of the Trust Fund in connection with a
default or imminent default of a Mortgage Loan, such property shall be disposed
of by the Servicer on behalf of the Trust Fund within three years after its
acquisition on behalf of the Trust Fund.

          (c) With respect to any Mortgage Loan as to which the Servicer or a
Subservicer has received notice of, or has actual knowledge of, the presence of
any toxic or hazardous substance on the Mortgaged Property, the Servicer shall
promptly notify the Certificate Administrator and the Trustee, and shall act in
accordance with any such directions and instructions provided by the Certificate
Administrator on behalf of, and after consulting with the Trustee.  If the
Certificate Administrator, on behalf of the Trustee has not provided directions
and instructions to the Servicer in connection with any such Mortgage Loan
within 5 days of a request by the Servicer for such directions and instructions,
then the Servicer shall take such action as it deems to be in the best economic
interest of the Trust Fund (other than proceeding against the Mortgaged
Property) and is hereby authorized at such time as it deems appropriate to
release such Mortgaged Property from the lien of the related Mortgage.  The
parties hereto acknowledge that the Servicer shall not obtain on behalf of the
Trust a deed as a result or in lieu of foreclosure, and shall not otherwise
acquire possession of or title to, or commence any proceedings to acquire
possession of or title to, or take any other action with respect to, any
Mortgaged Property, if the Trust could reasonably be considered to be a
responsible party for any liability arising from the presence of any toxic or
hazardous substance on the Mortgaged Property.

     Section 3.13.  Certificate Administrator to Cooperate; Release of Mortgage
                    -----------------------------------------------------------
Files.
-----

          (a) Upon payment in full of any Mortgage Loan, the Servicer will
immediately notify the Certificate Administrator and the Trustee by a
certification signed by a Servicing Officer (which certification shall include a
statement to the effect that all amounts received in connection with such
payment which are required to be deposited in the Collection Account have

                                      24
<PAGE>

been so deposited) and shall request delivery to the Servicer or Subservicer, as
the case may be, of the Mortgage File. Upon receipt of such certification and
request, the Certificate Administrator on behalf of the Trustee shall promptly
cause to be released the related Mortgage File to the Servicer or Subservicer
and execute and deliver to the Servicer, without recourse, the request for
reconveyance, deed of reconveyance or release or satisfaction of mortgage or
such instrument releasing the lien of the Mortgage (furnished by the Servicer),
together with the Mortgage Note with written evidence of cancellation thereon.

          (b) From time to time as is appropriate, for the servicing or
foreclosure of any Mortgage Loan or collection under an insurance policy, the
Servicer may deliver to the Certificate Administrator a Request for Release
signed by a Servicing Officer on behalf of the Servicer in substantially the
form attached as Exhibit E hereto. Upon receipt of the Request for Release, the
Certificate Administrator on behalf of the Trustee shall deliver the Mortgage
File or any document therein to the Servicer or Subservicer, as the case may be,
as bailee for the Trustee.

          (c) The Servicer shall cause each Mortgage File or any document
therein released pursuant to Subsection 3.14(b) to be returned to the
Certificate Administrator when the need therefor no longer exists, and in any
event within 21 days of the Servicer's receipt thereof, unless the Mortgage Loan
has become a Liquidated Mortgage Loan and the Liquidation Proceeds relating to
the Mortgage Loan have been deposited in the Collection Account or such Mortgage
File is being used to pursue foreclosure or other legal proceedings. Prior to
return of a Mortgage File or any document to the Certificate Administrator, the
Servicer, the related insurer or Subservicer to whom such file or document was
delivered shall retain such file or document in its respective control as bailee
for the Certificate Administrator on behalf of the Trustee unless the Mortgage
File or such document has been delivered to an attorney, or to a public trustee
or other public official as required by law, to initiate or pursue legal action
or other proceedings for the foreclosure of the Mortgaged Property either
judicially or non-judicially, and the Servicer has delivered to the Certificate
Administrator and the Trustee, a certificate of a Servicing Officer certifying
as to the name and address of the Person to which such Mortgage File or such
document was delivered and the purpose or purposes of such delivery. If a
Mortgage Loan becomes a Liquidated Mortgage Loan, the Certificate Administrator
on behalf of the Trustee shall deliver the Request for Release with respect
thereto to the Servicer upon deposit of the related Liquidation Proceeds in the
Collection Account.

          (d) The Certificate Administrator on behalf of the Trustee shall
execute and deliver or cause to be executed and delivered to the Servicer any
court pleadings, requests for trustee's sale or other documents necessary to (i)
the foreclosure or trustee's sale with respect to a Mortgaged Property; (ii) any
legal action brought to obtain judgment against any Mortgagor on the Mortgage
Note or Mortgage; (iii) obtain a deficiency judgment against the Mortgagor; or
(iv) enforce any other rights or remedies provided by the Mortgage Note or
Mortgage or otherwise available at law or equity. Together with such documents
or pleadings the Servicer shall deliver to the Certificate Administrator and the
Trustee a certificate of a Servicing Officer in which it requests the
Certificate Administrator on behalf of the Trustee to execute or cause to be
executed the pleadings or documents. The certificate shall certify and explain
the reasons for which the pleadings or documents are required. It shall further
certify that the Trustee's or the Certificate Administrator's execution and
delivery of the pleadings or documents will not invalidate any

                                      25
<PAGE>

insurance coverage under the insurance policies or invalidate or otherwise
affect the lien of the Mortgage, except for the termination of such a lien upon
completion of the foreclosure or trustee's sale.

     Section 3.14.  Servicing Compensation.
                    ----------------------

          (a) As compensation for its activities hereunder, the Servicer shall
be entitled to receive the Servicing Fee (out of which it will pay the Trustee)
from full payments of accrued interest on each Mortgage Loan. The Servicer shall
be solely responsible for paying any and all fees with respect to a Subservicer,
and the Trustee and the Trust Fund shall not bear any fees, expenses or other
costs directly associated with any Subservicer.

          (b) The Servicer may retain additional servicing compensation in the
form of late payment charges, to the extent such charges are collected from the
related Mortgagors and investment earnings on the Collection Account. The
Servicer shall be required to pay all expenses it incurs in connection with
servicing activities under this Agreement and shall not be entitled in
connection with servicing activities under this Agreement to reimbursement
except as provided in this Agreement. Expenses to be paid by the Servicer
without reimbursement under this Subsection 3.15(b) shall include payment of the
expenses of the accountants retained pursuant to Section 3.17.

     Section 3.15.  Annual Statements of Compliance.
                    -------------------------------

          Within 90 days after December 31 of each year, the Servicer at its own
expense shall deliver to the Certificate Administrator, with a copy to the
Trustee and the Rating Agencies, an Officer's Certificate stating, as to the
signer thereof, that (i) a review of the activities of the Servicer during the
preceding calendar year and of performance under this Agreement has been made
under such officer's supervision, (ii) to the best of such officer's knowledge,
based on such review, the Servicer has fulfilled its obligations under this
Agreement in all material respects for such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof including the steps
being taken by the Servicer to remedy such default; (iii) a review of the
activities of each Subservicer during the Subservicer's most recently ended
calendar year and its performance under its Subservicing Agreement has been made
under such officer's supervision; and (iv) to the best of the Servicing
Officer's knowledge, based on his review and the certification of an officer of
the Subservicer (unless the Servicing Officer has reason to believe that
reliance on such certification is not justified), either each Subservicer has
performed and fulfilled its duties, responsibilities and obligations under this
Agreement and its Subservicing Agreement in all material respects throughout the
year, or, if there has been a default in performance or fulfillment of any such
duties, responsibilities or obligations, specifying the nature and status of
each such default known to the Servicing Officer.  Copies of such statements
shall be provided by the Servicer to the Certificateholders upon request or by
the Certificate Administrator at the expense of the Servicer should the Servicer
fail to provide such copies.

                                      26
<PAGE>

     Section 3.16.  Annual Independent Public Accountants' Servicing Report.
                    -------------------------------------------------------

          (a) Within 90 days after December 31 of each year, the Servicer, at
its expense, shall cause a firm of independent public accountants who are
members of the American Institute of Certified Public Accountants to furnish a
statement to the Servicer, which will be provided to the Certificate
Administrator, the Trustee, and the Rating Agencies, to the effect that, in
connection with the firm's examination of the Servicer's financial statements as
of the end of such calendar year, nothing came to their attention that indicated
that the Servicer was not in compliance with Sections 3.06, 3.07 and 3.08 except
for (i) such exceptions as such firm believes to be immaterial and (ii) such
other exceptions as are set forth in such statement.

          (b) Within 90 days after December 31 of each year, the Servicer, at
its expense, shall, and shall cause each Subservicer to cause, a nationally
recognized firm of independent certified public accountants to furnish to the
Servicer or such Subservicer, as the case may be, a report stating that (i) it
has obtained a letter of representation regarding certain matters from the
management of the Servicer or such Subservicer, as the case may be, which
includes an assertion that the Servicer or such Subservicer, as the case may be,
has complied with certain minimum mortgage loan servicing standards identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America with respect to the servicing of
first lien conventional single family mortgage loans during the most recently
completed calendar year and (ii) on the basis of an examination conducted by
such firm in accordance with standards established by the American Institute of
Certified Public Accountants, such representation is fairly stated in all
material respects, subject to such exceptions and other qualifications that may
be appropriate.  Immediately upon receipt of such report, the Servicer shall or
shall cause each Subservicer to furnish a copy of such report to the Certificate
Administrator, the Trustee and the Rating Agencies.

     Section 3.17.  Optional Purchase of Defaulted Mortgage Loans.
                    ---------------------------------------------

          The Servicer may repurchase any Mortgage Loan delinquent in payment
for a period of 90 days or longer for a price equal to the Repurchase Price.
The procedure for such repurchase shall be the same as for repurchase by the
Seller under the Purchase Agreement. Notwithstanding any contrary provision of
this Agreement, with respect to any Mortgage Loan which is not in default or as
to which no default is imminent, no purchase or substitution pursuant to Section
2.03 or this Section 3.18 shall be made unless the Servicer provides to the
Certificate Administrator and the Trustee, an Opinion of Counsel to the effect
that such purchase or substitution would not (i) result in the imposition of
taxes on "prohibited transactions" of the Trust Fund, as defined in Section 860F
of the Code or a tax or contributions to the Trust Fund under the REMIC
Provisions, or (ii) cause the Trust Fund to fail to qualify as a REMIC at any
time that any Certificates are outstanding.  Any Mortgage Loan to be purchased
or substituted pursuant to this Section 3.18 shall be purchased or substituted
(subject to compliance with this Section 3.18) upon the earlier of (x) the
occurrence of a default or reasonably foreseeable default with respect to such
Mortgage Loan or (y) receipt by the Certificate Administrator and the Trustee,
of an Opinion of Counsel to the effect that such purchase or substitution will
not result in the events described in clauses (i) and (ii) of the preceding
sentence.

                                      27
<PAGE>

     Section 3.18.  Information Required by the Internal Revenue Service
                    ----------------------------------------------------
Generally and Reports of Foreclosures and Abandonments of Mortgaged Property.
----------------------------------------------------------------------------

          The Servicer shall prepare and deliver all federal and state
information reports when and as required by all applicable state and federal
income tax laws. In particular, with respect to the requirement under Section
6050J of the Code to the effect that the Servicer or Subservicer shall make
reports of foreclosures and abandonments of any mortgaged property, the Servicer
or Subservicer shall file reports relating to each instance occurring during the
previous calendar year in which the Servicer (i) acquires an interest in any
Mortgaged Property through foreclosure or other comparable conversion in full or
partial satisfaction of a Mortgage Loan, or (ii) knows or has reason to know
that any Mortgaged Property has been abandoned. The reports from the Servicer or
Subservicer shall be in form and substance sufficient to meet the reporting
requirements imposed by Section 6050J, Section 6050H (reports relating to
mortgage interest received) and Section 6050P of the Code (reports relating to
cancellation of indebtedness).

     Section 3.19.  Purchase of Converted Mortgage Loans.
                    ------------------------------------

          Pursuant to the Converted Loan Purchase Agreement, the Converted Loan
Purchaser shall be obligated to purchase from the Trust any Converted Mortgage
Loans at the Repurchase Price.  The Servicer shall promptly notify the
Certificate Administrator, the Trustee and the Converted Loan Purchaser of each
Mortgage Loan which becomes a Converted Mortgage Loan.  If the Converted Loan
Purchaser fails to purchase any Converted Loan, the Servicer shall be terminated
and the Certificate Administrator shall be the Servicer and is obligated to make
such purchase under the Converted Loan Purchase Agreement.

     Section 3.20.  [Reserved]
                    ----------

     Section 3.21.  Servicing and Administrating of the MI Policies.
                    -----------------------------------------------

          (a) The Servicer shall take all such actions on behalf of the Trustee
as are necessary to service, maintain and administer the MI Policies and to
perform the Trustee's obligations and enforce the Trustee's rights under the MI
Policies, which actions shall conform to the standards of an institution
prudently administering MI Policies for its own account. Except as expressly set
forth herein, the Servicer shall have full authority on behalf of the Trust to
do anything it reasonably deems appropriate or desirable in connection with the
servicing, maintenance and administration of the MI Policies. The Servicer shall
make its best reasonable efforts to file all insured claims under the MI
Policies and collect from the MI Insurer all Insurance Proceeds due to the
Trustee under the MI Policies. The Servicer shall not take, or permit any
subservicer to take, any action which would result in non-coverage under any
applicable MI Policy of any loss which, but for the actions of the Servicer or
Subservicer, would have been covered thereunder. To the extent coverage is
available, the Servicer shall keep or cause to be kept in full force and effect
each such MI Policy for the life of the Mortgage Loan; provided, however, that
if a MI Insurer Insolvency Event has occurred and is continuing, the Servicer
may terminate the MI Policy on any Mortgage Loan that is not then past due. The
Servicer shall cooperate with the MI Insurer and shall use its best efforts to
furnish all reasonable

                                      28
<PAGE>

aid, evidence and information in the possession of the Servicer or to which the
Servicer has access with respect to any Mortgage Loan.

          (b) The Servicer shall deposit into the Collection Account pursuant to
Section 3.06(d)(v) hereof all MI Insurance Proceeds received from the MI Insurer
under the terms of the MI Policies.  The Servicer shall withdraw from the
Collection Account and pay to the MI Insurer pursuant to Section 3.07(a)(xii)
hereof, the monthly MI Premiums due to the MI Insurer in accordance with the
terms of the MI Insurance Agreements.

          (c) Notwithstanding the provisions of Subsection 3.22(a) and (b), the
Servicer shall not take any action in regard to the MI Policies inconsistent
with the interests of the Trustee or the Certificateholders or with the rights
and interests of the Trustee or the Certificateholders under this Agreement;
provided, however, that payments of the monthly MI Premiums to the MI Insurer
pursuant to Subsection 3.22(b) above and Section 3.07(a)(xiii) hereof shall be
deemed not to be inconsistent with such interests.

          (d) The Trustee and the Certificate Administrator on behalf of the
Trustee shall furnish the Servicer with any powers of attorney and other
documents in form as provided to it necessary or appropriate to enable the
Servicer to service and administer the MI Policies; provided, however, that
neither the Certificate Administrator nor the Trustee shall be liable for the
actions of the Servicer under such powers of attorney.

          (e) If at any time during the term of this Agreement, a MI Insurer
Insolvency Event has occurred and is continuing, the Servicer agrees to review,
not less often than monthly, the financial condition of the related MI Insurer
with a view towards determining whether recoveries under the MI Policy are
jeopardized for reasons related to the financial condition of the related MI
Insurer.  In such event, the Servicer may obtain an additional MI Policy or a
replacement MI Policy, the MI Premiums on which would be paid by the Servicer
from the Collection Account pursuant to Section 3.07(a)(xiii) hereof.

          (f) The Servicer shall comply with all other terms, conditions and
obligations set forth in the MI Policies.

     Section 3.22.  Determination Date Reports.
                    --------------------------

          On the second Business Day following each Determination Date, the
Servicer shall deliver to the Certificate Administrator a report, prepared as of
the close of business on the Determination Date (the "Determination Date
                                                      ------------------
Report"), and shall forward to the Certificate Administrator in the form of
------
computer readable electromagnetic tape or disk a copy of such report. The
Determination Date Report and any written information supplemental thereto shall
include such information with respect to the Mortgage Loans that is reasonably
available to the Servicer and that is required by the Certificate Administrator
for purposes of making the calculations and providing the reports referred to in
this Agreement, as set forth in written specifications or guidelines issued by
the Certificate Administrator from time to time. Such information shall include
the aggregate amounts required to be withdrawn from the Collection Account and
deposited into the Payment Account pursuant to Section 3.07. Such information

                                      29
<PAGE>

shall also include (a) the number of Mortgage Loans that prepaid in the previous
month; (b) the loan balance of each such Mortgage Loan; (c) whether a prepayment
penalty was applied to such Mortgage Loan; and (d) the amount of prepayment
penalty with respect to each such Mortgage Loan.  The Servicer agrees to
cooperate with the Certificate Administrator in providing all information as is
reasonably requested by the Certificate Administrator to prepare the reports
required under the Agreement.

          The determination by the Servicer of such amounts shall, in the
absence of obvious error, be presumptively deemed to be correct for all purposes
hereunder and the Trustee and the Certificate Administrator shall be fully
protected in relying upon the same without any independent check or
verification.

     Section 3.23.  dvances.
                    -------

          If any Monthly Payment (together with any advances from the
Subservicers) on a Mortgage Loan that was due on the immediately preceding Due
Date and delinquent on the Determination Date is delinquent other than as a
result of application of the Relief Act, the Servicer will deposit in the
Collection Account not later than the Servicer Remittance Date immediately
preceding the related Distribution Date an amount equal to such deficiency net
of the related Servicing Fee for such Mortgage Loan, except to the extent the
Servicer determines any such advance to be nonrecoverable from Liquidation
Proceeds, Insurance Proceeds or future payments on such Mortgage Loan. Subject
to the foregoing and in the absence of such a determination, the Servicer shall
continue to make such advances through the date that the related Mortgaged
Property has, in the judgment of the Servicer, been completely liquidated.

          The Servicer may fund an Advance from its own corporate funds,
advances made by any subservicer or funds held in the Collection Account for
future payment or withdrawal.

          Advances made from funds held in the Collection Account may be made by
the Servicer from subsequent collections of principal and interest received on
other Mortgage Loans and deposited into the Collection Account. Advances made
from the Collection Account are not limited to subsequent collections of
principal and interest received on the delinquent Mortgage Loan with respect to
which an Advance is made. If on the Servicer Remittance Date prior to any
Distribution Date funds in the Collection Account are less than the amount
required to be paid to the Certificateholders on such Distribution Date, then
the Servicer shall deposit its own funds into the Payment Account in the amount
of the lesser of (i) any unreimbursed Advances previously made by the Servicer
with funds held in the Collection Account or (ii) the shortfall in the
Collection Account, provided, however, that in no event shall the Servicer
deposit into the Collection Account an amount that is less than any shortfall in
the Collection Account attributable to delinquent payments on Mortgage Loans
which the Servicer deems to be recoverable and which has not been covered by an
Advance from the Servicer's own corporate funds or any subservicer's funds. If
applicable, on the Servicer Remittance Date preceding each Distribution Date,
the Servicer shall present an Officer's Certificate to the Certificate
Administrator, and the Trustee (i) stating that the Servicer elects not to make
an Advance in a stated amount and (ii) detailing the reason it deems the advance
to be nonrecoverable.

                                      30
<PAGE>

     Section 3.24.  Compensating Interest Payments.
                    ------------------------------

            The Servicer shall deposit in the Collection Account not later than
the Servicer Remittance Date preceding the Distribution Date an amount equal to
the Compensating Interest related to the related Determination Date. The
Servicer shall not be entitled to any reimbursement of any Compensating Interest
payment.

                                  ARTICLE IV

                                 FLOW OF FUNDS

     Section 4.01.  Distributions.
                    -------------

            (a) On each Distribution Date, the Trustee shall (based solely on
the information provided to the Trustee by the Certificate Administrator
pursuant to Section 4.03 hereof) withdraw from the Distribution Account that
portion of REMIC Available Funds for such Distribution Date consisting of the
Interest Remittance Amount for such Distribution Date, and make the following
disbursements and transfers in the order of priority described below, in each
case to the extent of the Interest Remittance Amount remaining for such
Distribution Date:

            (i) On each Distribution Date, the Trustee will first distribute the
     Prepayment Charges collected during the prior Prepayment Period to the
     Holders of the Class P Certificates. After making that distribution, the
     Trustee will distribute the remaining Interest Remittance Amount for that
     Distribution Date, to the Certificate Administrator, the Certificate
     Administrator Fee which is due on that Distribution Date, and will then
     apply the remaining Interest Remittance Amount to the payment of interest
     then due on the certificates in the following order of priority:

          (A) first, with respect to the Class AIO Certificates and the Class A-
              -----
     1 Certificates, the Class AIO Monthly Interest Distributable Amount and the
     REMIC Monthly Interest Distributable Amount for the Class A-1 Certificates,
     respectively; these payments are of equal priority to those two Classes,
     and, in the event that the remaining Interest Remittance Amount is
     insufficient to pay both Classes the full amount due, the amount paid to
     the Holders of each of these two Classes will be a pro rata portion of the
     remaining Interest Remittance Amount, with the allocation based on the
     relative proportions of the Class AIO Monthly Interest Distributable Amount
     and the REMIC Monthly Interest Distributable Amount for the Class A-1
     Certificates; the REMIC Monthly Interest Distributable Amount for the Class
     A-1 Certificates shall be paid to the Holders of the Class A-1
     Certificates, and the Class AIO Monthly Interest Distributable Amount shall
     be paid to the Holders of the Class AIO Certificates, the Class AIO Unpaid
     Interest Shortfall Amount; and

          (B) second, to the Holders of  the Class M-1 Certificates, the REMIC
              ------
     Monthly Interest Distributable Amount for Class M-1;

                                      31
<PAGE>

          (C)    third, to the Holders of the Class M-2 Certificates, the REMIC
                 -----
     Monthly Interest Distributable Amount for Class M-2;

          (D)    fourth, to the Holders of the Class M-3 Certificates, the REMIC
                 ------
     Monthly Interest Distributable Amount for Class M-3; and

          (E)    fifth, to the Holders of the Class RU Certificates, any
                 -----
     remainder.

          (ii)   On each Distribution Date (a) prior to the Crossover Date
     or (b) on which a Trigger Event is in effect, the Trustee shall (based
     solely on the information provided to the Trustee by the Certificate
     Administrator pursuant to Section 4.03 hereof) withdraw from the
     Distribution Account that portion of the REMIC Available Funds for such
     Distribution Date consisting of the Principal Remittance Amount and make
     the following disbursements and transfers in the order of priority
     described below:

          (A)    first, to the Holders of the Class A-1 Certificates, the
                 -----
     entire amount of the Principal Remittance Amount, until the Certificate
     Principal Balance of the Class A-1 Certificates has been reduced to zero;

          (B)    second, to the Holders of the Class M-1 Certificates, the
                 ------
     entire amount of the Principal Remittance Amount until the certificate
     principal balance of the Class M-1 Certificates has been reduced to zero;

          (C)    third, to the Holders of Class M-2 Certificates, the entire
                 -----
     amount of the Principal Remittance Amount until the Certificate Principal
     Balance of the Class M-2 Certificates has been reduced to zero;

          (D)    fourth, to the Holders of the Class M-3 Certificates, the
                 ------
     entire amount of the Principal Remittance Amount until the Certificate
     Principal Balance of the Class M-3 Certificates has been reduced to zero;

          (E)    fifth, to the Trustee and the Certificate Administrator, pro
                 -----
     rata, any amounts owed to them under the Basic Documents remaining unpaid;

          (F)    sixth, to the Servicer, the amount of any reimbursement or
                 -----
     indemnification owed to it by the Trust pursuant to Section 6.03 hereof;

          (G)    seventh, to the Holders of the Class O Certificates, the
                 -------
     entire amount of the Principal Distribution Amount until the Certificate
     Balance of the Class O Certificates has been reduced to zero; and

          (H)    eighth, to the Holders of the Class RU Certificates, any
                 ------
     remainder.

          (iii)  On each Distribution Date (a) on or after the Crossover
     Date and (b) on which a Trigger Event is not in effect, the Trustee shall
     (based solely on the information provided to the Trustee by the Certificate
     Administrator pursuant to Section 4.03 hereof) withdraw from the
     Distribution Account that portion of the REMIC Available Funds for

                                      32
<PAGE>

     such Distribution Date consisting of the Principal Remittance Amount and
     make the following disbursements and transfers in the order of priority
     described below:

          (A)    first, to the Holders of the Class A-1 Certificates, the Class
                 -----
     A-1 Principal Distribution Amount, until the Certificate Principal Balance
     of the A-1 Certificates has been reduced to zero;

          (B)    second, to the Holders of the Class M-1 Certificates, the Class
                 ------
     M-1 Principal Distribution Amount, until the Certificate Principal Balance
     of the Class M-1 Certificates has been reduced to zero;

          (C)    third, to the Holders of the Class M-2 Certificates, the Class
                 -----
     M-2 Principal Distribution Amount, until the Certificate Principal Balance
     of the Class M-2 Certificates has been reduced to zero;

          (D)    fourth, to the Holders of the Class M-3 Certificates, the Class
                 ------
     M-3 Principal Distribution Amount, until the Certificate Principal Balance
     of the Class M-3 Certificates has been reduced to zero;

          (E)    fifth, to the Trustee and the Certificate Administrator, pro
                 -----
     rata, any amounts owed to them under the Basic Documents remaining unpaid;

          (F)    sixth, to the Servicer, the amount of any reimbursement or
                 -----
     indemnification owed to it by the Trust pursuant to Section 6.03 hereof;

          (G)    seventh, to the Holders of the Class O Certificates, the
                 -------
     entire amount of the Principal Distribution Amount until the Certificate
     Balance of the Class O Certificates has been reduced to zero; and

          (H)    eighth, to the Holders of the Class RU Certificates, any
                 ------
     remainder.

          (b)    Method of Distribution. The Trustee shall make distributions in
                 ----------------------
respect of a Distribution Date to each Certificateholder of record on the
related Record Date (other than as provided in Section 11.01 respecting the
final distribution), in the case of Certificateholders of the Regular
Certificates, by check or money order mailed to such Certificateholder at the
address appearing in the Certificate Register, or by wire transfer.
Distributions among Certificateholders shall be made in proportion to the
Percentage Interests evidenced by the Certificates held by such
Certificateholders.

          (c)    Distributions on Book-Entry Certificates. Each distribution
                 ----------------------------------------
with respect to a Book-Entry Certificate shall be paid to the Depository, which
shall credit the amount of such distribution to the accounts of its Depository
Participants in accordance with its normal procedures. Each Depository
Participant shall be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for which
it acts as agent. Each brokerage firm shall be responsible for disbursing funds
to the Certificate Owners that it represents. All such credits and disbursements
with respect to a Book-Entry Certificate are to be made by the

                                      33
<PAGE>

Depository and the Depository Participants in accordance with the provisions of
the Certificates. None of the Certificate Administrator, the Trustee, the
Company, the Servicer or the Seller shall have any responsibility therefor
except as otherwise provided by applicable law.

     Section 4.02.  Payment Account and Distribution Account.
                    ----------------------------------------

               (a)  No later than the Closing Date, the Certificate
Administrator shall establish and maintain a segregated trust account that is an
Eligible Account, which shall be titled "Payment Account,
______________________, as Certificate Administrator for the registered holders
of NovaStar Mortgage Funding Trust , Home Equity Loan Asset-Backed Certificates,
Series " (the "Payment Account"). The Certificate Administrator shall, promptly
               ---------------
upon receipt, deposit in the Payment Account and retain therein the Interest
Remittance Amount and the Principal Remittance Amount remitted on each Servicer
Remittance Date to the Certificate Administrator by the Servicer, as well as
amounts transferred from the Interest Coverage Account and the Pre-Funding
Account. Funds deposited in the Payment Account shall be held in trust by the
Certificate Administrator for the Certificateholders for the uses and purposes
set forth herein.

               (b)  The Certificate Administrator may invest funds deposited in
the Payment Account in Permitted Investments in its discretion with a maturity
date (i) no later than the Business Day immediately preceding the date on which
such funds are required to be withdrawn from such account pursuant to this
Agreement, if a Person other than the Certificate Administrator or an Affiliate
manages or advises such investment, and (ii) no later than the date on which
such funds are required to be withdrawn from such account pursuant to this
Agreement, if the Certificate Administrator or an Affiliate manages or advises
such investment. All income or other gain from such investments may be released
from the Payment Account and paid to the Certificate Administrator, from time to
time as part of its compensation for acting as Certificate Administrator.

               (c)  Amounts on deposit in the Payment Account shall be withdrawn
by the Certificate Administrator as follows:

               (i)   To fund the distributions described in Section 4.01 hereof;

               (ii)  To withdraw any amount not required to be deposited in the
Payment Account or deposited therein in error; and

               (iii) To clear and terminate the Payment Account upon the
termination of this Agreement, with any amounts remaining on deposit therein
being paid to the Holders of the Class RU Certificates.

               (d)   By noon on the Business Day prior to each Distribution
Date, the Certificate Administrator shall remit funds in the Payment Account to
the Trustee.

               (e)   No later than the Closing Date, the Trustee shall establish
and maintain a segregated trust account that is an Eligible Account, which shall
be titled "Distribution Account, The Chase Manhattan Bank, as Trustee for the
registered holders of NovaStar Mortgage Funding

                                      34
<PAGE>

Trust __________, Home Equity Loan Asset-Backed Certificates, Series __________"
(the "Distribution Account"). The Certificate Administrator shall, promptly upon
      --------------------
receipt, deposit in the Distribution Account and retain therein amounts
transferred from the Payment Account. Funds deposited in the Distribution
Account shall be held in trust by the Trustee for the Certificateholders for the
uses and purposes set forth herein.

               (f)   The Trustee may invest funds deposited in the Distribution
Account in Permitted Investments in its discretion with a maturity date (i) no
later than the Business Day immediately preceding the date on which such funds
are required to be withdrawn from such account pursuant to this Agreement, if a
Person other than the Trustee or an Affiliate manages or advises such
investment, and (ii) no later than the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement, if the Trustee or an
Affiliate manages or advises such investment. All income or other gain from such
investments may be released from the Distribution Account and paid to the
Trustee, from time to time as part of its compensation for acting as Trustee.

               (g)   Amounts on deposit in the Distribution Account shall be
withdrawn by the Trustee as follows:

               (i)   To fund the distributions described in Section 4.01 hereof;

               (ii)  To withdraw any amount not required to be deposited in the
Distribution Account or deposited therein in error; and

               (iii) To clear and terminate the Distribution Account upon the
termination of this Agreement, with any amounts remaining on deposit therein
being paid to the Holders of the Class RU Certificates.

               (h)   On each Distribution Date, the Trustee shall distribute all
amounts on deposit in the Distribution Account established by it to
Certificateholders in respect of the Certificates and to such other persons in
the order of priority set forth in Section 4.01 hereof.

     Section 4.03.   Statements.
                     ----------

               (a)   On each Distribution Date, based, as applicable, on
information provided to it by the Servicer, the Certificate Administrator shall
prepare and make available to each Holder of the Regular Certificates, the
Servicer and the Rating Agencies, a statement as to the distributions made on
such Distribution Date:

               (i)   the amount of the distribution made on such Distribution
     Date to the Holders of each Class of Regular Certificates, separately
     identified, allocable to principal and the amount of the distribution made
     to the Holders of the Class P Certificates allocable to Prepayment Charges;

               (ii)  the amount of the distribution made on such Distribution
     Date to the Holders of each Class of Regular Certificates (other than the
     Class P Certificates) allocable to interest, separately identified;

                                      35
<PAGE>

               (iii)   the Pool Balance at the Close of Business at the end of
     the related Due Period;

               (iv)    the number, aggregate principal balance, and weighted
     average Mortgage Rate of the Mortgage Loans as of the related Determination
     Date and the number and aggregate principal balance of all Subsequent
     Mortgage Loans added during the preceding Prepayment Period;

               (v)     the number and aggregate unpaid principal balance of
     Mortgage Loans that were (A) Delinquent (exclusive of Mortgage Loans in
     bankruptcy or foreclosure and REO Properties) (1) 30 to 59 days, (2) 60 to
     89 days and (3) 90 or more days, (B) as to which foreclosure proceedings
     have been commenced and (C) REO Properties;

               (vi)    the aggregate amount of Principal Prepayments made during
     the related Prepayment Period;

               (vii)   the aggregate amount of Realized Losses incurred during
     the related Prepayment Period and the cumulative amount of Realized Losses;

               (viii)  the Certificate Principal Balance of the Class A-1
     Certificates, the Mezzanine Certificates and the Class O Certificates,
     after giving effect to the distributions made on such Distribution Date;

               (ix)    the Unpaid Interest Shortfall Amount, if any, with
     respect to the Class A-1 Certificates, the Mezzanine Certificates and the
     Class AIO Certificates for such Distribution Date;

               (x)     the aggregate amount of any Prepayment Interest
     Shortfalls for such Distribution Date, to the extent not covered by
     payments by the Servicer pursuant to Section 3.25;

               (xi)    the Credit Enhancement Percentage for such Distribution
     Date;

               (xii)   the Available Funds Cap Carryforward Amount for the Class
     A-1 Certificates and the Mezzanine Certificates, if any, for such
     Distribution Date and the amount remaining unpaid after reimbursements
     therefor on such Distribution Date; and

               (xiii)  the respective REMIC Pass-Through Rates applicable to the
     Class A-1 Certificates, the Mezzanine Certificates and the Class AIO
     Certificates for such Distribution Date and the REMIC Pass-Through Rate
     applicable to the Class A-1 Certificates and the Mezzanine Certificates for
     the immediately succeeding Distribution Date.

               In the case of information furnished pursuant to subclauses (i)
and (ii) above, the amounts shall be expressed in a separate section of the
report as a dollar amount for each Class for each $1,000 original dollar amount
as of the Closing Date.

                                      36
<PAGE>

               The Certificate Administrator may, in the absence of manifest
error, conclusively rely upon the Determination Date Report of the Servicer in
its preparation of the statement to Certificateholders pursuant to this Section
4.03.

               (b)     Within a reasonable period of time after the end of each
calendar year, the Certificate Administrator shall, upon written request,
furnish to each Person who at any time during the calendar year was a
Certificateholder of a Regular Certificate, if requested in writing by such
Person, such information as is reasonably necessary to provide to such Person a
statement containing the information set forth in subclauses (i) and (ii) above,
aggregated for such calendar year or applicable portion thereof during which
such Person was a Certificateholder. Such obligation of the Certificate
Administrator shall be deemed to have been satisfied to the extent that
substantially comparable information shall be prepared and furnished by the
Certificate Administrator to Certificateholders pursuant to any requirements of
the Code as are in force from time to time.

               (c)     On each Distribution Date, the Certificate Administrator
shall forward to the Residual Certificateholders a copy of the reports forwarded
to the Regular Certificateholders in respect of such Distribution Date with such
other information as the Certificate Administrator deems necessary or
appropriate.

               (d)     Within a reasonable period of time after the end of each
calendar year, the Certificate Administrator shall deliver to each Person who at
any time during the calendar year was a Residual Certificateholder, if requested
in writing by such Person, such information as is reasonably necessary to
provide to such Person a statement containing the information provided pursuant
to the previous paragraph aggregated for such calendar year or applicable
portion thereof during which such Person was a Residual Certificateholder. Such
obligation of the Certificate Administrator shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
prepared and furnished to Certificateholders by the Certificate Administrator
pursuant to any requirements of the Code as from time to time in force.

               (e)     No later than noon on the Business Day prior to each
Distribution Date, the Certificate Administrator shall forward, by facsimile
transmission, the statement prepared pursuant to paragraph (a) of this Section
4.03, together with all other information reasonably necessary to make the
distributions pursuant to Section 4.01 of this Agreement, to the Trustee. On
each Distribution Date, the Trustee shall forward by mail to each
Certificateholder the statement prepared pursuant to paragraph (a) of this
Section 4.03. Neither the Trustee nor the Certificate Administrator shall have
any responsibility to (i) verify information provided by the Servicer to be
included in such statement or (ii) include any information required to be
included in such statement if the Servicer has failed to timely produce such
information to the Certificate Administrator, as required pursuant hereto.

     Section 4.04.     Pre-Funding Account.
                       -------------------

               (a)     No later than the Closing Date, the Certificate
Administrator shall establish and maintain, on behalf of the Trustee, a
segregated trust account that is an Eligible Account, which shall be titled
"Pre-Funding Account, ______________________, as Certificate

                                      37
<PAGE>

Administrator for the registered holders of NovaStar Mortgage Funding Trust
________, Home Equity Loan Asset-Backed Certificates, Series _______" (the "Pre-
                                                                            ----
Funding Account"). The Certificate Administrator shall, promptly upon receipt,
---------------
deposit in the Pre-Funding Account and retain therein the Original Pre-Funded
Amount remitted on the Closing Date to the Certificate Administrator by the
Company. Funds deposited in the Pre-Funding Account shall be held in trust by
the Certificate Administrator, on behalf of the Trustee, for the
Certificateholders for the uses and purposes set forth herein.

               (b)     The Certificate Administrator will invest funds deposited
in the Pre-Funding Account as directed by the Servicer in Permitted Investments
with a maturity date (i) no later than the Business Day immediately preceding
the date on which such funds are required to be withdrawn from such account
pursuant to this Agreement, if a Person other than the Certificate Administrator
or an Affiliate manages or advises such investment, and (ii) no later than the
date on which such funds are required to be withdrawn from such account pursuant
to this Agreement, if the Certificate Administrator or an Affiliate manages or
advises such investment. For federal income tax purposes, the Servicer shall be
the owner of the Pre-Funding Account and shall report all items of income,
deduction, gain or loss arising therefrom. All income and gain realized from
investment of funds deposited in the Pre-Funding Account shall be withdrawn and
deposited in the Interest Coverage Account. At no time will the Pre-Funding
Account be an asset of any REMIC created hereunder.

               (c)     Amounts on deposit in the Pre-Funding Account shall be
withdrawn by the Certificate Administrator as follows:

               (i)     On any Subsequent Transfer Date, the Certificate
     Administrator shall withdraw from the Pre-Funding Account an amount equal
     to ______% of the Principal Balances of the Subsequent Mortgage Loans
     transferred and assigned to the Certificate Administrator for deposit in
     the Mortgage Pool on such Subsequent Transfer Date and pay such amount to
     or upon the order of the Company upon satisfaction of the conditions set
     forth in Section 2.08 with respect to such transfer and assignment;

               (ii)    If the amount on deposit in the Pre-Funding Account
     (exclusive of investment income) has not been reduced to zero during the
     Funding Period, on the day immediately following the termination of the
     Funding Period, the Certificate Administrator shall deposit into the
     Payment Account any amounts remaining in the Pre-Funding Account (exclusive
     of investment income) for distribution in accordance with the terms hereof;

               (iii)   To withdraw investment income for deposit in the Interest
     Coverage Account;

               (iv)    To withdraw any amount not required to be deposited in
     the Pre-Funding Account or deposited therein in error; and

               (v)     To clear and terminate the Pre-Funding Account upon the
     earlier to occur of (A) the Distribution Date immediately following the end
     of the Funding Period and (B)

                                      38
<PAGE>

     the termination of this Agreement, with any amounts remaining on deposit
     therein being paid to the Holders of the Certificates then entitled to
     distributions in respect of principal.

               Withdrawals from the Pre-Funding Account pursuant to clauses (i),
(ii) and (iv) shall be treated as contributions of cash to the Lower-Tier REMIC
on the date of withdrawal.

     Section 4.05.  Interest Coverage Account.
                    -------------------------

               (a)  No later than the Closing Date, the Certificate
Administrator shall establish and maintain, on behalf of the Trustee, a
segregated trust account that is an Eligible Account, which shall be titled
"Interest Coverage Account, _______________________, as Certificate
Administrator for the registered holders of NovaStar Mortgage Funding Trust
______, Home Equity Loan Asset-Backed Certificates, Series _________" (the
"Interest Coverage Account"). The Certificate Administrator shall, promptly upon
 -------------------------
receipt, deposit in the Interest Coverage Account and retain therein (i) the
Interest Coverage Amount remitted on the Closing Date to the Certificate
Administrator by the Company and (ii) income and gain realized from investments
in the Pre-Funding Account. Funds deposited in the Interest Coverage Account
shall be held in trust by the Certificate Administrator on behalf of the Trustee
for the Certificateholders for the uses and purposes set forth herein.

               (b)  For federal income tax purposes, the Servicer shall be the
owner of the Interest Coverage Account and shall report all items of income,
deduction, gain or loss arising therefrom. At no time will the Interest Coverage
Account be an asset of any REMIC created hereunder. All income and gain realized
from investment of funds deposited in the Interest Coverage Account shall be for
the sole and exclusive benefit of the Servicer and shall be remitted by the
Certificate Administrator to the Servicer no later than the first Business Day
following receipt of such income and gain by the Certificate Administrator. The
Servicer shall deposit in the Interest Coverage Account the amount of any net
loss incurred in respect of any such Permitted Investment immediately upon
realization of such loss.

               (c)  On each Distribution Date during the Funding Period and on
the Distribution Date immediately following the end of the Funding Period, the
Certificate Administrator shall withdraw from the Interest Coverage Account, to
the extent funds are available therefore, and deposit in the Payment Account an
amount, as provided in the related Determination Date Report, equal to (i) 30
days' interest on the Original Pre-Funded Amount calculated at an annual rate
equal to the weighted average of the interest rate payable on the Underwritten
Certificates as of the commencement of the related Due Period, minus (ii) the
sum of (1) any interest payments received on Subsequent Mortgage Loans during
the related Due Period and (2) any Advances in respect of interest portions of
delinquent Monthly Payments on the Subsequent Mortgage Loans conveyed to the
Certificate Administrator during the related Due Period. Such withdrawal and
deposit shall be treated as a contribution of cash by the Company to REMIC 1 on
the date thereof. Immediately following any such withdrawal and deposit, and
immediately following the conveyance of any Subsequent Mortgage Loans to the
Trust on any Subsequent Transfer Date, the Certificate Administrator shall
withdraw from the Interest Coverage Account and remit to the Company or its
designee an amount equal to the excess, if any, of the amount remaining in the
Interest Coverage Account over the amount that would be

                                      39
<PAGE>

required to be withdrawn therefrom (assuming sufficient funds therein) pursuant
to the preceding sentence on each subsequent Distribution Date, if any, that
will occur during the Funding Period or that will be the Distribution Date
immediately following the end of the Funding Period, if no Subsequent Mortgage
Loans were acquired by the Trust Fund after the end of the Prepayment Period
relating to the current Distribution Date.

               (d)  Upon the earliest of (i) the Distribution Date immediately
following the end of the Funding Period, (ii) the reduction of the Certificate
Principal Balances of the Certificates to zero or (iii) the termination of this
Agreement in accordance with Section 11.01, any amount remaining on deposit in
the Interest Coverage Account after distributions pursuant to paragraph (c)
above shall be withdrawn by the Certificate Administrator and paid to the
Servicer or its designee.

     Section 4.06.  Allocation of Realized Losses.
                    -----------------------------

               (a)  All Realized Losses on the Mortgage Loans shall be allocated
by the Certificate Administrator on each Distribution Date as follows: first, to
the Class O Certificates, until the Certificate Principal Balance thereof has
been reduced to zero; second, to the Class M-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; third, to the
Class M-2 Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; and fourth, to the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero. All Realized
Losses to be allocated to the Certificate Principal Balances of all Classes on
any Distribution Date shall be so allocated after the actual distributions to be
made on such date as provided above. All references above to the Certificate
Principal Balance of any Class of Certificates shall be to the Certificate
Principal Balance of such Class immediately prior to the relevant Distribution
Date, before reduction thereof by any Realized Losses, in each case to be
allocated to such Class of Certificates, on such Distribution Date.

               Any allocation of Realized Losses to a Class O Certificate or to
a Mezzanine Certificate on any Distribution Date shall be made by reducing the
Certificate Principal Balance thereof by the amount so allocated. No allocations
of any Realized Losses shall be made to the Certificate Principal Balances of
the Class A-1 Certificates.

                                   ARTICLE V

                                THE CERTIFICATES

     Section 5.01.  The Certificates.
                    ----------------

               Each of the Class A-1 Certificates, the Mezzanine Certificates,
the Class AIO Certificates, the Class P Certificates, the Class O Certificates
and the Residual Certificates shall be substantially in the forms annexed hereto
as exhibits, and shall, on original issue, be executed, authenticated and
delivered by the Trustee or by the Certificate Administrator on behalf of the
Trustee to or upon the order of the Company concurrently with the sale and
assignment to the Trust of the Trust Fund. The Underwritten Certificates shall
be initially evidenced by one or more Certificates representing a Percentage
Interest with a minimum dollar denomination of

                                      40
<PAGE>

$25,000 and integral dollar multiples of $1,000 in excess thereof, except that
one Certificate of each such Class of Certificates may be in a different
denomination so that the sum of the denominations of all outstanding
Certificates of such Class shall equal the Certificate Principal Balance of such
Class on the Closing Date. The Class AIO Certificates, the Class P Certificates,
the Class O Certificates and the Residual Certificates are issuable in any
Percentage Interests; provided, however, that the sum of all such percentages
for each such Class totals 100% and no more than ten Certificates of each Class
may be issued.

          The Certificates shall be executed on behalf of the Trust by manual or
facsimile signature on behalf of the Trustee by a Responsible Officer.
Certificates bearing the manual or facsimile signatures of individuals who were,
at the time when such signatures were affixed, authorized to sign on behalf of
the Trustee shall bind the Trust, notwithstanding that such individuals or any
of them have ceased to be so authorized prior to the authentication and delivery
of such Certificates or did not hold such offices at the date of such
Certificate. No Certificate shall be entitled to any benefit under this
Agreement or be valid for any purpose, unless such Certificate shall have been
manually authenticated by the Certificate Administrator (or, in the case of the
initial Certificates issued on the Closing Date, by the Trustee) substantially
in the form provided for herein, and such authentication upon any Certificate
shall be conclusive evidence, and the only evidence, that such Certificate has
been duly authenticated and delivered hereunder. All Certificates shall be dated
the date of their authentication. Subject to Section 5.02(c), the Underwritten
Certificates, the Class AIO Certificates and the Class P Certificates shall be
Book-Entry Certificates. The other Classes of Certificates shall be Definitive
Certificates.

     Section 5.02. Registration of Transfer and Exchange of Certificates.
                   -----------------------------------------------------

          (a) The Certificate Registrar shall cause to be kept at the Corporate
Trust Office a Certificate Register in which, subject to such reasonable
regulations as it may prescribe, the Certificate Registrar shall provide for the
registration of Certificates and of transfers and exchanges of Certificates as
herein provided. The Certificate Administrator shall initially serve as
Certificate Registrar for the purpose of registering Certificates and transfers
and exchanges of Certificates as herein provided.

          Upon surrender for registration of transfer of any Certificate at any
office or agency of the Certificate Registrar maintained for such purpose
pursuant to the foregoing paragraph and, in the case of a Residual Certificate,
upon satisfaction of the conditions set forth below, the Certificate
Administrator on behalf of the Trust shall execute, authenticate and deliver, in
the name of the designated transferee or transferees, one or more new
Certificates of the same aggregate Percentage Interest.

          At the option of the Certificateholders, Certificates may be exchanged
for other Certificates in authorized denominations and the same aggregate
Percentage Interests, upon surrender of the Certificates to be exchanged at any
such office or agency. Whenever any Certificates are so surrendered for
exchange, the Certificate Administrator shall execute on behalf of the Trust and
authenticate and deliver the Certificates which the Certificateholder making the
exchange is entitled to receive. Every Certificate presented or surrendered for

                                      41
<PAGE>

registration of transfer or exchange shall (if so required by the Certificate
Administrator or the Certificate Registrar) be duly endorsed by, or be
accompanied by a written instrument of transfer satisfactory to the Certificate
Administrator and the Certificate Registrar duly executed by, the Holder thereof
or his attorney duly authorized in writing.

          (b) Except as provided in paragraph (c) below, the Book-Entry
Certificates shall at all times remain registered in the name of the Depository
or its nominee and at all times: (i) registration of such Certificates may not
be transferred by the Certificate Administrator except to another Depository;
(ii) the Depository shall maintain book-entry records with respect to the
Certificate Owners and with respect to ownership and transfers of such
Certificates; (iii) ownership and transfers of registration of such Certificates
on the books of the Depository shall be governed by applicable rules established
by the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Certificate
Administrator shall for all purposes deal with the Depository as representative
of the Certificate Owners of the Certificates for purposes of exercising the
rights of Holders under this Agreement, and requests and directions for and
votes of such representative shall not be deemed to be inconsistent if they are
made with respect to different Certificate Owners; (vi) the Certificate
Administrator may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its Depository Participants and
furnished by the Depository Participants with respect to indirect participating
firms and Persons shown on the books of such indirect participating firms as
direct or indirect Certificate Owners; and (vii) the direct participants of the
Depository shall have no rights under this Agreement under or with respect to
any of the Certificates held on their behalf by the Depository, and the
Depository may be treated by the Trustee, the Certificate Administrator and its
agents, employees, officers and directors as the absolute owner of the
Certificates for all purposes whatsoever.

          All transfers by Certificate Owners of Book-Entry Certificates shall
be made in accordance with the procedures established by the Depository
Participant or brokerage firm representing such Certificate Owners. Each
Depository Participant shall only transfer Book-Entry Certificates of
Certificate Owners that it represents or of brokerage firms for which it acts as
agent in accordance with the Depository's normal procedures. The parties hereto
are hereby authorized to execute a Letter of Representations with the Depository
or take such other action as may be necessary or desirable to register a Book-
Entry Certificate to the Depository. In the event of any conflict between the
terms of any such Letter of Representation and this Agreement, the terms of this
Agreement shall control.

          (c) If (i)(x) the Depository or the Company advises the Certificate
Administrator in writing that the Depository is no longer willing or able to
discharge properly its responsibilities as Depository and (y) the Certificate
Administrator or the Company is unable to locate a qualified successor, (ii) the
Company, at its sole option, with the consent of the Certificate Administrator,
elects to terminate the book-entry system through the Depository or (iii) after
the occurrence of a Servicing Default, the Certificate Owners of the Book-Entry
Certificates representing not less than 51% of the Voting Rights advise the
Certificate Administrator and Depository through the Financial Intermediaries
and the Depository Participants in writing that the continuation of a book-entry
system through the Depository to the exclusion of definitive, fully registered
certificates ("Definitive Certificates") to Certificate
               -----------------------

                                      42
<PAGE>

Owners is no longer in the best interests of the Certificate Owners. Upon
surrender to the Certificate Registrar of the Book-Entry Certificates by the
Depository, accompanied by registration instructions from the Depository for
registration, the Trustee or the Certificate Administrator, on behalf of the
Trustee, shall, at the Company's expense, in the case of (ii) above, or the
Seller's expense, in the case of (i) and (iii) above, execute on behalf of the
Trust and authenticate the Definitive Certificates. None of the Company, the
Certificate Administrator nor the Trustee shall be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of Definitive
Certificates, the Certificate Administrator, the Trustee, the Certificate
Registrar, the Servicer, any Paying Agent and the Company shall recognize the
Holders of the Definitive Certificates as Certificateholders hereunder.

          (d) No transfer, sale, pledge or other disposition of any Class O
Certificate or Residual Certificate shall be made unless such disposition is
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and any applicable state securities laws or is made in
              --------
accordance with the 1933 Act and laws. In the event of any such transfer, except
with respect to the initial transfers of any Class O Certificate or Residual
Certificates by the Company to NFRC, unless (i) such transfer is made in
reliance upon Rule 144A under the 1933 Act and an investment letter, in
substantially the form attached hereto as Exhibit G, is delivered by the
Transferee to the Certificate Administrator) or (ii) a written Opinion of
Counsel (which may be in-house counsel) acceptable to and in form and substance
reasonably satisfactory to the Certificate Administrator and the Company is
delivered to them stating that such transfer may be made pursuant to (x) the
1933 Act, or an exemption thereto, describing the applicable provision or
exemption and the basis therefor, and (y) the Investment Company Act of 1940, or
an exemption thereto, describing the applicable provision or exemption and the
basis therefor, which Opinion of Counsel shall not be an expense of the
Certificate Administrator or the Company. The Holder of a Class O Certificate or
Residual Certificate desiring to effect such transfer shall, and does hereby
agree to, indemnify the Certificate Administrator, the Trustee and the Company
against any liability that may result if the transfer is not so exempt or is not
made in accordance with such federal and state laws.

          No transfer of a Class AIO Certificate, Class O Certificate, Class P
Certificate or Residual Certificate or any interest therein shall be made to any
Plan subject to ERISA or Section 4975 of the Code, any Person acting, directly
or indirectly, on behalf of any such Plan or any Person acquiring such
Certificates with "plan assets" of a Plan within the meaning of the Department
of Labor regulation promulgated at 29 C.F.R. (S) 2510.3-101 or otherwise ("Plan
                                                                           ----
Assets"). Each Person who acquires any Ownership Interest in such classes of
------
Certificates shall be deemed, by the acceptance or acquisition of such Ownership
Interest, to represent that it is not acquiring such Ownership Interest with
Plan Assets.

          Prior to the later of the expiration of the Funding Period and the
publication of final amendments to the Underwriter's exemption from the
Department of Labor to extend exemptive relief to subordinate certificates, no
transfer of Mezzanine Certificates or any interest therein shall be made to a
Person acquiring such Certificates with Plan Assets.

                                      43
<PAGE>

          Each person who acquires any Ownership Interest in such class of
Certificates prior to the later of such dates shall be deemed, by the acceptance
or acquisition of such Ownership Interest, to represent that it is not acquiring
such Ownership Interest with Plan Assets.

          Prior to the expiration of the Funding Period, no transfer of Class A-
1 Certificates or any interest therein shall be made to any Person acquiring
such Certificates with Plan Assets. Each Person who acquires any Ownership
Interest in such class of Certificates prior to the expiration of such Period
shall be deemed, by the acceptance or acquisition of such Ownership Interest, to
represent that it is not acquiring such Ownership Interest with Plan Assets.

          Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions and to
have irrevocably appointed the Company or its designee as its attorney-in-fact
to negotiate the terms of any mandatory sale under clause (v) below and to
execute all instruments of transfer and to do all other things necessary in
connection with any such sale, and the rights of each Person acquiring any
Ownership Interest in a Residual Certificate are expressly subject to the
following provisions:

          (i) Each Person holding or acquiring any Ownership Interest in a
     Residual Certificate shall be a Permitted Transferee and shall promptly
     notify the Certificate Administrator of any change or impending change in
     its status as a Permitted Transferee.

          (ii) No Person shall acquire an Ownership Interest in a Residual
     Certificate unless such Ownership Interest is a pro rata undivided
     interest.

          (iii) In connection with any proposed transfer of any Ownership
     Interest in a Residual Certificate, the Certificate Administrator shall as
     a condition to registration of the transfer, require delivery to it, in
     form and substance satisfactory to it, of each of the following:

          (A) an affidavit in the form of Exhibit H hereto from the proposed
     transferee to the effect that such transferee is a Permitted Transferee and
     that it is not acquiring its Ownership Interest in the Residual Certificate
     that is the subject of the proposed transfer as a nominee, Certificate
     Administrator or agent for any Person who is not a Permitted Transferee;
     and

          (B) covenant of the proposed transferee to the effect that the
     proposed transferee agrees to be bound by and to abide by the transfer
     restrictions applicable to the Residual Certificates.

          (iv) Any attempted or purported transfer of any Ownership Interest in
     a Residual Certificate in violation of the provisions of this Section shall
     be absolutely null and void and shall vest no rights in the purported
     transferee. If any purported transferee shall, in violation of the
     provisions of this Section, become a Holder of a Residual Certificate, then
     the prior Holder of such Residual Certificate that is a Permitted
     Transferee shall, upon discovery that the registration of transfer of such
     Residual

                                      44
<PAGE>

     Certificate was not in fact permitted by this Section, be restored to all
     rights as Holder thereof retroactive to the date of registration of
     transfer of such Residual Certificate. Neither the Certificate
     Administrator nor the Trustee shall be under no liability to any Person for
     any registration of transfer of a Residual Certificate that is in fact not
     permitted by this Section or for making any distributions due on such
     Residual Certificate to the Holder thereof or taking any other action with
     respect to such Holder under the provisions of this Agreement so long as
     the Certificate Administrator received the documents specified in clause
     (iii). The Certificate Administrator shall be entitled to recover from any
     Holder of a Residual Certificate that was in fact not a Permitted
     Transferee at the time such distributions were made all distributions made
     on such Residual Certificate. Any such distributions so recovered by the
     Certificate Administrator shall be distributed and delivered by the
     Certificate Administrator to the prior Holder of such Residual Certificate
     that is a Permitted Transferee.

          (v) If any Person other than a Permitted Transferee acquires any
     Ownership Interest in a Residual Certificate in violation of the
     restrictions in this Section, then the Certificate Administrator shall have
     the right but not the obligation, without notice to the Holder of such
     Residual Certificate or any other Person having an Ownership Interest
     therein, to notify the Company to arrange for the sale of such Residual
     Certificate. The proceeds of such sale, net of commissions (which may
     include commissions payable to the Company or its affiliates in connection
     with such sale), expenses and taxes due, if any, will be remitted by the
     Certificate Administrator to the previous Holder of such Residual
     Certificate that is a Permitted Transferee, except that in the event that
     the Certificate Administrator determines that the Holder of such Residual
     Certificate may be liable for any amount due under this Section or any
     other provisions of this Agreement, the Certificate Administrator may
     withhold a corresponding amount from such remittance as security for such
     claim. The terms and conditions of any sale under this clause (v) shall be
     determined in the sole discretion of the Certificate Administrator and it
     shall not be liable to any Person having an Ownership Interest in a
     Residual Certificate as a result of its exercise of such discretion.

          (vi) If any Person other than a Permitted Transferee acquires any
     Ownership Interest in a Residual Certificate in violation of the
     restrictions in this Section, then the Certificate Administrator upon
     receipt of reasonable compensation will provide to the Internal Revenue
     Service, and to the persons specified in Sections 860E(e)(3) and (6) of the
     Code, information needed to compute the tax imposed under Section
     860E(e)(5) of the Code on transfers of residual interests to disqualified
     organizations.

The foregoing provisions of this Section shall cease to apply to transfers
occurring on or after the date on which there shall have been delivered to the
Certificate Administrator, in form and substance satisfactory to the Certificate
Administrator, (i) written notification from each Rating Agency that the removal
of the restrictions on Transfer set forth in this Section will not cause such
Rating Agency to downgrade its rating of the Certificates and (ii) an Opinion of
Counsel to the effect that such removal will not cause any REMIC created
hereunder to fail to qualify as a REMIC.

                                      45
<PAGE>

          (e) No service charge shall be made for any registration of transfer
or exchange of Certificates of any Class, but the Certificate Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Certificates.

          All Certificates surrendered for registration of transfer or exchange
shall be cancelled by the Certificate Registrar and disposed of pursuant to its
standard procedures.

     Section 5.03.  Mutilated, Destroyed, Lost or Stolen Certificates.
                    -------------------------------------------------

          If (i) any mutilated Certificate is surrendered to the Certificate
Registrar or the Certificate Registrar receives evidence to its satisfaction of
the destruction, loss or theft of any Certificate and (ii) there is delivered to
the Trustee, the Certificate Administrator, the Company and the Certificate
Registrar such security or indemnity as may be required by them to save each of
them harmless, then, in the absence of notice to the Certificate Administrator
or the Certificate Registrar that such Certificate has been acquired by a bona
fide purchaser, the Trustee or the Certificate Administrator shall execute on
behalf of the Trust, authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
tenor and Percentage Interest. Upon the issuance of any new Certificate under
this Section, the Trustee, the Certificate Administrator or the Certificate
Registrar may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee, the Certificate
Administrator and the Certificate Registrar) in connection therewith. Any
duplicate Certificate issued pursuant to this Section, shall constitute complete
and indefeasible evidence of ownership in the Trust, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be found at any
time.

     Section 5.04.  Persons Deemed Owners.
                    ---------------------

          The Servicer, the Company, the Trustee, the Certificate Administrator,
the Certificate Registrar, any Paying Agent and any agent of the Servicer, the
Company, the Trustee, the Certificate Administrator, the Certificate Registrar,
any Paying Agent or the Certificate Administrator may treat the Person,
including a Depository, in whose name any Certificate is registered as the owner
of such Certificate for the purpose of receiving distributions pursuant to
Section 4.01 and for all other purposes whatsoever, and none of the Servicer,
the Trust, the Certificate Administrator, the Trustee nor any agent of any of
them shall be affected by notice to the contrary.

     Section 5.05.  Appointment of Paying Agent.
                    ---------------------------

          (a) The Paying Agent shall make distributions to Certificateholders
from the Distribution Account pursuant to Section 4.01 and shall report the
amounts of such distributions to the Certificate Administrator. The duties of
the Paying Agent may include the obligation to distribute statements prepared by
the Certificate Administrator and delivered to the Trustee pursuant to Section
4.03 and provide information to Certificateholders as required hereunder. The
Paying Agent hereunder shall at all times be an entity duly incorporated and
validly existing

                                      46
<PAGE>

under the laws of the United States of America or any state thereof, authorized
under such laws to exercise corporate trust powers and subject to supervision or
examination by federal or state authorities. The Paying Agent shall initially be
the Trustee. The Trustee may appoint a successor to act as Paying Agent, which
appointment shall be reasonably satisfactory to the Company.

          (b) The Trustee shall cause the Paying Agent (if other than the
Trustee) to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee that such Paying Agent shall hold all
sums, if any, held by it for payment to the Certificateholders in trust for the
benefit of the Certificateholders entitled thereto until such sums shall be paid
to such Certificateholders and shall agree that it shall comply with all
requirements of the Code regarding the withholding of payments in respect of
Federal income taxes due from Certificate Owners and otherwise comply with the
provisions of this Agreement applicable to it.

                                  ARTICLE VI

                         THE SERVICER AND THE COMPANY

     Section 6.01.  Liability of the Servicer and the Company.
                    -----------------------------------------

          The Servicer shall be liable in accordance herewith only to the extent
of the obligations specifically imposed upon and undertaken by Servicer herein.
The Company shall be liable in accordance herewith only to the extent of the
obligations specifically imposed upon and undertaken by the Company.

     Section 6.02.  Merger or Consolidation of, or Assumption of the Obligations
                    ------------------------------------------------------------
of, the Servicer or the Company.
-------------------------------

          Any entity into which the Servicer or Company may be merged or
consolidated, or any entity resulting from any merger, conversion or
consolidation to which the Servicer or the Company shall be a party, or any
corporation succeeding to the business of the Servicer or the Company, shall be
the successor of the Servicer or the Company, as the case may be, hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding;
provided, however, that the successor Servicer shall satisfy all the
requirements of Section 7.02 with respect to the qualifications of a successor
Servicer.

     Section 6.03.  Limitation on Liability of the Servicer and Others.
                    --------------------------------------------------

          Neither the Servicer nor any of the directors or officers or employees
or agents of the Servicer shall be under any liability to the Trust or the
Certificateholders for any action taken or for refraining from the taking of any
action by the Servicer in good faith pursuant to this Agreement, or for errors
in judgment; provided, however, that this provision shall not protect the
Servicer or any such Person against any liability which would otherwise be
imposed by reason of its willful misfeasance, bad faith or negligence in the
performance of duties of the Servicer or by reason of its reckless disregard of
its obligations and duties of the Servicer hereunder.

                                      47
<PAGE>

          The Servicer and any director or officer or employee or agent of the
Servicer 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.
The Servicer and any director or officer or employee or agent of the Servicer
shall be indemnified by the Trust and held harmless against any loss, liability
or expense incurred in connection with any legal action relating to this
Agreement or the Certificates, including any amount paid to the Certificate
Administrator on behalf of the Trustee pursuant to Section 6.06(b), other than
any loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except as any such loss, liability or expense shall be otherwise
reimbursable pursuant to this Agreement) and any loss, liability or expense
incurred by reason of its willful misfeasance, bad faith or negligence in the
performance of its duties hereunder or by reason of its reckless disregard of
its obligations and duties hereunder. The Servicer shall not be under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its duties to service the Mortgage Loans in accordance with this
Agreement, and which in its opinion may involve it in any expense or liability;
provided, however, that the Servicer may in its sole discretion undertake any
such action which it may deem necessary or desirable in respect of this
Agreement, and the rights and duties of the parties hereto and the interests of
the Certificateholders hereunder. In such event, the reasonable legal expenses
and costs of such action and any liability resulting therefrom shall be
expenses, costs and liabilities of the Trust, and the Servicer shall be entitled
to be reimbursed therefor. The Servicer's right to indemnity or reimbursement
pursuant to this Section 6.03 shall survive any resignation or termination of
the Servicer pursuant to Section 6.04 or 7.01 with respect to any losses,
expenses, costs or liabilities arising prior to such resignation or termination
(or arising from events that occurred prior to such resignation or termination).
Any reimbursements or indemnification to the Servicer from the Trust pursuant to
this Section 6.03 shall be payable in the priority set forth in Section 4.01
hereof.

     Section 6.04.  Servicer Not to Resign.
                    ----------------------

          Subject to the provisions of Section 6.02, the Servicer shall not
resign from the obligations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties hereunder are no
longer permissible under applicable law or (ii) upon satisfaction of the
following conditions: (a) the Servicer has proposed a successor servicer to the
Trust, the Trustee and the Certificate Administrator in writing and such
proposed successor servicer is reasonably acceptable to the Trustee and the
Certificate Administrator; and (b) each Rating Agency shall have delivered a
letter to the Trust, the Trustee, and the Certificate Administrator prior to the
appointment of the successor servicer stating that the proposed appointment of
such successor servicer as Servicer hereunder will not result in the reduction
or withdrawal of the then current rating of the Certificates; provided, however,
                                                              --------  -------
that no such resignation by the Servicer shall become effective until such
successor servicer or, in the case of (i) above, the Certificate Administrator
or its designee as successor Servicer shall have assumed the Servicer's
responsibilities and obligations hereunder or the Trustee or its designee as
successor Servicer shall have designated a successor servicer in accordance with
Section 7.02. Any such resignation shall not relieve the Servicer of
responsibility for any of the obligations specified in Sections 7.01 and 7.02 as
obligations that survive the resignation or termination of the Servicer. The
Servicer shall have no claim (whether by subrogation or otherwise) or other
action against any Certificateholder for any amounts paid by the Servicer
pursuant to any

                                      48
<PAGE>

provision of this Pooling and Agreement. Any such determination permitting the
resignation of the Servicer under clause (i) above shall be evidenced by an
Opinion of Counsel to such effect delivered to the Certificate Administrator,
and the Trustee.

     Section 6.05.  Delegation of Duties.
                    --------------------

          In the ordinary course of business, the Servicer at any time may
delegate any of its duties hereunder to any Person, including any of its
Affiliates, who agrees to conduct such duties in accordance with the same
standards with which the Servicer complies pursuant to Section 3.01. Such
delegation shall not relieve the Servicer of its liabilities and
responsibilities with respect to such duties and shall not constitute a
resignation within the meaning of Section 6.04.

     Section 6.06.  Servicer to Pay Trustee's, and Certificate Administrator's
                    ----------------------------------------------------------
Fees and Expenses; Indemnification.
----------------------------------

          (a) The Servicer covenants and agrees to pay to the Certificate
Administrator, the Trustee and any co-trustee of the Trustee from time to time,
and the Certificate Administrator, the Trustee and any such co-trustee shall be
entitled to, reasonable compensation, including all indemnification payments
(which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust) for all services rendered by each
of them in the execution of the trusts created hereunder and in the exercise and
performance of any of the powers and duties and the Servicer will pay or
reimburse the Certificate Administrator, the Trustee and any co-trustee upon
request for all reasonable expenses, disbursements and advances incurred or made
by the Certificate Administrator, the Trustee or any co-trustee of the Trustee
in accordance with any of the provisions of this Agreement except any such
expense, disbursement or advance as may arise from its negligence or bad faith.

          (b) The Servicer agrees to indemnify the Trustee and the Certificate
Administrator for, and to defend and hold, the Trustee and the Certificate
Administrator, as the case may be, harmless against, any claim, tax, penalty,
loss, liability or expense of any kind whatsoever, incurred without gross
negligence or willful misconduct on the part of the Trustee and the Certificate
Administrator, as such and/or in its individual capacity, arising out of, or in
connection with, the failure by the Servicer to perform its duties in compliance
with this Agreement, including the reasonable costs and expenses (including
reasonable legal fees and expenses) of defending itself against any claim in
connection with the exercise or performance of any of its powers or duties
hereunder, provided that:

          (i) with respect to any such claim, the Trustee or the Certificate
     Administrator, as the case may be, shall have given the Servicer written
     notice thereof promptly after the Certificate Administrator, or the
     Trustee, as the case may be, shall have actual knowledge thereof;

          (ii) while maintaining control over its own defense, the Trustee or
     the Certificate Administrator, as the case may be, shall cooperate and
     consult fully with the Servicer in preparing such defense; and

                                      49
<PAGE>

          (iii) notwithstanding anything in this Agreement to the contrary, the
     Servicer shall not be liable for settlement of any claim by the Trustee or
     the Certificate Administrator, as the case may be, entered into without the
     prior consent of the Servicer, which consent shall not be unreasonably
     withheld.

          No termination of this Agreement and resignation and removal of the
Trustee and Certificate Administrator shall affect the obligations created by
this Section 6.06 of the Servicer to indemnify the Certificate Administrator and
the Trustee under the conditions and to the extent set forth herein. This
section shall survive the termination of this Agreement and resignation and
removal of the Trustee and Certificate Administrator. Any amounts to be paid by
the Servicer pursuant to this Subsection may not be paid from the Trust Fund
except as provided in Section 6.03.

          Notwithstanding the foregoing, the indemnification provided by the
Servicer in this Section 6.06 shall not pertain to any loss, liability or
expense of the Trustee or the Certificate Administrator, including the costs and
expenses of defending itself against any claim, incurred in connection with any
actions taken by the Trustee or the Certificate Administrator at the direction
of the Certificateholders, as the case may be, pursuant to the terms of this
Agreement.

          (c) The Servicer agrees to indemnify the Trust Fund in an amount equal
to the amount of any claim made under a MI Policy for which coverage is denied
by the MI Insurer because (and if the MI Insurer's denial of coverage is
contested by the Servicer, a court or arbitrator finally determines that
coverage is not available under the MI Policy because) of the Servicer's failure
to abide by the terms of the MI Policy or the MI Insurance Agreement or the
Servicer's failure to abide by the NFI Underwriting Guidelines or the NFI
Servicing Guidelines, as attached to the MI Insurance Agreement.

          (d) In the event the Certificate Administrator becomes the Servicer
pursuant to Section 7.02 hereof, neither the Trustee nor the Certificate
Administrator shall be obligated, in its individual capacity, to pay any
obligation of the Servicer under clause (a), (b) or (c) above.

                                  ARTICLE VII

                                    DEFAULT

     Section 7.01.  Servicing Default.
                    -----------------

          (a) If any one of the following events (a "Servicing Default") shall
                                                     -----------------
occur and be continuing:

          (i) Any failure by the Servicer to deposit in the Collection Account
     or Payment Account (A) any Advances and Compensating Interest or (B) any
     other Deposit required to be made under the terms of this Agreement, which,
     in the case of this clause (B), continues unremedied for a period of three
     Business Days after the date upon which written notice of such failure
     shall have been given to the Servicer by the Trustee

                                      50
<PAGE>

or the Certificate Administrator or to the Servicer, the Trustee and the
Certificate Administrator the Holders of Certificates evidencing at least 25% of
the Voting Rights; or

     (ii)  Failure on the part of the Servicer duly to observe or perform in any
material respect any other covenants or agreements of the Servicer set forth in
this Agreement, which failure, in each case, materially and adversely affects
the interests of Certificateholders or the breach of any representation or
warranty of the Servicer in this Agreement which materially and adversely
affects the interests of the Certificateholders, and which in either case
continues unremedied for a period of 30 days after the date on which written
notice of such failure or breach, requiring the same to be remedied, and stating
that such notice is a "Notice of Default" hereunder, shall have been given to
the Servicer by the Certificate Administrator or the Trustee or to the Servicer,
the Certificate Administrator and the Trustee by the Holders of Certificates
evidencing at least 25% of the Voting Rights; or

     (iii) The entry against the Servicer of a decree or order by a court or
agency or supervisory authority having jurisdiction in the premises for the
appointment of a trustee, conservator, receiver or liquidator in any insolvency,
conservatorship, receivership, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and in effect
for a period of 60 consecutive days; or

     (iv)  The Servicer shall voluntarily go into liquidation, consent to the
appointment of a conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Servicer or of or relating to all or
substantially all of its property, or a decree or order of a court, agency or
supervisory authority having jurisdiction in the premises for the appointment of
a conservator, receiver, liquidator or similar person in any insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against the Servicer and such decree or order shall have remained
in force undischarged, unbonded or unstayed for a period of 60 days; or the
Servicer shall admit in writing its inability to pay its debts generally as they
become due, file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations; or

     (v)   The Cumulative Loss Percentage exceeds (a) with respect to the first
12 Distribution Dates, ____% of the Cut-off Date Aggregate Principal Balance,
(b) with respect to the next 12 Distribution Dates, ____% of the Cut-off Date
Aggregate Principal Balance, (c) with respect to the next 12 Distribution Dates,
____% of the Cut-off Date Aggregate Principal Balance, (d) with respect to the
next 12 Distribution Dates, ____% of the Cut-off Date Aggregate Principal
Balance, (e) with respect to the next 12 Distribution Dates, ____% of the Cut-
off Date Aggregate Principal Balance, (f) and with respect to all Distribution
Dates thereafter, ____% of the Cut-off Date Aggregate Principal Balance; or

                                      51
<PAGE>

          (vi)  Realized Losses on the Mortgage Loans over any twelve-month
period exceeds 1.00% of the sum of the aggregate Principal Balance of the
Initial Mortgage Loans as of the Cut-off Date and the Original Pre-Funded
Amount; or

          (vii) The Rolling 90 Day Delinquency Percentage exceeds ____%.

          (b)   then, and in each and every such case, so long as a Servicing
Default shall not have been remedied within the applicable grace period, (x)
with respect solely to clause (i)(A) above, if such Advance is not made by 5:00
P.M., ________ time, on the Business Day immediately following the Servicer
Remittance Date (provided the Certificate Administrator shall give the Servicer
notice of such failure to advance by 5:00 P.M. ________ time on the Servicer
Remittance Date), the Certificate Administrator shall terminate all of the
rights and obligations of the Servicer under this Agreement and the Certificate
Administrator, or a successor servicer appointed in accordance with Section
7.02, shall assume, pursuant to Section 7.02, the duties of a successor Servicer
and (y) in the case of (i)(B), (ii), (iii), (iv) and (v) above, the Certificate
Administrator shall, at the direction of the Holders of Certificates evidencing
at least 51% of the Voters Rights, by notice then given in writing to the
Servicer (and to the Trustee or the Certificate Administrator if given by
Holders of Certificates), terminate all of the rights and obligations of the
Servicer as servicer under this Agreement. Any such notice to the Servicer shall
also be given to the Certificate Administrator, each Rating Agency, the Company
and the Seller. On or after the receipt by the Servicer (and by the Trustee or
the Certificate Administrator if such notice is given by the Holders) of such
written notice, all authority and power of the Servicer under this Agreement,
whether with respect to the Certificates or the Mortgage Loans or otherwise,
shall pass to and be vested in the Certificate Administrator or other Successor
Servicer appointed in accordance with Section 7.02.

     Section 7.02.  Certificate Administrator to Act; Appointment of Successor.
                    ----------------------------------------------------------

          (a)   Within 90 days of the time the Servicer (and the Trustee or the
Certificate Administrator, if notice is sent by the Holders) receives a notice
of termination pursuant to Section 7.01, the Certificate Administrator (or such
other successor Servicer as is approved in accordance with this Agreement) shall
be the successor in all respects to the Servicer in its capacity as servicer
under this Agreement and the transactions set forth or provided for herein and
shall be subject to all the responsibilities, duties and liabilities relating
thereto placed on the Servicer by the terms and provisions hereof arising on and
after its succession. Notwithstanding the foregoing, the parties hereto agree
that the Certificate Administrator, in its capacity as successor Servicer,
immediately will assume all of the obligations of the Servicer to make Advances.
Notwithstanding the foregoing, the Certificate Administrator, in its capacity as
successor Servicer, shall not be responsible for the lack of information and/or
documents that it cannot obtain through reasonable efforts. As compensation
therefor, the Certificate Administrator (or such other successor Servicer) shall
be entitled to such compensation as the Servicer would have been entitled to
hereunder if no such notice of termination had been given. Notwithstanding the
above, (i) if the Certificate Administrator is unwilling to act as successor
Servicer or (ii) if the Certificate Administrator is legally unable so to act,
the Certificate Administrator shall appoint or petition a court of competent
jurisdiction to appoint, any established housing and home finance institution,
bank or other mortgage loan or home equity

                                      52
<PAGE>

loan servicer having a net worth of not less than $____________ as the successor
to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder; provided,
that the appointment of any such successor Servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to the
Certificates by the Rating Agencies as evidenced by a letter to such effect from
the Rating Agencies. Pending appointment of a successor to the Servicer
hereunder, unless the Certificate Administrator is prohibited by law from so
acting, the Certificate Administrator shall act in such capacity as hereinabove
provided. In connection with such appointment and assumption, the successor
shall be entitled to receive compensation out of payments on Mortgage Loans in
an amount equal to the compensation which the Servicer would otherwise have
received pursuant to Section 3.18 (or such other compensation as the Certificate
Administrator and such successor shall agree, not to exceed the Servicing Fee).
The appointment of a successor Servicer shall not affect any liability of the
predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer to pay any deductible under an insurance policy pursuant
to Section 3.14 or to indemnify the Certificate Administrator and the Trustee
pursuant to Section 3.06), nor shall any successor Servicer be liable for any
acts or omissions of the predecessor Servicer or for any breach by such Servicer
of any of its representations or warranties contained herein or in any related
document or agreement. The Certificate Administrator and such successor shall
take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession. All Servicing Transfer Costs shall be paid by
the predecessor Servicer upon presentation of reasonable documentation of such
costs, and if such predecessor Servicer defaults in its obligation to pay such
costs, such costs shall be paid by the successor Servicer, the Certificate
Administrator or the Trustee (in which case the successor Servicer, the
Certificate Administrator or the Trustee, as applicable, shall be entitled to
reimbursement therefor from the assets of the Trust).

          (b)  Any successor, including the Certificate Administrator, to the
Servicer as servicer shall during the term of its service as servicer continue
to service and administer the Mortgage Loans for the benefit of
Certificateholders, and maintain in force a policy or policies of insurance
covering errors and omissions in the performance of its obligations as Servicer
hereunder and a Fidelity Bond in respect of its officers, employees and agents
to the same extent as the Servicer is so required pursuant to Section 3.14.

     Section 7.03.  Waiver of Defaults.
                    ------------------

          The Majority Certificateholders may, on behalf of all
Certificateholders, waive any events permitting removal of the Servicer as
servicer pursuant to this Article VII, provided, however, that the Majority
Certificateholders may not waive a default in making a required distribution on
a Certificate without the consent of the Holder of such Certificate. Upon any
waiver of a past default, such default shall cease to exist and any Servicing
Default arising therefrom shall be deemed to have been remedied for every
purpose of this Agreement. No such waiver shall extend to any subsequent or
other default or impair any right consequent thereto except to the extent
expressly so waived. Notice of any such waiver shall be given by the Certificate
Administrator to the Rating Agencies.

                                      53
<PAGE>

     Section 7.04.  Notification to Certificateholders.
                    ----------------------------------

          (a)  Upon any termination or appointment of a successor the Servicer
pursuant to this Article VII, the Certificate Administrator shall give prompt
written notice thereof to the Certificateholders at their respective addresses
appearing in the Certificate Register and each Rating Agency.

          (b)  No later than 60 days after the occurrence of any event which
constitutes or which, with notice or a lapse of time or both, would constitute a
Servicing Default for five Business Days after a Responsible Officer of the
Trustee becomes aware of the occurrence of such an event, the Certificate
Administrator shall transmit by mail to all Certificateholders notice of such
occurrence unless such default or Servicing Default shall have been waived or
cured.

     Section 7.05.  Survivability of Servicer Liabilities.
                    -------------------------------------

          Notwithstanding anything herein to the contrary, upon termination of
the Servicer hereunder, any liabilities of the Servicer which accrued prior to
such termination shall survive such termination.

                                 ARTICLE VIII

                 THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR

     Section 8.01.  Duties of the Trustee and the Certificate Administrator.
                    -------------------------------------------------------

          If a Servicing Default has occurred and is continuing, each of the
Trustee and the Certificate Administrator shall exercise the rights and powers
vested in each of them by this Agreement and use the same degree of care and
skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.

          (a)  Except during the continuance of a Servicing Default:

               (i)  each of the Trustee and the Certificate Administrator
          undertake to perform such duties and only such duties as are
          specifically set forth in this Agreement with respect to the Trustee
          and the Certificate Administrator, respectively, and no implied
          covenants or obligations shall be read into this Agreement against the
          Trustee or the Certificate Administrator; and

               (ii) in th e absence of bad faith on its part, each of the
          Trustee and the Certificate Administrator, as the case may be, may
          conclusively rely, as to the truth of the statements and the
          correctness of the opinions expressed therein, upon certificates or
          opinions furnished to the Trustee and/or the Certificate
          Administrator, as applicable, and conforming to the requirements of
          this Agreement; provided, however, that each of the Trustee and the
          Certificate Administrator, as the case may be, shall examine the
          certificates and opinions delivered to it to determine whether or not
          they conform to the requirements of this Agreement, provided, further,
          however, that the Trustee shall have no duty or

                                      54
<PAGE>

          responsibility to review any document, certificate, instrument or
          opinion delivered solely to the Certificate Administrator.

          (b)   Neither the Trustee nor the Certificate Administrator may be
relieved from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:

          (i)   this paragraph does not limit the effect of paragraph (b) of
     this Section 8.01;

          (ii)  the Trustee and the Certificate Administrator shall not be
     liable for any error of judgment made in good faith by its respective
     Responsible Officer unless it is proved that the Trustee or the Certificate
     Administrator, respectively, was negligent in ascertaining the pertinent
     facts; and

          (iii) neither the Trustee nor the Certificate Administrator shall be
     liable with respect to any action it takes or omits to take in good faith
     in accordance with a direction received by it from the Majority
     Certificateholders.

          Neither the Trustee nor the Certificate Administrator shall be liable
for interest on any money received by the Trustee or the Certificate
Administrator, as the case may be, except as the Trustee or the Certificate
Administrator, respectively, may agree in writing with the Servicer.

          Money held in trust by the Trustee or the Certificate Administrator
need not be segregated from other trust funds except to the extent required by
law or the terms of this Agreement.

          No provision of this Agreement shall require the Trustee or the
Certificate Administrator to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers, if it shall have reasonable grounds to
believe that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.

          Subject to the other provisions of this Agreement and without limiting
the generality of this Section 8.01, the Trustee and the Certificate
Administrator shall have no duty (A) to see to any recording, filing or
depositing of this Agreement or any agreement referred to herein or any
financing statement or continuation statement evidencing a security interest, or
to see to the maintenance of any such recording or filing or depositing or to
any rerecording, refiling or redepositing of any thereof, (B) to see to any
insurance, (C) to see to the payment or discharge of any tax, assessment, or
other governmental charge or any lien or encumbrance of any kind owing with
respect to, assessed or levied against, any part of the Trust Fund other than
from funds available in the Payment Account, or (D) to confirm or verify the
contents of any reports or certificates of the Servicer delivered to the
Certificate Administrator or the Trustee believed by the Certificate
Administrator or the Trustee to be genuine and to have been signed or presented
by the proper party or parties.

                                      55
<PAGE>

          (c)  The Certificate Administrator shall act as successor to the
Servicer to the extent provided in Section 7.02 hereof.

          (d)  For all purposes under this Agreement, neither the Trustee nor
the Certificate Administrator shall be deemed to have notice or knowledge of any
Servicing Default unless a Responsible Officer assigned to and working in the
Trustee's or the Certificate Administrator's, respectively, corporate trust
department has actual knowledge thereof or unless written notice of any event
which is in fact such Servicing Default is received by the Trustee or the
Certificate Administrator, respectively, at the Corporate Trust Office, and such
notice references the Certificates generally, the Trust, or this Agreement.

          The Trustee and the Certificate Administrator are hereby authorized to
execute and shall execute this Agreement, the Purchase Agreement, and the
Converted Loan Purchase Agreement, and shall perform their respective duties and
satisfy their respective obligations thereunder.  Every provision of this
Agreement relating to the conduct or affecting the liability of or affording
protection to the Trustee or the Certificate Administrator shall apply to the
Trustee's and the Certificate Administrator's execution of this Agreement, the
Purchase Agreement, and the Converted Loan Purchase Agreement, and the
performance of their respective duties and satisfaction of its obligations
hereunder and thereunder.

          Notwithstanding any term or provision in this Agreement to the
contrary, the rights and obligations of the Trustee as trustee under this
Agreement shall not be diminished by the fact that the Trustee may employ the
services of the Certificate Administrator to accomplish the duties of the
Trustee hereunder. Accordingly, any references in this Agreement or the other
Basic Documents alluding to a right or obligation of the Certificate
Administrator (other than the obligation of the Certificate Administrator to act
as successor Servicer pursuant to Section 7.02 hereof in the event of a
Servicing Default) shall be construed to mean such right or obligation of the
Trustee, which right or obligation may be accepted or performed by the
Certificate Administrator on behalf of the Trustee.

     Section 8.02.  Rights of Trustee and Certificate Administrator.
                    -----------------------------------------------

          Each of the Trustee and the Certificate Administrator may rely and
shall be protected in acting or refraining from acting on any resolution,
officer's certificate, opinion of counsel, certificate of auditors or other
certificate, statement, instrument, or document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee and the
Certificate Administrator need not investigate any fact or matter stated in the
document.

          Before either the Trustee or the Certificate Administrator acts or
refrains from acting, it may require an Officer's Certificate or an Opinion of
Counsel reasonably satisfactory in form and substance to the Trustee or the
Certificate Administrator, as the case may be, which Officer's Certificate or
Opinion of Counsel shall not be at the expense of the Trustee, the Certificate
Administrator or the Trust Fund. Neither the Trustee nor the Certificate
Administrator shall be liable for any action either of them takes or omits to
take in good faith in reliance on an Officer's Certificate or Opinion of
Counsel.

                                      56
<PAGE>

          The Trustee may execute any of its trusts or powers hereunder and both
the Trustee and the Certificate Administrator may perform any of their
respective duties hereunder either directly or by or through agents or attorneys
or a custodian or nominee and the Trustee and Certificate Administrator shall
have no liability for any misconduct or negligence on the part of such agent,
attorney or custodian appointed by the Trustee or Certificate Administrator with
due care.

          Neither the Trustee nor the Certificate Administrator shall be liable
for any action either of them takes or omits to take in good faith which it
believes to be authorized or within its rights or powers; provided, however,
that the Trustee's conduct or the Certificate Administrator's conduct, as the
case may be, does not constitute willful misconduct, negligence or bad faith.

          Each of the Trustee and the Certificate Administrator may consult with
counsel chosen by it with due care, and the advice or opinion of counsel with
respect to legal matters relating to this Agreement and the Certificates shall
be full and complete authorization and protection from liability in respect to
any action taken, omitted or suffered by either of them hereunder in good faith
and in accordance with the advice or opinion of such counsel.

          The Trustee and the Certificate Administrator shall be under no
obligation to exercise any of the trusts or powers vested in it by this
Agreement or to institute, conduct or defend any litigation hereunder or in
relation hereto at the request, order or direction of any of the
Certificateholders, pursuant to the provisions of this Agreement, unless such
Certificateholders shall have offered to the Trustee and the Certificate
Administrator reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby (which in the case of the
Majority Certificateholders will be deemed to be satisfied by a letter agreement
with respect to such costs from such Majority Certificateholders); nothing
contained herein shall, however, relieve the Trustee or the Certificate
Administrator of the obligation, upon the occurrence of a Servicing Default of
which a Responsible Officer of the Trustee or the Certificate Administrator
shall have actual knowledge (which has not been cured), to exercise such of the
rights and powers vested in it by this Agreement, and to use the same degree of
care and skill in their exercise, as a prudent person would exercise or use
under the circumstances in the conduct of such person's own affairs.

          The Trustee and the Certificate Administrator shall not be bound to
make any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
order, approval, bond or other paper or document, unless requested in writing to
do by the Majority Certificateholders; provided, however, that if the payment
within a reasonable time to the Trustee and the Certificate Administrator of the
costs, expenses or liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee or the Certificate
Administrator, not reasonably assured to the Trustee or the Certificate
Administrator by the security afforded to it by the terms of this Agreement, the
Trustee or the Certificate Administrator may require reasonable indemnity
against such cost, expense or liability as a condition to taking any such
action. The reasonable expense of every such examination shall be paid by the
Servicer or, if paid by the Trustee or the Certificate Administrator, shall be
repaid by the Servicer upon demand from the Servicer's own funds.

                                      57
<PAGE>

          The rights of the Trustee or the Certificate Administrator to perform
any discretionary act enumerated in this Agreement shall not be construed as a
duty, and the Trustee and the Certificate Administrator shall not be answerable
for other than its negligence or willful misconduct in the performance of such
act.

          The Trustee and the Certificate Administrator shall not be required to
give any bond or surety in respect of the execution of the Trust Fund created
hereby or the powers granted hereunder.

     Section 8.03.  Individual Rights of Trustee and Certificate Administrator.
                    ----------------------------------------------------------

          Each of the Trustee and the Certificate Administrator in its
individual or any other capacity may become the owner or pledgee of Certificates
and may otherwise deal with the Seller or its Affiliates with the same rights it
would have if it were not Trustee or Certificate Administrator, as applicable.
Any Certificates Registrar, co-registrar or co-paying agent may do the same with
like rights. However, the Trustee and the Certificate Administrator must comply
with Section 8.11 hereof.

     Section 8.04.  Trustee's and Certificate Administrator's Disclaimer.
                    ----------------------------------------------------

          Neither the Trustee nor the Certificate Administrator  shall  be
responsible for and makes no representation as to the validity or adequacy of
this Agreement or the Certificates, neither the Trustee nor the Certificate
Administrator shall be accountable for the use of the proceeds from the
Certificates, and neither the Trustee nor the Certificate Administrator shall be
responsible for any statement of the Trust in this Agreement or in any document
issued in connection with the sale of the Certificates or in the Certificates
other than the Trustee's or the Certificate Registrar's certificate of
authentication.

     Section 8.05.  Notice of Servicing Default.
                    ---------------------------

          The Trustee or the Certificate Administrator on behalf of the Trustee
shall mail to each Certificateholder notice of the Servicing Default within 10
days after a Responsible Officer has actual knowledge thereof unless such
Servicing Default shall have been waived or cured. Except in the case of a
Servicing Default in payment of principal of or interest on any Certificate, the
Trustee and the Certificate Administrator may withhold the notice if and so long
as it in good faith determines that withholding the notice is in the interests
of Certificateholders.

     Section 8.06.  [Reserved].
                    ----------

     Section 8.07.  Compensation and Indemnity.
                    --------------------------

          The amount of the Certificate Administrator Fee  shall be paid to the
Certificate Administrator on each Distribution Date pursuant to Section
4.01(a)(i) of this Agreement, and all amounts owing to the Trustee and to the
Certificate Administrator hereunder in excess of such amount shall be paid
solely as provided in this Agreement.  On each Distribution Date, the Trustee
shall be entitled to pay to itself the Trustee Fee pursuant to Section
4.01(a)(i).  The

                                      58
<PAGE>

Trustee's compensation and the Certificate Administrator's compensation shall
not be limited by any law on compensation of a trustee of an express trust.

     Section 8.08.  Replacement of Trustee or Certificate Administrator.
                    ---------------------------------------------------

          No resignation or removal of the Trustee or the Certificate
Administrator and no appointment of a successor Trustee or successor Certificate
Administrator shall become effective until the acceptance of appointment by the
successor Trustee or successor Certificate Administrator pursuant to this
Section 8.08. The Trustee or the Certificate Administrator may resign at any
time by so notifying the Trustee, the Certificate Administrator and the Company.
The Majority Certificateholders may at any time remove the Trustee or the
Certificate Administrator by so notifying the Company and the Trustee or the
Certificate Administrator, as applicable, and the Company and may appoint a
successor Trustee or successor Certificate Administrator. The Company shall
remove the Trustee or the Certificate Administrator, as the case may be, if:

          (a)  the Trustee or the Certificate Administrator fails to comply with
Section 8.11 hereof;

          (b)  the Trustee or the Certificate Administrator is adjudged a
bankrupt or insolvent;

          (c)  a receiver or other public officer takes charge of the Trustee or
the Certificate Administrator or its respective property; or

          (d)  the Trustee or the Certificate Administrator otherwise becomes
incapable of acting.

          If the Trustee or the Certificate Administrator resigns or is removed
or if a vacancy exists in the office of the Trustee or the Certificate
Administrator for any reason (the Trustee or the Certificate Administrator, as
applicable, in such event being referred to herein as the retiring Trustee or
the retiring Certificate Administrator), the Company shall promptly appoint a
successor Trustee or Certificate Administrator.

          A successor Trustee or successor Certificate Administrator shall
deliver a written acceptance of its appointment to the retiring Trustee or
retiring Certificate Administrator, the Company, the Trustee, the Certificate
Administrator and the Servicer. Thereupon, the resignation or removal of the
retiring Trustee or retiring Certificate Administrator shall become effective,
and the successor Trustee or successor Certificate Administrator shall have all
the rights, powers and duties of the Trustee or the Certificate Administrator
under this Agreement. The successor Trustee or successor Certificate
Administrator shall mail a notice of its succession to the Certificateholders.
The retiring Trustee or retiring Certificate Administrator shall promptly
transfer all property held by it as Trustee or Certificate Administrator to the
successor Trustee or successor Certificate Administrator.

          Subject to the foregoing provisions of this Section 8.08, the Trustee
may terminate the Certificate Administrator at any time for failure to perform
its obligations hereunder or under

                                      59
<PAGE>

the Basic Documents provided it or a Certificate Administrator acceptable to the
Company assumes the obligations of the Certificate Administrator.

          If a successor Trustee or successor Certificate Administrator does not
take office within 60 days after the retiring Trustee or retiring Certificate
Administrator resigns or is removed, the retiring Trustee or retiring
Certificate Administrator, as the case may be, the Company, the Trustee, the
Certificate Administrator or the Majority Certificateholders may petition any
court of competent jurisdiction for the appointment of a successor Trustee or
successor Certificate Administrator.

     Section 8.09.  Successor Trustee or Certificate Administrator by Merger.
                    --------------------------------------------------------

          If the Trustee or the Certificate Administrator consolidates with,
merges or converts into, or transfers all or substantially all of its corporate
trust business or assets to, another corporation or banking association, the
resulting, surviving or transferee corporation, without any further act, shall
be the successor Trustee or successor Certificate Administrator, as applicable;
provided, that such corporation or banking association shall be otherwise
qualified and eligible under Section 8.11 hereof.

          If at the time such successor or successors by merger, conversion or
consolidation to the Trustee or the Certificate Administrator, as the case may
be, shall succeed to the trusts created by this Agreement and any of the
Certificates shall have been authenticated but not delivered, any such successor
to the Trustee or the Certificate Administrator, as the case may be, may adopt
the certificate of authentication of any predecessor trustee and deliver such
Certificates so authenticated; and if at that time any of the Certificates shall
not have been authenticated, any successor to the Trustee or the Certificate
Administrator, as the case may be, may authenticate such Certificates either in
the name of any predecessor hereunder or in the name of the successor to the
Trustee or the Certificate Administrator, as the case may be; and in all such
cases such certificates shall have the full force as the Certificates or this
Agreement provide that such certificates of the Trustee or the Certificate
Administrator, as the case may be, shall have.

     Section 8.10.  Appointment of Co-Trustee or Separate Trustee.
                    ---------------------------------------------

          Notwithstanding any other provisions of this Agreement, at any time,
for the purpose of meeting any legal requirement of any jurisdiction in which
any part of the Trust Fund may at the time be located, the Trustee shall have
the power and may execute and deliver all instruments to appoint one or more
Persons to act as a co-trustee or co-trustees, or separate trustee or separate
trustees, of all or any part of the Trust Fund, and to vest in such Person or
Persons, in such capacity and for the benefit of the Certificateholders, such
title to the Trust Fund, or any part hereof, and, subject to the other
provisions of this Section, such powers, duties, obligations, rights and trusts
as the Trustee may consider necessary or desirable. No co-trustee or separate
trustee hereunder shall be required to meet the terms of eligibility as a
successor trustee under Section 8.11 hereof and notice to, and no consent of the
Certificateholders of the appointment of any co-trustee or separate trustee
shall be required.

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<PAGE>

          Every separate trustee and co-trustee shall, to the extent permitted
by law, be appointed and act subject to the following provisions and conditions:

          (a)  all rights, powers, duties and obligations conferred or imposed
upon the Trustee shall be conferred or imposed upon and exercised or performed
by the Trustee and such separate trustee or co-trustee jointly (it being
understood that such separate trustee or co-trustee is not authorized to act
separately without the Trustee joining in such act), except to the extent that
under any law of any jurisdiction in which any particular act or acts are to be
performed the Trustee shall be incompetent or unqualified to perform such act or
acts, in which event such rights, powers, duties and obligations (including the
holding of title to the Trust Fund or any portion thereof in any such
jurisdiction) shall be exercised and performed singly by such separate trustee
or co-trustee, but solely at the direction of the Trustee;

          (b)  no trustee hereunder shall be personally liable by reason of any
act or omission of any other trustee hereunder; and

          (c)  the Trustee may at any time accept the resignation of or remove
any separate trustee or co-trustee.

          Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee.

          Any separate trustee or co-trustee may at any time constitute the
Trustee, its agent or attorney-in-fact with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor trustee.

     Section 8.11.  Eligibility; Disqualification.
                    -----------------------------

          Each of the Trustee and the Certificate Administrator shall at all
times be reasonably acceptable to the Company and authorized to exercise
corporate trust powers. Each of the Trustee and the Certificate Administrator
shall have a combined capital and surplus of at least $___________ as set forth
in its most recent published annual report of condition and it or its parent
shall have a long-term debt rating of Baa3 or better by [Moody's] and BBB or
better by [Standard & Poor's].

     Section 8.12.  [Reserved]
                    ----------

                                      61
<PAGE>

     Section 8.13.  Representations and Warranties.
                    ------------------------------

          (a)   The Trustee hereby represents that:

          (i)   The Trustee is duly organized and validly existing as a
     _______________ corporation in good standing under the laws of the State of
     __________ 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;

          (ii)  The Trustee has the power and authority to execute and deliver
     this Agreement and to carry out its terms; and the execution, delivery and
     performance of this Agreement have been duly authorized by the Trustee by
     all necessary corporate action;

          (iii) The consummation of the transactions contemplated by this
     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
     organization or bylaws of the Trustee or any agreement or other instrument
     to which the Trustee is a party or by which it is bound; and

          (iv)  To the Trustee's best knowledge, there are no proceedings or
     investigations pending or threatened before any court, regulatory body,
     administrative agency or other governmental instrumentality having
     jurisdiction over the Trustee or its properties: (A) asserting the
     invalidity of this Agreement, (B) seeking to prevent the consummation of
     any of the transactions contemplated by this Agreement or (C) seeking any
     determination or ruling that might materially and adversely affect the
     performance by the Trustee of its obligations under, or the validity or
     enforceability of, this Agreement.

          (b)   The Certificate Administrator hereby represents that:

          (i)   The Certificate Administrator is duly organized and validly
     existing as a ___________________________ in good standing under the laws
     of the ___________ 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;

          (ii)  The Certificate Administrator has the power and authority to
     execute and deliver this Agreement and to carry out its terms; and the
     execution, delivery and performance of this Agreement have been duly
     authorized by the Certificate Administrator by all necessary corporate
     action;

          (iii) The consummation of the transactions contemplated by this
     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
     organization or bylaws of the Certificate Administrator or any agreement or
     other instrument to which the Certificate Administrator is a party or by
     which it is bound; and

                                      62
<PAGE>

          (iv)  To the Certificate Administrator's best knowledge, there are no
     proceedings or investigations pending or threatened before any court,
     regulatory body, administrative agency or other governmental
     instrumentality having jurisdiction over the Certificate Administrator or
     its properties: (A) asserting the invalidity of this Agreement, (B) seeking
     to prevent the consummation of any of the transactions contemplated by this
     Agreement or (C) seeking any determination or ruling that might materially
     and adversely affect the performance by the Certificate Administrator of
     its obligations under, or the validity or enforceability of, this
     Agreement.

     Section 8.14.  Directions to Trustee and Certificate Administrator.
                    ---------------------------------------------------

          The Trustee or the Certificate Administrator on behalf of the Trustee,
as the case may be, is hereby directed:

          (a)  to accept the Mortgage Loans and hold the assets of the Trust
Fund in trust for the Certificateholders;

          (b)  to authenticate and deliver the Certificates of each Class
substantially in the forms prescribed by Exhibits A-1, A-2, A-3, A-4, A-5, A-6,
A-7, A-8 and A-9 in accordance with the terms of this Agreement; and

          (c)  to take all other actions as shall be required to be taken by the
terms of this Agreement.

     Section 8.15.  The Agents.
                    ----------

          The provisions of this Agreement relating to the limitations of the
Trustee's and the Certificate Administrator's liability and to its indemnity
shall inure also to the Paying Agent, and the Certificate Registrar.

     Section 8.16.  Reports by the Certificate Administrator; Trust Fiscal Year.
                    -----------------------------------------------------------

          The Certificate Administrator, on behalf of the Trust, shall:

          (a)  file with the Commission, on behalf of the Trust, the annual
reports and information, documents and other reports (or copies of such portions
of any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) that the Trust may be required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. Such filings
shall be as follows: within 15 days after each Distribution Date, the
Certificate Administrator, on behalf of the Trust, shall file with the
Commission via the Electronic Data Gathering, Analysis and Retrieval System, a
Form 8-K with a copy of the statement to Certificateholders for such
Distribution Date as an exhibit thereto. Prior to _____________, the Certificate
Administrator, shall file a Form 15 Suspension Notification with respect to the
Trust Fund, if applicable. Prior to __________________, the Certificate
Administrator, on behalf of the Trust, shall file a Form 10-K, in substance
conforming to industry standards, with respect to the Trust Fund. The Trust
hereby grants to the Certificate Administrator, a limited power of attorney to
execute and file each such document on behalf of the Trust. Such power of
attorney

                                      63
<PAGE>

shall continue until the termination of the Trust Fund. The Certificate
Administrator, on behalf of the Trust, shall deliver to the Seller and the
Trustee within three Business Days after filing any Form 8-K or Form 10-K
pursuant to this Section 8.16 a copy of such Form 8-K or Form 10-K, as the case
may be; and

          (b)  file with the Commission (with copies to the Seller and the
Company) in accordance with rules and regulations prescribed from time to time
by the Commission such additional information, documents and reports with
respect to compliance by the Trust with the conditions and covenants of this
Agreement as may be required from time to time by such rules and regulations.

          The fiscal year of the Trust shall end on ________________ of each
year.

                                  ARTICLE IX

                                  [RESERVED]

                                   ARTICLE X

                             REMIC ADMINISTRATION

     Section 10.01. REMIC Administration.
                    --------------------

          (a)  [Reserved].

          (b)  The Closing Date is hereby designated as the "Startup Day" of
each REMIC within the meaning of section 860G(a)(9) of the Code.

          (c)  The Servicer shall pay any and all tax related expenses (not
including taxes) of each REMIC, including but not limited to any professional
fees or expenses related to audits or any administrative or judicial proceedings
with respect to each REMIC that involve the Internal Revenue Service or state
tax authorities, but only to the extent that (i) such expenses are ordinary or
routine expenses, including expenses of a routine audit but not expenses of
litigation (except as described in (ii)); or (ii) such expenses or liabilities
(including taxes and penalties) are attributable to the negligence or willful
misconduct of the Servicer in fulfilling its duties hereunder. The Servicer
shall be entitled to reimbursement of expenses to the extent provided in clause
(i) above from the Collection Account.

          (d)  The Certificate Administrator shall (a) maintain (or cause to be
maintained) the books of the Trust on a calendar year basis using the accrual
method of accounting, (b) deliver (or cause to be delivered) to each
Certificateholder as may be required by the Code and applicable Treasury
Regulations, including the REMIC Provisions, such information as may be required
to enable each Certificateholder to prepare its federal and state income tax
returns, (c) prepare and file or cause to be prepared and filed such tax returns
relating to the Trust as may be required by the Code and applicable Treasury
Regulations (including timely making one or more elections to treat the Trust as
a REMIC for federal income tax purposes and any other such elections as may from
time to time be required or appropriate under

                                      64
<PAGE>

any applicable state or federal statutes, rules or regulations), (d) collect or
cause to be collected any required withholding tax with respect to income or
distributions to Certificateholders and prepare or cause to be prepared the
appropriate forms relating thereto and (e) maintain records as required by the
REMIC Provisions.

          (e)  The Holder of the Residual Certificate at any time holding the
largest Percentage Interest thereof shall be the "tax matters person" as defined
in the REMIC Provisions (the "Tax Matters Person") with respect to each REMIC
and shall act as Tax Matters Person for each REMIC. The Certificate
Administrator, as agent for the Tax Matters Person, shall perform on behalf of
each REMIC all reporting and other tax compliance duties that are the
responsibility of such REMIC under the Code, the REMIC Provisions, or other
compliance guidance issued by the Internal Revenue Service or any state or local
taxing authority. Among its other duties, if required by the Code, the REMIC
Provisions, or other such guidance, the Certificate Administrator, as agent for
the Tax Matters Person, shall provide (i) to the Treasury or other governmental
authority such information as is necessary for the application of any tax
relating to the transfer of a Residual Certificate to any Disqualified
Organization or non-U.S. Person and (ii) to the Certificateholders such
information or reports as are required by the Code or REMIC Provisions.

          (f)  The Trustee, the Servicer, the Certificate Administrator and the
Holders of Certificates shall take any action or cause the REMIC to take any
action necessary to create or maintain the status of each REMIC as a REMIC under
the REMIC Provisions and shall assist each other as necessary to create or
maintain such status.  Neither the Trustee, the Certificate Administrator, the
Servicer nor the Holder of any Residual Certificate shall take any action, cause
any REMIC created hereunder to take any action or fail to take (or fail to cause
to be taken) any action that, under the REMIC Provisions, if taken or not taken,
as the case may be, could (i) endanger the status of such REMIC as a REMIC or
(ii) result in the imposition of a tax upon such REMIC (including but not
limited to the tax on prohibited transactions as defined in Code Section
860F(a)(2) and the tax on prohibited contributions set forth on Section 860G(d)
of the Code) (either such event, an "Adverse REMIC Event") unless the Trustee,
                                     -------------------
the Certificate Administrator and the Servicer have received an Opinion of
Counsel (at the expense of the party seeking to take such action) to the effect
that the contemplated action will not endanger such status or result in the
imposition of such a tax.  In addition, prior to taking any action with respect
to any REMIC created hereunder or the assets therein, or causing such REMIC to
take any action, which is not expressly permitted under the terms of this
Agreement, any Holder of a Residual Certificate will consult with the Trustee,
the Certificate Administrator and the Servicer, or their respective designees,
in writing, with respect to whether such action could cause an Adverse REMIC
Event to occur with respect to any REMIC, and no such Person shall take any such
action or cause any REMIC to take any such action as to which the Trustee, the
Certificate Administrator or the Servicer has advised it in writing that an
Adverse REMIC Event could occur.

          (g)  Each Holder of a Residual Certificate shall pay when due any and
all taxes imposed on each REMIC created hereunder by federal or state
governmental authorities. To the extent that such Trust taxes are not paid by a
Residual Certificateholder, the Certificate Administrator shall pay any
remaining REMIC taxes out of current or future amounts otherwise

                                      65
<PAGE>

distributable to the Holder of the Residual Certificate in the REMICs or, if no
such amounts are available, out of other amounts held in the Payment Account,
and shall reduce amounts otherwise payable to Holders of regular interests in
the related REMIC.

          (h) The Certificate Administrator, as agent for the Tax Matters
Person, shall, for federal income tax purposes, maintain books and records with
respect to each REMIC created hereunder on a calendar year and on an accrual
basis.

          (i) After the Pre-Funding Period, no additional contributions of
assets shall be made to any REMIC created hereunder, except as expressly
provided in this Agreement with respect to Qualified Replacement Mortgages.

          (j) None of the Trustee, the Certificate Administrator nor the
Servicer shall enter into any arrangement by which any REMIC created hereunder
will receive a fee or other compensation for services.

          (k) The Certificate Administrator will apply for an Employee
Identification Number from the Internal Revenue Service via a Form SS-4 or other
acceptable method for the Lower-Tier REMIC and the Upper-Tier REMIC.

     Section 10.02. Prohibited Transactions and Activities.
                    --------------------------------------

          Neither the Company, the Servicer, the Certificate Administrator nor
the Trustee shall sell, dispose of, or substitute for any of the Mortgage Loans,
except in a disposition pursuant to (i) the foreclosure of a Mortgage Loan, (ii)
the bankruptcy of the Trust Fund, (iii) the termination, pursuant to Article XI
of this Agreement, of any REMIC created hereunder (iv) a substitution pursuant
to Article II of this Agreement or (v) a repurchase of Mortgage Loans pursuant
to Article II of this Agreement, nor acquire any assets for any REMIC, nor sell
or dispose of any investments in the Payment Account for gain, nor accept any
contributions to either REMIC after the Closing Date, unless it has received an
Opinion of Counsel (at the expense of the party causing such sale, disposition,
or substitution) that such disposition, acquisition, substitution, or acceptance
will not (a) affect adversely the status of any REMIC created hereunder as a
REMIC, or (b) cause any REMIC created hereunder to be subject to a tax on
prohibited transactions or prohibited contributions pursuant to the REMIC
Provisions.

                                  ARTICLE XI

                                  TERMINATION

     Section 11.01. Termination.
                    -----------

          (a)  The respective obligations and responsibilities of the Seller,
the Servicer, the Company, the Certificate Administrator and the Trustee created
hereby (other than the obligation of the Certificate Administrator to make
certain payments to Certificateholders after the final Distribution Date and the
obligation of the Servicer to send certain notices as hereinafter set forth)
shall terminate upon notice to the Trustee or the Certificate Administrator upon
the earliest of (i) the Distribution Date on which the Certificate Principal
Balances of the Regular

                                      66
<PAGE>

Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below and (iv) the
Distribution Date in ______________. Notwithstanding the foregoing, in no event
shall the trust created hereby continue beyond the expiration of 21 years from
the death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date
hereof.

          The Servicer may, at its option, terminate this Agreement on any date
on which the aggregate of the Principal Balances of the Mortgage Loans on such
date is equal to or less than 10% of the Maximum Collateral Amount, by
purchasing, on the next succeeding Distribution Date, all of the outstanding
Mortgage Loans and REO Properties at a price equal to the greater of the
Principal Balance of the Mortgage Loans and REO Properties or the market value
of the Mortgage Loans and REO Properties, in each case plus accrued and unpaid
interest thereon at the weighted average of the Mortgage Rates through the end
of the Due Period preceding the final Distribution Date plus unreimbursed
Servicing Advances, Advances, any unpaid Servicing Fees allocable to such
Mortgage Loans and REO Properties, any accrued and unpaid Available Funds Cap
Carryforward Amount and any unpaid amount due the Trustee and the Certificate
Administrator under this Agreement (the "Termination Price").
                                         -----------------

          In connection with any such purchase pursuant to the preceding
paragraph, the Servicer shall deposit in the Payment Account all amounts then on
deposit in the Collection Account, which deposit shall be deemed to have
occurred immediately preceding such purchase.

          Any such purchase shall be accomplished by deposit into the Payment
Account on the Distribution Date of the Termination Price.

          (b)  Notice of any termination, specifying the Distribution Date
(which shall be a date that would otherwise be a Distribution Date) upon which
the Certificateholders may surrender their Certificates to the Certificate
Administrator for payment of the final distribution and cancellation, shall be
given promptly by the Certificate Administrator upon the Certificate
Administrator receiving notice of such date from the Servicer, by letter to the
Certificateholders mailed not earlier than the 15th day and not later than the
25th day of the month next preceding the month of such final distribution
specifying (1) the Distribution Date upon which final distribution of the
Certificates will be made upon presentation and surrender of such Certificates
at the office or agency of the Certificate Administrator therein designated, (2)
the amount of any such final distribution and (3) that the Record Date otherwise
applicable to such Distribution Date is not applicable, distributions being made
only upon presentation and surrender of the Certificates at the office or agency
of the Certificate Administrator therein specified.

          (c)  Upon presentation and surrender of the Certificates, the
Certificate Administrator shall cause to be distributed to the Holders of the
Certificates on the Distribution Date for such final distribution, in proportion
to the Percentage Interests of their respective Class and to the extent that
funds are available for such purpose, an amount equal to the amount required to
be distributed to such Holders in accordance with the provisions of Section 4.01
for such Distribution Date.

                                      67
<PAGE>

          (d)  In the event that all Certificateholders shall not surrender
their Certificates for final payment and cancellation on or before such final
Distribution Date, the Certificate Administrator shall promptly following such
date cause all funds in the Payment Account not distributed in final
distribution to Certificateholders to be withdrawn therefrom and credited to the
remaining Certificateholders by depositing such funds in a separate Servicing
Account for the benefit of such Certificateholders, and the Servicer (if the
Servicer has exercised its right to purchase the Mortgage Loans) or the
Certificate Administrator (in any other case) shall give a second written notice
to the remaining Certificateholders, to surrender their Certificates for
cancellation and receive the final distribution with respect thereto. If within
nine months after the second notice all the Certificates shall not have been
surrendered for cancellation, the Residual Certificateholder shall be entitled
to all unclaimed funds and other assets which remain subject hereto, and the
Certificate Administrator, as agent of the Trustee upon transfer of such funds
shall be discharged of any responsibility for such funds, and the
Certificateholders shall look to the Residual Certificateholder for payment.

     Section 11.02. Additional Termination Requirements.
                    -----------------------------------

          (a)  In the event that the Servicer exercises its purchase option as
provided in Section 11.01, each REMIC shall be terminated in accordance with the
following additional requirements, unless the Certificate Administrator shall
have been furnished with an Opinion of Counsel to the effect that the failure of
the Trust to comply with the requirements of this Section will not (i) result in
the imposition of taxes on "prohibited transactions" of the Trust as defined in
Section 860F of the Code or (ii) cause any REMIC constituting part of the Trust
Fund to fail to qualify as a REMIC at any time that any Certificates are
outstanding:

          (i)  Within 90 days prior to the final Distribution Date, the Servicer
     shall adopt and the Certificate Administrator shall sign a plan of complete
     liquidation of each REMIC created hereunder meeting the requirements of a
     "Qualified Liquidation" under Section 860F of the Code and any regulations
     thereunder; and

          (ii) At or after the time of adoption of such a plan of complete
     liquidation and at or prior to the final Distribution Date, the Certificate
     Administrator shall sell all of the assets of the Trust Fund to the
     Servicer for cash pursuant to the terms of the plan of complete
     liquidation.

          (b)  By their acceptance of Certificates, the Holders thereof hereby
agree to appoint the Certificate Administrator as their attorney in fact to: (i)
adopt such a plan of complete liquidation (and the Certificateholders hereby
appoint the Certificate Administrator as their attorney in fact to sign such
plan) as appropriate and (ii) to take such other action in connection therewith
as may be reasonably required to carry out such plan of complete liquidation all
in accordance with the terms hereof.

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<PAGE>

                                  ARTICLE XII

                           MISCELLANEOUS PROVISIONS

     Section 12.01. Amendment.
                    ---------

          This Agreement may be amended from time to time by the parties hereto,
and without the consent of the Certificateholders (i) to cure any ambiguity,
(ii) to correct or supplement any provisions herein which may be defective or
inconsistent with any other provisions herein or (iii) to make any other
provisions with respect to matters or questions arising under this Agreement
which shall not be inconsistent with the provisions of this Agreement; provided,
however, that any such action listed in clause (i) through (iii) above shall be
deemed not to adversely affect in any respect the interests of any
Certificateholder, if evidenced by (i) written notice to the Company, the
Servicer, the Certificate Administrator and the Trustee from the Rating Agencies
that such action will not result in the reduction or withdrawal of the rating of
any outstanding Class of Certificates with respect to which it is a Rating
Agency or (ii) an Opinion of Counsel delivered to the Servicer, the Certificate
Administrator, the Company and the Trustee.

          In addition, this Agreement may be amended from time to time by the
parties hereto with the consent of the Majority Certificateholders for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement or of modifying in any manner the rights of
the Holders of Certificates; provided, however, that no such amendment or waiver
shall (x) reduce in any manner the amount of, or delay the timing of, payments
on the Certificates or distributions which are required to be made on any
Certificate without the consent of the Holder of such Certificate, (y) adversely
affect in any material respect the interests of the Holders of any Class of
Certificates in a manner other than as described in clause (x) above, without
the consent of the Holders of Certificates of such Class evidencing at least a
66% Percentage Interest in such Class, or (z) reduce the percentage of Voting
Rights required by clause (y) above without the consent of the Holders of all
Certificates of such Class then outstanding. Upon approval of an amendment, a
copy of such amendment shall be sent to the Rating Agencies.

          Notwithstanding any provision of this Agreement to the contrary, the
Trustee shall not consent to any amendment to this Agreement unless it shall
have first received an Opinion of Counsel, delivered by (and at the expense of)
the Person seeking such Amendment, to the effect that such amendment will not
result in the imposition of a tax on any REMIC created hereunder constituting
part of the Trust Fund pursuant to the REMIC Provisions or cause any REMIC
created hereunder constituting part of the Trust to fail to qualify as a REMIC
at any time that any Certificates are outstanding and that the amendment is
being made in accordance with the terms hereof.

          Promptly after the execution of any such amendment the Certificate
Administrator shall furnish, at the expense of the Person that requested the
amendment if such Person is Seller or the Servicer (but in no event at the
expense of the Certificate Administrator), otherwise at the

                                      69
<PAGE>

expense of the Trust, a copy of such amendment and the Opinion of Counsel
referred to in the immediately preceding paragraph to the Servicer and each
Rating Agency.

          It shall not be necessary for the consent of Certificateholders under
this Section 12.01 to approve the particular form of any proposed amendment;
instead it shall be sufficient if such consent shall approve the substance
thereof. The manner of obtaining such consents and of evidencing the
authorization of the execution thereof by Certificateholders shall be subject to
such reasonable regulations as the Trustee may prescribe.

          Neither the Certificate Administrator nor the Trustee shall be
obligated to enter into any amendment pursuant to this Section 12.01 that
affects its rights, duties and immunities under this Agreement or otherwise.

     Section 12.02. Recordation of Agreement; Counterparts.
                    --------------------------------------

          To the extent permitted by applicable law, this Agreement is subject
to recordation in all appropriate public offices for real property records in
all the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer at the expense of the Trust, but only upon direction of
Certificateholders accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of the
Certificateholders.

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

     Section 12.03. Limitation on Rights of Certificateholders.
                    ------------------------------------------

          The death or incapacity of any Certificateholder shall not (i) operate
to terminate this Agreement or the Trust, (ii) entitle such Certificateholder's
legal representatives or heirs to claim an accounting or to take any action or
proceeding in any court for a partition or winding up of the Trust, or (iii)
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

          Except as expressly provided for herein, no Certificateholder shall
have any right to vote or in any manner otherwise control the operation and
management of the Trust, or the obligations of the parties hereto, nor shall
anything herein set forth or contained in the terms of the Certificates be
construed so as to constitute the Certificateholders from time to time as
partners or members of an association; nor shall any Certificateholder be under
any liability to any third person by reason of any action taken by the parties
to this Agreement pursuant to any provision hereof.

          No Certificateholder shall have any right by virtue of any provision
of this Agreement to institute any suit, action or proceeding in equity or at
law upon or under or with respect to this Agreement, unless such Holder
previously shall have given to the Trustee a written

                                      70
<PAGE>

notice of default and of the continuance thereof, as hereinbefore provided, and
unless also the Holders of Certificates entitled to at least 25% of the Voting
Rights shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee for 15 days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute any such action, suit or
proceeding. It is understood and intended, and expressly covenanted by each
Certificateholder with every other Certificateholder and the Trustee, that no
one or more Holders of Certificates shall have any right in any manner whatever
by virtue of any provision of this Agreement to affect, disturb or prejudice the
rights of the Holders of any other of such Certificates, or to obtain or seek to
obtain priority over or preference to any other such Holder, which priority or
preference is not otherwise provided for herein, or to enforce any right under
this Agreement, except in the manner herein provided and for the equal, ratable
and common benefit of all Certificateholders. For the protection and enforcement
of the provisions of this Section 12.03 each and every Certificateholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.

     Section 12.04. Governing Law; Jurisdiction.
                    ---------------------------

          This Agreement shall be construed in accordance with the laws of the
State of ________, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such laws. With respect to any
claim arising out of this Agreement, each party irrevocably submits to the
exclusive jurisdiction of the courts of the _________________ and the United
States District Court located in the _______________________, and each party
irrevocably waives any objection which it may have at any time to the laying of
venue of any suit, action or proceeding arising out of or relating hereto
brought in any such courts, irrevocably waives any claim that any such suit,
action or proceeding brought in any such court has been brought in any
inconvenient forum and further irrevocably waives the right to object, with
respect to such claim, suit, action or proceeding brought in any such court,
that such court does not have jurisdiction over such party, provided that
service of process has been made by any lawful means.

     Section 12.05. 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 certified mail, return receipt requested, or sent by reputable overnight
courier service to:

                                      71
<PAGE>

                  (a)    in the case of the Servicer or the Seller:

                                  NovaStar Mortgage, Inc.
                                  1900 W. 47th Place
                                  Suite 205
                                  Westwood, Kansas 66205
                                  Attention: Chris Miller, Senior Vice President

                  (b)    in the case of the Company:


                                  NovaStar Mortgage Funding Corporation
                                  1901 West 47th Place, Suite 105
                                  Westwood, KS 66205
                                  Attention:  President

                  (c)    in the case of Rating Agencies:


                                  [Moody's Investors Service Inc.
                                  99 Church Street
                                  New York, New York 10007
                                  Attention:_____________________]

                                  [Standard & Poor's
                                  26 Broadway
                                  New York, New York 10004-1064
                                  Attention:_____________________]

                  (d)    in the case of the Certificate Administrator:

                                  ________________________________
                                  ________________________________
                                  ________________________________
                                  Attention:______________________

                  (e)    in the case of the Trustee:

                                  ________________________________
                                  ________________________________
                                  ________________________________
                                  Attention:______________________


or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party. Any notice required or permitted to be
mailed to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Certificateholder as shown in the Certificate
Register. Any notice so mailed within the time prescribed in this Agreement
shall be conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice. Any notice or other document required to
be delivered or mailed by the Certificate

                                      72
<PAGE>

Administrator to any Rating Agency shall be given on a reasonable efforts basis
and only as a matter of courtesy and accommodation and the Certificate
Administrator shall have no liability for failure to deliver such notice or
document to any Rating Agency.


     Section 12.06. Severability of Provisions.
                    --------------------------

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

     Section 12.07. Article and Section References.
                    ------------------------------

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

     Section 12.08. Further Assurances.
                    ------------------

             Notwithstanding any other provision of this Agreement, neither the
Certificate Administrator nor the Trustee shall have any obligation to consent
to any amendment or modification of this Agreement unless they have been
provided reasonable security or indemnity against their out-of-pocket expenses
(including reasonable attorneys' fees) to be incurred in connection therewith.

     Section 12.09. Benefits of Agreement.
                    ---------------------

             Nothing in this Agreement or in the Certificates, expressed or
implied, shall give to any Person, other than the Certificateholders and the
parties hereto and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.

     Section 12.10. Acts of Certificateholders.
                    --------------------------

             (a)   Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Agreement to be given or taken
by the Certificateholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Certificateholders in
person or by agent duly appointed in writing, and such action shall become
effective when such instrument or instruments are delivered to the Trustee, the
Certificate Administrator, the Seller and the Servicer. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "act" of the Certificateholders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Agreement and conclusive in favor of the Trustee and the Trust, if made in the
manner provided in this Section 12.10.

             (b)   The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of a

                                      73
<PAGE>

notary public or other officer authorized by law to take acknowledgments of
deeds, certifying that the individual signing such instrument or writing
acknowledged to him the execution thereof. Whenever such execution is by a
signer acting in a capacity other than his or her individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority.

             (c)   Any request, demand, authorization, direction, notice,
consent, waiver or other action by any Certificateholder shall bind every future
Holder of such Certificate and the Holder of every Certificate issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof, in
respect of anything done, omitted or suffered to be done by the Certificate
Administrator, the Trustee or the Trust in reliance thereon, whether or not
notation of such action is made upon such Certificate.

                                      74
<PAGE>

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

                                            NOVASTAR MORTGAGE, INC.,
                                            as Servicer and as Seller


                                            By:_________________________________
                                               Name:
                                               Title:

                                            NOVASTAR MORTGAGE FUNDING
                                            CORPORATION, as Company


                                            By:_________________________________
                                               Name:
                                               Title:

                                            ____________________________________
                                            as Certificate Administrator


                                            By:________________________________,
                                               Name:
                                               Title:

                                            ___________________________________,
                                            as Trustee


                                            By:_________________________________
                                               Name:
                                               Title:

                                      75
<PAGE>

STATE OF      )
        ______
                               ) ss.:
COUNTY OF                      )
          _____________________

          On the ____ day of _______________, _______ before me, a notary public
in and for said State, personally appeared ___________________ known to me (or
proved to me on the basis of satisfactory evidence) to be a
_____________________ of NovaStar Mortgage, Inc., a Virginia corporation that
executed the within instrument, and also known to me (or proved to me on the
basis of satisfactory evidence) to be the person who executed it on behalf of
said corporation, and acknowledged to me that such corporation executed the
within instrument.

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

                                        ________________________________________
           Seal                                       Notary Public


                                      76
<PAGE>

STATE OF                   )
        ___________________
                           ) ss.:
COUNTY OF                  )
          _________________

          On the ____ day of ___________, _____ before me, a notary public in
and for said State, personally appeared _________________ known to me (or proved
to me on the basis of satisfactory evidence) to be a _________________ of
NovaStar Mortgage Funding Corporation, a _________________ corporation that
executed the within instrument, and also known to me (or proved to me on the
basis of satisfactory evidence) to be the person who executed it on behalf of
said corporation, and acknowledged to me that such corporation executed the
within instrument.

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

                                         _______________________________________
            Seal                                    Notary Public

                                      77
<PAGE>

STATE OF                   )
        ___________________
                           ) ss.:
COUNTY OF                  )
          _________________

          On the ____ day of ____________, ______ before me, a notary public in
and for said State, personally appeared ___________________ known to me (or
proved to me on the basis of satisfactory evidence) to be a
_____________________ of ___________________, a ______________________ that
executed the within instrument, and also known to me (or proved to me on the
basis of satisfactory evidence) to be the person who executed it on behalf of
said corporation, and acknowledged to me that such corporation executed the
within instrument.

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

                                          ______________________________________
            Seal                                      Notary Public

                                      78
<PAGE>

STATE OF                     )
        _____________________
                             ) ss.:
COUNTY OF                    )
          ___________________

          On the _____ day of ______________, ______ before me, a notary public
in and for said State, personally appeared __________, known to me (or proved to
me on the basis of satisfactory evidence) to be ___________________ of
__________________, a __________ ________________ that executed the within
instrument, and also known to me (or proved to me on the basis of satisfactory
evidence) to be the person who executed it on behalf of said association, and
acknowledged to me that such corporation executed the within instrument.

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




                                         _______________________________________
            Seal                                          Notary Public

                                      79
<PAGE>

                                  APPENDIX A
                                  ----------

                                  DEFINITIONS
                                  -----------

          "1933 Act":  The Securities Act of 1933, as amended.
           --------

          "Account": The Collection Account, the Pre-Funding Account, the
           -------
Interest Coverage Account, and the Payment Account.

          "Accrual Period": With respect to each Distribution Date, the period
           --------------
commencing on the preceding Distribution Date (or in the case of the first
Accrual Period, commencing on the Closing Date) and ending on the day preceding
the current Distribution Date.

          "Addition Notice": With respect to the transfer of Subsequent Mortgage
           ---------------
Loans to the Trust Fund pursuant to Section 2.08, a notice of the Company's
designation of the Subsequent Mortgage Loans to be sold to the Trust Fund and
the aggregate principal balance of such Subsequent Mortgage Loans as of the
Subsequent Cut-off Date. The Addition Notice shall be given not later than six
Business Days prior to the related Subsequent Transfer Date and shall be
substantially in the form attached hereto as Exhibit C.

          "Adjustable Rate Mortgage Loan": A Mortgage Loan which provides at any
           -----------------------------
period during the life of such loan for the adjustment of the Mortgage Rate
payable in respect thereto. The Adjustable Rate Mortgage Loans are identified as
such on the Mortgage Loan Schedule.

          "Adjustment Date": With respect to each Adjustable Rate Mortgage Loan,
           ---------------
each adjustment date, on which the Mortgage Rate of such Mortgage Loan changes
pursuant to the related Mortgage Note.

          "Administrative Fee": With respect to each Distribution Date, the sum
           ------------------
of the MI Premium, the Servicing Fee and the Certificate Administrator Fee with
respect to such Distribution Date.

          "Administrative Fee Rate": As to each Distribution Date, the sum of
           -----------------------
(i) the Certificate Administrator Fee Rate, (ii) the Servicing Fee Rate, and
(iii) the total MI Premiums due during the related Due Period, expressed as an
annual percentage rate of the Pool Balance as of the beginning of that Due
Period.

          "Advance": As to any Mortgage Loan, any advance made by the Servicer
           -------
in respect of any Distribution Date pursuant to Section 3.24.


          "Adverse REMIC Event": As defined in Section 10.01(f) hereof.
           -------------------

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

                                      A-1
<PAGE>

          "Agreement": This Pooling and Servicing Agreement and all amendments
           ---------
hereof and supplements hereto.

          "Allocated Realized Loss Amount": With respect to any Distribution
           ------------------------------
Date and any Class of Mezzanine Certificates, the Realized Losses allocated to
such Class of Certificates on such Distribution Date pursuant to Section 4.06
hereof.

          "Applicable Regulations":  As to any Mortgage Loan, all federal and
           ----------------------
state laws, statutes, rules and regulations applicable thereto.

          "Appraised Value": The appraised value of a Mortgaged Property
           ---------------
based upon the appraisal made at the time of the origination of the related
Mortgage Loan. With respect to a Mortgage Loan the proceeds of which were used
to refinance an existing mortgage loan, the appraised value of the Mortgaged
Property based upon the appraisal (as reviewed and approved by the Seller)
obtained at the time of refinancing.

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

          "Assumed Final Maturity Date": As to each Class of Certificates, the
           ---------------------------
Distribution Date in ________________.


          "Available Funds Cap Carryforward Amount": With respect to any
           ---------------------------------------
Class of Underwritten Certificates and any Distribution Date, the sum of (i) the
positive excess, if any, of the aggregate, cumulative amount of REMIC Available
Funds Cap Shortfall Amounts for such Class on all prior Distribution Dates plus
(ii) interest on the amount described in clause (i) at a rate equal to the
related Formula Rate for such Class and Distribution Date.

          "Balloon Mortgage Loan": A Mortgage Loan that provides for the payment
           ---------------------
of the unamortized principal balance of such Mortgage Loan in a single payment
at the maturity of such Mortgage Loan that is substantially greater than the
preceding monthly payment.

          "Balloon Payment":  A payment of the unamortized principal balance of
           ---------------
a Mortgage Loan in a single payment at the maturity of such Mortgage Loan that
is substantially greater than the preceding Monthly Payment.

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

          "Base Prospectus":  The base Prospectus, dated ______________, with
           ---------------
respect to the Offered Certificates.

          "Basic Documents": This Agreement, the Purchase Agreement, each
           ---------------
Subsequent Transfer Instrument, the Side Indemnity Letter, the REMIC Interests
Sale Agreement, the

                                      A-2
<PAGE>

Converted Loan Purchase Agreement, the Underwriting Agreement, and the other
documents and certificates delivered in connection with any of the above.

          "Book-Entry Certificates": Any of the Certificates that shall be
           -----------------------
registered in the name of the Depository or its nominee, the ownership of which
is reflected on the books of the Depository or on the books of a Person
maintaining an account with the Depository (directly, as a Depository
Participant, or indirectly, as an indirect participant in accordance with the
rules of the Depository and as described in Section 5.02 hereof). On the Closing
Date, the Class A-1 Certificates, the Class AIO Certificates, the Class P
Certificates and the Mezzanine Certificates shall be Book-Entry Certificates.

          "Business Day": Any day other than (i) a Saturday or a Sunday or (ii)
           ------------
a day on which banking institutions in the City of ________, Delaware,
California or Kansas or in the city in which the corporate trust offices of the
Trustee and the Certificate Administrator are located, are required or
authorized by law to be closed.

          "Cash Liquidation": As to any defaulted Mortgage Loan other than a
           ----------------
Mortgage Loan as to which an REO Acquisition occurred, a determination by the
Servicer that it has received all Liquidation Proceeds and other payments or
cash recoveries which the Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.

          "Certificate":  Any Regular Certificate, Class RL or Class RU
           -----------
Certificate.

          "Certificate Administrator":  __________________, a ___________
           -------------------------
banking association, and any successor thereto.

          "Certificate Administrator Fee":  With respect to each Distribution
           -----------------------------
Date, the product of (i) the Certificate Administrator Fee Rate divided by 12
and (ii) the sum of the Principal Balance of the Mortgage Loans and the Pre-
Funded Amount as of the first day of the related Due Period.

          "Certificate Administrator Fee Rate":  _______% per annum.
           ----------------------------------

          "Certificateholder" or "Holder":  The Person in whose name a
           -----------------      ------
Certificate is registered in the Certificate Register, except that a
Disqualified Organization or non-U.S. Person shall not be a Holder of a Residual
Certificate for any purpose hereof.

          "Certificate Margin": With respect to the Class A-1 Certificates on
           ------------------
each Distribution Date (A) on or prior to the Rate Step-Up Date, ____% per annum
and (B) after the Rate Step-Up Date, _____% per annum. With respect to the Class
M-1 Certificates on each Distribution Date (A) on or prior to the Rate Step-Up
Date, ____% per annum and (B) after the Rate Step-Up Date, _____% per annum.
With respect to the Class M-2 Certificates on each Distribution Date (A) on or
prior to the Rate Step-Up Date, ____% per annum and (B) after the Rate Step-Up
Date, _____% per annum. With respect to the Class M-3 Certificates on each
Distribution Date (A) on or prior to the Rate Step-Up Date, ____% per annum and
(B) after the Rate Step-Up Date, _____% per annum.

                                      A-3
<PAGE>

          "Certificate Owner": With respect to each Book-Entry Certificate, any
           -----------------
beneficial owner thereof.

          "Certificate Principal Balance": With respect to any Class of Regular
           ------------------------------
Certificates (other than the Class AIO Certificates, the Class O Certificates
and the Class P Certificates) immediately prior to any Distribution Date, will
be equal to the Initial Certificate Principal Balance thereof reduced by the sum
of all amounts actually distributed in respect of principal of such Class and,
in the case of a Mezzanine Certificate, Allocated Realized Loss Amounts applied
with respect to that class on all prior Distribution Dates. With respect to the
Class O Certificates as of any date of determination, an amount equal to the
excess, if any, of (A) the Principal Balances of the Mortgage Loans over (B) the
then aggregate Certificate Principal Balances of the Class A-1 Certificates and
the Mezzanine Certificates then outstanding. The Class AIO Certificates and the
Class P Certificates will not have a Certificate Principal Balance.

          "Certificate Register": The register maintained by the Certificate
           --------------------
Registrar in which the Certificate Registrar shall provide for the registration
of Certificates and of transfers and exchanges of Certificates.

          "Certificate Registrar":  Initially, the Certificate Administrator,
           ---------------------
in its capacity as Certificate Registrar, or any successor to the Certificate
Administrator in such capacity.

          "Certificates Sale Agreement": The Certificates Sale Agreement, dated
           ---------------------------
as of ________________, between [NovaStar Mortgage Funding Corporation], a
Delaware corporation and NovaStar REMIC Financing Corporation, a Delaware
corporation.

          "Class": Collectively, Certificates which have the same priority of
           -----
payment and bear the same class designation and the form of which is identical
except for variation in the Percentage Interest evidenced thereby.

          "Class A-1 Certificate": Any one of the Class A-1 Certificates
           ---------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-1, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Upper-
Tier REMIC.

          "Class A-1 Certificateholder": Any Holder of a Class A-1 Certificate.
           ---------------------------

          "Class A-1 Principal Distribution Amount": The excess of (x) the
           ---------------------------------------
Certificate Principal Balance of the Class A-1 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) _____% and
(ii) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $__________.

                                      A-4
<PAGE>

          "Class AIO Certificate": Any one of the Class AIO Certificates
           ---------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-5, representing the right to distributions
as set forth herein and therein and evidencing one or more regular interests in
the Upper-Tier REMIC.

          "Class AIO Current Interest": With respect to any Distribution Date is
           --------------------------
equal to the excess of (x) Interest Remittance Formula Amount for that
Distribution Date less (y) the sum of (i) the Administrative Fees, (ii) the
REMIC Current Interest for the Class A-1 Certificates, (iii) the REMIC Current
Interest for the Class M-1 Certificates, (iv) the REMIC Current Interest for the
Class M-2 Certificates, and (v) the REMIC Current Interest for the Class M-3
Certificates. The "REMIC Current Interest" on each of the Class A-1, Class M-1,
Class M-2 and Class M-3 Certificates will be calculated for this purpose by
using the REMIC Available Funds Cap Rate.

          "Class AIO Monthly Distributable Amount": For any Distribution Date,
           --------------------------------------
the Class AIO Remaining Monthly Interest Distributable Amount for that
Distribution Date.

          "Class AIO Monthly Interest Distributable Amount": As of any
           -----------------------------------------------
Distribution Date, the sum of (1) the Class AIO Unpaid Interest Shortfall Amount
for that Distribution Date and (2) the Class AIO Current Interest for that
Distribution Date.

          "Class AIO Pass-Through Rate": For any Distribution Date, the
           ---------------------------
percentage equivalent of a fraction, the numerator of which is equal to the
Class AIO Current Interest for that Distribution Date and the denominator of
which is the product of (1) the actual number of days in the related Accrual
Period, divided by 360 and (2) the aggregate Principal Balance of the Mortgage
Loans as of the first day of the preceding Due Period.

          "Class AIO Remaining Monthly Interest Distributable Amount": As of any
           ---------------------------------------------------------
Distribution Date, the Class AIO Current Interest for all Classes of
Underwritten Certificates on that Distribution Date.

          "Class AIO Unpaid Interest Shortfall Amount": For the first
           ------------------------------------------
Distribution Date, zero and for any Distribution Date after the first
Distribution Date, the amount, if any, by which (a) the Class AIO Monthly
Interest Distributable Amount for the immediately preceding Distribution Date
exceeds (b) the aggregate amount actually paid to the Holders of the Class AIO
Certificates on such immediately preceding Distribution Date pursuant to Section
4.01(a)(i)(A) hereof plus interest on such sum, at the Class AIO Pass-Through
Rate for the related Accrual Period.

          "Class M-1 Certificate": Any one of the Class M-1 Certificates
           ---------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-2, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Upper-
Tier REMIC.

          "Class M-1 Principal Distribution Amount": The excess of (x) the sum
           ---------------------------------------
of (i) the Certificate Principal Balance of the Class A-1 Certificates (after
taking into account the payment of the Class A-1Principal Distribution Amount on
such Distribution Date) and (ii) the Certificate Principal Balance of the Class
M-1 Certificates immediately prior to such Distribution Date over (y) the lesser
of (A) the product of (i) _____% and (ii) the aggregate Principal Balance of the

                                      A-5
<PAGE>

Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate Principal Balance of
the Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus $___________.

          "Class M-2 Certificate": Any one of the Class M-2 Certificates
           ---------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-3, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Upper-
Tier REMIC.

          "Class M-2 Principal Distribution Amount": The excess of (x) the sum
           ---------------------------------------
of (i) the Certificate Principal Balance of the Class A-1 Certificates (after
taking into account the payment of the Class A-1Principal Distribution Amount on
such Distribution Date), (ii) the Certificate Principal Balance of the Class M-1
Certificates (after taking into account the payment of the Class M-1 Principal
Distribution Amount on such Distribution Date) and (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) ______% and (ii)
the aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $____________.

          "Class M-3 Certificate": Any one of the Class M-3 Certificates
           ---------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-4, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Upper-
Tier REMIC.

          "Class M-3 Principal Distribution Amount": The excess of (x) the sum
           ---------------------------------------
of (i) the Certificate Principal Balance of the Class A-1 Certificates (after
taking into account the payment of the Class A-1 Principal Distribution Amount
on such Distribution Date), (ii) the Certificate Principal Balance of the Class
M-1 Certificates (after taking into account the payment of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such Distribution
Date) and (iv) the Certificate Principal Balance of the Class M-3 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) ______% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the

                                      A-6
<PAGE>

extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $____________.

          "Class O Certificate": Any one of the Class O Certificates executed,
           -------------------
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-6, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Upper-Tier
REMIC.

          "Class P Certificate": Any one of the Class P Certificates executed,
           -------------------
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-7, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Upper-Tier
REMIC.

          "Class RL Certificate": Any one of the Class RL Certificates
           --------------------
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-8, representing the right to distributions
as set forth herein, and evidencing an interest designated as the "residual
interest" in the Lower-Tier REMIC for the purposes of the REMIC Provisions.

          "Class RU Certificate": Any one of the Class RU Certificates executed,
           --------------------
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-9, representing the right to distributions as set
forth herein, and evidencing an interest designated as the "residual interest"
in the Upper-Tier REMIC for the purposes of the REMIC Provisions.

          "Close of Business": As used herein, with respect to any Business Day,
           -----------------
5:00 p.m. (________ time).

          "Closing Date":  ________________.
           ------------

          "Code":  The Internal Revenue Code of 1986 as it may be amended from
           ----
time to time.

          "Collection Account":  The account or accounts created and maintained
           ------------------
by the Servicer pursuant to Section 3.06(d) hereof, which must be an Eligible
Account.

          "Commission":  The Securities and Exchange Commission.
           ----------

          "Company":  NovaStar Mortgage Funding Corporation, a Delaware
           -------
corporation, or any successor in interest.

          "Compensating Interest":  With respect to any Determination Date, an
           ---------------------
amount equal to the lesser of (i) the aggregate amount of Prepayment Interest
Shortfall for the related Prepayment Period and (ii) the Servicing Fee for the
related Distribution Date.

          "Conversion Date":  The date on which a Convertible Mortgage Loan
           ---------------
becomes a Converted Mortgage Loan according to the terms of the related Mortgage
Note.

                                      A-7
<PAGE>

          "Converted Loan Purchase Agreement":  The Converted Loan Purchase
           ---------------------------------
Agreement, dated as of ____________________, among the Converted Loan Purchaser,
the Certificate Administrator, the Trustee and the Servicer.

          "Converted Loan Purchaser":  NovaStar Capital, Inc., a Delaware
           ------------------------
corporation, and any successor thereto.

          "Converted Mortgage Loan": Any Convertible Mortgage Loan as to which
           -----------------------
the Mortgagor has exercised the option to convert to a fixed Mortgage Rate and
satisfied all of the conditions to conversion set forth in the Mortgage Note.

          "Convertible Mortgage Loans": Any Mortgage Loan evidenced by a
           --------------------------
Mortgage Note that according to its terms is convertible at the option of the
Mortgagor from a variable Mortgage Rate to a fixed Mortgage Rate, subject to
satisfaction of the conditions set forth in such note.

          "Corporate Trust Office": With respect to the Trustee and the Paying
           ----------------------
Agent, the principal corporate trust office at which at any particular time its
corporation trust business shall be administered, which office at the date of
execution of this Agreement is located at
_____________________________________________________________________________,
Attention: _____________________________________________. With respect to the
Certificate Administrator and the Certificate Registrar, the principal corporate
trust office at which at any particular time its corporate trust business shall
be administered, which office at the date of the execution of this instrument is
located at _____________________________________________________________________
___________________________________________________, Attention: ________________
________________________.

          "Credit Enhancement Percentage": For any Distribution Date, the
           -----------------------------
percentage equivalent of a fraction, (x) the numerator of which is the sum of
the aggregate Certificate Principal Balances of the Mezzanine Certificates and
the Class O Certificates, and (y) the denominator of which is the sum of (i) the
aggregate Principal Balance of the Mortgage Loans and (ii) the Pre-Funded
Amount, in each case calculated prior to taking into account the distribution of
the Principal Distribution Amount to the Holders of the Certificates then
entitled to distributions of principal on such Distribution Date.

          "Crossover Date": The later to occur of (i) the Distribution Date
           --------------
occurring in October 2003 and (ii) the first Distribution Date on which the
Credit Enhancement Percentage (calculated for this purpose only prior to taking
into account the distribution of the Principal Distribution Amount to the
Certificates then entitled to distributions of principal on such Distribution
Date) is equal to or greater than ___%.

          "Cumulative Loss Percentage": As to any Distribution Date, the
           --------------------------
percentage equivalent of the fraction obtained by dividing (i) the aggregate
amount of Realized Losses on the Mortgage Loans (after giving effect to coverage
provided by any MI Policy) from the Cut-off Date through such Distribution Date
by (ii) the sum of the aggregate Principal Balance of the Initial Mortgage Loans
as of the Cut-off Date plus the Original Pre-Funded Amount.

                                      A-8
<PAGE>

          "Cut-off Date": With respect to each Initial Mortgage Loan, the later
           ------------
of (i) the date of origination of such Mortgage Loan or (ii) _________________.

          "Cut-off Date Aggregate Principal Balance": With respect to the
           ----------------------------------------
Mortgage Pool, the aggregate of the Cut-off Date Principal Balances of the
Initial Mortgage Loans.

          "Cut-off Date Principal Balance": With respect to any Mortgage Loan,
           ------------------------------
the unpaid principal balance thereof as of the Cut-off Date or Subsequent Cut-
off Date, as the case may be (or as of the applicable date of substitution with
respect to an Eligible Substitute Mortgage Loan).

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

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

           Definitive Certificates": The Class O, Class RU and Class RL
           -----------------------
Certificates, and such other classes of certificates as become definitive
certificates pursuant to Section 5.02(c) hereof.

          "Deleted Mortgage Loan": A Mortgage Loan replaced or to be replaced by
           ---------------------
one or more Eligible Substitute Mortgage Loans.

          "60-Day Delinquency Percentage": As of the last day of any Due Period,
           -----------------------------
the percentage equivalent of a fraction, (i) the numerator of which equals the
aggregate Principal Balance of the Mortgage Loans that are 60 or more days
delinquent, in foreclosure or converted to REO Properties as of such last day of
such Due Period, and (ii) the denominator of which is the aggregate Principal
Balance of the Mortgage Loans as of the last day of such Due Period.

          "90-Day Delinquency Percentage": As of the last day of any Due Period,
           -----------------------------
the percentage equivalent of a fraction, (i) the numerator of which equals the
aggregate Principal Balance of the Mortgage Loans that are 90 or more days
delinquent, in foreclosure or converted to REO Properties as of such last day of
such Due Period, and (ii) the denominator of which is the aggregate Principal
Balance of the Mortgage Loans as of the last day of such Due Period.

          "Delinquent": Any Mortgage Loan, the Monthly Payment due on a Due Date
           ----------
which is not made by the Close of Business on the next scheduled Due Date for
such Mortgage Loan.

          "Depository": The initial Depository shall be The Depository Trust
           ----------
Company, whose nominee is Cede & Co., or any other organization registered as a
"clearing agency" pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. The Depository shall initially be the registered Holder of the
Book-Entry Certificates. The Depository shall at all

                                      A-9
<PAGE>

times be a "clearing corporation" as defined in Section 8-102(3) of the Uniform
Commercial Code of the State of New York.

          "Depository Participant": A broker, dealer, bank or other financial
           ----------------------
institution or other person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository .

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

          "Determination Date Report": The meaning specified in Section 3.23
           -------------------------
hereof. "Disqualified Organization":

          "Disqualified Organization" shall have the meaning set forth from time
           -------------------------
to time in the definition thereof at Section 860E(e)(5) of the Code and
applicable to the Trust.

          "Distribution Date": The 25th day of any calendar month, or if such
           -----------------
25th day is not a Business Day, the Business Day immediately following such 25th
day, commencing in ___________________.

          "Due Date": The first day of the month of the related Distribution
           --------
Date.

          "Due Period": With respect to any Mortgage Loan and Due Date, the
           ----------
period commencing on the second day of the month preceding the month of such
Distribution Date and ending on the related Due Date.

          "Eligible Account": An account that is either: (A) a segregated
           ----------------
account or accounts maintained with an institution whose deposits are insured by
the FDIC, the unsecured and uncollateralized long-term debt obligations of which
institution shall be rated AA or higher by [Standard & Poor's] and Aa2 or higher
by [Moody's] and in the highest short-term rating category by each of the Rating
Agencies, and which is (i) a federal savings and loan association duly
organized, validly existing and in good standing under the federal banking laws,
(ii) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (iii) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws, (iv) a principal subsidiary of a bank holding company or (v) approved in
writing by each Rating Agency or (B) a segregated trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution acceptable to each Rating Agency, having capital and surplus of not
less than $_____________, acting in its fiduciary capacity.

          "Eligible Investments":  One or more of the following:
           --------------------

           (i)   direct obligations of, and obligations fully guaranteed by, the
United States of America, any of the Federal Home Mortgage Corporation, the
Federal National Mortgage Association, the Federal Home Loan Banks or any agency
or instrumentality of the United States of America the obligations of which are
backed by the full faith and credit of the United States of America;

                                      A-10
<PAGE>

          (ii)   (A) demand and time deposits in, certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Trustee, the Certificate
Administrator or their agents acting in their respective commercial capacities)
incorporated under the laws of the United States of America or any State thereof
and subject to supervision and examination by federal and/or state authorities,
so long as at the time of such investment or contractual commitment providing
for such investment, such depository institution or trust company has a short-
term unsecured debt rating in the highest available rating category of each of
the Rating Agencies and provided that each such investment has an original
maturity of no more than 365 days, and (B) any other demand or time deposit or
deposit which is fully insured by the Federal Deposit Insurance Corporation;

          (iii)  repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (i) above and entered into with a
depository institution or trust company (acting as a principal) rated "A" or
higher by [Standard & Poor's] and A2 or higher by [Moody's]; provided, however,
that collateral transferred pursuant to such repurchase obligation must (A) be
valued daily at current market price plus accrued interest, (B) pursuant to such
valuation, equal, at all times, 105% of the cash transferred in exchange for
such collateral and (C) be delivered in such a manner as to accomplish
perfection of a security interest in the collateral by possession of
certificated securities.

          (iv)   securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of America
or any State thereof which has a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of such
investment;

          (v)    commercial paper having an original maturity of less than 365
days and issued by an institution having a short-term unsecured debt rating in
the highest available rating category of each of the Rating Agencies at the time
of such investment;

          (vi)   a guaranteed investment contract approved by each of the
Rating Agencies and issued by an insurance company or other corporation having a
long-term unsecured debt rating in the highest available rating category of each
of the Rating Agencies at the time of such investment;

          (vii)  money market funds having ratings in the highest available
long-term rating category of each of the Rating Agencies at the time of such
investment; any such money market funds which provide for demand withdrawals
being conclusively deemed to satisfy any maturity requirement for Eligible
Investments set forth in the Agreement; and

          (viii) any investment approved in writing by each of the Rating
Agencies;

          provided, however, that each such instrument shall be acquired in an
          --------  -------
arm's-length transaction and no such instrument shall be an Eligible Investment
if it represents, either (1) the right to receive only interest payments with
respect to the underlying debt instrument or (2) the right to receive both
principal and interest payments derived from obligations underlying such
instrument and the principal and interest payments with respect to such
instrument provide a yield to maturity greater than 120% of the yield to
maturity at par of such underlying obligations; provided, further, however, that
each such instrument acquired shall not be acquired at a price in

                                      A-11
<PAGE>

excess of par. The Trustee or Certificate Administrator may purchase from or
sell to itself or an affiliate, as principal or agent, the Eligible Investments
listed above.

          "Eligible Substitute Mortgage Loan": A Mortgage Loan substituted by
           ---------------------------------
the Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, as confirmed in an Officer's Certificate delivered to the
Certificate Administrator, (i) have an outstanding principal balance, after
deduction of the principal portion of the monthly payment due in the month of
substitution (or in the case of a substitution of more than one Mortgage Loan
for a Deleted Mortgage Loan, an aggregate outstanding principal balance, after
such deduction), not in excess of the outstanding principal balance of the
Deleted Mortgage Loan (the amount of any shortfall to be deposited by the Seller
in the Collection Account in the month of substitution); (ii) comply in all
material respects with each representation and warranty set forth in clauses
(ii) through (lxviii) of Section 3.01(b) of the Purchase Agreement other than
clauses (iii), (v)-(xiv), (xli), (lv) and (lvi); (iii) have a Mortgage Rate and,
with respect to an Adjustable Rate Mortgage Loan, a Gross Margin no lower than
and not more than 1% per annum higher than the Mortgage Rate and Gross Margin,
respectively, of the Deleted Mortgage Loan as of the date of substitution; (iv)
have a Loan-to-Value Ratio, at the time of substitution no higher than that of
the Deleted Mortgage Loan at the time of substitution; (v) have a remaining term
to stated maturity not greater than (and not more than one year less than) that
of the Deleted Mortgage Loan; (vi) not be 30 days or more delinquent; (vii) not
be a negative amortization loan; (viii) have a lien priority equal to or
superior to the lien priority of the Deleted Mortgage Loan; and (ix) be a
Qualified Replacement Mortgage.

          "ERISA": The Employee Retirement Income Security Act of 1974, as
           -----
amended.

          "Expense Adjusted Mortgage Rate": With respect to any Mortgage Loan,
           ------------------------------
as of any date of determination, a per annum rate of interest equal to the then
applicable Mortgage Rate for such Mortgage Loan minus the Administrative Fee
Rate.

          "Fannie Mae":  Federal National Mortgage Association or any successor
           ----------
thereto.

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

          "Fixed Rate Mortgage Loan": A  first lien Mortgage Loan which provides
           ------------------------
for a fixed Mortgage Rate payable with respect thereto. The Fixed Rate Mortgage
Loans are identified as such on the Mortgage Loan Schedule.

          "Foreclosure Profit": With respect to a Liquidated Mortgage Loan, the
           ------------------
amount, if any, by which (i) the aggregate of its Net Liquidation Proceeds
exceeds (ii) the related Principal Balance (plus accrued and unpaid interest
thereon at the applicable Mortgage Rate from the date interest was last paid
through the date of receipt of the final Liquidation Proceeds) of such
Liquidated Mortgage Loan immediately prior to the final recovery of its
Liquidation Proceeds.

          "Formula Rate": For any Distribution Date and the Class A-1
           ------------
Certificates and the Mezzanine Certificates, LIBOR plus the related Certificate
Margin.

          "Freddie Mac": The Federal Home Loan Mortgage Corporation, or any
           -----------
successor thereto.

                                     A-12
<PAGE>

                  "Funding Period": The period beginning on the Closing Date and
                   --------------
ending on the earlier to occur of the date upon which (a) the amount on deposit
in the Pre-Funding Account (exclusive of investment income) has been reduced to
less than $10,000 or (b) ______________.

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

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

                  "Index": With respect to each Adjustable Rate Mortgage Loan
                   -----
and with respect to each related Adjustment Date, the index as specified in the
related Mortgage Note.

                  "Initial Certificate Principal Balance": With respect to any
                   -------------------------------------
Regular Certificate (other than a Class AIO or a Class P Certificate), the
amount designated "Initial Certificate Principal Balance" on the face thereof.

                  "Initial Mortgage Loan": Any of the Mortgage Loans included in
                   ---------------------
the Trust Fund as of the Closing Date. The aggregate principal balance of the
Initial Mortgage Loans as of the Closing Date is equal to $___________________.

                  "Insurance Proceeds": Proceeds paid by any insurer pursuant to
                   ------------------
any insurance policy covering a Mortgage Loan which are required to be remitted
to the Servicer, including MI Insurance Proceeds in the case of Mortgage Loans
covered under a MI Policy, or amounts required to be paid by the Servicer
hereunder, net of any component thereof (i) covering any expenses incurred by or
on behalf of the Servicer in connection with obtaining such proceeds, (ii) that
is applied to the restoration or repair of the related Mortgaged Property or
(iii) released to the Mortgagor in accordance with the Servicer's normal
servicing procedures.

                  "Interest Coverage Account": The account established and
                   -------------------------
maintained pursuant to Section 4.05 , as defined therein, which must be an
Eligible Account.

                  "Interest Coverage Amount": The amount to be paid by the
                   ------------------------
Company to the Certificate Administrator for deposit in the Interest Coverage
Account on the Closing Date pursuant to Section 4.05, which amount is
$_____________.

                  "Interest Determination Date": With respect to each Accrual
                   ---------------------------
Period, the second LIBOR Business Day preceding the commencement of such Accrual
Period.

                                     A-13
<PAGE>

                  "Interest Remittance Amount": With respect to any Distribution
                   --------------------------
Date, that portion of the REMIC Available Funds for such Distribution Date
allocable to interest and Prepayment Charges.

                  "Interest Remittance Formula Amount": As of any Distribution
                   ----------------------------------
Date is an amount equal to (1) the product of (x) 1/12 of the Weighted Average
Mortgage Rate of the Mortgage Pool as of the beginning of the prior Due Period
and (y) the aggregate Principal Balances of the Mortgage Loans as of the
beginning of the prior Due Period minus (2) the aggregate amount of Relief Act
Shortfalls and Prepayment Interest Shortfalls for the prior period.

                  "LIBOR": With respect to any Accrual Period, the rate
                   -----
determined by the Certificate Administrator on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rates appear on the Telerate
Page 3750, as of 11:00 a.m. (London time) on such Interest Determination Date.
If such rate does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant Accrual Period (commencing on the first day of such
Accrual Period). The Certificate Administrator will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in _____________, selected by the Certificate Administrator, at
approximately 11:00 a.m., _____________ time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period).

                  The establishment of LIBOR on each Interest Determination Date
by the Certificate Administrator and the Certificate Administrator's calculation
of the rate of interest applicable to the Certificates for the related Accrual
Period shall (in the absence of manifest error) be final and binding.

                  "LIBOR Business Day": Any day other than (i) a Saturday or a
                   ------------------
Sunday or (ii) a day on which banking institutions in the State of ________ or
in the city of London, England are required or authorized by law to be closed.

                  "Lifetime Rate Cap": With respect to each Adjustable Rate
                   -----------------
Mortgage Loan with respect to which the related Mortgage Note provides for a
lifetime rate cap, the maximum Mortgage Rate permitted over the life of such
Mortgage Loan under the terms of such Mortgage Note, as set forth on the
Mortgage Loan Schedule.

                  "Liquidated Mortgage Loan": With respect to any Distribution
                   ------------------------
Date, any Mortgage Loan in respect of which the Servicer has determined, in
accordance with the servicing procedures specified in Article III hereof, as of
the end of the related Prepayment Period that substantially all Liquidation
Proceeds which it reasonably expects to recover with respect to the disposition
of the related Mortgaged Property or REO Property have been recovered.

                                     A-14
<PAGE>

                  "Liquidation Expenses": Out-of-pocket expenses (exclusive of
                   --------------------
overhead) which are incurred by or on behalf of the Servicer in connection with
the liquidation of any Mortgage Loan and not recovered under any insurance
policy, such expenses, including, without limitation, legal fees and expenses,
any unreimbursed amount expended respecting the related Mortgage Loan and any
related and unreimbursed expenditures for real estate property taxes or for
property restoration, preservation or insurance against casualty loss or damage.

                  "Liquidation Proceeds": Proceeds (including Insurance
                   --------------------
Proceeds) received in connection with the liquidation of any Mortgage Loan or
related REO Property.

                  "Loan-to-Value Ratio": With respect to any Mortgage Loan, as
                   -------------------
of any date of determination, a fraction expressed as a percentage, the
numerator of which is the then current principal amount of the Mortgage Loan,
and the denominator of which is the lesser of the purchase price or the
Appraised Value of the related Mortgaged Property.

                  "Loan Year": With respect to any Mortgage Loan, the one year
                   ---------
period commencing on the day succeeding the origination of such Mortgage Loan
and ending on the anniversary date of such Mortgage Loan, and each annual period
thereafter.

                  "Lower-Tier Balance": As to each Class of Lower-Tier Interests
                   ------------------
and any Distribution Date, the Initial Lower-Tier Balance as set forth in
Section 2.09(b) minus all amounts distributed as principal of such Class on
previous Distribution Dates.

                  "Lower-Tier Interest 1": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 2": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 3": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 4": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 5": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 6": The interest of that name established
                   ---------------------
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Pass-Through Rate": As to each of the respective
                   ----------------------------
Lower-Tier Interests, the applicable "Lower-Tier Pass-Through Rate" set forth in
Section 2.09(b) hereof.

                  "Lower-Tier REMIC": The segregated pool of assets consisting
                   ----------------
of the Mortgage Loans, the Accounts (other than the Non-REMIC Accounts), any REO
Property and any proceeds of the foregoing.

                  "Lower-Tier REMIC Interests": As defined in Section 2.09(b)
                   --------------------------
hereof.

                                     A-15
<PAGE>

                  "Lower-Tier REMIC Regular Interests": As defined in Section
                   ----------------------------------
2.09(b) hereof.

                  "Majority Certificateholders": The Holders of Certificates
                   ---------------------------
evidencing at least 51% of the Voting Rights.

                  "Maximum Collateral Amount": The sum of the Principal Balance
                   -------------------------
as of the Cut-off Date of the Initial Mortgage Loans and the Principal Balance
of each Subsequent Mortgage Loan as of its respective Subsequent Cut-Off Date.

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

                  "Mezzanine Certificate": Any Class M-1 Certificate, Class M-2
                   ---------------------
Certificate or Class M-3 Certificate.

                  "MI Insurance Agreement": A private mortgage insurance
                   ----------------------
agreement issued by the MI Insurer pursuant to which MI Policies are issued on
individual Mortgage Loans.

                  "MI Insurance Proceeds": Proceeds paid by the MI Insurer
                   ---------------------
pursuant to an MI Policy.

                  "MI Insurer": PMI Mortgage Insurance Co., an Arizona mortgage
                   ----------
insurance company, and its successors and assigns.

                  "MI Insurer Insolvency Event": (A) The determination by the
                   ---------------------------
applicable regulatory or supervisory agency having jurisdiction over the MI
Insurer that such MI Insurer is insolvent or unable to pay its obligations as
they mature, (B) following the failure of the MI Insurer to pay any claim under
the related MI Policy, the determination by the Servicer that such MI Insurer is
insolvent or unable to pay its obligations as they become due, (C) the long-term
rating on the claims paying ability of the MI Insurer shall be lowered by
[Moody's] below A-2, if such MI Insurer is then rated by [Moody's], or shall be
lowered by [Standard & Poor's] below AA, if such MI Insurer is then rated by
[Standard & Poor].

                  "MI Policy": A private mortgage insurance policy underwritten
                   ---------
by the MI Insurer with respect to an individual Mortgage Loan, issued pursuant
to the MI Insurance Agreement.

                  "MI Premium": The primary mortgage insurance premium for each
                   ----------
MI Policy, payable annually to an MI Insurer, as specified in the MI Insurance
Agreement, and with respect to each monthly premium payment, 1/12 of the annual
premium.

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

                  "Monthly Payment": With respect to any Mortgage Loan
                   ---------------
(including any REO Property) and any Due Date, the payment of principal and
interest due thereon in accordance with the amortization schedule at the time
applicable thereto (after adjustment, if any, for partial

                                     A-16
<PAGE>

Principal Prepayments and for Deficient Valuations occurring prior to such Due
Date but before any adjustment to such amortization schedule by reason of any
bankruptcy, other than a Deficient Valuation, or similar proceeding or any
moratorium or similar waiver or grace period).

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

                  "Mortgage": The mortgage, deed of trust or other instrument
                   --------
creating a first lien on an estate or fee simple interest in real property
securing a Mortgage Note.

                  "Mortgage File": The mortgage documents listed in Section 2.01
                   -------------
pertaining to a particular Mortgage Loan and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.

                  "Mortgage Loan Schedule": With respect to any date, the
                   ----------------------
schedule of Mortgage Loans subject to this Agreement on such date. The schedule
of Initial Mortgage Loans as of the Cut-off Date is the schedule set forth in
Exhibit B hereto and the schedule or schedules of Subsequent Mortgage Loans, if
any, as of the Subsequent Cut-off Date, which schedules set forth as to each
Mortgage Loan

                  (i)    the loan number and name of the Mortgagor;

                  (ii)   the street address, city, state and zip code of the
Mortgaged Property;

                  (iii)  the Mortgage Rate at origination;

                  (iv)   with respect to an Adjustable Rate Mortgage Loan, the
Maximum Rate and the Minimum Rate;

                  (v)    the maturity date;

                  (vi)   the original principal balance;

                  (vii)  the first Distribution Date;

                  (viii) the type of Mortgaged Property;

                  (ix)   the Monthly Payment in effect as of the Cut-off Date
(with respect to an Initial Mortgage Loan) or Subsequent Cut-off Date (with
respect to a Subsequent Mortgage Loan);

                  (x)    the Principal Balance as of the Cut-off Date (with
respect to an Initial Mortgage Loan) or Subsequent Cut-off Date (with respect to
a Subsequent Mortgage Loan);

                  (xi)   with respect to an Adjustable Rate Mortgage Loan, the
Index, the Gross Margin; the Lifetime Rate Cap and the Periodic Rate Cap;

                  (xii)  with respect to an Adjustable Rate Mortgage Loan, the
first Adjustment Date and next Adjustment Date, if any;

                                     A-17
<PAGE>

                  (xiii)  with respect to an Adjustable Rate Mortgage Loan, the
Adjustment Date frequency and Distribution Date frequency;

                  (xiv)   the occupancy status;

                  (xv)    the purpose of the Mortgage Loan;

                  (xvi)   the Appraised Value of the Mortgaged Property;

                  (xvii)  the original term to maturity;

                  (xviii) the paid-through date of the Mortgage Loan;

                  (xix)   the Loan-to-Value Ratio;

                  (xx)    whether the Mortgage Loan is an Adjustable Rate
Mortgage Loan or a Fixed Rate Mortgage Loan;

                  (xxi)   whether or not the Mortgage Loan was underwritten
pursuant to a limited documentation program;

                  (xxii)  whether or not the Mortgage Loan is a Convertible
Mortgage Loan; and

                  (xxiii) whether the Mortgage Loan is covered by an MI Policy.

                  The Mortgage Loan Schedule shall set forth the total of the
amounts described under (x) above for all of the Mortgage Loans.

                  "Mortgage Loans": At any time, collectively, all Mortgage
                   --------------
Loans that have been transferred and conveyed to the Trust, in each case
together with the Related Documents, and that remain subject to the terms of the
Agreement. As applicable, Mortgage Loan shall be deemed to refer to the related
REO Property and both Initial Mortgage Loans and Subsequent Mortgage Loans.

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

                  "Mortgage Rate": With respect to any Mortgage Loan, the annual
                   -------------
rate at which interest accrues on such Mortgage Loan.


                  "Mortgage Pool": The pool of Mortgage Loans, identified on
                   -------------
Exhibit B from time to time, and any REO Properties acquired in respect thereof
and as supplemented by any Subsequent Mortgage Loans identified on each schedule
of Subsequent Mortgage Loans attached to a Subsequent Transfer Instrument.

                  "Mortgaged Property": The underlying property, including real
                   ------------------
property and improvements thereon, securing a Mortgage Loan.

                  "Mortgagor": The obligor on a Mortgage Note.
                   ---------

                                     A-18
<PAGE>

                  "Net Liquidation Proceeds": With respect to any Liquidated
                   ------------------------
Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses.

                  "Net Mortgage Rate": With respect to any Mortgage Loan and any
                   -----------------
day, the related Mortgage Rate less the Administrative Fee Rate.

                  "NFI": NovaStar Financial, Inc., a Maryland corporation, and
                   ---
its successors and assigns.

                  "Non-REMIC Accounts" The Pre-Funding Account and the Interest
                   ------------------
Coverage Account.


                  "Nonrecoverable Advance": With respect to any Mortgage Loan,
                   ----------------------
any Advance (i) which was previously made or is proposed to be made by the
Servicer; and (ii) which, in the good faith judgment of the Servicer, will not
or, in the case of a proposed Advance, would not, be ultimately recoverable by
the Servicer from Liquidation Proceeds, Repurchase Price or future payments on
such Mortgage Loan.

                  "Notional Principal Amount": For purposes of calculating
                   -------------------------
original issue discount ("OID"), with respect to the Class AIO Certificates,
initially $___________, and with respect to the Class P Certificates, initially
$______________.

                  "NRFC": NovaStar REMIC Financing Corporation, a Delaware
                   ----
corporation, and its successors and assigns.

                  "Offered Certificates": Collectively, the Class A-1
                   --------------------
Certificates, the Class AIO Certificates, the Mezzanine Certificates and the
Class P Certificates.

                  "Officers' Certificate": A certificate signed by the Chairman
                   ---------------------
of the Board, the Vice Chairman of the Board, the President or any vice
president (however denominated), and by the Treasurer, the Secretary, or any
assistant treasurer or assistant secretary of the applicable Person.

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

                  "Optional Termination Date": The first Distribution Date on
                   -------------------------
which the Servicer may opt to terminate the Trust Fund pursuant to Section
11.01.

                  "Original Pre-Funded Amount": The amount deposited by the
                   --------------------------
Company in the Pre-Funding Account on the Closing Date, which amount is
$____________________.

                  "Original Value": Except in the case of a refinanced Mortgage
                   --------------
Loan, the lesser of the Appraised Value or sales price of Mortgaged Property at
the time a Mortgage Loan is closed,

                                     A-19
<PAGE>

and for a refinanced Mortgage Loan, the Original Value is the value of such
property set forth in an appraisal acceptable to the Servicer.

                  "Ownership Interest": As to any Certificate, any ownership or
                   ------------------
security interest in such Certificate, including any interest in such
Certificate as the Holder thereof and any other interest therein, whether direct
or indirect, legal or beneficial, as owner or as pledgee.

                  "Paying Agent": Any paying agent appointed pursuant to Section
                   ------------
5.05.

                  "Payment Account": The trust account or accounts created and
                   ---------------
maintained by the Trustee or the Certificate Administrator pursuant to Section
4.02 hereof, which must be an Eligible Account.

                  "Percentage Interest": With respect to any Underwritten
                   -------------------
Certificate, a fraction, expressed as a percentage, the numerator of which is
the Initial Certificate Principal Balance represented by such Certificate and
the denominator of which is the Initial Certificate Principal Balance of the
related Class. With respect to a Class AIO Certificate, Class P Certificate,
Class O Certificate or Residual Certificate, the portion of the Class evidenced
thereby, expressed as a percentage, as stated on the face of such Certificate;
provided, however, that the sum of all such percentages for each such Class
totals 100%.

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

                  "Permitted Transferee": Any transferee of a Residual
                   --------------------
Certificate other than a Disqualified Organization or a non-U.S. Person.

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

                  "Plan": Any employee benefit plan or certain other retirement
                   ----
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and bank collective investment funds and insurance company general
or separate accounts in which such plans, accounts or arrangements are invested,
that are subject to ERISA or Section 4975 of the Code.

                  "Pool Balance": As of any date of determination, the aggregate
                   ------------
unpaid principal balance of the Mortgage Loans as of such date.

                  "Pre-Funded Amount": With respect to any date of
                   -----------------
determination, the amount on deposit in the Pre-Funding Account.

                                     A-20
<PAGE>

                  "Pre-Funding Account": The account established and maintained
                   -------------------
pursuant to Section 4.04, as defined herein, and which must be an Eligible
Account.

                  "Prepayment Assumption": As defined in the Prospectus
                   ---------------------
Supplement.

                  "Prepayment Charge": With respect to any Mortgage Loan, the
                   -----------------
charges or premiums, if any, due in connection with a full or partial prepayment
of such Mortgage Loan in accordance with the terms thereof.

                  "Prepayment Interest Shortfall": As to any Distribution Date
                   -----------------------------
and any Mortgage Loan (other than a Mortgage Loan relating to an REO Property)
that was the subject of (a) a Principal Prepayment in full during the related
Prepayment Period, an amount equal to the excess of interest accrued during the
related Prepayment Period at the Mortgage Rate (net of the Servicing Fee) on the
Principal Balance of such Mortgage Loan over the amount of interest (adjusted to
the Mortgage Rate (net of the Servicing Fee)) paid by the Mortgagor for such
Prepayment Period to the date of such Principal Prepayment in full or (b) a
partial Principal Prepayment during the prior calendar month, an amount equal to
interest accrued during the related Prepayment Period at the Mortgage Rate (net
of the Servicing Fee) on the amount of such partial Prepayment.

                  "Prepayment Period": As to any Distribution Date, the calendar
                   -----------------
month preceding the month of such Distribution Date.

                  "Principal Balance": With respect to any Mortgage Loan or
                   -----------------
related REO Property, at any given time, (i) the Principal Balance of the
Mortgage Loan as of the Cut-off Date or Subsequent Cut-off Date, as applicable,
minus (ii) the sum of (a) the principal portion of the Monthly Payments due with
respect to such Mortgage Loan or REO Property during each Due Period ending
prior to the most recent Distribution Date which were received or with respect
to which an Advance was made, and (b) all Principal Prepayments with respect to
such Mortgage Loan or REO Property, and all Insurance Proceeds, Liquidation
Proceeds and REO Proceeds, to the extent applied by the Servicer as recoveries
of principal in accordance with Section 3.13 hereof with respect to such
Mortgage Loan or REO Property, and (c) the principal portion of any Realized
Loss with respect thereto for any previous Distribution Date.

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

                  "Principal Remittance Amount": With respect to any
                   ---------------------------
Distribution Date, the sum of (i) each scheduled payment of principal collected
or advanced on the Mortgage Loans by the Servicer that were due during the
related Due Period, (ii) the principal portion of all partial and full principal
prepayments of the Mortgage Loans applied by the Servicer during the related
Prepayment Period, (iii) the principal portion of all related Net Liquidation
Proceeds and Insurance Proceeds received during such Prepayment Period, (iv)
that portion of the Repurchase Price, representing principal of any repurchased
Mortgage Loan, deposited to the Collection Account during such Prepayment
Period, (v) the principal portion of any related Substitution Adjustment Amounts
deposited in the Collection Account during such Prepayment Period, (vi) in

                                     A-21
<PAGE>

the case of the Distribution Date immediately following the end of the Funding
Period, any amount remaining in the Pre-Funding Account not used by the Trustee
to purchase Subsequent Mortgage Loans and (vii) on the Distribution Date on
which the Trust Fund is to be terminated pursuant to Section 11.01, that portion
of the Termination Price, in respect of principal.


          "Prospectus": The Prospectus Supplement together with the Base
           ----------
Prospectus attached thereto with respect to the Offered Certificates.

          "Prospectus Supplement": That certain Prospectus Supplement dated
           ---------------------
____________________ relating to the public offering of the Offered
Certificates.

          "Purchase Agreement":  The agreement, dated as of ______________,
           ------------------
between the Seller, the Trustee, the Certificate Administrator and the Company,
regarding the transfer of the Mortgage Loans by the Seller to or at the
direction of the Company.

          "Qualified Liquidation":  The meaning set forth from time to time in
           ---------------------
the definition thereof at Section 860F(a)(3) of the Code and applicable to the
Trust.

          "Qualified Mortgage": The meaning set forth from time to time in the
           ------------------
definition thereof at Section 860G(a)(3) of the Code and applicable to the
Trust.

          "Qualified Replacement Mortgage": A Mortgage Loan substituted for
           ------------------------------
another pursuant to Section 3.01 of the Purchase Agreement and that satisfies
all of the criteria set forth from time to time in the definition thereof at
Section 860G(a)(4) of the Code and applicable to the Trust, all as evidenced by
an Officer's Certificate of the Seller delivered to the Certificate
Administrator on behalf of the Trustee prior to any such substitution.

          "Rate Stepup Date": The first Distribution Date to occur after the
           ----------------
Optional Termination Date has occurred.

          "Rating Agency": Any nationally recognized statistical rating
           -------------
organization, or its successor, that rated the Offered Certificates at the
request of the Company at the time of the initial issuance of the Offered
Certificates. Initially such rating agencies shall consist of [Moody's] and
[Standard & Poor's]. If such organization or a successor is no longer in
existence, "Rating Agency" shall be such nationally recognized statistical
rating organization, or other comparable Person, designated by the Company,
notice of which designation shall be given to the Certificate Administrator and
the Trustee. References herein to the highest short-term unsecured rating
category of a Rating Agency shall mean A-1 or better in the case of [Standard &
Poor's] and P-1 or better in the case of [Moody's] and in the case of any other
Rating Agency shall mean such equivalent rating. References herein to the
highest long-term rating category of a Rating Agency shall mean "AAA" in the
case of [Standard & Poor's] and "Aaa" in the case of [Moody's] and in the case
of any other Rating Agency, such equivalent rating.

          "Realized Loss": With respect to each Mortgage Loan (or REO Property)
           -------------
as to which a Cash Liquidation or REO Disposition has occurred, an amount (not
less than zero) equal to (i) the Principal Balance of the Mortgage Loan (or REO
Property) as of the date of Cash Liquidation or REO Disposition, plus (ii)
interest (and REO Imputed Interest, if any) at the Net Mortgage Rate from the
Due Date as to which interest was last paid or advanced to

                                     A-22
<PAGE>

Certificateholders up to the last day of the month in which the Cash Liquidation
(or REO Disposition) occurred on the Principal Balance of such Mortgage Loan (or
REO Property) outstanding during each Due Period that such interest was not paid
or advanced, minus (iii) Net Liquidation Proceeds (after giving effect to
coverage provided by any MI policy), if any, received with respect to such Cash
Liquidation (or REO Disposition), minus the portion thereof reimbursable to the
Servicer or any Subservicer with respect to related Advances or expenses as to
which the Servicer or Subservicer is entitled to reimbursement thereunder but
which have not been previously reimbursed. With respect to each Mortgage Loan
which has become the subject of a Deficient Valuation, the difference between
the principal balance of the Mortgage Loan outstanding immediately prior to such
Deficient Valuation and the principal balance of the Mortgage Loan as reduced by
the Deficient Valuation. With respect to each Mortgage Loan which has become the
object of a Debt Service Reduction, the amount of such Debt Service Reduction.

          "Record Date":  With respect to each Distribution Date, the Close of
           -----------
Business on the Business Day immediately preceding the related Distribution
Date.

          "Reference Banks": _______________________________, ______________
           ---------------
___________________ and __________________________ and their successors in
interest; provided that if any of the foregoing banks are not suitable to serve
as a Reference Bank, then any leading banks selected by the Certificate
Administrator which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) not controlling, under the control of or under common control with
the Seller or any Affiliate thereof, (iii) whose quotations appear on the
Reuters Screen LIBO Page on the relevant Interest Determination Date and (iv)
which have been designated as such by the Certificate Administrator.

          "Regular Certificate": Any of the Class A-1 Certificates, Mezzanine
           -------------------
Certificates, Class AIO Certificates, Class O Certificates or Class P
Certificates.

          "Related Documents": With respect to each Mortgage Loan, the documents
           -----------------
specified in Section 2.01 hereof and any documents required to be added to such
documents pursuant to this Agreement, the Purchase Agreement or any Subsequent
Transfer Instrument.

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

          "Relief Act Shortfall":  As to any Distribution Date and any Mortgage
           --------------------
Loan (other than a Mortgage Loan relating to an REO Property), any shortfalls
relating to the Relief Act or similar legislation or regulations.

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

          "REMIC Available Funds": As to each Distribution Date, an amount equal
           ---------------------
to the amount on deposit in the Payment Account, representing the sum of (i) the
aggregate amount of scheduled payments on the related Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
(ii) miscellaneous fees and collections, including prepayment penalties with
respect to the Mortgage Loans (but excluding late fees), (iii) any

                                     A-23
<PAGE>

unscheduled payments and receipts, including Mortgagor prepayments on the
related Mortgage Loans, received during the related Prepayment Period and
proceeds of repurchases, and adjustments in the case of substitutions and
terminations, Net Liquidation Proceeds, Insurance Proceeds, MI Insurance
Proceeds and proceeds from the sale of Converted Mortgage Loans, (iv) all
Advances made for such Distribution Date in respect of the related Mortgage
Loans, (v) on the Distribution Date relating to the Due Period in which the
termination of the Funding Period occurred, the amount on deposit in the Pre-
Funding Account with respect to such Class at such time, and (vi) on each
Payment Date on or prior to the Distribution Date in _____________, the amount,
if any, withdrawn from the Interest Coverage Account for such Class.

          "REMIC Available Funds Cap Rate": With respect to any Distribution
           ------------------------------
Date, the percentage equivalent of a fraction, the numerator of which is equal
to the Interest Remittance Formula Amount for that Distribution Date less the
Administrative Fees for that Distribution Date, and the denominator of which is
the product of (1) the actual number of days in the related Accrual Period,
divided by 360 and (2) the aggregate Certificate Principal Balances of the
Underwritten Certificates immediately prior to such Distribution Date.

          "REMIC Available Funds Cap Shortfall Amount": With respect to any
           ------------------------------------------
Distribution Date and Class of Underwritten Certificates, the excess, if any, of
(1) the interest due on such Class calculated using the Formula Rate applicable
to such Class (less any Prepayment Interest Shortfalls and Relief Act Shortfalls
allocable to that Class) over (2) the interest due on such Class, calculated
using the REMIC Pass-Through Rate applicable to such Class (less any Prepayment
Interest Shortfalls and Relief Act Shortfalls allocable to that Class).

          "REMIC Current Interest": For any Distribution Date and each Class of
           ----------------------
Underwritten Certificates, the amount of interest accrued during the related
Accrual Period at the related REMIC Pass-through Rate on the Certificate
Principal Balance of such Class immediately prior to such Distribution Date, in
each case, reduced by any Prepayment Interest Shortfalls and any Relief Act
Shortfalls allocated to that class (allocated to each Certificate based on its
respective entitlements to interest irrespective of any Prepayment Interest
Shortfalls or Relief Act Shortfalls for that Distribution Date).

          "REMIC Interests Sale Agreement": The REMIC Interests Sale Agreement,
           ------------------------------
dated as of ___________________, between the Company and NRFC.

          "REMIC Monthly Interest Distributable Amount": For any Distribution
           -------------------------------------------
Date and any Class of Underwritten Certificates, the sum of (1) the Unpaid
Interest Shortfall Amount for that Class and Distribution Date and (2) the REMIC
Current Interest for that Class and Distribution Date. In the event of a
shortfall in the full amount necessary to pay both the Unpaid Interest Shortfall
Amount and the REMIC Current Interest for a Class, the money will first be
applied to the Unpaid Interest Shortfall Amount and then to the REMIC Current
Interest.

          "REMIC Pass-Through Rate": With respect to the Underwritten
           -----------------------
Certificates (other than the Class AIO Certificates) and any Distribution Date,
the lesser of (x) the related Formula Rate for such Distribution Date and (y)
the REMIC Available Funds Cap Rate for such Distribution Date.

                                     A-24
<PAGE>

          "REMIC Provisions": Provisions of the federal income tax law relating
           ----------------
to real estate mortgage investment conduits which appear at Section 860A through
860G of Subchapter M of Chapter 1 of the Code, and related provisions, and
regulations and rulings promulgated thereunder, as the foregoing may be in
effect from time to time.

          "REMIC Regular Interests": The Lower-Tier REMIC Regular Interests and
           -----------------------
the Upper-Tier REMIC Regular Interests.

          "REMIC Trust": The segregated pool of assets containing of the Trust
           ------------
Fund, but excluding the Non-REMIC Accounts.

          "REO Acquisition": The acquisition by the Servicer on behalf of the
           ---------------
Trustee for the benefit of the Certificateholders of any REO Property pursuant
to Section 3.13 hereof.

          "REO Disposition": As to any REO Property, a determination by the
           ---------------
Servicer that it has received substantially all Insurance Proceeds, Liquidation
Proceeds, REO Proceeds and other payments and recoveries (including proceeds of
a final sale) which the Servicer expects to be finally recoverable from the sale
or other disposition of the REO Property.

          "REO Imputed Interest": As to any REO Property, for any period, an
           --------------------
amount equivalent to interest (at the Net Mortgage Rate that would have been
applicable to the related Mortgage Loan had it been outstanding net, with
respect to a negative amortization loan, of amounts that would have been
Deferred Interest, if any) on the unpaid principal balance of the Mortgage Loan
as of the date of acquisition thereof for such period as such balance is reduced
pursuant to Section 3.13 hereof by any income from the REO Property treated as a
recovery of principal and with respect to a negative amortization loan, as such
balance is increased by the addition of Deferred Interest.

          "REO Proceeds": Proceeds, net of expenses, received in respect of any
           ------------
REO Property (including, without limitation, proceeds from the rental of the
related Mortgaged Property), which proceeds are required to be deposited into
the Collection Account within two days of receipt by the Servicer.


          "REO Property": A Mortgaged Property that is acquired by the Trust by
           ------------
foreclosure or by deed in lieu of foreclosure.

          "Repurchase Event": With respect to any Mortgage Loan, either (i) a
           ----------------
discovery that, as of the Closing Date the related Mortgage was not a valid lien
on the related Mortgaged Property subject only to (A) the lien of real property
taxes and assessments not yet due and payable, (B) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of recording of such Mortgage and such other permissible title
exceptions as are permitted and (C) other matters to which like properties are
commonly subject which do not materially adversely affect the value, use,
enjoyment or marketability of the related Mortgaged Property or (ii) with
respect to any Mortgage Loan as to which the Seller delivers an affidavit
certifying that the original Mortgage Note has been lost or destroyed, a
subsequent default on such Mortgage Loan if the enforcement thereof or of the
related Mortgage is materially and adversely affected by the absence of such
original Mortgage Note.

                                     A-25
<PAGE>

          "Repurchase Price": With respect to any Mortgage Loan (i) required to
           ----------------
be repurchased on any date by the Seller pursuant to the Purchase Agreement,
(ii) permitted to be purchased by the Servicer pursuant to Article III hereof or
(iii) required to be purchased by the Converted Loan Purchaser pursuant to the
Converted Loan Purchase Agreement, an amount equal to the sum, without
duplication, of (i) 100% of the Principal Balance thereof (without reduction for
any amounts charged off) and (ii) unpaid accrued interest at the Mortgage Rate
on the outstanding principal balance thereof from the Due Date to which interest
was last paid by the Mortgagor (or with respect to which an Advance was last
made by the Servicer) to the first day of the month following the month of
purchase plus (iii) the amount of any unreimbursed Servicing Advances or
unreimbursed Advances made with respect to such Mortgage Loan plus (iv) any
other amounts owed to the Servicer or the Subservicer pursuant to Section 3.07
hereof and not included in clause (iii) of this definition.

          "Request for Release":  A request for release in substantially the
           -------------------
form of Exhibit E hereto.

          "Residual Certificate":  The Class RL Certificates and the Class RU
           --------------------
Certificates.

          "Residual Interest":  The sole class of "residual interests" in a
           -----------------
REMIC within the meaning of Section 860G(a)(2) of the Code.

          "Responsible Officer": With respect to the Trustee or the Certificate
           -------------------
Administrator, any officer thereof with direct responsibility for the
administration of this Agreement and also, with respect to a particular matter,
any other officer to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.

          "Retained Certificates": The Class O Certificates, the Class P
           ---------------------
Certificates, the Class R Certificates and the Class AIO Certificates.

          "Rolling 60-Day Delinquency Percentage": For any Distribution Date,
           -------------------------------------
the average of the 60-Day Delinquency Percentages for the Mortgage Loans as of
the last day of each of the three (or 1 and 2 in the case of the first two
Distribution Dates, as applicable) most recently ended Due Periods.

          "Rolling 90-Day Delinquency Percentage": For any Distribution Date,
           -------------------------------------
the average of the 90-Day Delinquency Percentages for the Mortgage Loans as of
the last day of each of the three (or 1 and 2 in the case of the first two
Distribution Dates, as applicable) most recently ended Due Periods.

          "Seller": NovaStar Mortgage, Inc., a Virginia corporation, and its
           ------
successors and assigns.

          "Servicer": NovaStar Mortgage, Inc., a Virginia corporation, and its
           --------
successors and assigns.

          "Servicer Remittance Date": The third Business Day prior to each
           ------------------------
Distribution Date.

                                     A-26
<PAGE>

          "Servicing Account": The separate trust account created and maintained
           -----------------
by the Servicer or each Subservicer with respect to the Mortgage Loans or REO
Property, which shall be an Eligible Account, for collection of taxes,
assessments, insurance premiums and comparable items as described in Section
3.08 hereof.

          "Servicing Advances": All customary, reasonable and necessary "out of
           ------------------
pocket" costs and expenses incurred in connection with a default, delinquency or
other unanticipated event in the performance by the Servicer of its servicing
obligations, including, without duplication, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of any REO Property and (iv) compliance with the
obligations under Section 3.13 hereof.

          "Servicing Default": The meaning assigned in Section 7.01 hereof.
           -----------------

          "Servicing Fee": With respect to the Mortgage Loans and any
           -------------
Distribution Date, the product of (i) the Servicing Fee Rate divided by 12 and
(ii) the Principal Balance of such Mortgage Loans as of such Distribution Date.

          "Servicing Fee Rate":  With respect to any Mortgage Loan, ______%
           ------------------
per annum.

          "Servicing Officer": Any officer of the Servicer involved in, or
           -----------------
responsible for, the administration and servicing of the Mortgage Loans whose
name and specimen signature appear on a list of servicing officers furnished to
the Certificate Administrator by the Servicer or a Subservicer, as such list may
be amended from time to time.

          "Servicing Transfer Costs": Reasonable and necessary costs and
           ------------------------
expenses incurred, by or on behalf of the Trustee, Certificate Administrator or
successor Servicer in connection with the transfer of servicing in the event of
termination of the Servicer as servicer hereunder and the resulting transfer to
the successor Servicer.

          "Side Indemnity Letter": The Side Indemnity Letter dated
           ---------------------
__________________ among the Company, the Seller and NFI.

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

          "Startup Day":  As defined in Section 10.01(b) hereof.
           -----------

          "Subsequent Cut-off Date": With respect to those Subsequent Mortgage
           -----------------------
Loans which are sold to the Trust pursuant to a Subsequent Transfer Instrument,
the first day of the month in which the Subsequent Transfer Date occurs.

          "Subsequent Mortgage Loan": A Mortgage Loan sold by the Company to the
           ------------------------
Trust Fund pursuant to Section 2.08, such Mortgage Loan being identified on the
Mortgage Loan Schedule attached to a Subsequent Transfer Instrument.

                                     A-27
<PAGE>

          "Subsequent Transfer Date": With respect to each Subsequent Transfer
           ------------------------
Instrument, the date on which the related Subsequent Mortgage Loans are sold to
the Trust Fund. "Subsequent Transfer Instrument": Each Subsequent Transfer
Instrument, dated as of a Subsequent Transfer Date, executed by the Trustee and
the Company substantially in the form attached hereto as Exhibit D, by which
Subsequent Mortgage Loans are transferred to the Trust Fund.

          "Sub-Servicer": Any Person with which either Servicer has entered into
           ------------
a Subservicing Agreement and which meets the qualifications of a Sub-Servicer
pursuant to Section 3.02 hereof.

          "Subservicing Account": An account established by a Sub-Servicer which
           --------------------
meets the requirements set forth in Section 3.06(e) and is otherwise acceptable
to the applicable Servicer.

          "Subservicing Agreement": The written contract between either Servicer
           ----------------------
and a Sub-Servicer relating to servicing and administration of certain Mortgage
Loans as provided in Section 3.02 hereof.

          "Subservicing Fee": With respect to each Mortgage Loan and any
           ----------------
Distribution Date, the portion of the Servicing Fee paid to a Subservicer.

          "Substitution Adjustment Amount":  As defined in Section 2.03 hereof.
           ------------------------------

          "Tax Matters Person":  The tax matters person appointed pursuant to
           ------------------
Section 10.01(e) hereof.

          "Tax Returns": The federal income tax return on Internal Revenue
           -----------
Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return, including Schedule Q thereto, Quarterly Notice to Residual Interest
Holders of the REMIC Taxable Income or Net Loss Allocation, or any successor
forms, to be filed by the Certificate Administrator, as agent of the Trustee, on
behalf of each REMIC, together with any and all other information reports or
returns that may be required to be furnished to the Certificateholders or filed
with the Internal Revenue Service or any other governmental taxing authority
under any applicable provisions of federal, state or local tax laws.

          "Termination Price": As defined in Section 11.01(a) hereof.
           -----------------

          "Telerate Page 3750": The display page currently so designated on the
           ------------------
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by the Certificate Administrator and engaged
in transactions in European deposits in the international Eurocurrency market.

          "Treasury Regulations": Regulations, including proposed or temporary
           --------------------
Regulations, promulgated under the Code. References herein to specific
provisions of proposed

                                     A-28
<PAGE>

or temporary regulations shall include analogous provisions of final Treasury
Regulations or other successor Treasury Regulations.

          "Trigger Event": A Trigger Event is in effect with respect to any
           -------------
Distribution Date if the Rolling 60-Day Delinquency Percentage calculated with
respect to that Distribution Date exceeds ___% of the current Principal Balance
of the Mortgage Loans.

          "Trust": NovaStar Mortgage Funding Trust _______, the trust created
           -----
hereunder.

          "Trust Fund": All of the assets of the Trust, which is the trust
           ----------
created hereunder consisting of the Lower-Tier REMIC, the Upper-Tier REMIC, the
Interest Coverage Account and the Pre-Funding Account.

          "Trustee":  _________________, a __________________________, and its
           -------
successors and assigns or any successor Agreement trustee appointed pursuant to
the terms of the Agreement.

          "Trustee Fee": With respect to each Distribution Date, the product of
           -----------
(i) the Trustee Fee Rate divided by 12 and (ii) the sum of the Principal Balance
of the Mortgage Loans and the Pre-Funded Amount as of such date, which fee shall
be payable from the Certificate Administrator Fee.

          "Trustee Fee Rate":  _____% per annum.
           ----------------

          "Underwriter":  ___________________ and its successors and assigns.
           -----------

          "Underwriting Agreement": The Underwriting Agreement dated as of
           ----------------------
____________________ between the Underwriter and the Company with respect to the
offer and sale of the Class A-1 Certificates and the Mezzanine Certificates, as
the same may be amended from time to time.

          "Underwriting Guidelines": The underwriting guidelines set forth in
           -----------------------
the Prospectus Supplement under the heading "Description of the Mortgage Pool--
Underwriting Standards for Mortgage Loans".


          "Underwritten Certificates" means, collectively, the Class A-1 and
           -------------------------
Mezzanine Certificates.

          "United States Person" or "U.S. Person": A citizen or resident of the
           --------------------      -----------
United States, a corporation, partnership or other entity treated as a
corporation or partnership for federal income tax purposes (other than a
partnership that is not treated as a U.S. Person pursuant to any applicable
Treasury regulations) created or organized in, or under the laws of, the United
States, any state thereof or the District of Columbia, or an estate the income
of which from sources without the United States is includible in gross income
for United States federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all

                                     A-29
<PAGE>

substantial decisions of the trust. The term "United States" shall have the
meaning set forth in Section 7701 of the Code.

          "Unpaid Interest Shortfall Amount": With respect to each Class of
           --------------------------------
Underwritten Certificates and (i) the first Distribution Date, zero, and (ii)
any Distribution Date after the first Distribution Date, the sum of (a) the
Unpaid Interest Shortfall Amount for that Class as of the prior Distribution
Date, (b) the excess of the amount of the REMIC Current Interest due with
respect to that Class on the prior Distribution Date over the amount actually
distributed to the Holders of that Class on account of the REMIC Current
Interest on the prior Distribution Date and (c) interest on the sum of (a) and
(b) to the extent permitted by law, at the Formula Rate for such Class for the
related Accrual Period.

          "Upper-Tier REMIC": The REMIC established pursuant to Section 2.09
           ----------------
hereof. The assets of the Upper-Tier REMIC shall be the Lower-Tier REMIC Regular
Interests.

          "Upper-Tier REMIC Regular Interests": As defined in Section 2.09(c)
           ----------------------------------
hereof.

          "Voting Rights": The portion of the voting rights of all of the
           -------------
Certificates which is allocated to any Certificate. At all times the Class A-1
Certificates and the Mezzanine Certificates shall have 96% of the Voting Rights
(allocated among the Holders of the Class A-1 Certificates and the Mezzanine
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective Certificates), the Class AIO Certificates shall
have 1% of the Voting Rights, the Class O Certificates shall have 1% of the
Voting Rights, the Class P Certificates shall have 1% of the Voting Rights and
the Class RU Certificates shall have 1% of the Voting Rights. The Voting Rights
allocated to any Class of Certificates (other than the Class AIO Certificates,
Class O Certificates, Class P Certificates and the Class RU Certificates) shall
be allocated among all Holders of each such Class in proportion to the
outstanding Certificate Principal Balance of such Certificates and the Voting
Rights allocated to the Class AIO Certificates, Class O Certificates, Class P
Certificates and the Class RU Certificates shall be allocated among all Holders
of each such Class in proportion to such Holders' respective Percentage
Interest; provided, however that when none of the Regular Certificates are
outstanding, 100% of the Voting Rights shall be allocated among Holders of the
Class RU Certificates in accordance with such Holders' respective Percentage
Interests in the Certificates of such Class.

          "Weighted Average Mortgage Rate": With respect to any Distribution
           ------------------------------
Date, the weighted average of the Mortgage Rates of the Mortgage Loans (weighted
by the Principal Balances of the Mortgage Loans).

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