<PAGE>

                                                                     Exhibit 4.1

                                                                  EXECUTION COPY



================================================================================


                     NOVASTAR MORTGAGE FUNDING CORPORATION,
                                   as Company



                            NOVASTAR MORTGAGE, INC.,
                            as Servicer and as Seller



                       WACHOVIA BANK, NATIONAL ASSOCIATION
                                  as Custodian



                                       and



                              JPMORGAN CHASE BANK,
                                   as Trustee



                         POOLING AND SERVICING AGREEMENT

                          Dated as of February 1, 2003

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

                 NovaStar Mortgage Funding Trust, Series 2003-1

       NovaStar Home Equity Loan Asset-Backed Certificates, Series 2003-1

================================================================================

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                     Page
                                                                                                     ----
<S>                                                                                                  <C>
ARTICLE I DEFINITIONS.................................................................................    1

  Section 1.01    Defined Terms.......................................................................    1
                  -------------
  Section 1.02    Accounting..........................................................................    1
                  ----------
  Section 1.03    Allocation of Certain Interest Shortfalls...........................................    2
                  -----------------------------------------
  Section 1.04    Calculation of Interest on Certificates.............................................    2
                  ---------------------------------------

ARTICLE II CONVEYANCE OF MORTGAGE LOANS; ORIGINAL ISSUANCE OF CERTIFICATES............................    2

  Section 2.01    Conveyance of Mortgage Loans and Other Trust Assets.................................    2
                  ---------------------------------------------------
  Section 2.02    Acceptance of Mortgage Loans by Custodian, on behalf of the Trustee.................    5
                  -------------------------------------------------------------------
  Section 2.03    Repurchase or Substitution of Mortgage Loans by the Seller..........................    6
                  ----------------------------------------------------------
  Section 2.04    Acknowledgement of Trustee..........................................................    9
                  --------------------------
  Section 2.05    Representations, Warranties and Covenants of the Servicer...........................    9
                  ---------------------------------------------------------
  Section 2.06    Representations and Warranties of the Company.......................................   10
                  ---------------------------------------------
  Section 2.07    Issuance of Certificates............................................................   11
                  ------------------------
  Section 2.08    Conveyance of the Subsequent Mortgage Loans.........................................   11
                  -------------------------------------------

ARTICLE III ADMINISTRATION AND SERVICING OF THE MORTGAGE LOANS........................................   22

  Section 3.01    Servicer to Assure Servicing........................................................   22
                  ----------------------------
  Section 3.02    Subservicing Agreements Between Servicer and Subservicers...........................   23
                  ---------------------------------------------------------
  Section 3.03    Successor Subservicers..............................................................   24
                  ----------------------
  Section 3.04    Liability of the Servicer...........................................................   24
                  -------------------------
  Section 3.05    Assumption or Termination of Subservicing Agreements by the Trustee.................   25
                  -------------------------------------------------------------------
  Section 3.06    Collection of Mortgage Loan Payments................................................   26
                  ------------------------------------
  Section 3.07    Withdrawals from the Collection Account.............................................   28
                  ---------------------------------------
  Section 3.08    Collection of Taxes, Assessments and Similar Items; Servicing Accounts..............   29
                  ----------------------------------------------------------------------
  Section 3.09    Access to Certain Documentation and Information Regarding the Mortgage Loans........   30
                  ----------------------------------------------------------------------------
  Section 3.10    [Reserved]..........................................................................   30
                  ---------
  Section 3.11    Maintenance of Hazard Insurance and Fidelity Coverage...............................   30
                  -----------------------------------------------------
  Section 3.12    Due-on-Sale Clauses; Assumption Agreements..........................................   32
                  ------------------------------------------
  Section 3.13    Realization Upon Defaulted Mortgage Loans...........................................   33
                  -----------------------------------------
  Section 3.14    Custodian to Cooperate; Release of Mortgage Files...................................   34
                  -------------------------------------------------
  Section 3.15    Servicing Compensation..............................................................   35
                  ----------------------
  Section 3.16    Annual Statements of Compliance.....................................................   36
                  -------------------------------
</TABLE>

                                       i

<PAGE>

<TABLE>
<S>                                                                                         <C>
    Section 3.17    Annual Independent Public Accountants' Servicing Report .................   36
                    -------------------------------------------------------
    Section 3.18    Optional Purchase of Defaulted Mortgage Loans ...........................   37
                    ---------------------------------------------
    Section 3.19    Information Required by the Internal Revenue Service Generally and
                    ------------------------------------------------------------------
                    Reports of Foreclosures and Abandonments of Mortgaged Property ..........   37
                    --------------------------------------------------------------
    Section 3.20    Purchase of Converted Mortgage Loans ....................................   37
                    ------------------------------------
    Section 3.21    [Reserved] ..............................................................   38
                    ----------
    Section 3.22    Servicing and Administration of the MI Policies .........................   38
                    -----------------------------------------------
    Section 3.23    Determination Date Reports ..............................................   39
                    --------------------------
    Section 3.24    Advances ................................................................   39
                    --------
    Section 3.25    Compensating Interest Payments ..........................................   40
                    ------------------------------

ARTICLE IV FLOW OF FUNDS ....................................................................   40

    Section 4.01    Distributions ...........................................................   40
                    -------------
    Section 4.02    Distribution Account ....................................................   45
                    --------------------
    Section 4.03    Statements ..............................................................   46
                    ----------
    Section 4.04    Supplemental Interest Trust .............................................   49
                    ---------------------------
    Section 4.05    Pre-Funding Account .....................................................   51
                    -------------------
    Section 4.06    [Reserved] ..............................................................   53
                    ----------
    Section 4.07    Allocation of Realized Losses ...........................................   53
                    -----------------------------

ARTICLE V THE CERTIFICATES ..................................................................   53

    Section 5.01    The Certificates ........................................................   53
                    ----------------
    Section 5.02    Registration of Transfer and Exchange of Certificates ...................   54
                    -----------------------------------------------------
    Section 5.03    Mutilated, Destroyed, Lost or Stolen Certificates .......................   58
                    -------------------------------------------------
    Section 5.04    Persons Deemed Owners ...................................................   58
                    ---------------------
    Section 5.05    Appointment of Paying Agent .............................................   58
                    ---------------------------

ARTICLE VI THE SERVICER AND THE COMPANY .....................................................   59

    Section 6.01    Liability of the Servicer and the Company ...............................   59
                    -----------------------------------------
    Section 6.02    Merger or Consolidation of, or Assumption of the Obligations of,
                    ----------------------------------------------------------------
                    the Servicer or the Company .............................................   59
                    ---------------------------
    Section 6.03    Limitation on Liability of the Servicer and Others ......................   59
                    --------------------------------------------------
    Section 6.04    Servicer Not to Resign ..................................................   60
                    ----------------------
    Section 6.05    Delegation of Duties ....................................................   61
                    --------------------
    Section 6.06    Servicer to Pay Trustee's Fees and Expenses; Indemnification ............   61
                    ------------------------------------------------------------

ARTICLE VII DEFAULT .........................................................................   62

    Section 7.01    Servicing Default .......................................................   62
                    -----------------
    Section 7.02    Trustee to Act; Appointment of Successor ................................   64
                    ----------------------------------------
    Section 7.03    Waiver of Defaults ......................................................   65
                    ------------------
    Section 7.04    Notification to Certificateholders ......................................   65
                    ----------------------------------
    Section 7.05    Survivability of Servicer Liabilities ...................................   66
                    -------------------------------------

ARTICLE VIII THE TRUSTEE ....................................................................   66
</TABLE>

                                       ii

<PAGE>

<TABLE>
<S>                                                                    <C>
    Section 8.01   Duties of the Trustee...............................   66
                   ---------------------
    Section 8.02   Rights of Trustee...................................   68
                   -----------------
    Section 8.03   Individual Rights of Trustee........................   69
                   ----------------------------
    Section 8.04   Trustee's Disclaimer................................   69
                   --------------------
    Section 8.05   Notice of Servicing Default.........................   69
                   ---------------------------
    Section 8.06   [Reserved]..........................................   69
                   ---------
    Section 8.07   Compensation and Indemnity..........................   69
                   --------------------------
    Section 8.08   Replacement of Trustee..............................   70
                   ----------------------
    Section 8.09   Successor Trustee by Merger.........................   70
                   ---------------------------
    Section 8.10   Appointment of Co-Trustee or Separate Trustee.......   71
                   ---------------------------------------------
    Section 8.11   Eligibility; Disqualification.......................   72
                   -----------------------------
    Section 8.12   [Reserved]..........................................   72
                   ---------
    Section 8.13   Representations and Warranties......................   72
                   ------------------------------
    Section 8.14   Directions to Trustee...............................   73
                   ---------------------
    Section 8.15   The Agents..........................................   73
                   ----------
    Section 8.16   Reports by the Trustee; Trust Fiscal Year...........   73
                   -----------------------------------------

ARTICLE IX [RESERVED]..................................................   74

ARTICLE X REMIC ADMINISTRATION.........................................   74

    Section 10.01  REMIC Administration................................   74
                   --------------------
    Section 10.02  Prohibited Transactions and Activities..............   76
                   --------------------------------------

ARTICLE XI TERMINATION.................................................   76

    Section 11.01  Termination.........................................   76
                   -----------
    Section 11.02  Additional Termination Requirements.................   78
                   -----------------------------------

ARTICLE XII MISCELLANEOUS PROVISIONS...................................   78

    Section 12.01  Amendment...........................................   78
                   ---------
    Section 12.02  Recordation of Agreement; Counterparts..............   80
                   --------------------------------------
    Section 12.03  Limitation on Rights of Certificateholders..........   80
                   ------------------------------------------
    Section 12.04  Governing Law; Jurisdiction.........................   81
                   ---------------------------
    Section 12.05  Notices.............................................   81
                   -------
    Section 12.06  Severability of Provisions..........................   83
                   --------------------------
    Section 12.07  Article and Section References......................   83
                   ------------------------------
    Section 12.08  Further Assurances..................................   83
                   ------------------
    Section 12.09  Benefits of Agreement...............................   83
                   ---------------------
    Section 12.10  Acts of Certificateholders..........................   83
                   --------------------------
</TABLE>



APPENDIX A

EXHIBITS:

Exhibit A-1    Form of Class A-1 Certificates
Exhibit A-2    Form of Class A-2 Certificates
Exhibit A-3    Form of Class M-1 Certificates

                                       iii

<PAGE>

Exhibit A-4    Form of Class M-2 Certificates
Exhibit A-5    Form of Class M-3 Certificates
Exhibit A-6    [RESERVED]
Exhibit A-7    Form of Class I Certificates
Exhibit A-8    Form of Class AIO Certificates
Exhibit A-9    Form of Class P Certificates
Exhibit A-10   Form of Class O Certificates
Exhibit A-11   Form of Class R Certificates
Exhibit B      Mortgage Loan Schedule
Exhibit C      Form of Addition Notice
Exhibit D      Form of Subsequent Transfer Instrument
Exhibit E      Request for Release
Exhibit F-1    Form of Trustee's Initial Certification
Exhibit F-2    Form of Trustee's Final Certification
Exhibit G      Form of Investment Letter
Exhibit H      Form of Residual Certificate Transfer Affidavit
Exhibit I      [Reserved]
Exhibit J      Form of Notional Amount Test Event Notice

                                       iv

<PAGE>

          This Pooling and Servicing Agreement is dated as of February 1, 2003
(the "Agreement"), among NOVASTAR MORTGAGE FUNDING CORPORATION, as company (the
"Company"), NOVASTAR MORTGAGE, INC., as servicer (the "Servicer") and as seller
(the "Seller"), WACHOVIA BANK, NATIONAL ASSOCIATION, as custodian (the
"Custodian") and JPMORGAN CHASE BANK, as trustee (the "Trustee").

                                   ARTICLE I

                                   DEFINITIONS

          Section 1.01 Defined Terms.

          Whenever used in this Agreement, except as otherwise expressly
provided herein or unless the context otherwise requires, capitalized terms and
phrases used herein shall have the meanings assigned to such terms and phrases
in the definitions attached hereto as Appendix A, which is incorporated herein
by reference. Unless the context otherwise requires:

          (a) a term has the meaning assigned to it;

          (b) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles as in effect
from time to time;

          (c) "or" is not exclusive;

          (d) "including" means including without limitation;

          (e) words in the singular include the plural and words in the plural
include the singular;

          (f) any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; and

          (g) references to a Person are also to such Person's permitted
successors and assigns.

          Section 1.02 Accounting.

          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.

                                        1

<PAGE>

          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 Certificates, the Mezzanine Certificates
and the Class AIO Certificates for any Distribution Date, (1) the aggregate
amount of any Net Prepayment Interest Shortfalls and any Relief Act Shortfalls
incurred in respect of the Mortgage Loans for any Distribution Date shall be
allocated first to the Excess Cashflow, and second, 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 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 Net
Prepayment Interest Shortfalls and any Relief Act Shortfalls.

          All Net Prepayment Interest Shortfalls and Relief Act Shortfalls on
the REMIC I, REMIC II and REMIC III shall be allocated on each Distribution Date
among the REMIC I, REMIC II and REMIC III in the proportion that Net Prepayment
Interest Shortfalls and Relief Act Shortfalls are allocated to the related
Master REMIC Regular Interests.

          Section 1.04 Calculation of Interest on Certificates.

          Unless otherwise specified, all calculations in respect of interest on
the Class A Certificates, the Class AIO Certificates and the Mezzanine
Certificates shall be made on the basis of the actual number of days elapsed in
the related Accrual Period 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 and
the Class P Certificates are not entitled to distributions in respect of
interest and, accordingly, will not accrue interest.

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

          Section 2.01 Conveyance of Mortgage Loans and Other Trust Assets.

          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 Closing Date 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) its
interest in the Swap Agreements; (vii) all other assets included or to be
included in the Trust Fund; and (viii)

                                        2

<PAGE>

all proceeds of any of the foregoing. Such assignment includes all interest and
principal due to the Company or the Servicer after the related 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 Custodian, as the
Trustee's designated agent, the following documents or instruments with respect
to each Closing Date Mortgage Loan so transferred and assigned and the Seller,
on behalf of the Company, shall, in accordance with Section 2.08, deliver or
cause to be delivered to the Custodian, 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 "JPMorgan Chase
     Bank, as Trustee for the NovaStar Home Equity Loan Asset-Backed
     Certificates, Series 2003-1";

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

               (iii) unless the Mortgage Loan is registered on the MERS System,
     an original assignment (which may be included in one or more blanket
     assignments if permitted by applicable law) of the Mortgage endorsed to
     "JPMorgan Chase Bank, as Trustee for the NovaStar Home Equity Loan
     Asset-Backed Certificates, Series 2003-1", and otherwise in recordable
     form;

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

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

               (vi)  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 Custodian 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

                                        3

<PAGE>

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 Closing Date 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 a Closing Date 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, excluding any Mortgage Loan that is
registered on the MERS System, if MERS is identified on the Mortgage, or on a
properly recorded assignment of Mortgage as the mortgagee of record. While such
assignment to be recorded is being recorded, the Custodian shall retain a
photocopy of such assignment. If any assignment is lost or returned unrecorded
to the Custodian 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 Custodian, on behalf of the Trustee, prior to or
on the Closing Date in the case of a Closing Date Mortgage Loan or, in the case
of a Subsequent Mortgage Loan, promptly after the Subsequent Transfer Date, the
Seller will deliver or cause to be delivered the originals of such documents to
the Custodian, on behalf of the Trustee, promptly upon receipt thereof.

          In connection with the assignment of any Mortgage Loan registered on
the MERS System, promptly after the Closing Date in the case of a Closing Date
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 further agrees that it will cause, at the
Seller's own expense, the MERS System to indicate that such Mortgage Loan has
been assigned by the Seller to the Trustee in accordance with this Agreement for
the benefit of the Certificateholders by including (or deleting, in the case of
Mortgage Loans which are repurchased in accordance with this Agreement) in its
computer files (a) the applicable Trustee code in the field "Trustee" which
identifies the Trustee and (b) the code "NovaStar 2003-1" (or its equivalent) in
the field "Pool Field" which identifies the series of the Certificates issued in
connection with such Mortgage Loans. The Seller further agrees that it will not,
and will not permit the Servicer to, and the Servicer agrees that it will not,
alter the codes referenced in this paragraph with respect to any such Mortgage
Loan during the term of this Agreement unless and until such Mortgage Loan is
repurchased in accordance with the terms of this Agreement.

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

                                        4

<PAGE>

          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 Closing Date 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 Closing Date 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, on behalf of the Certificateholders, as of the
Closing Date a security interest in all of the Company's right, title and
interest in, to and under the Closing Date 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 Custodian, in addition to holding
the Closing Date Mortgage Loans on behalf of the Trustee for the benefit of the
Certificateholders, holds the Closing Date 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 in the State of Virginia (which shall have been
submitted for filing as of the Closing Date and each Subsequent Transfer Date,
as applicable), any continuation statements with respect thereto and any
amendments thereto required to reflect a change in the name or corporate
structure of the Seller or the filing of any additional UCC-1 financing
statements due to the change in the state of incorporation of the Seller, as are
necessary to perfect and protect the interests of the Trust and its assignees in
each Closing Date 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 Custodian, on behalf of
the Trustee.

          (a) The Custodian, 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 Mortgage Loan, within 5 Business Days after the receipt by the
Custodian, on behalf of the Trustee, thereof and, with respect to any documents
received beyond 45 days after the Closing Date, promptly thereafter), the
Custodian, 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 Custodian, 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

                                        5

<PAGE>

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 Custodian's obligations shall extend only to documents actually
delivered pursuant to such subclause). In performing any such review, the
Custodian, 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 Custodian, 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 Custodian, 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 Custodian, 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 Custodian, 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 Custodian, 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 Custodian, on behalf of the Trustee, shall promptly
notify the Seller and the Trustee 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 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 Trustee shall cause the
Custodian to release 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 Distribution Account was received by the Trustee. The
Custodian, 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.

          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 Custodian shall promptly notify the Seller and the

                                        6

<PAGE>

Servicer of such defect, missing document or breach and request that the Seller
deliver such missing document or cure such defect or breach no later than 90
days from the date of the discovery or receipt of written notice 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 Custodian shall notify the Trustee and the Trustee 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.

          (b) The Repurchase Price for the repurchased Mortgage Loan shall be
deposited in the Collection Account, and the Trustee, upon receipt of written
certification from the Servicer of such deposit, shall cause the Custodian to
release to the Seller the related Mortgage File and the Trustee 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 Trustee and the
Custodian shall have no further responsibility with regard to such Mortgage File
(it being understood that the Custodian 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 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 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 Custodian, 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 Custodian 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

                                        7

<PAGE>

one year of the date of substitution, the Custodian 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
Custodian. 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 Custodian, 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 related Mortgage
File or Files and the Custodian 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 Trustee 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)(l) of the Code or on "contributions after the startup date" under
Section 860G(d)(l) 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 Custodian 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

                                        8

<PAGE>

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 Custodian, 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 Closing Date Mortgage Loans and the MI Policies from the Seller
to the Company, or from the Company to the Trustee on behalf of the
Certificateholders, is determined to constitute a financing, or (ii) the
transfer of the Subsequent Mortgage Loans from the Seller to the Company or from
the Company to the Trustee on behalf of the Certificateholders, is determined to
constitute a financing, then in each case the Custodian, on behalf of the
Trustee, and the Trustee hold the Closing Date 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
Certificateholders 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 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

                                        9

<PAGE>

     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;

               (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;

               (vi)  The Servicer is a member of MERS in good standing, and will
     comply in all material respects with the rules and procedures of MERS in
     connection with the servicing of the Mortgage Loans that are registered
     with MERS; and

               (vii) With respect to the Group I Mortgage Loans, the Servicer
     will accurately and fully report its borrower credit files to the three
     largest credit repositories in a timely manner.

          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 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 from the Seller and the
Company has duly authorized such purchase by all necessary corporate action; and
the execution, delivery and performance of this Agreement

                                       10

<PAGE>

have been duly authorized by the Company by all necessary corporate action. When
executed and delivered, this Agreement will constitute the legal, valid and
binding obligation of the Company 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.

          (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 Custodian, 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 Custodian on behalf of the Trustee, shall purchase
the Subsequent Mortgage Loans as set forth in Section 2.02 of the Purchase
Agreement. The Seller shall deliver a Mortgage File (as described in Section
2.01) with respect to such Subsequent Mortgage Loans.

          Section 2.09 Designation Under REMIC Provisions.

          (a) The Trustee, shall elect that each of REMIC I, REMIC II, REMIC
III, and the Master 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.

          (b) The designation of REMIC interests shall be as follows:

                                       11

<PAGE>

               (i)   REMIC I will consist of all of the assets of the Trust,
     including the Mortgage Loans, the Accounts (other than the Pre-Funding
     Account and the Supplemental Interest Account), any REO Property and any
     proceeds of the foregoing. REMIC I will be evidenced by the Class I-A
     Interest, the Class I-B Interest, the Class I-C Interest, the Class I-D
     Interest, the Class I-E Interest, the Class I-F Interest, the Class I-G
     Interest, the Class I-H Interest, the Class I-J Interest, the Class I-K
     Interest, the Class I-L Interest, the Class I-M Interest, the Class I-N
     Interest and the Class I-P Interest (collectively, the "REMIC I Regular
     Interests") which will be uncertificated and will represent the "regular
     interests" in REMIC I. The Class R-I Interest will represent the sole class
     of residual interest in REMIC I;

               (ii)  REMIC II will consist of the REMIC I Regular Interests and
     will be evidenced by the Class II-A1 Interest, the Class II-A2 Interest,
     the Class II-A3 Interest, the Class II-B1 Interest, the Class II-B2
     Interest, the Class II-B3 Interest, the Class II-C1 Interest, the Class
     II-C2 Interest, the Class II-C3 Interest, the Class II-D1 Interest, the
     Class II-D2 Interest, the Class II-D3 Interest, the Class II-E1 Interest,
     the Class II-E2 Interest, the Class II-E3 Interest, the Class II-F1
     Interest, the Class II-F2 Interest, the Class II-F3 Interest, the Class
     II-G1 Interest, the Class II-G2 Interest, the Class II-G3 Interest, the
     Class II-H1 Interest, the Class II-H2 Interest, the Class II-H3 Interest,
     the Class II-J1 Interest, the Class II-J2 Interest, the Class II-J3
     Interest, the Class II-K1 Interest, the Class II-K2 Interest, the Class
     II-K3 Interest, the Class II-L1 Interest, the Class II-L2 Interest, the
     Class II-L3 Interest, the Class II-M1 Interest, the Class II-M2 Interest,
     the Class II-M3 Interest, the Class II-N Interest and the Class II-P
     Interest (collectively, the "REMIC II Regular Interests") which will be
     uncertificated and will represent the "regular interests" in REMIC II. The
     Class R-II Interest will represent the sole class of residual interest in
     REMIC II;

               (iii) REMIC III will consist of the REMIC II Regular Interests
     and will be evidenced by the Class III-Accrual Interest, the Class III-A1
     Interest, the Class III-A2 Interest, the Class III-M-1 Interest, the Class
     III-M2 Interest, the Class III-M3 Interest, the Class III-O Interest, the
     Class III-P Interest and the Class III-I Interest (collectively, the "REMIC
     III Regular Interests") which will be uncertificated and will represent the
     "regular interests" in REMIC III. The Class R-III Interest will represent
     the sole class of residual interest in REMIC III; and

               (iv)  The Master REMIC will consist of the REMIC III Regular
     Interests and will be evidenced by the Class A-1 (other than the right to
     receive Supplemental Interest Payments), the Class A-2 (other than the
     right to receive Supplemental Interest Payments), the Class M-1 (other than
     the right to receive Supplemental Interest Payments), the Class M-2 (other
     than the right to receive Supplemental Interest Payments), the Class M-3
     (other than the right to receive Supplemental Interest Payments), the Class
     A-IO, the Class I, the Class O, and the Class P Certificates which will
     represent the "regular interests" in the Master REMIC. The Class R-IV
     Interest will represent the sole class of residual interest in the Master
     REMIC.

                                       12

<PAGE>

               (v)   The Class R Certificates will represent the beneficial
     ownership of the Class R-I, Class R-II, Class R-III and Class R-IV
     Interests. The R Certificates will not have a principal balance and will
     not bear interest.

               (vi)  The Trustee will hold the REMIC I Regular Interests, REMIC
     II Regular Interests and REMIC III Regular Interests.

          (c) The REMIC I Regular Interests shall have the following principal
balances and REMIC Pass-Through Rates as set forth in the table below:

     -----------------------------------------------------------
           REMIC          Initial         REMIC Pass-Through
         Interest    Principal Balance           Rate
     -----------------------------------------------------------
            I-A         $ 75,000,000            Net WAC
     -----------------------------------------------------------
            I-B         $ 75,000,000            Net WAC
     -----------------------------------------------------------
            I-C         $ 65,000,000            Net WAC
     -----------------------------------------------------------
            I-D         $ 65,000,000            Net WAC
     -----------------------------------------------------------
            I-E         $125,000,000            Net WAC
     -----------------------------------------------------------
            I-F         $125,000,000            Net WAC
     -----------------------------------------------------------
            I-G         $ 25,000,000            Net WAC
     -----------------------------------------------------------
            I-H         $ 25,000,000            Net WAC
     -----------------------------------------------------------
            I-J         $ 35,000,000            Net WAC
     -----------------------------------------------------------
            I-K         $ 35,000,000            Net WAC
     -----------------------------------------------------------
            I-L         $ 75,000,000            Net WAC
     -----------------------------------------------------------
            I-M         $ 75,000,000            Net WAC
     -----------------------------------------------------------
            I-N         $500,000,000            Net WAC
     -----------------------------------------------------------
            I-P         $        100              (1)
     -----------------------------------------------------------

(1)  Class I-P is entitled to distributions of all Prepayment Charges.

          On each Distribution Date, all Realized Losses, prepayments and
payments of scheduled principal generated with respect to the Mortgage Loans
shall be allocated in the following order: (i) first to the Class I-N Interest,
until such Class is paid in full or eliminated by such losses; (ii) second, to
the Class I-A Interest, until such Class is paid in full or eliminated by such
losses; (iii) third, to the Class I-B Interest, until such Class is paid in full
or eliminated by such losses; (iv) fourth, to the Class I-C Interest, until such
Class is paid in full or eliminated by such losses; (v) fifth, to the Class I-D
Interest, until such Class is paid in full or eliminated by such losses; (vi)
sixth, to the Class I-E Interest, until such Class is paid in full or eliminated
by such losses; (vii) seventh, to the Class I-F Interest, until such Class is
paid in full or eliminated by such losses; (viii) eighth, to the Class I-G
Interest, until such Class is paid in full or eliminated by such losses; (ix)
ninth, to the Class I-H Interest, until such Class is paid in full or eliminated
by such losses; (x) tenth, to the Class I-J Interest, until such Class is paid
in full or eliminated by such losses; (xi) eleventh, to the Class I-K Interest,
until such Class is paid in full or eliminated by such losses; (xii) twelfth, to
the Class I-L Interest, until such Class is paid in full or eliminated by such
losses; (xiii) thirteenth, to the Class I-M Interest, until such Class is paid
in full or eliminated by such losses; provided, however, that on the Class P
Principal Distribution Date, $100 shall be paid to the Class I-P Interest.

          (d) The REMIC II Regular Interests shall have the following principal
balances and REMIC Pass-Through Rates set forth in the table below:

                                       13

<PAGE>

     ---------------------------------------------------------------------------
                                                         REMIC Pass-Through
         REMIC Interest     Initial Principal Balance            Rate
     --------------------------------------------------------------------------
              II-A1               $   50,000,000                  (2)
     --------------------------------------------------------------------------
              II-A2               $   25,000,000                  (3)
     --------------------------------------------------------------------------
              II-A3                    (1)                        (4)
     --------------------------------------------------------------------------
              II-B1               $   50,000,000                  (6)
     --------------------------------------------------------------------------
              II-B2               $   25,000,000                  (7)
     -------------------------------------------------------------------------
              II-B3                    (5)                        (8)
     --------------------------------------------------------------------------
              II-C1               $43,333,333.33                 (10)
     --------------------------------------------------------------------------
              II-C2               $21,666,666.67                 (11)
     --------------------------------------------------------------------------
              II-C3                    (9)                       (12)
     --------------------------------------------------------------------------
              II-D1               $43,333,333.33                 (14)
     --------------------------------------------------------------------------
              II-D2               $21,666,666.67                 (15)
     --------------------------------------------------------------------------
              II-D3                    (13)                      (16)
     --------------------------------------------------------------------------
              II-E1               $83,333,333.33                 (18)
     --------------------------------------------------------------------------
              II-E2               $41,666,666.67                 (19)
     --------------------------------------------------------------------------
              II-E3                    (17)                      (20)
     --------------------------------------------------------------------------
              II-F1               $83,333,333.33                 (22)
     --------------------------------------------------------------------------
              II-F2               $41,666,666.67                 (23)
     --------------------------------------------------------------------------
              II-F3                    (21)                      (24)
     --------------------------------------------------------------------------
              II-G1               $16,666,666.67                 (26)
     --------------------------------------------------------------------------
              II-G2               $ 8,333,333.33                 (27)
     --------------------------------------------------------------------------
              II-G3                    (25)                      (28)
     --------------------------------------------------------------------------
              II-H1               $16,666,666.67                 (30)
     --------------------------------------------------------------------------
              II-H2               $ 8,333,333.33                 (31)
     --------------------------------------------------------------------------
              II-H3                    (29)                      (32)
     --------------------------------------------------------------------------
              II-J1               $23,333,333.33                 (34)
     --------------------------------------------------------------------------
              II-J2               $11,666,666.67                 (35)
     --------------------------------------------------------------------------
              II-J3                    (33)                      (36)
     --------------------------------------------------------------------------
              II-K1               $23,333,333.33                 (38)
     --------------------------------------------------------------------------
              II-K2               $11,666,666.67                 (39)
     --------------------------------------------------------------------------
              II-K3                    (37)                      (40)
     --------------------------------------------------------------------------
              II-L1               $   50,000,000                 (42)
     --------------------------------------------------------------------------
              II-L2               $   25,000,000                 (43)
     --------------------------------------------------------------------------
              II-L3                    (41)                      (44)
     --------------------------------------------------------------------------
              II-M1               $   50,000,000                 (46)
     --------------------------------------------------------------------------
              II-M2               $   25,000,000                 (47)
     --------------------------------------------------------------------------
              II-M3                    (45)                      (48)
     --------------------------------------------------------------------------
              II-N                $  500,000,000                 (49)
     --------------------------------------------------------------------------
              II-P                $          100                 (50)
     --------------------------------------------------------------------------

(1)  The Class II-A3 Interest will have a notional principal balance equal to
     the following amounts: (i) commencing on the first Distribution Date
     through and including the Distribution Date in July 2004, an amount equal
     to the balance of the Class I-A interest and (ii) for all Distribution
     Dates thereafter, zero.

                                       14

<PAGE>

(2)  The pass-through rate for the Class II-A1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in July 2004, 1.5 multiplied by (Net WAC minus 3.1490%);
     (ii) for all Distribution Dates thereafter, Net WAC.

(3)  The pass-through rate for the Class II-A2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in July 2004, 3 multiplied by 1-month LIBOR, subject to a
     cap of 9.4470%; (ii) for all Distribution Dates thereafter, Net WAC.

(4)  The pass-through rate for the Class II-A3 Interest will be equal to 3.1490%
     minus 1-Month LIBOR, subject to a floor of zero.

(5)  The Class II-B3 Interest will have a notional principal balance equal to
     the following amounts: (i) commencing on the first Distribution Date
     through and including the Distribution Date in September 2004, an amount
     equal to the balance of the Class I-B interest and (ii) for all
     Distribution Dates thereafter, zero.

(6)  The pass-through rate for the Class II-B1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in September 2004, 1.5 multiplied by (Net WAC minus
     2.3240%); (ii) for all Distribution Dates thereafter, Net WAC.

(7)  The pass-through rate for the Class II-B2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in September 2004, 3 multiplied by 1-month LIBOR, subject
     to a cap of 6.9720%; (ii) for all Distribution Dates thereafter, Net WAC.

(8)  The pass-through rate for the Class II-B3 Interest will be equal to 2.3240%
     minus 1-Month LIBOR, subject to a floor of zero.

(9)  The Class II-C3 Interest will have a notional principal balance equal to
     the following amounts: (i) commencing on the first Distribution Date
     through and including the Distribution date in November 2004, an amount
     equal to the balance of the Class I-C interest and (ii) for all
     Distribution Dates thereafter, zero.

(10) The pass-through rate for the Class II-C1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in November 2004, 1.5 multiplied by (Net WAC minus
     2.1925%); (ii) for all Distribution Dates thereafter, Net WAC.

(11) The pass-through rate for the Class II-C2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in November 2004, 3 multiplied by 1-month LIBOR, subject
     to a cap of 6.5775%; (ii) for all Distribution Dates thereafter, Net WAC.

(12) The pass-through rate for the Class II-C3 Interest will be equal to 2.1925%
     minus 1-Month LIBOR, subject to a floor of zero.

                                       15

<PAGE>

(13) The Class II-D3 Interest will have a notional principal balance equal to
     the following amounts: (i) commencing on the first Distribution Date
     through and including the Distribution Date in December 2004, an amount
     equal to the balance of the Class I-D Interest and (ii) for all
     Distribution Dates thereafter, zero.

(14) The pass-through rate for the Class II-D1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2004, 1.5 multiplied by (Net WAC minus
     2.4225%); (ii) for all Distribution Dates thereafter, Net WAC.

(15) The pass-through rate for the Class II-D2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2004, 3 multiplied by 1-month LIBOR, subject
     to a cap of 7.2675%; (ii) for all Distribution Dates thereafter, Net WAC.

(16) The pass-through rate for the Class II-D3 Interest will be equal to 2.4225%
     minus 1-month LIBOR, subject to a floor of zero.

(17) The Class II-E3 Interest will have notional balance equal to the following
     amounts: (i) commencing on the first Distribution Date through and
     including the Distribution Date in December 2004, an amount equal to the
     balance of the Class I-E Interest and (ii) for all Distribution Dates
     thereafter, zero.

(18) The pass-through rate for the Class II-E1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2004, 1.5 multiplied by (Net WAC minus
     2.1100%), (ii) for all Distribution Dates thereafter, Net WAC.

(19) The pass-through rate for the Class II-E2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2004, 3 multiplied by 1-month LIBOR, subject
     to a cap of 6.3300%; (ii) for all Distribution Dates thereafter, Net WAC.

(20) The pass-through rate for the Class II-E3 Interest will be equal to 2.1100%
     minus 1-month LIBOR, subject to a floor of zero.

(21) The Class II-F3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in January 2005, an amount equal to the
     balance of the Class I-F Interest and (ii) for all Distribution Dates
     thereafter, zero.

(22) The pass-through rate for the Class II-F1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in January 2005, 1.5 multiplied by (Net WAC minus
     2.0340%); (ii) for all Distribution Dates thereafter, Net WAC.

(23) The pass-through rate for the Class II-F2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in January 2005, 3

                                       16

<PAGE>

     multiplied by 1-month LIBOR, subject to a cap of 6.1020%; (ii) for all
     Distribution Dates thereafter, Net WAC.

(24) The pass-through rate for the Class II-F3 Interest will be equal to 2.0340%
     minus 1-month LIBOR, subject a floor of zero.

(25) The Class II-G3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in July 2005, an amount equal to the
     balance of the Class I-G Interest and (ii) for all Distribution Dates
     thereafter, zero.

(26) The pass-through rate for the Class II-G1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in July 2005, 1.5 multiplied by (Net WAC minus 3.7340%);
     (ii) for all Distribution Dates thereafter, Net WAC.

(27) The pass-through rate for the Class II-F2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in July 2005, 3 multiplied by 1-month LIBOR, subject to a
     cap of 11.2020%; (ii) for all Distribution Dates thereafter, Net WAC.

(28) The pass-through rate for the Class II-F3 Interest will be equal to 3.7340%
     minus 1-month LIBOR, subject a floor of zero.

(29) The Class II-H3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in September 2005, an amount equal to
     the balance of the Class I-H Interest and (ii) for all Distribution Dates
     thereafter, zero.

(30) The pass-through rate for the Class II-H1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in September 2005, 1.5 multiplied by (Net WAC minus
     2.7640%); (ii) for all Distribution Dates thereafter, Net WAC.

(31) The pass-through rate for the Class II-H2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in September 2005, 3 multiplied by 1-month LIBOR, subject
     to a cap of 8.2920%; (ii) for all Distribution Dates thereafter, Net WAC.

(32) The pass-through rate for the Class II-H3 Interest will be equal to 2.7640%
     minus 1-month LIBOR, subject a floor of zero.

(33) The Class II-J3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in November 2005, an amount equal to
     the balance of the Class I-J Interest and (ii) for all Distribution Dates
     thereafter, zero.

                                       17

<PAGE>

(34) The pass-through rate for the Class II-J1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in November 2005, 1.5 multiplied by (Net WAC minus
     2.6900%); (ii) for all Distribution Dates thereafter, Net WAC.

(35) The pass-through rate for the Class II-J2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in November 2005, 3 multiplied by 1-month LIBOR, subject
     to a cap of 8.0700%; (ii) for all Distribution Dates thereafter, Net WAC.

(36) The pass-through rate for the Class II-J3 Interest will be equal to 2.6900%
     minus 1-month LIBOR, subject a floor of zero.

(37) The Class II-K3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in December 2005, an amount equal to
     the balance of the Class I-K Interest and (ii) for all Distribution Dates
     thereafter, zero.

(38) The pass-through rate for the Class II-K1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2005, 1.5 multiplied by (Net WAC minus
     2.9675%); (ii) for all Distribution Dates thereafter, Net WAC.

(39) The pass-through rate for the Class II-K2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2005, 3 multiplied by 1-month LIBOR, subject
     to a cap of 8.9025%; (ii) for all Distribution Dates thereafter, Net WAC.

(40) The pass-through rate for the Class II-K3 Interest will be equal to 2.9675%
     minus 1-month LIBOR, subject a floor of zero.

(41) The Class II-L3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in December 2005, an amount equal to
     the balance of the Class I-L Interest and (ii) for all Distribution Dates
     thereafter, zero.

(42) The pass-through rate for the Class II-L1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2005, 1.5 multiplied by (Net WAC minus
     2.6500%); (ii) for all Distribution Dates thereafter, Net WAC.

(43) The pass-through rate for the Class II-L2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in December 2005, 3 multiplied by 1-month LIBOR, subject
     to a cap of 7.9500%; (ii) for all Distribution Dates thereafter, Net WAC.

(44) The pass-through rate for the Class II-L3 Interest will be equal to 2.6500%
     minus 1-month LIBOR, subject a floor of zero.

                                       18

<PAGE>

(45) The Class II-M3 Interest will have a notional balance equal to the
     following amounts: (i) commencing on the first Distribution Date through
     and including the Distribution Date in January 2006, an amount equal to the
     balance of the Class I-M Interest and (ii) for all Distribution Dates
     thereafter, zero.

(46) The pass-through rate for the Class II-M1 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in January 2006, 1.5 multiplied by (Net WAC minus
     2.6400%); (ii) for all Distribution Dates thereafter, Net WAC.

(47) The pass-through rate for the Class II-M2 Interest will be as follows: (i)
     commencing on the first Distribution Date through and including the
     Distribution Date in January 2006, 3 multiplied by 1-month LIBOR, subject
     to a cap of 7.9200%; (ii) for all Distribution Dates thereafter, Net WAC.

(48) The pass-through rate for the Class II-M3 Interest will be equal to 2.6400%
     minus 1-month LIBOR, subject a floor of zero.

(49) The pass-through rate for the Class II-N Interest will be Net WAC.

(50) Class II-P is entitled to distributions of 100% of the distributions
     received from the Class I-P Interest.

          On each Distribution Date, all Realized Losses, prepayments and
payments of scheduled principal generated with respect to the Mortgage Loans
shall be allocated in the following order: (i) first to the Class II-N Interest,
until such Class is paid in full or eliminated by such losses; (ii) second, to
the Class II-A1 Interest and the Class II-A2 Interest, pro-rata, until such
Classes are paid in full or eliminated by such losses; (iii) third, to the Class
II-B1 Interest and the Class II-B2 Interest, pro-rata, until such Classes are
paid in full or eliminated by such losses; (iv) fourth, to the Class II-C1
Interest and the Class II-C2 Interest, pro-rata, until such Classes are paid in
full or eliminated by such losses; (v) fifth, to the Class II-D1 Interest and
the Class II-D2 Interest, pro-rata, until such Classes are paid in full or
eliminated by such losses; (vi) sixth, to the Class II-E1 Interest and the Class
II-E2 Interest, pro rata, until such classes are paid in full or eliminated by
such losses; (vii) seventh, to the Class II-F1 Interest and Class II-F2
Interest, until such classes are paid in full or eliminated by such losses;
(viii) eighth, to the Class II-G1 Interest and Class II-G2 Interest, until such
classes are paid in full or eliminated by such losses; (ix) ninth, to the Class
II-H1 Interest and Class II-H2 Interest, until such classes are paid in full or
eliminated by such losses; (x) tenth, to the Class II-J1 Interest and Class
II-J2 Interest, until such classes are paid in full or eliminated by such
losses; (xi) eleventh, to the Class II-K1 Interest and Class II-K2 Interest,
until such classes are paid in full or eliminated by such losses; (xii) twelfth,
to the Class II-L1 Interest and Class II-L2 Interest, until such classes are
paid in full or eliminated by such losses; (xiii) thirteenth, to the Class II-M1
Interest and Class II-M2 Interest, until such classes are paid in full or
eliminated by such losses.

          (e) The REMIC III Regular Interests shall have the following principal
balances, REMIC Pass-Through Rates and Corresponding Classes of Master REMIC
Certificates, as set forth in the table below:

                                       19

<PAGE>

<TABLE>
<CAPTION>
    -----------------------------------------------------------------------------------------
                                                      REMIC Pass-      Corresponding
          REMIC            Initial Principal            Through       Class of Master
        Interest                Balance                  Rate       REMIC Certificates
    -----------------------------------------------------------------------------------------
    <S>             <C>                               <C>           <C>
       III-Accrual  50% of the Aggregate Principal        (1)                N/A
                    Balance of the Mortgage Loans
    -----------------------------------------------------------------------------------------
         III-A1     50% of the Corresponding Class        (1)                A-1
                    Balance
    -----------------------------------------------------------------------------------------
         III-A2     50% of the Corresponding Class        (1)                A-2
                    Balance
    -----------------------------------------------------------------------------------------
         III-M1     50% of the Corresponding Class        (1)                M-1
                    Balance
    -----------------------------------------------------------------------------------------
         III-M2     50% of the Corresponding Class        (1)                M-2
                    Balance
    -----------------------------------------------------------------------------------------
         III-M3     50% of the Corresponding Class        (1)                M-3
                    Balance
    -----------------------------------------------------------------------------------------
          III-O     50% of the Corresponding Class        (1)                 O
                    Balance
    -----------------------------------------------------------------------------------------
          III-P                   $100                    (2)                 P
    -----------------------------------------------------------------------------------------
          III-I                   (3)                     (3)                 I
    -----------------------------------------------------------------------------------------
</TABLE>

(1)  The pass-through rate for the Class III-Accrual, Class III-A1, Class
     III-A2, Class III-M1, Class III-M2, Class III-M3 and Class III-O Interests
     will be the weighted average of the pass-through rates of the Class II-A1,
     Class II-A2, Class II-B1, Class II-B2, Class II-C1, Class II-C2, Class
     II-D1, Class II-D2, Class II-E1, Class II-E2, Class II-F1, Class II-F2,
     Class II-G1, Class II-G2, Class II-H1, Class II-H2, Class II-J1, Class
     II-J2, Class II-K1, Class II-K2, Class II-L1, Class II-L2, Class II-M1,
     Class II-M2 and Class II-N Interests.

(2)  Class III-P is entitled to distributions on the Class II-P Interest.

(3)  The Class III-I Interest will have a notional principal amount equal to the
     sum of the notional principal amounts of the Class II-A3, Class II-B3,
     Class II-C3, Class II-D3, Class II-E3, Class II-F3, Class II-G3, Class
     II-H3, Class II-J3, Class II-K3, Class II-L3 and Class II-M3 Interests and
     a pass-through rate equal to 100% of the pass-through rate on each of those
     classes.

          On each Distribution Date, 50% of the increase in the
Over-collateralization Amount will be payable as a reduction of the principal
balances of the Class III-A1, Class III-A2, Class III-M1, Class III-M2, Class
III-M3 and Class III-O Interests (in the order and amount of such reduction to
the principal balance of each class' Corresponding Class) and will be accrued
and added to the principal balance of the Class III Accrual Interest. On each
Distribution Date, the increase in principal balance of the Class III-Accrual
Interest may not exceed interest accruals for such Distribution Date for the
Class III-Accrual Interest. In the event that (i) 50% of the increase in the
Over-collateralization Amount exceeds (ii) interest accruals on the Class
III-Accrual Interest for such Distribution Date, the excess for such
Distribution Date (accumulated with all such excesses for all prior Distribution
Dates) will be added to any increase in the Over-collateralization Amount for
purposes of determining the amount of interest accrual on the Class III-Accrual
Interest payable as principal on the Class III-Accrual Interest on the next
Distribution Date pursuant to the first sentence of this paragraph.

                                       20

<PAGE>

          All payments of scheduled principal and prepayments of principal with
respect to the Mortgage Loans shall be allocated 50% to the Class III-Accrual
Interest and 50% as follows: (i) first, to the Class III-A1 and Class III-A2
Interests (to each such Class in an amount equal to 1/2 of the principal paid in
reduction of the principal balance of the Corresponding Class of Master REMIC
Interest) until paid in full and (ii) second, to the Class III-M1, Class III-M2,
Class III-M3 and Class III-O Interests (to each such Class in an amount equal to
1/2 of the principal paid in reduction of the principal balance of the
Corresponding Class of Master REMIC Interest) until paid in full.
Notwithstanding the above, principal payments allocated to the Class AIO
Certificates that result in the reduction of the Over-collateralization Amount
shall be allocated to the Class III-Accrual Interest until paid in full.
Liquidated Loan Losses shall be applied so that after all distributions have
been made on each Distribution Date the principal balances of the Class III-A1,
Class III-A2, Class III-M1, Class III-M2, Class III-M3 and Class III-O are each
equal to 50% of the principal balance of its Corresponding Class and the Class
III-Accrual Interest is equal to 50% of the principal balance of the Mortgage
Loans.

          (f) The following table sets forth characteristics of the
Certificates, each of which (other than the Class R Certificates and, with
respect to the Class A Certificates and Class M Certificates, other than the
right to receive Supplemental Interest Payments) is hereby designated as a
"regular interest" in the Master REMIC:

<TABLE>
<CAPTION>
      ------------------------------------------------------------------------------------
                                   Initial Certificate                REMIC
                                        Principal                  Pass-Through
           Class of Certificates         Balance                       Rate
      ------------------------------------------------------------------------------------
      <S>                          <C>                    <C>
       Class A-1                      $844,793,000        LIBOR + Certificate Margin (1)
      ------------------------------------------------------------------------------------
       Class A-2                      $292,707,000        LIBOR + Certificate Margin (1)
      ------------------------------------------------------------------------------------
       Class M-1                      $ 50,050,000        LIBOR + Certificate Margin (1)
      ------------------------------------------------------------------------------------
       Class M-2                      $ 39,000,000        LIBOR + Certificate Margin (1)
      ------------------------------------------------------------------------------------
       Class M-3                      $ 31,200,000        LIBOR + Certificate Margin (1)
      ------------------------------------------------------------------------------------
       Class AIO                           (2)                         (2)
      ------------------------------------------------------------------------------------
       Class I                             (3)                         (4)
      ------------------------------------------------------------------------------------
       Class O                        $ 42,249,900                     (5)
      ------------------------------------------------------------------------------------
       Class P                        $        100                     (6)
      ------------------------------------------------------------------------------------
       Class R                             (7)                         (7)
      ------------------------------------------------------------------------------------
</TABLE>

(1)  Subject to the REMIC Available Funds Cap.

(2)  The Class AIO Certificates will have a notional principal balance equal to
     the aggregate principal balance of the Mortgage Loans plus any outstanding
     Pre-Funded Amount. The REMIC Pass-Through Rate for the Class AIO
     Certificate will be the excess of: (i) the weighted average of the
     pass-through rates on the REMIC III Regular Interests (other than the Class
     III-I Interest) minus 0.50% over (ii) the product of: (A) two and (B) the
     weighted average pass-through rate of the REMIC III Regular Interests
     (other than the Class III-I Interest) where the Class III-Accrual Interest
     is subject to a cap equal to zero, and the remaining classes are subject to
     a cap equal to the REMIC Pass-Through Rates on their respective
     Corresponding Classes of Master REMIC Regular Interests.

(3)  The Class I Certificates will have a notional principal balance equal to
     the Class III-I notional principal balance.

                                       21

<PAGE>

(4)  The REMIC Pass-Through Rate for the Class I Certificate shall be 100% of
     the pass-through rate on the Class III-I Interest.

(5)  The Class O Certificate will not be entitled to any distributions of
     interest.

(6)  The Class P Certificates are entitled to distributions on the Class III-P
     Interest.

(7)  The Class R Certificates will represent the beneficial ownership of the
     R-I, R-II, R-III and R-IV Interests. On each Distribution Date, available
     funds, if any, remaining in any of the REMICs after payments of interest
     and principal, as designated above, will be distributed to the Class R
     Certificate. It is expected that there shall not be any distributions on
     the Class R Certificate.

               (g) For federal income tax purposes, the "latest possible
maturity date" for each of the REMIC I Regular Interests, REMIC II Regular
Interests, REMIC III Regular Interests and Master REMIC Regular Interests is
hereby set to be the Distribution Date of May 2033.

                                  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 (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

                                       22

<PAGE>

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 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 related Mortgage Loans and
REO Property and the Trustee shall not be liable for the actions of the Servicer
or any Subservicers under such powers of attorney.

               (d) The Servicer further is authorized and empowered by the
Trustee, on behalf of the Certificateholders and the Trustee, when the Servicer
believes it is appropriate in its best judgment to register any Mortgage Loan on
the MERS System, or cause the removal from the registration of any Mortgage Loan
on the MERS System, to execute and deliver, on behalf of the Trustee and the
Certificateholders or any of them, any and all instruments of assignment and
other comparable instruments with respect to such assignment or re-recording of
a Mortgage in the name of MERS, solely as nominee for the Trustee and its
successors and assigns. Any expenses incurred in connection with the actions
described in the preceding sentence shall be borne by the Servicer with no right
of reimbursement; provided, that if, as a result of MERS discontinuing or
becoming unable to continue operations in connection with the MERS System, it
becomes necessary to remove any Mortgage Loan from registration on the MERS
System and to arrange for the assignment of the related Mortgages to the
Trustee, then any related expenses shall be reimbursable to the Servicer by the
Trust.

               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

                                       23

<PAGE>

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, 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 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 Trustee and the Certificateholders for

                                       24

<PAGE>

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
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 Custodian, 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 3.05.

               Section 3.05 Assumption or Termination of Subservicing Agreements
by the Trustee.

               (a) If the Trustee or its designee as the successor Servicer,
shall assume the servicing obligations of the Servicer in accordance with
Section 7.02 below, the Trustee or its designee as the successor Servicer, 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 Trustee
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 Trustee or its designee as a
successor Servicer, except that the Trustee 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 Trustee's or
its designee's terminating any Subservicer upon the Trustee or its designee
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 Trustee's or its designee's terminating
any Subservicer upon the Trustee or its designee becoming successor Servicer.

               (b) The Trustee or its designee as the successor Servicer may
terminate any Subservicer upon becoming successor Servicer.

               (c) In the event that the Trustee or its designee as successor
Servicer assumes the servicing obligations of the Servicer under Section 7.02,
upon the request of the Trustee or such designee as successor Servicer, the
Servicer shall at its own expense deliver to the Trustee, 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

                                       25

<PAGE>

reasonable efforts to effect the orderly and efficient transfer of the
Subservicing Agreements, or responsibilities hereunder to the Trustee, or at its
written request to such designee as successor Servicer.

               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 Trustee 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):

                                       26

<PAGE>

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

               (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; and

               (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. The Servicer shall be
obligated to cover losses on such Eligible Investments.

          (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

                                       27

<PAGE>

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 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 into the Collection Account 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 Distribution Account, by the Servicer
     Remittance Date prior to each Distribution Date, all collections on the
     Mortgage Loans required to be distributed from the Distribution 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 Mortgaged Property which was damaged by the uninsured cause
     or in connection with the liquidation of such Mortgage Loan;

                                       28

<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 Distribution 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

                                       29

<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 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 Custodian and 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
Servicer and any Subservicer 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 Trustee shall coordinate
its request 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 Custodian 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 [Reserved]

          Section 3.11 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 current replacement cost of the Mortgaged Property, and containing a
standard mortgagee clause, provided, however, that the amount of hazard
insurance may not be less than the amount necessary to prevent loss due to the
application

                                       30

<PAGE>

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 ensure that, with respect to such Mortgage Loan or such REO
Property, flood insurance is acquired (to the extent available and in accordance
with mortgage servicing industry practice). 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 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

                                       31

<PAGE>

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 correspond
with the FNMA/FHMLC levels presently maintained by the Servicer. The Servicer
shall promptly notify the Trustee of any material change in the terms of such
bond or policy. The Servicer shall provide annually to 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
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 3.12 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 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 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 Custodian and
Trustee, whenever possible, before the completion of such assumption agreement,
and shall forward to the Custodian the original copy

                                       32

<PAGE>

of such assumption agreement, which copy shall be added by the Custodian 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 3.13 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.

     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

                                       33

<PAGE>

by the Custodian, 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 as soon as reasonably
practicable, but in no event later than 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 Trustee, and shall act in accordance with any such
directions and instructions provided by the Trustee. If 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 3.14 Custodian to Cooperate; Release of Mortgage Files.

     (a) Upon payment in full of any Mortgage Loan, the Servicer will
immediately notify the Custodian 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 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 Custodian, on behalf
of the Trustee, shall promptly cause to be released the related Mortgage File to
the Servicer or Subservicer and the Trustee shall 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 Trustee and the Custodian a Request for Release signed by a
Servicing Officer on behalf of the Servicer

                                       34

<PAGE>

in substantially the form attached as Exhibit E hereto. Upon receipt of the
Request for Release, the Custodian, 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 Custodian 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 Custodian, 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 Custodian, 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 Custodian 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 Custodian, 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 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 Trustee a certificate of a Servicing Officer in which it requests 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 execution
and delivery of the pleadings or documents will not invalidate any 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 3.15 Servicing Compensation.

     (a) As compensation for its activities hereunder, the Servicer shall be
entitled to receive the Servicing Fee 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

                                       35

<PAGE>

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 3.16 Annual Statements of Compliance.

     Within 90 days after December 31 of each year, the Servicer at its own
expense shall deliver 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 Trustee at the expense of the Servicer should the Servicer
fail to provide such copies.

     Section 3.17 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 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

                                       36

<PAGE>

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 Trustee and the Rating
Agencies.

     Section 3.18 Optional Purchase of Defaulted Mortgage Loans.

     Subject to the limitations set forth in Section 10.02 hereof, the Servicer
shall have the right, but not the obligation; to purchase any Mortgage Loan
which becomes 90 days or more delinquent at a purchase price equal to the
Repurchase Price (a) within 29 days after the date the Mortgage Loan becomes 90
days delinquent or (b) on the date the Servicer liquidates the related Mortgaged
Property. The procedure for such purchase shall be the same as for a repurchase
made by the Seller under the Purchase Agreement. The Servicer shall purchase the
most delinquent Mortgage Loans before purchasing other less delinquent Mortgage
Loans.

     Section 3.19 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 3.20 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 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 Trustee shall be the Servicer and
is obligated to make such purchase under the Converted Loan Purchase Agreement.

                                       37

<PAGE>

          Section 3.21 [Reserved].

          Section 3.22 Servicing and Administration 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 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)(xii) hereof shall be
deemed not to be inconsistent with such interests.

          (d) 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
the Trustee shall not 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

                                       38

<PAGE>

replacement MI Policy, the MI Premiums on which would be paid by the Servicer
from the Collection Account pursuant to Section 3.07(a)(xii) hereof.

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

     Section 3.23 Determination Date Reports.

     On the second Business Day following each Determination Date, the Servicer
shall deliver to the Trustee a report, prepared as of the close of business on
the Determination Date (the "Determination Date Report"), and shall forward to
the Trustee in the form of computer readable electromagnetic tape or disk a copy
of such report in a format acceptable to the Trustee. 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 Trustee 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 Trustee from time to
time. Such information shall include the aggregate amounts required to be
withdrawn from the Collection Account and deposited into the Distribution
Account pursuant to Section 3.07. Such information 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 Trustee in
providing all information as is reasonably requested by the Trustee 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 shall be fully protected in relying upon the same without any
independent check or verification.

     Section 3.24 Advances.

     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

                                       39

<PAGE>

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 Distribution 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 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.

          Section 3.25 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, will first distribute the
Prepayment Charges collected on the Group I Mortgage Loans and on the Group II
Mortgage Loans during the prior Prepayment Period to the Holders of the Class P
Certificates. After making that distribution, the Trustee, shall (based solely
on the information provided to the Trustee by the Servicer 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 distribute, pro
     rata from both the Group I Interest Remittance Amount and the Group II
     Interest Remittance Amount, the Trustee Fee and the Custodian Fee which is
     due on that Distribution Date to the Trustee and Custodian respectively.
     After making that distribution, the Trustee 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, on each Distribution Date on or prior to the Class I
Termination Date, payable from the Group I Interest Remittance Amount and the
Group II Interest

                                       40

<PAGE>

Remittance Amount, to the Holders of the Class I Certificates, the Class I
Monthly Interest Distributable Amount;

          (B) second, concurrently, with equal priority of payment:

              (I)   payable solely from the Group I Interest Remittance Amount
          for that Distribution Date or, to the extent that the Group I Interest
          Remittance Amount is less than the related REMIC Monthly Interest
          Distributable Amount for the Class A-1 Certificates, from the Group II
          Cross Collateralization Amount for that Distribution Date, to the
          Holders of the Class A-1 Certificates, the REMIC Monthly Interest
          Distributable Amount for the Class A-1 Certificates;

              (II)  payable solely from the Group II Interest Remittance Amount
          for that Distribution Date or, to the extent that the Group II
          Interest Remittance Amount is less than the related REMIC Monthly
          Interest Distributable Amount for the Class A-2 Certificates, from the
          Group I Cross Collateralization Amount for that Distribution Date, to
          the Holders of the Class A-2 Certificates, the REMIC Monthly Interest
          Distributable Amount for the Class A-2 Certificates; and

              (III) payable from both the Group I Interest Remittance Amount and
          the Group II Interest Remittance Amount, the Class AIO Monthly
          Interest Distributable Amount, which shall be paid as follows:

                    (x) first, to the Supplemental Interest Account, the Class
              AIO Unpaid Interest Shortfall Amount; and

                    (y) second, to the Supplemental Interest Account for further
              application in accordance with Section 4.04 hereof, the Class AIO
              Current Interest;

          (C) third, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class M-1
Certificates, the REMIC Monthly Interest Distributable Amount for Class M-1;

          (D) fourth, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class M-2
Certificates, the REMIC Monthly Interest Distributable Amount for Class M-2;

          (E) fifth, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class M-3
Certificates, the REMIC Monthly Interest Distributable Amount for Class M-3;

          (F) sixth, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class R
Certificates for the benefit of the Supplemental Interest Trust, the Excess
Cashflow (net of the Overcollateralization Release Amount and any amounts
distributed pursuant to Section 4.04(d)(i)), to be distributed pursuant to
Sections 4.04 (d)(ii) and 4.04(d)(iii); and

                                       41

<PAGE>

          (G) seventh, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class R
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 Servicer 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
     Group I Principal Distribution Amount and Group II Principal Distribution
     Amount and make the following disbursements and transfers in the order of
     priority described below:

          (A) first, concurrently, with equal priority of payment:

              (I)  payable solely from the Group I Principal Distribution
          Amount, to the Holders of the Class A-1 Certificates, the entire
          amount of the Group I Principal Distribution Amount, until the
          Certificate Principal Balance of the Class A-1 Certificates has been
          reduced to zero; and

              (II) payable solely from the Group II Principal Distribution
          Amount, to the Holders of the Class A-2 Certificates, the entire
          amount of the Group II Principal Distribution Amount, until the
          Certificate Principal Balance of the Class A-2 Certificates has been
          reduced to zero (except that on the Class P Principal Distribution
          Date, the Certificate Principal Balance of the Class P Certificates
          shall first be paid from the Group II Principal Distribution Amount to
          the Holders of the Class P Certificates);

          (B) second:

              (I)  if the Certificate Principal Balance of the Class A-1
          Certificates has been reduced to zero, then to the Holders of the
          Class A-2 Certificates, the amount of any remaining Group I Principal
          Distribution Amount, until the Certificate Principal Balance of the
          Class A-2 Certificates has been reduced to zero; or

              (II) if the Certificate Principal Balance of the Class A-2
          Certificates has been reduced to zero, then to the Holders of the
          Class A-1 Certificates, the amount of any remaining Group II Principal
          Distribution Amount, until the Certificate Principal Balance of the
          Class A-1 Certificates has been reduced to zero;

          (C) third, payable from both the Group I Principal Distribution Amount
and the Group II Principal Distribution Amount, to the Holders of the Class M-1
Certificates, the entire remaining Principal Distribution Amount until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero;

          (D) fourth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Holders of the
Class M-2 Certificates, the

                                       42

<PAGE>

entire remaining Principal Distribution Amount until the Certificate Principal
Balance of the Class M-2 Certificates has been reduced to zero;

              (E)    fifth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Holders of the
Class M-3 Certificates, the entire remaining Principal Distribution Amount until
the Certificate Principal Balance of the Class M-3 Certificates has been reduced
to zero;

              (F)    sixth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Trustee and the
Custodian, pro rata, any amounts owed to them under the Basic Documents
remaining unpaid;

              (G)    seventh, payable from both the Group I Principal
Distribution Amount and the Group II Principal Distribution Amount, to the
Servicer, the amount of any reimbursement of indemnification owed to it by the
Trust pursuant to Section 6.03 hereof;

              (H)    eighth, payable from the Group I Principal Distribution
Amount, the Group II Principal Distribution Amount and any remaining REMIC
Available Funds relating to principal, to the Holders of the Class O
Certificates, for the benefit of the Supplemental Interest Trust, the entire
remaining Principal Distribution Amount plus any remaining Overcollateralization
Release Amount until the Certificate Principal Balance of the Class O
Certificates has been paid; and

              (I)    ninth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Holders of the
Class R Certificates, for the benefit of the Supplemental Interest Trust, 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 Servicer 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 Group I Principal Distribution Amount
       and Group II Principal Distribution Amount and make the following
       disbursements and transfers in the order of priority described below:

              (A)    first, concurrently, with equal priority of payment:

                     (I)    payable solely from the Group I Principal
              Distribution Amount, to the holders of the Class A-1 Certificates,
              the Class A-1 Principal Distribution Amount, until the Certificate
              Principal Balance of the Class A-1 Certificates has been reduced
              to zero; and

                     (II)   payable solely from the Group II Principal
              Distribution Amount, to the holders of the Class A-2 Certificates,
              the Class A-2 Principal Distribution Amount, until the Certificate
              Principal Balance of the Class A-2 Certificates has been reduced
              to zero (except that on the Class P Principal Distribution Date,
              the Certificate Principal Balance of the Class P Certificates
              shall first be paid from

                                       43

<PAGE>

              the Group II Principal Distribution Amount to the holders of the
              Class P Certificates);

              (B)    second;

                     (I)    if the Group I Principal Distribution Amount was
              insufficient to pay the Class A-1 Principal Distribution Amount,
              then payable from the remaining Group II Principal Distribution
              Amount, to the holders of the Class A-1 Certificates, the unpaid
              portion of the Class A-1 Principal Distribution Amount; or

                     (II)   if the Group II Principal Distribution Amount was
              insufficient to pay the Class A-2 Principal Distribution Amount,
              then payable from the remaining Group I Principal Distribution
              Amount, to the holders of the Class A-2 Certificates, the unpaid
              portion of the Class A-2 Principal Distribution Amount.

              (C)    third, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, 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;

              (D)    fourth, payable from both the Group I Principal
Distribution Amount and the Group II Principal Distribution Amount, 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;

              (E)    fifth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, 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;

              (F)    sixth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Trustee and the
Custodian, pro rata, any amounts owed to them under the Basic Documents
remaining unpaid;

              (G)    seventh, payable from both the Group I Principal
Distribution Amount and the Group II Principal Distribution Amount, to the
Servicer, the amount of any reimbursement of indemnification owed to it by the
Trust pursuant to Section 6.03 hereof;

              (H)    eighth, payable from the Group I Principal Distribution
Amount, the Group II Principal Distribution Amount and any remaining REMIC
Available Funds relating to principal, to the Holders of the Class O
Certificates, for the benefit of the Supplemental Interest Trust, the entire
remaining Principal Distribution Amount plus any remaining Overcollateralization
Release Amount until the Certificate Principal Balance of the Class O
Certificates has been paid; and

                                       44

<PAGE>

              (I)    ninth, payable from both the Group I Principal Distribution
Amount and the Group II Principal Distribution Amount, to the Holders of the
Class R Certificates, for the benefit of the Supplemental Interest Trust, 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 Depository and
the Depository Participants in accordance with the provisions of the
Certificates. None of the Custodian, the Trustee, the Company, the Servicer or
the Seller shall have any responsibility therefor except as otherwise provided
by applicable law.

              Section 4.02  Distribution Account.

              (a)    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, JPMorgan Chase Bank, as Trustee for
the registered holders of NovaStar Mortgage Funding Trust 2003-1, Home Equity
Loan Asset-Backed Certificates, Series 2003-1" (the "Distribution Account"). The
Trustee shall, promptly upon receipt, deposit in the Distribution Account and
retain therein the Interest Remittance Amount and the Principal Remittance
Amount remitted on each Servicer Remittance Date to the Trustee by the Servicer.
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.

              (b)    The Trustee may invest funds deposited in the Distribution
Account in Eligible Investments in accordance with the written direction of the
Servicer with a maturity date no later than the Business Day immediately
proceeding the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement. All income or other gain from such
investments may be released from the Distribution Account and paid to the
Servicer. The Servicer shall be obligated to cover losses on such Eligible
Investments.

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

                                       45

<PAGE>

                     (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;

                     (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 R Certificates; and

                     (iv)   To distribute any amounts of investment income to
       the Servicer.

              (d)    On each Distribution Date, the Trustee shall distribute all
amounts on deposit in the Distribution Account (other than investment income)
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 Trustee shall prepare and make
available to each Holder of the Regular Certificates, the Swap Counterparties,
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;

                     (iii)  the Pool Balance of the Group I Mortgage Loans and
       the Group II Mortgage Loans 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;

                                       46

<PAGE>

                     (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 each class of
       the Class A Certificates, each class of 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 each class of the Class A Certificates, each class of 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 each
       class of the Class A Certificates and each class of the Mezzanine
       Certificates, if any, for such Distribution Date and the amount remaining
       unpaid after reimbursements therefor on such Distribution Date;

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

                     (xiv)  the Supplemental Interest Payment for each Class on
       such Distribution Date;

                     (xv)   the difference between the Swap Notional Amount and
       the Underwritten Certificates Principal Balance on such Distribution
       Date;

                     (xvi)  the Required Overcollateralization Amount for such
       Distribution Date; and

                     (xvii) the Excess Cashflow for such 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.

              The Trustee 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.

                                       47

<PAGE>

              (b)    Within a reasonable period of time after the end of each
calendar year, the Trustee 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 Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
prepared and furnished by the Trustee to Certificateholders pursuant to any
requirements of the Code as are in force from time to time.

              (c)    On each Distribution Date, the Trustee 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 Trustee deems necessary or appropriate.

              (d)    Within a reasonable period of time after the end of each
calendar year, the Trustee 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
Trustee shall be deemed to have been satisfied to the extent that substantially
comparable information shall be prepared and furnished to Certificateholders by
the Trustee pursuant to any requirements of the Code as from time to time in
force.

              (e)    On each Distribution Date, the Trustee shall post on its
website at www.jpmorgan.com\absmbs, which posting shall be accessible to each
Certificateholder, the statement prepared pursuant to paragraph (a) of this
Section 4.03. Assistance in using the website can be obtained by calling the
Trustee's customer service desk at 1-877-722-1095. Such parties that are unable
to use the website are entitled to have a paper copy mailed to them via first
class mail by calling the customer service desk and indicating such. The Trustee
shall have the right to change the way such statements are distributed in order
to make such distribution more convenient and/or accessible to the above parties
and the Trustee shall provide timely and adequate notification to all above
parties regarding any such changes. The Trustee shall not 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 Trustee, as required pursuant hereto.

              (f)    No later than noon on the second Business Day prior to each
Distribution Date, the Trustee will verify that no Notional Amount Test Event is
scheduled to occur on the related Distribution Date. In the event a Notional
Amount Test Event would otherwise occur on the related Distribution Date, the
Trustee will immediately provide notice in the form of Exhibit J to the
appropriate NovaStar entity and assign or reduce in $25,000,000 increments a
portion of the related notional amount from the affected Swap Agreement on the
day immediately preceding that Distribution Date until no Notional Amount Test
Event will occur on the related Distribution Date. The Trustee shall assign or
reduce the applicable notional amount from the Swap Agreement with the earliest
maturity. In the event that two or more Swap Agreements

                                       48

<PAGE>

have the same maturity date, which date is the earliest maturity date of the
outstanding Swap Agreements, the Trustee shall assign or reduce the applicable
notional amounts from the Swap Agreement(s) on a pro rata basis. Once such
notional amounts have been reduced or assigned back to the appropriate NovaStar
entity, the related Swap Counterparty will have no obligation to, nor interest
in, the Trust with respect to such notional amounts. Furthermore, no
distributions will be made from the Supplemental Interest Trust to the related
Swap Counterparty in respect of notional amounts assigned or reduced under this
Section 4.03 (f).

              In no event shall the Trustee allow a Notional Amount Test Event
to occur on any Distribution Date.

              Section 4.04  Supplemental Interest Trust; Excess Cashflow.

              (a)    (i) The parties do hereby create and establish a sub-trust
of the Trust Fund, which shall hold an account, which, no later than the Closing
Date, the Trustee shall, at the direction of the Servicer, establish and
maintain, as a segregated trust account that is an Eligible Account, which shall
be titled "Supplemental Interest Trust, JPMorgan Chase Bank, as Trustee for the
registered holders of NovaStar Mortgage Funding Trust 2003-1, Home Equity Loan
Asset-Backed Certificates, Series 2003-1." The Trustee shall, promptly upon
receipt, deposit in the Supplemental Interest Trust each distribution of the
Class AIO Monthly Interest Distributable Amount pursuant to Section
4.01(a)(i)(B)(III) and each distribution of the Class I Monthly Interest
Distributable Amount pursuant to Section 4.01(a)(i)(A). Funds deposited in the
Supplemental Interest Trust shall be held in trust by the Trustee for the
Certificateholders for the uses and purposes set forth herein. Neither the
Supplemental Interest Trust nor the Supplemental Interest Account shall be an
asset of any of the REMICs created hereunder.

              (ii)   On each Distribution Date prior to the Class I Termination
Date, the funds in the Supplemental Interest Trust (as reduced from time to time
in accordance with this Section 4.04) will equal the sum of (a) any amounts
received under any Swap Agreement pursuant to Section 4.04(e), (b) the Class I
Monthly Interest Distributable Amount (c) the Class AIO Monthly Interest
Distributable Amount and (d) any amounts of Excess Cashflow not used to build
and maintain the Required Overcollateralization Amount.

              On each Distribution Date commencing in February 2006, the funds
in the Supplemental Interest Trust (as reduced from time to time in accordance
with this Section 4.04) will equal the Class AIO Monthly Interest Distributable
Amount and any amounts of Excess Cashflow not used to build and maintain the
Required Overcollateralization Amount.

              (b)    The Trustee will invest funds deposited in the Supplemental
Interest Trust as directed in writing by the Servicer in Eligible 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 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 and gain realized from investment of funds deposited in the
Supplemental Interest Trust shall be credited to such

                                       49

<PAGE>

Account. The Trustee will not be liable for investment losses on investments
selected by the Servicer pursuant to this Section 4.04(b). The Supplemental
Interest Trust will not be an asset of any of the REMICs created hereunder.

              (c)    (x)    On each Distribution Date, the Trustee shall
distribute the funds (other than funds relating to Excess Cashflow) held in the
Supplemental Interest Trust as follows:

                     (i)    first, to each Swap Counterparty, its related Swap
       Amount for such Distribution Date;

                     (ii)   second, any remaining amounts to pay, on a pro rata
       basis, by the amount of Supplemental Interest Payments due to each of the
       Class A-1 and Class A-2 Certificates, the Supplemental Interest Payment
       for the Class A-1 Certificates and Class A-2 Certificates;

                     (iii)  third, any remaining amounts to pay the Supplemental
       Interest Payment for the Class M-1 Certificates;

                     (iv)   fourth, any remaining amounts to pay the
       Supplemental Interest Payment for the Class M-2 Certificates;

                     (v)    fifth, any remaining amounts to pay the Supplemental
       Interest Payment for the Class M-3 Certificates;

                     (vi)   sixth, to pay any remaining amount to the Class AIO
       Certificates.

              (d)    (y)    On each Distribution Date, the Trustee shall
distribute the funds relating to Excess Cashflow as follows:

                     (i)    prior to any deposit to the Supplemental Interest
Trust, to the Holders of the Class or Classes of Certificates then entitled to
receive distributions in respect of principal, in an amount equal to any Extra
Principal Distribution Amount, distributable to such holders in the same order
of priority as the Group I Principal Distribution Amount and/or the Group II
Principal Distribution Amount as described in Section 4.01;

                     (ii)   to the Supplemental Interest Trust to distribute in
the following order of priority:

                            (a)    to the Holders of the Class A-1 Certificates
and Class A-2 Certificates, pro rata, based on the respective Supplemental
Interest Payment allocable to such Certificates to the extent not paid out of
the Supplemental Interest Trust (without giving effect to amounts of Excess
Cashflow on deposit in the Supplemental Interest Trust);

                            (b)    to the Holders of the Class M-1 Certificates,
in an amount equal to the Supplemental Interest Payment allocable to such
Certificates to the extent not paid out of the Supplemental Interest Trust
(without giving effect to amounts of Excess Cashflow on deposit in the
Supplemental Interest Trust);

                                       50

<PAGE>

                            (c)    to the Holders of the Class M-2 Certificates,
in an amount equal to the Supplemental Interest Payment allocable to such
Certificates to the extent not paid out of the Supplemental Interest Trust
(without giving effect to amounts of Excess Cashflow on deposit in the
Supplemental Interest Trust);

                            (d)    to the Holders of the Class M-3 Certificates,
in an amount equal to the Supplemental Interest Payment allocable to such
Certificates to the extent not paid out of the Supplemental Interest Trust
(without giving effect to amounts of Excess Cashflow on deposit in the
Supplemental Interest Trust); and

                     (iii)  any remaining amounts, pro rata to the Holders of
the Class O and Class R Certificates based on the amounts paid to the
Supplemental Interest Trust on behalf of the Holders of the Class O and Class R
Certificates pursuant to Section 4.01(a)(i)(F), Section 4.01(a)(ii)(H), Section
4.01(a)(ii)(I), Section 4.01(a)(iii)(H) and Section 4.01(a)(iii)(I).

              (e)    On any Distribution Date on which the Swap Amount for any
Swap Agreement is a negative number, the absolute value of such negative number
shall be paid by each related Swap Counterparty to the Supplemental Interest
Trust.

              (f)    On each Distribution Date during the Funding Period and on
the day of the termination of the Funding Period and to the extent that the sum
of the products of (x) the principal balance of each REMIC I Regular Interest
and (y) its corresponding REMIC Pass-Through Rate divided by 12 exceeds the sum
of (i) the Interest Remittance Amount for such Distribution Date and (ii) the
amounts in the Supplemental Interest Trust (other than amounts necessary to pay
the Swap Counterparty its related Swap Amount), the Company will make available
to the Trustee funds available to cover such excess. The Trustee will credit
amounts payable to the Company or its Affiliate on such Distribution Date before
using such funds made available by the Company. If the amounts payable to the
Company or its Affiliate on such Distribution Date exceed the amount the Company
must make available pursuant to this subsection, the difference shall be
transferred to the Company or its Affiliate in full satisfaction of amounts
owing to the Company or its Affiliate on such Distribution Date. If the amount
that the Company must make available pursuant to this subsection exceeds the
amount payable to the Company or its Affiliate on such Distribution Date, no
payment shall be transferred to the Company or its Affiliate, and the Company is
required to deposit such difference in the Distribution Account no later than
the Distribution Date. The amount of funds that the Company must make available
pursuant to this subsection without regard to any credit for amounts payable to
the Company or its Affiliate shall be treated as a contribution of cash by the
Company to REMIC I on the date hereof.

              Section 4.05  Pre-Funding Account.

              (a)    No later than the Closing Date, the Trustee, at the
direction of the Servicer, shall establish and maintain, a segregated trust
account that is an Eligible Account, which shall be titled "Pre-Funding Account,
JPMorgan Chase Bank, as Trustee for the registered holders of NovaStar Mortgage
Funding Trust 2003-1, Home Equity Loan Asset-Backed Certificates, Series 2003-1"
(the "Pre-Funding Account"). The Trustee shall, promptly upon

                                       51

<PAGE>

receipt, deposit in the Pre-Funding Account and retain therein the Original
Pre-Funded Amount remitted on the Closing Date to the Trustee by the Company.
Funds deposited in the Pre-Funding Account shall be held in trust by the Trustee
for the Certificateholders for the uses and purposes set forth herein.

              (b)    The Trustee 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 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. 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 Distribution Account. The
Trustee shall treat the Pre-Funding Account as an outside reserve fund within
the meaning of Treasury Regulation Section 1.860G-2(h). At no time will the
Pre-Funding Account be an asset of any REMIC created hereunder. The Trustee
shall not be liable for investment losses on investments selected by the
Servicer pursuant to this Section 4.05(b).

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

                     (i)    On any Subsequent Transfer Date, the Trustee shall
       withdraw from the Pre-Funding Account an amount equal to 100% of the
       Principal Balances of the Subsequent Mortgage Loans transferred and
       assigned to the Trustee 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
       has not been reduced to zero during the Funding Period, on the day of the
       termination of the Funding Period, the Trustee shall deposit into the
       Distribution Account any amounts remaining in the Pre-Funding Account for
       distribution in accordance with the terms hereof;

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

                     (iv)   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 but not later than the Distribution Date in
       May 2003 and (B) 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 (iii) shall be treated as contributions of cash to REMIC I on the date
of withdrawal.

                                       52

<PAGE>

              Section 4.06  [Reserved]

              Section 4.07  Allocation of Realized Losses.

              All Realized Losses on the Mortgage Loans shall be allocated by
the Trustee on each Distribution Date as follows: first, to Excess Cashflow,
second to the Class O Certificates, until the Certificate Principal Balance
thereof has been reduced to zero; third, to the Class M-3 Certificates, until
the Certificate Principal Balance thereof has been reduced to zero; fourth, to
the Class M-2 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero; and fifth, 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. In no event
shall Realized Losses be allocated to the Class A Certificates.

              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.

                                   ARTICLE V

                                THE CERTIFICATES

              Section 5.01  The Certificates.

              Each of the Class A Certificates, the Mezzanine Certificates, the
Class AIO Certificates, the Class I 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 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 $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
I 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

                                       53

<PAGE>

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 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 Trustee 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 Trustee 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 Trustee 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
registration of transfer or exchange shall (if so required by the Trustee or the
Certificate Registrar) be duly endorsed by, or be accompanied by a written
instrument of transfer satisfactory to the Trustee 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 Trustee 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 Trustee 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

                                       54

<PAGE>

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 Trustee 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 Trustee 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 Trustee
in writing that the Depository is no longer willing or able to discharge
properly its responsibilities as Depository and (y) the Trustee or the Company
is unable to locate a qualified successor, (ii) the Company, at its sole option,
with the consent of the Trustee, 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 Trustee 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 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 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. Neither the Company 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 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
I Certificate, 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 I
Certificate, 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

                                       55

<PAGE>

the form attached hereto as Exhibit G, is delivered by the Transferee to the
Trustee) or (ii) a written Opinion of Counsel (which may be in-house counsel)
acceptable to and in form and substance reasonably satisfactory to the Trustee
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 Trustee or the Company. The Holder of a Class I Certificate,
Class O Certificate or Residual Certificate desiring to effect such transfer
shall, and 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 I 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. ss.
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.

              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 Trustee 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 Trustee 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, Trustee or agent for any Person who is not a Permitted
       Transferee; and

                                       56

<PAGE>

                     B.     a 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 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. 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 Trustee
       received the documents specified in clause (iii). The Trustee 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 Trustee shall be distributed and
       delivered by the Trustee 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 Trustee 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
       Trustee to the previous Holder of such Residual Certificate that is a
       Permitted Transferee, except that in the event that the Trustee
       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 Trustee 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 Trustee 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 Trustee 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) of
       the Code on transfers of residual interests to disqualified
       organizations.

                                       57

<PAGE>

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
Trustee, in form and substance satisfactory to the Trustee, (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.

         (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 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 Trustee or the Certificate Registrar that such
Certificate has been acquired by a bona fide purchaser, the Trustee 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 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 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 Registrar, any
Paying Agent and any agent of the Servicer, the Company, the Trustee, the
Certificate Registrar or any Paying Agent 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
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 Trustee. The duties of the Paying Agent may
include the obligation to distribute statements prepared by 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

                                       58

<PAGE>

entity duly incorporated and validly existing 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.

                                       59

<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 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
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; and (b) each Rating Agency shall have delivered a letter to the
Trustee 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 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
Trustee or its designee as successor Servicer shall have assumed the Servicer's
responsibilities and obligations hereunder or 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 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
Trustee.

                                       60

<PAGE>

         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 Fees and Expenses;
Indemnification.

         (a)  The Servicer covenants and agrees to pay to the Trustee and any
co-trustee of the Trustee from time to time, and 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 Trustee and any co-trustee upon request for all
reasonable expenses, disbursements and advances incurred or made by 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 for, and to defend
and hold, the Trustee 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 as such and/or in its individual capacity,
arising out of, or in connection with, the performance of the Trustee's duties
under this Agreement or the other Basic Documents, 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 shall have given
    the Servicer written notice thereof promptly after the Trustee shall have
    actual knowledge thereof;

              (ii)  while maintaining control over its own defense, the Trustee
    shall cooperate and consult fully with the Servicer in preparing such
    defense; and

              (iii) notwithstanding anything in this Agreement to the contrary,
    the Servicer shall not be liable for settlement of any claim by the Trustee
    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 shall affect the obligations created by this Section 6.06 of the
Servicer to indemnify 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. 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.

                                       61

<PAGE>

         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 including the costs and expenses of defending itself
against any claim, incurred in connection with any actions taken by the Trustee
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 Trustee becomes the Servicer pursuant to Section
7.02 hereof, the Trustee shall not 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 Distribution 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 or to the
    Servicer and the Trustee by 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
    Trustee or to the Servicer 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

                                       62


<PAGE>

    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, 1.25% of the Cut-off Date Aggregate
    Principal Balance, (b) with respect to the next 12 Distribution Dates, 1.75%
    of the Cut-off Date Aggregate Principal Balance, (c) with respect to the
    next 12 Distribution Dates, 2.50% of the Cut-off Date Aggregate Principal
    Balance, (d) with respect to the next 12 Distribution Dates, 3.00% of the
    Cut-off Date Aggregate Principal Balance, (e) with respect to the next 12
    Distribution Dates, 4.00% of the Cut-off Date Aggregate Principal Balance,
    (f) and with respect to all Distribution Dates thereafter, 5.00% of the
    Cut-off Date Aggregate Principal Balance; or

              (vi)  Realized Losses on the Mortgage Loans over any twelve-month
    period exceeds 1.50% of the sum of the aggregate Principal Balance of the
    Closing Date Mortgage Loans as of the Cut-off Date and the Original
    Pre-Funded Amount; or

              (vii) The Rolling 90 Day Delinquency Percentage exceeds 19.00%.

         (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., New York time, on the Business Day immediately following the Servicer
Remittance Date (provided the Trustee shall give the Servicer notice of such
failure to advance by 5:00 P.M. New York time on the Servicer Remittance Date),
the Trustee shall terminate all of the rights and obligations of the Servicer
under this Agreement and the Trustee, 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), (v)
and (vi) and (vii)] above, the Trustee 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 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

                                       63

<PAGE>

the Servicer shall also be given to the Trustee, each Rating Agency, the Company
and the Seller. On or after the receipt by the Servicer (and by the Trustee 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 Trustee or other Successor Servicer appointed in accordance with Section
7.02.

         Section 7.02  Trustee to Act; Appointment of Successor.

         (a)  Within 90 days of the time the Servicer (and the Trustee if notice
is sent by the Holders) receives a notice of termination pursuant to Section
7.01, the Trustee (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 Trustee, in its capacity as successor Servicer,
immediately will assume all of the obligations of the Servicer to make Advances;
provided however, that the obligation of the Trustee to make Advances is subject
to the standards set forth in Section 3.24 hereof. Notwithstanding the
foregoing, the Trustee, 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 Trustee (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 Trustee is unwilling to act as successor
Servicer or (ii) if the Trustee is legally unable so to act, the Trustee 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 loan servicer having a net worth of not less than $10,000,000 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 Trustee is prohibited by law from so acting, the Trustee
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 Trustee 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 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 Trustee 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

                                       64

<PAGE>

successor Servicer or the Trustee (in which case the successor Servicer or the
Trustee, as applicable, shall be entitled to reimbursement therefor from the
assets of the Trust).

         (b)  Any successor, including the Trustee, 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.

         (c)  In connection with the termination or resignation of the Servicer
hereunder, either (i) the successor Servicer, shall represent and warrant that
it is a member of MERS in good standing and shall agree to comply in all
material respects with the rules and procedures of MERS in connection with the
servicing of the Mortgage Loans that are registered with MERS, in which case the
predecessor Servicer shall cooperate with the successor Servicer in causing MERS
to revise its records to reflect the transfer of servicing to the successor
Servicer as necessary under MERS' rules and regulations, or (ii) the predecessor
Servicer shall cooperate with the successor Servicer in causing MERS to execute
and deliver an assignment of Mortgage in recordable form to transfer the
Mortgages from MERS to the Trustee and to execute and deliver such other
notices, documents and other instruments as may be necessary or desirable to
effect a transfer of such Mortgage Loans or servicing of such Mortgage Loan on
the MERS System to the successor Servicer. The predecessor Servicer shall file
or cause to be filed any such assignment in the appropriate recording offices.
The predecessor Servicer shall bear any and all fees of MERS, costs of preparing
any assignments of Mortgage, and fees and costs of filing any assignments of
Mortgage that may be required under this subsection (c). The successor Servicer
shall cause assignment to be delivered to the Trustee promptly upon receipt of
the original with evidence of recording thereon or a copy certified by the
public recording office in which such assignment was recorded.

         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 by delivering written notice to the
Trustee, 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 Trustee to the Rating Agencies.

         Section 7.04  Notification to Certificateholders.

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

                                       65

<PAGE>

         (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 Trustee 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

         Section 8.01  Duties of the Trustee.

         If a Servicing Default has occurred and is continuing, the Trustee
shall exercise the rights and powers vested in it by this Agreement and use the
same degree of care and skill in its 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)   the Trustee undertakes to perform such duties and only such
    duties as are specifically set forth in this Agreement with respect to the
    Trustee and no implied covenants or obligations shall be read into this
    Agreement against the Trustee; and

              (ii)  in the absence of bad faith on its part, the Trustee 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 conforming to the requirements of this Agreement; provided,
    however, that the Trustee shall examine the certificates and opinions
    delivered to it to determine whether or not they conform to the requirements
    of this Agreement.

         (b)  The Trustee may not 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 shall not be liable for any error of judgment
    made in good faith by its Responsible Officer unless it is proved that the
    Trustee was negligent in ascertaining the pertinent facts; and

                                       66

<PAGE>

              (iii) the Trustee shall not 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.

         The Trustee shall not be liable for interest on any money received by
the Trustee.

         Money held in trust by the Trustee 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 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 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
Distribution Account, or (D) to confirm or verify the contents of any reports or
certificates of the Servicer delivered to the Trustee believed by the Trustee to
be genuine and to have been signed or presented by the proper party or parties.

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

         (d)  For all purposes under this Agreement, the Trustee shall not be
deemed to have notice or knowledge of any Servicing Default unless a Responsible
Officer assigned to and working in the Trustee's 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 at the Corporate Trust Office,
and such notice references the Certificates generally, the Trust, or this
Agreement.

         The Trustee is 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
shall apply to the Trustee'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.

                                       67

<PAGE>

         Section 8.02  Rights of Trustee.

         The Trustee 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 need not investigate any fact or matter stated in the
document.

         Before the Trustee 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 which Officer's Certificate or Opinion of Counsel
shall not be at the expense of the Trustee or the Trust Fund. The Trustee shall
not 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.

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

         The Trustee shall not 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 does not
constitute willful misconduct, negligence or bad faith.

         The Trustee 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 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 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 of the obligation, upon the
occurrence of a Servicing Default of which a Responsible Officer of the Trustee
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 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

                                       68

<PAGE>

the Majority Certificateholders; provided, however, that if the payment within a
reasonable time to the Trustee 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, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Agreement, the Trustee 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, shall be repaid by the Servicer upon demand
from the Servicer's own funds.

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

         The Trustee 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.

         The Trustee 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. Any
Certificates Registrar, co-registrar or co-paying agent may do the same with
like rights. However, the Trustee must comply with Section 8.11 hereof.

         Section 8.04  Trustee's Disclaimer.

         The Trustee shall not be responsible for and makes no representation as
to the validity or adequacy of this Agreement or the Certificates, or of any
Mortgage Loan or related document, or of MERS or the MERS System. The Trustee
shall not be accountable for the use of the proceeds from the Certificates, and
the Trustee shall not 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 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 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 Trustee Fee and Custodian Fee shall be paid to the
Trustee and Custodian, respectively, on each Distribution Date pursuant to
Section 4.01(a)(i) of this Agreement, and all amounts owing to the Trustee
hereunder in excess of such amount shall be

                                       69

<PAGE>

paid solely as provided in this Agreement. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust.

         Section 8.08  Replacement of Trustee.

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

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

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

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

         (d)  the Trustee otherwise becomes incapable of acting.

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

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

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

         Section 8.09  Successor Trustee by Merger.

         If the Trustee 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; 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, 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 may adopt the

                                       70

<PAGE>

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 may authenticate such
Certificates either in the name of any predecessor hereunder or in the name of
the successor to the Trustee; 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 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.

         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 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

                                       71

<PAGE>

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.

         The Trustee shall be a corporation or association organized and doing
business under the laws of a state of the United States. The Trustee is subject
to supervision or examination by federal or state authority. The Trustee shall
at all times be reasonably acceptable to the Company and authorized to exercise
corporate trust powers. The Trustee shall have a combined capital and surplus of
at least $50,000,000 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].

         Section 8.13  Representations and Warranties.

         (a)  The Trustee hereby represents that:

              (i)   The Trustee is duly organized and validly existing as a New
    York banking corporation in good standing under the laws of the State of New
    York 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.

                                       72

<PAGE>

         Section 8.14 Directions to Trustee.

         The Trustee 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-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 liability and to its indemnity shall inure also to the Paying Agent,
and the Certificate Registrar.

         Section 8.16  Reports by the Trustee; Trust Fiscal Year.

         The Trustee, 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 Trustee,
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 January 31, 2004, the Trustee, shall file a Form 15 Suspension
Notification with respect to the Trust Fund, if applicable. Prior to March 31,
2004, the Trustee, on behalf of the Trust, shall file a Form 10-K, in substance
conforming to industry standards, with respect to the Trust Fund. The Company
will prepare and execute any certifications to be filed with the Form 10-K as
required under the Sarbanes-Oxley Act of 2002. The Trust hereby grants to the
Trustee, a limited power of attorney to execute and file each such document on
behalf of the Trust. Such power of attorney shall continue until the termination
of the Trust Fund. The Trustee, on behalf of the Trust, shall deliver to the
Seller 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 December 31 of each year.

                                       73

<PAGE>

                                   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 Trustee 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 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 Trustee, 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
Trustee, as agent for the Tax Matters Person, shall provide (i) to the Treasury
or other governmental authority such information as is

                                       74

<PAGE>

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 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 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 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 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 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 Trustee shall pay any remaining REMIC taxes out
of current or future amounts otherwise 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 Distribution Account, and shall reduce amounts
otherwise payable to Holders of regular interests in the related REMIC.

         (h)  The Trustee, 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 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)  Neither of the Trustee 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 Trustee will apply for an Employee Identification Number from
the Internal Revenue Service via a Form SS-4 or other acceptable method for
REMIC I, REMIC II and REMIC III and the Master REMIC.

                                       75

<PAGE>

         (l)  The Trustee shall treat the Supplemental Interest Trust as an
outside reserve fund within the meaning of Treasury Regulation Section
1.860G-2(h) that is owned by the holders of the Class AIO, Class O and Class R
Certificates and that is not an asset of any REMIC. The Trustee shall treat the
rights of the Class A-1, Class A-2, Class M-1, Class M-2 and Class M-3
Certificateholders to receive payments from the Supplemental Interest Trust as a
notional principal contract written by the Class AIO Certificateholder in favor
of the Class A-1, Class A-2, Class M-1, Class M-2 and Class M-3
Certificateholders. Thus, each Class A-1, Class A-2, Class M-1, Class M-2, Class
M-3 Certificate shall be treated as representing not only ownership of a regular
interest in the Master REMIC but also ownership of an interest in a notional
principal contract.

         Section 10.02 Prohibited Transactions and Activities.

         None of the Company, the Servicer nor the Trustee shall sell, dispose
of, or substitute for any of the Mortgage Loans, if such disposition,
acquisition, substitution, or acceptance would (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 and the Trustee created hereby (other than the obligation
of the Trustee 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 and the obligation of the Servicer to indemnify the
Trustee in accordance with Section 6.06) shall terminate upon notice to the
Trustee upon the earliest of (i) the Distribution Date on which the Certificate
Principal Balances of the Regular 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 May 2033. 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

                                       76

<PAGE>

unpaid Servicing Fees allocable to such Mortgage Loans and REO Properties, any
accrued and unpaid REMIC Available Funds Cap Shortfall Amount and Available
Funds Cap Carryforward Amount and any unpaid amount due the Trustee and the
Custodian under this Agreement (the "Termination Price").

         In connection with any such purchase pursuant to the preceding
paragraph, the Servicer shall deposit in the Distribution 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
Distribution Account on the Distribution Date of the Termination Price.

         (b)  In the event that the Certificate Principal Balances of all of the
Class A Certificates have not been reduced to zero by the Distribution Date in
May 2033, the Trustee, shall (i) 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, (ii) sell all of
the assets of the Trust Fund for cash in a commercially reasonable manner to
maximize the value thereof, pursuant to the terms of the plan of complete
liquidation, (iii) distribute the proceeds of the sale to the Certificateholders
in accordance with Section 4.01 hereof, and (iv) terminate the Trust. By their
acceptance of Certificates, the Holders thereof hereby agree to appoint the
Trustee as their attorney in fact to: (i) adopt such a plan of complete
liquidation (and the Certificateholders hereby appoint the Trustee as their
attorney in fact to sign such a 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 in accordance with the terms thereof.

         (c)  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 Trustee for payment
of the final distribution and cancellation, shall be given promptly by the
Trustee upon the Trustee 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 Trustee 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 Trustee therein specified.

         (d)  Upon presentation and surrender of the Certificates, the Trustee
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.

                                       77

<PAGE>

          (e)  In the event that all Certificateholders shall not surrender
their Certificates for final payment and cancellation on or before such final
Distribution Date, the Trustee shall promptly following such date cause all
funds in the Distribution 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 Trustee (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 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 or the Trustee terminates the Trust, each REMIC shall
be terminated in accordance with the following additional requirements, unless
the Trustee 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 Trustee 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 Trustee
     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 Trustee as their attorney in fact to: (i) adopt such a plan
of complete liquidation (and the Certificateholders hereby appoint the Trustee
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.

                                  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 or the Swap Counterparties (i)
to cure any

                                       78

<PAGE>

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 (A) any
Certificateholder, if evidenced by (i) written notice to the Company, the
Servicer 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 Company and the Trustee and (B) any Swap
Counterparty, if evidenced by an Opinion of Counsel delivered to the Servicer,
the Company, the Trustee and each Swap Counterparty. This Agreement may be
amended by the parties hereto without the consent of the Swap Counterparties
after the Class I Termination Date.

          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. Additionally, prior to entering
into any amendment, the Trustee shall be entitled to receive from the party
requesting such amendment an opinion of counsel stating that such amendment is
authorized any permitted pursuant to the terms of this Agreement.

          Promptly after the execution of any such amendment the Trustee 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
Trustee), otherwise at the 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

                                       79

<PAGE>

evidencing the authorization of the execution thereof by Certificateholders
shall be subject to such reasonable regulations as the Trustee may prescribe.

          The Trustee shall not 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 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

                                       80

<PAGE>

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 New York, 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 State of New York and the United
States District Court located in the Borough of Manhattan in The City of New
York, 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:

          (a)  in the case of the Company:

                    NovaStar Mortgage Funding Corporation
                    8140 Ward Parkway
                    Suite 300
                    Kansas City, Missouri 64114
                    Attention: Matt Kaltenrieder

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

                    NovaStar Mortgage, Inc.
                    8140 Ward Parkway
                    Suite 300
                    Kansas City, Missouri 64114
                    Attention: Matt Kaltenrieder

                                       81

<PAGE>

          (c)  in the case of Rating Agencies:

                    Moody's Investors Service Inc.
                    99 Church Street
                    New York, New York 10007
                    Attention: Nicolas Vassalli

                    Standard & Poor's
                    26 Broadway
                    New York, New York 10004-1064
                    Attention: Scott Mason

                    Fitch Ratings
                    One State Street Plaza, 32nd Floor
                    New York, New York 10004

          (d)  in the case of the Custodian:

                    Wachovia Bank, National Association
                    4527 Metropolitan Court
                    Suite C
                    Frederick, MD 21704
                    Attn: Edwin Aquino
                    Tel: (301) 874-4531
                    Fax: (301) 874-6055
                    Attention: Structured Finance Trust Services (NovaStar
                    Mortgage Funding Trust, Series 2003-1)

          (e)  in the case of the Trustee:

                    JPMorgan Chase Bank
                    4 New York Plaza, 6/th/ Floor
                    New York, NY 10004-2477
                    Attention: Institutional Trust Services (NovaStar Mortgage
                    Funding Trust, Series 2003-1)

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

                                       82

<PAGE>

          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, the Trustee
shall not 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, the Swap
Counterparties 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 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 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.

                                       83

<PAGE>

          (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 Trustee or the
Trust in reliance thereon, whether or not notation of such action is made upon
such Certificate.

                                       84

<PAGE>

          IN WITNESS WHEREOF, the Company, the Servicer, the Seller, Custodian
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 FUNDING
                                                CORPORATION,
                                                as Company


                                                By: /s/ Matt Kaltenrieder
                                                    ----------------------------
                                                    Name:   Matt Kaltenrieder
                                                    Title:  Vice President


                                                NOVASTAR MORTGAGE, INC.,
                                                as Servicer and as Seller


                                                By: /s/ Matt Kaltenrieder
                                                    ----------------------------
                                                    Name:   Matt Kaltenrieder
                                                    Title:  Vice President


                                                WACHOVIA BANK, NATIONAL
                                                ASSOCIATION,
                                                as Custodian


                                                By: /s/ Edwin Aquino
                                                    ----------------------------
                                                    Name:  Edwin Aquino
                                                    Title: Vice President


                                                JPMORGAN CHASE BANK,
                                                as Trustee

                                                By: /s/ Patricia Russo
                                                    ----------------------------
                                                    Name:  Patricia Russo
                                                    Title: Vice President



                [Pooling and Servicing Agreement Signature Page]

                                       85

<PAGE>

STATE OF MISSOURI       )
                        ) ss.:
COUNTY OF Jackson       )


          On the 25th day of February, 2003 before me, a notary public in and
for said State, personally appeared Matt Kaltenrieder known to me (or proved to
me on the basis of satisfactory evidence) to be a Vice President of NovaStar
Mortgage Funding Corporation, a Delaware 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.



                                    /s/ Myra N. Kerr
                                    -------------------------
Seal                                Notary Public

                                       86

<PAGE>

STATE OF MISSOURI       )
                        ) ss.:
COUNTY OF Jackson       )



          On the 25th day of February, 2003 before me, a notary public in and
for said State, personally appeared Matt Kaltenrieder known to me (or proved to
me on the basis of satisfactory evidence) to be a Vice President 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.



                                            /s/ Myra N. Kerr
                                            -----------------------------
Seal                                        Notary Public

                                       87

<PAGE>

STATE OF MARYLAND       )
                        ) ss.:
COUNTY OF Frederick     )



          On the 26th day of February, 2003 before me, a notary public in and
for said State, personally appeared Edwin Aquino known to me (or proved to me on
the basis of satisfactory evidence) to be a Vice President of Wachovia Bank,
National Association, a national banking association 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.



                                            /s/ Maureen K. Bodine
                                            --------------------------
Seal                                        Notary Public

                                       88

<PAGE>

STATE OF NEW YORK       )
                        ) ss.:
COUNTY OF _______       )



          On the 26th day of February, 2003 before me, a notary public in and
for said State, personally appeared Patricia M. F. Russo, known to me (or proved
to me on the basis of satisfactory evidence) to be Vice President of JPMorgan
Chase Bank 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.



                                         /s/ Margaret M. Price
                                         ------------------------
          Seal                           Notary Public

                                       89

<PAGE>

                                   APPENDIX A

                                   DEFINITIONS

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

     "Account": The Collection Account, the Pre-Funding Account, the
Supplemental Interest Account, and the Distribution 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 applicable 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 four
Business Days prior to the related Subsequent Transfer Date and shall be
substantially in the form attached hereto as Exhibit C.

     "Additional Mortgage Loan": A Mortgage Loan added to the Mortgage Pool
between the Cut-off Date and the Closing Date as discussed in the Prospectus
Supplement.

     "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, the Custodian Fee and the Trustee Fee with
respect to such Distribution Date.

     "Administrative Fee Rate": As to each Distribution Date, the sum of (i) the
Trustee Fee Rate, (ii) the Servicing Fee Rate, (iii) the Custodian Fee Rate and
(iv) 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

<PAGE>

ownership of voting securities, by contract or otherwise and "controlling" and
"controlled" shall have meanings correlative to the foregoing.

     "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 or the Class O Certificates, the Realized
Losses allocated to such Class of Certificates on such Distribution Date.

     "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 with the lowest appraised value (as reviewed and approved by the
Seller) obtained within 12 months of 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 May 2033.

     "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 (x) the aggregate cumulative amount of REMIC Available Funds
Cap Shortfall Amounts for such Class on all prior Distribution Dates over (y)
the aggregate cumulative amount of Supplemental Interest Payments actually paid
to the Holders of that Class on all prior Distribution Dates pursuant to those
clauses of Section 4.04(c) which relate to payments to that Class, 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.

                                       2

<PAGE>

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

     "Base Prospectus": The base Prospectus, dated February 24, 2003, 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 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 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 New York, or the states of
California or Kansas or in the city in which the corporate trust office of the
Trustee is 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 or Class R Certificate.

     "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) prior to the Rate Step-Up Date 0.38% per annum and (B) on
and after the Rate Step-Up Date, 0.76% per annum. With respect to the Class A-2
Certificates on each Distribution Date (A) prior to the Rate Step-Up Date, 0.39%
per annum and (B) on and after the Rate Step-Up Date, 0.78% per annum. With
respect to the Class M-1 Certificates on each Distribution Date (A) prior to the
Rate Step-Up Date, 0.95% per annum and (B) on and after the Rate Step-Up Date,
1.425% per annum. With respect to the Class M-2 Certificates on each
Distribution Date (A) prior to the Rate Step-Up Date, 2.00% per annum and (B) on
and after the Rate Step-Up Date, 3.00% per annum. With respect to the Class M-3
Certificates on each Distribution Date (A) prior to the Rate Step-Up Date, 4.00%
per annum and (B) on and after the Rate Step-Up Date, 6.00% per annum.

                                       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 I Certificate and
the Class O Certificates) immediately prior to any Distribution Date, an amount
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 plus the
outstanding Pre-Funded Amount over (B) the then aggregate Certificate Principal
Balances of the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates then outstanding. The Class AIO Certificates and the Class I
Certificate 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 Trustee, in its capacity as
Certificate Registrar, or any successor to the Trustee in such capacity.

     "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 Certificate": Any Class A-1 Certificate or Class A-2 Certificate.

     "Class A Principal Distribution Amount": The sum of the Class A-1 Principal
Distribution Amount and the Class A-2 Principal Distribution Amount.

     "Class A-1 Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (i) the Group I
Principal Remittance Amount for such Distribution Date and the denominator of
which is (ii) the Principal Remittance Amount for such Distribution Date.

     "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 Master REMIC.

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

     "Class A-1 Principal Distribution Amount": For any Distribution Date, an
amount equal to the excess of (x) the aggregate Certificate Principal Balance of
the Class A-1 Certificates immediately prior to that Distribution Date over (y)
the lesser of (A) the product of (i) 74.50% and (ii) the aggregate principal
balance of the Group I Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related

                                       4

<PAGE>

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 Group I 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 $4,827,386.

     The "Class A-2 Allocation Percentage" for any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (i) the Group II
Principal Remittance Amount for such Distribution Date and the denominator of
which is (ii) the Principal Remittance Amount for such Distribution Date.

     "Class A-2 Certificate": Any one of the Class A-2 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 Master REMIC.

     "Class A-2 Principal Distribution Amount": For any Distribution Date, an
amount equal to the excess of (x) the aggregate Certificate Principal Balance of
the Class A-2 Certificates immediately prior to that Distribution Date over (y)
the lesser of (A) the product of (i) 74.50% and (ii) the aggregate principal
balance of the Group II 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 Group II 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 $1,672,614.

     "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-7, representing the right to distributions as set
forth herein and therein and evidencing one or more regular interests in the
Master 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 over (y) the sum of (i) the Administrative Fees, (ii) the
Class I Monthly Distributable Amount, (iii) the REMIC Current Interest for the
Class A-1 Certificates, (iv) the REMIC Current Interest for the Class A-2
Certificates, (v) the REMIC Current Interest for the Class M-1 Certificates,
(vi) the REMIC Current Interest for the Class M-2 Certificates, (vii) the REMIC
Current Interest for the Class M-3 Certificates, and (viii) Excess Cashflow
Strip, but in no case shall the Class AIO Current Interest be less than zero.

     "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. In the event of a shortfall in the full amount necessary to pay both the
Class AIO Unpaid Interest Shortfall Amount and the Class

                                       5

<PAGE>

AIO Current Interest, the available funds will be applied first to the Class AIO
Unpaid Interest Shortfall Amount and then to the Class AIO Current Interest.

     "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 Pool Balance as of the first day of the preceding Due Period
plus any outstanding Pre-Funded Amount.

     "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 sum of (i) the
aggregate amount actually paid and distributed to the Holders of the Class AIO
Certificates on such immediately preceding Distribution Date and (ii) the amount
actually transferred to the Supplemental Interest Trust on such immediately
preceding Distribution Date pursuant to Section 4.01(a)(i)(B)(III) hereof and
used to pay Supplemental Interest Payments, plus interest on such sum, at the
Class AIO Pass-Through Rate for the related Accrual Period.

     "Class I Certificate": Any one of the Class I 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 Master REMIC.

     "Class I Monthly Interest Distributable Amount": On each Distribution Date
up to and including the Distribution Date in January 2006, the following:
Commencing on the first Distribution Date through and including the Distribution
Date in July 2004, an amount equal to the (positive) product of (x) 2.48207813%
(on a 30/360 basis) minus one-month LIBOR (on an actual/360 basis) and (y) the
lesser of the Pool Balance and a $800,000,000 notional amount. For the
Distribution Date commencing in August 2004 through and including the
Distribution Date in September 2004, an amount equal to the (positive) product
of (x) 2.41308621% (on a 30/360 basis) minus one-month LIBOR (on an actual/360
basis) and (y) the lesser of the Pool Balance and a $725,000,000 notional
amount. For the Distribution Date commencing in October 2004 through and
including the Distribution Date in November 2004, an amount equal to the
(positive) product of (x) 2.42336538% (on a 30/360 basis) minus one-month LIBOR
(on an actual/360 basis) and (y) the lesser of the Pool Balance and a
$650,000,000 notional amount. For the Distribution Date in December 2004, an
amount equal to the (positive) product of (x) 2.44901709% (on a 30/360 basis)
minus one-month LIBOR (on an actual/360 basis) and (y) the lesser of the Pool
Balance and a $585,000,000 notional amount. For the Distribution Date in January
2005, an amount equal to the (positive) product of (x) 2.56066456% (on a 30/360
basis) minus one-month LIBOR (on an actual/360 basis) and (y) the lesser of the
Pool Balance and a $395,000,000 notional amount. For the Distribution Date
commencing in February 2005 through and including the Distribution Date in July
2005, an amount equal to the (positive) product of (x) 2.80449074% (on a 30/360
basis) minus one-month LIBOR (on an actual/360 basis) and (y) the lesser of the
Pool Balance and a $270,000,000 notional amount. For the Distribution Date
commencing in August 2005 through and including the Distribution Date in
September 2005, an amount equal to the (positive) product of (x) 2.70964286% (on
a 30/360

                                       6

<PAGE>

basis) minus one-month LIBOR (on an actual/360 basis) and (y) the lesser of the
Pool Balance and a $245,000,000 notional amount. For the Distribution Date
commencing in October 2005 through and including the Distribution Date in
November 2005, an amount equal to the (positive) product of (x) 2.70346591% (on
a 30/360 basis) minus one-month LIBOR (on an actual/360 basis) and (y) the
lesser of the Pool Balance and a $220,000,000 notional amount. For the
Distribution Date in December 2005, an amount equal to the (positive) product of
(x) 2.70601351% (on a 30/360 basis) minus one-month LIBOR (on an actual/360
basis) and (y) the lesser of the Pool Balance and a $185,000,000 notional
amount. For the Distribution Date in January 2006, an amount equal to the
(positive) product of (x) 2.64000000% (on a 30/360 basis) minus one-month LIBOR
(on an actual/360 basis) and (y) the lesser of the Pool Balance and a
$75,000,000 notional amount. In the event that the Class I Monthly Interest
Distributable Amount is not a positive number, no payment will be made in
respect of the Class I Monthly Interest Distributable Amount. For each
Distributable Date commencing in February 2006, the Class I Monthly Interest
Distributable Amount shall be zero.

     "Class I Termination Date": The Distribution Date occurring in January
2006.

     "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-3, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

     "Class M-1 Principal Distribution Amount": The excess of (x) the sum of (i)
the aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A-1 Principal Distribution Amount,
and the Class A-2 Principal 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)
82.20% and (ii) the Pool Balance 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 Pool
Balance 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 $6,500,000.

     "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-4, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

     "Class M-2 Principal Distribution Amount": The excess of (x) the sum of (i)
the aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A-1 Principal Distribution Amount
and the Class A-2 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) 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

                                       7

<PAGE>

product of (i) 88.20% and (ii) the Pool Balance 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 Pool Balance 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 $6,500,000.

     "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-5, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

     "Class M-3 Principal Distribution Amount": The excess of (x) the sum of (i)
the aggregate Certificate Principal Balance of the Class A Certificates (after
taking into account the payment of the Class A-1 Principal Distribution Amount,
and the Class A-2 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) 93.00% and (ii)
the Pool Balance 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 Pool Balance 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 $6,500,000.

     "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-9, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master 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-10, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

     "Class P Monthly Distribution Amount": An amount equal to all prepayment
penalties on a Distribution Date received on the Mortgage Pool during the prior
Prepayment Period.

     "Class P Principal Distribution Date": The earlier of (i) the 35th
Distribution Date and (ii) the Distribution Date on which the Certificate
Principal Balances for all of the Class A Certificates are reduced to zero.

                                       8

<PAGE>


         "Class R Certificate": Any one of the Class R Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-10, representing the right to distributions as set
forth herein, and evidencing the R-I Interest, the R-II Interest, the R-III
Interest and the R-IV Interest, each the sole "residual interest" in REMIC I,
REMIC II, REMIC III and the Master REMIC, respectively.

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

         "Closing Date": February 27, 2003.

         "Closing Date Mortgage Loans": The Mortgage Loans included in the Trust
Fund as of the Closing Date identified in the Mortgage Loan Schedule in Exhibit
B.

         "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, and its successors and assigns.

         "Compensating Interest": With respect to any Determination Date, an
amount equal to the lesser of (i) the aggregate amount of Prepayment Interest
Shortfalls 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.

         "Converted Loan Purchase Agreement": The Converted Loan Purchase
Agreement, dated as of February 1, 2003, among the Converted Loan Purchaser, the
Custodian, 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, the Paying Agent
and the Certificate Registrar, the principal corporate trust office at which at
any particular time its

                                       9

<PAGE>

corporation trust business shall be administered, which office at the date of
execution of this Agreement is located at 4 New York Plaza, 6th Floor, New York,
New York 10004-2477, Attention: Institutional Trust Services, NovaStar Mortgage
Funding Trust, Series 2003-1.

         "Credit Enhancement Percentage": For any Distribution Date, is equal to
(i) the sum of the aggregate Certificate Principal Balances of the Mezzanine
Certificates and the Class O Certificates, divided by (ii) the Pool Balance, 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 and prior to taking into
account distributions of principal on the Mortgage Loans on such Distribution
Date.

         "Crossover Date": The earlier to occur of (i) the Distribution Date on
which the aggregate Certificate Principal Balance of the Class A Certificates is
reduced to zero; and (ii) the later to occur of (x) the Distribution Date
occurring in March 2006 and (y) the first Distribution Date on which the Credit
Enhancement Percentage for the Class A Certificates (calculated for this purpose
only after taking into account distributions of principal on the mortgage loans
but prior to the principal distributions to the certificates) is greater than or
equal to 25.50%.

         "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 Closing Date Mortgage
Loans as of the Cut-off Date plus the Original Pre-Funded Amount.

         "Custodian": Wachovia Bank, National Association, a national banking
association, and any successor thereto.

         "Custodian Fee": With respect to each Distribution Date, the product of
(i) $0.20 and (ii) the number of Mortgage Loans.

         "Custodian Fee Rate": The percentage equivalent expressed as a
fraction, the numerator of which is (i) the product of (a) the Custodian Fee and
(b) 12 and the denominator of which is (ii) the aggregate principal balance of
the Mortgage Loans as of the beginning of the Due Period.

         "Cut-off Date": With respect to each Closing Date Mortgage Loan, the
later of (i) February 1, 2003 and (ii) the date of origination of such Closing
Date Mortgage Loan.

         "Cut-off Date Aggregate Principal Balance": With respect to the
Mortgage Pool, the aggregate of the Cut-off Date Principal Balances of the
Closing Date Mortgage Loans of $1,084,764,759.12 consisting of $805,599,037.21
related to Group I and $279,165,721.91 related to Group II.

         "Cut-off Date Principal Balance": With respect to any Mortgage Loan,
the unpaid principal balance thereof as of the applicable 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).

                                       10

<PAGE>

         "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.

         "Deferred Interest": With respect to any REO Property, the current
portion of interest not currently paid by the Mortgagor that is added to the
principal balance of such REO Property.

         "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 I and Class R
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.

         "30-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 30 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 Pool Balance as of the
last day of such Due Period.

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

                                       11

<PAGE>

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

         "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 March 2003.

         "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, or (iv) a principal subsidiary of a bank holding company 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 $100,000,000, 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;

                                       12

<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 or its 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-1+" or
higher by S&P 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; and

         (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;

         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

                                       13

<PAGE>

excess of par. The Trustee 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 Trustee, (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.

         "Excess Cashflow": For any Distribution Date, the sum of (i) the
Overcollateralization Release Amount and (ii) the excess of (a) the Interest
Remittance Amount over (b) the sum of (w) the REMIC Monthly Interest
Distributable Amounts for the Class A Certificates and the Mezzanine
Certificates, (x) the Class AIO Monthly Interest Distributable Amount, (y) the
Class I Monthly Interest Distributable Amount and (z) the Administrative Fees,
each for such Distribution Date.

         "Excess Cashflow Strip": For any Distribution Date, 0.50% divided by 12
multiplied by the sum of (i) the Pool Balance as of the first day of the related
Due Period and (ii) any amounts on deposit in the Pre-Funding Account.

         "Extra Principal Distribution Amount": For any Distribution Date, is
the lesser of (x) the Excess Cashflow for such Distribution Date and (y) the
Overcollateralization Deficiency Amount for such Distribution Date.

         "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.

                                       14

<PAGE>

         "Fitch": Fitch Ratings, or its successor in interest.

         "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 Certificates
and the Mezzanine Certificates, LIBOR plus the related Certificate Margin.

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

         "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) the Distribution Date in May 2003.

         "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.

         "Group I Basic Principal Distribution Amount" means with respect to any
Distribution Date, the excess of (i) the Group I Principal Remittance Amount for
such Distribution Date, over (ii) the Overcollateralization Release Amount, if
any, for such Distribution Date multiplied by the Class A-1 Allocation
Percentage.

         "Group I Cross Collateralization Amount": For any Distribution Date,
the portion of the Group I Interest Remittance Amount remaining after payment of
the REMIC Monthly Interest Distributable Amount on the Class A-1 Certificates,
the related proportional amount of the Class I Monthly Distributable Amount and
the related proportional amount of the Administrative Fees.

         "Group I Interest Remittance Amount": For any Distribution Date, the
portion of the Interest Remittance Amount that was collected or advanced on the
Group I Mortgage Loans.

         "Group I Mortgage Loans": The Mortgage Loans allocated to Group I which
primarily support the Class A-1 Certificates.

         "Group I Principal Distribution Amount" with respect to any
Distribution Date is the sum of (i) the Group I Basic Principal Distribution
Amount for such Distribution Date and (ii) the Extra Principal Distribution
Amount for such Distribution Date multiplied by the Class A-1 Allocation
Percentage.

                                       15

<PAGE>

         "Group I Principal Remittance Amount": For any Distribution Date, the
portion of the Principal Remittance Amount that was collected or advanced on the
Group I Mortgage Loans plus, following the Funding Period any remaining
Pre-Funded Amounts related to the Group I Mortgage Loans.

         "Group II Basic Principal Distribution Amount" means with respect to
any Distribution Date, the excess of (i) the Group II Principal Remittance
Amount for such Distribution Date over (ii) the Overcollateralization Release
Amount, if any, for such Distribution Date multiplied by the Class A-2
Allocation Percentage.

         "Group II Cross Collateralization Amount": For any Distribution Date,
the portion of the Group II Interest Remittance Amount remaining after payment
of the REMIC Monthly Interest Distributable Amounts on the Class A-2
Certificates, the related proportional amount of the Class I Monthly
Distributable Amount and the related proportional amount of the Administrative
Fees.

         "Group II Interest Remittance Amount": For any Distribution Date, the
portion of the Interest Remittance Amount that was collected or advanced on the
Group II Mortgage Loans.

         "Group II Mortgage Loans:" The Mortgage Loans allocated to Group II
which primarily support the Class A-2 Certificates.

         "Group II Principal Distribution Amount" with respect to any
Distribution Date is the sum of (i) the Group II Basic Principal Distribution
Amount for such Distribution Date and (ii) the Extra Principal Distribution
Amount for such Distribution Date multiplied by the Class A-2 Allocation
Percentage.

         "Group II Principal Remittance Amount": For any Distribution Date, the
portion of the Principal Remittance Amount that was collected or advanced on the
Group II Mortgage Loans plus following the Funding Period any remaining
Pre-Funded Amounts related to the Group II Mortgage Loans.

         "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 Certificate or Class I Certificate), the
amount designated "Initial Certificate Principal Balance" on the face thereof.

                                       16

<PAGE>

         "Initial Mortgage Loan": The Mortgage Loans which are described (with
complete statistical information included) in the Prospectus Supplement.

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

         "Interest Remittance Amount": With respect to any Distribution Date,
that portion of the REMIC Available Funds for such Distribution Date allocable
to interest (excluding 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 Pool Balance as of the beginning of the prior Due Period minus (2) the
aggregate amount of Relief Act Shortfalls and Net Prepayment Interest Shortfalls
for the prior period.

         "Lender Letter": The lender letter #LL03-00 dated April 11, 2000 for
Fannie Mae Sellers.

         "LIBOR": All references to LIBOR herein are references to One-Month
LIBOR. With respect to any Accrual Period, the rate determined by the Trustee 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 Trustee 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 New York City, selected by the Trustee, at approximately 11:00
a.m., New York City 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
Trustee and the Trustee'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.

                                       17

<PAGE>

         "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 New York 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.

         "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.

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

         "Master REMIC": The REMIC established pursuant to Section 2.09 hereof.
The assets of the Master REMIC shall be the REMIC III Regular Interests.

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

         "Master REMIC Regular Interests": As defined in Section 2.09 hereof.

         "Maximum Collateral Amount": The sum of the Principal Balance as of the
Cut-off Date of the Closing Date Mortgage Loans and the Original Pre-Funded
Amount.

                                       18

<PAGE>

         "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.

         "MERS": Mortgage Electronic Registration Systems, Inc., a corporation
organized and existing under the laws of the State of Delaware, or any successor
thereto.

         "MERS System": The system of recording transfers of Mortgages
electronically maintained by MERS.

         "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": Each of (i) PMI Mortgage Insurance Co., an Arizona
mortgage insurance company and (ii) Mortgage Guaranty Insurance Corporation, a
Wisconsin private mortgage insurance company and their 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 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 S&P below AA, if
such MI Insurer is then rated by S&P.

         "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.

         "MIN": The Mortgage Identification Number for Mortgage Loans registered
with MERS on the MERS System.

         "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.

         "MOM Loan": With respect to any Mortgage Loan, MERS acting as the
mortgagee of such Mortgage Loan, solely as nominee for the originator of such
Mortgage Loan and its successors and assigns, at the origination thereof.

                                       19

<PAGE>

         "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 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 Closing
Date 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 due date;

         (viii) the type of Mortgaged Property;

         (ix)   the Monthly Payment in effect as of the Cut-off Date (with
respect to a Closing Date 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 a
Closing Date 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;

                                       20

<PAGE>

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

         (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;

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

         (xxiv)  if the Mortgage Loan is registered with MERS on the MERS
System, the MIN; and

         (xxv)   whether the Mortgage Loan is in Group I or Group II.

         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 Closing Date 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.

                                       21

<PAGE>

         "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.

         "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.

         "Net Prepayment Interest Shortfall": On any Distribution Date, the
excess, if any of (i) any Prepayment Interest Shortfall and (ii) any payments of
Compensating Interest made by the Servicer.

         "Net WAC": The weighted average Net Mortgage Rate on the Mortgage
Loans.

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

         "Non-REMIC Accounts" The Pre-Funding Account and the Supplemental
Interest Account held by the Supplemental Interest Trust.

         "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 Amount Test Event": Occurs when the Trustee determines,
pursuant to Section 4.03(f), that the scheduled notional amount that would be
used to calculate the Class I Monthly Interest Distributable Amount exceeds the
aggregate Certificate Principal Balance of the Underwritten Certificates on such
Distribution Date.

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

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

         "Officer's 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.

                                       22

<PAGE>

         "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 Trustee, 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 approximately
$215,235,240.88 ($159,878,677.08 related to Group I Mortgage Loans and
$55,356,563.80 related to Group II Mortgage Loans).

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

         "Overcollateralization Amount": For any Distribution Date, is equal to
(a) the sum of (i) the Pool Balance, after giving effect to distributions of
principal on the Mortgage Loans, and (ii) any outstanding Pre-Funded Amount,
minus (b) the aggregate Principal Balance of the Offered Certificates, after
giving effect to principal distributions to be made on the Offered Certificates
on such Distribution Date.

         "Overcollateralization Deficiency Amount": With respect to any
Distribution Date equals the amount, if any, by which the Required
Overcollateralization Amount exceeds the Overcollateralization Amount on such
Distribution Date (after giving effect to distributions in respect of the Group
I Basic Principal Distribution Amount and the Group II Basic Principal
Distribution Amount on such Distribution Date).

         "Overcollateralization Release Amount": With respect to any
Distribution Date, the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the excess, if any, of (i) the Overcollateralization
Amount for such Distribution Date (assuming that 100% of the Principal
Remittance Amount is applied as a principal payment on such Distribution Date)
over (ii) the Required Overcollateralization Amount for such Distribution Date.

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

         "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 I Certificate, Class AIO Certificate, Class P
Certificate, Class O Certificate or Residual Certificate, the portion of the
Class evidenced thereby, expressed

                                       23

<PAGE>

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.

         "Pre-Funding Account": The account established and maintained pursuant
to Section 4.05, 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 Principal 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 Principal Prepayment.

                                       24

<PAGE>

         "Prepayment Period": For any Distribution Date, the period commencing
on the day after the Determination Date in the month preceding the month in
which such Distribution Date falls (or, in the case of the first Distribution
Date, from the Cut-off Date) and ending on the Determination Date of the
calendar month in which such Distribution Date falls.

         "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 the case of the
Distribution Date immediately following the end of the Funding Period but no
later than the Distribution Date in May 2003, 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
February 24, 2003 relating to the public offering of the Offered Certificates.

         "Purchase Agreement": The agreement, dated as of February 1, 2003,
between the Seller, the Company, the Trustee and the Custodian, regarding the
transfer of the Mortgage Loans by the Seller to or at the direction of the
Company.

                                       25

<PAGE>

         "Qualified Liquidation": The meaning set forth from time to time in the
definition thereof at Section 860F(a)(4) 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 Trustee prior to any
such substitution.

         "Rate Step-up 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, Standard
& Poor's and Fitch. 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 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, P-1 or better in the case of
Moody's, F-1 or better in the case of Fitch 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 Fitch 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 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.

                                       26

<PAGE>

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

         "Reference Banks": Deutsche Bank, Barclay's Bank PLC, The Bank of
Tokyo-Mitsubishi, LTD. and National Westminster Bank PLC 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 Trustee 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 LIBOR
Page on the relevant Interest Determination Date and (iv) which have been
designated as such by the Trustee.

         "Regular Certificate": Any of the Class A Certificates, Mezzanine
Certificates, Class I 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 Distribution 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
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, and (iv) all
Advances made and Compensating Interest paid for such Distribution Date in
respect of the related Mortgage Loans, (v) on the Distribution Date following
the termination of the Funding Period but no later than the Distribution Date in
May 2003, the amount on deposit in the Pre-Funding Account at such time, and
(vi) on each Distribution Date on or prior to the Distribution Date in May 2003,
the amounts, if any, deposited by the Company into the Distribution Account
pursuant to Section 4.04(f) of the Pooling and Servicing Agreement.

         "REMIC Available Funds Cap": With respect to any Distribution Date, the
percentage equivalent of a fraction the numerator of which is the Interest
Remittance Formula Amount for that Distribution Date less the Class I Monthly
Interest Distributable Amount and Administrative Fees for that Distribution Date
and the denominator of which is the product of (i) actual days in

                                       27

<PAGE>

the related Accrual Period divided by 360 and (ii) the aggregate Certificate
Principal Balance of the Offered Certificates.

         "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 over (2) the interest due on such Class, calculated using the
REMIC Pass-Through Rate applicable to such Class.

         "REMIC I Balance": As to each Class of REMIC I Interests and any
Distribution Date, the Initial REMIC I Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "REMIC II Balance": As to each Class of REMIC II Interests and any
Distribution Date, the Initial REMIC II Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "REMIC III Balance": As to each Class of REMIC III Interests and any
Distribution Date, the Initial REMIC III Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "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 Net 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 Net Prepayment Interest
Shortfalls or Relief Act Shortfalls for that Distribution Date).

         "REMIC I Interests":  As defined in Section 2.09 hereof.

         "REMIC II Interests":  As defined in Section 2.09 hereof.

         "REMIC III Interests":  As defined in Section 2.09 hereof.

         "REMIC Interests Sale Agreement": The REMIC Interests Sale Agreement,
dated as February 1, 2003, 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": As defined in Section 2.09 hereof.

         "REMIC I Pass-Through Rate": As to each of the respective REMIC I
Interests, the applicable "REMIC I Pass-Through Rate" set forth in Section 2.09
hereof.

                                       28

<PAGE>

         "REMIC II Pass-Through Rate": As to each of the respective REMIC II
Interests, the applicable "REMIC II Pass-Through Rate" set forth in Section 2.09
hereof.

         "REMIC III Pass-Through Rate": As to each of the respective REMIC III
Interests, the applicable "REMIC III Pass-Through Rate" set forth in Section
2.09 hereof.

         "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 REMIC I Regular Interests, the REMIC II
Regular Interests, the REMIC III Regular Interests and the Master REMIC Regular
Interests.

         "REMIC I Regular Interests":  As defined in Section 2.09 hereof.

         "REMIC II Regular Interests":  As defined in Section 2.09 hereof.

         "REMIC III Regular Interests":  As defined in Section 2.09 hereof.

         "REMIC Trust": The segregated pool of assets containing 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.

                                       29

<PAGE>

         "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.

         "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.

         The "Required Overcollateralization Amount" for any Distribution Date
is equal to:

         (i)  prior to the Crossover Date, 3.50% of the sum of (i) the Pool
Balance of the Closing Date Mortgage Loans as of the Cut-Off Date, and (ii) the
Original Pre-Funded Amount.

         (ii) on or after the Crossover Date, the greater of:

              a. the lesser of:

                 (1) 3.50% of the sum of (i) the Pool Balance of the Closing
              Date Mortgage Loans as of the Cut-Off Date, (ii) the Original
              Pre-Funded Amount; and

                 (2) 7.00% of the current Pool Balance, after giving effect to
              distributions of principal on the Mortgage Loans; and

              b. 0.50% of the sum of (i) the Pool Balance of the Closing Date
         Mortgage Loans as of the Cut-Off Date and (ii) the Original Pre-Funded
         Amount as of the Closing Date.

                                       30

<PAGE>

         On any Distribution Date on which a Trigger Event is in effect, the
Required Overcollateralization Amount will be equal to the Required
Overcollateralization Amount as of the preceding Distribution Date.

         "Residual Certificate": The Class R Certificates representing
beneficial ownership of the Class R-I, Class R-II, Class R-III and Class R-IV
Interests.

         "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, any officer working
in the Corporate Trust Office 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 I Certificates, 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.

         "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, (iv) compliance with the
obligations under Section 3.13 hereof, and (v) expenses incurred in connection
with any Mortgage Loan being registered on the MERS System.

                                       31

<PAGE>

         "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 Pool Balance as of the first day of the related Due Period.

         "Servicing Fee Rate": With respect to any Mortgage Loan, 0.50% 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 Trustee 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 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.

         "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(a) 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 date of origination of such Mortgage Loan.

         "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.

         "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.

         "Subservicer": Any Person with which either Servicer has entered into a
Subservicing Agreement and which meets the qualifications of a Subservicer
pursuant to Section 3.02 hereof.

         "Subservicing Account": An account established by a Subservicer which
meets the requirements set forth in Section 3.06(e) and is otherwise acceptable
to the Servicer.

         "Subservicing Agreement": The written contract between either Servicer
and a Subservicer relating to servicing and administration of certain Mortgage
Loans as provided in Section 3.02 hereof.

                                       32

<PAGE>

         "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.

         "Supplemental Interest Account": An account established by the Trustee
pursuant to Section 4.04 and is otherwise acceptable to the applicable Servicer.

         "Supplemental Interest Trust": The trust established and maintained
pursuant to Section 4.04.

         "Supplemental Interest Amount Due": With respect to any Class of
Underwritten Certificates and any Distribution Date, the sum of (x) the REMIC
Available Funds Cap Shortfall Amount for such Class of Certificates and such
Payment Date and (y) the Available Funds Cap Carryforward Amount for such Class
and Distribution Date.

         "Supplemental Interest Payment": With respect to any Distribution Date:

         (i)   for the Class A-1 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class A-1 Certificates and (y) the
amounts on deposit and available for distribution in the Supplemental Interest
Trust on that Distribution Date;

         (ii)  for the Class A-2 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class A-2 Certificates and (y) the
amounts on deposit and available for distribution in the Supplemental Interest
Trust on that Distribution Date;

         (iii) for the Class M-1 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class M-1 Certificates and (y) any
remaining amounts on deposit and available for distribution in the Supplemental
Interest Trust after giving effect to the payment of the Supplemental Interest
Payment Amount for the Class A-1 and Class A-2 Certificates on that Distribution
Date;

         (iv)  for the Class M-2 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class M-2 Certificates and (y) any
remaining amounts on deposit and available for distribution in the Supplemental
Interest Trust after giving effect to the payment of the Supplemental Interest
Amount Due for the Class A-1, Class A-2, and the Class M-1 Certificates on that
Distribution Date; and

         (v)   for the Class M-3 Certificates, the lesser of (x) the
Supplemental Interest Payment Amount Due for the Class M-3 Certificates and (y)
any remaining amounts on deposit and available for distribution in the
Supplemental Interest Trust after giving effect to the payment of the
Supplemental Interest Amounts Due for the Class A-1, Class A-2, Class M-1 and
Class M-2 Certificates on that Distribution Date.

         "Swap Agreement": Any of the twelve interest rate Swap Agreements
between the Trustee, on behalf of the Trust and a Swap Counterparty which are
deemed to be assets of the Supplemental Interest Trust and not an asset of any
one of the REMICs created hereunder.

                                       33

<PAGE>

         "Swap Amount": The calculation of the Swap Amount is subject to the
verification and confirmation of the Swap Counterparties who are calculation
agents for the Swap Agreements. Swap Amount shall mean, on each Distribution
Date on or prior to the Class I Termination Date, the excess of (x) the product
of (i) the related fixed rate of interest, (ii) 30 divided by 360 and (iii) the
related notional amount over (y) the product of (i) LIBOR, (ii) the actual
number of days elapsed in the related Accrual Period divided by 360 and (iii)
the related notional amount (so long as such calculation results in a positive
number) which after the occurrence of a Notional Amount Test Event, shall be
calculated pursuant to Section 4.03(f).

         "Swap Counterparty": Shall mean Morgan Stanley Capital Services Inc.

         "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 (REMIC) Income
Tax Return, including Schedule Q thereto, Quarterly Notice to Residual Interest
Holders of REMIC Taxable Income or Net Loss Allocation, or any successor forms,
to be filed by the Trustee, on behalf of each REMIC, together with any and all
other information reports, forms 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).

         "Treasury Regulations": Regulations, including proposed or temporary
Regulations, promulgated under the Code. References herein to specific
provisions of proposed 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, on or after the Crossover Date, if either (i) the Rolling
60-Day Delinquency Average exceeds 17% of the Pool Balance at the end of the
related Due Period, or (ii) the Cumulative Loss Percentage for such Distribution
Date is greater than the applicable percentage set forth below with respect to
such Distribution Date:

             Distribution Date Occurring In:              Percentage
             -------------------------------              ----------

             March 2006                                      3.50%
             April 2006                                      3.57%
             May 2006                                        3.63%
             June 2006                                       3.70%
             July 2006                                       3.76%
             August 2006                                     3.83%

                                       34

<PAGE>

             September 2006                                 3.89%
             October 2006                                   3.96%
             November 2006                                  4.02%
             December 2006                                  4.09%
             January 2007                                   4.15%
             February 2007                                  4.22%
             March 2007                                     4.28%
             April 2007                                     4.35%
             May 2007                                       4.41%
             June 2007                                      4.48%
             July 2007                                      4.54%
             August 2007                                    4.61%
             September 2007                                 4.67%
             October 2007                                   4.74%
             November 2007                                  4.80%
             December 2007                                  4.87%
             January 2008                                   4.93%
             February 2008 and thereafter                   5.00%

        "Trust": NovaStar Mortgage Funding Trust 2003-1, the trust created
hereunder.

        "Trust Fund": All of the assets of the Trust, which is the trust created
hereunder consisting of the REMIC I, REMIC II, REMIC III, the Master REMIC, the
Pre-Funding Account and the Supplemental Interest Trust.

        "Trustee": JPMorgan Chase Bank, a New York banking corporation, 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 the first day of the
related Due Period.

        "Trustee Fee Rate": 0.0035% per annum.

        "Underwriters": Greenwich Capital Markets, Inc., Wachovia Securities,
Inc., Morgan Stanley & Co. Incorporated, and their successors and assigns.

        "Underwriting Agreement": The Underwriting Agreement dated February 24,
2003 among the Underwriters, the Company and the Seller with respect to the
offer and sale of the Underwritten 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
Certificates and Mezzanine Certificates.

                                       35

<PAGE>


        "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 substantial decisions of the trust.

        "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.

        "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
Certificates and the Mezzanine Certificates shall have 95% of the Voting Rights
(allocated among the Holders of the Class A 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 I Certificates shall have 1% of the Voting Rights, the
Class P Certificates shall have 1% of the Voting Rights and the Class R
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, Class I Certificates and the Class R
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 I Certificates, Class P Certificates and the Class R
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 R 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).

                                       36

<PAGE>

                                                                     Exhibit A-1

                          Form of Class A-1 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-1 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

<TABLE>
<S>                                      <C>                                    <C>
No.:  A-1-1                              Date: February 27, 2003                CUSIP:  66987XCD5

Original Principal Balance:              Registered Owner:                      Final Scheduled Distribution
$844,793,000                             CEDE & CO.                             Date: May 25, 2033

Percentage Interest:  100%               Pass-Through Rate:
                                         LIBOR +0.38%
</TABLE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Group I Mortgage Loan identified on the Mortgage
Loan Schedule attached as Exhibit B to that certain Pooling and Servicing
Agreement dated as of February 1, 2003 (the "Pooling and Servicing Agreement")
by and among NovaStar Mortgage Funding Corporation, as the company (the
"Company"), JPMorgan Chase Bank, as trustee (the "Trustee"), Wachovia Bank,
National Association, as the custodian (the "Custodian"), and NovaStar Mortgage,
Inc. as servicer (the "Servicer") and as seller (the "Seller"), including the
related Cut-off Date Principal Balance, all interest accruing thereon on and
after the Cut-off Date and all collections in respect

<PAGE>

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) the Company's interest in any insurance
policies in respect of such Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. 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.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class A-1 Certificates on
February 27, 2003 which aggregate amount was $844,793,000. The owner hereof is
entitled to principal payments on each Distribution Date, which will fully
amortize such Original Principal Amount over the period from the date of initial
delivery hereof to the final Distribution Date of the Class A-1 Certificates.
Therefore, the actual outstanding principal amount of this Certificate, on any
date subsequent to March 25, 2003 (the first Distribution Date) will be less
than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class A-1 Certificates (the "Class A-1 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-2 Certificates,
Class M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the

                                      A-1-2

<PAGE>

"Certificates." Terms capitalized herein and not otherwise defined herein shall
have the respective meanings set forth in the Pooling and Servicing Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class A-1
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to the
distribution described in Article IV of the Pooling and Servicing Agreement,
relating to such Distribution Date. Distributions will be made in immediately
available fluids to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class A-1 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class A-1 Certificates. The
Percentage Interest of each Class A-1 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class A-1 Certificate by $844,793,000.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive

                                      A-1-3

<PAGE>

distributions to the extent provided in the Pooling and Servicing Agreement with
respect to such Certificate or to institute suit for the enforcement of any such
distribution, and such right shall not be impaired without the consent of such
owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and the REMIC I, REMIC II and REMIC
III is effected pursuant to the Pooling and Servicing Agreement. In addition,
under certain circumstances relating to the qualification of either the Master
REMIC or any of REMIC I, REMIC II or REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                  The Class A-1 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class A-1 Certificates are
exchangeable for new Class A-1 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                                      A-1-4

<PAGE>

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                      A-1-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK, not in its
                                          individual capacity, but solely in its
                                          capacity as Trustee



                                        By: ____________________________________
                                            Name:
                                            Title:


Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee



By: ___________________________________
    Name:
    Title:

                                      A-1-6

<PAGE>

                                                                     Exhibit A-2

                          Form of Class A-2 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-2 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                Mortgage Loans The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

<TABLE>
<S>                                      <C>                                    <C>
No.:  A-2-1                              Date:  February 27, 2003               CUSIP: 66987XCE3

Original Principal Balance:              Registered Owner:                      Final Scheduled Distribution
$292,707,000                             CEDE & CO.                             Date: May 25, 2033

Percentage Interest:  100%               Pass-Through Rate:
                                         LIBOR +0.39%
</TABLE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Group II Mortgage Loan identified on the
Mortgage Loan Schedule attached as Exhibit B to that certain Pooling and
Servicing Agreement dated as of February 1, 2003 (the "Pooling and Servicing
Agreement") by and among NovaStar Mortgage Funding Corporation, as the company
(the "Company"), JPMorgan Chase Bank, as trustee (the "Trustee"), Wachovia Bank,
National Association, as the Custodian (the "Custodian"), and NovaStar Mortgage,
Inc. as servicer (the "Servicer") and as seller (the "Seller"), 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

<PAGE>

Mortgage Loan and which has been acquired by foreclosure or deed in lieu of
foreclosure; (iii) the Company's interest in any insurance policies in respect
of such Mortgage Loans; (iv) all proceeds of any of the foregoing; (v) the
rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust Fund. 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.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class A-2 Certificates on
February 27, 2003 which aggregate amount was $292,707,000. The owner hereof is
entitled to principal payments on each Distribution Date, which will fully
amortize such Original Principal Amount over the period from the date of initial
delivery hereof to the final Distribution Date of the Class A-2 Certificates.
Therefore, the actual outstanding principal amount of this Certificate, on any
date subsequent to March 25, 2003 (the first Distribution Date) will be less
than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class A-2 Certificates (the "Class A-2 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                                      A-2-2

<PAGE>

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class A-2
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to the
distribution described in Article IV of the Pooling and Servicing Agreement,
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class A-2 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class A-2 Certificates. The
Percentage Interest of each Class A-2 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class A-2 Certificate by $292,707,000.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such

                                      A-2-3

<PAGE>

Certificate or to institute suit for the enforcement of any such distribution,
and such right shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III
is effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II or REMIC III as a REMIC under the Code, the Mortgage
Loans may be sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and Servicing
Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                  The Class A-2 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class A-2 Certificates are
exchangeable for new Class A-2 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                                      A-2-4

<PAGE>

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                      A-2-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK, not in its
                                          individual capacity, but solely in its
                                          capacity as Trustee



                                        By: ____________________________________
                                            Name:
                                            Title:


Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee



By: _______________________________
    Name:
    Title:

                                      A-2-6

<PAGE>

                                                                     Exhibit A-3

                          Form of Class M-1 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-1 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

<TABLE>
<S>                                      <C>                                    <C>
No.:  M-1-1                              Date:  February 27, 2003               CUSIP: 66987XCF0

Original Principal Balance:              Registered Owner:                      Final Scheduled Distribution
$50,050,000                              CEDE & CO.                             Date: May 25, 2033

Percentage Interest:  100%               Pass-Through Rate:
                                         LIBOR +0.95%
</TABLE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company, (the "Company"),
JPMorgan Chase Bank, as trustee (the "Trustee"), Wachovia Bank, National
Association, as the Custodian (the "Custodian"), and NovaStar Mortgage, Inc. as
servicer (the "Servicer") and as seller (the "Seller"), 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

<PAGE>

and which has been acquired by foreclosure or deed in lieu of foreclosure; (iii)
the Company's interest in any insurance policies in respect of the Mortgage
Loans; (iv) all proceeds of any of the foregoing; (v) the rights of the Company
under the Purchase Agreement and (vi) all other assets included or to be
included in the Trust fund. 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.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-1 Certificates on
February 27, 2003 which aggregate amount was $50,050,000. The owner hereof is
entitled to principal payments on each Distribution Date, as hereinafter
described, which will fully amortize such Original Principal Amount over the
period from the date of initial delivery hereof to the final Distribution Date
of the Class M-1 Certificates. Therefore, the actual outstanding principal
amount of this Certificate, on any date subsequent to March 25, 2003 (the first
Distribution Date) will be less than the Original Principal Amount set forth
above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class M-1 Certificates (the "Class M-1 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                                      A-3-2

<PAGE>

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class M-1
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-1 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-1 Certificates. The
Percentage Interest of each Class M-1 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-1 Certificate by $50,050,000.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such

                                      A-3-3

<PAGE>

Certificate or to institute suit for the enforcement of any such distribution,
and such right shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III
is effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                  The Class M-1 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-1 Certificates are
exchangeable for new Class M-1 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                                      A-3-4

<PAGE>

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                      A-3-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK, not in its
                                          individual capacity, but solely in its
                                          capacity as Trustee



                                        By: ____________________________________
                                            Name:
                                            Title:


Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee



By: _______________________________
    Name:
    Title:

                                      A-3-6

<PAGE>

                                                                     Exhibit A-4

                          Form of Class M-2 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-2 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

          Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to the Trust or
its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.

          (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans and
other assets held in the Trust Fund.)

No.: M-2-1                  Date: February 27, 2003 CUSIP: 66987XCG8

Original Principal Balance: Registered Owner:       Final Scheduled Distribution
$39,000,000                 CEDE & CO.              Date: May 25, 2033

Percentage Interest: 100%   Pass-Through Rate:
                            LIBOR +2.00%

          The registered owner named above is the registered owner of a
fractional interest in (I) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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

<PAGE>

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) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. 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.

          The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class M-2 Certificates on February
27, 2003 which aggregate amount was $39,000,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-2
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to March 25, 2003 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

          In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

          SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT
CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G
AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

          THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

          NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

          This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2003-1, Class M-2 Certificates (the "Class M-2 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-1 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                                     A-4-2

<PAGE>

          Terms capitalized herein and not otherwise defined herein shall have
the respective meanings set forth in the Pooling and Servicing Agreement.

          On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing March 25, 2003, the owners of the Class M-2 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

          Each owner of record of a Class M-2 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class M-2 Certificates. The Percentage
Interest of each Class M-2 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class M-2 Certificate by $39,000,000.

          The Trustee is required to duly and punctually pay distributions with
respect to this Certificate in accordance with the terms hereof and the Pooling
and Servicing Agreement. Amounts properly withheld under the Code or applicable
to any owner shall be considered as having been paid by the Trustee to such
owner for all purposes of the Pooling and Servicing Agreement.

          The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any SubServicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

          This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

          No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

          Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such

                                     A-4-3

<PAGE>

Certificate or to institute suit for the enforcement of any such distribution,
and such right shall not be impaired without the consent of such owner.

          The Pooling and Servicing Agreement will terminate upon notice to the
Trustee upon the earliest of (i) the Distribution Date on which the Certificate
Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when a
Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III is
effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

          The Servicer may, at its option, terminate the Pooling and Servicing
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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

          The Trustee shall give written notice of termination of the Pooling
and Servicing Agreement to each owner in the manner set forth therein.

          As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

          The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

          The Class M-2 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-2 Certificates are
exchangeable for new Class M-2 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                                     A-4-4

<PAGE>

          The Trustee and any agent thereof may treat the person in whose name
this Certificate is registered as the owner hereof for all purposes, and none of
the Trustee or any such agent shall be affected by notice to the contrary.

                                     A-4-5

<PAGE>

          IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK, not in its
                                          individual capacity, but solely in its
                                          capacity as Trustee



                                        By: ____________________________________
                                            Name:
                                            Title:



Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee


By: _____________________________________
    Name:
    Title:

                                     A-4-6

<PAGE>

                                                                     Exhibit A-5

                          Form of Class M-3 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-3 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

<TABLE>
<CAPTION>
No.:  M-3-1                     Date:  February 27, 2003    CUSIP: 66987XCH6
<S>                             <C>                         <C>
Original Principal Balance:     Registered Owner:           Final Scheduled Distribution Date:
$31,200,000                     CEDE & CO.                  May 25, 2033

Percentage Interest:  100%      Pass-Through Rate:
                                LIBOR + 4.00%
</TABLE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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

<PAGE>

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) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. 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.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-3 Certificates on
February 27, 2003 which aggregate amount was $31,200,000. The owner hereof is
entitled to principal payments on each Distribution Date, as hereinafter
described, which will fully amortize such Original Principal Amount over the
period from the date of initial delivery hereof to the final Distribution Date
of the Class M-3 Certificates. Therefore, the actual outstanding principal
amount of this Certificate, on any date subsequent to March 25, 2003 (the first
Distribution Date) will be less than the Original Principal Amount set forth
above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class M-3 Certificates (the "Class M-3 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-2 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                                     A-5-2

<PAGE>

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class M-3
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-3 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-3 Certificates. The
Percentage Interest of each Class M-3 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-3 Certificate by $31,200,000.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such

                                     A-5-3

<PAGE>

Certificate or to institute suit for the enforcement of any such distribution,
and such right shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III
is effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                  The Class M-3 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-3 Certificates are
exchangeable for new Class M-3 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                                     A-5-4

<PAGE>

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                     A-5-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK, not in its
                                          individual capacity, but solely in its
                                          capacity as Trustee

                                        By: ____________________________________
                                            Name:
                                            Title:

Trustee Authentication

JPMORGAN CHASE BANK, not in its
    individual capacity, but solely in its
    capacity as Trustee

By: ______________________
     Name:
     Title:

                                      A-5-6

<PAGE>

                                                                     Exhibit A-6

                                   [RESERVED]

<PAGE>

                                                                     Exhibit A-7

                           Form of Class I Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS I CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                 Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, JPMorgan Chase Bank, in its capacity as trustee of the NovaStar
Mortgage Funding Trust, Series 2003-1, has an interest herein.

                 (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                 THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW OF
ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT
SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES
NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE
PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

                 NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

<PAGE>

<TABLE>
<CAPTION>
No.: I-1                    Date:  February 27, 2003               Final Scheduled Distribution
                                                                   Date: January 25, 2006
<S>                         <C>                                    <C>
Percentage Interest: 100%   Registered Owner:
                            JPMorgan Chase Bank, not in its
                            individual capacity but solely as
                            Trustee for the NovaStar Mortgage
                            Funding Trust, Series 2003-1
</TABLE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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) the Company's interest in any insurance
policies in respect of the Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust fund. 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 order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                                     A-7-2

<PAGE>

                  THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class I Certificates (the "Class I Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-2 Certificates, Class
M-3 Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class I
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class I Certificate will be entitled
to receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class I Certificates.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as

                                     A-7-3

<PAGE>

otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III
is effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                                     A-7-4

<PAGE>

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth, Class I Certificates are exchangeable
for new Class I Certificates of authorized denominations evidencing the same
aggregate principal amount.

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                     A-7-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                              JPMORGAN CHASE BANK, not in its
                                                individual capacity, but solely
                                                in its capacity as Trustee

                                              By: ______________________________
                                                  Name:
                                                  Title:


Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee

By: ____________________________________
    Name:
    Title:

                                     A-7-6

<PAGE>

                                                                     Exhibit A-8

                          Form of Class AIO Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS AIO CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation ("DTC"),
to the Trust or its agent for registration of transfer, exchange, or payment,
and any certificate issued is registered in the name of Cede & Co. or in such
other name as is requested by an authorized representative of DTC (and any
payment is made to Cede & Co. or to such other entity as is requested by an
authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

<TABLE>
<CAPTION>
No.: AIO-1                    Date:  February 27, 2003   CUSIP: 66987XCJ2
<S>                           <C>                        <C>
Notional Amount:              Registered Owner:          Final Scheduled Distribution
                              Cede & Co.                 Date: May 25, 2033
$1,300,000,000

Percentage Interest: 100%
</TABLE>

<PAGE>

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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) the Company's interest in any insurance
policies in respect of the Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. 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.

                  Each owner of record of a Class AIO Certificate will be
entitled to interest payments only on each Distribution Date, which shall be
calculated based on a notional principal balance equal to the aggregate
outstanding principal balance of the Mortgage Loans. The owner hereof will not
receive any distributions of principal.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN ONE OR MORE CLASSES OF "REGULAR INTERESTS" IN A "REAL
ESTATE MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED,
RESPECTIVELY, IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE "CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS
860A THROUGH 860G) OF THE CODE.

                  DISTRIBUTIONS ON THIS CERTIFICATE WILL BE MADE TO THE OWNER
HEREOF FOLLOWING THE PRIOR FUNDING OF AMOUNTS OWED TO CERTAIN SWAP
COUNTERPARTIES, AND FOLLOWING THE FUNDING OF SUPPLEMENTAL INTEREST PAYMENTS TO
CERTAIN OTHER CLASSES OF CERTIFICATES.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                                     A-8-2

<PAGE>

                  THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2003-1, Class AIO Certificates (the "Class AIO Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class A-1 Certificates, Class A-2 Certificates,
Class M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing March 25, 2003, the owners of the Class AIO
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
Class AIO Distribution Amount relating to such Distribution Date. Distributions
will be made in immediately available funds to such owners, by wire transfer or
by check mailed to the address of the person entitled thereto as it appears on
the Certificate Register.

                  The Trustee is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Trustee to such owner for all purposes of the Pooling and Servicing
Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                                     A-8-3

<PAGE>

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee upon the earliest of (i) the Distribution Date on which the
Certificate Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when
a Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III
is effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing 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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

                  The Trustee shall give written notice of termination of the
Pooling and Servicing Agreement to each owner in the manner set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                                     A-8-4

<PAGE>

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth, Class AIO Certificates are
exchangeable for new Class AIO Certificates of authorized denominations
evidencing the same aggregate principal amount.

                  The Trustee and any agent thereof may treat the person in
whose name this Certificate is registered as the owner hereof for all purposes,
and none of the Trustee or any such agent shall be affected by notice to the
contrary.

                                     A-8-5

<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                        JPMORGAN CHASE BANK,
                                          not in its individual capacity, but
                                          solely in its capacity as Trustee

                                        By: ____________________________________
                                            Name:
                                            Title:

Trustee Authentication

JPMORGAN CHASE BANK,
  not in its individual capacity, but
  solely in its capacity as Trustee

By: _________________________________
     Name:
     Title:

                                     A-8-6

<PAGE>

                                                                     Exhibit A-9

                           Form of Class P Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS P CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

          Unless this certificate is presented by an authorized representative
of The Depository Trust Company, a New York corporation ("DTC"), to the Trust or
its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.

          (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans held in
the Trust Fund.)

          NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE MADE
TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.: P-1                    Date: February 27, 2003 CUSIP: 66987XCK9

Original Principal Balance: Registered Owner:       Final Scheduled Distribution
$ 100                       Cede & Co.              Date: May 25, 2033

Percentage Interest: 100%

<PAGE>

          The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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) the Company's interest in any insurance
policies in respect of the Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. 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 order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

          SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT
CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTION 860G AND
860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

          THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

          NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

          THE HOLDER OF THIS CERTIFICATE IS ENTITLED TO PREPAYMENT CHARGES
COLLECTED WITH RESPECT TO THE MORTGAGE LOANS AND A SINGLE PRINCIPAL PAYMENT OF
$100 ON THE EARLIER OF (1) THE DISTRIBUTION DATE ON WHICH THE AGGREGATE
CERTIFICATE PRINCIPAL BALANCE OF THE CLASS A CERTIFICATES IS REDUCED TO ZERO, OR
(2) THE 35TH DISTRIBUTION DATE. THE HOLDERS OF THIS CERTIFICATE ARE NOT ENTITLED
TO ANY DISTRIBUTIONS OF INTEREST WITH RESPECT TO THE MORTGAGE LOANS.

                                     A-9-2

<PAGE>

          This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2003-1, Class P Certificates (the "Class P Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class A-1 Certificates, Class A-2 Certificates, Class AIO
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class I Certificates, Class O Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

          Terms capitalized herein and not otherwise defined herein shall have
the respective meanings set forth in the Pooling and Servicing Agreement.

          On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing March 25, 2003, the owners of the Class P Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the Prepayment
Charges relating to such Distribution Date. Furthermore, on the earlier of (i)
the distribution date on which the aggregate certificate principal balance is
reduced to zero, or (ii) the 35th Distribution Date, the owner of the Class P
Certificates on the Record Date will be entitled to the Certificate Principal
Balance on the Class P Certificates. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

          The Trustee is required to duly and punctually pay distributions with
respect to this Certificate in accordance with the terms hereof and the Pooling
and Servicing Agreement. Amounts properly withheld under the Code or applicable
to any owner shall be considered as having been paid by the Trustee to such
owner for all purposes of the Pooling and Servicing Agreement.

          The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any Sub-Servicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

          This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

                                     A-9-3

<PAGE>

          No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

          Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such owner.

          The Pooling and Servicing Agreement will terminate upon notice to the
Trustee upon the earliest of (i) the Distribution Date on which the Certificate
Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when a
Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III is
effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

          The Servicer may, at its option, terminate the Pooling and Servicing
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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

          The Trustee shall give written notice of termination of the Pooling
and Servicing Agreement to each owner in the manner set forth therein.

          As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

          The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

                                     A-9-4

<PAGE>

          As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class P Certificates are exchangeable for
new Class P Certificates of authorized denominations evidencing the same
aggregate principal amount.

          The Trustee and any agent thereof may treat the person in whose name
this Certificate is registered as the owner hereof for all purposes, and none of
the Trustee or any such agent shall be affected by notice to the contrary.

                                     A-9-5

<PAGE>

          IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                           JPMORGAN CHASE BANK,
                                             not in its individual capacity, but
                                             solely in its capacity as Trustee


                                           By: _________________________________
                                               Name:
                                               Title:

Trustee Authentication

JPMORGAN CHASE BANK,
  not in its individual capacity, but
  solely in its capacity as Trustee


By: _________________________________
    Name:
    Title:

                                      A-9-6

<PAGE>

                                                                    Exhibit A-10


                           Form of Class O Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS O CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

       (This certificate does not represent an interest in, or an obligation of,
nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans and
other assets held in the Trust Fund.)

       THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW OF
ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT
SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES
NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE
PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

       NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE MADE TO
ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING INDIVIDUAL
RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO TITLE I OF
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR
SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN") OR TO ANY
ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.: O-1                    Date: February 27, 2003 Final Scheduled Distribution
                                                    Date: May 25, 2033

Original Principal Balance: Registered Owner:
$42,249,900                 NovaStar Certificates
                            Financing Corporation

Percentage Interest:  100%

<PAGE>

       The registered owner named above is the registered owner of a fractional
interest in (i) each Mortgage Loan identified on the Mortgage Loan Schedule
attached as Exhibit B to that certain Pooling and Servicing Agreement dated as
of February 1, 2003 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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) the Company's interest in any insurance
policies in respect of the Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. 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.

       Each owner of record of a Class O Certificate will be entitled to certain
distributions, as described under Article IV of the Pooling and Servicing
Agreement.

       In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

       SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT
CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G
AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

       THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND, NOTWITHSTANDING
REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY PERSON IS
REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX PURPOSES).

       NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

       THIS CERTIFICATE IS A PRINCIPAL ONLY CERTIFICATE. THE HOLDER OF THIS
CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF INTEREST WITH RESPECT
TO THE MORTGAGE LOANS.

                                     A-10-2

<PAGE>

       This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2003-1, Class O Certificates (the "Class O Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class A-1 Certificates, Class A-2 Certificates, Class AIO
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class I Certificates, Class P Certificates, and Class R
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

       Terms capitalized herein and not otherwise defined herein shall have the
respective meanings set forth in the Pooling and Servicing Agreement.

       On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing March 25, 2003, the owners of the Class O Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the Class O
Distribution Amount relating to such Distribution Date. Distributions will be
made in immediately available funds to such owners, by wire transfer or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register.

       The Trustee is required to duly and punctually pay distributions with
respect to this Certificate in accordance with the terms hereof and the Pooling
and Servicing Agreement. Amounts properly withheld under the Code or applicable
to any owner shall be considered as having been paid by the Trustee to such
owner for all purposes of the Pooling and Servicing Agreement.

       The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any SubServicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

       This Certificate does not represent a deposit or other obligation of, or
an interest in, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

       No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

                                     A-10-3

<PAGE>

       Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such owner.

       The Pooling and Servicing Agreement will terminate upon notice to the
Trustee upon the earliest of (i) the Distribution Date on which the Certificate
Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when a
Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III is
effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust 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 of the Pooling and
Servicing Agreement.

       The Servicer may, at its option, terminate the Pooling and Servicing
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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

       The Trustee shall give written notice of termination of the Pooling and
Servicing Agreement to each owner in the manner set forth therein.

       As provided in the Pooling and Servicing Agreement and subject to certain
limitations therein set forth and referred to on the face hereof, the transfer
of this Certificate is registerable in the Certificate Register upon surrender
of this Certificate for registration of transfer at the office designated as the
location of the Certificate Register, and thereupon one or more new certificates
of like class, tenor and Percentage Interest will be issued to the designated
transferee or transferees.

       The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

       As provided in the Pooling and Servicing Agreement and subject to certain
limitations therein set forth, Class O Certificates are exchangeable for new
Class O Certificates of authorized denominations evidencing the same aggregate
principal amount.

                                     A-10-4

<PAGE>

       The Trustee and any agent thereof may treat the person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Trustee or any such agent shall be affected by notice to the contrary.

                                     A-10-5

<PAGE>

       IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.


                                             JPMORGAN CHASE BANK, not in its
                                               individual capacity, but solely
                                               in its capacity as Trustee



                                             By: _______________________________
                                                 Name:
                                                 Title:



Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely
  in its capacity as Trustee



By: __________________________________
    Name:
    Title:

                                     A-10-6

<PAGE>

                                                                    Exhibit A-11

                           Form of Class R Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2003-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS R CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

          (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans held in
the Trust Fund.)

          THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW OF
ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT
SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES
NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE
PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

          NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE MADE
TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.: R-[I/II/III/IV]      Date: February 27, 2003   Final Scheduled Distribution
                                                    Date: May 25, 2033

Percentage Interest: 100% Registered Owner:
                          NovaStar REMIC Financing
                          Corporation

<PAGE>

          The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of February 1, 2003 (the "Pooling and Servicing Agreement") by and
among NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the Custodian (the
"Custodian"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), 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) the Company's interest in any insurance
policies in respect of the Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. 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.

          Each owner of record of a Class R Certificate will be entitled to
certain distributions as described in Section 2.09 of the Pooling and Servicing
Agreement.

          In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

          SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS
"RESIDUAL INTERESTS" IN FOUR "REAL ESTATE MORTGAGE INVESTMENT CONDUITS"
("REMICs") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D
OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

          THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

          TRANSFER OF THIS CLASS R CERTIFICATE IS RESTRICTED AS SET FORTH IN THE
POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS R CERTIFICATE MAY BE
MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION 860E(5) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH TERM INCLUDES THE
UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN
GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR INSTRUMENTALITY OF ANY
OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE INSTRUMENTALITIES), ANY COOPERATIVE
ORGANIZATION FURNISHING ELECTRIC ENERGY OR PROVIDING THEREOF SERVICE TO PERSONS
IN RURAL AREAS, OR ANY ORGANIZATION (OTHER THAN A FARMERS' COOPERATIVE) THAT IS
EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX ON
UNRELATED BUSINESS INCOME. NO TRANSFER OF THIS CLASS R

                                     A-11-2

<PAGE>

CERTIFICATE WILL BE REGISTERED BY THE TRUSTEE UNLESS THE PROPOSED TRANSFEREE HAS
DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE PROPOSED
TRANSFEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE CLASS R
CERTIFICATE FOR THE ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF THE FORM
OF AFFIDAVIT REQUIRED OF EACH PROPOSED TRANSFEREE IS ON FILE AND AVAILABLE FROM
THE TRUSTEE.

          A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY GIVE RISE
TO A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN AGENT
ACTING FOR THE TRANSFEREE. A PASS-THRU ENTITY THAT HOLDS THIS CLASS R
CERTIFICATE AND THAT HAS A DISQUALIFIED ORGANIZATION AS A RECORD OWNER IN ANY
TAXABLE YEAR GENERALLY WILL BE SUBJECT TO A TAX FOR EACH SUCH YEAR EQUAL TO THE
PRODUCT OF (A) THE AMOUNT OF EXCESS INCLUSIONS WITH RESPECT TO THE PORTION OF
THIS CERTIFICATE OWNED THROUGH SUCH PASS-THRU ENTITY BY SUCH DISQUALIFIED
ORGANIZATION AND (B) THE HIGHEST MARGINAL FEDERAL TAX RATE ON CORPORATIONS. FOR
PURPOSES OF THE PRECEDING SENTENCE, THE TERM "PASS-THRU" ENTITY INCLUDES
REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, COMMON TRUST
FUNDS, PARTNERSHIPS, TRUSTS, ESTATES, COOPERATIVES TO WHICH PART I OF SUBCHAPTER
T, CHAPTER 1 OF THE CODE APPLIES AND, EXCEPT AS PROVIDED IN REGULATIONS,
NOMINEES.

          NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

          This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series 2003-1
Class R Certificates (the "Class R Certificates") and issued under and subject
to the terms, provisions and conditions of the Pooling and Servicing Agreement,
to which the owner of this Certificate, by virtue of acceptance hereof assents,
and is bound. Also issued under the Pooling and Servicing Agreement are Class
A-1 Certificates, Class A-2 Certificates, Class AIO Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class I
Certificates, Class P Certificates and Class O Certificates, and all such
Certificates are collectively referred to as the "Certificates."

          Terms capitalized herein and not otherwise defined herein shall have
the respective meanings set forth in the Pooling and Servicing Agreement.

          On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing March 25, 2003, the owners of the Class R Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by

                                     A-11-3

<PAGE>

wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

          The Trustee is required to duly and punctually pay distributions with
respect to this Certificate in accordance with the terms hereof and the Pooling
and Servicing Agreement. Amounts properly withheld under the Code or applicable
to any owner shall be considered as having been paid by the Trustee to such
owner for all purposes of the Pooling and Servicing Agreement.

          The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any SubServicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

          This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

          No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

          Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such owner.

          The Pooling and Servicing Agreement will terminate upon notice to the
Trustee upon the earliest of (i) the Distribution Date on which the Certificate
Principal Balances of the Regular 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, (iv) the Distribution Date in May 2033 and (v) at any time when a
Qualified Liquidation of the Master REMIC and REMIC I, REMIC II and REMIC III is
effected pursuant to the Pooling and Servicing Agreement. In addition, under
certain circumstances relating to the qualification of either the Master REMIC
or any of REMIC I, REMIC II and REMIC III as a REMIC under the Code, the
Mortgage Loans may be sold, thereby affecting the early retirement of the
Certificates. Notwithstanding the foregoing, in no event shall the Trust hereby
continue beyond the expiration of 21 years from the death of the last survivor
of the

                                     A-11-4

<PAGE>

descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

          The Servicer may, at its option, terminate the Pooling and Servicing
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 and any accrued and unpaid Available
Funds Cap Carryforward Amount.

          The Trustee shall give written notice of termination of the Pooling
and Servicing Agreement to each owner in the manner set forth therein.

          As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

          The Trustee is required to furnish certain information on each
Distribution Date to the owner of this Certificate, as more fully described in
the Pooling and Servicing Agreement.

          As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class R Certificates are exchangeable for
new Class R Certificates of authorized denominations evidencing the same
aggregate principal amount.

          The Trustee and any agent thereof may treat the person in whose name
this Certificate is registered as the owner hereof for all purposes, and none of
the Trustee or any such agent shall be affected by notice to the contrary.

                                     A-11-5

<PAGE>

          IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                            JPMORGAN CHASE BANK, not in its
                                              individual capacity, but solely in
                                              its capacity as Trustee


                                            By: ________________________________
                                                Name:
                                                Title:

Trustee Authentication

JPMORGAN CHASE BANK, not in its
  individual capacity, but solely in its
  capacity as Trustee


By: _____________________________
    Name:
    Title:

                                     A-11-6

<PAGE>

                                                                       Exhibit B

                             Mortgage Loan Schedule

                       [On File with Dewey Ballantine LLP]

<PAGE>

                                                                       Exhibit C

                             Form of Addition Notice

                              ______________, 2002

VIA FEDERAL EXPRESS

JPMorgan Chase Bank
4 New York Plaza, 6/th/ Floor
New York, New York 10004
Attn: Institutional Trust Services - NovaStar Series 2003-1

     Re:  Mortgage Loan Purchase Agreement, dated as of February 1, 2003 (the
          "Purchase Agreement"), among NovaStar Mortgage, Inc. (the "Seller"),
          NovaStar Mortgage Funding Corporation (the "Company"), Wachovia Bank,
          National Association, as Custodian (the "Custodian") and JPMorgan
          Chase Bank, as trustee (the "Trustee"), relating to NovaStar Home
          Equity Loan Asset-Backed Certificates, Series 2003-1

Ladies and Gentlemen:

          Pursuant to Section 2.02(b)(i) of the above-captioned Purchase
Agreement, the Seller has designated the Subsequent Mortgage Loans (see
subsequent mortgage loan schedule attached hereto) to be sold to the Company,
and then sold by the Company to the Trust, on ____________, with an aggregate
principal balance of $______________. Capitalized terms not otherwise defined
herein have the meaning set forth in the Purchase Agreement.

          Please acknowledge your receipt of this notice by countersigning the
enclosed copy in the space indicated below and returning it to the attention of
the undersigned.

                                          Very truly yours,

                                          NOVASTAR MORTGAGE, INC.

                                          By:  __________________________
                                                 Matt Kaltenrieder
                                                 Vice President

Acknowledged and agreed:

JPMORGAN CHASE BANK, not in its
individual capacity, but solely in its capacity as Trustee

By: ___________________________

<PAGE>

                                                                       Exhibit D

                     Form of Subsequent Transfer Instrument

      [See Exhibits 2(A) and 2(B) to the Mortgage Loan Purchase Agreement]

<PAGE>

                                                                       Exhibit E

                               Request for Release

                                                              [date]

To:  Wachovia Bank, National Association,
     as Custodian and JPMorgan Chase Bank,
     as Trustee

     Re:  Pooling and Servicing Agreement, dated as of February 1, 2003
          NovaStar Home Equity Loan Asset-Backed Certificates, Series 2003-1

          In connection with the administration of the pool of Mortgage Loans
held by you as Custodian, we request the release, and acknowledge receipt, of
the (Mortgage File/[specify document]) for the Mortgage Loan described below,
for the reason indicated.

Mortgagor's Name, Address & Zip Code:

Mortgage Loan Number:

Reason for Requesting Documents (check one)

--------------------------------------------------------------------------------
____  1.    Mortgage Loan Paid in Full
            (Servicer hereby certifies that all amounts received in connection
            therewith have been credited to the Collection Account and remitted
            to the Trustee for deposit into the Distribution Account pursuant to
            the Pooling and Servicing Agreement.)
--------------------------------------------------------------------------------
____  2.    Mortgage Loan Liquidated
            (Servicer hereby certifies that all proceeds of foreclosure,
            insurance or other liquidation have been finally received and
            credited to the Collection Account and remitted to the Trustee for
            deposit into the Distribution Account pursuant to the Pooling and
            Servicing Agreement.)
--------------------------------------------------------------------------------
____  3.    Mortgage Loan in Foreclosure

--------------------------------------------------------------------------------
____  4.    Mortgage Loan Purchased Pursuant to Section 11.01 of the Pooling and
            Servicing Agreement.

--------------------------------------------------------------------------------
____  5.    Mortgage Loan Repurchased or Substituted pursuant to Article II or
            III of the Pooling and Servicing Agreement (Seller hereby certifies
            that the repurchase price or Substitution Adjustment has been
            credited to the Collection Account and that the substituted mortgage
            loan is a Qualified Substitute Mortgage Loan.)
--------------------------------------------------------------------------------
____ 6.     Other
            (explain) ___________________________________________________
--------------------------------------------------------------------------------

<PAGE>

          If box 1 or 2 above is checked, and if all or part of the Mortgage
File was previously released to us, please release to us our previous receipt on
file with you, as well as any additional documents in your possession relating
to the above specified Mortgage Loan.

          If box 3, 4, 5 or 6 above is checked, upon our return of all of the
above documents to you as Custodian, please acknowledge your receipt by signing
in the space indicated below, and returning this form.

                                         NovaStar Mortgage, Inc.,
                                         as [Servicer][Seller]

                                         By: ___________________________
                                             Name:
                                             Title:

Documents returned to Custodian:

Wachovia Bank, National Association,
as Custodian

By:___________________________
   Name:
   Title:

Date:_________________________

Remittance returned to Trustee:

JPMORGAN CHASE BANK, not in its
individual capacity, but solely in its capacity as Trustee

By: __________________________
    Name:
    Title:

Date:_________________________

                                      E-2

<PAGE>

                                                                     Exhibit F-1

                          Form of Initial Certification

                                                     [Date]

NovaStar Mortgage, Inc.
8140 Ward Parkway, Suite 300
Kansas City, Missouri 64114
Attention: Chris Miller, Senior Vice President

NovaStar Mortgage Funding Corporation
8140 Ward Parkway, Suite 300
Kansas City, Missouri 64114
Attention: Chris Miller, Senior Vice President

Wachovia Bank, National Association
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn: NovaStar Mortgage Funding Trust,
      Series 2003-1

JPMorgan Chase Bank
4 New York Plaza, 6/th/ Floor
New York, New York 10004
Attn: Institutional Trust Services - NovaStar Series 2003-1

     Re:  Pooling and Servicing Agreement, dated as of February 1, 2003 (the
          "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
          Corporation, Wachovia Bank, National Association (the "Custodian") and
          JPMorgan Chase Bank (the "Trustee"), relating to the NovaStar Mortgage
          Funding Trust, Series 2003-1 Home Equity Loan Asset-Backed
          Certificates

Gentlemen:

          In accordance with Section 2.03 of the above-captioned Agreement, and
Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as of February 1,
2003 (the "Purchase Agreement" and, together with the Agreement, the
"Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Custodian, the Trustee and Wachovia Bank, National Association,
the undersigned, as Custodian, on behalf of the Trustee, hereby certifies that
as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any
Mortgage Loan paid in full or listed on the attachment hereto) it has reviewed
the Mortgage File and the Mortgage Loan Schedule and has determined that: (i)
all documents required to be included in the Mortgage File are in its
possession; (ii) such documents have been reviewed by it and appear regular on
their face and relate to such Mortgage Loan; and (iii) based on examination by
it, and only as to such documents, the information set forth in items (i) -
(vii) and (xiv) of the definition or description of "Mortgage Loan Schedule" is
correct.

<PAGE>

          The Custodian, on behalf of the Trustee, has made no independent
examination of any documents contained in each Mortgage File beyond the review
specifically required in the above-referenced Agreements. The Custodian, on
behalf of the Trustee, makes no representation that any documents specified in
clause (vi) of Section 2.01(c) of the Purchase Agreement should be included in
any Mortgage File. The Custodian, on behalf of the Trustee, makes no
representations as to and shall not be responsible to verify: (i) the validity,
legality, sufficiency, enforceability, due authorization, recordability or
genuineness of any of the documents contained in each Mortgage File of any of
the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan, or (iii) the existence of any assumption, modification, written assurance
or substitution agreement with respect to any Mortgage File if no such documents
appear in the Mortgage File delivered to the Custodian, on behalf of the
Trustee.

          Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Agreement.

                                     WACHOVIA BANK, NATIONAL
                                     ASSOCIATION, not in its
                                     individual capacity but solely as Custodian

                                     By: _________________________________
                                         Name:
                                         Title:

                                      F-2

<PAGE>

                                                                     Exhibit F-2

                           Form of Final Certification

                                                  [Date]

NovaStar Mortgage, Inc.
8140 Ward Parkway, Suite 300
Kansas City, Missouri 64114
Attention:  Chris Miller, Senior Vice President

NovaStar Mortgage Funding Corporation
8140 Ward Parkway, Suite 300
Kansas City, Missouri 64114
Attention:  Chris Miller, Senior Vice President

Wachovia Bank, National Association
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
         Series 2003-1

JPMorgan Chase Bank
4 New York Plaza, 6/th/ Floor
New York, New York 10004
Attn: Institutional Trust Services - NovaStar Series 2003-1

     Re:  Pooling and Servicing Agreement, dated as of February 1, 2003 (the
          "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
          Corporation, Wachovia Bank, National Association (the "Custodian") and
          JPMorgan Chase Bank (the "Trustee") relating to the NovaStar Mortgage
          Funding Trust, Series 2003-1 Home Equity Loan Asset-Backed
          Certificates

Gentlemen:

          In accordance with Section 2.03 of the above-captioned Agreement, and
Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as of February 1,
2003 (the " Purchase Agreement" and, together with the Agreement, the
"Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Custodian and the Trustee, the undersigned, as Custodian, on
behalf of the Trustee, hereby certifies that as to each Mortgage Loan listed in
the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed
on the attachment hereto) it has received the documents set forth in Section
2.01(c) of the Mortgage Loan Purchase Agreement.

          The Custodian, on behalf of the Trustee, has made no independent
examination of any documents contained in each Mortgage File beyond the review
specifically required in the Agreements. The Custodian, on behalf of the
Trustee, makes no representation that any documents specified in clause (vi) of
Section 2.01(c) should be included in any Mortgage File. The Custodian, on
behalf of the Trustee, makes no representations as to and shall not be
responsible to verify: (i) the validity, legality, sufficiency, enforceability,
due authorization,

<PAGE>

recordability or genuineness of any of the documents contained in each Mortgage
File of any of the Mortgage Loans identified on the Mortgage Loan Schedule, (ii)
the collectability, insurability, effectiveness or suitability of any such
Mortgage Loan or (iii) the existence of any assumption, modification, written
assurance or substitution agreement with respect to any Mortgage File if no such
documents appear in the Mortgage File delivered to the Custodian, on behalf of
the Trustee.

          Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Agreement.

                                    WACHOVIA BANK, NATIONAL
                                    ASSOCIATION, not in its
                                    individual capacity but solely as Custodian


                                    By: _________________________________
                                        Name:
                                        Title:

                                     F-2-2

<PAGE>

                                                                       Exhibit G

                            Form of Investment Letter

NovaStar Mortgage, Inc.
8140 Ward Parkway, Suite 300
Kansas City, Missouri 64114
Attention:  Chris Miller, Senior Vice President

JPMorgan Chase Bank
4 New York Plaza, 6/th/ Floor
New York, New York 10004
Attn: Institutional Trust Services - NovaStar Series 2003-

Ladies and Gentlemen:

          The undersigned (the "Transferee") has agreed to purchase from
________ (the "Transferor") the following certificates:

          Class                     Number
          __
          __
          __
          __
          __

          I. The Transferee is (check one):

--------------------------------------------------------------------------------
          __   (i) An insurance company, as defined in Section 2(13) of the
               Securities Act of 1933, as amended (the "Securities Act"), (ii)
               an investment company registered under the Investment Company Act
               of 1940, as amended (the "Investment Company Act"), (iii) a
               business development company as defined in Section 2(a)(48) of
               the Securities Act, (iv) a Small Business Investment Company
               licensed by the U.S. Small Business Administration under Section
               301(c) or (d) of the Small Business Investment Act of 1958, as
               amended, (v) a plan established and maintained by a state, its
               political subdivisions, or any agency or instrumentality of a
               state or its political subdivisions, for the benefit of its
               employees, (vi) an employee benefit plan within the meaning of
               Title I of the Employee Retirement Income Security Act of 1974,
               as amended ("ERISA"), (vii) a business development company as
               defined in Section 202(a)(22) of the Investment Advisors Act of
               1940, as amended, (viii) an organization described in Section
               501(c)(3) of the Internal Revenue Code, corporation (other than a
               bank as defined in Section 3(a)(2) of the Securities Act or a
               savings and loan association or other institution referenced in
               Section 3(a)(2) of
--------------------------------------------------------------------------------

<PAGE>
--------------------------------------------------------------------------------
               the Securities Act or a foreign bank or savings and loan
               association or equivalent institution), partnership, or
               Massachusetts or similar business trust; or (ix) an investment
               advisor registered under the Investment Advisors Act of 1940, as
               amended, which, for each of (i) through (ix), owns and invests on
               a discretionary basis at least $100 million in securities other
               than securities of issuers affiliated with the Transferee,
               securities issued or guaranteed by the United States or a person
               controlled or supervised by and acting as an instrumentality of
               the government of the United States pursuant to authority granted
               by the Congress of the United States, bank deposit notes and
               certificates of deposit, loan participations, repurchase
               agreements, securities owned but subject to a repurchase
               agreement, and currency, interest rate and commodity swaps
               (collectively, "Excluded Securities");
--------------------------------------------------------------------------------
        __     a dealer registered pursuant to Section 15 of the Securities
               Exchange Act of 1934, as amended (the "Exchange Act") that in the
               aggregate owns and invests on a discretionary basis at least $10
               million of securities other than Excluded Securities and
               securities constituting the whole or part of an unsold allotment
               to, or subscription by, Transferee as a participant in a public
               offering;
--------------------------------------------------------------------------------
        __     an investment  company registered under the Investment Company
               Act that is part of a family of investment companies (as defined
               in Rule 144A of the Securities and Exchange Commission) which own
               in the aggregate at least $100 million in securities other than
               Excluded Securities and securities of issuers that are part of
               such family of investment companies;
--------------------------------------------------------------------------------
        __     an entity, all of the equity owners of which are entities
               described in this Paragraph A(I);
--------------------------------------------------------------------------------
        __     a bank as defined in Section 3(a)(2) of the Securities Act, any
               savings and loan association or other institution as referenced
               in Section 3(a)(5)(A) of the Securities Act, or any foreign bank
               or savings and loan association or equivalent institution that in
               the aggregate owns and invests on a discretionary basis at least
               $100 million in securities other than Excluded Securities and has
               an audited net worth of at least $25 million as demonstrated in
               its latest annual financial statements, as of a date not more
               than 16 months preceding the date of transfer of the Certificates
               to the Transferee in the case of a U.S. Bank or savings and loan
               association, and not more than 18 months preceding such date in
               the case of a foreign bank or savings association or equivalent
               institution.
--------------------------------------------------------------------------------

          II. The Transferee is acquiring such Certificates solely for its own
account, for the account of one or more others, all of which are "Qualified
Institutional Buyers" within the

                                      G-2

<PAGE>

meaning of Rule 144A, or in its capacity as a dealer registered pursuant to
Section 15 of the Exchange Act acting in a riskless principal transaction on
behalf of a "Qualified Institutional Buyer". The Transferee is not acquiring
such Certificates with a view to or for the resale, distribution, subdivision or
fractionalization thereof which would require registration of the Certificates
under the Securities Act.

          D. The Transferee represents that it is not (i) an employee benefit
plan (as defined in section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) subject to the provisions of Title I of ERISA,
(ii) a plan described in section 4975(e)(1) of the Internal Revenue Code of
1986, or (iii) an entity whose underlying assets are deemed to be assets of a
plan described in (i) or (ii) above by reason of such plan's investment in the
entity.

                                           Very truly yours,

                                           By:  _____________________________
                                           Title:  __________________________

Dated:  __________

                                      G-3

<PAGE>

                                                                       Exhibit H

                 Form of Residual Certificate Transfer Affidavit

AFFIDAVIT PURSUANT TO SECTION 860E OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED

STATE OF          )
                  )  ss:
COUNTY OF         )

          [NAME OF OFFICER], being first duly sworn, deposes and says:

          1. That he is [Title of Officer] of [Name of Investor] (the
"Investor"), a [savings institution] [corporation] duly organized and existing
under the laws of [the State of_____[the United States], on behalf of which he
makes this affidavit.

          2. That (i) the Investor is not a "disqualified organization" and will
not be a "disqualified organization" as of [date of transfer] (for this purpose,
a "disqualified organization" means the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing (other than certain taxable
instrumentalities), any cooperative organization furnishing electric energy or
providing telephone service to persons in rural areas, or any organization
(other than a farmers' cooperative) that is exempt from federal income tax
unless such organization is subject to the tax on unrelated business income);
(ii) it is not acquiring the Class R Certificate for the account of a
disqualified organization; (iii) it consents to any amendment of the Pooling and
Servicing Agreement dated as of February 1, 2003 among NovaStar Funding
Corporation, as Company, NovaStar Mortgage, Inc., as Servicer, Wachovia Bank,
National Association, as Custodian, and JPMorgan Chase Bank, as Trustee, that
shall be deemed necessary by the Trustee (upon advice of counsel) to constitute
a reasonable arrangement to ensure that the Class R Certificates will not be
owned directly or indirectly by a disqualified organization; (iv) no purpose of
the acquisition of the Class R Certificate is to avoid or impede the assessment
or collection of tax; (v) it understands that it may incur tax liabilities in
excess of any cash flows generated by the Class R Certificate; (vi) it intends
to pay taxes associated with holding the Class R Certificate as they become due;
(vii) it will not cause income from the Class R Certificate to be attributable
to a foreign permanent establishment or fixed base (within the meaning of an
applicable income tax treaty) of the Investor or another United States taxpayer;
and (viii) it will not transfer such Class R Certificate unless (a) it has
received from the transferee an affidavit in substantially the same form as this
affidavit containing these same four representations and (b) as of the time of
the transfer, it does not have actual knowledge that such affidavit is false.

          3. That the Investor is (i) a "United States person" within the
meaning of section 7701(a)(30) of the Code or (ii) a person who would be subject
to United States income taxation on a net basis on income derived from the Class
R Certificate.

          4. That, if the Investor is a partnership for United States income tax
purposes, each person or entity that holds an interest (directly, or indirectly
through a pass

<PAGE>

through entity) in the partnership is (i) a United States person within the
meaning of section 7701 (a)(30) of the Code or (ii) a person who would be
subject to United States income taxation on a net basis on income derived from
the Class R Certificate.

                                       H-2

<PAGE>

          IN WITNESS WHEREOF, the Investor has caused this instrument to be
executed on its behalf, pursuant to authority of its Board of Directors, by its
[Title of Officer] and its corporate seal to be hereunto attached, attested by
its [Assistant] Secretary, this ____ day of ____________, ____.

                                            [NAME OF INVESTOR]

                                            By: _________________________
                                            [Name of Officer]
                                            [Title of Officer]

[Corporate Seal]

Attest:

_________________________
[Assistant] Secretary

          Personally appeared before me the above-named [Name of Officer], known
or proved to be the same person who executed the foregoing instrument and to be
the [Title of Officer] of the Investor, and acknowledged to me that he executed
the same as his free act and deed and the free act and deed of the Investor.

          Subscribed and sworn before me this ____ day of _________, ____.

_________________________
NOTARY PUBLIC

COUNTY OF _______________

STATE OF ________________

          My commission expires the ____ day of ________, ____.

                                       H-3

<PAGE>

                                                                       Exhibit I

                                   [Reserved]

                                      I-1

<PAGE>

                                                                       Exhibit J

                    Form of Notional Amount Test Event Notice

                      [On File with Dewey Ballantine LLP]

                                       J-1