<PAGE>
 
                                                                   EXHIBIT 10.88

               ASSIGNMENT, ASSUMPTION AND RECOGNITION AGREEMENT
               ------------------------------------------------


          This Assignment, Assumption and Recognition Agreement (the
"Agreement") is made and entered into on August 14, 1998, by Countrywide Home
Loans, Inc., a New York corporation, having an address at 4500 Park Granada
Boulevard, Calabasas, California 91302 (the "Seller"), Fidelity Federal Bank,
FSB, having an address at 4565 Colorado Boulevard, Los Angeles, California 90039
(the "Purchaser") and Pan American Bank, FSB, having an address at 625 The City
Drive, Orange, California 92868 (the "Company").

          In consideration of the mutual promises and agreements contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

1.   Assignment and Assumption.  Except as expressly provided for herein, the
     -------------------------                                               
     Seller hereby grants, transfers and assigns to the Purchaser (a) all of its
     right, title and interest as "Purchaser" in, to and under that certain
     Mortgage Loan Purchase and Interim Servicing Agreement dated as of August
     14, 1998, and duly executed by the Company and the Seller (attached hereto
     as Exhibit A, the "Purchase Agreement"), (b) all of its right, title and
        ---------                                                            
     interest in and to the each of the mortgage loans identified in Exhibit B
                                                                     ---------
     hereto (the "Mortgage Loans"), and (c) all servicing rights relating to the
     Mortgage Loans.  Except for the provisions pertaining to the payment of the
     purchase price, the Purchaser hereby assumes all of the Seller's
     obligations as "Purchaser" under the Purchase Agreement from and after the
     date hereof, and the Seller shall be relieved and released by the Company
     of all of its obligations under the Purchase Agreement from and after the
     date hereof. Except as is otherwise expressly provided herein, the Seller
     Makes no representations, warranties or covenants to the Purchaser and the
     Purchaser acknowledges that the Seller has no obligations to the Purchaser
     under the terms of the Purchase Agreement or otherwise relating to the
     transaction contemplated herein (including but not limited to any
     obligation to repurchase any of the Mortgage Loans or to indemnify the
     Purchaser).

2.   Consideration.  In consideration for the transfers and assignments set
     -------------                                                         
     forth in paragraph 1 of this Agreement, the Purchaser agrees to pay to the
     Seller the amounts referenced in that certain Funding Schedule dated as of
     August 14, 1998 (the "Funding Schedule") and duly executed by the Seller
     and the Purchaser (the "Purchase Price").  The Purchaser agrees to wire the
     agreed upon Purchase Price to the Seller to the account designated below:

                    Bank of New York
                    ABA - 021000018
                    Countrywide Home Loans
                    ACCT - 8900038632
                    REF - Stuart Levitt

3.   Recognition of the Purchaser by the Company.  From and after the date
     -------------------------------------------                          
     hereof, the Company shall recognize the Purchaser as the owner of the
     Mortgage Loans and the "Purchaser" under the Purchase Agreement.

4.   Servicing of the Mortgage Loans.  From and after the date hereof, the
     -------------------------------                                      
     Company shall interim service the Mortgage Loans for the Purchaser in
     accordance with the terms and conditions of the Purchase Agreement, as if
     the Purchaser and Company had entered into the Purchase Agreement.  The
     address of the Purchaser set forth in Section 6.1 of the Purchase Agreement
     shall be changed to read as follows:

          Fidelity Federal Bank, FSB
          4565 Colorado Boulevard
          Los Angeles, California 90039
          Attn:  Mark Mason, Executive Vice President
<PAGE>
 
5.   Status of Purchase Agreement.  The Company and the Seller represent and
     ----------------------------                                           
     warrant that (a) the Purchase Agreement is in full force and effect as of
     the date hereof, (b) the Purchase Agreement has not been amended or
     modified in any respect, and (c) there has been no waiver or any agreement
     to waive any provision, nor has any notice of termination been given, under
     the Purchase Agreement.

6.   No Claims.  The Company represents and warrants that it has no offsets,
     ---------                                                              
     counterclaims or other defenses available to it with respect to the
     Purchase Agreement.

7.   Covenants, Representations and Warranties of the Seller.  The Seller
     -------------------------------------------------------             
     represents and warrants to, and covenants with, the Purchaser that:

     a.  The Seller is a corporation duly organized, validly existing and in
         good standing under the laws of the jurisdiction of its incorporation,
         and has all requisite corporate power and authority to acquire, own and
         sell the Mortgage Loans;

     b.  The Seller has full corporate power and authority to execute, deliver
         and perform under this Agreement, and to consummate the transactions
         set forth herein. The execution, delivery and performance of the Seller
         of this Agreement, and the consummation by it of the transactions
         contemplated hereby, have been duly authorized by all necessary
         corporate action of the Seller. This Agreement has been fully executed
         and delivered by the Seller and constitutes the valid and legally
         binding obligation of the Seller enforceable against the Seller in
         accordance with its respective terms;

     c.  No material consent, approval, order or authorization of, or
         declaration, filing or registration with, any governmental entity is
         required to be obtained or made by the Seller in connection with the
         execution, delivery or performance by the Seller of this Agreement, or
         the consummation by it of the transaction contemplated hereby;

     d.  There is no action, suit, proceeding, investigation or litigation
         pending or, to the Seller's knowledge, threatened, which either in any
         instance or in the aggregate, if determined adversely to the Seller,
         would adversely affect the sale of the Mortgage Loans to the Purchaser,
         the execution, delivery or enforceability of this Agreement, or the
         Seller's ability to perform its obligations under this Agreement; and

     e.  Immediately prior to payment of the purchase price for the Mortgage
         Loans, the Seller is the lawful owner of the Mortgage Loans with the
         full right to transfer the Mortgage Loans free from any and all claims
         and encumbrances whatsoever.

8.   Covenants, Representations and Warranties of Purchaser.  The Purchaser
     ------------------------------------------------------                
     represents and warrants to, and covenants with, the Seller and the Company
     that except for the provisions pertaining to the payment of the purchase
     price thereunder, the Purchaser agrees to be bound as "Purchaser" by all of
     the terms, covenants and conditions of the Purchase Agreement, and from and
     after the date hereof, the Purchaser assumes for the benefit of the Seller
     and the Company all of the Seller's obligations as "Purchaser" thereunder.

9.   Governing Law.  This Agreement shall be construed in accordance with the
     -------------                                                           
     laws of the State of California and the obligations, rights and remedies of
     the parties hereunder shall be determined in accordance with the laws of
     the State of California, except to the extent preempted by federal law.

10.  Confidentiality.  The Seller and the Purchaser hereby acknowledge and agree
     ---------------                                                            
     that this Agreement shall be kept confidential and its contents will not be
     divulged to any party without the other party's consent except to the
     extent that it is appropriate for the Seller or the Purchaser to do so in
     working with legal counsel, auditors, taxing authorities or other
     governmental agencies.

                                       2
<PAGE>
 
11.  Conflict with Purchase Agreement.  To the extent there is any conflict
     --------------------------------                                      
     between the terms of the Purchase Agreement and this Agreement, the latter
     shall be controlling, notwithstanding anything to the contrary contained in
     the Purchase Agreement.

12.  Capitalized Terms.  All capitalized terms used herein and not otherwise
     -----------------                                                      
     defined herein shall have the meanings assigned to such terms in the
     Purchase Agreement.

13.  Counterparts.  This Agreement may be executed in any number of
     ------------                                                  
     counterparts.  Each counterpart shall be deemed to be an original and all
     such counterparts shall constitute one and the same instrument.


                            [Signature page follows]

                                       3
<PAGE>
 
          IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.

                                        COUNTRYWIDE HOME LOANS, INC.,
                                        the Seller

 
                                        By /s/  Michael W. Schloessmann
                                          --------------------------------------
                                          Michael W. Schloessmann
                                          Vice President


                                        FIDELITY FEDERAL BANK, FSB,
                                        the Purchaser


                                        By /s/  Mark Mason
                                          --------------------------------------
                                          Mark Mason
                                          Executive Vice President


                                        PAN AMERICAN BANK, FSB
                                        the Company

                             
                                        By /s/  Blair Kenny
                                          --------------------------------------
                                          Name:  Blair Kenny
                                          Title:  Senior Vice President

                                       4
<PAGE>
 
                                   EXHIBIT A


                                 MORTGAGE LOAN
                        PURCHASE AND INTERIM SERVICING
                                   AGREEMENT

                                  (attached)

                                       5
<PAGE>
 
            MORTGAGE LOAN PURCHASE AND INTERIM SERVICING AGREEMENT
            ------------------------------------------------------


          This Mortgage Loan Purchase and Interim Servicing Agreement is dated
and effective as of August 14, 1998 (the "Agreement"), between Pan American
Bank, FSB, having an address at 625 The City Drive, Orange, California 92868
(the "Seller"), and Countrywide Home Loans, Inc., having an address at 4500 Park
Granada, Calabasas, California 91302 (the "Purchaser").


                                R E C I T A L S
                                - - - - - - - -

          The Seller desires to sell and transfer to the Purchaser, and the
Purchaser desires to purchase from the Seller, those certain mortgage loans
identified on Exhibit A hereto, including all servicing rights relating thereto
(the "Mortgage Loans") upon such terms as are set forth below.

          In consideration of the promises and the mutual agreements and
undertakings set forth herein, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

                                   ARTICLE I

                                  Definitions
                                  -----------

          Whenever used herein, the following words and phrases, unless the
context Otherwise requires, shall have the following meanings:

          ACCRUED INTEREST:  Accrued interest owing to the Seller on the Stated
          ----------------                                                     
Principal Balance of each Mortgage Loan at a rate equal to the Mortgage Interest
Rate of each such Mortgage Loan, from the date through which interest has last
been paid (as of Cut-off Date) through the day prior to the Closing Date,
inclusive; provided, however, with respect to those Mortgage Loans for which
interest has been paid through a date beyond the Cut-off Date, such accrued
interest owing to Seller shall be reduced by the amount of interest accruing on
the Stated Principal Balance of each such Mortgage Loan at a rate equal to the
Mortgage Interest Rate of such Mortgage Loan, from the Closing Date to the day
prior to the interest paid through date for such Mortgage Loan, inclusive.

          AGENCIES:  Both FNMA or FHLMC.
          --------                      

          AGREEMENT: This Mortgage Loan Purchase and Interim Servicing
          ---------                                                   
Agreement, including all exhibits and supplements hereto, and all amendments
hereof.

          APPRAISED VALUE:  With respect to any Mortgage Loan, the value of the
          ---------------                                                      
related Mortgaged Property based upon the lesser of (i) the original, signed
appraisal made by a Qualified Appraiser for the originator at the time of
origination of the Mortgage Loan or (ii) the purchase price of the Mortgaged
Property at the time of origination of the Mortgage Loan, provided, however,
that in the case of a refinanced Mortgage Loan, such value is based solely upon
the appraisal made at the time of origination, of such refinanced Mortgage Loan
and in the case of a Mortgage Loan originated under the streamlined
documentation program, such value shall be based on an appraisal obtained at the
time the original loan was originated.

          ASSIGNMENT OF MORTGAGE:  An assignment of the Mortgage, notice of
          ----------------------                                           
transfer or equivalent instrument in recordable form, sufficient under the laws
of the jurisdiction wherein the related Mortgaged Property is located to reflect
the sale of the Mortgage to the Purchaser.

          BUSINESS DAY:  Any day other than (i) a Saturday or Sunday, or (ii) a
          ------------                                                         
day on which banking and savings and loan institutions in the State of
California, are authorized or obligated by law or executive order to be closed.


                                       1
<PAGE>
 
          CLOSING DATE:  August 14, 1998, or such other date as may be mutually
          ------------                                                         
agreed upon by the Seller and the Purchaser.

          CUT-OFF DATE:  August 7, 1998.
          ------------                  

          DUE DATE:  The day of the month on which a Monthly Payment is due on a
          --------                                                              
Mortgage Loan, exclusive of any days of grace.

          ESCROW ACCOUNT:  An account or accounts maintained by the Seller, or
          --------------                                                      
the Seller's predecessor in interest, maintained for the deposit of Escrow
Payments received in respect of one or more Mortgage Loans.

          ESCROW PAYMENTS:  The amounts held in Escrow Accounts which include
          ---------------                                                    
amounts being held for payment of ground rents, property taxes, assessments,
water rates, sewer rents, municipal charges, mortgage insurance premiums, fire
and hazard insurance premiums, condo charges and other payments required to be
escrowed by the Mortgagor pursuant to any Mortgage Loan.

          FHLMC:  The Federal Home Loan Mortgage Corporation, or any successor
          -----                                                               
thereto.

          FNMA:  The Federal National Mortgage Association or any successor
          ----                                                             
thereto.

          GROSS MARGIN:  The fixed percentage amount set forth in the related
          ------------                                                       
Mortgage Note which amount is added to the Index in accordance with the terms of
the related Mortgage Note to determine the Mortgage Interest Rate for such
Mortgage Loan.

          HMDA:  The Home Mortgage Disclosure Act, as amended.
          ----                                                

          HUD:  The Department of Housing and Urban Development or any successor
          ---                                                                   
thereto.

          INDEX:  On each Interest Adjustment Date, the Index shall mean the
          -----                                                             
rate per annum equal to the average of interbank offered rates for six-month
U.S. dollar denominated deposits in the London market (LIBOR), as published in
the Wall Street Journal as of the first Business Day of the month immediately
preceding the month in which such Interest Adjustment Date occurs.

          INTEREST ADJUSTMENT DATE:  With respect to each Mortgage Loan, the
          ------------------------                                          
date on which an adjustment to the Mortgage Interest Rate on a Mortgage Note
becomes effective.

          INTERIM SERVICING PERIOD:  The period commencing with the Cut-off Date
          ------------------------                                              
and ending with the Servicing Transfer Date.

          INTEREST PAID TO DATE:  As of the Cut-off Date, the date for each
          ---------------------                                            
Mortgage Loan through which the Mortgagor has paid interest to the holder of the
Note and which is listed on the Mortgage Loan Schedule.

          LIFETIME MORTGAGE INTEREST RATE CAP:  The absolute maximum Mortgage
          -----------------------------------                                
Interest Rate payable for a Mortgage Loan, above which the Mortgage Interest
Rate shall not be adjusted, as provided in the Mortgage Loan Schedule.

          LOAN-TO-VALUE RATIO OR LTV:  With respect to any Mortgage Loan, the
          -------------------    ---                                         
ratio of the original outstanding principal amount to the Appraised Value of the
Mortgage Loan.

          MONTHLY PAYMENT:  The scheduled monthly payment of principal and
          ---------------                                                 
interest on a Mortgage Loan.


                                       2
<PAGE>
 
          MORTGAGE:  The mortgage, deed of trust or other such instrument
          --------                                                       
securing a Mortgage Note, which creates a first lien on an unsubordinated estate
in fee simple in real property securing the Mortgage Note.

          MORTGAGE FILE:  The file containing the Mortgage Loan Documents, all
          -------------                                                       
other documents in connection with the origination of a particular Mortgage Loan
and all documents, files and other information reasonably necessary to service
the Mortgage Loans, including, but not limited to, good faith estimate, HUD 1
Settlement Statement, Truth in Lending Disclosure Statement, and Truth in
Lending Notice of Right to Cancel (if required by law).

          MORTGAGE INTEREST RATE:  The annual rate at which interest accrues on
          ----------------------                                               
any Mortgage Loan, exclusive of any primary mortgage insurance, as adjusted from
time to time in accordance with the provisions of the related Mortgage Note, if
applicable.

          MORTGAGE LOAN:  A mortgage loan identified in the Mortgage Loan
          -------------                                                  
Schedule which is sold pursuant to this Agreement, which Mortgage Loan includes
without limitation the Mortgage File, the Monthly Payments, Principal
Prepayments and all other rights, benefits, proceeds and obligations arising
from or in connection with such Mortgage Loan.

          MORTGAGE LOAN DOCUMENTS: The following documents pertaining to any
          -----------------------                                           
Mortgage Loan:

          (a) The original Mortgage Note bearing all intervening endorsements,
endorsed "Pay to the order of _______________" and signed in the name of the
Seller by an authorized officer;

          (b) The original Assignment of Mortgage for each Mortgage Loan in
blank;

          (c) The original Mortgage with evidence of recording thereon;

          (d) The originals of all intervening assignments of mortgage with
evidence of recording thereon;

          (e) The original mortgagee title insurance policy; and

          (f) The originals of any modification agreement.

          MORTGAGE LOAN SCHEDULE:  The schedule of Mortgage Loans set forth on
          ----------------------                                              
Exhibit A hereto.
---------        

          MORTGAGE NOTE:  The note or other evidence of the indebtedness of a
          -------------                                                      
Mortgagor secured by a Mortgage.

          MORTGAGED PROPERTY:  The real property securing repayment of the debt
          ------------------                                                   
evidenced by a Mortgage Note.

          MORTGAGOR:  The obligor on a Mortgage Note.
          ---------                                  

          NET ESCROW PAYMENTS:  Escrow Payment balances remaining after advances
          -------------------                                                   
by the Seller for taxes and insurance to the extent documented under a detailed
statement provided to the Purchaser.

          NEXT DUE DATE:  As of the Cut-off Date, the date upon which a
          -------------                                                
Mortgagor is required to make its next Monthly Payment, as set out on the
Mortgage Loan Schedule.

          PERIODIC MORTGAGE INTEREST RATE CAP:  The provision of a Mortgage Note
          -----------------------------------                                   
which provides for an absolute maximum amount by which the Mortgage Interest
Rate therein may increase or decrease 


                                       3
<PAGE>
 
on an Interest Adjustment Date above the Mortgage Interest Rate previously in
effect, equal to the rate set forth in the Mortgage Loan Schedule, if
applicable.

          PRIMARY MORTGAGE LNSURANCE POLICY:  A policy of primary mortgage
          ---------------------------------                               
guaranty insurance issued by a Qualified Insurer, providing coverage at least
equal to the level of coverage required by the Agencies at the time the related
Mortgage Loan was originated if such Mortgage Loan was to be eligible for sale
to, and securitization by, either FNMA or FHLMC.

          PRINCIPAL PREPAYMENT:  Any payment or other recovery of principal on a
          --------------------                                                  
Mortgage Loan which is received in advance of its scheduled Due Date, including
any prepayment penalty or premium thereon, which is not accompanied by an amount
of interest representing scheduled interest due on any date or dates in any
month or months subsequent to the month of prepayment.

          PURCHASE PRICE:  The purchase price to be paid by the Purchaser for
          --------------                                                     
the Mortgage Loans (including the Servicing Rights relating thereto) which shall
equal the product of (a) the Purchase Price Percentage, times (b) the Stated
Principal Balance of the Mortgage Loans.

          PURCHASE PRICE PERCENTAGE:  The purchase price percentage set forth in
          -------------------------                                             
the Funding Schedule.

          PURCHASE PROCEEDS:  The aggregate of the Purchase Price and the
          -----------------                                              
Accrued Interest.

          PURCHASER:  Any entity which purchases the Mortgage Loans pursuant to
          ---------                                                            
this Agreement or its successor in interest or any successor or assign to the
Purchaser under this Agreement as herein provided.  Unless the context requires
otherwise, all references to "Purchaser" in this Agreement shall be deemed to
include such Purchaser's successors in interest, assignees or designees.

          QUALIFIED APPRAISER:  An appraiser who (i) is licensed in the state
          -------------------                                                
where the Mortgaged Property is located, (ii) has no interest, direct or
indirect, in the Mortgaged Property or in any Mortgage Loan or the security
therefore, (iii) complies with the Uniform Standards or Professional Appraisal
Practice and the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), and (iv) does not receive compensation that is affected by the
approval or disapproval of the Mortgage Loan or by the amount of the appraisal."

          QUALIFIED INSURER:  An insurance company duly qualified as such under
          -----------------                                                    
the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by the
Agencies and whose claims paying ability is rated in the two highest rating
categories by the Standard & Poor's Ratings Group or Moody's Investors Service
with respect to primary mortgage insurance and in the two highest rating
categories by Best's with respect to hazard and flood insurance.

          REPURCHASE PRICE:  With respect to any Mortgage Loan, a price equal to
          ----------------                                                      
the sum of (a) the product of (i) the unpaid principal balance of the Mortgage
Loan at the time of repurchase, and (ii) the greater of par or the Purchase
Price Percentage, and (b) interest on such unpaid principal balance at the
Mortgage Interest Rate from the last date through which interest has been paid
and distributed to the Purchaser to the date of repurchase.

          SEGMENT(S):  One or more segments of Mortgage Loans (each, a
          ----------                                                  
"Segment") comprising the Segment A Mortgage Loans and the Segment B Mortgage
Loans, whether individually or in the aggregate, as applicable.  Each such
Segment and the Mortgage Loans relating thereto are identified on Exhibit A and
                                                                  ---------    
may hereafter be referred to as Segments A and B, respectively.

          SEGMENT A MORTGAGE LOANS:  The Mortgage Loans identified under Segment
          ------------------------                                              
A of the Mortgage Loan Schedule.


                                       4
<PAGE>
 
          SEGMENT B MORTGAGE LOANS:  The Mortgage Loans identified under Segment
          ------------------------                                              
B of the Mortgage Loan Schedule.

          SERVICING RIGHTS:  With respect to each Mortgage Loan, any and all of
          ----------------                                                     
the following: (a) all rights to service the Mortgage Loans; (b) any payments or
monies payable or received for servicing the Mortgage Loans; (c) any late fees,
assumption fees, penalties or similar payments with respect to the Mortgage
Loans; (d) all agreements or documents creating, defining or evidencing any such
Servicing Rights and all rights of the Seller thereunder, including, but not
limited to, any clean-up calls and termination options; (e) Escrow Payments or
other similar payments with respect to the Mortgage Loans and any amounts
actually collected with respect thereto; (f) all accounts and other rights to
payments related to any of the property described in this paragraph; (g)
possession and use of any and all Mortgage Files pertaining to the Mortgage
Loans or pertaining to the past, present, or prospective servicing of the
Mortgage Loans; and (h) all rights, powers and privileges incident to any of the
foregoing.

          SERVICING TRANSFER DATE:  September 21, 1998, or such other date the
          -----------------------                                             
Purchaser may select upon reasonable notice to the Seller.

          STATED PRINCIPAL BALANCE:  The unpaid principal balance of the
          ------------------------                                      
Mortgage Loans at the Cut-off Date.

                                  ARTICLE II

                          SALE OF THE MORTGAGE LOANS
                          --------------------------

          SECTION 2.1  AGREEMENT OF SALE.  The Seller does hereby agree to sell,
                       -----------------                                        
convey, transfer and assign to the Purchaser on the Closing Date all right,
title and interest in and to the Mortgage Loans, the Servicing Rights, the
Mortgage Loan Documents, the Mortgage Files and the Escrow Accounts relating to
the Mortgage Loans, all in accordance with the terms and conditions set forth
herein.

          SECTION 2.2  PAYMENT OF THE PURCHASE PROCEEDS.  No later than 1:00
                       --------------------------------                     
p.m. (Pacific time) on the Closing Date, the Purchaser shall pay to the Seller
the Purchase Proceeds, by wire transfer in immediately available funds to the
account designated by the Seller.  Upon completion of the wire transfer to the
Seller's designated account, the Purchaser shall own the Mortgage Loans and the
Servicing Rights, free and clear of any lien or encumbrance whatsoever.

          SECTION 2.3  ENTITLEMENT TO PAYMENT ON THE MORTGAGE LOANS.  The
                       --------------------------------------------      
Purchaser shall be entitled to all collections and recoveries of principal and
interest received or applied to any Mortgagor's account after the Cut-off Date.
All payments and remittances on the Mortgage Loans received by the Seller after
the Cut-off Date and payable to the Purchaser shall be paid promptly to the
Purchaser in accordance to the terms set forth in Article IV or Article V, as
                                                  ----------    ---------    
applicable.

          SECTION 2.4  EXAMINATION OF MORTGAGE LOAN DOCUMENTS BY THE PURCHASER.
                       -------------------------------------------------------  
Prior to the Closing Date, the Purchaser shall have the right to review the
Mortgage File and, based on its review, decline to purchase any Mortgage Loan
which the Purchaser, in its sole discretion, determines not to be in compliance
with each of the representations and warranties contemplated hereby or which is
otherwise unsatisfactory to the Purchaser in its reasonable discretion.  The
Seller agrees to deliver or make available to the Purchaser a complete Mortgage
File for each Mortgage Loan on or before such date as may be reasonably
requested by the Purchaser.  The fact that the Purchaser has conducted or has
failed to conduct any partial or complete examination of the Mortgage Files
shall not affect the Purchaser's right to demand repurchase or to avail itself
of any other remedy available hereunder.  Notwithstanding anything contained
herein to the contrary, should there be a material adverse change in the
characteristics of the Mortgage Loans remaining after the exclusion or rejection
of one or more Mortgage Loans by the Purchaser as contemplated above, the
Purchaser may, in its sole discretion, elect not to purchase the remaining
Mortgage Loans and the Purchaser shall have no liability therefor.


                                       5
<PAGE>
 
          SECTION 2.5  DELIVERY OF MORTGAGE LOAN DOCUMENTS.  At least two (2)
                       -----------------------------------                   
Business Days prior to the Closing Date, the Seller shall deliver the Mortgage
Loan Documents with respect to each Mortgage Loan to the Purchaser or a bonded
third party custodian (the "Custodian") and, in the case of the latter, shall
cause the Custodian to deliver to the Purchaser a custodian's certification
pursuant to which the Custodian certifies to the Purchaser that (i) with respect
to each Mortgage Loan, it has in its Possession originals of each of the
Mortgage Loan Documents, (ii) all of the Mortgage Loan Documents appear on their
face to be genuine originals or copies, as applicable, and (iii) upon the
Purchaser's wiring of the Purchase Proceeds to the Seller, that the Custodian
shall hold the Mortgage Loan Documents with respect to each Mortgage Loan in
trust for the Purchaser and will, subsequent thereto, act only in a manner
consistent with the Purchaser's instructions with respect thereto. In the event
that any of the Mortgage Loan Documents set forth in clauses (c) through (e) of
the definition of Mortgage Loan Documents in Article I have not been delivered
                                             ---------                        
to the Purchaser in the time specified above (the "Missing Documents") either
                                                   -----------------         
because such Missing Documents have not been returned by the applicable public
recording office with respect to items (c) and (d), or because the final
original title policy has not yet been issued by the title company with respect
to item (e), then the Seller shall deliver to the Purchaser certified true and
correct copies of the same and shall further deliver the originals of any such
Missing Documents within fifteen (15) days of its receipt thereof, but in no
event later than one hundred and twenty (120) days from the Closing Date. If the
Seller fails to deliver any of the Missing Documents relating to a Mortgage Loan
within the time specified above, the Seller shall, upon written request from the
Purchaser, repurchase such Mortgage Loan in accordance with Section 3.3.
                                                            -----------

          SECTION 2.6  CONDITIONS TO CLOSING.  The Purchaser's obligations
                       ---------------------                              
hereunder are subject to the fulfillment of the following conditions precedent.
In the event that any of the conditions set forth below are not satisfied in all
material respects, the Purchaser shall not have any obligation to purchase any
of the Mortgage Loans or to pay the Purchase Proceeds as contemplated hereunder
and shall instead be entitled, in its sole discretion, to terminate this
Agreement in its entirety.

          (a)  Each of the representations and warranties made by the Seller
hereunder shall be true and correct in all material respects as of the Closing
Date and no event shall have occurred which, with notice or the passage of time,
would constitute a default under this Agreement.

          (b)  The Seller shall have delivered to the Purchaser all of the
Mortgage Loan Documents in accordance with Section 2.5 and a complete Mortgage
                                           -----------                        
File with respect to each Mortgage Loan.

          (c)  Each of the terms and conditions set forth herein which are
required to be satisfied on or before the Closing Date shall have been satisfied
unless waived by the prejudiced party(ies).

          (d)  The Seller shall have delivered to the Purchaser on or before the
Closing Date the following documents:

               (1)  a fully executed Agreement;

               (2)  the Mortgage Loan Schedule, which shall include, without
                    limitation, the Stated Principal Balance of each Mortgage
                    Loan;

               (3)  an executed Funding Schedule, in the form of Exhibit 8
                                                                 ---------
                    hereto;

               (4)  an Officer's Certificate, in the form of Exhibit C hereto;
                                                             ---------        

               (5)  State Licenses of the Seller;

               (6)  Opinion of Counsel, substantially in the form of Exhibit E
                    hereto;

               (7)  Certificate of Good Standing of the Seller; and


                                       6
<PAGE>
 
               (8)   such other documents related to the purchase and sale of
                     the Mortgage Loans and the Servicing Rights as the
                     Purchaser may reasonably request.

          SECTION 2.7  RECORD TITLE.  Record title to each Mortgage and the
                       ------------                                        
related Mortgage Note shall be transferred by the Seller to the Purchaser.  The
Seller shall, at the option of the Purchaser, either (i) prepare and ca use to
be recorded the Assignment of Mortgage for each Mortgage Loan and shall,
promptly upon its receipt of each original recorded Assignment of Mortgage from
the applicable recording office, deliver the same to the Purchaser, or (ii)
prepare and deliver to the Purchaser an original Assignment of Mortgage in
blank, in each case, within the time and in the manner specified in Section 2.5.
                                                                    ----------- 
The Seller shall bear the cost and expense related to (i) providing all
Assignments of Mortgages and endorsements of Mortgage Notes for any transfer of
record title required hereunder with respect to the obligations of the Mortgage
Notes and the underlying security interest related to each Mortgage Loan and
(ii) recording title of the Mortgage Loans including, but not limited to,
recording fees and fees for title policy endorsements.

                                  ARTICLE III

                        REPRESENTATIONS AND WARRANTIES
                        ------------------------------

          SECTION 3.1  REPRESENTATIONS AND WARRANTIES RESPECTING THE SELLER.
                       ----------------------------------------------------  
The Seller represents, warrants and covenants to the Purchaser that, as of the
Closing Date:

          (a) The Seller is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and is
qualified to transact business in and is in good standing under the laws of each
state where a Mortgaged Property is located or is otherwise exempt under
applicable law from such qualification or is otherwise not required under
applicable law to effect such qualification and no demand for such qualification
has been made upon the Seller by any state having jurisdiction and in any event
the Seller is or will be in compliance with the laws of any such state to the
extent necessary to insure the enforceability of each Mortgage Note and the sale
of the Mortgage Loans and Servicing Rights as contemplated by this Agreement;

          (b) The Seller has the full power and authority to perform, and to
enter into and consummate, all transactions contemplated by this Agreement.  As
of the Closing Date, the Seller has the full power and authority to hold each
Mortgage Loan and to sell each Mortgage Loan and the Servicing Rights;

          (c) Neither the acquisition or origination of the Mortgage Loans by
the Seller, the sale of the Mortgage Loans or the Servicing Rights to the
Purchaser, the consummation of the transactions contemplated hereby, nor the
fulfillment of or compliance with the terms and conditions of this Agreement,
will conflict with or result in a breach of any of the terms, conditions or
provisions of the Seller's certificate of incorporation or bylaws or result in a
material breach of any legal restriction or any agreement or instrument to which
the Seller is now a party or by which it is bound, or constitute a material
default or result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Seller or its property is subject;

          (d) The Seller is an approved seller/servicer for the Agencies, in
good standing with each such agency, and is a mortgagee approved by the
Secretary of HUD.  No event has occurred, including but not limited to, a change
in insurance coverage, which would make the Seller unable to comply with FNMA-,
FHLMC- or HUD-eligibility requirements or which would require notification to
the Agencies or HUD;

          (e) The Seller does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
Agreement;


                                       7
<PAGE>
 
          (f) There is no action, suit, proceeding, investigation or litigation
pending or, to the best of the Seller's knowledge, threatened, which either in
any one instance or in the aggregate, if determined adversely to the Seller,
would adversely affect the sale of the Mortgage Loans or the Servicing Rights to
the Purchaser, or the Seller's ability to perform its obligations under this
Agreement;

          (g) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Seller of or compliance by the Seller with this Agreement or
the terms of the Mortgage Loans, the delivery of the Mortgage Files to the
Purchaser, the sale of the Mortgage Loans and the Servicing Rights to the
Purchaser or the consummation of the transactions contemplated by this
Agreement, or if required, such consent, approval, authorization or order has
been obtained prior to the Closing Date; and

          (h) The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of the Seller, and the
transfer, assignment and conveyance of the Mortgage Notes, the Mortgages and/or
the Servicing Rights by the Seller pursuant to this Agreement are not subject to
the bulk transfer or any similar statutory provisions in effect and applicable
to this transaction.

          (i) Seller has previously furnished Purchaser with Seller's most
recent audited financial statements, together with the respective reports
thereon of the Seller's independent public accountant, and Seller's most recent
unaudited financial statements, each of which has been prepared in accordance
with generally accepted accounting principles.  Each of the balance sheets
included in the financial statements sets for the Seller's financial condition
as of the date thereof, and there have been no material adverse changes in
Seller's business or financial conditions since that date.

          (j) Neither this Agreement, nor any statement, report, or other
document furnished or to be furnished pursuant to this Agreement or in
connection with the transaction contemplated hereby, contains any untrue
statement of fact by Seller, or omits to state a fact necessary to make the
statements of Seller contained therein not misleading.

          (k) Upon request, Seller will deliver to Purchaser a true and correct
copy of Seller's fidelity bond and Seller's errors and omissions policy, and/or
certificates evidencing the same as currently in effect, the amounts and
coverages of both of which will be acceptable to Purchaser.  Seller shall, at
its own expense, maintain a fidelity bond and an errors and omissions policy, in
amounts at least as great as, and with the coverages at least as broad as, those
currently in effect.  Seller shall, upon request, furnish proof of such coverage
at or before the first Purchase and, upon request, annually thereafter.

          (l) The Mortgage Loans were not intentionally selected in a manner
intended to adversely affect the interest of the Purchaser.

          (m) Seller has not dealt with any broker or Agent or other Person who
might be entitled to a fee, commission or compensation in connection with this
transaction other than the Purchaser except as Seller has previously disclosed
to Purchaser in writing.

          (n) The consideration received by Seller upon the sale of the Mortgage
Loans under this Agreement constitutes fair consideration and reasonably
equivalent value for the Mortgage Loans.

          (o) Seller has determined that the disposition of the Mortgage Loans
pursuant to this Agreement will be afforded sale treatment for accounting and
tax purposes.

     SECTION 3.2  REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL MORTGAGE
                  ------------------------------------------------------------
LOANS.  With respect to each Mortgage Loan, the Seller represents and warrants
-----                                                                         
to the Purchaser that as of the Closing Date:

          (a) The information set forth in the Mortgage Loan Schedule and in
each Mortgage File is complete, true and correct;


                                       8
<PAGE>
 
          (b) All payments required under the terms of the Mortgage Note to be
made on or prior to the Closing Date have been made; the Seller has not advanced
funds, or induced, solicited or knowingly received any advance of funds from a
party other than the owner of the Mortgaged Property subject to the Mortgage,
directly or indirectly, for the payment of any amount required under the
Mortgage Loan; and there has been no delinquency of thirty (30) days or more in
any payment by the Mortgagor thereunder during the last twelve (12) months.
Each Mortgagor has made or shall make, as the case may   be, the first Monthly
Payment with respect to the related Mortgage Loan on its Due Date or in no event
later than twenty-nine (29) days thereafter.  No Mortgage Loan is subject to any
pending foreclosure, bankruptcy, insolvency, or reorganization proceeding.
Nothing contained in this Section 3.2(b) shall in any way limit any other rights
                          --------------                                        
of the Purchaser as provided hereunder;

          (c) There are no delinquent taxes, water charges, sewer rents,
assessments, insurance premiums, leasehold payments, including assessments
currently due and owing in future installments or other outstanding charges
affecting the related Mortgaged Property;

          (d) The terms of the Mortgage Note and the Mortgage have not been
impaired, waived, altered or modified in any respect, except by written
instruments which are in the Mortgage File and have been or will be recorded, if
necessary to protect the interests of the Purchaser, and which have been
delivered to the Purchaser, all in accordance with this Agreement.  The
substance of any such waiver, alteration or modification has been approved by
the primary mortgage guaranty insurer, if any, and by the title insurer, to the
extent required by the related policy, and its terms are reflected on the
Mortgage Loan Schedule.  No Mortgagor has been released, in whole or in part,
except in connection with an assumption agreement approved by the primary
mortgage insurer, if any, and title insurer, to the extent required by the
policy, and which assumption agreement is part of the Mortgage File and the
terms of which are reflected in the Mortgage Loan Schedule, if executed prior to
the Closing Date;

          (e) The Mortgage Note and the Mortgage are not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note and the
Mortgage, or the exercise of any right thereunder, render the Mortgage
unenforceable, in whole or in part, or subject to any right of rescission, set-
off, counterclaim or defense, including the defense of usury and no such right
of rescission, set-off, counterclaim or defense has been asserted with respect
thereto;

          (f) All buildings upon, or comprising part of, the Mortgaged Property
are insured by an insurer acceptable to the Agencies against loss by fire,
hazards of extended coverage and such other hazards as are customary in the area
where the Mortgaged Property is located, and such insurer is licensed to do
business in the state where the Mortgaged Property is located.  All such
insurance policies (collectively, the "hazard insurance policy") contain a
standard mortgagee clause naming the Seller, its successors and assigns as
mortgagee and all premiums thereon have been paid.  If upon origination of the
Mortgage Loan, the Mortgaged Property was, or was subsequently deemed to be, in
an area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), which require under applicable law that a flood insurance policy
meeting the requirements of the current guidelines of the Federal Insurance
Administration (or any successor thereto) be obtained, such flood insurance
policy is in effect which policy conforms to the requirements of the Agencies.
The Mortgage obligates the Mortgagor thereunder to maintain all such insurance
at Mortgagor's cost and expense and, on the Mortgagor's failure to do so,
authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's
cost and expense and to obtain reimbursement therefor from the Mortgagor.  Each
Mortgage Loan has in place a fully-paid life of loan flood certification from a
FNMA- or FHLMC-approved vendor, assigned in care of the Purchaser, which
provides for notification to the Purchaser of changes in designated flood areas
which would affect such Mortgage Loan;

          (g) Any and all requirements of any federal, state or local law
including, without limitation, usury, truth in lending, real estate settlement
procedures including, without limitation, the Real Estate Settlement Procedures
Act of 1974, as amended, consumer credit protection, equal credit 


                                       9
<PAGE>
 
opportunity or disclosure laws applicable to the Mortgage Loan have been
complied with in all material respects;

          (h) The Mortgage has not been satisfied, canceled, subordinated, or
rescinded, in whole or in part, and the Mortgaged Property has not been released
from the lien of the Mortgage, in whole or in part, nor has any instrument been
executed that would effect any such release, cancellation, subordination or
rescission;

          (i) The Mortgage is a valid, existing and enforceable first lien on
the Mortgaged Property, including all improvements on the Mortgaged Property, if
any, subject only to (a) the lien of current real property taxes and assessments
not yet due and payable, (b) covenants, conditions and restrictions, rights of
way, easements and other matters of the public record as of the date of
recording being acceptable to mortgage lending institutions generally and
specifically referred to in the lender's title insurance policy delivered to the
originator of the Mortgage Loan and which do not adversely affect the Appraised
Value (as defined in clause (i) of such definition) of the Mortgaged Property,
and (c) other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by the Mortgage or the use, enjoyment, value or marketability of the related
Mortgaged Property.  The Seller has full right to sell and assign the Mortgage
to the Purchaser;

          (j) The Mortgage Note and the related Mortgage are genuine and each is
the legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency or reorganization.

          (k) All parties to the Mortgage Note and the Mortgage had the legal
capacity to enter into the Mortgage Loan transaction and to execute and deliver
the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have
been duly and properly executed by such parties;

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

          (m) The Seller is the sole owner and holder of the Mortgage Loan and
the related Servicing Rights and is the custodian of the related Escrow Account,
if applicable.  The Mortgage Loan has neither been assigned nor pledged, and the
Seller has good and marketable title thereto, and has full right to transfer and
sell the Mortgage Loan and the related Servicing Rights to the Purchaser free
and clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan and the related Servicing Rights to the Purchaser pursuant to the
terms of this Agreement;

          (n) All parties which have had any interest in the Mortgage, whether
as mortgagee, assignee, pledgee or otherwise, are (or, during the period in
which they held and disposed of such interest were (a) in compliance with any
and all applicable licensing requirements of the laws of the state wherein the
Mortgaged Property is located, and (b) (i) organized under the laws of such
state, or (ii) qualified to do business in such state, or (iii) a federal
savings and loan association or national bank, or (iv) not deemed to be doing
business in such state under applicable law;

          (o) The Mortgage Loan is covered by an ALTA lender's title insurance
policy acceptable to the Agencies, issued by a title insurer acceptable to the
Agencies and qualified to do business in the jurisdiction where the Mortgaged
Property is located, insuring (subject to the exceptions contained in (i)(a) and
(b) above) the Seller, its successors and assigns as to the first priority lien
of the Mortgage in the original principal amount of the Mortgage Loan and
against any loss by reason of the invalidity or unenforceability of the lien
resulting from the provisions of the Mortgage Note and/or Mortgage 


                                      10
<PAGE>
 
providing for adjustment in the Mortgage Interest Rate and Monthly Payment.
Additionally, such lender's title insurance policy affirmatively insures ingress
and egress, and against encroachments by or upon the Mortgaged Property or any
interest therein. The Seller is the sole insured of such lender's title
insurance policy, and such lender's title insurance policy is in full force and
effect and will be in full force and effect upon the consummation of the
transactions contemplated by this Agreement. No claims have been made under such
lender's title insurance policy, and no prior holder of the-related Mortgage,
including the Seller, has done, by act or omission, anything which would impair
the coverage of such lender's title insurance policy;

          (p) There is no default, breach, violation or event of acceleration
existing under the Mortgage or the Mortgage Note and no event which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event of acceleration, and the
Seller has not waived any default, breach, violation or event of acceleration;

          (q) There are no mechanics or similar liens or claims which have been
filed for work, labor or material (and no rights are outstanding that under law
could give rise to such lien) affecting the related Mortgaged Property which are
or may be liens prior to or equal with, the lien of the related Mortgage;

          (r) All improvements which were considered in determining the
Appraised Value (as defined in clause (i) of said definition) of the related
Mortgaged Property lay wholly within the boundaries and building restriction
lines of the Mortgaged Property, and no improvements on adjoining properties
encroach upon the Mortgaged Property;

          (s) The Mortgage Loan was originated by the Seller or by a FNMA-
approved or FHLMC-approved mortgage banker (which mortgage banker is a mortgagee
approved by HUD), or savings and loan association, a savings bank, a commercial
bank or similar banking institution which is supervised and examined by a
federal or state authority, or by another mortgagee approved by the Secretary of
HUD;

          (t) The origination, servicing and collection practices with respect
to each Mortgage Note and Mortgage including, without limitation, the
establishment, maintenance and servicing of the Escrow Accounts and Escrow
Payments, if any, since origination, have been conducted in all respects in
accordance with the terms of Mortgage Note and in compliance with all applicable
laws and regulations and, unless otherwise required by law or FNMA/FHLMC
standard, in accordance with the proper, prudent and customary practices in the
mortgage origination and servicing business.  With respect to the Escrow
Accounts and Escrow Payments, if any, all such payments are in the possession or
under the control of the Seller and there exists no deficiencies in connection
therewith for which customary arrangements for repayment thereof have not been
made.  No escrow deposits or Escrow Payments or other charges or payments due
the Seller have been capitalized under any Mortgage or the related Mortgage
Note.  All Mortgage Interest Rate adjustments have been made in strict
compliance with state and federal law and the terms of the related Mortgage
Note.  Any interest required to be paid pursuant to state and local law has been
properly paid and credited;

          (u) The Mortgaged Property is free of material damage and waste and
there is no proceeding pending for the total or partial condemnation thereof;

          (v) The Mortgage contains customary and enforceable provisions to
render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security
intended to be provided thereby, including, (a) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial
foreclosure.  There is no other exemption available to the Mortgagor which would
interfere with the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage.  The Mortgagor has not notified the Seller
and the Seller has no knowledge of any relief requested or allowed to the
Mortgagor under the Soldiers and Sailors Civil Relief Act of 1940;


                                      11
<PAGE>
 
          (w)  The Mortgage Note is not and has not been secured by any
collateral except the lien of the applicable Mortgage;

          (x)  The Mortgage File contains an original appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan application
by a Qualified Appraiser duly appointed by the originator; the signature
appearing on such appraisal is the genuine signature of such Qualified
Appraiser; the appraisal is in a form acceptable to the Agencies, with such
riders as are acceptable to the Agencies;

          (y)  In the event the Mortgage constitutes a deed of trust, a trustee,
duly qualified under applicable law to serve as such, has been properly
designated and currently so serves and is named in the Mortgage, and no fees or
expenses are or will become payable by the Purchaser to the trustee under the
deed of trust, except in connection with a trustee's sale after default by the
Mortgagor;

          (z)  No Mortgage Loan contains a permanent or temporary "buydown"
provision;

          (aa) The Mortgagor has executed one or more statements to the effect
that the Mortgagor has received all disclosure materials required by applicable
law with respect to the making of the Mortgage Loan.  The Seller shall maintain
all such statements in the Mortgage File;

          (bb) No Mortgage Loan was made in connection with (a) the construction
or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or
exchange of a Mortgaged Property;

          (cc) [Intentionally left blank];

          (dd) To the best of Seller's knowledge, the Mortgaged Property is
lawfully occupied under applicable law and all inspections, licenses and
certificates required to be made or issued with respect to all occupied portions
of the Mortgaged Property and, with respect to the use and occupancy of the
same, including but not limited to certificates of occupancy, have been made or
obtained from the appropriate authorities;

          (ee) [Intentionally left blank];

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

          (gg) Any future advances made to the Mortgagor prior to the Closing
Date have been consolidated with the outstanding principal amount secured by the
Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term.  The lien of the Mortgage securing the
consolidated principal amount is expressly insured as having first lien priority
by a title insurance policy, an endorsement to the policy insuring the
mortgagee's consolidated interest or by other title evidence acceptable to the
Agencies.  The consolidated principal amount does not exceed the original
principal amount of the Mortgage Loan;

          (hh) If the Mortgaged Property is a condominium unit or a planned unit
development, such condominium or planned unit development project meets the
eligibility requirements of the Agencies;

          (ii) The Mortgage Note and Mortgage are on forms acceptable to either
of the Agencies;

          (jj) The Mortgaged Property is located in the state indicated on the
Mortgage Loan Schedule, and consists of a single parcel of real property with a
detached single family residence erected thereon or an individual condominium
unit, or a 2-4 family dwelling or an individual unit in a planned unit
development as defined by FNMA, none of which is a mobile home or manufactured
dwelling;


                                      12
<PAGE>
 
          (kk) There are no circumstances or conditions with respect to the
Mortgage, the Mortgage Property, the Mortgagor, the Mortgage File or the
Mortgagor's credit standing that can reasonably be expected to cause private
institutional investors to regard the Mortgage Loan as an unacceptable
investment, cause the Mortgage Loan to become delinquent, or adversely affect
the value or marketability of the Mortgage Loan;

          (ll) The Mortgage contains an enforceable provision for the
acceleration of the payment of the unpaid principal balance of the Mortgage Loan
in the event that the Mortgaged Property is sold or transferred without the
prior written consent of the mortgagee thereunder;

          (mm) The Seller has no knowledge of any circumstances existing that
could reasonably be expected to adversely affect the value or the marketability
of any Mortgaged Property or Mortgage Loan or to cause the Mortgage Loans to
prepay during any period materially faster or slower than the mortgage loans of
similar characteristics originated by the Seller generally;

          (nn) Each Mortgage Loan is covered by a valid and transferable tax
service contract with First American, or such other vendor as may be reasonably
acceptable to the Purchaser;

          (oo) Each Mortgage Loan is an adjustable rate mortgage loan requiring
monthly payments sufficient to amortize the original principal balance over the
original term set forth in the Mortgage Loan Schedule. No Mortgage Loan has
negatively amortized nor shall any Mortgage Loan have any negative amortization
after the Closing Date. The Mortgage Interest Rate adjusts semi-annually in
accordance with the related Mortgage Note, provided, however, with respect to
Segments A and B, the Mortgage Interest Rate shall be fixed for an initial
period of two (2) and three (3) years, respectively. On each Interest Adjustment
Date, the Mortgage Interest Rate shall be adjusted to equal the Index plus the
Gross Margin (rounded up or down to the nearest 0.125%), subject to the Periodic
Mortgage Interest Rate Cap and the Lifetime Mortgage Interest Rate Cap as set
forth in the respective Mortgage Note and the Mortgage Loan Schedule. None of
the Mortgage Loans contain a provision allowing the Mortgagor to convert the
Mortgage Note from an adjustable rate mortgage loan to a fixed rate mortgage
loan;

          (pp) Each Mortgage Loan at the time of origination was underwritten in
accordance with the credit underwriting guidelines of the Seller attached hereto
as Exhibit D and, to the extent not inconsistent therewith, generally accepted
   ---------                                                                  
sub-prime credit underwriting guidelines;

          (qq) As of the Closing Date, the Seller shall have received neither
actual nor constructive notice that either a Mortgage Loan will be paid in full
(whether by virtue of a demand statement or otherwise) or that any Mortgagor has
elected to convert the related Mortgage Loan into a fixed-rate mortgage loan in
accordance with the terms of the related Mortgage Note;

          (rr) The Mortgage Note is not and has not been secured by any
collateral except the lien of corresponding Mortgage on the Mortgaged Property;

          (ss) No Mortgage Loan contains provisions pursuant to which Monthly
Payments are (a) paid or partially paid with funds deposited in any separate
account established by the Seller, the Mortgagor, or anyone on behalf of the
Mortgagor or (b) paid by any source other than the Mortgagor or contains any
other similar provisions which may constitute a "buydown" provision.  The
Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan
does not have a shared appreciation or other contingent interest feature; and

          (tt) No error, omission, misrepresentation, negligence, fraud or
similar occurrence with respect to a Mortgage Loan has taken place on the part
of the Seller, or, to the best of Seller's knowledge, on the part of any other
person including without limitation the Mortgagor, any appraiser, any builder or
developer, or any other party involved in the origination of the Mortgage Loan
or in the application of any insurance in relation to such Mortgage Loan.


                                      13
<PAGE>
 
          (uu) There is no homestead or other exemption available to the
Mortgagor which would interfere with the right to sell the Mortgaged Property at
a trustee's sale or the right to foreclose the Mortgage subject to applicable
federal and state laws and judicial precedent with respect to bankruptcy and
right of redemption.

          (vv) There exists no violation of any local, state or federal
environmental law, rule or regulation in respect of the Mortgaged Property which
violation has or could have a material adverse effect on the market value of
such Mortgaged Property.  There exists no pending action or proceeding directly
or indirectly involving the related Mortgaged Property in which compliance with
any environmental law, rule or regulation is in issue; and, to the best of
Seller's knowledge, nothing further remains to be done to satisfy in full all
requirements of each such law, rule or regulation constituting a prerequisite to
the use and enjoyment of such Mortgaged Property.  There has been no release in
or on the Mortgaged Property of any hazardous substances, hazardous wastes or
solid wastes, as such terms are defined in the Comprehensive Environmental
Response Compensation and Liability Act, the Resource Conservation and Recovery
Act of 1976, or other federal, state and local environmental laws and the
Mortgage Property is not and has not been used for the storage or transportation
of any such hazardous substances, hazardous wastes or solid wastes.  There are
no underground storage tanks on the Mortgaged Property.

          (ww) Except as disclosed on the Mortgage Loan Schedule, none of the
Mortgage Loans are classified as "high cost" Mortgage Loans under Section 32 of
the Home Ownership and Equity Protection Act of 1994.

          (xx) None of the Mortgaged Properties are located in the State of
Alabama.

          (yy) If during the origination or acquisition of a Mortgage Loan a
yield spread premium or other origination fee was paid to any agent or affiliate
of Seller, Seller represents that such fees were disclosed on the settlement
statement provided to the related Mortgagor that evidences such Mortgagor's
acknowledgment of such fees and such disclosure will be included in the related
Mortgage File.

          SECTION 3.3  REMEDIES FOR BREACH OF REPRESENTATIONS AND WARRANTIES.
                       -----------------------------------------------------  
The representations and warranties set forth in Sections 3.1 and 3.2 shall
                                                --------------------      
survive the sale of the Mortgage Loans to the Purchaser and shall inure to the
benefit of the Purchaser, notwithstanding any restrictive or qualified
endorsement on any Mortgage Note or Assignment of Mortgage or the examination or
failure to examine any Mortgage File.  Furthermore, the absence of the Seller in
either the chain of title or endorsement shall in no way limit the Purchaser's
recourse against the Seller as provided in this Section 3.3 for a breach of one
                                                -----------                    
or more of the Seller's representations and warranties made herein.  Upon
discovery by either the Seller or the Purchaser of a breach of any of the
foregoing representations and warranties which materially and adversely affects
the value of one or more of the Mortgage Loans or the Purchaser's interest
therein, the party discovering such breach shall give written notice within
thirty (30) days of such discovery to the other.

          The Seller shall have a period of thirty (30) days from the earlier of
the discovery of a breach or the receipt by the Purchaser of notice of a breach
within which to correct or cure such breach.  If any such breach cannot be
corrected or cured within such thirty (30) day period, the Seller shall, at the
Purchaser's option and not later than thirty (30) days after its discovery or
its receipt of notice of such breach, repurchase such Mortgage Loan at the
Repurchase Price.  In the event that a breach shall involve any representation
or warranty set forth in Section 3.1 and such breach cannot be cured within
                         -----------                                       
sixty (60) days of the earlier of either discovery by or notice to the Seller of
such breach, all of the Mortgage Loans shall, at the Purchaser's option, be
repurchased by the Seller at the Repurchase Price.  Any repurchase of a Mortgage
Loan(s) pursuant to the foregoing provisions of this Section 3.3 shall be
                                                     -----------         
accomplished by wire transfer of immediately available funds on the repurchase
date to an account designated by the Purchaser.

          At the time of repurchase, the Purchaser and the Seller shall arrange
for the reassignment of the repurchased Mortgage Loan to the Seller and the
delivery to the Seller of any documents held by the Purchaser or its custodian
relating to such Mortgage Loan.  The Seller shall, simultaneously with such


                                      14
<PAGE>
 
reassignment, give written notice to the Purchaser that such repurchase has
taken place.  All out of pocket costs incurred by the Purchaser in connection
with the reassignment shall be paid by the Seller.

          Any cause of action against the Seller relating to or arising out of
the breach of any representations and warranties made in Sections 3.1 or 3.2
                                                         -------------------
shall accrue as to any Mortgage Loan upon (i) discovery of such breach by the
Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the
Seller to cure such breach or repurchase such Mortgage Loan as specified above,
and (iii) demand upon the Seller by the Purchaser for compliance with the
relevant provisions of this Agreement.

          Purchaser has the right to perform a field review of all appraisals of
the Mortgage Properties related to the Mortgage Loans on or before September 14,
1998, provided that Seller shall have delivered to the Purchaser, on or before
the Closing Date, copies of appraisals relating to certain Mortgaged Properties
(a list of which shall be provided by Purchaser to Seller prior to the Closing
Date) and the addresses of each of the Mortgagor.  If during such review
Purchaser determines using a third party appraisal service, that the Appraised
Value of any Mortgage Property varies by more than (i) ten percent (10%) for
Mortgage Loans disclosed on a Mortgage Loan Schedule with a Loan-To-Value Ratio
of less than or equal to 75% or (ii) five percent (5%) for Mortgage Loans
disclosed on a Mortgage Loan Schedule with a Loan-To-Value Ratio of greater than
75% then Purchaser will notify Seller of such variance.

          Within five (5) Business Days of receipt of such notification by
Purchaser, Seller, at its own expense, may request an additional independent
appraisal and/or a drive-by appraisal completed on FNMA form 2055 using an
appraisal service approved by Purchaser (such approval not to be unreasonably
withheld).  If such additional appraisal indicates that the variance is less
than 10% or 5%, as applicable, Purchaser will not pursue a repurchase; provided,
                                                                       -------- 
however, if such additional appraisal indicates a variance of more than 10% or
-------                                                                       
5%, as applicable, Seller must repurchase such Mortgage Loan by depositing in an
account specified by Purchaser the amount of the Repurchase Price within five
(5) Business Days.  When the Repurchase Price is wire transferred to the
specified account, Seller shall, simultaneously with such deposit, give written
notice to Purchaser that such deposit has taken Place.

          SECTION 3.4  INDEMNIFICATION OF THE PURCHASER.  (a)  In addition to
                       --------------------------------                      
the repurchase obligations set forth in Section 3.3, the Seller shall indemnify
                                     --------------                            
the Purchaser and hold it harmless against any losses, damages, penalties,
fines, forfeitures, judgments and any related costs including, without
limitation, reasonable and necessary legal fees, resulting from any claim,
demand, defense or a material omission on the part of the Seller in receiving,
processing, funding or servicing any Mortgage Loan, or from any assertion based
on, grounded upon or resulting from a breach of any of the Seller's
representations and warranties contained in this Article III, or failure to
                                                 -----------               
perform any warranty/agreements contained in this Agreement.  Notwithstanding
the foregoing, Seller shall not be liable for any damages resulting from a
material omission on the part of the Purchaser in servicing any Mortgage Loan
after the Servicing Transfer Date.  In addition to the obligations of the Seller
set forth in this Article III, the Purchaser may pursue any and all remedies
                  -----------                                               
otherwise available at law or in equity, including, but not limited to, the
right to seek damages.  Notwithstanding the foregoing, Seller shall not be
liable for any special, consequential or punitive damages.  This section shall
survive the transfer of the Mortgage Loans under this Agreement and the term of
this Agreement.

     (b)  Within ten (10) Business Days after a receipt by a party of a third
party claim, the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Agreement, deliver a claim notice
to the indemnifying party; provided, however, that the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that the indemnifying party may have to the indemnified party otherwise than
under this subsection, unless the indemnifying party is materially prejudiced
thereby.  In the event that any third party claim is made against the
indemnified party and the indemnified party notifies the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, to assume the defense
thereof, with counsel satisfactory to the indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), which consent shall not be unreasonably withheld.  The indemnified party
shall have the right to employ separate counsel in any 


                                      15
<PAGE>
 
action or claim and to participate in the defense thereof at the expense of the
indemnifying party, if the retention of such counsel has been specifically
authorized by the indemnifying party, if such counsel is retained because the
indemnifying party does not notify the indemnified party within fifteen (15)
Business Days after receipt of a claim notice that it elects to undertake the
defense thereof, or if there is a reasonable basis on which the indemnified
party's interest may differ from those of the indemnifying party.

     The indemnifying party shall remit payment for the amount of a valid and
substantiated claim for indemnification hereunder within fifteen (15) Business
Days of the receipt of a claim notice therefor.  Upon the payment in full of any
claim hereunder, the indemnifying party shall be subrogated to the rights of the
indemnified party against any person with respect to the subject matter of such
claim.  In the event of a dispute, the parties shall proceed in good faith to
negotiate a resolution of such dispute.

     The indemnified party shall have the right to reject any settlement
approved by the indemnifying party if the indemnified party waives its right to
indemnification hereunder.  The indemnified party shall have the right to settle
any third party claim over the objection of the indemnifying party; provided,
                                                                    -------- 
however, that if the indemnifying party is contesting such claim in good faith
-------                                                                       
and has assumed the defense of such claim from the indemnified party, the
indemnified party waives any right to indemnity therefor.

     In the event that the indemnifying party reimburses the indemnified party
with respect to any third party claim and the indemnified party subsequently
receives reimbursement from another person with respect to that third party
claim, then the indemnified party shall remit such reimbursement from such other
person to the indemnifying party within thirty (30) days of receipt thereof.

          SECTION 3.5  PREPAYMENT AND CONVERSION PROTECTION.  In the event that
                       ------------------------------------                    
any of the Mortgage Loans are (i) paid in full by the related Mortgagor or (ii)
converted to a fixed rate mortgage loan, in either case, on or prior to the
Servicing Transfer Date, or (iii) subject to a breach of the representation set
forth in Section 3.2(qq), the Seller shall, with respect to each such Mortgage
                 -------                                                      
Loan, pay to the Purchaser, in addition to the unpaid principal balance plus
accrued interest at the time of such payoff or conversion, the product of (a)
the positive difference, if any, between the Purchase Price Percentage and 100%,
times (b) the unpaid principal balance of such Mortgage Loan at the time such
Mortgage Loan is paid in full or converted, as applicable.

                                  ARTICLE IV

                    INTERIM SERVICING OF THE MORTGAGE LOANS
                    ---------------------------------------

          SECTION 4.1  GENERAL.  The Mortgage Loans will be purchased by the
                       -------                                              
Purchaser and sold by the Seller on a servicing-released basis and the purchase
of the Mortgage Loans by the Purchaser shall, for all purposes, include all
Servicing Rights relating thereto.  From the Closing Date to the Servicing
Transfer Date, the Seller shall interim service the Mortgage Loans in strict
accordance with the terms of this Agreement, applicable law, and, to the extent
not inconsistent herewith, the servicing standards of the Agencies.  Without
limiting the generality of the foregoing, the Seller shall not take, or fail to
take, any action which would result in the Purchaser's interest in the Mortgage
Loans being adversely affected.  It is expressly understood by the Seller that,
during the Interim Servicing Period, the Purchaser intends to market the
Mortgage Loans for sale to a whole loan investor and, as such, the Seller agrees
to comply with all reasonable requests of the Purchaser made prior to the
Servicing Transfer Date in order to effectuate the foregoing including, without
limitation, any request for information or documentation in connection with any
Mortgage Loan which the Purchaser deems is necessary to carry out the foregoing.
With respect to each Mortgage Loan for which an Escrow Account has been
established for the payment of taxes, insurance and other similar payments, the
Seller shall, upon notice from the Purchaser, effect the termination of such
Escrow Account on or prior to the Servicing Transfer Date, and refund any
positive balance therein to the related Mortgagor(s).

          SECTION 4.2  REPORTING AND REMITTANCE.  Within five (5) Business Days
                       ------------------------                                
following the conclusion of each calendar month reporting and remittance cycle
occurring during the Interim Servicing Period (each, a "Reporting Cycle"), if
any, the Seller shall forward to the Purchaser with respect to the 


                                      16
<PAGE>
 
Mortgage Loans a full set of tapes or other computer or like records and a trial
balance as of the end of each such Reporting Cycle, which tapes or computer
records and trial balance shall include information relating to all payment and
other activity on the Mortgage Loans. With respect to any payments of principal
or interest (including all prepayments) received, or applied to any Mortgagor's
account, by the Seller during the Interim Servicing Period (or prior to the
Closing Date, if any such payments were not reflected in the calculation of the
Purchaser Proceeds), the Seller shall remit to the Purchaser all such payments
of principal and interest on the Mortgage Loans no later than the fifth (5/th/)
day of the month following the conclusion of each Reporting Cycle and, with
respect to the month in which the Servicing Transfer Date occurs, no later than
the fifth (5/th/) Business Day thereafter.

                                   ARTICLE V

                         TRANSFER OF SERVICING RIGHTS
                         ----------------------------

          SECTION 5.1  TRANSFER OF SERVICING.  The Seller agrees to act
                       ---------------------                           
reasonably, in good faith and in accordance with all applicable laws and
regulations and to do all things necessary to effect the transfer of the
Servicing Rights to the Purchaser on the Servicing Transfer Date including,
without limitation, complying with all reasonable instructions provided by the
Purchaser relating to the transfer of the Servicing Rights.

          SECTION 5.2  OBLIGATIONS OF THE SELLER PRIOR TO THE SERVICING TRANSFER
                       ---------------------------------------------------------
DATE.  Without limiting the generality of Section 5.1, the Seller shall take, or
----                                                                            
cause to be taken, the following actions with respect to the Mortgage Loans
prior to the Servicing Transfer Date (or within such time as may otherwise be
specified below) in order to effect the transfer of the Servicing Rights to the
Purchaser on the Servicing Transfer Date:

          (a)  Preliminary Test Tape.  On or prior to the Closing Date, the
               ---------------------                                       
Seller shall forward to the Purchaser a preliminary test tape or other computer
or like records (including master file, escrow file, payee file, ARM master
file, ARM history, all HMDA data required by the Agencies, etc.) containing all
of the Mortgage Loans as of a date mutually agreed upon by the Seller and the
Purchaser.  The preliminary test tape or computer records shall include all
field descriptions and record layouts;

          (b)  Notice to Hazard Insurers.  The Seller shall inform by written
               -------------------------                                     
notice all hazard insurance companies and/or their agents of the transfer and
request a change in the loss payee mortgage endorsement clause to the
Purchaser's name.  The Seller shall provide the Purchaser with a form of the
notification letter and an officer's certification that all hazard insurance
companies have been notified by an identical letter;

          (c)  Notice to Mortgage Insurance Companies.  The Seller shall inform
               --------------------------------------                          
by written notice all mortgage insurance companies providing any Primary
Mortgage Insurance Policy of the change in insured's name on each such policy to
the Purchaser's name.  The Seller shall provide the Purchaser with a form of the
notification letter and an officer's written certification that all such
mortgage insurance companies have been notified by an identical letter;

          (d)  Tax Service Contracts.  The Seller shall have obtained a life of
               ---------------------                                           
loan, transferable real estate tax service contract with a tax service company
reasonably acceptable to the Purchaser on all of the Mortgage Loans and shall
assign all such contracts to the Purchaser or, in the alternative, the Seller,
                                           --                                 
shall notify the Purchaser as to any Mortgage Loans for which it has not
procured the requisite contract and shall pay to the Purchaser a fee of twenty-
five dollars ($25.00) for each such Mortgage Loan;

          (e)  Flood Certifications.  The Seller shall have obtained a life of
               --------------------                                           
loan, transferable flood certification contract for each Mortgage Loan and shall
assign all such contracts to the Purchaser or, in the alternative, the Seller
                                           --                                
shall notify the Purchaser as to any Mortgage Loans for which it has not
procured the flood certification referenced above and shall pay to the Purchaser
a fee of fifteen dollars ($15.00) for each such Mortgage Loan;


                                      17
<PAGE>
 
          (f)  Notice to Mortgagors.  The Seller shall, no later than fifteen
               --------------------                                          
(15) days prior to the Servicing Transfer Date, inform in writing all Mortgagors
of the change in servicer from the Seller to the Purchaser, all in accordance
with applicable law.  The Seller shall obtain the Purchaser's approval of the
form of such notifications prior to their mailing.  The Seller acknowledges that
the Purchaser's review of this notice shall not be a review for statutory or
regulatory compliance purposes, and that the Seller shall have the sole
responsibility for such compliance.  The Seller shall provide the Purchaser with
a form of the notification letter and an officer's written certification that
all Mortgagors have been notified by an identical letter;

          (g)  Payment of Real Estate Taxes.  The Seller shall make or cause to
               ----------------------                                          
be made all payments of all real estate taxes on the Mortgage Loans which (i)
will be delinquent on or prior to the Servicing Transfer Date, (ii) are required
to be paid within thirty (30) days after the Closing Date to receive a discount,
or (iii) will be delinquent within thirty (30) days after the Closing Date.  If
tax bills have not been received by the Seller by the Servicing Transfer Date on
any Mortgage Loans subject to this subsection, the Seller shall obtain and pay
all tax bills subsequent to the Servicing Transfer Date and the Purchaser will
promptly reimburse the Seller upon receipt from the Seller of documentation
evidencing such payment.  On non-impounded accounts, the Seller shall ensure
that all taxes which would otherwise be delinquent by the Servicing Transfer
Date, if not paid by such date, have been paid.  With respect to each of the
Mortgage Loans which do not have an impound or escrow account maintained for the
payment of taxes and insurance, the Seller shall hold harmless and indemnify the
Purchaser against any and all costs, expenses, penalties, fines, damages and
judgments of whatever kind arising from the Seller's failure to pay, or cause to
be paid, any delinquent taxes or tax penalties outstanding as of the Servicing
Transfer Date;

          (h)  Payment of Insurance Premiums, The Seller shall pay all hazard
and flood insurance and Primary Mortgage Insurance Policy premiums required to
be paid prior to the Servicing Transfer Date or within thirty (30) days after
the Closing Date on all impounded accounts relating to the Mortgage Loans and
shall ensure that all premiums required to be paid prior to the Servicing
Transfer Date by the Mortgagors on non-impounded accounts have been paid. With
respect to each of the Mortgage Loans which do not have an impound or escrow
account maintained for the payment of taxes and insurance, the Seller shall hold
harmless and indemnify the Purchaser against any and all costs, expenses,
penalties, fines, damages and judgments of whatever kind arising from the
Seller's failure to ensure that the related Mortgagor is maintaining adequate
insurance coverage on the Mortgaged Property at all times prior to the Servicing
Transfer Date in accordance with the terms of the any document contained in the
Mortgage File or any applicable law or regulation including, without limitation,
adequate flood insurance coverage for all Mortgaged Properties located within an
"A" or "V" flood hazard area; and

          (i)  ARM Adjustments.  With respect to each adjustable rate Mortgage
               ---------------                                                
Loan whose index value for any Interest Adjustment Date is available on or prior
to the Servicing Transfer Date, the Seller shall make all such adjustments and
shall inform the related Mortgagors of such adjustments.

          SECTION 5.3  OBLIGATIONS OF THE SELLER AFTER THE SERVICING TRANSFER
                       ------------------------------------------------------
DATE.  Without limiting the generality of Section 5.1, the Seller shall take, or
----                                      -----------                           
cause to be taken, the following actions with respect to the Mortgage Loans
within three (3) Business Days following the Servicing Transfer Date (or within
such time as may otherwise be specified below):

          (a)  Tape.  The Seller shall furnish to the Purchaser all available
               ----                                                          
computer or like records requested by the Purchaser reflecting the status of
payments, balances and other pertinent information with respect to the Mortgage
Loans as of the Servicing Transfer Date (including, without limitation, (I)
master file, (ii) escrow file, (iii) payee file, which includes comprehensive
tax and insurance information identifying payee, payee address, next payment due
date, next amount payable and policy number/parcel number, and (iv) ARM master
file).  Such records shall include magnetic tapes reflecting all computer files
maintained on the Mortgage-Loans and shall include hard copy trial balance
reports as specifically requested by the Purchaser;


                                      18
<PAGE>
 
          (b)  Mortgage File.  If the Seller has not already done so, the Seller
               -------------                                                    
shall have forwarded a complete Mortgage File with respect to each Mortgage
Loan;

          (c)  Accounting Reports.  The Seller shall furnish to the Purchaser
               ------------------                                            
copies of all accounting reports relating to the Mortgage Loans as of the
Servicing Transfer Date including, without   limitation, a trial balance and
reports of collections, delinquencies, prepaids, curtailments, escrow payments,
escrow balances, partial payments, partial payment balances and other like
information with respect to the Mortgage Loans;

          (d)  Other Documentation.  The Seller shall provide the Purchaser any
               -------------------                                             
and all further documents reasonably required by the Purchaser in order to fully
transfer to the Purchaser possession of all tangible evidence of the Servicing
Rights and escrow, impound and trust funds transferred hereunder;

          (e)  Transfer of Escrow Funds and Other Proceeds.  The Seller shall
               -------------------------------------------                   
transfer to the Purchaser, by wire transfer to the account designated by the
Purchaser, an amount equal to the sum of (i) the Net Escrow Payments, (ii) all
undistributed insurance loss draft funds, (iii) all unapplied funds received by
the Seller, (iv) all unapplied interest on escrow balances accrued through the
Servicing Transfer Date, (v) all buydown funds held by the Seller as of the
Servicing Transfer Date, and (vi) all other amounts held by the Seller with
respect to the Mortgage Loans as of the Servicing Transfer Date for which the
Seller is not entitled to retain (collectively, the "Escrow Proceeds").  Within
five (5) Business Days following the Purchaser's receipt of the Escrow Proceeds,
the Seller and the Purchaser shall resolve any discrepancies between the
Seller's accounting statement and the Purchaser's reconciliation with respect
thereto.  No later than ten (10) Business Days following the Servicing Transfer
Date, the Seller or the Purchaser, as the case may be, shall transfer to the
other, by wire transfer to the designated account, any amounts to which the
other party is entitled; and

          (f)  Mortgage Payments Received After Servicing Transfer Date.  The
               --------------------------------------------------------      
Seller shall, within two (2) Business Days of receipt, forward to the Purchaser
any payment received by it after the Servicing Transfer Date with respect to any
of the Mortgage Loans, whether such payment is in the form of principal,
interest, taxes, insurance, loss drafts, insurance refunds, etc., in the
original form received, unless such payment has been received in cash or by the
Seller's lock box facility, in which case the Seller shall forward such payment
in a form acceptable to the Purchaser.  The Seller shall notify the Purchaser of
the particulars of the payment, which notification shall set forth sufficient
information to permit timely and appropriate processing of the payment by the
Purchaser.

                                  ARTICLE VI

                                 MISCELLANEOUS
                                 -------------

          SECTION 6.1  NOTICES.  All demands, notices and communications
                       -------                                          
required to be provided hereunder shall be in writing and shall be deemed to
have been duly given if mailed, by registered or certified mail, postage
prepaid, and return receipt requested, or, if by other means, when received by
the other party at the address as follows:

               (i)  if to the Seller:

                    United PanAm Mortgage
                    625 The City Drive
                    Orange, CA 92868
                    Attn:  Mr. Blair Kenny

               (ii) if to the Purchaser:

                    As provided by Purchaser in writing.


                                      19
<PAGE>
 
or such other address as may hereafter be furnished to the other party by like
notice.  Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).

          SECTION 6.2  INTENTION OF THE PARTIES.  Pursuant to this Agreement,
                       ------------------------                              
the Purchaser is purchasing, and the Seller is selling the Mortgage Loans and
not a debt instrument of the Seller or any other security.  Accordingly, the
Seller and the Purchaser shall each treat the transaction for federal income tax
purposes as a sale by the Seller, and a purchase by the Purchaser, of the
Mortgage Loans and the Servicing Rights.  The Purchaser shall have the right to
review the Mortgage Loans and the related Mortgage Loan Files to determine the
characteristics of the Mortgage Loans which shall affect the federal income tax
consequences of owning the Mortgage Loans and the Servicing Rights and the
Seller shall cooperate with all reasonable requests made by the Purchaser in the
course of such review.

          SECTION 6.3  EXHIBITS.  The exhibits to this Agreement are hereby
                       --------                                            
incorporated and made a part hereof and are an integral part of this Agreement.

          SECTION 6.4  GENERAL INTERPRETIVE PRINCIPLES.  For purposes of this
                       -------------------------------                       
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:

          (a)  the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular, and the
use of any gender herein shall be deemed to include the other gender;

          (b)  accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;

          (c)  references herein to "Sections," "Subsections," "Paragraphs," and
other Subdivisions without reference to a document are to designated Sections,
Subsections, Paragraphs and other subdivisions of this Agreement;

          (d)  reference to a Subsection without further reference to a Section
is a reference to such Subsection as contained in the same Section in which the
reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;

          (e)  the words "herein," "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular provision; and

          (f)  the term "include" or "including" shall mean without limitation
by reason of enumeration.

          SECTION 6.5  REPRODUCTION OF DOCUMENTS.  This Agreement and all
                       -------------------------                         
documents relating thereto, including, without limitation, (a) consents, waivers
and modifications which may hereafter be executed, (b) documents received by any
party at the closing, and (c) financial statements, certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, micro-card, miniature photographic or
other similar process.  The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.

          SECTION 6.6  FURTHER AGREEMENTS.  The Seller shall execute and deliver
                       ------------------                                       
to the Purchaser and the Purchaser shall execute and deliver to the Seller such
reasonable and appropriate additional documents, instruments or agreements as
may be necessary or appropriate to effectuate the purposes of this Agreement.


                                      20
<PAGE>
 
          SECTION 6.7  EXECUTION OF AGREEMENT.  This Agreement may be executed
                       ----------------------                                 
simultaneously in any number of counterparts.  Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.  This Agreement shall be deemed binding when executed by both the
Purchaser and the Seller.  Telecopy signatures shall be deemed valid and binding
to the same extent as the original.

          SECTION 6.8  SUCCESSORS AND ASSIGNS.  This Agreement shall bind and
                       ----------------------                                
inure to the benefit of and be enforceable by the Seller and the Purchaser and
the respective permitted successors and assigns of the Seller and the successors
and assigns of the Purchaser.  This Agreement shall not be assigned, pledged or
hypothecated by the Seller without the consent of the Purchaser.  This Agreement
may be assigned, pledged or hypothecated or otherwise transferred or encumbered
by the Purchaser, in whole or part, without the consent of the Seller.  If the
Purchaser assigns all of its rights as the Purchaser hereunder relating to some
or all of the Mortgage Loans, the assignee of the Purchaser, upon notification
to the Seller, will become the "Purchaser" hereunder with respect to such
Mortgage Loans assigned hereby.

          SECTION 6.9  SEVERABILITY CLAUSE.  Any part, provision, representation
                       -------------------                                      
or warranty of this Agreement which is prohibited or which is held to be void or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.  Any
part, provision, representation or warranty of this Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
relevant jurisdiction shall be ineffective, as to such jurisdiction, to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction.  To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof.

          SECTION 6.10  COSTS.  The Purchaser shall pay any commissions due its
                        -----                                                  
salesmen and the legal fees and expenses of its attorneys and expenses of its
custodian.  All other costs and expenses incurred in connection with the
transfer and delivery of the Mortgage Loans, including recording fees, fees for
title policy endorsements and continuations and the Seller's attorney's fees,
shall be paid by the Seller.

          SECTION 6.11  ATTORNEYS' FEES.  If any claim, legal action or any
                        ---------------                                    
arbitration or other proceeding is brought for the enforcement of this Agreement
or because of a dispute, breach, default or misrepresentation in connection with
any of the provisions of this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that claim, action or proceeding, in addition to any other relief to which
such party may be entitled.

          SECTION 6.12  GOVERNING LAW.  This Agreement shall be governed by and
                        -------------                                          
interpreted in accordance with the laws of the State of California applicable to
agreements entered into and wholly performed within said jurisdiction.

          SECTION 6.13  SURVIVAL.  All covenants, agreements, representations
                        --------                                             
and warranties made herein shall survive the execution and delivery of this
Agreement.

          SECTION 6.14  ENTIRE AGREEMENT.  This Agreement constitutes the entire
                        ----------------                                        
understanding between the parties hereto and supersedes any and all prior or
contemporaneous oral or written communications with respect to the subject
matter hereof, all of which communications are merged herein. It is expressly
understood and agreed that no employee, agent or other representative of the
Seller or the Purchaser has any authority to bind such party with regard to any
statement, representation, warranty or other expression unless said statement,
representation, warranty or other expression is specifically included within the
express terms of this Agreement.  This Agreement shall not be modified, amended
or in any way altered except by an instrument in writing signed by both the
parties hereto.

          SECTION 6.15  CONFIDENTIALITY.  The Seller and the Purchaser hereby
                        ---------------                                      
acknowledge and agree that this Agreement shall be kept confidential and its
contents will not be divulged to any party 


                                      21
<PAGE>
 
without the other party's consent except to the extent that it is appropriate
for the Seller or the Purchaser to do so in working with legal counsel,
auditors, taxing authorities or other governmental agencies. Neither Seller nor
any of its affiliates or agents shall issue any press release or public
announcement concerning the contemplated transaction, the existence of this
Agreement, or the terms, conditions, and provisions of this Agreement (i)
without the prior written consent of Purchaser or (ii) except as required by
law, in which event Seller shall consult with Purchaser to the extent
practicable before making such disclosure.

          SECTION 6.16  NO SOLICITATION.  From and after the Closing Date, the
                        ---------------                                       
Seller agrees that for a period of five (5) years, it will not take any action
or cause any action to be taken by any of its employees, agents or affiliates,
or by any independent contractors acting on the Seller's behalf, to solicit in
any manner whatsoever any Mortgagor to prepay or refinance a Mortgage Loan.  It
is understood and agreed by the Seller and the Purchaser that all rights and
benefits relating to the solicitation of any Mortgagors to refinance any
Mortgage Loans shall be transferred to the Purchaser pursuant hereto on the
Closing Date and the Seller shall take no action to undermine these rights and
benefits.  The Seller shall use its best efforts to prevent the sale of the name
of any Mortgagor to any person or entity.  It is understood that promotions
undertaken by the Seller or Seller's affiliate(s) which are directed to the
general public at large (i.e., newspaper advertisements, radio or T.V. ads,
etc.) and not specifically directed to any Mortgagor or any borrower identified
in any Mortgage Loan shall not constitute a breach of the obligations set forth
in this Section 6.16.

          SECTION 6.17  NON-CIRCUMVENTION.  The Seller and the Purchaser
                        ------------------                              
understand and agree that the Purchaser may introduce prospective buyers of the
Mortgage Loans to the Seller, that such buyers are customers of the Purchaser
and that relationships of the Purchaser to such buyers are confidential. The
Seller agrees with respect to a particular buyer of the Mortgage Loans, the
Seller will not, for the purpose of buying and selling other mortgage loans, and
for a period of nine (9) months from the Closing Date, communicate with or sell
such other mortgage loans to such buyer unless such buyer is or has been
independently introduced to the Seller or the Seller has had previous dealings
(other than any transactions involving the Purchaser) with such buyer.


                           [SIGNATURE PAGE FOLLOWS]


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<PAGE>
 
          IN WITNESS WHEREOF, the Seller and the Purchaser have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as of e date first above written.

                                        COUNTRYWIDE HOME LOANS, INC.,
                                        as Purchaser


                                        By:  /s/  Michael W. Schloessmann
                                             --------------------------------
                                             Michael W. Schloessmann
                                             Vice President


                                        PAN AMERICAN BANK, FSB,
                                        as Seller


                                             
                                        By:  /s/  Blair Kenny
                                             --------------------------------
                                             Name:  Blair Kenny
                                             Title:  Senior Vice President


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