Document:

<PAGE>
                                                                    EXHIBIT 10.1

                        ROCKY MOUNTAIN CHOCOLATE FACTORY

                               FRANCHISE AGREEMENT

                                    Franchisee:
                                               ---------------------------------
                                    Date:
                                         ---------------------------------------
                                    Franchised Location:
                                                        ------------------------

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

<PAGE>

                     ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
                               FRANCHISE AGREEMENT
                                TABLE OF CONTENTS

<Table>
<S>                                                                                                              <C>
1.    PURPOSE.....................................................................................................1

2.    GRANT OF FRANCHISE..........................................................................................1
         2.1.         Grant of Franchise..........................................................................1
         2.2.         Scope of Franchise Operations...............................................................1

3.    FRANCHISED LOCATION AND DESIGNATED AREA.....................................................................2
         3.1.         Franchised Location.........................................................................2
         3.2.         Limitation on Franchise Rights; Relocation..................................................2
         3.3.         Franchisor's Reservation of Rights..........................................................2

4.    INITIAL FRANCHISE FEE.......................................................................................3
         4.1.         Initial Franchise Fee.......................................................................3

5.    DEVELOPMENT OF FRANCHISED LOCATION..........................................................................3
         5.1.         Approval of Lease...........................................................................3
         5.2.         Conversion and Design.......................................................................4
         5.3.         Signs.......................................................................................4
         5.4.         Equipment...................................................................................4
         5.5.         Permits and Licenses........................................................................4
         5.6.         Commencement of Operations..................................................................5

6.    TRAINING....................................................................................................5
         6.1.         Initial Training Program....................................................................5
         6.2.         Length of Training..........................................................................6
         6.3.         Additional Training.........................................................................6

7.    DEVELOPMENT ASSISTANCE......................................................................................6
         7.1.         Franchisor's Development Assistance.........................................................6

8.    OPERATIONS MANUAL...........................................................................................7
         8.1.         Operations Manual...........................................................................7
         8.2.         Confidentiality of Operations Manual Contents...............................................7
         8.3.         Changes to Operations Manual................................................................7

9.    OPERATING ASSISTANCE........................................................................................8
         9.1.         Franchisor's Services.......................................................................8
         9.2.         Additional Franchisor Services..............................................................8

10.   FRANCHISEE'S OPERATIONAL COVENANTS..........................................................................8
         10.1.        Store Operations............................................................................8

11.   ROYALTIES..................................................................................................11
         11.1.        Monthly Royalty............................................................................11
         11.2.        Gross Retail Sales.........................................................................11
         11.3.        Royalty Payments...........................................................................12

12.   ADVERTISING................................................................................................12
         12.1.        Approval of Advertising....................................................................12
         12.2.        Local Advertising..........................................................................12
         12.3.        Marketing and Promotion Fee................................................................13
         12.4.        Regional Advertising Programs..............................................................13
</Table>

<PAGE>

<Table>
<S>                                                                                                              <C>
         12.5.        Marketing Services.........................................................................14

13.   QUALITY CONTROL............................................................................................14
         13.1.        Compliance with Operations Manual..........................................................14
         13.2.        Standards and Specifications...............................................................14
         13.3.        Inspections................................................................................14
         13.4.        Restrictions on Services and Products......................................................14
         13.5.        Approved Suppliers.........................................................................15
         13.6.        Request to Change Supplier.................................................................15
         13.7.        Approval of Intended Supplier..............................................................15

14.   TRADEMARKS, TRADE NAMES AND PROPRIETARY INTERESTS..........................................................16
         14.1.        Marks......................................................................................16
         14.2.        No Use of Other Marks......................................................................16
         14.3.        Licensed Methods...........................................................................16
         14.4.        Effect of Termination......................................................................16
         14.5.        Mark Infringement..........................................................................16
         14.6.        Franchisee's Business Name.................................................................17
         14.7.        Change of Marks............................................................................17
         14.8.        Creative Ownership.........................................................................17

15.   REPORTS, RECORDS AND FINANCIAL STATEMENTS..................................................................18
         15.1.        Franchisee Reports.........................................................................18
         15.2.        Annual Financial Statements................................................................18
         15.3.        Verification...............................................................................18
         15.4.        Books and Records..........................................................................18
         15.5.        Audit of Books and Records.................................................................18
         15.6.        Failure to Comply with Reporting Requirements..............................................19
         15.7.        Shopping Service...........................................................................19

16.   TRANSFER...................................................................................................19
         16.1.        Transfer by Franchisee.....................................................................19
         16.2.        Pre-Conditions to Franchisee's Transfer....................................................19
         16.3.        Franchisor's Approval of Transfer..........................................................20
         16.4.        Right of First Refusal.....................................................................20
         16.5.        Types of Transfers.........................................................................21
         16.6.        Transfer by the Franchisor.................................................................21
         16.7.        Franchisee's Death or Disability...........................................................21

17.   TERM AND EXPIRATION........................................................................................22
         17.1.        Term.......................................................................................22
         17.2.        Continuation...............................................................................22
         17.3.        Rights Upon Expiration.....................................................................22
         17.4.        Exercise of Option for Successor Franchise.................................................23
         17.5.        Conditions of Refusal......................................................................23

18.   DEFAULT AND TERMINATION....................................................................................23
         18.1.        Termination by Franchisor - Effective Upon Notice..........................................23
         18.2.        Termination by Franchisor - Thirty Days Notice.............................................24
         18.3.        Franchisor's Remedies......................................................................25
         18.4.        Right to Purchase..........................................................................25
         18.5.        Obligations of Franchisee Upon Termination or Expiration...................................26
         18.6.        State and Federal Law......................................................................27
</Table>

<PAGE>

<Table>
<S>                                                                                                              <C>
19.   BUSINESS RELATIONSHIP......................................................................................28
         19.1.        Independent Businesspersons................................................................28
         19.2.        Payment of Third Party Obligations.........................................................28
         19.3.        Indemnification............................................................................28

20.   RESTRICTIVE COVENANTS......................................................................................28
         20.1.        Non-Competition During Term................................................................28
         20.2.        Post-Termination Covenant Not to Compete...................................................29
         20.3.        Confidentiality of Proprietary Information.................................................29
         20.4.        Confidentiality Agreement..................................................................30

21.   INSURANCE..................................................................................................30
         21.1.        Insurance Coverage.........................................................................30
         21.2.        Proof of Insurance Coverage................................................................30

22.   MISCELLANEOUS PROVISIONS...................................................................................30
         22.1.        Governing Law/Consent to Venue and Jurisdiction............................................30
         22.2.        Cumulative Rights..........................................................................31
         22.3.        Modification...............................................................................31
         22.4.        Entire Agreement...........................................................................31
         22.5.        Delegation by the Franchisor...............................................................31
         22.6.        Effective Date.............................................................................32
         22.7.        Review of Agreement........................................................................32
         22.8.        Attorneys' Fees............................................................................32
         22.9.        Injunctive Relief..........................................................................32
         22.10.       No Waiver..................................................................................32
         22.11.       No Right to Set Off........................................................................32
         22.12.       Invalidity.................................................................................32
         22.13.       Notices....................................................................................32
         22.14.       Payment of Taxes...........................................................................33
         22.15.       Acknowledgement............................................................................33
</Table>

         EXHIBITS

I.       Addendum to Franchise Agreement - Location Approval

II.      Personal Guaranty

III.     Statement of Ownership

IV.      Authorization Agreement for Prearranged Payments

V.       Permit, License and Construction Certificate

VI.      Confidentiality and Noncompetition Agreement

<PAGE>

                     ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
                               FRANCHISE AGREEMENT

         THIS AGREEMENT (the "AGREEMENT") is made this ____ day of
_______________, 20___, by and between ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a
Colorado corporation, located at 265 Turner Drive, Durango, Colorado 81303 (the
"FRANCHISOR") and _____________________________________________________________,
located at _____________________________________________________________________
(the "FRANCHISEE"), who, on the basis of the following understandings and
agreements, agree as follows:

                                   1. PURPOSE

         1.1 The Franchisor has developed methods for establishing, operating
and promoting retail stores selling gourmet chocolates and other premium
confectionery products ("ROCKY MOUNTAIN CHOCOLATE FACTORY STORES" or "STORES")
using the service mark "ROCKY MOUNTAIN CHOCOLATE FACTORY" and related trade
names and trademarks ("MARKS") and the Franchisor's proprietary methods of doing
business (the "LICENSED METHODS").

         1.2. The Franchisor grants the right to others to develop and operate
ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, under the Marks and pursuant to the
Licensed Methods.

         1.3. The Franchisee desires to establish a ROCKY MOUNTAIN CHOCOLATE
FACTORY Store at a location identified herein or to be later identified, and the
Franchisor desires to grant the Franchisee the right to operate a ROCKY MOUNTAIN
CHOCOLATE FACTORY Store at such location under the terms and conditions which
are contained in this Agreement.

                             2. GRANT OF FRANCHISE

2.1.     GRANT OF FRANCHISE.

         The Franchisor grants to the Franchisee, and the Franchisee accepts
from the Franchisor, the right to use the Marks and Licensed Methods in
connection with the establishment and operation of a ROCKY MOUNTAIN CHOCOLATE
FACTORY Store, at the location described in Article 3 of this Agreement. The
Franchisee agrees to use the Marks and Licensed Methods, as they may be changed,
improved, and further developed by the Franchisor from time to time, only in
accordance with the terms and conditions of this Agreement.

2.2.     SCOPE OF FRANCHISE OPERATIONS.

         The Franchisee agrees at all times to faithfully, honestly and
diligently perform the Franchisee's obligations hereunder, and to continuously
exert best efforts to promote the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. The
Franchisee agrees to utilize the Marks and Licensed Methods to operate all
aspects of the business franchised hereunder in accordance with the methods and
systems developed and prescribed from time to time by the Franchisor, all of
which are a part of the Licensed Methods. The Franchisee's ROCKY MOUNTAIN
CHOCOLATE FACTORY Store shall offer such products and services as the Franchisor
shall designate and shall be restricted from manufacturing, offering or selling
any products and services not previously approved by the Franchisor in writing.
The Franchisee is required to devote a minimum of 50% of all retail display
space to ROCKY MOUNTAIN CHOCOLATE FACTORY brand assorted bulk chocolates and
boxed and packaged candies. The Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY
Store must feature ROCKY

<PAGE>

MOUNTAIN CHOCOLATE FACTORY brand candy and other confectionery products
("CANDY") and related nonconfectionery items ("ITEMS") approved by the
Franchisor in writing. The Franchisee shall also be permitted to make, serve and
sell store-made candies ("STORE-MADE CANDIES") prepared in accordance with
recipes and techniques in the Operations Manual.

                   3. FRANCHISED LOCATION AND DESIGNATED AREA

3.1.     FRANCHISED LOCATION.

         The Franchisee is granted the right and franchise to own and operate a
ROCKY MOUNTAIN CHOCOLATE FACTORY Store at the address and location which shall
be set forth in Exhibit I, attached hereto ("FRANCHISED LOCATION").

3.2.     LIMITATION ON FRANCHISE RIGHTS; RELOCATION.

         The rights that are hereby granted to the Franchisee are for the
specific Franchised Location and cannot be transferred to an alternative
Franchised Location, or any other location, without the prior written approval
of the Franchisor. If the Franchisee has operated a ROCKY MOUNTAIN CHOCOLATE
FACTORY Store for not less than 12 months and desires to relocate it to an
alternative site, the Franchisee must set forth its reasons for requesting the
relocation in writing to the Franchisor, along with a proposed new location. The
Franchisor will have 30 days from receipt of the Franchisee's written request to
respond. If the Franchisor approves the relocation and the proposed new
location, and if the ownership of the Franchisee does not change in any respect
from the ownership of the Franchisee before the relocation, then the Franchisee
may move its Store to the new approved location, provided that the Franchisee
signs the Franchisor's then current form of Franchise Agreement and opens the
Store at the new location within 12 months after the Store closes at its former
Franchised Location. In addition, the Franchisee will be required to either hire
an independent architect/designer or request design assistance from the
Franchisor for the design of their new Store location. If the Franchisee
requests design assistance from the Franchisor, the Franchisee must pay a
nonrefundable design fee of up to $2,500 to the Franchisor for the Franchisor's
Store designers to design the layout of the Franchisee's new Store location. A
similar design fee will also apply if the Franchisee requests design assistance
in remodeling its Store at any time during the term of this Agreement. See
Section 5.2 below. The Marks and Licensed Methods are licensed to the Franchisee
for the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store only at the
Franchised Location; therefore, the Franchisee may not operate food carts or
kiosks, participate in food festivals or offer any other type of off-site food
services using the Marks and Licensed Methods without the prior written consent
of the Franchisor, in which case the Franchisor and the Franchisee shall execute
an addendum to this Agreement relating to the operation of "SATELLITE STORES"
(if this Agreement governs the operation of a traditional Store, any Satellite
Store(s) shall be governed by separate Franchise Agreements) or "TEMPORARY
STORES."

3.3.     FRANCHISOR'S RESERVATION OF RIGHTS.

         The Franchisee acknowledges that the franchise granted hereunder is
non-exclusive and that the Franchisor retains the rights, among others: (1) to
use, and to license others to use, the Marks and Licensed Methods for the
operation of ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, Satellite Stores and
Temporary Stores, at any location other than at the Franchised Location; (2) to
use the Marks and Licensed Methods to identify services and products,
promotional and marketing efforts or related items, and to identify products and
services similar to those which the Franchisee will sell, but made available
through alternative channels of distribution other than through traditional
ROCKY MOUNTAIN CHOCOLATE FACTORY Stores, at any location other than at the
Franchised Location, including, but not limited to, through Satellite Stores,
Temporary Stores, by way of mail order, (including

                                       2
<PAGE>

electronic mail order), the internet, catalog, television, retail store kiosk or
display or through the wholesale sale of its products to unrelated retail
outlets or to candy distributors or outlets located in stadiums, arenas,
airports, turnpike rest stops or supermarkets; and (3) to use and license the
use of other proprietary marks or methods in connection with the sale of
products and services similar to those which the Franchisee will sell or in
connection with the operation of retail stores selling gourmet chocolates or
other premium confectionery products, at any location other than at the
Franchised Location, which stores are the same as, or similar to, or different
from a traditional ROCKY MOUNTAIN CHOCOLATE FACTORY Store or a Satellite Store
or a Temporary Store, on any terms and conditions as the Franchisor deems
advisable, and without granting the Franchisee any rights therein.

                            4. INITIAL FRANCHISE FEE

4.1.     INITIAL FRANCHISE FEE.

         In consideration for the right to develop and operate one ROCKY
MOUNTAIN CHOCOLATE FACTORY Store, the Franchisee agrees to pay to the Franchisor
an initial franchise fee in the amount set forth in Exhibit I attached hereto,
$5,000 of which is due and payable as of the date of execution of this
Agreement, with the balance due and payable at the earlier of 120 days from the
date this Agreement is executed or the date that a lease is executed for a
Franchised Location that has been approved by the Franchisor. The Franchisee
acknowledges and agrees that the initial franchise fee represents payment for
the initial grant of the rights to use the Marks and Licensed Methods, that the
Franchisor has earned the initial franchise fee upon receipt thereof and that
the fee is under no circumstances refundable to the Franchisee after it is paid,
unless otherwise specifically set forth in this Agreement. If a transfer occurs,
no initial franchise fee shall be due at the time that the Franchisee transfers
the Store to another party, but a transfer fee will apply as set forth in
Section 16.2 of this Agreement.

                     5. DEVELOPMENT OF FRANCHISED LOCATION

5.1.     APPROVAL OF LEASE.

         The Franchisee shall obtain the Franchisor's prior written approval
before executing any lease or purchase agreement for the Franchised Location.
Any lease for the Franchised Location shall, at the option of the Franchisor,
contain provisions including: (1) allowing for assignment of the lease to the
Franchisor in the event that this Agreement is terminated or not renewed for any
reason; (2) giving the Franchisor the right to cure any default by the
Franchisee under such lease; and/or (3) providing the Franchisor with the right,
exercisable upon and as a condition of the approval of the Franchised Location,
to execute the lease agreement or other document providing entitlement to the
use of the Franchised Location in its own name or jointly with the Franchisee as
lessee and, upon the exercise of such option, the Franchisor shall provide the
Franchisee with the right to use the premises as its sublessee, assignee, or
other similar capacity upon the same terms and conditions as obtained by the
Franchisor. The Franchisor may choose to hire a third party professional to
negotiate the Franchisee's lease and the Franchisee agrees to reimburse the
Franchisor for its actual costs associated with any such negotiation. The
Franchisee shall deliver a copy of the signed lease for the Franchised Location
to the Franchisor within 15 days of its execution. The Franchisee acknowledges
that approval of a lease for the Franchised Location by the Franchisor does not
constitute a recommendation, endorsement or guarantee by the Franchisor of the
suitability of the location or the lease and the Franchisee should take all
steps necessary to ascertain whether such location and lease are acceptable to
the Franchisee.

                                       3
<PAGE>

5.2.     CONVERSION AND DESIGN.

         The Franchisee acknowledges that the layout, design, decoration and
color scheme of ROCKY MOUNTAIN CHOCOLATE FACTORY Stores are an integral part of
the Franchisor's proprietary Licensed Methods and accordingly, the Franchisee
shall convert, design and decorate the Franchised Location in accordance with
the Franchisor's plans and specifications which are contained in a Design and
Construction Manual that is considered, for the purposes of this Agreement, to
be a part of the Operations Manual, defined in Section 8.1. The Franchisee shall
hire an architect/designer to prepare written plans for the Store's layout and
construction, which plans shall be submitted to the Franchisor for its prior
written approval. Throughout the term of this Agreement, the Franchisee shall
also obtain the Franchisor's written consent to any remodeling or decoration of
the premises before remodeling or decorating begins, recognizing that such
remodeling, decoration and any related costs are the Franchisee's sole
responsibility. If the Franchisee elects to remodel its Store at any time during
the term of this Agreement and requests assistance from the Franchisor in
designing its Store premises, the Franchisee shall pay the Franchisor up to
$2,500 for the Franchisor's design services.

5.3.     SIGNS.

         The Franchisee shall purchase or otherwise obtain for use at the
Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store signs which comply with the standards and specifications of the Franchisor
as set forth in the Operations Manual, as that term is defined in Section 8.1.
It is the Franchisee's sole responsibility to insure that any signs comply with
applicable local ordinances, building codes and zoning regulations. Any
modifications to the Franchisor's standards and specifications for signs which
must be made due to local ordinances, codes or regulations shall be submitted to
the Franchisor for prior written approval. The Franchisee acknowledges the
Marks, or any other name, symbol or identifying marks on any signs shall only be
used in accordance with the Franchisor's standards and specifications and only
with the prior written approval of the Franchisor.

5.4.     EQUIPMENT.

         The Franchisee shall purchase or otherwise obtain for use at the
Franchised Location and in connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store equipment of a type and in an amount which complies with the standards and
specifications of the Franchisor. The Franchisee acknowledges that the type,
quality, configuration, capability and/or performance of the equipment are all
standards and specifications which are a part of the Licensed Methods and
therefore such equipment must be purchased, leased, or otherwise obtained in
accordance with the Franchisor's standards and specifications and only from
suppliers or other sources approved by the Franchisor. The Franchisee must
purchase a facsimile machine and connect it to a phone line which is separate
from the main phone number for the Store. The Franchisee shall equip the Store
with an integrated store information system ("SYSTEM"), computer hardware and
software, printers and other designated equipment consistent with the standards
and specifications of the Franchisor. The Franchisor requires that it be given
reasonable access to information and data regarding the Franchisee's ROCKY
MOUNTAIN CHOCOLATE FACTORY Store by computer modem with a separate phone line
dedicated to such modem, or by another form of electronic transmission. The
Franchisor also requires the Franchisee to obtain and maintain an account with
an internet service provider which meets the Franchisor's standards and
specifications to facilitate electronic communication.

5.5.     PERMITS AND LICENSES.

         The Franchisee agrees to obtain all such permits and certifications as
may be required for the lawful construction and operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store

                                       4
<PAGE>

together with all certifications from government authorities having jurisdiction
over the site that all requirements for construction and operation have been
met, including without limitation, zoning, access, sign, health, safety
requirements, building and other required construction permits, licenses to do
business and fictitious name registrations, sales tax permits, health and
sanitation permits and ratings and fire clearances. Franchisee agrees to obtain
all customary contractors' sworn statements and partial and final lien waivers
for construction, remodeling, decorating and installation of equipment at the
Franchised Location. Franchisee shall sign and deliver to the Franchisor the
Permit, License and Construction Certificate set forth as Exhibit V to this
Agreement, to confirm Franchisee's compliance with the Americans with
Disabilities Act and other provisions of this Section 5.5 not later than 30 days
prior to the date the Store begins operating. Copies of all inspection reports,
warnings, certificates and ratings issued by any governmental entity during the
term of this Agreement in connection with the conduct of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store which indicates the Franchisee's failure to meet or
maintain the highest governmental standards, or less than full compliance by the
Franchisee with any applicable law, rule or regulation, shall be forwarded to
the Franchisor within five days of the Franchisee's receipt thereof.

5.6.     COMMENCEMENT OF OPERATIONS.

         Unless otherwise agreed in writing by the Franchisor and the
Franchisee, the Franchisee has 180 days from the date of this Agreement within
which to complete the initial training program, described in Section 6.1 of this
Agreement, develop the Franchised Location and commence operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store. Failure to commence operations within this
time frame shall constitute grounds for termination under Article 18 of this
Agreement. The Franchisor will extend the time in which the Franchisee has to
commence operations for a reasonable period of time in the event factors beyond
the Franchisee's reasonable control prevent the Franchisee from meeting this
development schedule, so long as the Franchisee has made reasonable and
continuing efforts to comply with such development obligations and the
Franchisee requests, in writing, an extension of time in which to have its ROCKY
MOUNTAIN CHOCOLATE FACTORY Store established before such development period
lapses. However, notwithstanding the Franchisor's written agreement to extend
the Franchisee's development period, if more than 270 days elapse between the
date of this Agreement and the commencement of operation of the Store, the
Franchisor reserves the right, in its sole discretion, to require the Franchisee
to execute the Franchisor's then current form of Franchise Agreement or an
amendment to this Agreement to conform this Agreement with the terms of the then
current Franchise Agreement.

                                  6. TRAINING

6.1.     INITIAL TRAINING PROGRAM.

         After the Franchisee executes a lease for the Franchised Location, the
Franchisee or, if the Franchisee is not an individual, the person designated by
the Franchisee to assume primary responsibility for the management of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store, ("GENERAL MANAGER") is required to attend and
successfully complete the initial training program which is offered by the
Franchisor at one of the Franchisor's designated training facilities. Up to
three individuals are eligible to participate in the Franchisor's initial
training program without charge of a tuition or fee. The Franchisee shall be
responsible for any and all traveling and living expenses incurred in connection
with attendance at the training program. At least one individual must
successfully complete the initial training program prior to the Franchisee's
commencement of operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY Store.

                                       5
<PAGE>

6.2.     LENGTH OF TRAINING.

         The initial training program shall consist of 6 days of instruction at
a location designated by the Franchisor; provided, however, that the Franchisor
reserves the right to waive a portion of the training program or alter the
training schedule, if in the Franchisor's sole discretion, the Franchisee or
General Manager has sufficient prior experience or training.

6.3.     ADDITIONAL TRAINING.

         From time to time, the Franchisor may present seminars, conventions or
continuing development programs or conduct meetings for the benefit of the
Franchisee. The Franchisee or its General Manager shall be required to attend
any ongoing mandatory seminars, conventions, programs or meetings as may be
offered by the Franchisor. The Franchisor shall give the Franchisee at least 30
days prior written notice of any ongoing seminar, convention or program which is
deemed mandatory. The Franchisor shall not require that the Franchisee attend
any ongoing training more often than once a year. All mandatory training will be
offered without charge of a tuition or fee; provided, however, the Franchisee
will be responsible for all traveling and living expenses which are associated
with attendance at the same.

                           7. DEVELOPMENT ASSISTANCE

7.1.     FRANCHISOR'S DEVELOPMENT ASSISTANCE.

         The Franchisor shall provide the Franchisee with assistance in the
initial establishment of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store as follows:

                  a. Provision of the initial training program to be conducted
         at the Franchisor's designated training facilities or at another
         location designated by the Franchisor, as described in Article 6 above.

                  b. Provision of written guidelines for a Franchised Location
         which shall include, without limitation, specifications for space
         requirements and build out. The Franchisee acknowledges that the
         Franchisor shall have no other obligation to provide assistance in the
         selection and approval of a Franchised Location other than the
         provision of such written specifications and approval or disapproval of
         a proposed Franchised Location, which approval or disapproval shall be
         based on information submitted to the Franchisor in a form sufficient
         to assess the proposed location as may be required by the Franchisor,
         in the Franchisor's sole discretion, and on information gathered by the
         Franchisor.

                  c. Direction regarding the required conversion, design and
         decoration of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store premises, plus
         specifications concerning signs, decor and equipment.

                  d. Direction regarding the selection of suppliers of
         equipment, items and materials used and inventory offered for sale in
         connection with the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. After
         execution of this Agreement, the Franchisor will provide the Franchisee
         with a list of approved suppliers, if any, of such equipment, items,
         materials and inventory and, if available, a description of any
         national or central purchase and supply agreements offered by such
         approved suppliers for the benefit of ROCKY MOUNTAIN CHOCOLATE FACTORY
         franchisees.

                  e. Provision of an Operations Manual in accordance with
         Section 8.1 below.

                                       6
<PAGE>

                  f. As the Franchisor may reasonably schedule, and depending on
         availability of personnel, the Franchisor will make available to the
         Franchisee at or close to the opening of the Franchisee's ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store, a representative ("SITE
         REPRESENTATIVE") who will be present for up to five days beginning
         approximately three days prior to the opening of the Franchisee's ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store. If the Franchisee's Store opens on or
         near a holiday, however, the Site Representative shall not begin the
         in-Store assistance until three days after the holiday. Holidays shall
         include, but not be limited to, New Years Day, Valentines Day, Easter,
         Memorial Day, Fourth of July, Labor Day, Thanksgiving, Hanukkah and
         Christmas. There will be no charge to the Franchisee for this service
         provided by the Franchisor. The Site Representative will assist the
         Franchisee's employees in opening the Store, unless in the Franchisor's
         determination, the Franchisee or the General Manager have had
         sufficient prior training or experience.

                              8. OPERATIONS MANUAL

8.1.     OPERATIONS MANUAL.

         The Franchisor agrees to provide to the Franchisee one or more manuals,
technical bulletins, cookbooks and recipes or other written materials
(collectively referred to as "OPERATIONS MANUAL") covering Candy ordering,
manufacturing, processing and stocking and other operating and in-store
marketing techniques for the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. The
Franchisee agrees that it shall comply with the Operations Manual as an
essential aspect of its obligations under this Agreement, that the Operations
Manual shall be deemed to be incorporated herein by reference and failure by the
Franchisee to substantially comply with the Operations Manual may be considered
by the Franchisor to be a breach of this Agreement.

8.2.     CONFIDENTIALITY OF OPERATIONS MANUAL CONTENTS.

         The Franchisee agrees to use the Marks and Licensed Methods only as
specified in the Operations Manual. The Operations Manual is the sole property
of the Franchisor and shall be used by the Franchisee only during the term of
this Agreement and in strict accordance with the terms and conditions hereof.
The Franchisee shall not duplicate the Operations Manual nor disclose its
contents to persons other than its employees or officers who have signed a
confidentiality and noncompetition agreement in a form approved by the
Franchisor. The Franchisee shall return the Operations Manual to the Franchisor
upon the expiration, termination or transfer of this Agreement.

8.3.     CHANGES TO OPERATIONS MANUAL.

         The Franchisor reserves the right to revise the Operations Manual from
time to time as it deems necessary to update or change operating and marketing
techniques, standards and specifications for all components of the Licensed
Methods and approved Candy, Items and Store-Made Candies offered by Stores. The
Franchisee, within 30 days of receiving any updated information, shall in turn
update its copy of the Operations Manual as instructed by the Franchisor and
shall conform its operations with the updated provisions within a reasonable
time after receipt of such updated information. The Franchisee acknowledges that
a master copy of the Operations Manual maintained by the Franchisor at its
principal office shall be controlling in the event of a dispute relative to the
content of any Operations Manual.

                                       7
<PAGE>

                            9. OPERATING ASSISTANCE

9.1.     FRANCHISOR'S SERVICES.

         The Franchisor agrees that, during the Franchisee's operation of the
ROCKY MOUNTAIN CHOCOLATE FACTORY Store, the Franchisor shall make available to
the Franchisee the following services:

                  a. Upon the reasonable request of the Franchisee, consultation
         by telephone regarding the continued operation and management of a
         ROCKY MOUNTAIN CHOCOLATE FACTORY Store and advice regarding the retail
         services, product quality control, inventory issues, customer relations
         issues and similar advice.

                  b. Access to advertising and promotional materials as may be
         developed by the Franchisor, the cost of which may be passed on to the
         Franchisee at the Franchisor's option.

                  c. On-going updates of information and programs regarding the
         candy industry, the ROCKY MOUNTAIN CHOCOLATE FACTORY concept and
         related Licensed Methods, including, without limitation, information
         about special or new products which may be developed and made available
         to ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees.

                  d. Depending on availability, allow replacement or additional
         General Managers to attend the initial training program. The Franchisor
         reserves the right to charge a tuition or fee in an amount payable in
         advance, commensurate with the Franchisor's then current published
         prices for such training. The Franchisee shall be responsible for all
         travel and living expenses incurred by its personnel during the
         training program. Further, the availability of the training program
         shall be subject to space considerations and prior commitments to new
         ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees.

9.2.     ADDITIONAL FRANCHISOR SERVICES.

         Although not obligated to do so, upon the reasonable request of the
Franchisee, the Franchisor may make its employees or designated agents available
to the Franchisee for on-site advice and assistance in connection with the
on-going operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store governed by
this Agreement. In the event that the Franchisee requests such additional
assistance and the Franchisor agrees to provide the same, the Franchisor
reserves the right to charge the Franchisee for all travel, lodging, living
expenses, telephone charges and other identifiable expenses associated with such
assistance, plus a fee based on the time spent by each employee on behalf of the
Franchisee, which fee will be charged in accordance with the then current daily
or hourly rates being charged by Franchisor for assistance.

                     10. FRANCHISEE'S OPERATIONAL COVENANTS

10.1.    STORE OPERATIONS.

         The Franchisee acknowledges that it is solely responsible for the
successful operation of its ROCKY MOUNTAIN CHOCOLATE FACTORY Store and that the
continued successful operation thereof is, in part, dependent upon the
Franchisee's compliance with this Agreement and the Operations Manual. In
addition to all other obligations contained in this Agreement and in the
Operations Manual, the Franchisee covenants that:

                                       8
<PAGE>

                  a. The Franchisee shall maintain clean, efficient and high
         quality ROCKY MOUNTAIN CHOCOLATE FACTORY Store operations and shall
         operate the business in accordance with the Operations Manual and in
         such a manner as not to detract from or adversely reflect upon the name
         and reputation of the Franchisor and the goodwill associated with the
         ROCKY MOUNTAIN CHOCOLATE FACTORY name and Marks.

                  b. The Franchisee will operate its ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store in compliance with all applicable laws, health department
         regulations and other ordinances. In connection therewith, the
         Franchisee will be solely and fully responsible for obtaining any and
         all licenses to operate the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. The
         Franchisee shall promptly forward to the Franchisor copies of all
         health department, fire department, building department and other
         similar reports of inspections as and when they become available.

                  c. The Franchisee and all persons who work behind the counter
         at the Store in any capacity, whether or not they are employees of the
         Franchisee ("PERSONNEL"), shall conduct themselves in such a manner so
         as to promote a good image to the public and to the business community.
         At no time shall any of the Personnel engage in unreasonable or
         disrespectful behavior toward anyone, including using offensive or rude
         language or gestures. The Franchisee shall at all times require its
         Personnel to follow the Code of Conduct as set forth in the Operations
         Manual.

                  d. The Franchisee acknowledges that proper management of the
         ROCKY MOUNTAIN CHOCOLATE FACTORY Store is important and shall insure
         that the Franchisee or a designated General Manager who has completed
         the Franchisor's initial training program be responsible for the
         management of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store after
         commencement of Store operations and be present at the Franchised
         Location during operation of the Store.

                  e. The Franchisee shall offer only authorized products and
         services as are more fully described in the vendor lists which are a
         part of the Operations Manual, which may include, without limitation,
         Candy, Store-Made Candy, Items and other authorized confectionery food
         and beverage products. The Franchisee shall offer only the types of
         products and services as from time to time may be prescribed by the
         Franchisor and shall refrain from offering any other types of products
         or services, from or through the ROCKY MOUNTAIN CHOCOLATE FACTORY
         Store, including, without limitation, filling "Wholesale Orders",
         defined below, selling Candy, Store-Made Candy, Items or other
         authorized products through the internet, or catering or other
         off-premises sales, without the prior written consent of the
         Franchisor. "WHOLESALE ORDERS" are defined as those orders or sales
         where the principal purpose of the purchase is for resale, not
         consumption, or any sale other than those sold over the counter at a
         price other than that price charged to the general public; provided,
         however, that volume discounted sales made on the premises at the
         Franchised Location to a single purchaser, not for resale, and
         discounted sales made on the premises at the Franchised Location to
         charitable organizations for fund-raising purposes shall be permitted.
         Candy, Store-Made Candies and Items shall never be sold in containers
         or bags other than those approved and supplied by the Franchisor or
         other supplier approved by the Franchisor.

                  f. The Franchisee shall promptly pay when due all taxes and
         other obligations owed to third parties in the operation of the ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store, including without limitation,
         unemployment and sales taxes, and any and all accounts or other
         indebtedness of every kind incurred by the Franchisee in the conduct of
         the ROCKY

                                       9
<PAGE>

         MOUNTAIN CHOCOLATE FACTORY Store. In the event of a bona fide dispute
         as to the liability for taxes assessed or other indebtedness, the
         Franchisee may contest the validity or the amount of the tax or
         indebtedness in accordance with procedures of the taxing authority or
         applicable law; however, in no event shall the Franchisee permit a tax
         sale or seizure by levy or execution or similar writ or warrant, or
         attachment by a creditor to occur against the premises of the
         Franchised Location, or any improvement thereon.

                  g. The Franchisee shall subscribe for and maintain not fewer
         than three separate telephone numbers for its ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store at the Franchised Location, two of which, the telephone
         and facsimile machine numbers, shall be listed and identified
         exclusively with the ROCKY MOUNTAIN CHOCOLATE FACTORY Store in all
         official telephone directories and in all advertising in which such
         numbers appear and shall be separate and distinct from all other
         telephone numbers subscribed for by the Franchisee. One number shall be
         used exclusively for voice communication, the second shall be used
         exclusively for a facsimile machine and the third shall be used
         exclusively for the modem that is included in the System.

                  h. The Franchisee shall comply with all agreements with third
         parties related to the ROCKY MOUNTAIN CHOCOLATE FACTORY Store
         including, in particular, all provisions of any lease for the
         Franchised Location.

                  i. The Franchisee and all employees of the Franchisee shall
         adhere to strict grooming and dress code guidelines, as described in
         the Code of Conduct set forth in the Operations Manual, while on duty
         at the Franchised Location. The Franchisee is required, at the
         Franchisee's expense, to purchase specified apparel from suppliers
         approved by the Franchisor. All General Managers, employees of the
         Franchisee, the Franchisee and its owners shall wear the specified
         apparel at all times while working at the Franchised Location. The
         Franchisor has the right, in its sole and absolute discretion, to
         change or modify such grooming and dress code guidelines in the
         Operations Manual.

                  j. The Franchisee agrees to renovate, refurbish, remodel or
         replace, at its own expense, the personal property and equipment used
         in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store, when
         reasonably required by the Franchisor in order to comply with the
         image, standards of operation and performance capability established by
         the Franchisor from time to time. If the Franchisor changes its image
         or standards of operation, it shall give the Franchisee a reasonable
         period of time within which to comply with such changes.

                  k. The Franchisee shall be responsible for training all of its
         Personnel who work in any capacity in the ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store. The Franchisee must conduct its Personnel training in
         the manner and according to the standards as prescribed in the
         Operations Manual. All Personnel who do not satisfactorily complete the
         training shall not work in any capacity in the Franchisee's ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store.

                  l. The Franchisee shall at all times during the term of this
         Agreement own and control the ROCKY MOUNTAIN CHOCOLATE FACTORY Store
         authorized hereunder. The Franchisee shall not operate any other
         business or profession from or through the Store. If the Franchisee is
         an entity, the entity shall only operate the ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store governed by this Agreement and no other business, unless
         the Franchisee receives the Franchisor's prior written approval. Upon
         request of the Franchisor, the Franchisee shall promptly provide
         satisfactory proof of such ownership to the Franchisor. The Franchisee

                                       10
<PAGE>

         represents that the Statement of Ownership, attached hereto as Exhibit
         III and by this reference incorporated herein, is true, complete,
         accurate and not misleading, and, in accordance with the information
         contained in the Statement of Ownership, the controlling ownership of
         the ROCKY MOUNTAIN CHOCOLATE FACTORY Store is held by the Franchisee.
         The Franchisee shall promptly provide the Franchisor with a written
         notification if the information contained in the Statement of Ownership
         changes at any time during the term of this Agreement and shall comply
         with the applicable transfer provisions contained in Article 16 herein.
         In addition, if the Franchisee is an entity, all of the owners of the
         Franchisee shall sign the Personal Guaranty attached hereto as Exhibit
         II.

                  m. The Franchisee shall at all times during the term of this
         Agreement keep its ROCKY MOUNTAIN CHOCOLATE FACTORY Store open during
         the business hours designated by the Franchisor from time to time in
         the Operations Manual.

                  n. Unless notified in writing otherwise by the Franchisor, all
         Candy, Items and related products shall be sold and shipped to the
         Franchisee on a net 30-day basis, or according to the then current
         payment terms set by the Franchisor or its designated suppliers. The
         Franchisor reserves the right to charge interest at the rate of 1.5%
         per month if the Franchisee fails to pay for its orders on time and the
         Franchisor reserves the right to discontinue shipment of Candy, Items
         and related products to the Franchisee if the Franchisee is repeatedly
         delinquent in paying for its Candy, Items and related products, in the
         Franchisor's sole discretion. The Franchisee may be required to
         "prepay" factory orders, notwithstanding the payment policy set forth
         above, in the event of poor payment performance. The Franchisor
         reserves the right to change payment terms and policies at any time.
         The Franchisor also reserves the right to change the price for Candy,
         Items and related products from time to time as may be set forth in the
         most recent price bulletin sent to all franchisees or the then current
         Operations Manual.

                                 11. ROYALTIES

11.1.    MONTHLY ROYALTY.

         The Franchisee agrees to pay to the Franchisor a monthly royalty
("ROYALTY") equal to 5% of the total amount of its Gross Retail Sales, defined
in Section 11.2 below, generated from or through its ROCKY MOUNTAIN CHOCOLATE
FACTORY Store.

11.2.    GROSS RETAIL SALES.

         "GROSS RETAIL SALES" shall be defined as receipts and income of any
kind from all products or services sold from or through the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store, including any such sale of products or services made
for cash or upon credit, or partly for cash and partly for credit, regardless of
collection of charges for which credit is given, less returns for which refunds
are made, provided that the refund shall not exceed the sales price and
exclusive of discounts, sales taxes and other taxes, amounts received in
settlement of a loss of merchandise, shipping expenses paid by the customer and
discount sales to corporations or to charities for fund-raising purposes. "Gross
Retail Sales" shall also include the fair market value of any services or
products received by the Franchisee in barter or in exchange for its services
and products.

                                       11
<PAGE>

11.3.    ROYALTY PAYMENTS.

         The Franchisee agrees that Royalty payments shall be paid monthly and
sent to the Franchisor, post-marked no later than the 15th of each month based
on Gross Retail Sales for the immediately preceding month. Royalty payments
shall be accompanied by monthly reports, as more fully described in Article 15
hereof, and standard transmittal forms containing information regarding the
Franchisee's Gross Retail Sales and such additional information as may be
requested by the Franchisor. The Franchisor reserves the right to require
Royalty payments be made on a weekly or bi-weekly basis if the Franchisee does
not timely or fully submit the required payments or reports. The Franchisor also
reserves the right to require that Royalty payments, late charges and payment of
the Marketing and Promotion Fee and late charges (as set forth in Section 12.3
below) be made by means of electronic funds transfer and the Franchisee agrees
to provide the information and sign the documents necessary to implement such
transfer payments within 30 days of receiving notice that such a program is
being implemented. The Franchisee must sign the Franchisor's form of
Authorization Agreement for Prearranged Payments attached to this Agreement as
Exhibit IV. The Franchisor shall have the right to verify such Royalty payments
from time to time as it deems necessary, in any reasonable manner. In the event
that the Franchisee fails to pay any Royalties within 14 days after they are
due, the Franchisee shall, in addition to such Royalties, pay a late charge
equivalent to 18% of the late Royalty payment; provided, however, in no event
shall the Franchisee be required to pay a late payment at a rate greater than
the maximum interest rate permitted by applicable law. If the Franchisee pays
Royalties with a check returned for non-sufficient funds more than one time in
any calendar year, in addition to all other remedies which may be available, the
Franchisor shall have the right to require that Royalty payments be made by
certified or cashier's checks.

                                12. ADVERTISING

12.1.    APPROVAL OF ADVERTISING.

         The Franchisee shall obtain the Franchisor's prior written approval of
all advertising or other marketing or promotional programs published by any
method, including print, broadcast and electronic media, regarding the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store, including, without limitation, "Yellow Pages"
advertising, newspaper ads, flyers, brochures, coupons, direct mail pieces,
specialty and novelty items, radio, television, Internet and World Wide Web
advertising. The Franchisee acknowledges and agrees that the Franchisor may
disapprove of any advertising, marketing or promotional programs submitted to
the Franchisor, for any reason, in the Franchisor's sole discretion. The
Franchisee shall also obtain the Franchisor's prior written approval of all
promotional materials provided by vendors. The proposed written advertising or a
description of the marketing or promotional program shall be submitted to the
Franchisor at least 10 days prior to publication, broadcast or use. The
Franchisee acknowledges that advertising and promoting the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store in accordance with the Franchisor's standards and
specifications is an essential aspect of the Licensed Methods, and the
Franchisee agrees to comply with all advertising standards and specifications.
The Franchisee shall display all required promotional materials, signs, point of
purchase displays and other marketing materials in its ROCKY MOUNTAIN CHOCOLATE
FACTORY Store in the manner prescribed by the Franchisor. The Franchisee shall
not, under any circumstances, use handwritten signs in the operation of its
Store.

12.2.    LOCAL ADVERTISING.

         The Franchisor reserves the right to require the Franchisee to spend up
to 1% of monthly Gross Retail Sales on local advertising to create public
awareness of the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Store. The
Franchisee will submit to the Franchisor an accounting of the

                                       12
<PAGE>

amounts spent on advertising within 30 days following the end of each calendar
quarter. If the Franchisor requires its franchisees to advertise locally as
described above, all Franchisor-owned Stores will be required to spend money for
local advertising on an equal percentage basis with all franchised Stores. If
the Franchisee's lease requires it to advertise locally, the Franchisor may, in
its sole discretion, count such expenditures toward the Franchisee's local
advertising expenditure required by this Section 12.2. The Franchisee shall
obtain the Franchisor's prior written approval of all written advertising and
promotional materials before publication, in accordance with Section 12.1 above.

12.3.    MARKETING AND PROMOTION FEE.

         The Franchisee shall pay to the Franchisor, in addition to Royalties, a
fee of 1% of the total amount of the Franchisee's Gross Retail Sales ("MARKETING
AND PROMOTION FEE"). The Marketing and Promotion Fee shall be in addition to and
not in lieu of the Franchisee's expenditures for local advertising, as described
in Section 12.2 above. The following terms and conditions will apply:

                  a. The Marketing and Promotion Fee shall be payable
         concurrently with the payment of the Royalties, and transmitted to the
         Franchisor in accordance with Section 11.3 above, for all Marketing and
         Promotion Fees based on Gross Retail Sales for the immediately
         preceding month.

                  b. The Marketing and Promotion Fees will be subject to the
         same late charges as the Royalties, in an amount and manner set forth
         in Section 11.3 above.

                  c. Upon written request by the Franchisee, the Franchisor will
         make available to the Franchisee, no later than 120 days after the end
         of each fiscal year, an annual financial statement which indicates how
         the Marketing and Promotion Fees have been spent.

                  d. The Marketing and Promotion Fees will be administered by
         the Franchisor, in its sole discretion, and may be used for production
         and placement of point of purchase advertising, in-store signage,
         in-store promotions, media advertising, direct mailings, brochures,
         collateral material advertising, surveys of advertising effectiveness,
         packaging development, logo design or other advertising or public
         relations expenditures relating to advertising the Franchisee's
         products and services.

                  e. The Franchisor may reimburse itself for independent audits,
         reasonable accounting, bookkeeping, reporting and legal expenses, taxes
         and other reasonable direct and indirect expenses as may be incurred by
         the Franchisor or its authorized representatives in connection with the
         programs funded by the Marketing and Promotion Fees. The Franchisor
         will not be liable for any act or omission with respect to such
         Marketing and Promotion Fees which is consistent with this Agreement
         and is done in good faith.

12.4.    REGIONAL ADVERTISING PROGRAMS.

         Although not obligated to do so, the Franchisor reserves the right to
allocate up to 50% of the Marketing and Promotion Fees as may be collected in
accordance with Section 12.3 above toward a regional advertising program for the
benefit of ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees located within a
particular region. The Franchisor has the right, in its sole discretion, to
determine the composition of all geographic territories and market areas for the
implementation of such regional advertising and promotion campaigns and to
require that the Franchisee participate in such regional advertising programs as
and when they may be established by the Franchisor. If a regional

                                       13
<PAGE>

advertising program is implemented on behalf of a particular region by the
Franchisor, the Franchisor, to the extent reasonably calculable, will only use
contributions from ROCKY MOUNTAIN CHOCOLATE FACTORY franchisees within such
region for the particular regional advertising program. The Franchisor also
reserves the right to establish an advertising cooperative for a particular
region to enable the cooperative to self-administer the regional advertising
program. If a regional advertising cooperative is established by the Franchisor,
the Franchisee agrees that it will participate in it. If the Franchisor creates
a regional advertising program, either as a co-operative or otherwise, the
Franchisor has the right to charge the program for the actual costs of forming
and administering the program.

12.5.    MARKETING SERVICES.

         The Franchisor may, in its sole discretion, offer marketing and
merchandising services to the Franchisee at rates that are competitive with
those charged by third parties offering similar services. The Franchisee may
utilize such services, if they are offered, at the Franchisee's option. Services
offered by the Franchisor may include marketing consulting, graphic design,
copywriting, advertising, public relations and merchandising consultations.

                              13. QUALITY CONTROL

13.1.    COMPLIANCE WITH OPERATIONS MANUAL.

         The Franchisee agrees to maintain and operate the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store in compliance with this Agreement and the standards and
specifications contained in the Operations Manual, as the same may be modified
from time to time by the Franchisor.

13.2.    STANDARDS AND SPECIFICATIONS.

         The Franchisor will make available to the Franchisee standards and
specifications for products and services offered at or through the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store and specifically, for the recipes for
Store-Made Candy, display cases, uniforms, materials, forms, menu boards, items
and supplies used in connection with the Store. The Franchisor reserves the
right to change standards and specifications for services and products offered
at or through the ROCKY MOUNTAIN CHOCOLATE FACTORY Store and for the recipes for
Store-Made Candy, display cases, uniforms, materials, forms, items and supplies
used in connection with the Store upon 30 days prior written notice to the
Franchisee. The Franchisee shall strictly adhere to all of the Franchisor's
current standards and specifications for the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store as prescribed from time to time.

13.3.    INSPECTIONS.

         The Franchisor shall have the right to examine the Franchised Location,
including the inventory, products, equipment, materials and supplies, to ensure
compliance with all standards and specifications set by the Franchisor. The
Franchisor shall conduct such inspections during regular business hours and the
Franchisee may be present at such inspections. The Franchisor, however, reserves
the right to conduct the inspections without prior notice to the Franchisee.

13.4.    RESTRICTIONS ON SERVICES AND PRODUCTS.

         The Franchisee will be required to purchase all of its Candy for its
ROCKY MOUNTAIN CHOCOLATE FACTORY Store from the Franchisor or its designee.
Candy shall consist of any and all varieties from time to time made available to
the Franchisor's franchisees by the Franchisor and its

                                       14
<PAGE>

designated suppliers. The parties hereby acknowledge the uniqueness and
importance of Candy being prepared by the Franchisor or its designee in order to
maintain the uniformity, quality and uniqueness of Candy, and therefore the
Franchisor and its designees are hereby appointed the Franchisee's exclusive
source of Candy. The Franchisee is prohibited from offering or selling any
products or services not authorized by Franchisor, including, without
limitation, operating a catering or wholesale business or offering Candy, Items,
Store-Made Candy or other authorized products for sale on the internet, as part
of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. However, if the Franchisee
proposes to offer, conduct or utilize any products, services, materials, forms,
items or supplies for use in connection with or sale through the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store which are not previously approved by the Franchisor as
meeting its specifications, the Franchisee shall first notify the Franchisor in
writing requesting approval. The Franchisor may, in its sole discretion, for any
reason whatsoever, elect to withhold such approval. In order to make such
determination, the Franchisor may require submission of specifications,
information, or samples of such products, services, materials, forms, items or
supplies. The Franchisor will advise the Franchisee within a reasonable time
whether such products, services, materials, forms, items or supplies meet its
specifications.

13.5.    APPROVED SUPPLIERS.

         The Franchisee shall purchase all products, services, supplies and
materials required for the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store licensed herein, from manufacturers, suppliers or distributors designated
by the Franchisor or, if there is no designated supplier for a particular
product, service, supply or material, from such other suppliers who meet all of
the Franchisor's specifications and standards as to quality, composition,
finish, appearance and service, and who shall adequately demonstrate their
capacity and facilities to supply the Franchisee's needs in the quantities, at
the times, and with the reliability requisite to an efficient operation.

13.6.    REQUEST TO CHANGE SUPPLIER.

         In the event the Franchisee desires to purchase products, services,
supplies or materials from manufacturers, suppliers or distributors other than
those previously approved by the Franchisor, the Franchisee shall, prior to
purchasing any such products, services, supplies or materials, give the
Franchisor a written request by certified mail, return receipt requested, to
change supplier. In the event the Franchisor rejects the Franchisee's requested
new manufacturer, supplier or distributor, the Franchisor must, within 60 days
of the receipt of the Franchisee's request to change supplier, notify the
Franchisee of its rejection. Failure to notify the Franchisee within such time
period shall not constitute approval or a waiver of objections. The Franchisor
may continue from time to time to inspect any manufacturer's, supplier's, or
distributor's facilities and products to assure proper production, processing,
storing and transportation of products, services, supplies or materials to be
purchased from the manufacturer, supplier or distributor by the Franchisee.
Permission for such inspection shall be a condition of the continued approval of
such manufacturer, supplier or distributor.

13.7.    APPROVAL OF INTENDED SUPPLIER.

         The Franchisor may at its sole discretion, for any reason whatsoever,
elect to withhold approval of the manufacturer, supplier or distributor;
however, in order to make such determination, the Franchisor may require that
samples from a proposed new supplier be delivered to the Franchisor for testing
prior to approval and use. A charge not to exceed the actual cost of the test
may be made by the Franchisor and shall be paid by the Franchisee.

                                       15
<PAGE>

             14. TRADEMARKS, TRADE NAMES AND PROPRIETARY INTERESTS

14.1.    MARKS.

         The Franchisee hereby acknowledges that the Franchisor has the sole
right to license and control the Franchisee's use of the ROCKY MOUNTAIN
CHOCOLATE FACTORY service mark and other of the Marks, and that such Marks shall
remain under the sole and exclusive ownership and control of the Franchisor. The
Franchisee acknowledges that it has not acquired any right, title or interest in
such Marks except for the right to use such Marks in the operation of its ROCKY
MOUNTAIN CHOCOLATE FACTORY Store as it is governed by this Agreement. Except as
permitted in the Operations Manual, the Franchisee agrees not to use any of the
Marks as part of an electronic mail address, or on any sites on the Internet or
World Wide Web and the Franchisee agrees not to use or register any of the Marks
as a domain name on the Internet.

14.2.    NO USE OF OTHER MARKS.

         The Franchisee further agrees that no service mark other than "ROCKY
MOUNTAIN CHOCOLATE FACTORY" or such other Marks as may be specified by the
Franchisor shall be used in the marketing, promotion or operation of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store.

14.3.    LICENSED METHODS.

         The Franchisee hereby acknowledges that the Franchisor owns and
controls the distinctive plan for the establishment, operation and promotion of
the ROCKY MOUNTAIN CHOCOLATE FACTORY Store and all related licensed methods of
doing business, previously defined as the "LICENSED METHODS", which include, but
are not limited to, gourmet chocolate specialty recipes and cooking methods,
confectionery ordering, processing, manufacturing, stocking and inventory
control, technical equipment standards, order fulfillment methods and customer
relations, marketing techniques, written promotional materials, advertising, and
accounting systems, all of which constitute trade secrets of the Franchisor, and
the Franchisee acknowledges that the Franchisor has valuable rights in and to
such trade secrets. The Franchisee further acknowledges that it has not acquired
any right, title or interest in the Licensed Methods except for the right to use
the Licensed Methods in the operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store as it is governed by this Agreement.

14.4.    EFFECT OF TERMINATION.

         In the event this Agreement is terminated for any reason, the
Franchisee shall immediately cease using any of the Licensed Methods and Marks,
trade names, trade dress, trade secrets, copyrights or any other symbols used to
identify the ROCKY MOUNTAIN CHOCOLATE FACTORY Store, and all rights the
Franchisee had to the same shall automatically terminate. The Franchisee agrees
to execute any documents of assignment as may be necessary to transfer any
rights the Franchisee may possess in and to the Marks.

14.5.    MARK INFRINGEMENT.

         The Franchisee agrees to notify the Franchisor in writing of any
possible infringement or illegal use by others of a trademark the same as or
confusingly similar to the Marks which may come to its attention. The Franchisee
acknowledges that the Franchisor shall have the right, in its sole discretion,
to determine whether any action will be taken on account of any possible
infringement or illegal use. The Franchisor may commence or prosecute such
action in the Franchisor's own name and may join the Franchisee as a party
thereto if the Franchisor determines it to be reasonably necessary for the
continued

                                       16
<PAGE>

protection and quality control of the Marks and Licensed Methods. The Franchisor
shall bear the reasonable cost of any such action, including attorneys' fees.
The Franchisee agrees to fully cooperate with the Franchisor in any such
litigation.

14.6.    FRANCHISEE'S BUSINESS NAME.

         The Franchisee acknowledges that the Franchisor has a prior and
superior claim to the ROCKY MOUNTAIN CHOCOLATE FACTORY trade name. The
Franchisee shall not use the phrase or two or more of the words "ROCKY MOUNTAIN
CHOCOLATE FACTORY" or abbreviations thereof in the legal name of its
corporation, partnership or any other business entity used in conducting the
business provided for in this Agreement. The Franchisee also agrees not to
register or attempt to register a trade name using the phrase or two or more of
the words "ROCKY MOUNTAIN CHOCOLATE FACTORY" or abbreviations thereof in the
Franchisee's name or that of any other person or business entity, without prior
written consent of the Franchisor. When this Agreement is terminated, the
Franchisee shall execute any assignment or other document the Franchisor
requires to transfer to itself any rights the Franchisee may possess in a trade
name utilizing any or all of the words ROCKY MOUNTAIN CHOCOLATE FACTORY, any
abbreviations thereof or any other Mark owned by the Franchisor. The Franchisee
further agrees that it will not identify itself as being "Rocky Mountain
Chocolate Factory, Inc." or as being associated with the Franchisor in any
manner other than as a franchisee or licensee. The Franchisee further agrees
that in all advertising and promotion and promotional materials it will display
its business name only in obvious conjunction with the phrase "ROCKY MOUNTAIN
CHOCOLATE FACTORY Licensee" or "ROCKY MOUNTAIN CHOCOLATE FACTORY Franchisee" or
with such other words and in such other phrases as may from time to time be
prescribed in the Operations Manual, in the Franchisor's sole discretion.

14.7.    CHANGE OF MARKS.

         In the event that the Franchisor, in its sole discretion, shall
determine it necessary to modify or discontinue use of any proprietary Marks, or
to develop additional or substitute marks, the Franchisee shall, within a
reasonable time after receipt of written notice of such a modification or
discontinuation from the Franchisor, take such action, at the Franchisee's sole
expense, as may be necessary to comply with such modification, discontinuation,
addition or substitution.

14.8.    CREATIVE OWNERSHIP.

         All copyrightable works created by the Franchisee or any of its owners,
officers or employees in connection with the Store shall be the sole property of
the Franchisor. The Franchisee assigns all proprietary rights, including
copyrights, in these works to the Franchisor without additional consideration.
The Franchisee hereby assigns and will execute such additional assignments or
documentation to effectuate the assignment of all intellectual property,
inventions, copyrights and trade secrets developed in part or in whole in
relation to the Store, during the term of this Agreement, as the Franchisor may
deem necessary in order to enable it, at its expense, to apply for, prosecute
and obtain copyrights, patents or other proprietary rights in the United States
and in foreign countries or in order to transfer to the Franchisor all right,
title, and interest in said property. The Franchisee shall promptly disclose to
the Franchisor all inventions, discoveries, improvements, recipes, creations,
patents, copyrights, trademarks and confidential information relating to the
Store which it or any of its owners, officers or employees has made or may make
solely, jointly or commonly with others and shall promptly create a written
record of the same. In addition to the foregoing, the Franchisee acknowledges
and agrees that any improvements or modifications, whether or not copyrightable,
directly or indirectly related to the Store, shall be deemed to be a part of the
Licensed Methods and shall inure to the benefit of the Franchisor.

                                       17
<PAGE>

                 15. REPORTS, RECORDS AND FINANCIAL STATEMENTS

15.1.    FRANCHISEE REPORTS.

         The Franchisee shall establish and maintain at its own expense a
bookkeeping and accounting system which conforms to the specifications which the
Franchisor may prescribe from time to time, including the Franchisor's current
"Standard Code of Accounts" as described in the Operations Manual. The
Franchisee shall supply to the Franchisor such reports in a manner and form as
the Franchisor may from time to time reasonably require, including:

                  a. Monthly summary reports, in a form as may be prescribed by
         the Franchisor, mailed to the Franchisor postmarked no later than the
         15th day of the month and containing information relative to the
         previous month's operations; and

                  b. Quarterly financial statements, prepared in accordance with
         generally accepted accounting principles ("GAAP"), and consisting of a
         profit and loss statement and balance sheet for the ROCKY MOUNTAIN
         CHOCOLATE FACTORY Store, mailed to the Franchisor postmarked no later
         than the 15th day following the end of the calendar quarter, based on
         operating results of the prior quarter, which shall be submitted in a
         form approved by the Franchisor and shall be certified by the
         Franchisee to be correct.

The Franchisor reserves the right to disclose data derived from such reports,
without identifying the Franchisee, except to the extent identification of the
Franchisee is required by law.

15.2.    ANNUAL FINANCIAL STATEMENTS.

         The Franchisee shall, within 90 days after the end of its fiscal year,
provide to the Franchisor annual unaudited financial statements, compiled or
reviewed by an independent certified public accountant acceptable to and
approved by the Franchisor and prepared in accordance with GAAP, and state and
federal income tax returns prepared by a certified public accountant. If these
financial statements or tax returns show an underpayment of any amounts owed to
the Franchisor, these amounts shall be paid to the Franchisor concurrently with
the submission of the statements or returns.

15.3.    VERIFICATION.

         Each report and financial statement to be submitted to the Franchisor
hereunder shall be signed and verified by the Franchisee.

15.4.    BOOKS AND RECORDS.

         The Franchisee shall maintain all books and records for its ROCKY
MOUNTAIN CHOCOLATE FACTORY Store in accordance with GAAP, consistently applied,
and preserve these records for at least five years after the fiscal year to
which they relate.

15.5.    AUDIT OF BOOKS AND RECORDS.

         The Franchisee shall permit the Franchisor to inspect and audit the
books and records of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store at any
reasonable time, at the Franchisor's expense. If any audit discloses a
deficiency in amounts for payments owed to the Franchisor pursuant to this
Agreement, then such amounts shall become immediately payable to the Franchisor
by the Franchisee, with interest from the date such payments were due at the
lesser of 1 1/2% per month or the

                                       18
<PAGE>

maximum rate allowed by law. In addition, if it is found by such audit that the
Gross Retail Sales of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store have been
understated by five percent (5%) or more during the period audited, the
Franchisee shall pay all reasonable costs and expenses the Franchisor incurred
in connection with such audit.

15.6.    FAILURE TO COMPLY WITH REPORTING REQUIREMENTS.

         If the Franchisee fails to prepare and submit any statement or report
as required under this Article 15, then the Franchisor shall have the right to
treat the Franchisee's failure as good cause for termination of this Agreement.
In addition to all other remedies available to the Franchisor, in the event that
the Franchisee fails to prepare and submit any statement or report required
under this Article 15 for two consecutive reporting periods, the Franchisor
shall be entitled to make an audit, at the expense of the Franchisee, of the
Franchisee's books, records and accounts, including the Franchisee's bank
accounts, which in any way pertain to the Gross Retail Sales of the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store. The statements or reports not previously
submitted shall be prepared by or under the direction and supervision of an
independent certified public accountant selected by the Franchisor.

15.7.    SHOPPING SERVICE.

         The Franchisor reserves the right to use third party shopping services
from time to time to evaluate the conduct of the Franchisee's ROCKY MOUNTAIN
CHOCOLATE FACTORY Store, including such things as customer service, cleanliness,
merchandising and proper use of registers. The Franchisor may use such shopping
services to inspect the Franchisee's ROCKY MOUNTAIN CHOCOLATE FACTORY Store at
any time at the Franchisor's expense, without prior notification to the
Franchisee. The Franchisor may make the results of any such service evaluation
available to the Franchisee, in the Franchisor's sole discretion.

                                  16. TRANSFER

16.1.    TRANSFER BY FRANCHISEE.

         The franchise granted herein is personal to the Franchisee and, except
as stated below, the Franchisor shall not allow or permit any transfer,
assignment, subfranchise or conveyance of this Agreement or any interest
hereunder. As used in this Agreement, the term "TRANSFER" includes the
Franchisee's voluntary, involuntary, direct or indirect assignment, sale, gift
or other disposition of any interest in: (1) this Agreement; (2) the Franchisee
entity; (3) the Store governed by this Agreement; or (4) all or a substantial
portion of the assets of the Store.

16.2.    PRE-CONDITIONS TO FRANCHISEE'S TRANSFER.

         The Franchisee shall not engage in a transfer unless the Franchisee
obtains the Franchisor's written consent and the Franchisee and the proposed
transferee comply with the following requirements:

                  a. All amounts due and owing pursuant to this Agreement by the
         Franchisee to the Franchisor or its affiliates or to third parties
         whose debts or obligations the Franchisor has guaranteed on behalf of
         the Franchisee, if any, are paid in full;

                  b. The proposed transferee agrees to operate the Store as a
         ROCKY MOUNTAIN CHOCOLATE FACTORY Store and agrees to satisfactorily
         complete the initial training program described in this Agreement,
         which training must be completed to the Franchisor's satisfaction prior
         to the effectiveness of the transfer;

                                       19
<PAGE>

                  c. The proposed transferee agrees to execute the then current
         form of Franchise Agreement which shall supersede this Agreement in all
         respects. If a new Franchise Agreement is signed, the terms thereof may
         differ from the terms of this Agreement; provided, however, the
         transferee will not be required to pay any initial franchise fee;

                  d. The Franchisee provides written notice to the Franchisor 30
         days' prior to the proposed effective date of the transfer, and
         includes information reasonably detailed to enable the Franchisor to
         evaluate the terms and conditions of the proposed transfer and which at
         a minimum includes a written offer from the proposed transferee;

                  e. The proposed transferee provides information to the
         Franchisor sufficient for the Franchisor to assess the proposed
         transferee's business experience, aptitude and financial qualification,
         and the Franchisor approves the proposed transferee as a franchisee;

                  f. The Franchisee executes a general release, in a form
         satisfactory to the Franchisor, of any and all claims against the
         Franchisor, its affiliates and their respective officers, directors,
         employees and agents;

                  g. The Franchisee or the proposed transferee pay a
         nonrefundable transfer fee of $2,500 before the proposed transferee
         attends the initial training program; provided, however, that no
         transfer fee will be charged for a transfer by the Franchisee to a
         corporation wholly-owned by the Franchisee, between partners of a
         partnership Franchisee or to a spouse of a Franchisee upon the death or
         disability of the Franchisee;

                  h. The Franchisee remodels the Store and upgrades equipment,
         including installing the Franchisor's then current System, fixtures,
         furnishings and signage, if the Franchisor so requires; and

                  i. The Franchisee agrees to abide by all post-termination
         covenants set forth herein, including, without limitation, the covenant
         not to compete in Section 20.2 below.

16.3.    FRANCHISOR'S APPROVAL OF TRANSFER.

         The Franchisor has 30 days from the date of the written notice to
approve or disapprove in writing, of the Franchisee's proposed transfer, which
approval shall not be unreasonably withheld. The Franchisee acknowledges that
the proposed transferee shall be evaluated for approval by the Franchisor based
on the same criteria as is currently being used to assess new franchisees of the
Franchisor and that the Franchisor shall provide such proposed transferee, if
appropriate, with such disclosures as may be required by state or federal law.
If the Franchisee and its proposed transferee comply with all conditions for
transfer set forth herein and the Franchisor has not given the Franchisee notice
of its approval or disapproval within such period, approval is deemed granted.

16.4.    RIGHT OF FIRST REFUSAL.

         In the event the Franchisee wishes to engage in a transfer, the
Franchisee agrees to grant to the Franchisor a 30 day right of first refusal to
purchase such rights, interest or assets on the same terms and conditions as are
contained in the written notice set forth in Section 16.2.d; provided, however,
the following additional terms and conditions shall apply:

                                       20
<PAGE>

                  a. The 30 day right of first refusal period will run
         concurrently with the period in which the Franchisor has to approve or
         disapprove the proposed transferee;

                  b. The right of first refusal will be effective for each
         proposed transfer and any material change in the terms or conditions of
         the proposed transfer shall be deemed a separate offer on which the
         Franchisor shall have a new 30 day right of first refusal;

                  c. If the consideration or manner of payment offered by a
         proposed transferee is such that the Franchisor may not reasonably be
         required to furnish the same, then the Franchisor may purchase the
         interest which is proposed to be sold for the reasonable cash
         equivalent. If the parties cannot agree within a reasonable time on the
         cash consideration, each of the Franchisor and the Franchisee shall
         designate an independent appraiser who, in turn, shall designate a
         third independent appraiser. The third appraiser's determination will
         be binding upon the parties. All expenses of the appraiser shall be
         paid for equally between the Franchisor and the Franchisee; and

                  d. If the Franchisor chooses not to exercise its right of
         first refusal, the Franchisee shall be free to complete the transfer
         subject to compliance with Sections 16.2 and 16.3 above. Absence of a
         reply to the Franchisee's notice of a proposed transfer within the 30
         day period may be deemed a waiver of such right of first refusal.

16.5.    TYPES OF TRANSFERS.

         The Franchisee acknowledges that the Franchisor's right to approve or
disapprove of a proposed transfer as provided for above, shall apply (1) if the
Franchisee is a partnership, corporation or other business association, (i) to
the addition or deletion of a partner, shareholder or members of the association
or the transfer of any ownership interest among existing partners, shareholders
or members; (ii) to any proposed transfer of 25% or more of the interest
(whether stock, partnership interest or membership interest) to a third party,
whether such transfer occurs in a single transaction or several transactions;
and (2) if the Franchisee is an individual, to the transfer from such individual
or individuals to a corporation or other entity controlled by them, in which
case the Franchisor's approval will be conditioned upon: (i) the continuing
personal guarantee of the individual (or individuals) for the performance of
obligations under this Agreement; and (ii) a limitation on the corporation's or
other entity's business activity to that of operating the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store and related activities provided that with respect to
such transfer, the Franchisor's right of first refusal to purchase shall not
apply and the Franchisor will not charge any transfer fee.

16.6.    TRANSFER BY THE FRANCHISOR.

         This Agreement is fully assignable by the Franchisor and shall inure to
the benefit of any assignee or other legal successor in interest, and the
Franchisor shall in such event be fully released from the same.

16.7.    FRANCHISEE'S DEATH OR DISABILITY.

         Upon the death or permanent disability of the Franchisee (or individual
owning 25% or more of, or controlling the Franchisee entity), the personal
representative of such person shall transfer the Franchisee's interest in this
Agreement or such interest in the Franchisee entity to an approved third party.
Such disposition of this Agreement or such interest (including, without
limitation, transfer by bequest or inheritance) shall be completed within a
reasonable time, not to exceed 120 days from the date of death or permanent
disability (unless extended by probate proceedings), and shall be subject to all
terms and conditions applicable to transfers contained in this Article 16.
Provided, however, that for purposes of

                                       21
<PAGE>

this Section 16.7, there shall be no transfer fee charged by the Franchisor.
Failure to transfer the interest within said period of time shall constitute a
breach of this Agreement. For the purposes hereof, the term "PERMANENT
DISABILITY" shall mean a mental or physical disability, impairment or condition
that is reasonably expected to prevent or actually does prevent the Franchisee
(or the owner of 25% or more of, or controlling, the Franchisee entity) from
supervising the management and operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY
Store for a period of 120 days from the onset of such disability, impairment or
condition.

                            17. TERM AND EXPIRATION

17.1.    TERM.

         The term of this Agreement begins on the date this Agreement is fully
executed and ends ten years later, unless sooner terminated as provided herein.

17.2.    CONTINUATION.

         If, for any reason, the Franchisee continues to operate the Store
beyond the term of this Agreement or any subsequent renewal period, it shall be
deemed to be on a month-to-month basis under the terms of this Agreement and
subject to termination upon 30 days notice or as required by law. If said
holdover period exceeds 90 days, this Agreement is subject to immediate
termination unless applicable law requires a longer period. Upon termination
after any holdover period, the Franchisee and those in active concert with the
Franchisee, including family members, officers, directors, partners and managing
agents, are subject to the terms of Articles 20 and 22 and Section 18.5 of this
Agreement and all other applicable post-termination obligations contained in
this Agreement.

17.3.    RIGHTS UPON EXPIRATION.

         At the end of the initial term hereof the Franchisee shall have the
option to renew its franchise rights for one additional ten year term, by
acquiring successor franchise rights, if the Franchisor does not exercise its
right not to offer a successor franchise in accordance with Section 17.5 below
and if the Franchisee:

                  a. At least 30 days prior to expiration of the term, executes
         the form of Franchise Agreement then in use by the Franchisor;

                  b. Has complied with all provisions of this Agreement during
         the current term, including the payment on a timely basis of all
         Royalties and other fees due hereunder. "COMPLIANCE" shall mean, at a
         minimum, that the Franchisee has not received any written notification
         from the Franchisor of breach hereunder more than four times during the
         term hereof;

                  c. Upgrades and/or remodels the ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store and its operations at the Franchisee's sole expense (the
         necessity of which shall be in the sole discretion of the Franchisor)
         to conform with the then current Operations Manual;

                  d. Executes a general release, in a form satisfactory to the
         Franchisor, of any and all claims against the Franchisor and its
         affiliates, and their respective officers, directors, employees and
         agents arising out of or relating to this Agreement; and

                  e. Pays a successor franchise fee of $100.

                                       22
<PAGE>

17.4.    EXERCISE OF OPTION FOR SUCCESSOR FRANCHISE.

         The Franchisee may exercise its option for a successor franchise by
giving written notice of such exercise to the Franchisor not less than 90 days
prior to the scheduled expiration of this Agreement. If the Franchisee fails to
provide such notice to the Franchisor within the time frame set forth in the
preceding sentence, but notifies the Franchisor of its desire to obtain a
successor franchise prior to the expiration of the then-current term of this
Agreement, the Franchisee shall pay the Franchisor a penalty of $1,000 for every
30 day period that the Franchisee was late, plus attorneys' and administrative
fees and expenses attributable to such late renewal. The Franchisee's successor
franchise rights shall become effective by signing the Franchise Agreement then
currently being offered to new franchisees of the Franchisor.

17.5.    CONDITIONS OF REFUSAL.

         The Franchisor shall not be obligated to offer the Franchisee a
successor franchise upon the expiration of this Agreement if the Franchisee
fails to comply with any of the above conditions of renewal. In such event,
except for failure to execute the then current Franchise Agreement or pay the
successor franchise fee, the Franchisor shall give notice of expiration at least
180 days prior to the expiration of the term, and such notice shall set forth
the reasons for such refusal to offer successor franchise rights. Upon the
expiration of this Agreement, the Franchisee shall comply with the provisions of
Section 18.5 below.

                          18. DEFAULT AND TERMINATION

18.1.    TERMINATION BY FRANCHISOR - EFFECTIVE UPON NOTICE.

         The Franchisor shall have the right, at its option, to terminate this
Agreement and all rights granted the Franchisee hereunder, without affording the
Franchisee any opportunity to cure any default (subject to any state laws to the
contrary, where state law shall prevail), effective upon receipt of notice by
the Franchisee, addressed as provided in Section 22.12, upon the occurrence of
any of the following events:

                  a. ABANDONMENT. If the Franchisee ceases to operate the ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store or otherwise abandons the ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store for a period of five consecutive days,
         or any shorter period that indicates an intent by the Franchisee to
         discontinue operation of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store,
         unless and only to the extent that full operation of the ROCKY MOUNTAIN
         CHOCOLATE FACTORY Store is suspended or terminated due to fire, flood,
         earthquake or other similar causes beyond the Franchisee's control and
         not related to the availability of funds to the Franchisee;

                  b. INSOLVENCY; ASSIGNMENTS. If the Franchisee becomes
         insolvent or is adjudicated a bankrupt; or any action is taken by the
         Franchisee, or by others against the Franchisee under any insolvency,
         bankruptcy or reorganization act, (this provision may not be
         enforceable under federal bankruptcy law, 11 U.S.C. Sections 101 et
         seq.), or if the Franchisee makes an assignment for the benefit of
         creditors, or a receiver is appointed by the Franchisee;

                  c. UNSATISFIED JUDGMENTS; LEVY; FORECLOSURE. If any material
         judgment (or several judgments which in the aggregate are material) is
         obtained against the Franchisee and remains unsatisfied or of record
         for 30 days or longer (unless a supersedeas or other appeal bond has
         been filed); or if execution is levied against the Franchisee's
         business or any of the property used in the operation of the ROCKY
         MOUNTAIN CHOCOLATE FACTORY Store and is not

                                       23
<PAGE>

         discharged within five days; or if the real or personal property of the
         Franchisee's business shall be sold after levy thereupon by any
         sheriff, marshal or constable;

                  d. CRIMINAL CONVICTION. If the Franchisee is convicted of a
         felony, a crime involving moral turpitude, or any crime or offense that
         is reasonably likely, in the sole opinion of the Franchisor, to
         materially and unfavorably affect the Licensed Methods, Marks, goodwill
         or reputation thereof;

                  e. FAILURE TO MAKE PAYMENTS. If the Franchisee fails to pay
         any amounts due the Franchisor or affiliates, including any amounts
         which may be due as a result of any subleases or lease assignments
         between the Franchisee and the Franchisor, within 10 days after
         receiving notice that such fees or amounts are overdue;

                  f. MISUSE OF MARKS. If the Franchisee misuses or fails to
         follow the Franchisor's directions and guidelines concerning use of the
         Franchisor's Marks and fails to correct the misuse or failure within
         ten days after notification from the Franchisor;

                  g. UNAUTHORIZED DISCLOSURE. If the Franchisee intentionally or
         negligently discloses to any unauthorized person the contents of or any
         part of the Franchisor's Operations Manual or any other trade secrets
         or confidential information of the Franchisor;

                  h. REPEATED NONCOMPLIANCE. If the Franchisee has received two
         previous notices of default from the Franchisor and is again in default
         of this Agreement at any time during the term of this Agreement,
         regardless of whether the previous defaults were cured by the
         Franchisee; or

                  i. UNAUTHORIZED TRANSFER. If the Franchisee sells, transfers
         or otherwise assigns the Franchise, an interest in the Franchise or the
         Franchisee entity, this Agreement, the ROCKY MOUNTAIN CHOCOLATE FACTORY
         Store or a substantial portion of the assets of the ROCKY MOUNTAIN
         CHOCOLATE FACTORY Store owned by the Franchisee without complying with
         the provisions of Article 16 above.

18.2.    TERMINATION BY FRANCHISOR - THIRTY DAYS NOTICE.

         The Franchisor shall have the right to terminate this Agreement
(subject to any state laws to the contrary, where state law shall prevail),
effective upon 30 days written notice to the Franchisee, if the Franchisee
breaches any other provision of this Agreement and fails to cure the default
during such 30 day period. In that event, this Agreement will terminate without
further notice to the Franchisee, effective upon expiration of the 30 day
period. Defaults shall include, but not be limited to, the following:

                  a. FAILURE TO MAINTAIN STANDARDS. The Franchisee fails to
         maintain the then-current operating procedures and adhere to the
         specifications and standards established by the Franchisor as set forth
         herein or in the Operations Manual or otherwise communicated to the
         Franchisee;

                  b. DECEPTIVE PRACTICES. The Franchisee engages in any
         unauthorized business or practice or sells any unauthorized product or
         service under the Franchisor's Marks or under a name or mark which is
         confusingly similar to the Franchisor's Marks;

                  c. FAILURE TO OBTAIN CONSENT. The Franchisee fails, refuses or
         neglects to obtain the Franchisor's prior written approval or consent
         as required by this Agreement;

                                       24
<PAGE>

                  d. FAILURE TO COMPLY WITH MANUAL. The Franchisee fails or
         refuses to comply with the then-current requirements of the Operations
         Manual; or

                  e. BREACH OF RELATED AGREEMENT. The Franchisee defaults under
         any term of the lease, sublease or lease assignment for the Franchised
         Location, any equipment lease or any other agreement material to the
         ROCKY MOUNTAIN CHOCOLATE FACTORY Store or any other Franchise Agreement
         between the Franchisor and the Franchisee and such default is not cured
         within the time specified in such lease, sublease, other agreement or
         other Franchise Agreement. Provided, however, so long as financing from
         the United States Small Business Administration remains outstanding,
         the Franchisee will be given the same opportunity to cure defaults
         under any agreement between the Franchisor or its affiliates and the
         Franchisee, as the Franchisee is given under this Agreement

Notwithstanding the foregoing, if the breach is curable, but is of a nature
which cannot be reasonably cured within such 30 day period and the Franchisee
has commenced and is continuing to make good faith efforts to cure the breach
during such 30 day period, the Franchisee shall be given an additional
reasonable period of time to cure the same, and this Agreement shall not
automatically terminate without written notice from the Franchisor.

18.3.    FRANCHISOR'S REMEDIES.

                  a. FAILURE TO PAY. In addition to all other remedies that may
         be exercised by the Franchisor upon a default by the Franchisee under
         the terms of this Agreement, the Franchisor reserves the right to
         collect amounts due from the Franchisee to any third party and to pay
         the third party directly. If the Franchisor collects any such amounts,
         the Franchisor may, in its sole discretion, charge the Franchisee an
         administrative fee to reimburse the Franchisor for its costs of
         collecting and paying such amounts. Any administrative fee charged
         would not exceed 15% of the total amount of money collected.
         Additionally, in the event this Agreement is terminated by the
         Franchisor prior to its expiration as set forth in Sections 18.1 or
         18.2 above, the Franchisee acknowledges and agrees that in addition to
         all other available remedies, the Franchisor shall have the right to
         recover lost future Royalties during any period in which the Franchisee
         fails to pay such Royalties through and including the remainder of the
         then current term of this Agreement.

                  b. LIQUIDATED DAMAGES. Franchisee acknowledges that, if there
         is any act in violation of Sections 18.1 or 18.2 of this Agreement, it
         will be impossible to determine with specificity the damage to
         Franchisor. Therefore, for purposes of this Agreement, as liquidated
         damages and not as a penalty, for each day that Franchisee is in
         violation of Sections 18.1 or 18.2 of this Agreement, Franchisee shall
         pay to Franchisor the sum of $500.

18.4.    RIGHT TO PURCHASE.

         Upon termination or expiration of this Agreement for any reason, the
Franchisor shall have the option to purchase some or all of the assets of the
ROCKY MOUNTAIN CHOCOLATE FACTORY Store, which may include, at the Franchisor's
option, all of the Franchisee's interest, if any, in and to the real estate upon
which the ROCKY MOUNTAIN CHOCOLATE FACTORY Store is located, and all buildings
and other improvements thereon, including leasehold interests, at fair market
value, less any amount apportioned to the goodwill of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store which is attributable to the Franchisor's Marks and
Licensed Methods, and less any amounts owed to the

                                       25
<PAGE>

Franchisor by the Franchisee. The following additional terms shall apply to the
Franchisor's exercise of this option:

                  a. The Franchisor's option hereunder shall be exercisable by
         providing the Franchisee with written notice of its intention to
         exercise the option given to the Franchisee no later than the effective
         date of termination, in the case of termination, or at least 90 days
         prior to the expiration of the term of the franchise, in the case of
         non-renewal. Such notice shall include a description of the assets the
         Franchisor will purchase.

                  b. In the event that the Franchisor and the Franchisee cannot
         agree to a fair market value for the assets of the ROCKY MOUNTAIN
         CHOCOLATE FACTORY Store, then the fair market value shall be determined
         by an independent third party appraisal. The Franchisor and the
         Franchisee shall each select one independent, qualified appraiser, and
         the two so selected shall select a third appraiser, all three to
         determine the fair market value of the ROCKY MOUNTAIN CHOCOLATE FACTORY
         Store. The purchase price shall be the median of the fair market values
         as determined by the three appraisers.

                  c. The Franchisor and the Franchisee agree that the terms and
         conditions of this right and option to purchase may be recorded, if
         deemed appropriate by the Franchisor, in the real property records and
         the Franchisor and the Franchisee further agree to execute such
         additional documentation as may be necessary and appropriate to
         effectuate such recording.

         The closing for the purchase of the assets of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store will take place no later than 60 days after the
termination or nonrenewal date. The Franchisor will pay the purchase price in
full at the closing, or, at its option, in five equal consecutive monthly
installments with interest at a rate of 10% per annum. The Franchisee must sign
all documents of assignment and transfer as are reasonably necessary for
purchase of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store by the Franchisor.

         In the event that the Franchisor does not exercise the Franchisor's
right to purchase the assets of the Franchisee's ROCKY MOUNTAIN CHOCOLATE
FACTORY Store as set forth above, the Franchisee will be free to keep or to
sell, after such termination or expiration, to any third party, all of the
assets of its ROCKY MOUNTAIN CHOCOLATE FACTORY Store; provided, however, that
all appearances of the Marks are first removed in a manner approved in writing
by the Franchisor. The Franchisor will only be obligated to purchase any assets
of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store in the event and to the extent it
is required by applicable state or federal law.

18.5.    OBLIGATIONS OF FRANCHISEE UPON TERMINATION OR EXPIRATION.

         The Franchisee is obligated upon termination or expiration of this
Agreement to immediately:

                  a. Pay to the Franchisor all Royalties, other fees, and any
         and all amounts or accounts payable then owed the Franchisor or its
         affiliates pursuant to this Agreement, or pursuant to any other
         agreement, whether written or oral, including subleases and lease
         assignments, between the parties;

                  b. Cease to identify itself as a ROCKY MOUNTAIN CHOCOLATE
         FACTORY Franchisee or publicly identify itself as a former Franchisee
         or use any of the Franchisor's trade secrets, signs, symbols, devices,
         trade names, trademarks, or other materials.

                                       26
<PAGE>

                  c. Immediately cease to identify the Franchised Location as
         being, or having been, associated with the Franchisor, and immediately
         cease using any proprietary mark of the Franchisor or any mark in any
         way associated with the ROCKY MOUNTAIN CHOCOLATE FACTORY Marks and
         Licensed Methods;

                  d. Deliver to the Franchisor all Candy inventory which bears
         the ROCKY MOUNTAIN CHOCOLATE FACTORY logo, signs, sign-faces,
         advertising materials, forms and other materials bearing any of the
         Marks or otherwise identified with the Franchisor and obtained by and
         in connection with this Agreement;

                  e. Immediately deliver to the Franchisor the Operations Manual
         and all other information, documents and copies thereof which are
         proprietary to the Franchisor;

                  f. Promptly take such action as may be required to cancel all
         fictitious or assumed names or equivalent registrations relating to its
         use of any Marks which are under the exclusive control of the
         Franchisor or, at the option of the Franchisor, assign the same to the
         Franchisor;

                  g. Notify the telephone company and all telephone directory
         publishers of the termination or expiration of the Franchisee's right
         to use any telephone number and any regular, classified or other
         telephone directory listings associated with any Mark and to authorize
         transfer thereof to the Franchisor or its designee. The Franchisee
         acknowledges that, as between the Franchisee and the Franchisor, the
         Franchisor has the sole rights to and interest in all telephone,
         telecopy or facsimile machine numbers and directory listings associated
         with any Mark. The Franchisee authorizes the Franchisor, and hereby
         appoints the Franchisor and any of its officers as the Franchisee's
         attorney-in-fact, to direct the telephone company and all telephone
         directory publishers to transfer any telephone, telecopy or facsimile
         machine numbers and directory listings relating to the ROCKY MOUNTAIN
         CHOCOLATE FACTORY Store to the Franchisor or its designee, should the
         Franchisee fail or refuse to do so, and the telephone company and all
         telephone directory publishers may accept such direction or this
         Agreement as conclusive of the Franchisor's exclusive rights in such
         telephone numbers and directory listings and the Franchisor's authority
         to direct their transfer;

                  h. Abide by all restrictive covenants set forth in Article 20
         of this Agreement;

                  i. Sign a general release, in a form satisfactory to the
         Franchisor, of any and all claims against the Franchisor, its
         affiliates and their respective officers, directors, employees and
         agents; and

                  j. If applicable, take such action as may be required to
         remove from the internet all sites referring to the Franchisee's former
         ROCKY MOUNTAIN CHOCOLATE FACTORY Store or any of the Marks and to
         cancel or assign to the Franchisor, in the Franchisor's sole
         discretion, all rights to any domain names for any sites on the
         internet that refer to the Franchisee's former ROCKY MOUNTAIN CHOCOLATE
         FACTORY Store or any of the Marks.

18.6.    STATE AND FEDERAL LAW.

         THE PARTIES ACKNOWLEDGE THAT IN THE EVENT THAT THE TERMS OF THIS
AGREEMENT REGARDING TERMINATION OR EXPIRATION ARE INCONSISTENT WITH APPLICABLE
STATE OR FEDERAL LAW, SUCH LAW SHALL GOVERN THE FRANCHISEE'S RIGHTS REGARDING
TERMINATION OR EXPIRATION OF THIS AGREEMENT.

                                       27
<PAGE>

                           19. BUSINESS RELATIONSHIP

19.1.    INDEPENDENT BUSINESSPERSONS.

         The parties agree that each of them are independent businesspersons,
their only relationship is by virtue of this Agreement and that no fiduciary
relationship is created hereunder. Neither party is liable or responsible for
the other's debts or obligations, nor shall either party be obligated for any
damages to any person or property directly or indirectly arising out of the
operation of the other party's business authorized by or conducted pursuant to
this Agreement. The Franchisor and the Franchisee agree that neither of them
will hold themselves out to be the agent, employer or partner of the other and
that neither of them has the authority to bind or incur liability on behalf of
the other.

19.2.    PAYMENT OF THIRD PARTY OBLIGATIONS.

         The Franchisor shall have no liability for the Franchisee's obligations
to pay any third parties, including without limitation, any product vendors, or
any sales, use, service, occupation, excise, gross receipts, income, property or
other tax levied upon the Franchisee, the Franchisee's property, the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store or upon the Franchisor in connection with the
sales made or business conducted by the Franchisee (except any taxes the
Franchisor is required by law to collect from the Franchisee with respect to
purchases from the Franchisor).

19.3.    INDEMNIFICATION.

         The Franchisee agrees to indemnify, defend and hold harmless the
Franchisor, its subsidiaries and affiliates, and their respective shareholders,
directors, officers, employees, agents, successors and assignees, (the
"INDEMNIFIED PARTIES") against, and to reimburse them for all claims,
obligations and damages described in this Section 19.3, any and all third party
obligations described in Section 19.2 and any and all claims and liabilities
directly or indirectly arising out of the operation of the ROCKY MOUNTAIN
CHOCOLATE FACTORY Store or arising out of the use of the Marks and Licensed
Methods in any manner not in accordance with this Agreement. For purposes of
this indemnification, claims shall mean and include all obligations, actual and
consequential damages and costs reasonably incurred in the defense of any claim
against the Indemnified Parties, including, without limitation, reasonable
accountants', attorneys' and expert witness fees, costs of investigation and
proof of facts, court costs, other litigation expenses and travel and living
expenses. The Franchisor shall have the right to defend any such claim against
it. This indemnity shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.

                           20. RESTRICTIVE COVENANTS

20.1.    NON-COMPETITION DURING TERM.

         The Franchisee acknowledges that, in addition to the license of the
Marks hereunder, the Franchisor has also licensed commercially valuable
information which comprises and is a part of the Licensed Methods, including
without limitation, recipes, operations, marketing, advertising and related
information and materials and that the value of this information derives not
only from the time, effort and money which went into its compilation, but from
the usage of the same by all the franchisees of the Franchisor using the Marks
and Licensed Methods. The Franchisee therefore agrees that other than the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store licensed herein, neither the Franchisee nor any
of the Franchisee's officers, directors, shareholders or partners, nor any
member of his or their immediate families, shall during the term of this
Agreement:

                                       28
<PAGE>

                  a. have any direct or indirect controlling interest as a
         disclosed or beneficial owner in a "Competitive Business" as defined
         below;

                  b. perform services as a director, officer, manager, employee,
         consultant, representative, agent or otherwise for a Competitive
         Business; or

                  c. divert or attempt to divert any business related to, or any
         customer or account of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store, the
         Franchisor's business or any other ROCKY MOUNTAIN CHOCOLATE FACTORY
         franchisee's business, by direct inducement or otherwise, or divert or
         attempt to divert the employment of any employee of the Franchisor or
         another franchisee licensed by the Franchisor to use the Marks and
         Licensed Methods, to any Competitive Business by any direct inducement
         or otherwise.

The term "COMPETITIVE BUSINESS" as used in this Agreement shall mean any
business operating, or granting franchises or licenses to others to operate, a
retail, wholesale, distribution or manufacturing business deriving more than 5%
of its gross receipts from the sale, processing or manufacturing of chocolate
candies and other non-chocolate confectionery items, Items or other products
which are offered in ROCKY MOUNTAIN CHOCOLATE FACTORY Stores and which
constitute 5% or more of the Gross Retail Sales of any ROCKY MOUNTAIN CHOCOLATE
FACTORY Store; provided, however, the Franchisee shall not be prohibited from
owning securities in a Competitive Business if such securities are listed on a
stock exchange or traded on the over-the-counter market and represent 5% or less
of that class of securities issued and outstanding.

20.2.    POST-TERMINATION COVENANT NOT TO COMPETE.

         Upon termination or expiration of this Agreement for any reason, the
Franchisee and its officers, directors, shareholders, and/or partners agree
that, for a period of two years commencing on the effective date of termination
or expiration, or the date on which the Franchisee ceases to conduct business,
whichever is later, neither Franchisee nor its officers, directors,
shareholders, and/or partners shall have any direct or indirect interest
(through a member of any immediate family of the Franchisee or its Owners or
otherwise) as a disclosed or beneficial owner, investor, partner, director,
officer, employee, consultant, representative or agent or in any other capacity
in any Competitive Business, defined in Section 20.1 above, located or operating
within a 10 mile radius of the Franchised Location or within a 10 mile radius of
any other franchised or company-owned ROCKY MOUNTAIN CHOCOLATE FACTORY Store.
The restrictions of this Section shall not be applicable to the ownership of
shares of a class of securities listed on a stock exchange or traded on the
over-the-counter market that represent 5% or less of the number of shares of
that class of securities issued and outstanding. The Franchisee and its
officers, directors, shareholders, and/or partners expressly acknowledge that
they possess skills and abilities of a general nature and have other
opportunities for exploiting such skills. Consequently, enforcement of the
covenants made in this Section will not deprive them of their personal goodwill
or ability to earn a living.

20.3.    CONFIDENTIALITY OF PROPRIETARY INFORMATION.

         The Franchisee shall treat all information it receives which comprises
or is a part of the Licensed Methods licensed hereunder as proprietary and
confidential and will not use such information in an unauthorized manner or
disclose the same to any unauthorized person without first obtaining the
Franchisor's written consent. The Franchisee acknowledges that the Marks and the
Licensed Methods have valuable goodwill attached to them, that the protection
and maintenance thereof is essential to the Franchisor and that any unauthorized
use or disclosure of the Marks and Licensed Methods will result in irreparable
harm to the Franchisor.

                                       29
<PAGE>

20.4.    CONFIDENTIALITY AGREEMENT.

         The Franchisor requires that the Franchisee cause each of its officers,
directors, partners, shareholders, and General Manager, and, if the Franchisee
is an individual, immediate family members, to execute a confidentiality and
noncompetition agreement containing the above restrictions, in the form attached
hereto as Exhibit VI and incorporated herein by reference.

                                 21. INSURANCE

21.1.    INSURANCE COVERAGE.

         The Franchisee shall procure, maintain and provide evidence of (i)
comprehensive general liability insurance for the Franchised Location and its
operations with a limit of not less than $1,000,000 combined single limit, or
such greater limit as may be required as part of any lease agreement for the
Franchised Location; (ii) automobile liability insurance covering all employees
of the ROCKY MOUNTAIN CHOCOLATE FACTORY Store with authority to operate a motor
vehicle in an amount not less than $1,000,000 or, with the prior written consent
of the Franchisor, such lesser amount as may be available at a commercially
reasonable rate, but in no event less than any statutorily imposed minimum
coverage; (iii) unemployment and worker's compensation insurance with a broad
form all-states endorsement coverage sufficient to meet the requirements of the
law; and (iv) all-risk personal property insurance in an amount equal to at
least 100% of the replacement costs of the contents and tenant improvements
located at the ROCKY MOUNTAIN CHOCOLATE FACTORY Store. All of the required
policies of insurance shall name the Franchisor as an additional named insured
and shall provide for a 30 day advance written notice to the Franchisor of
cancellation.

21.2.    PROOF OF INSURANCE COVERAGE.

         The Franchisee will provide proof of insurance to the Franchisor prior
to commencement of operations at its ROCKY MOUNTAIN CHOCOLATE FACTORY Store.
This proof will show that the insurer has been authorized to inform the
Franchisor in the event any policies lapse or are cancelled. The Franchisor has
the right to change the minimum amount of insurance the Franchisee is required
to maintain by giving the Franchisee prior reasonable notice, giving due
consideration to what is reasonable and customary in the similar business.
Noncompliance with the insurance provisions set forth herein shall be deemed a
material breach of this Agreement; in the event of any lapse in insurance
coverage, in addition to all other remedies, the Franchisor shall have the right
to demand that the Franchisee cease operations of the ROCKY MOUNTAIN CHOCOLATE
FACTORY Stores until coverage is reinstated, or, in the alternative, pay any
delinquencies in premium payments and charge the same back to the Franchisee.

                          22. MISCELLANEOUS PROVISIONS

22.1.    GOVERNING LAW/CONSENT TO VENUE AND JURISDICTION.

         Except to the extent governed by the United States Trademark Act of
1946 (Lanham Act, 15 U.S.C. Sections 1051 et seq.) or other federal law, this
Agreement shall be interpreted under the laws of the state of Colorado and any
disputes between the parties shall be governed by and determined in accordance
with the substantive laws of the state of Colorado, which laws shall prevail in
the event of any conflict of law. The Franchisee and the Franchisor have
negotiated regarding a forum in which to resolve any disputes which may arise
between them and have agreed to select a forum in order to promote stability in
their relationship. Therefore, if a claim is asserted in a legal proceeding
involving the Franchisee, its officers,

                                       30
<PAGE>

directors, partners or managers (collectively, "FRANCHISEE AFFILIATES") and the
Franchisor, its officers, directors or sales employees (collectively,
"FRANCHISOR AFFILIATES") all parties agree that the exclusive venue for disputes
between them shall be in the state courts in La Plata County, Colorado and
federal courts located in Colorado and each waive any objections they may have
to the personal jurisdiction of or venue in the state courts in La Plata County
and federal courts located in Colorado. The Franchisor, the Franchisor
Affiliates, the Franchisee and the Franchisee Affiliates each waive their rights
to a trial by jury.

22.2.    CUMULATIVE RIGHTS.

         The rights and remedies of the Franchisor and the Franchisee hereunder
are cumulative and no exercise or enforcement by either of them of any right or
remedy hereunder shall preclude the exercise or enforcement by either of them of
any other right or remedy hereunder which they are entitled by law to enforce.

22.3.    MODIFICATION.

         The Franchisor and/or the Franchisee may modify this Agreement only
upon execution of a written agreement between the two parties. The Franchisee
acknowledges that the Franchisor may modify its standards and specifications and
operating and marketing techniques set forth in the Operations Manual
unilaterally under any conditions and to the extent in which the Franchisor, in
its sole discretion, deems necessary to protect, promote, or improve the Marks
and the quality of the Licensed Methods, but under no circumstances will such
modifications be made arbitrarily without such determination.

22.4.    ENTIRE AGREEMENT.

         This Agreement, including all exhibits and addenda hereto, contains the
entire agreement between the parties and supersedes any and all prior agreements
concerning the subject matter hereof. The Franchisee agrees and understands that
the Franchisor shall not be liable or obligated for any oral representations or
commitments made prior to the execution hereof or for claims of negligent or
fraudulent misrepresentation based on any such oral representations or
commitments and that no modifications of this Agreement shall be effective
except those in writing and signed by both parties. The Franchisor does not
authorize and will not be bound by any representation of any nature other than
those expressed in this Agreement. The Franchisee further acknowledges and
agrees that no representations have been made to it by the Franchisor regarding
projected sales volumes, market potential, revenues, profits of the Franchisee's
ROCKY MOUNTAIN CHOCOLATE FACTORY Store, or operational assistance other than as
stated in this Agreement or in any disclosure document provided by the
Franchisor or its representatives.

22.5.    DELEGATION BY THE FRANCHISOR.

         From time to time, the Franchisor shall have the right to delegate the
performance of any portion or all of its obligations and duties hereunder to
third parties, whether the same are agents of the Franchisor or independent
contractors which the Franchisor has contracted with to provide such services.
The Franchisee agrees in advance to any such delegation by the Franchisor of any
portion or all of its obligations and duties hereunder.

                                       31
<PAGE>

22.6.    EFFECTIVE DATE.

         This Agreement shall not be effective until accepted by the Franchisor
as evidenced by dating and signing by an officer of the Franchisor.

22.7.    REVIEW OF AGREEMENT.

         The Franchisee acknowledges that it had a copy of this Agreement in its
possession for a period of time not fewer than 10 full business days, during
which time the Franchisee has had the opportunity to submit same for
professional review and advice of the Franchisee's choosing prior to freely
executing this Agreement.

22.8.    ATTORNEYS' FEES.

         In the event of any dispute between the parties to this Agreement,
including any dispute involving an officer, director, employee or managing agent
of a party to this Agreement, in addition to all other remedies, the
non-prevailing party will pay the prevailing party all costs and expenses,
including reasonable attorneys' fees, incurred by the prevailing party in any
legal action, arbitration or other proceeding as a result of such dispute.

22.9.    INJUNCTIVE RELIEF.

         Nothing herein shall prevent the Franchisor or the Franchisee from
seeking injunctive relief to prevent irreparable harm, in addition to all other
remedies. If the Franchisor seeks an injunction, the Franchisor will not be
required to post a bond in excess of $500.

22.10.   NO WAIVER.

         No waiver of any condition or covenant contained in this Agreement or
failure to exercise a right or remedy by the Franchisor or the Franchisee shall
be considered to imply or constitute a further waiver by the Franchisor or the
Franchisee of the same or any other condition, covenant, right, or remedy.

22.11.   NO RIGHT TO SET OFF.

         The Franchisee shall not be allowed to set off amounts owed to the
Franchisor for Royalties, fees or other amounts due hereunder, against any
monies owed to Franchisee, nor shall the Franchisee in any event withhold such
amounts due to any alleged nonperformance by the Franchisor hereunder, which
right of set off is hereby expressly waived by the Franchisee.

22.12.   INVALIDITY.

         If any provision of this Agreement is held invalid by any tribunal in a
final decision from which no appeal is or can be taken, such provision shall be
deemed modified to eliminate the invalid element and, as so modified, such
provision shall be deemed a part of this Agreement as though originally
included. The remaining provisions of this Agreement shall not be affected by
such modification.

22.13.   NOTICES.

         All notices required to be given under this Agreement shall be given in
writing, by certified mail, return receipt requested, or by an overnight
delivery service providing documentation of receipt, at the address set forth in
the first Section of this Agreement or at such other addresses as the Franchisor
or the

                                       32
<PAGE>

Franchisee may designate from time to time, and shall be effectively given when
deposited in the United States mails, postage prepaid, or when received via
overnight delivery, as may be applicable.

22.14.   PAYMENT OF TAXES.

         The Franchisee shall reimburse the Franchisor, or its affiliates and
designees, promptly and when due, the amount of all sales taxes, use taxes,
personal property taxes and similar taxes imposed upon, required to be collected
or paid by the Franchisor, or its affiliates or designees, on account of
services or goods furnished by the Franchisor, its affiliates or designees, to
the Franchisee through sale, lease or otherwise, or on account of collection by
the Franchisor, its affiliates or designees, of the initial franchise fee,
Royalties, Marketing and Promotion Fees or any other payments made by the
Franchisee to the Franchisor required under the terms of this Agreement.

22.15.   ACKNOWLEDGEMENT.

         BEFORE SIGNING THIS AGREEMENT, THE FRANCHISEE SHOULD READ IT CAREFULLY
WITH THE ASSISTANCE OF LEGAL COUNSEL. THE FRANCHISEE ACKNOWLEDGES THAT:

         (A) THE SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED HEREIN INVOLVES
SUBSTANTIAL RISKS AND DEPENDS UPON THE FRANCHISEE'S ABILITY AS AN INDEPENDENT
BUSINESS PERSON AND ITS ACTIVE PARTICIPATION IN THE DAILY AFFAIRS OF THE
BUSINESS, AND

         (B) NO ASSURANCE OR WARRANTY, EXPRESS OR IMPLIED, HAS BEEN GIVEN AS TO
THE POTENTIAL SUCCESS OF SUCH BUSINESS VENTURE OR THE EARNINGS LIKELY TO BE
ACHIEVED, AND

         (C) NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR COMMUNICATION,
EXCEPT AS SET FORTH IN THIS DOCUMENT, AND IN ANY OFFERING CIRCULAR SUPPLIED TO
THE FRANCHISEE IS BINDING ON THE FRANCHISOR IN CONNECTION WITH THE SUBJECT
MATTER OF THIS AGREEMENT.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above set forth.

                                             ROCKY MOUNTAIN CHOCOLATE
                                             FACTORY, INC.

Date:                                        By:
     ----------------------------               --------------------------------
                                             Title:
                                                   -----------------------------

                                             FRANCHISEE:

Date:
     ----------------------------            -----------------------------------
                                             Individually

                                       33
<PAGE>

                                             AND:

                                             (if a corporation or partnership)

                                             -----------------------------------
                                             Company Name

Date:                                        By:
     ----------------------------               --------------------------------
                                             Title:
                                                   -----------------------------

                                       34
<PAGE>

                                                                       EXHIBIT I
                                                          TO FRANCHISE AGREEMENT

               ADDENDUM TO ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
                               FRANCHISE AGREEMENT

         1. Franchised Location. The Franchised Location, set forth in Section
3.1 of the Agreement shall be:__________________________________________________
_______________________________________________________________________________.

         2. Initial Franchise Fee. The amount of the initial franchise fee, set
forth in Section 4.1 of the Agreement, shall be: $_________________________.

         Fully executed this ____ day of ________________, 20____.

                                             ROCKY MOUNTAIN CHOCOLATE
                                             FACTORY, INC.

                                             By:
                                                --------------------------------
                                             Title:
                                                   -----------------------------

                                             FRANCHISEE:

                                             -----------------------------------
                                             Individually

                                             AND:

                                             (if a corporation or partnership)

                                             -----------------------------------
                                             Company Name

                                             By:
                                                --------------------------------
                                             Title:
                                                   -----------------------------

<PAGE>

                                                                      EXHIBIT II
                                                          TO FRANCHISE AGREEMENT

               GUARANTY AND ASSUMPTION OF FRANCHISEE'S OBLIGATIONS

         In consideration of, and as an inducement to, the execution of the
above Franchise Agreement (the "AGREEMENT") by Rocky Mountain Chocolate Factory,
Inc. ("THE FRANCHISOR"), each of the undersigned hereby personally and
unconditionally:

         Guarantees to the Franchisor and its successors and assigns, for the
term of this Agreement, including renewals thereof, that the franchisee, as that
term is defined in the Agreement ("FRANCHISEE"), shall punctually pay and
perform each and every undertaking, agreement and covenant set forth in the
Agreement; and

         Agrees to be personally bound by, and personally liable for the breach
of, each and every provision in the Agreement.

Each of the undersigned waives the following:

         1. Acceptance and notice of acceptance by the Franchisor of the
foregoing undertaking;

         2. Notice of demand for payment of any indebtedness or nonperformance
of any obligations hereby guaranteed;

         3. Protest and notice of default to any party with respect to the
indebtedness or nonperformance of any obligations hereby guaranteed;

         4. Any right he or she may have to require that any action be brought
against Franchisee or any other person as a condition of liability; and

         5. Any and all other notices and legal or equitable defenses to which
he or she may be entitled.

Each of the undersigned consents and agrees that:

         1. His or her direct and immediate liability under this guaranty shall
be joint and several;

         2. He or she shall render any payment or performance required under the
Agreement upon demand if Franchisee fails or refuses punctually to do so;

         3. Such liability shall not be contingent or conditioned upon pursuit
by the Franchisor of any remedies against Franchisee or any other person; and

         4. Such liability shall not be diminished, relieved or otherwise
affected by any extension of time, credit or other indulgence which the
Franchisor may from time to time grant to Franchisee or to any other person,
including without limitation the acceptance of any partial payment or
performance, or the compromise or release of any claims, none of which shall in
any way modify or amend this guaranty, which shall be continuing and irrevocable
during the term of the Agreement, including renewals thereof.

<PAGE>

         IN WITNESS WHEREOF, each of the undersigned has affixed his or her
signature effective on the same day and year as the Agreement was executed.

<Table>
<Caption>
WITNESS                                               GUARANTOR(S)
<S>                                          <C>

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

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

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

-----------------------------------          -----------------------------------
</Table>

                                       2
<PAGE>

                                                                     EXHIBIT III
                                                          TO FRANCHISE AGREEMENT

                             STATEMENT OF OWNERSHIP

Franchisee:
           ---------------------------------------------------------------------

Trade Name (if different from above):
                                     -------------------------------------------

                                Form of Ownership
                                   (Check One)
<Table>
<S>                        <C>                         <C>                            <C>
                                                                                               Limited
______  Individual            ______  Partnership         ______  Corporation          ______  Liability
                                                                                               Company
</Table>

If a Partnership, provide name and address of each partner showing percentage
owned, whether active in management, and indicate the state in which the
partnership was formed.

If a Limited Liability Company, provide name and address of each member and each
manager showing percentage owned and indicate the state in which the Limited
Liability Company was formed.

If a Corporation, give the state and date of incorporation, the names and
addresses of each officer and director, and list the names and addresses of
every shareholder showing what percentage of stock is owned by each.

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

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

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

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

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

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

Franchisee acknowledges that this Statement of Ownership applies to the ROCKY
MOUNTAIN CHOCOLATE FACTORY Store authorized under the Franchise Agreement.

Use additional sheets if necessary. Any and all changes to the above information
must be reported to the Franchisor in writing.

-------------------------                    -----------------------------------
Date                                         Signature

                                             -----------------------------------
                                             Print Name

<PAGE>

                                                                      EXHIBIT IV
                                                          TO FRANCHISE AGREEMENT

                AUTHORIZATION AGREEMENT FOR PREARRANGED PAYMENTS
                                 (DIRECT DEBITS)

The undersigned depositor ("DEPOSITOR") hereby (1) authorizes Rocky Mountain
Chocolate Factory, Inc. ("COMPANY") to initiate debit entries and/or credit
correction entries to the undersigned's checking and/or savings account
indicated below and (2) authorizes the depository designated below
("DEPOSITORY") to debit such account pursuant to Company's instructions.

----------------------------------           -----------------------------------
Depository                                   Branch

----------------------------------           -----------------------------------
City                                         State                      Zip Code

--------------------------------------------------------------------------------
Bank Transit/ABA Number                                           Account Number

This authority is to remain in full force and effect until Depository has
received joint written notification from Company and Depositor of the
Depositor's termination of such authority in such time and in such manner as to
afford Depository a reasonable opportunity to act on it. Notwithstanding the
foregoing, Depository shall provide Company and Depositor with 30 days' prior
written notice of the termination of this authority. If an erroneous debit entry
is initiated to Depositor's account, Depositor shall have the right to have the
amount of such entry credited to such account by Depository, if (a) within 15
calendar days following the date on which Depository sent to Depositor a
statement of account or a written notice pertaining to such entry or (b) 45 days
after posting, whichever occurs first, Depositor shall have sent to Depository a
written notice identifying such entry, stating that such entry was in error and
requesting Depository to credit the amount thereof to such account. These rights
are in addition to any rights Depositor may have under federal and state banking
laws.

----------------------------------           -----------------------------------
DEPOSITOR (Print Name)                       DEPOSITORY (Print Name)

By:                                          By:
   -------------------------------              --------------------------------
Its:                                         Its:
    ------------------------------               -------------------------------
Date:                                        Date:
     -----------------------------                ------------------------------

<PAGE>

                                                                       EXHIBIT V
                                                      TO THE FRANCHISE AGREEMENT

                  PERMIT, LICENSE AND CONSTRUCTION CERTIFICATE

         Franchisor and Franchisee are parties to a Franchise Agreement dated
____________, 20____ for the development and operation of ROCKY MOUNTAIN
CHOCOLATE FACTORY Store located at _____________________________________________
(the "FRANCHISED LOCATION"). In accordance with Section 5.5 of the Franchise
Agreement, Franchisee certifies to Franchisor that the Franchised Location
complies with all applicable federal, state and local laws, statutes, codes,
rules, regulations and standards including, but not limited to, the federal
Americans with Disabilities Act and any similar state or local laws. The
Franchisee has obtained all such permits and certifications as may be required
for the lawful construction and operation of the ROCKY MOUNTAIN CHOCOLATE
FACTORY Store, together with all certifications from government authorities
having jurisdiction over the site that all requirements for construction and
operation have been met, including without limitation, zoning, access, sign,
health, safety requirements, building and other required construction permits,
licenses to do business, sales tax permits, health and sanitation permits and
ratings and fire clearances. The Franchisee has obtained all customary
contractors' sworn statements and partial and final lien waivers for
construction, remodeling, decorating and installation of equipment at the
Franchised Location. The Franchisee acknowledges that it is an independent
contractor and that the requirement of this certification does not constitute
ownership, control, leasing or operation of the Store or the Franchised Location
by the Franchisor, but rather provides notice to Franchisor that the Franchisee
has complied with all applicable laws. The Franchisee asserts that Franchisor
may justifiably rely on the information contained in this certificate.

                                             FRANCHISEE:

                                             -----------------------------------
                                             Individually

                                             AND:

                                             (if a corporation or partnership)

                                             -----------------------------------
                                             Company Name

                                             By:
                                                --------------------------------
                                             Title:
                                                   -----------------------------

<PAGE>

                                                                      EXHIBIT VI
                                                          TO FRANCHISE AGREEMENT

                  CONFIDENTIALITY AND NONCOMPETITION AGREEMENT

         AGREEMENT, dated _______________, 20__, by and between Rocky Mountain
Chocolate Factory, Inc. ("FRANCHISOR") and ____________________________________,
a(n) [directors, officer, partner, principal, employee, agent or stockholder] of
__________________ (the "FRANCHISEE"). All capitalized terms not otherwise
defined herein shall have the meanings set forth in the Franchise Agreement,
defined below.

         The Franchisor has granted to the Franchisee, pursuant to that certain
Franchise Agreement dated ________________, 20__, (the "FRANCHISE AGREEMENT"),
the right to operate a ROCKY MOUNTAIN CHOCOLATE FACTORY Store. The undersigned,
in consideration of the receipt and/or use of the Operations Manual and other
information proprietary to the Franchisor, including but not limited to methods,
strategies and techniques developed by the Franchisor relating to operations,
marketing, training, advertising, trade secrets, recipes and other confidential
data (collectively referred to as "PROPRIETARY INFORMATION"), agrees with the
Franchisor as follows:

         (1) The undersigned acknowledges that the Operations Manual and other
Proprietary Information now or hereafter provided to Franchisee by the
Franchisor is proprietary to the Franchisor and must be held in the utmost and
strictest confidence.

         (2) The undersigned represents and agrees that the undersigned will
not, without the prior written consent of the Franchisor, either:

                  (i) Duplicate or otherwise reproduce the Operations Manual or
         other Proprietary Information;

                  (ii) Deliver or make available the Operations Manual or other
         Proprietary Information to any person other than an authorized
         representative of the Franchisor;

                  (iii) Discuss or otherwise disclose the contents of the
         Operations Manual or other Proprietary Information to any person other
         than an authorized representative of the Franchisor; or

                  (iv) Use the Operations Manual or other Proprietary
         Information to his, her or its commercial advantage other than in
         connection with the operation of the franchise created and granted by
         the Franchise Agreement.

         (3) While the Franchise Agreement is in effect, neither the
undersigned, nor any member of his or her immediate family, shall engage in, or
participate as an owner, officer, partner, director, agent, employee,
shareholder or otherwise in any other Competitive Business without having first
obtained the Franchisor's written consent. For the purposes of this Agreement,
"COMPETITIVE BUSINESS" shall mean any business deriving more than 5% of its
gross sales receipts from the sale, processing or manufacturing of chocolate
candies and other non-chocolate confectionery items, Items or other products
offered in ROCKY MOUNTAIN CHOCOLATE FACTORY Stores and which constitute 5% or
more of the Gross Retail Sales of any ROCKY MOUNTAIN CHOCOLATE FACTORY Store.

<PAGE>

         (4) The undersigned has acquired from the Franchisor confidential
information regarding Franchisor's trade secrets and franchised methods which,
in the event of a termination of the Franchise Agreement, could be used to
injure the Franchisor. As a result, neither the undersigned, nor any member of
his or her immediate family, shall, for a period of 2 years from the date of
termination, transfer or expiration of the Franchise Agreement, without having
first obtained the Franchisor's written consent, engage in or participate as an
owner, officer, partner, director, agent, employee, shareholder or otherwise in
any Competitive Business which is located or operating, as of the date of such
termination, transfer or expiration, within a 10 mile radius of the Franchisee's
former Franchised Location as defined in the Franchise Agreement, or within a 10
mile radius of any other franchised or company-owned ROCKY MOUNTAIN CHOCOLATE
FACTORY Store, unless such right is granted pursuant to a separate agreement
with the Franchisor.

         (5) The undersigned agrees that during the term of the Franchise
Agreement, and for a period of 2 years thereafter, it shall in no way divert or
attempt to divert the business of customers, or interfere with the business
relationship established with customers of the Franchisee's ROCKY MOUNTAIN
CHOCOLATE FACTORY Store or of any Competitive Business.

         IN WITNESS WHEREOF, this Agreement has been executed by the undersigned
as of the date set forth above.

                                             AGREED TO BY:

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

                                             ROCKY MOUNTAIN CHOCOLATE
                                             FACTORY, INC.

                                             By:
                                                --------------------------------

                                             Title:
                                                   -----------------------------

                                       2<PAGE>

                                                                  EXECUTION COPY

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

                     NOVASTAR MORTGAGE FUNDING CORPORATION,
                                   as Company

                            NOVASTAR MORTGAGE, INC.,
                            as Servicer and as Seller

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                          as Certificate Administrator

                                       and

                              JPMORGAN CHASE BANK,
                                   as Trustee

                         POOLING AND SERVICING AGREEMENT

                            Dated as of June 1, 2002

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

                 NovaStar Mortgage Funding Trust, Series 2002-2

       NovaStar Home Equity Loan Asset-Backed Certificates, Series 2002-2

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

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

         SECTION 1.01 DEFINED TERMS.................................................................................1
         SECTION 1.02 ACCOUNTING....................................................................................1
         SECTION 1.03 ALLOCATION OF CERTAIN INTEREST SHORTFALLS.....................................................2
         SECTION 1.04 CALCULATION OF INTEREST ON CERTIFICATES.......................................................2

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

         SECTION 2.01 CONVEYANCE OF MORTGAGE LOANS AND MI POLICIES..................................................2
         SECTION 2.02 ACCEPTANCE OF MORTGAGE LOANS BY CERTIFICATE ADMINISTRATOR, ON BEHALF OF THE TRUSTEE...........5
         SECTION 2.03 REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS BY THE SELLER....................................6
         SECTION 2.04 ACKNOWLEDGEMENT OF TRUSTEE....................................................................9
         SECTION 2.05 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SERVICER.....................................9
         SECTION 2.06 REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................10
         SECTION 2.07 ISSUANCE OF CERTIFICATES.....................................................................11
         SECTION 2.08 [RESERVED]...................................................................................11
         SECTION 2.09 MISCELLANEOUS REMIC PROVISIONS...............................................................11

ARTICLE III ADMINISTRATION AND SERVICING OF THE MORTGAGE LOANS.....................................................20

         SECTION 3.01 SERVICER TO ASSURE SERVICING.................................................................20
         SECTION 3.02 SUBSERVICING AGREEMENTS BETWEEN SERVICER AND SUBSERVICERS....................................21
         SECTION 3.03 SUCCESSOR SUBSERVICERS.......................................................................22
         SECTION 3.04 LIABILITY OF THE SERVICER....................................................................22
         SECTION 3.05 ASSUMPTION OR TERMINATION OF SUBSERVICING AGREEMENTS BY THE CERTIFICATE ADMINISTRATOR........23
         SECTION 3.06 COLLECTION OF MORTGAGE LOAN PAYMENTS.........................................................23
         SECTION 3.07 WITHDRAWALS FROM THE COLLECTION ACCOUNT......................................................25
         SECTION 3.08 COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS; SERVICING ACCOUNTS.......................27
         SECTION 3.09 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING THE MORTGAGE LOANS.................28
         SECTION 3.10 [RESERVED]...................................................................................28
         SECTION 3.11 MAINTENANCE OF HAZARD INSURANCE AND FIDELITY COVERAGE........................................28
         SECTION 3.12 DUE-ON-SALE CLAUSES; ASSUMPTION AGREEMENTS...................................................30
         SECTION 3.13 REALIZATION UPON DEFAULTED MORTGAGE LOANS....................................................31
         SECTION 3.14 CERTIFICATE ADMINISTRATOR TO COOPERATE; RELEASE OF MORTGAGE FILES............................32
         SECTION 3.15 SERVICING COMPENSATION.......................................................................33
</TABLE>

                                        i
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                               <C>
         SECTION 3.16 ANNUAL STATEMENTS OF COMPLIANCE..............................................................34
         SECTION 3.17 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT......................................34
         SECTION 3.18 OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS................................................35
         SECTION 3.19 INFORMATION REQUIRED BY THE INTERNAL REVENUE SERVICE GENERALLY AND REPORTS OF
                             FORECLOSURES AND ABANDONMENTS OF MORTGAGED PROPERTY...................................35
         SECTION 3.20 PURCHASE OF CONVERTED MORTGAGE LOANS.........................................................35
         SECTION 3.21 [RESERVED]...................................................................................35
         SECTION 3.22 SERVICING AND ADMINISTRATING OF THE MI POLICIES..............................................35
         SECTION 3.23 DETERMINATION DATE REPORTS...................................................................37
         SECTION 3.24 ADVANCES.....................................................................................37
         SECTION 3.25 COMPENSATING INTEREST PAYMENTS...............................................................38

ARTICLE IV FLOW OF FUNDS...........................................................................................38

         SECTION 4.01 DISTRIBUTIONS................................................................................38
         SECTION 4.02 DISTRIBUTION ACCOUNT.........................................................................43
         SECTION 4.03 STATEMENTS...................................................................................44
         SECTION 4.04 SUPPLEMENTAL INTEREST TRUST..................................................................47
         SECTION 4.05 [RESERVED]...................................................................................48
         SECTION 4.06 [RESERVED]...................................................................................48
         SECTION 4.07 ALLOCATION OF REALIZED LOSSES................................................................48

ARTICLE V THE CERTIFICATES.........................................................................................49

         SECTION 5.01 THE CERTIFICATES.............................................................................49
         SECTION 5.02 REGISTRATION OF TRANSFER AND EXCHANGE OF CERTIFICATES........................................50
         SECTION 5.03 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES............................................54
         SECTION 5.04 PERSONS DEEMED OWNERS........................................................................54
         SECTION 5.05 APPOINTMENT OF PAYING AGENT..................................................................55

ARTICLE VI THE SERVICER AND THE COMPANY............................................................................55

         SECTION 6.01 LIABILITY OF THE SERVICER AND THE COMPANY....................................................55
         SECTION 6.02 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE OBLIGATIONS OF, THE SERVICER OR THE
                             COMPANY...............................................................................55
         SECTION 6.03 LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS...........................................56
         SECTION 6.04 SERVICER NOT TO RESIGN.......................................................................56
         SECTION 6.05 DELEGATION OF DUTIES.........................................................................57
         SECTION 6.06 SERVICER TO PAY TRUSTEE'S, AND CERTIFICATE ADMINISTRATOR'S FEES AND EXPENSES;
                             INDEMNIFICATION.......................................................................57

ARTICLE VII DEFAULT ...............................................................................................58

         SECTION 7.01 SERVICING DEFAULT............................................................................58
         SECTION 7.02 CERTIFICATE ADMINISTRATOR TO ACT; APPOINTMENT OF SUCCESSOR...................................60
         SECTION 7.03 WAIVER OF DEFAULTS...........................................................................62
         SECTION 7.04 NOTIFICATION TO CERTIFICATEHOLDERS...........................................................62
         SECTION 7.05 SURVIVABILITY OF SERVICER LIABILITIES........................................................62
</TABLE>

                                       ii
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                               <C>
ARTICLE VIII THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR.........................................................62

         SECTION 8.01 DUTIES OF THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR......................................62
         SECTION 8.02 RIGHTS OF TRUSTEE AND CERTIFICATE ADMINISTRATOR..............................................65
         SECTION 8.03 INDIVIDUAL RIGHTS OF TRUSTEE AND CERTIFICATE ADMINISTRATOR...................................66
         SECTION 8.04 TRUSTEE'S AND CERTIFICATE ADMINISTRATOR'S DISCLAIMER.........................................66
         SECTION 8.05 NOTICE OF SERVICING DEFAULT..................................................................67
         SECTION 8.06 [RESERVED]...................................................................................67
         SECTION 8.07 COMPENSATION AND INDEMNITY...................................................................67
         SECTION 8.08 REPLACEMENT OF TRUSTEE OR CERTIFICATE ADMINISTRATOR..........................................67
         SECTION 8.09 SUCCESSOR TRUSTEE OR CERTIFICATE ADMINISTRATOR BY MERGER.....................................68
         SECTION 8.10 APPOINTMENT OF CO-TRUSTEE OR SEPARATE TRUSTEE................................................69
         SECTION 8.11 ELIGIBILITY; DISQUALIFICATION................................................................70
         SECTION 8.12 [RESERVED]...................................................................................70
         SECTION 8.13 REPRESENTATIONS AND WARRANTIES...............................................................70
         SECTION 8.14 DIRECTIONS TO TRUSTEE AND CERTIFICATE ADMINISTRATOR..........................................71
         SECTION 8.15 THE AGENTS...................................................................................71
         SECTION 8.16 REPORTS BY THE CERTIFICATE ADMINISTRATOR; TRUST FISCAL YEAR..................................72

ARTICLE IX [Reserved] .............................................................................................72

ARTICLE X REMIC ADMINISTRATION.....................................................................................72

         SECTION 10.01 REMIC ADMINISTRATION........................................................................72
         SECTION 10.02 PROHIBITED TRANSACTIONS AND ACTIVITIES......................................................74

ARTICLE XI TERMINATION.............................................................................................75

         SECTION 11.01 TERMINATION.................................................................................75
         SECTION 11.02 ADDITIONAL TERMINATION REQUIREMENTS.........................................................76

ARTICLE XII MISCELLANEOUS PROVISIONS...............................................................................77

         SECTION 12.01 AMENDMENT...................................................................................77
         SECTION 12.02 RECORDATION OF AGREEMENT; COUNTERPARTS......................................................78
         SECTION 12.03 LIMITATION ON RIGHTS OF CERTIFICATEHOLDERS..................................................79
         SECTION 12.04 GOVERNING LAW; JURISDICTION.................................................................79
         SECTION 12.05 NOTICES.....................................................................................80
         SECTION 12.06 SEVERABILITY OF PROVISIONS..................................................................81
         SECTION 12.07 ARTICLE AND SECTION REFERENCES..............................................................81
         SECTION 12.08 FURTHER ASSURANCES..........................................................................81
         SECTION 12.09 BENEFITS OF AGREEMENT.......................................................................82
         SECTION 12.10 ACTS OF CERTIFICATEHOLDERS..................................................................82
</TABLE>

<PAGE>

APPENDIX A

EXHIBITS:

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

                                       iv
<PAGE>

         This Pooling and Servicing Agreement is dated as of June 1, 2002 (the
"Agreement"), among NOVASTAR MORTGAGE FUNDING CORPORATION, as company (the
"Company"), NOVASTAR MORTGAGE, INC., as servicer (the "Servicer") and as seller
(the "Seller"), WACHOVIA BANK, NATIONAL ASSOCIATION, as certificate
administrator (the "Certificate Administrator") and JPMorgan Chase Bank, as
trustee (the "Trustee").

                                   ARTICLE I

                                   DEFINITIONS

         Section 1.01 Defined Terms.

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

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

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

         (c) "or" is not exclusive;

         (d) "including" means including without limitation;

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

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

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

         Section 1.02 Accounting.

         Unless otherwise specified herein, for the purpose of any definition or
calculation, whenever amounts are required to be netted, subtracted or added or
any distributions are taken into account such definition or calculation and any
related definitions or calculations shall be determined without duplication of
such functions.

                                       1
<PAGE>

         Section 1.03 Allocation of Certain Interest Shortfalls.

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

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

         Section 1.04 Calculation of Interest on Certificates.

         Unless otherwise specified, all calculations in respect of interest on
the Class A Certificates, the Class AIO Certificates, the Mezzanine Certificates
and the Class B Certificates shall be made on the basis of the actual number of
days elapsed in the related Accrual Period on the basis of a 360-day year and
all other calculations of interest described herein shall be made on the basis
of a 360-day year consisting of twelve 30-day months. The Class O Certificates
and the Class P Certificates are not entitled to distributions in respect of
interest and, accordingly, will not accrue interest.

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

         Section 2.01 Conveyance of Mortgage Loans and Other Trust Assets.

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

                                       2
<PAGE>

included or to be included in the Trust Fund; and (ix) all proceeds of any of
the foregoing. Such assignment includes all interest and principal due to the
Company or the Servicer after the related Cut-off Date with respect to the
Mortgage Loans.

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

              (i) the original Mortgage Note endorsed to "JPMorgan Chase Bank,
    as Trustee for the NovaStar Home Equity Loan Asset-Backed Certificates,
    Series 2002-2";

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

              (iii) unless the Mortgage Loan is registered on the MERS System,
    an original assignment (which may be included in one or more blanket
    assignments if permitted by applicable law) of the Mortgage endorsed to
    "JPMorgan Chase Bank, as Trustee for the NovaStar Home Equity Loan
    Asset-Backed Certificates, Series 2002-2", and otherwise in recordable form;

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

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

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

         If a material defect in any Mortgage File is discovered which may
materially and adversely affect the value of the related Mortgage Loan, or the
interests of the Trustee or the Certificateholders in such Mortgage Loan,
including if any document required to be delivered to the Certificate
Administrator has not been delivered (provided that a Mortgage File will not be
deemed to contain a defect for an unrecorded assignment under clause (iii) above
for 180 days

                                       3
<PAGE>

following submission of the assignment if the Seller has submitted such
assignment for recording pursuant to the terms of the following paragraph), the
Seller shall cure such defect or repurchase the related Mortgage Loan at the
Repurchase Price or substitute an Eligible Substitute Mortgage Loan for the
related Mortgage Loan upon the same terms and conditions set forth in Section
3.01 of the Purchase Agreement as to the Closing Date Mortgage Loans.

         Promptly after the Closing Date in the case of a Closing Date Mortgage
Loan (or after the date of transfer of any Eligible Substitute Mortgage Loan),
the Seller at its own expense shall complete and submit for recording in the
appropriate public office for real property records each of the assignments
referred to in clause (iii) above, with such assignment completed in favor of
the Trustee, excluding any Mortgage Loan that is registered on the MERS System,
if MERS is identified on the Mortgage, or on a properly recorded assignment of
Mortgage as the mortgagee of record. While such assignment to be recorded is
being recorded, the Certificate Administrator shall retain a photocopy of such
assignment. If any assignment is lost or returned unrecorded to the Certificate
Administrator because of any defect therein, the Seller is required to prepare a
substitute assignment or cure such defect, as the case may be, and the Seller
shall cause such substitute assignment to be recorded in accordance with this
paragraph.

         In instances where an original Mortgage or any original intervening
assignment of Mortgage is not, in accordance with clause (ii) or (iv) above,
delivered by the Seller to the Certificate Administrator, on behalf of the
Trustee, prior to or on the Closing Date in the case of an Closing Date Mortgage
Loan, the Seller will deliver or cause to be delivered the originals of such
documents to the Certificate Administrator, on behalf of the Trustee, promptly
upon receipt thereof.

         In connection with the assignment of any Mortgage Loan registered on
the MERS System, promptly after the Closing Date in the case of a Closing Date
Mortgage Loan (or after the date of transfer of any Eligible Substitute Mortgage
Loan), the Seller further agrees that it will cause, at the Seller's own
expense, the MERS System to indicate that such Mortgage Loan has been assigned
by the Seller to the Trustee in accordance with this Agreement for the benefit
of the Certificateholders by including (or deleting, in the case of Mortgage
Loans which are repurchased in accordance with this Agreement) in its computer
files (a) the applicable Trustee code in the field "Trustee" which identifies
the Trustee and (b) the code "NovaStar 2002-2" (or its equivalent) in the field
"Pool Field" which identifies the series of the Certificates issued in
connection with such Mortgage Loans. The Seller further agrees that it will not,
and will not permit the Servicer to, and the Servicer agrees that it will not,
alter the codes referenced in this paragraph with respect to any such Mortgage
Loan during the term of this Agreement unless and until such Mortgage Loan is
repurchased in accordance with the terms of this Agreement.

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

         The Trustee, as assignee or transferee of the Company, shall be
entitled to all scheduled principal payments due after the Cut-off Date, all
other payments of principal due and collected after the Cut-off Date, and all
payments of interest on the Closing Date Mortgage

                                       4
<PAGE>

Loans. No scheduled payments of principal due on or before the Cut-off Date and
collected after the Cut-off Date shall belong to the Company pursuant to the
terms of the Purchase Agreement. Any late payment charges collected in
connection with a Mortgage Loan shall be paid to the Servicer as provided in
Section 3.15(b) hereof.

         The parties hereto intend that the transactions set forth herein
constitute a sale by the Company to the Trust on the Closing Date of all the
Company's right, title and interest in and to the Closing Date Mortgage Loans
and other property as and to the extent described above. In the event the
transactions set forth herein shall be deemed not to be a sale, the Company
hereby grants to the Trustee, on behalf of the Certificateholders, as of the
Closing Date a security interest in all of the Company's right, title and
interest in, to and under the Closing Date Mortgage Loans and such other
property, to secure all of the Company's obligations hereunder and this
Agreement shall constitute a security agreement under applicable law and in such
event, the parties hereto acknowledge that the Certificate Administrator, in
addition to holding the Closing Date Mortgage Loans on behalf of the Trustee for
the benefit of the Certificateholders, holds the Closing Date Mortgage Loans as
designee of the Company. The Seller agrees to take or cause to be taken such
actions and to execute such documents, including without limitation the filing
of all necessary UCC-1 financing statements in the State of Virginia (which
shall have been submitted for filing as of the Closing Date), any continuation
statements with respect thereto and any amendments thereto required to reflect a
change in the name or corporate structure of the Seller or the filing of any
additional UCC-1 financing statements due to the change in the state of
incorporation of the Seller, as are necessary to perfect and protect the
interests of the Trust and its assignees in each Closing Date Mortgage Loan and
the proceeds thereof.

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

         (a) The Certificate Administrator, on behalf of the Trustee,
acknowledges receipt of, subject to the review described below and any
exceptions it notes pursuant to the procedures described below, the documents
(or certified copies thereof) referred to in Section 2.01 hereof and declares
that it holds and will continue to hold those documents and any amendments,
replacements or supplements thereto and all other assets of the Trust Fund in
trust for the use and benefit of all present and future Certificateholders. No
later than 45 days after the Closing Date (or, with respect to any Eligible
Substitute Mortgage Loan, within 5 Business Days after the receipt by the
Certificate Administrator, on behalf of the Trustee, thereof and, with respect
to any documents received beyond 45 days after the Closing Date, promptly
thereafter), the Certificate Administrator, on behalf of the Trustee, agrees,
for the benefit of the Certificateholders, to review each Mortgage File
delivered to it and to execute and deliver, or cause to be executed and
delivered, to the Seller an initial certification in the form annexed hereto as
Exhibit F-1. In conducting such review, the Certificate Administrator, on behalf
of the Trustee, will ascertain whether all required documents described in
Section 2.01 hereof have been executed and received and whether those documents
relate, determined on the basis of the Mortgagor name, original principal
balance and loan number, to the Mortgage Loans it has received, as identified in
Exhibit B to this Agreement, as supplemented (provided, however, that with
respect to those documents described in subclause (vii) of such section, the
Certificate Administrator's obligations shall extend only to documents actually
delivered pursuant to such subclause). In

                                       5
<PAGE>

performing any such review, the Certificate Administrator, on behalf of the
Trustee, may conclusively rely on the purported due execution and genuineness of
any such document and on the purported genuineness of any signature thereon. If
the Certificate Administrator, on behalf of the Trustee, finds that any document
constituting part of the Mortgage File not to have been executed or received, or
to be unrelated to the Mortgage Loans identified in Exhibit B or Attachment B to
Exhibit 2 of the Purchase Agreement or to appear to be defective on its face,
the Certificate Administrator, on behalf of the Trustee, shall promptly notify
the Seller of such finding and the Seller's obligation to cure such defect or
repurchase or substitute for the related Mortgage Loan.

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

         (c) Upon deposit of the Repurchase Price in the Collection Account and
notification of the Certificate Administrator, on behalf of the Trustee, by a
certification signed by a Servicing Officer (which certification shall include a
statement to the effect that the Repurchase Price has been deposited in the
Collection Account), the Certificate Administrator, on behalf of the Trustee,
shall cause to be released to the Seller the related Mortgage File and shall
cause to be executed and delivered all instruments of transfer or assignment,
without recourse, furnished to it by the Seller as are necessary to vest in the
Seller title to and rights under the related Mortgage Loan. Such purchase shall
be deemed to have occurred on the date on which certification of the deposit of
the Repurchase Price in the Distribution Account was received by the Trustee.
The Certificate Administrator, on behalf of the Trustee, shall amend the
applicable Mortgage Loan Schedule to reflect such repurchase and shall promptly
notify the Servicer, and the Rating Agencies of such amendment. The Trustee
agrees to provide the Certificate Administrator with such power of attorneys as
are necessary for the Certificate Administrator to fulfill its obligations under
this Section 2.03 and otherwise under the Basic Documents.

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

         (a) Upon discovery or receipt of written notice of any materially
defective document in, or that a document is missing from, a Mortgage File or of
the breach by the Seller of any representation, warranty or covenant under the
Purchase Agreement in respect of any Mortgage Loan which materially adversely
affects the value of such Mortgage Loan or the

                                       6
<PAGE>

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

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

         (c) Within 90 days of the earlier of discovery by the Servicer or
receipt of notice by the Servicer of the breach of any representation, warranty
or covenant of the Servicer set forth in Section 2.05 which materially and
adversely affects the interests of the Certificateholders in any Mortgage Loan,
the Servicer shall cure such breach in all material respects.

         (d) Any substitution of Eligible Substitute Mortgage Loans for Deleted
Mortgage Loans made pursuant to Section 2.03(a) must be effected prior to the
last Business Day that is within two years after the Closing Date. As to any
Deleted Mortgage Loan for which the Seller substitutes an Eligible Substitute
Mortgage Loan or Loans, such substitution shall be effected by the Seller
delivering to the Certificate Administrator, for such Eligible Substitute
Mortgage Loan or Loans, the Mortgage Note, the Mortgage, the Assignment to the
Trustee, and such other documents and agreements, with all necessary
endorsements thereon, as are required by Section 2.01, together with an
Officers' Certificate providing that each such Eligible Substitute Mortgage Loan
satisfies the definition thereof and specifying the Substitution Adjustment
Amount (as described below), if any, in connection with such substitution. The
Certificate Administrator

                                       7
<PAGE>

shall acknowledge receipt for such Eligible Substitute Mortgage Loan or Loans
and, within ten Business Days thereafter, shall review such documents as
specified in Section 2.02 and deliver to the Servicer, with respect to such
Eligible Substitute Mortgage Loan or Loans, a certification substantially in the
form attached hereto as Exhibit F-1, with any applicable exceptions noted
thereon. Within one year of the date of substitution, the Certificate
Administrator shall deliver to the Servicer a certification substantially in the
form of Exhibit F-2 hereto with respect to such Eligible Substitute Mortgage
Loan or Loans, with any applicable exceptions noted thereon. Monthly Payments
due with respect to Eligible Substitute Mortgage Loans in the month of
substitution are not part of the Trust Fund and will be retained by the Seller.
For the month of substitution, distributions to Certificateholders will reflect
the collections and recoveries in respect of such Deleted Mortgage Loan in the
Due Period preceding the month of substitution and the Seller shall thereafter
be entitled to retain all amounts subsequently received in respect of such
Deleted Mortgage Loan. The Seller shall give or cause to be given written notice
to the Certificateholders that such substitution has taken place, shall amend
the Mortgage Loan Schedule to reflect the removal of such Deleted Mortgage Loan
from the terms of this Agreement and the substitution of the Eligible Substitute
Mortgage Loan or Loans and shall deliver a copy of such amended Mortgage Loan
Schedule to the Certificate Administrator. Upon such substitution by the Seller,
such Eligible Substitute Mortgage Loan or Loans shall constitute part of the
Mortgage Pool and shall be subject in all respects to the terms of this
Agreement and the Purchase Agreement, including all applicable representations
and warranties thereof included in the Purchase Agreement as of the date of
substitution.

         For any month in which the Seller substitutes one or more Eligible
Substitute Mortgage Loans for one or more Deleted Mortgage Loans, the Servicer
will determine the amount (the "Substitution Adjustment Amount"), if any, by
which the aggregate Repurchase Price of all such Deleted Mortgage Loans exceeds
the aggregate, as to each such Eligible Substitute Mortgage Loan, of the
principal balance thereof as of the date of substitution, together with one
month's interest on such principal balance at the applicable Net Mortgage Rate.
On the date of such substitution, the Seller will deliver or cause to be
delivered to the Servicer for deposit in the Collection Account an amount equal
to the Substitution Adjustment Amount, if any, and the Certificate
Administrator, upon receipt of the related Eligible Substitute Mortgage Loan or
Loans and certification by the Servicer of such deposit, shall release to the
Seller the related Mortgage File or Files and the Certificate Administrator or
the Trustee, as applicable, shall execute and deliver such instruments of
transfer or assignment, in each case without recourse, as the Seller shall
deliver to it and as shall be necessary to vest therein any Deleted Mortgage
Loan released pursuant hereto.

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

                                       8
<PAGE>

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

         Section 2.04 Acknowledgement of Trustee.

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

         Section 2.05 Representations, Warranties and Covenants of the Servicer.

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

         (i) The Servicer is a corporation duly organized, validly existing and
    in good standing under the laws of the State of Virginia and has the
    corporate power to own its assets and to transact the business in which it
    is currently engaged. The Servicer is duly qualified to do business as a
    foreign corporation and is in good standing in each jurisdiction in which
    the character of the business transacted by it or properties owned or leased
    by it requires such qualification and in which the failure to so qualify
    would have a material adverse effect on the business, properties, assets, or
    condition (financial or other) of the Servicer or the validity or
    enforceability of the Mortgage Loans;

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

                                       9
<PAGE>

         (iii) The Servicer is not required to obtain the consent of any other
    Person or any consent, license, approval or authorization from, or
    registration or declaration with, any governmental authority, bureau or
    agency in connection with the execution, delivery, performance, validity or
    enforceability of this Agreement, except for such consent, license, approval
    or authorization, or registration or declaration, as shall have been
    obtained or filed, as the case may be;

         (iv) The execution and delivery of this Agreement and the performance
    of the transactions contemplated hereby by the Servicer will not violate any
    provision of any existing law or regulation or any order or decree of any
    court applicable to the Servicer or any provision of the certificate of
    incorporation or bylaws of the Servicer, or constitute a material breach of
    any mortgage, indenture, contract or other agreement to which the Servicer
    is a party or by which the Servicer may be bound;

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

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

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

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

         Section 2.06 Representations and Warranties of the Company.

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

         (a) The Company is duly organized and validly existing as a corporation
in good standing under the laws of the State of Delaware, with power and
authority to own its properties and to conduct its business as such properties
are currently owned and such business is presently conducted.

         (b) The Company is duly qualified to do business as a foreign
corporation in good standing and has obtained all necessary licenses and
approvals in all jurisdictions in which the ownership or lease of its property
or the conduct of its business shall require such qualifications and in which
the failure to so qualify would have a material adverse effect on the business,
properties, assets or condition (financial or other) of the Company and the
ability of the Company to perform hereunder.

                                       10
<PAGE>

(c) The Company has the power and authority to execute and deliver this
Agreement and to carry out its terms; the Company has full power and authority
to purchase the property to be purchased from the Seller and the Company has
duly authorized such purchase by all necessary corporate action; and the
execution, delivery and performance of this Agreement have been duly authorized
by the Company by all necessary corporate action. When executed and delivered,
this Agreement will constitute the legal, valid and binding obligation of the
Company enforceable in accordance with its terms, except as enforcement of such
terms may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and by the availability of equitable
remedies.

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

         Section 2.07 Issuance of Certificates.

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

         Section 2.08 [Reserved].

         Section 2.09 Designation Under REMIC Provisions.

         (a) The Certificate Administrator, as agent of the Trustee, shall elect
that each of REMIC I, REMIC II, REMIC III, and the Master REMIC shall be treated
as a REMIC under Section 860D of the Code. Any inconsistencies or ambiguities in
this Agreement or in the administration of this Agreement shall be resolved in a
manner that preserves the validity of such REMIC elections.

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

              (i) REMIC I will consist of all of the assets of the Trust,
    including the Mortgage Loans, the Accounts (other than the Supplemental
    Interest Account), any REO Property and any proceeds of the foregoing. REMIC
    I will be evidenced by the Class I-A

                                       11
<PAGE>

    Interest, the Class I-B Interest, the Class I-C Interest the Class I-D
    Interest, the Class I-E Interest, the Class I-F Interest, the Class I-G
    Interest and the Class I-P Interest (collectively, the "REMIC I Regular
    Interests") which will be uncertificated and will represent the "regular
    interests" in REMIC I. The Class R-I Interest will represent the sole class
    of residual interest in REMIC I;

              (ii) REMIC II will consist of the REMIC I Regular Interests and
    will be evidenced by the Class II-A1 Interest, the Class II-A2 Interest, the
    Class II-A3 Interest, the Class II-B1 Interest, the Class II-B2 Interest,
    the Class II-B3 Interest, the Class II-C1 Interest, the Class II-C2
    Interest, the Class II-C3 Interest, the Class II-D1 Interest, the Class
    II-D2 Interest, the Class II-D3 Interest, the Class II-E1 Interest, the
    Class II-E2 Interest, the Class II-E3 Interest, the Class II-F1 Interest,
    the Class II-F2 Interest, the Class II-F3 Interest, the Class II-G Interest
    and the Class II-P Interest (collectively, the "REMIC II Regular Interests")
    which will be uncertificated and will represent the "regular interests" in
    REMIC II. The Class R-II Interest will represent the sole class of residual
    interest in REMIC II;

              (iii) REMIC III will consist of the REMIC II Regular Interests and
    will be evidenced by the Class III-Accrual Interest, the Class III-A-1
    Interest, the Class III-A-2 Interest, the Class III-M-1 Interest, the Class
    III-M-2 Interest, the Class III-M-3 Interest, the Class III-B Interest, the
    Class III-O Interest, the Class III-P Interest and the Class III-I Interest
    (collectively, the "REMIC III Regular Interests") which will be
    uncertificated and will represent the "regular interests" in REMIC III. The
    Class R-III Interest will represent the sole class of residual interest in
    REMIC III; and

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

              (v) The Class R Certificates will represent the beneficial
    ownership of the Class R-I, Class R-II, Class R-III and Class R-IV
    Interests.

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

         (c) The REMIC I Regular Interests shall have the following principal
balances and pass-through rates as set forth in the table below:

--------------------------------------------------------------------
   REMIC             Initial              Pass-Through
 Interest       Principal Balance             Rate
--------------------------------------------------------------------
    I-A            $25,000,000               Net WAC
--------------------------------------------------------------------

                                       12
<PAGE>

--------------------------------------------------------------------
   REMIC             Initial              Pass-Through
 Interest       Principal Balance             Rate
--------------------------------------------------------------------
    I-B            $25,000,000               Net WAC
--------------------------------------------------------------------
    I-C            $75,000,000               Net WAC
--------------------------------------------------------------------
    I-D            $25,000,000               Net WAC
--------------------------------------------------------------------
    I-E            $25,000,000               Net WAC
--------------------------------------------------------------------
    I-F            $25,000,000               Net WAC
--------------------------------------------------------------------
    I-G            $101,475,000              Net WAC
--------------------------------------------------------------------
    I-P                $100                    (1)
--------------------------------------------------------------------

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

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

         (d) The REMIC II Regular Interests shall have the following principal
balances and pass-through rates set forth in the table below:

----------------------------------------------------------------------------
   REMIC Interest    Initial Principal Balance      Pass-Through Rate
----------------------------------------------------------------------------
        II-A1              $16,666,666.67                  (2)
----------------------------------------------------------------------------
        II-A2              $8,333,333.33                   (3)
----------------------------------------------------------------------------
        II-A3                   (1)                        (4)
----------------------------------------------------------------------------
        II-B1              $16,666,666.67                  (6)
----------------------------------------------------------------------------
        II-B2              $8,333,333.33                   (7)
----------------------------------------------------------------------------
        II-B3                   (5)                        (8)
----------------------------------------------------------------------------
        II-C1               $50,000,000                   (10)
----------------------------------------------------------------------------
        II-C2               $25,000,000                   (11)
----------------------------------------------------------------------------
        II-C3                   (9)                       (12)
----------------------------------------------------------------------------
        II-D1              $16,666,666.67                 (14)
----------------------------------------------------------------------------
        II-D2              $8,333,333.33                  (15)
----------------------------------------------------------------------------
        II-D3                   (13)                      (16)
----------------------------------------------------------------------------
        II-E1              16,666,666.67                  (18)
----------------------------------------------------------------------------
        II-E2               8,333,333.33                  (19)
----------------------------------------------------------------------------
        II-E3                   (17)                      (20)
----------------------------------------------------------------------------
        II-F1              16,666,666.67                  (22)
----------------------------------------------------------------------------
        II-F2               8,333,333.33                  (23)
----------------------------------------------------------------------------
        II-F3                   (21)                      (24)
----------------------------------------------------------------------------
        II-G                $101,475,000                  (25)
----------------------------------------------------------------------------
        II-P                    $100                      (26)
----------------------------------------------------------------------------

                                       13
<PAGE>

(1)      The Class II-A3 Interest will have a notional principal balance equal
         to the following amounts: (i) commencing on the first Distribution Date
         through and including the Distribution date in November 2003, an amount
         equal to the balance of the Class I-A interest and (ii) for all
         Distribution Dates thereafter, zero.

(2)      The pass-through rate for the Class II-A1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2003, 1.5 multiplied by (Net WAC minus
         3.2175%); (ii) for all Distribution Dates thereafter, Net WAC.

(3)      The pass-through rate for the Class II-A2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2003, 3 multiplied by 1-month LIBOR,
         subject to a cap of 9.653%; (ii) for all Distribution Dates thereafter,
         Net WAC.

(4)      The pass-through rate for the Class II-A3 Interest will be equal to
         3.2175% minus 1-Month LIBOR, subject to a floor of zero.

(5)      The Class II-B3 Interest will have a notional principal balance equal
         to the following amounts: (i) commencing on the first Distribution Date
         through and including the Distribution date in December 2003, an amount
         equal to the balance of the Class I-B interest and (ii) for all
         Distribution Dates thereafter, zero.

(6)      The pass-through rate for the Class II-B1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2003, 1.5 multiplied by (Net WAC minus
         3.849%); (ii) for all Distribution Dates thereafter, Net WAC.

(7)      The pass-through rate for the Class II-B2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2003, 3 multiplied by 1-month LIBOR,
         subject to a cap of 11.547%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(8)      The pass-through rate for the Class II-B3 Interest will be equal to
         3.849% minus 1-Month LIBOR, subject to a floor of zero.

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

(10)     The pass-through rate for the Class II-C1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2004, 1.5 multiplied by (Net WAC minus
         3.577%); (ii) for all Distribution Dates thereafter, Net WAC.

                                       14
<PAGE>

(11)     The pass-through rate for the Class II-C2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2004, 3 multiplied by 1-month LIBOR,
         subject to a cap of 10.671%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(12)     The pass-through rate for the Class II-C3 Interest will be equal to
         3.577% minus 1-Month LIBOR, subject to a floor of zero.

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

(14)     The pass-through rate for the Class II-D1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2004, 1.5 multiplied by (Net WAC minus
         3.810%); (ii) for all Distribution Dates thereafter, Net WAC.

(15)     The pass-through rate for the Class II-D2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2004, 3 multiplied by 1-month LIBOR,
         subject to a cap of 11.430%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(16)     The pass-through rate for the Class II-D3 Interest will be equal to
         3.810% minus 1-month LIBOR, subject to a floor of zero.

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

(18)     The pass-through rate for the Class II-E1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2004, 1.5 multiplied by (Net WAC minus
         4.488%), (ii) for all Distribution Dates thereafter, Net WAC.

(19)     The pass-through rate for the Class II-E2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2004, 3 multiplied by 1-month LIBOR,
         subject to a cap of 13.464%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(20)     The pass-through rate for the Class II-E3 Interest will be equal to
         4.488% minus 1-month LIBOR, subject to a floor of zero.

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

                                       15
<PAGE>

(22)     The pass-through rate for the Class II-F1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in May 2005, 1.5 multiplied by (Net WAC minus
         4.135%); (ii) for all Distribution Dates thereafter, Net WAC.

(23)     The pass-through rate for the Class II-F2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in May 2005, 3 multiplied by 1-month LIBOR, subject
         to a cap of 12.405%; (ii) for all Distribution Dates thereafter, Net
         WAC.

(24)     The pass-through rate for the Class II-F3 Interest will be equal to
         4.137% minus 1-month LIBOR, subject a floor of zero.

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

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

         On each Distribution Date, all Realized Losses, prepayments and
payments of scheduled principal generated with respect to the Mortgage Loans
shall be allocated in the following order: (i) first to the Class II-G Interest,
until such Class is paid in full or eliminated by such losses; (ii) second, to
the Class II-A1 Interest and the Class II-A2 Interest, pro-rata, until such
Classes are paid in full or eliminated by such losses; (iii) third, to the Class
II-B1 Interest and the Class II-B2 Interest, pro-rata, until such Classes are
paid in full or eliminated by such losses; (iv) fourth, to the Class II-C1
Interest and the Class II-C2 Interest, pro-rata, until such Classes are paid in
full or eliminated by such losses; (v) fifth, to the Class II-D1 Interest and
the Class II-D2 Interest, pro-rata, until such Classes are paid in full or
eliminated by such losses; (vi) sixth, to the Class II-E1 Interest and the Class
II-E2 Interest, pro rata, until such classes are paid in full or eliminated by
such losses; (vii) seventh, to the Class II-F1 Interest and Class II-F2
Interest, until such classes are paid in full or eliminated by such losses.

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

                                       16
<PAGE>

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

(1)      The pass-through rate for the Class III-Accrual, Class III-A-1, Class
         III-A-2, Class III-M-1, Class III-M-2, Class III-M-3, Class III-B and
         Class III-O Interests will be the weighted average of the pass-through
         rates of the Class II-A1, Class II-A2, Class II-B1, Class II-B2, Class
         II-C1, Class II-C2, Class II-D1, Class II-D2, Class II-E1, Class II-E2,
         Class II-F1, Class II-F2 and Class II-G Interests.

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

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

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

                                       17
<PAGE>

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

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                             Initial Certificate            REMIC
                                  Principal              Pass-Through
    Class of Certificates          Balance                   Rate
--------------------------------------------------------------------------------
<S>                             <C>                   <C>
Class A-1                       $200,000,000          LIBOR + 0.270% (1)
--------------------------------------------------------------------------------
Class A-2                        $80,550,000          LIBOR + 0.290% (1)
--------------------------------------------------------------------------------
Class M-1                        $8,525,000           LIBOR + 0.750% (1)
--------------------------------------------------------------------------------
Class M-2                        $6,975,000           LIBOR + 1.350% (1)
--------------------------------------------------------------------------------
Class M-3                        $5,425,000           LIBOR + 1.800% (1)
--------------------------------------------------------------------------------
Class AIO                            (2)                     (2)
--------------------------------------------------------------------------------
Class B                          $3,100,000               4.500% (1)
--------------------------------------------------------------------------------
Class I                              (3)                     (4)
--------------------------------------------------------------------------------
Class O                          $5,425,000                  (5)
--------------------------------------------------------------------------------
Class P                             $100                     (6)
--------------------------------------------------------------------------------
Class R                              (7)                     (7)
--------------------------------------------------------------------------------
</TABLE>

(1)      Subject to the REMIC Available Funds Cap.

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

                                       18
<PAGE>

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

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

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

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

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

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

                                       19
<PAGE>

                                  ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

         Section 3.01 Servicer to Assure Servicing.

         (a) The Servicer shall supervise, or take such actions as are necessary
to ensure, the servicing and administration of the Mortgage Loans and any REO
Property in accordance with this Agreement and its normal servicing practices,
which generally shall conform to the standards of an institution prudently
servicing mortgage loans for its own account and shall have full authority to do
anything it reasonably deems appropriate or desirable in connection with such
servicing and administration. The Servicer may perform its responsibilities
relating to servicing through other agents or independent contractors, but shall
not thereby be released from any of its responsibilities as hereinafter set
forth. Subject to Section 3.06(b), the authority of the Servicer, in its
capacity as Servicer, and any Subservicer acting on its behalf, shall include,
without limitation, the power to (i) consult with and advise any Subservicer
regarding administration of a related Mortgage Loan, (ii) approve any
recommendation by a Subservicer to foreclose on a related Mortgage Loan, (iii)
supervise the filing and collection of insurance claims and take or cause to be
taken such actions on behalf of the insured Person thereunder as shall be
reasonably necessary to prevent the denial of coverage thereunder, and (iv)
effectuate foreclosure or other conversion of the ownership of the Mortgaged
Property securing a related Mortgage Loan, including the employment of
attorneys, the institution of legal proceedings, the collection of deficiency
judgments, the acceptance of compromise proposals and any other matter
pertaining to a delinquent Mortgage Loan. The authority of the Servicer shall
include, in addition, the power on behalf of the Certificateholders, the
Trustee, or any of them to (i) execute and deliver customary consents or waivers
and other instruments and documents, (ii) consent to transfer of any related
Mortgaged Property and assumptions of the related Mortgage Notes and Mortgages
(in the manner provided in this Agreement) and (iii) collect any Insurance
Proceeds and Liquidation Proceeds. Without limiting the generality of the
foregoing, the Servicer and any Subservicer acting on its behalf may, and is
hereby authorized, and empowered by the Trustee when the Servicer believes it is
reasonably necessary in its best judgment in order to comply with its servicing
duties hereunder, to execute and deliver, on behalf of itself, the
Certificateholders, the Trustee, or any of them, any instruments of
satisfaction, cancellation, partial or full release, discharge and all other
comparable instruments, with respect to the related Mortgage Loans, the
insurance policies and the accounts related thereto, and the Mortgaged
Properties. The Servicer may exercise this power in its own name or in the name
of a Subservicer.

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

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

                                       20
<PAGE>

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

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

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

         Section 3.02 Subservicing Agreements Between Servicer and Subservicers.

         (a) The Servicer may enter into Subservicing Agreements with
Subservicers for the servicing and administration of the Mortgage Loans and for
the performance of any and all other activities of the Servicer hereunder. Each
Subservicer shall be either (i) an institution the accounts of which are insured
by the FDIC or (ii) another entity that engages in the business of originating
or servicing mortgage loans comparable to the Mortgage Loans, and in either case
shall be authorized to transact business in the state or states in which the
related Mortgaged Properties it is to service are situated, if and to the extent
required by applicable law to enable the Subservicer to perform its obligations
hereunder and under the Subservicing Agreement. Any Subservicing Agreement
entered into by the Servicer shall include the provision that such Agreement may
be immediately terminated (i) (x) with cause and without any termination fee by
the Servicer hereunder and/or (y) without cause, in which case the Servicer
shall be solely responsible for any termination fee or penalty resulting
therefrom and (ii) at the option of the Trustee upon the termination or
resignation of the Servicer hereunder, in which case the Servicer shall be
solely responsible for any termination fee or penalty resulting therefrom. In
addition, each Subservicing Agreement shall provide for servicing of the
Mortgage Loans consistent with the terms of this Agreement. The Servicer and the
Subservicers may enter into Subservicing Agreements and make amendments to the
Subservicing Agreements or enter into different forms of Subservicing Agreements
providing for, among other things, the delegation by the Servicer to a
Subservicer of additional duties regarding the administration of the Mortgage
Loans; provided, however, that any such amendments or different forms shall be
consistent with and not violate the provisions of this Agreement, and that no
such amendment or different form shall be made or

                                       21
<PAGE>

entered into which could be reasonably expected to be materially adverse to the
interests of the Certificateholders, without the consent of the
Certificateholders holding at least 51% of the aggregate Voting Rights.

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

         Section 3.03 Successor Subservicers.

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

         Section 3.04 Liability of the Servicer.

         (a) Notwithstanding any Subservicing Agreement, any of the provisions
of this Agreement relating to agreements or arrangements between the Servicer
and a Subservicer or reference to actions taken through a Subservicer or
otherwise, the Servicer shall under all circumstances remain obligated and
primarily liable to the Certificate Administrator, the Trustee and the
Certificateholders for the servicing and administering of the Mortgage Loans and
any REO Property in accordance with this Agreement. The obligations and
liability of the Servicer shall not be diminished by virtue of Subservicing
Agreements or by virtue of indemnification of the Servicer by any Subservicer,
or any other Person. The obligations and liability of the Servicer shall remain
of the same nature and under the same terms and conditions as if the Servicer
alone were servicing and administering the related Mortgage Loans. The Servicer
shall, however, be entitled to enter into indemnification agreements with any
Subservicer or other Person and nothing in this Agreement shall be deemed to
limit or modify such indemnification. For the purposes of this Agreement, the
Servicer shall be deemed to have received any payment on a Mortgage Loan on the
date the Subservicer received such payment.

         (b) Any Subservicing Agreement that may be entered into and any
transactions or services relating to the Mortgage Loans involving a Subservicer
in its capacity as such and not as an originator shall be deemed to be between
the Subservicer and the Servicer alone, and the Certificate Administrator, the
Trustee and the Certificateholders shall not be deemed parties

                                       22
<PAGE>

thereto and shall have no claims, rights, obligations, duties or liabilities
with respect to the Subservicer, except as set forth in Section 3.05.

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

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

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

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

         Section 3.06 Collection of Mortgage Loan Payments.

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

         (b) The Servicer shall make its best reasonable efforts to collect or
cause to be collected all payments required under the terms and provisions of
the Mortgage Loans and shall follow, and use its best reasonable efforts to
cause Subservicers to follow, collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account to the extent such procedures shall be consistent with this Agreement.
Consistent with the foregoing, the Servicer or the related Subservicer may in
its discretion (i)

                                       23
<PAGE>

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

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

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

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

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

              (iii) Net Liquidation Proceeds;

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

                                       24
<PAGE>

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

              (vi) any Advance and any Compensating Interest payments; and

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

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

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

         (e) The Servicer will require each Subservicer to hold all funds
constituting collections on the Mortgage Loans, pending remittance thereof to
the Servicer, in one or more accounts in the name of the Trustee meeting the
requirements of an Eligible Account, and such funds shall not be invested. The
Subservicer shall segregate and hold all funds collected and received pursuant
to each Mortgage Loan separate and apart from any of its own funds and general
assets and any other funds. Each Subservicer shall make remittances to the
Servicer no later than one Business Day following receipt thereof and the
Servicer shall deposit into the Collection Account any such remittances received
from any Subservicer within one Business Day following receipt by the Servicer.

         Section 3.07 Withdrawals from the Collection Account.

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

                                       25
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       26
<PAGE>

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

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

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

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

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

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

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

         (b) The deposits in the Servicing Accounts shall be held in trust by
the Servicer or a Subservicer (and its successors and assigns) in the name of
the Trustee. Such Servicing Accounts shall be Eligible Accounts and, if
permitted by applicable law, invested in Eligible Investments held in trust by
the Servicer or a Subservicer as described above and maturing, or be subject to
redemption or withdrawal, no later than the date on which such funds are
required to be withdrawn, and in no event later than 45 days after the date of
investment; withdrawals of amounts from the Servicing Accounts may be made only
to effect timely payment of taxes, assessments, insurance premiums, or
comparable items, to reimburse the Servicer or a Subservicer for any advances
made with respect to such items, to refund to any Mortgagors any sums as may be
determined to be overages, to pay interest, if required, to Mortgagors on
balances in the Servicing Accounts or to clear and terminate the Servicing
Accounts at or any time after the termination of this Agreement. Amounts
received from Mortgagors for deposit into the Servicing Accounts shall be
deposited in the Servicing Accounts by the Servicer within two days of receipt.
The Servicer shall advance from its own funds amounts needed to pay items
payable from the Servicing Accounts if the Servicer reasonably believes that
such amounts are recoverable from the related Mortgagor. The Servicer shall
comply with all laws relating to the

                                       27
<PAGE>

Servicing Accounts, including laws relating to payment of interest on the
Servicing Accounts. If interest earned by the Servicer on the Servicing Accounts
is not sufficient to pay required interest on the Servicing Accounts, the
Servicer shall pay the difference from its own funds. The Servicing Accounts
shall not be the property of the Trust.

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

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

         Section 3.10 [Reserved]

         Section 3.11 Maintenance of Hazard Insurance and Fidelity Coverage.

         (a) The Servicer shall maintain and keep, or cause each Subservicer to
maintain and keep, with respect to each Mortgage Loan and each REO Property, in
full force and effect hazard insurance (fire insurance with extended coverage)
equal to at least the lesser of the Principal Balance of the Mortgage Loan or
the current replacement cost of the Mortgaged Property, and containing a
standard mortgagee clause, provided, however, that the amount of hazard
insurance may not be less than the amount necessary to prevent loss due to the
application of any co-insurance provision of the related policy. Unless
applicable state law requires a higher deductible, the deductible on such hazard
insurance policy may be no more than $1,500 or 1% of the applicable amount of
coverage, whichever is less. In the case of a condominium unit or a unit in a
planned unit development, the required hazard insurance shall take the form of a
multi-peril policy covering the entire condominium project or planned unit
development, in an amount equal to at least 100% of the insurable value based on
replacement cost. If the Servicer shall obtain and maintain a blanket policy
consistent with its general mortgage servicing activities insuring against
hazard losses on all of the Mortgage Loans, it shall conclusively be deemed to
have satisfied its obligations as set forth in this Section 3.11(a), it being
understood and agreed that such policy may contain a deductible clause, in which
case the Servicer shall, in the event that there shall not have been maintained
on the related Mortgaged Property a policy complying with this Section 3.11(a)
and there shall have been a loss which would have been covered by such

                                       28
<PAGE>

policy, deposit in the Collection Account the amount not otherwise payable under
the blanket policy because of such deductible clause without any right of
reimbursement. Any such deposit by the Servicer shall be made on the last
Business Day of the Due Period in the month in which payments under any such
policy would have been deposited in the Collection Account. In connection with
its activities as servicer of the Mortgage Loans, the Servicer agrees to
present, on behalf of itself, the Trust, and the Trustee, claims under any such
blanket policy.

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

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

         (d) No earthquake or other additional insurance is to be required of
any Mortgagor or maintained on property acquired with respect to a Mortgage
other than pursuant to such applicable laws and regulations as shall at any time
be in force and shall require such additional insurance. When, at the time of
origination of the Mortgage Loan or at any subsequent time, the Mortgaged
Property is located in a federally designated special flood hazard area, the
Servicer shall ensure that, with respect to such Mortgage Loan or such REO
Property, flood insurance is acquired (to the extent available and in accordance
with mortgage servicing industry practice). Such flood insurance shall cover the
Mortgaged Property, including all items taken into account in arriving at the
Appraised Value on which the Mortgage Loan was based, and shall be in an amount
equal to the lesser of (i) the Principal Balance of the related Mortgage Loan
and (ii) the minimum amount required under the terms of coverage to compensate
for any damage or loss on a replacement cost basis, but not more than the
maximum amount of such insurance available for the related Mortgaged Property
under either the regular or emergency programs of the National Flood Insurance
Program (assuming that the area in which such Mortgaged Property is located is
participating in such program). Unless applicable state law requires a higher
deductible, the deductible on such flood insurance may not exceed $1,500 or 1%
of the applicable amount of coverage, whichever is less.

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

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

                                       29
<PAGE>

         (g) The Servicer shall obtain and maintain at its own expense, and
shall cause each Subservicer to obtain and maintain at its own expense, and for
the duration of this Agreement, a blanket fidelity bond and an errors and
omissions insurance policy covering the Servicer's and such Subservicer's
officers, employees and other persons acting on its behalf in connection with
its activities under this Agreement. The amount of coverage shall correspond
with the FNMA/FHMLC levels presently maintained by the Servicer. The Servicer
shall promptly notify the Certificate Administrator and the Trustee of any
material change in the terms of such bond or policy. The Servicer shall provide
annually to the Certificate Administrator and the Trustee a certificate of
insurance that such bond and policy are in effect. If any such bond or policy
ceases to be in effect, the Servicer shall, to the extent possible, give the
Certificate Administrator and the Trustee ten days' notice prior to any such
cessation and shall use its reasonable best efforts to obtain a comparable
replacement bond or policy, as the case may be. Any amounts relating to the
Mortgage Loans collected under such bond or policy shall be deposited in the
Collection Account.

         Section 3.12 Due-on-Sale Clauses; Assumption Agreements.

         (a) In any case in which the Servicer is notified by any Mortgagor or
Subservicer that a Mortgaged Property relating to a Mortgage Loan has been or is
about to be conveyed by the Mortgagor, the Servicer shall enforce, or shall
instruct such Subservicer to enforce, any due-on-sale clause contained in the
related Mortgage to the extent permitted under the terms of the related Mortgage
Note and by applicable law. The Servicer or the related Subservicer may
repurchase a Mortgage Loan at the Repurchase Price when the Servicer requires
acceleration of the Mortgage Loan, but only if the Servicer is satisfied, as
evidenced by an Officer's Certificate delivered to the Certificate Administrator
and the Trustee, that such Mortgage Loan is in default or default is reasonably
foreseeable. If the Servicer reasonably believes that such due-on-sale clause
cannot be enforced under applicable law or if the Mortgage Loan does not contain
a due-on-sale clause, the Servicer is authorized, and may authorize any
Subservicer, to consent to a conveyance subject to the lien of the Mortgage,
and, with the consent of the MI Insurer, if applicable, to take or enter into an
assumption agreement from or with the Person to whom such property has been or
is about to be conveyed, pursuant to which such Person becomes liable under the
related Mortgage Note and unless prohibited by applicable state law, on
condition, however, that the related Mortgage Loan shall continue to be covered
by a hazard policy. In connection with any such assumption, no material term of
the related Mortgage Note may be changed. The Servicer shall notify the
Certificate Administrator and the Trustee, whenever possible, before the
completion of such assumption agreement, and shall forward to the Certificate
Administrator the original copy of such assumption agreement, which copy shall
be added by the Certificate Administrator to the related Mortgage File and which
shall, for all purposes, be considered a part of such Mortgage File to the same
extent as all other documents and instruments constituting a part thereof.

         (b) Notwithstanding the foregoing paragraph or any other provision of
this Agreement, the Servicer shall not be deemed to be in default, breach or any
other violation of its obligations hereunder by reason of any assumption of a
Mortgage Loan by operation of law or any conveyance by the Mortgagor of the
related Mortgaged Property or assumption of a Mortgage Loan which the Servicer
reasonably believes it may be restricted by law from

                                       30
<PAGE>

preventing, for any reason whatsoever or if the exercise of such right would
impair or threaten to impair any recovery under any applicable insurance policy.

         Section 3.13 Realization Upon Defaulted Mortgage Loans.

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

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

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

         (b) The Servicer shall not acquire any real property (or any personal
property incident to such real property) on behalf of the Trust Fund except in
connection with a default or reasonably foreseeable default of a Mortgage Loan.
In the event that the Servicer acquires any

                                       31
<PAGE>

real property (or personal property incident to such real property) on behalf of
the Trust Fund in connection with a default or imminent default of a Mortgage
Loan, such property shall be disposed of by the Servicer on behalf of the Trust
Fund as soon as reasonably practicable, but in no event later than three years
after its acquisition on behalf of the Trust Fund.

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

         Section 3.14 Certificate Administrator to Cooperate; Release of
Mortgage Files.

         (a) Upon payment in full of any Mortgage Loan, the Servicer will
immediately notify the Certificate Administrator and the Trustee by a
certification signed by a Servicing Officer (which certification shall include a
statement to the effect that all amounts received in connection with such
payment which are required to be deposited in the Collection Account have been
so deposited) and shall request delivery to the Servicer or Subservicer, as the
case may be, of the Mortgage File. Upon receipt of such certification and
request, the Certificate Administrator, on behalf of the Trustee, shall promptly
cause to be released the related Mortgage File to the Servicer or Subservicer
and execute and deliver to the Servicer, without recourse, the request for
reconveyance, deed of reconveyance or release or satisfaction of mortgage or
such instrument releasing the lien of the Mortgage (furnished by the Servicer),
together with the Mortgage Note with written evidence of cancellation thereon.

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

         (c) The Servicer shall cause each Mortgage File or any document therein
released pursuant to Subsection 3.14(b) to be returned to the Certificate
Administrator when the need

                                       32
<PAGE>

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

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

         Section 3.15 Servicing Compensation.

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

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

                                       33
<PAGE>

this Subsection 3.15(b) shall include payment of the expenses of the accountants
retained pursuant to Section 3.17.

         Section 3.16 Annual Statements of Compliance.

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

         Section 3.17 Annual Independent Public Accountants' Servicing Report.

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

         (b) Within 90 days after December 31 of each year, the Servicer, at its
expense, shall, and shall cause each Subservicer to cause, a nationally
recognized firm of independent certified public accountants to furnish to the
Servicer or such Subservicer, as the case may be, a report stating that (i) it
has obtained a letter of representation regarding certain matters from the
management of the Servicer or such Subservicer, as the case may be, which
includes an assertion that the Servicer or such Subservicer, as the case may be,
has complied with certain minimum mortgage loan servicing standards identified
in the Uniform Single Attestation Program for Mortgage Bankers established by
the Mortgage Bankers Association of America with respect to the servicing of
first lien conventional single family mortgage loans during the most recently
completed calendar year and (ii) on the basis of an examination conducted by
such firm in

                                       34
<PAGE>

accordance with standards established by the American Institute of Certified
Public Accountants, such representation is fairly stated in all material
respects, subject to such exceptions and other qualifications that may be
appropriate. Immediately upon receipt of such report, the Servicer shall or
shall cause each Subservicer to furnish a copy of such report to the Certificate
Administrator, the Trustee and the Rating Agencies.

         Section 3.18 Optional Purchase of Defaulted Mortgage Loans.

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

         Section 3.19 Information Required by the Internal Revenue Service
Generally and Reports of Foreclosures and Abandonments of Mortgaged Property.

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

         Section 3.20 Purchase of Converted Mortgage Loans.

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

         Section 3.21 [Reserved]

         Section 3.22 Servicing and Administrating of the MI Policies.

         (a) The Servicer shall take all such actions on behalf of the Trustee
as are necessary to service, maintain and administer the MI Policies and to
perform the Trustee's obligations and enforce the Trustee's rights under the MI
Policies, which actions shall conform to the standards of an institution
prudently administering MI Policies for its own account. Except

                                       35
<PAGE>

as expressly set forth herein, the Servicer shall have full authority on behalf
of the Trust to do anything it reasonably deems appropriate or desirable in
connection with the servicing, maintenance and administration of the MI
Policies. The Servicer shall make its best reasonable efforts to file all
insured claims under the MI Policies and collect from the MI Insurer all
Insurance Proceeds due to the Trustee under the MI Policies. The Servicer shall
not take, or permit any subservicer to take, any action which would result in
non-coverage under any applicable MI Policy of any loss which, but for the
actions of the Servicer or Subservicer, would have been covered thereunder. To
the extent coverage is available, the Servicer shall keep or cause to be kept in
full force and effect each such MI Policy for the life of the Mortgage Loan;
provided, however, that if a MI Insurer Insolvency Event has occurred and is
continuing, the Servicer may terminate the MI Policy on any Mortgage Loan that
is not then past due. The Servicer shall cooperate with the MI Insurer and shall
use its best efforts to furnish all reasonable aid, evidence and information in
the possession of the Servicer or to which the Servicer has access with respect
to any Mortgage Loan.

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

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

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

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

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

                                       36
<PAGE>

         Section 3.23 Determination Date Reports.

         On the second Business Day following each Determination Date, the
Servicer shall deliver to the Certificate Administrator a report, prepared as of
the close of business on the Determination Date (the "Determination Date
Report"), and shall forward to the Certificate Administrator in the form of
computer readable electromagnetic tape or disk a copy of such report. The
Determination Date Report and any written information supplemental thereto shall
include such information with respect to the Mortgage Loans that is reasonably
available to the Servicer and that is required by the Certificate Administrator
for purposes of making the calculations and providing the reports referred to in
this Agreement, as set forth in written specifications or guidelines issued by
the Certificate Administrator from time to time. Such information shall include
the aggregate amounts required to be withdrawn from the Collection Account and
deposited into the Distribution Account pursuant to Section 3.07. Such
information shall also include (a) the number of Mortgage Loans that prepaid in
the previous month; (b) the loan balance of each such Mortgage Loan; (c) whether
a prepayment penalty was applied to such Mortgage Loan; and (d) the amount of
prepayment penalty with respect to each such Mortgage Loan. The Servicer agrees
to cooperate with the Certificate Administrator in providing all information as
is reasonably requested by the Certificate Administrator to prepare the reports
required under the Agreement.

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

         Section 3.24 Advances.

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

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

         Advances made from funds held in the Collection Account may be made by
the Servicer from subsequent collections of principal and interest received on
other Mortgage Loans and deposited into the Collection Account. Advances made
from the Collection Account are not limited to subsequent collections of
principal and interest received on the delinquent Mortgage Loan with respect to
which an Advance is made. If on the Servicer Remittance Date prior to any
Distribution Date funds in the Collection Account are less than the amount
required to be paid to

                                       37
<PAGE>

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

         Section 3.25 Compensating Interest Payments.

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

                                   ARTICLE IV

                                  FLOW OF FUNDS

         Section 4.01 Distributions.

         (a) On each Distribution Date, the Certificate Administrator, on behalf
of the Trustee, will first distribute the Prepayment Charges collected on the
Group I Mortgage Loans and on the Group II Mortgage Loans during the prior
Prepayment Period to the Holders of the Class P Certificates. After making that
distribution, the Certificate Administrator, on behalf of the Trustee, shall
(based solely on the information provided to the Trustee by the Certificate
Administrator pursuant to Section 4.03 hereof) withdraw from the Distribution
Account that portion of REMIC Available Funds for such Distribution Date
consisting of the Interest Remittance Amount for such Distribution Date, and
make the following disbursements and transfers in the order of priority
described below, in each case to the extent of the Interest Remittance Amount
remaining for such Distribution Date:

              (i) On each Distribution Date, the Certificate Administrator, on
    behalf of the Trustee, will distribute, pro rata from both the Group I
    Interest Remittance Amount and the Group II Interest Remittance Amount, the
    Certificate Administrator Fee which is due on that Distribution Date to the
    Certificate Administrator. After making that distribution, the Certificate
    Administrator, on behalf of the Trustee, will then apply the remaining
    Interest Remittance Amount to the payment of interest then due on the
    certificates in the following order of priority:

         (A) first, on each Distribution Date prior to the Class I Termination
Date, payable from the Group I Interest Remittance Amount and the Group II
Interest Remittance

                                       38
<PAGE>

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

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

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

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

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

                  (x) first, to the Holders of the Class AIO Certificates, the
              Class AIO Unpaid Interest Shortfall Amount; and

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

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

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

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

         (F) sixth, payable from the Group I Interest Remittance Amount and
Group II Interest Remittance Amount, to the Holders of the Class B Certificates,
the REMIC Monthly Interest Distributable Amount for Class B; and

                                       39
<PAGE>

         (G) seventh, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class R
Certificates, any remainder.

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

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

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

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

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

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

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

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

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

                                       40
<PAGE>

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

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

         (F) sixth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class B
Certificates, the entire remaining Principal Remittance Amount until the
Certificate Principal Balance of the Class B Certificates has been reduced to
zero;

         (G) seventh, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Trustee and the Certificate
Administrator, pro rata, any amounts owed to them under the Basic Documents
remaining unpaid;

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

         (I) ninth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class O
Certificates, the entire remaining Principal Remittance Amount until the
Certificate Principal Balance of the Class O Certificates has been paid; and

         (J) tenth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class R
Certificates, any remainder.

              (iii) On each Distribution Date (a) on or after the Crossover Date
    and (b) on which a Trigger Event is not in effect, the Certificate
    Administrator, on behalf of the Trustee, shall (based solely on the
    information provided to the Trustee by the Certificate Administrator
    pursuant to Section 4.03 hereof) withdraw from the Distribution Account that
    portion of the REMIC Available Funds for such Distribution Date consisting
    of the Principal Remittance Amount and make the following disbursements and
    transfers in the order of priority described below:

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

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

                  (II) payable solely from the Group II Principal Remittance
              Amount, to the holders of the Class A-2 Certificates, the Class
              A-2 Principal Distribution Amount, until the Certificate Principal
              Balance of the Class A-2 Certificates has

                                       41

<PAGE>

              been reduced to zero (except that on the Class P Principal
              Distribution Date, the Certificate Principal Balance of the Class
              P Certificates shall first be paid from the Group II Principal
              Remittance Amount to the holders of the Class P Certificates);

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

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

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

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

         (D) fourth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class M-2
Certificates, the Class M-2 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to zero;

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

         (F) sixth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class B
Certificates, the Class B Principal Distribution Amount, until the Certificate
Principal Balance of the Class B Certificates has been reduced to zero;

         (G) seventh, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Trustee and the Certificate
Administrator, pro rata, any amounts owed to them under the Basic Documents
remaining unpaid;

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

         (I) ninth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class O
Certificates, the entire

                                       42
<PAGE>

remaining Principal Remittance Amount until the Certificate Principal Balance of
the Class O Certificates has been paid; and

         (J) tenth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class R
Certificates, any remainder.

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

         (c) Distributions on Book-Entry Certificates. Each distribution with
respect to a Book-Entry Certificate shall be paid to the Depository, which shall
credit the amount of such distribution to the accounts of its Depository
Participants in accordance with its normal procedures. Each Depository
Participant shall be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for which
it acts as agent. Each brokerage firm shall be responsible for disbursing funds
to the Certificate Owners that it represents. All such credits and disbursements
with respect to a Book-Entry Certificate are to be made by the Depository and
the Depository Participants in accordance with the provisions of the
Certificates. None of the Certificate Administrator, the Trustee, the Company,
the Servicer or the Seller shall have any responsibility therefor except as
otherwise provided by applicable law.

         Section 4.02 Distribution Account.

         (a) No later than the Closing Date, the Certificate Administrator, on
behalf of the Trustee, shall establish and maintain a segregated trust account
that is an Eligible Account, which shall be titled "Distribution Account,
JPMorgan Chase Bank, as Trustee for the registered holders of NovaStar Mortgage
Funding Trust 2002-2, Home Equity Loan Asset-Backed Certificates, Series 2002-2"
(the "Distribution Account"). The Certificate Administrator shall, promptly upon
receipt, deposit in the Distribution Account and retain therein the Interest
Remittance Amount and the Principal Remittance Amount remitted on each Servicer
Remittance Date to the Certificate Administrator by the Servicer. Funds
deposited in the Distribution Account shall be held in trust by the Certificate
Administrator, on behalf of the Trustee, for the Certificateholders for the uses
and purposes set forth herein.

         (b) The Certificate Administrator, on behalf of the Trustee, may invest
funds deposited in the Distribution Account in Eligible Investments in its
discretion with a maturity date (i) no later than the Business Day immediately
preceding the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement, if a Person other than the Certificate
Administrator, on behalf of the Trustee, or an Affiliate manages or advises such
investment, and (ii) no later than the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement, if the Certificate
Administrator, on behalf of the

                                       43
<PAGE>

Trustee, or an Affiliate manages or advises such investment. All income or other
gain from such investments may be released from the Distribution Account and
paid to the Certificate Administrator, from time to time as part of its
compensation for acting as Certificate Administrator. The Certificate
Administrator shall be obligated to cover losses on such Eligible Investments.

         (c) Amounts on deposit in the Distribution Account shall be withdrawn
by the Certificate Administrator, on behalf of the Trustee, as follows:

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

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

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

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

         Section 4.03      Statements.

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

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

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

              (iii) the Pool Balance of the Group I Mortgage Loans and the Group
    II Mortgage Loans at the Close of Business at the end of the related Due
    Period;

              (iv) the number, aggregate principal balance, and weighted average
    Mortgage Rate of the Mortgage Loans as of the related Determination Date;

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

                                       44
<PAGE>

    days, (B) as to which foreclosure proceedings have been commenced and (C)
    REO Properties;

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

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

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

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

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

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

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

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

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

              (xv) the difference between the Swap Notional Amount and the
    Underwritten Certificates (and the Class B Certificate if held by an entity
    unrelated to the Seller) Principal Balance on such Distribution Date;

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

                                       45
<PAGE>

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

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

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

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

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

         (f) No later than noon on the third Business Day prior to each
Distribution Date, the Certificate Administrator will verify that no Notional
Amount Test Event is scheduled to occur on the related Distribution Date. In the
event a Notional Amount Test Event would otherwise occur on the related
Distribution Date, the Certificate Administrator will immediately provide notice
in the form of Exhibit J to the appropriate NovaStar entity (which shall be
NovaStar Financial Inc. in the case of MSCS and Novastar Mortgage, Inc. in the
case of CSFB)

                                       46
<PAGE>

and release in $25,000,000 increments from the affected Swap Agreement on the
day immediately preceding that Distribution Date until no Notional Amount Test
Event will occur on the related Distribution Date. The Certificate Administrator
shall release the first $25,000,000 notional amount from the Swap Counterparty
with the earliest maturity Swap Agreement and shall subsequently release from
the Trust in $25,000,000 notional amounts from the alternate Swap Counterparty
and continue in this manner until the two-year duration Swap Agreements have
been reduced to a zero notional amount. The Certificate Administrator shall
repeat the process of notional amount reduction described above until the
remaining three-year Swap Agreements have been reduced to a zero notional
amount. Once such Swap Agreements have been released from the Trust, the related
Swap Counterparty will have no obligation to, nor interest in, the Trust.

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

         Section 4.04 Supplemental Interest Trust.

         (a) (i) The parties do hereby create and establish a sub-trust of the
Trust Fund, which shall hold an account, which, no later than the Closing Date,
the Certificate Administrator shall, at the direction of the Servicer, establish
and maintain, on behalf of the Trustee, as a segregated trust account that is an
Eligible Account, which shall be titled "Supplemental Interest Trust, Wachovia
Bank, National Association, as Certificate Administrator for the registered
holders of NovaStar Mortgage Funding Trust 2002-2, Home Equity Loan Asset-Backed
Certificates, Series 2002-2." The Certificate Administrator shall, promptly upon
receipt, deposit in the Supplemental Interest Trust each distribution of the
Class AIO Current Interest pursuant to Section 4.01(a)(i)(B)(III) and each
distribution of the Class I Monthly Interest Distributable Amount pursuant to
Section 4.01(a)(i)(B). Funds deposited in the Supplemental Interest Trust shall
be held in trust by the Certificate Administrator for the Certificateholders for
the uses and purposes set forth herein. Neither the Supplemental Interest Trust
nor the Supplemental Interest Account shall be an asset of any of the REMICs
created hereunder.

         (ii) On each Distribution Date prior to the Class I Termination Date,
the funds in the Supplemental Interest Trust (as reduced from time to time in
accordance with this Section 4.04) will equal the sum of (a) any amounts
received under any Swap Agreement pursuant to Section 4.04(d), (b) the Class I
Monthly Interest Distributable Amount and (c) the Class AIO Monthly Interest
Distributable Amount.

         On each Distribution Date commencing in June 2005, the funds in the
Supplemental Interest Trust (as reduced from time to time in accordance with
this Section 4.04) will equal the Class AIO Monthly Interest Distributable
Amount.

         (b) The Certificate Administrator will invest funds deposited in the
Supplemental Interest Trust as directed in writing by the Servicer in Eligible
Investments with a maturity date (i) no later than the Business Day immediately
preceding the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement, if a Person other than the Certificate
Administrator or an Affiliate manages or advises such investment, and (ii) no
later

                                       47
<PAGE>

than the date on which such funds are required to be withdrawn from such account
pursuant to this Agreement, if the Certificate Administrator or an Affiliate
manages or advises such investment. All income and gain realized from investment
of funds deposited in the Supplemental Interest Trust shall be credited to such
Account. The Supplemental Interest Trust will not be an asset of any of the
REMICs created hereunder.

         (c) On each Distribution Date, the Certificate Administrator shall
distribute the funds held in the Supplemental Interest Trust as follows:

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

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

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

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

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

              (vi) sixth, any remaining amounts to pay the Supplemental Interest
    Payment for the Class B Certificates; and

              (vii) seventh, to pay any remaining amount to the Class AIO
    Certificates.

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

         Section 4.05 [Reserved].

         Section 4.06 [Reserved].

         Section 4.07 Allocation of Realized Losses.

         All Realized Losses on the Mortgage Loans shall be allocated by the
Certificate Administrator on each Distribution Date as follows: first, to the
Class O Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; second, to the Class B Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; third, to the Class M-3
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; fourth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been

                                       48
<PAGE>

reduced to zero; and fifth, to the Class M-1 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero. All Realized Losses to be
allocated to the Certificate Principal Balances of all Classes on any
Distribution Date shall be so allocated after the actual distributions to be
made on such date as provided above. All references above to the Certificate
Principal Balance of any Class of Certificates shall be to the Certificate
Principal Balance of such Class immediately prior to the relevant Distribution
Date, before reduction thereof by any Realized Losses, in each case to be
allocated to such Class of Certificates, on such Distribution Date. In no event
shall Realized Losses be allocated to the Class A Certificates.

         Any allocation of Realized Losses to a Class O Certificate, Class B
Certificate or to a Mezzanine Certificate on any Distribution Date shall be made
by reducing the Certificate Principal Balance thereof by the amount so
allocated.

                                    ARTICLE V

                                THE CERTIFICATES

         Section 5.01 The Certificates.

         Each of the Class A Certificates, the Mezzanine Certificates, the Class
B Certificates, the Class AIO Certificates, the Class I Certificates, the Class
P Certificates, the Class O Certificates and the Residual Certificates shall be
substantially in the forms annexed hereto as exhibits, and shall, on original
issue, be executed, authenticated and delivered by the Trustee or by the
Certificate Administrator, on behalf of the Trustee, to or upon the order of the
Company concurrently with the sale and assignment to the Trust of the Trust
Fund. The Underwritten Certificates and the Class B Certificates, shall be
initially evidenced by one or more Certificates representing a Percentage
Interest with a minimum dollar denomination of $25,000 and integral dollar
multiples of $1,000 in excess thereof, except that one Certificate of each such
Class of Certificates may be in a different denomination so that the sum of the
denominations of all outstanding Certificates of such Class shall equal the
Certificate Principal Balance of such Class on the Closing Date. The Class AIO
Certificates, the Class I Certificates, the Class P Certificates, the Class O
Certificates and the Residual Certificates are issuable in any Percentage
Interests; provided, however, that the sum of all such percentages for each such
Class totals 100% and no more than ten Certificates of each Class may be issued.

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

                                       49
<PAGE>

dated the date of their authentication. Subject to Section 5.02(c), the
Underwritten Certificates, the Class B Certificates, the Class AIO Certificates
and the Class P Certificates shall be Book-Entry Certificates. The other Classes
of Certificates shall be Definitive Certificates.

         Section 5.02 Registration of Transfer and Exchange of Certificates.

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

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

         At the option of the Certificateholders, Certificates may be exchanged
for other Certificates in authorized denominations and the same aggregate
Percentage Interests, upon surrender of the Certificates to be exchanged at any
such office or agency. Whenever any Certificates are so surrendered for
exchange, the Certificate Administrator shall execute on behalf of the Trust and
authenticate and deliver the Certificates which the Certificateholder making the
exchange is entitled to receive. Every Certificate presented or surrendered for
registration of transfer or exchange shall (if so required by the Certificate
Administrator or the Certificate Registrar) be duly endorsed by, or be
accompanied by a written instrument of transfer satisfactory to the Certificate
Administrator and the Certificate Registrar duly executed by, the Holder thereof
or his attorney duly authorized in writing.

         (b) Except as provided in paragraph (c) below, the Book-Entry
Certificates shall at all times remain registered in the name of the Depository
or its nominee and at all times: (i) registration of such Certificates may not
be transferred by the Certificate Administrator except to another Depository;
(ii) the Depository shall maintain book-entry records with respect to the
Certificate Owners and with respect to ownership and transfers of such
Certificates; (iii) ownership and transfers of registration of such Certificates
on the books of the Depository shall be governed by applicable rules established
by the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Certificate
Administrator shall for all purposes deal with the Depository as representative
of the Certificate Owners of the Certificates for purposes of exercising the
rights of Holders under this Agreement, and requests and directions for and
votes of such representative shall not be deemed to be inconsistent if they are
made with respect to different Certificate Owners; (vi) the Certificate
Administrator may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its Depository Participants and
furnished by the Depository Participants with respect to indirect participating
firms and Persons shown on the books of such indirect participating firms as
direct or indirect Certificate Owners; and (vii) the

                                       50
<PAGE>

direct participants of the Depository shall have no rights under this Agreement
under or with respect to any of the Certificates held on their behalf by the
Depository, and the Depository may be treated by the Trustee, the Certificate
Administrator and its agents, employees, officers and directors as the absolute
owner of the Certificates for all purposes whatsoever.

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

         (c) If (i)(x) the Depository or the Company advises the Certificate
Administrator in writing that the Depository is no longer willing or able to
discharge properly its responsibilities as Depository and (y) the Certificate
Administrator or the Company is unable to locate a qualified successor, (ii) the
Company, at its sole option, with the consent of the Certificate Administrator,
elects to terminate the book-entry system through the Depository or (iii) after
the occurrence of a Servicing Default, the Certificate Owners of the Book-Entry
Certificates representing not less than 51% of the Voting Rights advise the
Certificate Administrator and Depository through the Financial Intermediaries
and the Depository Participants in writing that the continuation of a book-entry
system through the Depository to the exclusion of definitive, fully registered
certificates ("Definitive Certificates") to Certificate Owners is no longer in
the best interests of the Certificate Owners. Upon surrender to the Certificate
Registrar of the Book-Entry Certificates by the Depository, accompanied by
registration instructions from the Depository for registration, the Trustee or
the Certificate Administrator, on behalf of the Trustee, shall, at the Company's
expense, in the case of (ii) above, or the Seller's expense, in the case of (i)
and (iii) above, execute on behalf of the Trust and authenticate the Definitive
Certificates. None of the Company, the Certificate Administrator nor the Trustee
shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
Upon the issuance of Definitive Certificates, the Certificate Administrator, the
Trustee, the Certificate Registrar, the Servicer, any Paying Agent and the
Company shall recognize the Holders of the Definitive Certificates as
Certificateholders hereunder.

         (d) No transfer, sale, pledge or other disposition of any Class B
Certificate, Class I Certificate, Class O Certificate or Residual Certificate
shall be made unless such disposition is exempt from the registration
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and any
applicable state securities laws or is made in accordance with the 1933 Act and
laws. In the event of any such transfer, except with respect to the initial
transfers of any Class B Certificate, Class I Certificate, Class O Certificate
or Residual Certificates by the Company to NFRC, unless (i) such transfer is
made in reliance upon Rule 144A under the 1933 Act and an investment letter, in
substantially the form attached hereto as Exhibit G, is delivered by the
Transferee to the Certificate Administrator) or (ii) a written Opinion of
Counsel (which may be in-house counsel) acceptable to and in form and substance

                                       51
<PAGE>

reasonably satisfactory to the Certificate Administrator and the Company is
delivered to them stating that such transfer may be made pursuant to (x) the
1933 Act, or an exemption thereto, describing the applicable provision or
exemption and the basis therefor, and (y) the Investment Company Act of 1940, or
an exemption thereto, describing the applicable provision or exemption and the
basis therefor, which Opinion of Counsel shall not be an expense of the
Certificate Administrator or the Company. The Holder of a Class B Certificate,
Class I Certificate, Class O Certificate or Residual Certificate desiring to
effect such transfer shall, and does hereby agree to, indemnify the Certificate
Administrator, the Trustee and the Company against any liability that may result
if the transfer is not so exempt or is not made in accordance with such federal
and state laws.

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

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

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

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

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

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

                                       52
<PAGE>

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

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

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

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

                                       53
<PAGE>

    Section 860E(e)(5) of the Code on transfers of residual interests to
    disqualified organizations.

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

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

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

         Section 5.03 Mutilated, Destroyed, Lost or Stolen Certificates.

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

         Section 5.04 Persons Deemed Owners.

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

                                       54
<PAGE>

         Section 5.05 Appointment of Paying Agent.

         (a) The Paying Agent shall make distributions to Certificateholders
from the Distribution Account pursuant to Section 4.01 and shall report the
amounts of such distributions to the Certificate Administrator. The duties of
the Paying Agent may include the obligation to distribute statements prepared by
the Certificate Administrator and delivered to the Trustee pursuant to Section
4.03 and provide information to Certificateholders as required hereunder. The
Paying Agent hereunder shall at all times be an entity duly incorporated and
validly existing under the laws of the United States of America or any state
thereof, authorized under such laws to exercise corporate trust powers and
subject to supervision or examination by federal or state authorities. The
Paying Agent shall initially be the Certificate Administrator. The Trustee may
appoint a successor to act as Paying Agent, which appointment shall be
reasonably satisfactory to the Company.

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

                                   ARTICLE VI

                          THE SERVICER AND THE COMPANY

         Section 6.01 Liability of the Servicer and the Company.

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

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

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

                                       55
<PAGE>

         Section 6.03 Limitation on Liability of the Servicer and Others.

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

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

         Section 6.04 Servicer Not to Resign.

         Subject to the provisions of Section 6.02, the Servicer shall not
resign from the obligations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties hereunder are no
longer permissible under applicable law or (ii) upon satisfaction of the
following conditions: (a) the Servicer has proposed a successor servicer to the
Trust, the Trustee and the Certificate Administrator in writing and such
proposed successor servicer is reasonably acceptable to the Trustee and the
Certificate Administrator; and (b) each Rating Agency shall have delivered a
letter to the Trust, the Trustee, and the Certificate Administrator prior to the
appointment of the successor servicer stating that the proposed appointment of
such successor servicer as Servicer hereunder will not result in the reduction
or

                                       56
<PAGE>

withdrawal of then current rating of the Certificates; provided, however, that
no such resignation by the Servicer shall become effective until such successor
servicer or, in the case of (i) above, the Certificate Administrator or its
designee as successor Servicer shall have assumed the Servicer's
responsibilities and obligations hereunder or the Trustee or its designee as
successor Servicer shall have designated a successor servicer in accordance with
Section 7.02. Any such resignation shall not relieve the Servicer of
responsibility for any of the obligations specified in Sections 7.01 and 7.02 as
obligations that survive the resignation or termination of the Servicer. The
Servicer shall have no claim (whether by subrogation or otherwise) or other
action against any Certificateholder for any amounts paid by the Servicer
pursuant to any provision of this Pooling and Agreement. Any such determination
permitting the resignation of the Servicer under clause (i) above shall be
evidenced by an Opinion of Counsel to such effect delivered to the Certificate
Administrator, and the Trustee.

         Section 6.05 Delegation of Duties.

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

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

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

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

                                       57
<PAGE>

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

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

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

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

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

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

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

                                  ARTICLE VII

                                     DEFAULT

         Section 7.01 Servicing Default.

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

                                       58
<PAGE>

              (i) Any failure by the Servicer to deposit in the Collection
    Account or Distribution Account (A) any Advances and Compensating Interest
    or (B) any other Deposit required to be made under the terms of this
    Agreement, which, in the case of this clause (B), continues unremedied for a
    period of three Business Days after the date upon which written notice of
    such failure shall have been given to the Servicer by the Trustee or the
    Certificate Administrator or to the Servicer, the Trustee and the
    Certificate Administrator the Holders of Certificates evidencing at least
    25% of the Voting Rights; or

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

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

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

              (v) The Cumulative Loss Percentage exceeds (a) with respect to the
    first 12 Distribution Dates, 1.00% of the Cut-off Date Aggregate Principal
    Balance, (b) with respect to the next 12 Distribution Dates, 1.25% of the
    Cut-off Date Aggregate Principal Balance, (c) with respect to the next 12
    Distribution Dates, 1.50% of the Cut-off Date Aggregate Principal Balance,
    (d) with respect to the next 12 Distribution Dates,

                                       59
<PAGE>

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

              (vi) Realized Losses on the Mortgage Loans over any twelve-month
    period exceeds 1.00% of the aggregate Principal Balance of the Closing Date
    Mortgage Loans as of the Cut-off Date; or

              (vii) The Rolling 90 Day Delinquency Percentage exceeds 19%.

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

         Section 7.02 Trustee to Act; Appointment of Successor.

         (a) Within 90 days of the time the Servicer (and the Trustee or the
Certificate Administrator, if notice is sent by the Holders) receives a notice
of termination pursuant to Section 7.01, the Trustee (or such other successor
Servicer as is approved in accordance with this Agreement) shall be the
successor in all respects to the Servicer in its capacity as servicer under this
Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities relating thereto
placed on the Servicer by the terms and provisions hereof arising on and after
its succession. Notwithstanding the foregoing, the parties hereto agree that the
Trustee, in its capacity as successor Servicer, immediately will assume all of
the obligations of the Servicer to make Advances; provided however, that the
obligation of the Trustee to make Advances is subject to the standards set forth
in Section 3.24 hereof. Notwithstanding the foregoing, the Trustee, in its
capacity as successor Servicer, shall not be responsible for the lack of
information and/or documents that it cannot obtain through reasonable efforts.
As compensation therefor, the Trustee (or such other successor Servicer) shall
be entitled to such compensation as the Servicer would have been entitled to
hereunder if no such

                                       60
<PAGE>

notice of termination had been given. Notwithstanding the above, (i) if the
Trustee is unwilling to act as successor Servicer or (ii) if the Trustee is
legally unable so to act, the Trustee shall appoint or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution, bank or other mortgage loan or home equity loan servicer having a
net worth of not less than $10,000,000 as the successor to the Servicer
hereunder in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer hereunder; provided, that the appointment of any
such successor Servicer will not result in the qualification, reduction or
withdrawal of the ratings assigned to the Certificates by the Rating Agencies as
evidenced by a letter to such effect from the Rating Agencies. Pending
appointment of a successor to the Servicer hereunder, unless the Trustee is
prohibited by law from so acting, the Trustee shall act in such capacity as
hereinabove provided. In connection with such appointment and assumption, the
successor shall be entitled to receive compensation out of payments on Mortgage
Loans in an amount equal to the compensation which the Servicer would otherwise
have received pursuant to Section 3.18 (or such other compensation as the
Trustee and such successor shall agree, not to exceed the Servicing Fee). The
appointment of a successor Servicer shall not affect any liability of the
predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer to pay any deductible under an insurance policy pursuant
to Section 3.14 or to indemnify the Certificate Administrator and the Trustee
pursuant to Section 3.06), nor shall any successor Servicer be liable for any
acts or omissions of the predecessor Servicer or for any breach by such Servicer
of any of its representations or warranties contained herein or in any related
document or agreement. The Trustee and such successor shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession. All Servicing Transfer Costs shall be paid by the predecessor
Servicer upon presentation of reasonable documentation of such costs, and if
such predecessor Servicer defaults in its obligation to pay such costs, such
costs shall be paid by the successor Servicer, the Certificate Administrator or
the Trustee (in which case the successor Servicer, the Certificate Administrator
or the Trustee, as applicable, shall be entitled to reimbursement therefor from
the assets of the Trust).

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

         (c) In connection with the termination or resignation of the Servicer
hereunder, either (i) the successor Servicer, shall represent and warrant that
it is a member of MERS in good standing and shall agree to comply in all
material respects with the rules and procedures of MERS in connection with the
servicing of the Mortgage Loans that are registered with MERS, in which case the
predecessor Servicer shall cooperate with the successor Servicer in causing MERS
to revise its records to reflect the transfer of servicing to the successor
Servicer as necessary under MERS' rules and regulations, or (ii) the predecessor
Servicer shall cooperate with the successor Servicer in causing MERS to execute
and deliver an assignment of Mortgage in recordable form to transfer the
Mortgages from MERS to the Trustee and to execute and deliver such other
notices, documents and other instruments as may be necessary or desirable to
effect a transfer of such Mortgage Loans or servicing of such Mortgage Loan on
the MERS

                                       61
<PAGE>

System to the successor Servicer. The predecessor Servicer shall file or cause
to be filed any such assignment in the appropriate recording offices. The
predecessor Servicer shall bear any and all fees of MERS, costs of preparing any
assignments of Mortgage, and fees and costs of filing any assignments of
Mortgage that may be required under this subsection (c). The successor Servicer
shall cause assignment to be delivered to the Trustee promptly upon receipt of
the original with evidence of recording thereon or a copy certified by the
public recording office in which such assignment was recorded.

         Section 7.03 Waiver of Defaults.

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

         Section 7.04 Notification to Certificateholders.

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

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

         Section 7.05 Survivability of Servicer Liabilities.

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

                                  ARTICLE VIII

                  THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR

         Section 8.01 Duties of the Trustee and the Certificate Administrator.

         If a Servicing Default has occurred and is continuing, each of the
Trustee and the Certificate Administrator shall exercise the rights and powers
vested in each of them by this

                                       62
<PAGE>

Agreement and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.

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

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

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

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

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

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

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

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

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

                                       63
<PAGE>

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

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

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

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

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

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

                                       64
<PAGE>

         Section 8.02 Rights of Trustee and Certificate Administrator.

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

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

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

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

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

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

                                       65
<PAGE>

degree of care and skill in their exercise, as a prudent person would exercise
or use under the circumstances in the conduct of such person's own affairs.

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

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

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

         Section 8.03 Individual Rights of Trustee and Certificate
Administrator.

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

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

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

                                       66
<PAGE>

         Section 8.05 Notice of Servicing Default.

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

         Section 8.06 [Reserved].

         Section 8.07 Compensation and Indemnity.

         The amount of the Certificate Administrator Fee shall be paid to the
Certificate Administrator on each Distribution Date pursuant to Section
4.01(a)(i) of this Agreement, and all amounts owing to the Trustee and to the
Certificate Administrator hereunder in excess of such amount shall be paid
solely as provided in this Agreement. On each Distribution Date, the Certificate
Administrator will pay to the Trustee its fee as compensation for the
performance of its duties hereunder in the amount as set forth in a separate
letter agreement between the Certificate Administrator and the Trustee. The
Trustee's compensation and the Certificate Administrator's compensation shall
not be limited by any law on compensation of a trustee of an express trust.

         Section 8.08 Replacement of Trustee or Certificate Administrator.

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

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

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

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

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

                                       67
<PAGE>

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

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

         Subject to the foregoing provisions of this Section 8.08, the Trustee
may terminate the Certificate Administrator at any time for failure to perform
its obligations hereunder or under the Basic Documents provided it or a
Certificate Administrator acceptable to the Company assumes the obligations of
the Certificate Administrator.

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

         Section 8.09 Successor Trustee or Certificate Administrator by Merger.

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

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

                                       68
<PAGE>

all such cases such certificates shall have the full force as the Certificates
or this Agreement provide that such certificates of the Trustee or the
Certificate Administrator, as the case may be, shall have.

         Section 8.10 Appointment of Co-Trustee or Separate Trustee.

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

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

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

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

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

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

                                       69
<PAGE>

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

         Section 8.11 Eligibility; Disqualification.

         The Trustee shall be a corporation or association organized and doing
business under the laws of a state of the United States. The Trustee is subject
to supervision or examination by federal or state authority. Each of the Trustee
and the Certificate Administrator shall at all times be reasonably acceptable to
the Company and authorized to exercise corporate trust powers. Each of the
Trustee and the Certificate Administrator shall have a combined capital and
surplus of at least $50,000,000 as set forth in its most recent published annual
report of condition and it or its parent shall have a long-term debt rating of
Baa3 or better by Moody's and BBB or better by Standard & Poor's.

         Section 8.12 [Reserved]

         Section 8.13 Representations and Warranties.

         (a) The Trustee hereby represents that:

              (i) The Trustee is duly organized and validly existing as a New
    York banking corporation in good standing under the laws of the United
    States with power and authority to own its properties and to conduct its
    business as such properties are currently owned and such business is
    presently conducted;

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

              (iii) The consummation of the transactions contemplated by this
    Agreement and the fulfillment of the terms hereof do not conflict with,
    result in any breach of any of the terms and provisions of, or constitute
    (with or without notice or lapse of time) a default under, the articles of
    organization or bylaws of the Trustee or any agreement or other instrument
    to which the Trustee is a party or by which it is bound; and

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

         (b) The Certificate Administrator hereby represents that:

                                       70
<PAGE>

              (i) The Certificate Administrator is duly organized and validly
    existing as a national banking association in good standing under the laws
    of the United States with power and authority to own its properties and to
    conduct its business as such properties are currently owned and such
    business is presently conducted;

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

              (iii) The consummation of the transactions contemplated by this
    Agreement and the fulfillment of the terms hereof do not conflict with,
    result in any breach of any of the terms and provisions of, or constitute
    (with or without notice or lapse of time) a default under, the articles of
    organization or bylaws of the Certificate Administrator or any agreement or
    other instrument to which the Certificate Administrator is a party or by
    which it is bound; and

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

         Section 8.14 Directions to Trustee and Certificate Administrator.

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

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

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

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

         Section 8.15 The Agents.

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

                                       71
<PAGE>

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

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

         (a) file with the Commission, on behalf of the Trust, the annual
reports and information, documents and other reports (or copies of such portions
of any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) that the Trust may be required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. Such filings
shall be as follows: within 15 days after each Distribution Date, the
Certificate Administrator, on behalf of the Trust, shall file with the
Commission via the Electronic Data Gathering, Analysis and Retrieval System, a
Form 8-K with a copy of the statement to Certificateholders for such
Distribution Date as an exhibit thereto. Prior to January 31, 2003, the
Certificate Administrator, shall file a Form 15 Suspension Notification with
respect to the Trust Fund, if applicable. Prior to March 31, 2003, the
Certificate Administrator, on behalf of the Trust, shall file a Form 10-K, in
substance conforming to industry standards, with respect to the Trust Fund. The
Trust hereby grants to the Certificate Administrator, a limited power of
attorney to execute and file each such document on behalf of the Trust. Such
power of attorney shall continue until the termination of the Trust Fund. The
Certificate Administrator, on behalf of the Trust, shall deliver to the Seller
and the Trustee within three Business Days after filing any Form 8-K or Form
10-K pursuant to this Section 8.16 a copy of such Form 8-K or Form 10-K, as the
case may be; and

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

       The fiscal year of the Trust shall end on December 31 of each year.

                                   ARTICLE IX

                                   [Reserved]

                                   ARTICLE X

                              REMIC ADMINISTRATION

         Section 10.01 REMIC Administration.

         (a) [Reserved].

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

         (c) The Servicer shall pay any and all tax related expenses (not
including taxes) of each REMIC, including but not limited to any professional
fees or expenses related to audits or any administrative or judicial proceedings
with respect to each REMIC that involve the

                                       72
<PAGE>

Internal Revenue Service or state tax authorities, but only to the extent that
(i) such expenses are ordinary or routine expenses, including expenses of a
routine audit but not expenses of litigation (except as described in (ii)); or
(ii) such expenses or liabilities (including taxes and penalties) are
attributable to the negligence or willful misconduct of the Servicer in
fulfilling its duties hereunder. The Servicer shall be entitled to reimbursement
of expenses to the extent provided in clause (i) above from the Collection
Account.

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

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

         (f) The Trustee, the Servicer, the Certificate Administrator and the
Holders of Certificates shall take any action or cause the REMIC to take any
action necessary to create or maintain the status of each REMIC as a REMIC under
the REMIC Provisions and shall assist each other as necessary to create or
maintain such status. Neither the Trustee, the Certificate Administrator, the
Servicer nor the Holder of any Residual Certificate shall take any action, cause
any REMIC created hereunder to take any action or fail to take (or fail to cause
to be taken) any action that, under the REMIC Provisions, if taken or not taken,
as the case may be, could (i) endanger the status of such REMIC as a REMIC or
(ii) result in the imposition of a tax upon such REMIC (including but not
limited to the tax on prohibited transactions as defined in Code Section
860F(a)(2) and the tax on prohibited contributions set forth on Section 860G(d)
of the Code) (either such event, an "Adverse REMIC Event") unless the Trustee,
the Certificate Administrator and the Servicer have received an Opinion of
Counsel (at the expense of the party

                                       73
<PAGE>

seeking to take such action) to the effect that the contemplated action will not
endanger such status or result in the imposition of such a tax. In addition,
prior to taking any action with respect to any REMIC created hereunder or the
assets therein, or causing such REMIC to take any action, which is not expressly
permitted under the terms of this Agreement, any Holder of a Residual
Certificate will consult with the Trustee, the Certificate Administrator and the
Servicer, or their respective designees, in writing, with respect to whether
such action could cause an Adverse REMIC Event to occur with respect to any
REMIC, and no such Person shall take any such action or cause any REMIC to take
any such action as to which the Trustee, the Certificate Administrator or the
Servicer has advised it in writing that an Adverse REMIC Event could occur.

         (g) Each Holder of a Residual Certificate shall pay when due any and
all taxes imposed on each REMIC created hereunder by federal or state
governmental authorities. To the extent that such Trust taxes are not paid by a
Residual Certificateholder, the Certificate Administrator shall pay any
remaining REMIC taxes out of current or future amounts otherwise distributable
to the Holder of the Residual Certificate in the REMICs or, if no such amounts
are available, out of other amounts held in the Distribution Account, and shall
reduce amounts otherwise payable to Holders of regular interests in the related
REMIC.

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

         (i) No additional contributions of assets shall be made to any REMIC
created hereunder, except as expressly provided in this Agreement with respect
to Qualified Replacement Mortgages.

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

         (k) The Certificate Administrator will apply for an Employee
Identification Number from the Internal Revenue Service via a Form SS-4 or other
acceptable method for REMIC I, REMIC II and REMIC III and the Master REMIC.

         Section 10.02 Prohibited Transactions and Activities.

         Neither the Company, the Servicer, the Certificate Administrator nor
the Trustee shall sell, dispose of, or substitute for any of the Mortgage Loans,
if such disposition, acquisition, substitution, or acceptance would (a) affect
adversely the status of any REMIC created hereunder as a REMIC or (b) cause any
REMIC created hereunder to be subject to a tax on prohibited transactions or
prohibited contributions pursuant to the REMIC Provisions.

                                       74
<PAGE>

                                   ARTICLE XI

                                   TERMINATION

         Section 11.01 Termination.

         (a) The respective obligations and responsibilities of the Seller, the
Servicer, the Company, the Certificate Administrator and the Trustee created
hereby (other than the obligation of the Certificate Administrator to make
certain payments to Certificateholders after the final Distribution Date and the
obligation of the Servicer to send certain notices as hereinafter set forth)
shall terminate upon notice to the Trustee or the Certificate Administrator upon
the earliest of (i) the Distribution Date on which the Certificate Principal
Balances of the Regular Certificates have been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage Loan in the Trust, (iii) the
optional purchase by the Servicer of the Mortgage Loans as described below and
(iv) the Distribution Date in March 2033. Notwithstanding the foregoing, in no
event shall the trust created hereby continue beyond the expiration of 21 years
from the death of the last survivor of the descendants of Joseph P. Kennedy, the
late ambassador of the United States to the Court of St. James, living on the
date hereof.

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

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

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

         (b) In the event that the Certificate Principal Balances of all of the
Class A Certificates have not been reduced to zero by the Distribution Date on
September 2032, the Certificate Administrator, on behalf of the Trustee, shall
(i) sign a plan of complete liquidation of each REMIC created hereunder meeting
the requirements of a "Qualified Liquidation" under Section 860F of the Code and
any regulations thereunder, (ii) sell all of the assets of the Trust Fund for
cash in a commercially reasonable manner to maximize the value thereof, pursuant
to the terms of the plan of complete liquidation, (iii) distribute the proceeds
of the sale to the Certificateholders in accordance with Section 4.01 hereof,
and (iv) terminate the Trust. By their acceptance of Certificates, the Holders
thereof hereby agree to appoint the Certificate

                                       75
<PAGE>

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

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

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

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

         Section 11.02 Additional Termination Requirements.

         (a) In the event that the Servicer exercises its purchase option as
provided in Section 11.01 or the Trustee terminates the Trust, each REMIC shall
be terminated in accordance with the following additional requirements, unless
the Certificate Administrator shall have been furnished with an Opinion of
Counsel to the effect that the failure of the Trust to comply with the

                                       76
<PAGE>

requirements of this Section will not (i) result in the imposition of taxes on
"prohibited transactions" of the Trust as defined in Section 860F of the Code or
(ii) cause any REMIC constituting part of the Trust Fund to fail to qualify as a
REMIC at any time that any Certificates are outstanding:

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

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

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

                                  ARTICLE XII

                            MISCELLANEOUS PROVISIONS

         Section 12.01 Amendment.

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

         In addition, this Agreement may be amended from time to time by the
parties hereto with the consent of the Majority Certificateholders for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Agreement

                                       77
<PAGE>

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

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

         Promptly after the execution of any such amendment the Certificate
Administrator shall furnish, at the expense of the Person that requested the
amendment if such Person is Seller or the Servicer (but in no event at the
expense of the Certificate Administrator), otherwise at the expense of the
Trust, a copy of such amendment and the Opinion of Counsel referred to in the
immediately preceding paragraph to the Servicer and each Rating Agency.

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

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

         Section 12.02 Recordation of Agreement; Counterparts.

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

                                       78
<PAGE>

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

         Section 12.03 Limitation on Rights of Certificateholders.

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

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

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

         Section 12.04 Governing Law; Jurisdiction.

         This Agreement shall be construed in accordance with the laws of the
State of New York, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such laws. With respect to any
claim arising out of this Agreement, each party irrevocably submits to the
exclusive jurisdiction of the courts of the State of New York and

                                       79
<PAGE>

the United States District Court located in the Borough of Manhattan in The City
of New York, and each party irrevocably waives any objection which it may have
at any time to the laying of venue of any suit, action or proceeding arising out
of or relating hereto brought in any such courts, irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in any inconvenient forum and further irrevocably waives the right to
object, with respect to such claim, suit, action or proceeding brought in any
such court, that such court does not have jurisdiction over such party, provided
that service of process has been made by any lawful means.

         Section 12.05 Notices.

         All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by certified mail, return receipt requested, or sent by reputable overnight
courier service to:

         (a) in the case of the Company:

                  NovaStar Mortgage Funding Corporation
                  1901 W. 47th Place
                  Suite 105
                  Westwood, Kansas  66205
                  Attention:  Matt Kaltenrieder

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

                  NovaStar Mortgage, Inc.
                  1900 W. 47th Place
                  Suite 205
                  Westwood, Kansas 66205
                  Attention:  Matt Kaltenrieder

         (c) in the case of Rating Agencies:

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

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

         (d) in the case of the Certificate Administrator:

                                       80
<PAGE>

                  Wachovia Bank, National Association
                  401 South Tryon Street, NC1179
                  12th Floor
                  Charlotte, NC  28288-1179
                  Attention: Structured Finance Trust Services
                 (NovaStar Mortgage Funding Trust, Series 2002-2)

         (e) in the case of the Trustee:

                  JPMorgan Chase Bank
                  450 West 33rd Street, 14th Floor
                  New York, NY 10001
                  Attention: Institutional Trust Services
                 (NovaStar Mortgage Funding Trust, Series 2002-2)

or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party. Any notice required or permitted to be
mailed to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Certificateholder as shown in the Certificate
Register. Any notice so mailed within the time prescribed in this Agreement
shall be conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice. Any notice or other document required to
be delivered or mailed by the Certificate Administrator to any Rating Agency
shall be given on a reasonable efforts basis and only as a matter of courtesy
and accommodation and the Certificate Administrator shall have no liability for
failure to deliver such notice or document to any Rating Agency.

         Section 12.06 Severability of Provisions.

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

         Section 12.07 Article and Section References.

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

         Section 12.08 Further Assurances.

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

                                       81
<PAGE>

         Section 12.09 Benefits of Agreement.

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

         Section 12.10 Acts of Certificateholders.

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

         (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Whenever
such execution is by a signer acting in a capacity other than his or her
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority.

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

                                       82
<PAGE>

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

                                       NOVASTAR MORTGAGE FUNDING CORPORATION,
                                       as Company

                                       By: /s/ Kelly Meinders
                                           -------------------------------------
                                           Name:       Kelly Meinders
                                           Title:      Vice President

                                       NOVASTAR MORTGAGE, INC.,
                                       as Servicer and as Seller

                                       By: /s/ Kelly Meinders
                                           -------------------------------------
                                           Name:       Kelly Meinders
                                           Title:      Vice President

                                       WACHOVIA BANK, NATIONAL ASSOCIATION,
                                       as Certificate Administrator

                                       By: /s/ Robert Ashbaugh
                                           -------------------------------------
                                           Name:       Robert Ashbaugh
                                           Title:      Vice President

                                       JPMORGAN CHASE BANK,
                                       as Trustee

                                       By: /s/ Ryan Biasi
                                           -------------------------------------
                                           Name:       Ryan Biasi
                                           Title:      Trust Officer

                [Pooling and Servicing Agreement Signature Page]

                                       83
<PAGE>

STATE OF KANSAS            )
                           ) ss.:
COUNTY OF JOHNSON          )

         On the 27th day of June, 2002 before me, a notary public in and for
said State, personally appeared Kelly Meinders known to me (or proved to me on
the basis of satisfactory evidence) to be a Vice President of NovaStar Mortgage
Funding Corporation, a Delaware corporation that executed the within instrument,
and also known to me (or proved to me on the basis of satisfactory evidence) to
be the person who executed it on behalf of said corporation, and acknowledged to
me that such corporation executed the within instrument.

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

                                    /s/ Apryl D. Green
                                    --------------------------------
Seal                                Notary Public

                                       84
<PAGE>

STATE OF KANSAS            )
                           ) ss.:
COUNTY OF JOHNSON          )

         On the 27th day of June, 2002 before me, a notary public in and for
said State, personally appeared Kelly Meinders known to me (or proved to me on
the basis of satisfactory evidence) to be a Vice President of NovaStar Mortgage,
Inc., a Virginia corporation that executed the within instrument, and also known
to me (or proved to me on the basis of satisfactory evidence) to be the person
who executed it on behalf of said corporation, and acknowledged to me that such
corporation executed the within instrument.

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

                                            /s/ Apryl D. Green
                                            --------------------------------
Seal                                        Notary Public

                                       85
<PAGE>

STATE OF KANSAS            )
                           ) ss.:
COUNTY OF JOHNSON          )

         On the 27th day of June, 2002 before me, a notary public in and for
said State, personally appeared Robert Ashbaugh known to me (or proved to me
on the basis of satisfactory evidence) to be a Vice President of Wachovia
Bank, National Association, a national banking association that executed the
within instrument, and also known to me (or proved to me on the basis of
satisfactory evidence) to be the person who executed it on behalf of said
corporation, and acknowledged to me that such corporation executed the within
instrument.

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

                                            /s/ Jan Deuters
                                            --------------------------------
Seal                                        Notary Public

                                       86
<PAGE>

STATE OF KANSAS            )
                           ) ss.:
COUNTY OF JOHNSON          )

         On the 27th day of June, 2002 before me, a notary public in and for
said State, personally appeared Ryan Biasi, known to me (or proved to me on the
basis of satisfactory evidence) to be Trust Officer of JPMorgan Chase Bank
that executed the within instrument, and also known to me (or proved to me on
the basis of satisfactory evidence) to be the person who executed it on behalf
of said association, and acknowledged to me that such corporation executed the
within instrument.

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

                                          /s/ Jonathan P. Ravens
                                          --------------------------------
Seal                                      Notary Public

                                       87
<PAGE>

                                   APPENDIX A

                                   DEFINITIONS

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

         "Account": The Collection Account, the Supplemental Interest Account,
and the Distribution Account.

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

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

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

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

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

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

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

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

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

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

<PAGE>

         "Allocated Realized Loss Amount": With respect to any Distribution Date
and any Class of Mezzanine Certificates, the Class B Certificates, or the Class
O Certificates, the Realized Losses allocated to such Class of Certificates on
such Distribution Date and the Realized Losses allocated to such Class of
Certificates remaining unpaid from the previous Distribution Date pursuant to
Section 4.07 hereof.

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

         "Appraised Value": The appraised value of a Mortgaged Property based
upon the appraisal made at the time of the origination of the related Mortgage
Loan. With respect to a Mortgage Loan the proceeds of which were used to
refinance an existing Mortgage Loan, the appraised value of the Mortgaged
Property based upon the appraisal with the lowest appraised value (as reviewed
and approved by the Seller) obtained within 12 months of the time of
refinancing.

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

         "Assumed Final Maturity Date": As to each Class of Certificates, the
Distribution Date in March 2033.

         "Available Funds Cap Carryforward Amount": With respect to any Class of
Underwritten Certificates and the Class B Certificates and any Distribution
Date, the sum of (i) the positive excess, if any, of (x) the aggregate
cumulative amount of REMIC Available Funds Cap Shortfall Amounts for such Class
on all prior Distribution Dates over (y) the aggregate cumulative amount of
Supplemental Interest Payments actually paid to the Holders of that Class on all
prior Distribution Dates pursuant to those clauses of Section 4.04(c) which
relate to payments to that Class, plus (ii) interest on the amount described in
clause (i) at a rate equal to the related Formula Rate for such Class and
Distribution Date.

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

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

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

         "Base Prospectus": The base Prospectus, dated April 15, 2002, with
respect to the Offered Certificates.

                                       2
<PAGE>

         "Basic Documents": This Agreement, the Purchase Agreement, the Side
Indemnity Letter, the REMIC Interests Sale Agreement, the Converted Loan
Purchase Agreement, the Underwriting Agreement, and the other documents and
Certificates delivered in connection with any of the above.

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

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

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

         "Certificate": Any Regular Certificate or Class R Certificate.

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

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

         "Certificate Administrator Fee Rate": 0.007% per annum.

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

         "Certificate Margin": With respect to the Class A-1 Certificates on
each Distribution Date (A) on or prior to the Rate Step-Up Date, 0.270% per
annum and (B) after the Rate Step-Up Date, 0.540% per annum. With respect to the
Class A-2 Certificates on each Distribution Date (A) on or prior to the Rate
Step-Up Date,0.290% per annum and (B) after the Rate Step-Up Date, 0.580% per
annum. With respect to the Class M-1 Certificates on each Distribution Date (A)
on or prior to the Rate Step-Up Date, 0.750% per annum and (B) after the Rate
Step-Up Date, 1.125% per annum. With respect to the Class M-2 Certificates on
each Distribution Date (A) on or prior to the Rate Step-Up Date, 1.350% per
annum and (B) after the Rate Step-Up Date, 2.025% per annum. With respect to the
Class M-3 Certificates on each Distribution Date (A) on or prior to the Rate
Step-Up Date, 1.800% per annum and (B) after the Rate Step-Up Date,

                                       3
<PAGE>

2.700% per annum. With respect to the Class B Certificates on each Distribution
Date (A) on or prior to the Rate Step-Up Date, 4.500% per annum and (B) after
the Rate Step-Up Date, 6.750% per annum.

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

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

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

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

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

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

         "Class A Principal Distribution Amount": The excess of (x) the
Certificate Principal Balance of the Class A Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 81.00% and
(ii) the Pool Balance as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) and (B) the Pool Balance as of
the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) minus $1,550,000.

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

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

                                       4
<PAGE>

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

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

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

         "Class AIO Certificate": Any one of the Class AIO Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-7, representing the right to distributions
as set forth herein and therein and evidencing one or more regular interests in
the Master REMIC.

         "Class AIO Current Interest": With respect to any Distribution Date is
equal to the excess of (x) Interest Remittance Formula Amount for that
Distribution Date less (y) the sum of (i) the Administrative Fees, (ii) the
Class I Monthly Distributable Amount, (iii) the REMIC Current Interest for the
Class A-1 Certificates, (iv) the REMIC Current Interest for the Class A-2
Certificates, (v) the REMIC Current Interest for the Class M-1 Certificates,
(vi) the REMIC Current Interest for the Class M-2 Certificates, (vii) the REMIC
Current Interest for the Class M-3 Certificates and (viii) the REMIC Current
Interest for the Class B Certificates.

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

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

         "Class AIO Unpaid Interest Shortfall Amount": For the first
Distribution Date, zero and for any Distribution Date after the first
Distribution Date, the amount, if any, by which (a) the Class AIO Monthly
Interest Distributable Amount for the immediately preceding Distribution Date
exceeds (b) the sum of (i) the aggregate amount actually paid to the Holders of
the Class AIO Certificates on such immediately preceding Distribution Date
pursuant to Section 4.01(a)(ii)(B)(x) hereof and (ii) the amount actually
transferred to the Supplemental Interest Trust on such immediately preceding
Distribution Date pursuant to Section 4.01(a)(ii)(B)(y)

                                       5
<PAGE>

hereof, plus interest on such sum, at the Class AIO Pass-Through Rate for the
related Accrual Period.

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

         "Class B Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the payment of the Class
M-2 Principal Distribution Amount on such Distribution Date) (iv) the
Certificate Principal Balance of the Class M-3 Certificates (after taking into
account the payment of the Class M-3 Principal Distribution Amount on such
Distribution Date) and (v) the Certificate Principal Balance of the Class B
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 96.50% and (ii) the Pool Balance as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the Pool Balance as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $1,550,000.

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

         "Class I Monthly Interest Distributable Amount": On each Distribution
Date commencing on the first Distribution Date through and including the
Distribution Date in November 2003, an amount equal to the (positive) product of
(x) 3.7788% minus LIBOR (on an actual/360 basis), and (y) the lesser of the
aggregate Certificate Pricipal Balance of the Underwritten Certificates and
Class B Certificates (if such Class B Certificates are held by an entity
unrelated to the seller) and a $200,000,000 notional amount; for the
Distribution Date in December 2003, an amount equal to the (positive) product of
(x) 3.8590% minus LIBOR (on an actual/360 basis), and (y) the lesser of the
aggregate Certificate Pricipal Balance of the Underwritten Certificates and
Class B Certificates (if such Class B Certificates are held by an entity
unrelated to the seller) and a $175,000,000 notional amount; for the
Distribution Date in January 2004 through and including May 2004, an amount
equal to the (positive) product of (x) 3.8606% minus LIBOR (on an actual/360
basis), and (y) the lesser of the aggregate Certificate Pricipal Balance of the
Underwritten Certificates and Class B Certificates (if such Class B Certificates
are held by an entity unrelated to the seller) and a $150,000,000 notional
amount; for the Distribution Date in June 2004 through and including November
2004, an amount equal to the (positive) product of (x) 4.1443% minus LIBOR (on
an actual/360 basis), and (y) the lesser of the aggregate Certificate Pricipal
Balance of the Underwritten Certificates and Class B Certificates (if such Class
B Certificates are held by an entity unrelated to the seller) and a $75,000,000
notional amount; for the Distribution Date in December 2004, an amount equal to
the (positive) product of (x) 4.3114% minus LIBOR (on an actual/360 basis), and
(y) the lesser of the aggregate Certificate Pricipal Balance of the Underwritten
Certificates and Class B Certificates (if such Class B Certificates are held by
an entity unrelated to the seller) and $50,000,000 notional amount; for the
Distribution Date in January 2005 through and including the final Distribution
Date, which shall

                                       6
<PAGE>

be the Distribution Date in May 2005, an amount equal to the (positive) product
of (x) 4.1350% minus LIBOR (on an actual/360 basis), and (y) the lesser of the
aggregate Certificate Pricipal Balane of the Underwritter Certificates and Class
B Certificates (if such Class B Certificates are held by an entity unrelated to
the seller) and a $25,000,000 notional amount. In the event that the Class I
Monthly Interest Distributable Amount is not a positive number, no payment will
be made in respect of the Class I Monthly Interest Distributable Amount.

         "Class I Termination Date": May 25, 2005.

         "Class M-1 Certificate": Any one of the Class M-1 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-3, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-1 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date) and (ii) the Certificate Principal Balance of the Class M-1 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 86.50% and (ii) the Pool Balance as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the Pool Balance as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $1,550,000.

         "Class M-2 Certificate": Any one of the Class M-2 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-4, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-2 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date) and (iii) the Certificate Principal Balance of
the Class M-2 Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) 91.00% and (ii) the Pool Balance as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the Pool Balance as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) minus $1,550,000.

                                       7
<PAGE>

         "Class M-3 Certificate": Any one of the Class M-3 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-5, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-3 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the payment of the Class
M-2 Principal Distribution Amount on such Distribution Date) and (iv) the
Certificate Principal Balance of the Class M-3 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 94.50% and
(ii) the Pool Balance as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) and (B) the Pool Balance as of
the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) minus $1,550,000.

         "Class O Certificate": Any one of the Class O Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-9, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

         "Class P Certificate": Any one of the Class P Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-10, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

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

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

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

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

                                       8
<PAGE>

         "Closing Date": June 27, 2002.

         "Closing Date Mortgage Loans": The Initial Mortgage Loans plus the
Additional Mortgage Loans.

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

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

         "Commission": The Securities and Exchange Commission.

         "Company": NovaStar Mortgage Funding Corporation, a Delaware
corporation, and its successors and assigns.

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

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

         "Converted Loan Purchase Agreement": The Converted Loan Purchase
Agreement, dated as of June 1, 2002, among the Converted Loan Purchaser, the
Certificate Administrator, the Trustee and the Servicer.

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

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

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

         "Corporate Trust Office": With respect to the Trustee, the principal
corporate trust office at which at any particular time its corporation trust
business shall be administered, which office at the date of execution of this
Agreement is located at 450 West 33rd Street, 14th Floor, New York, New York
10001, Attention: Institutional Trust Services, NovaStar Mortgage Funding Trust,
Series 2002-2. With respect to the Certificate Administrator, the Paying Agent
and the Certificate Registrar, the principal corporate trust office at which at
any particular time its corporate trust business shall be administered, which
office at the date of the execution of this instrument is located at 401 S.
Tryon Street, NC 1179, 12th Floor, Charlotte, North Carolina 28288-1179,
Attention: Structured Finance Trust Services (NovaStar Mortgage Funding Trust,
Series 2002-2).

                                       9
<PAGE>

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

         "Crossover Date": The earlier to occur of (i) the Distribution Date on
which the aggregate certificate balance of the Class A Certificates is reduced
to zero; and (ii) the later to occur of (x) the Distribution Date occurring in
the 37th period and (y) the first Distribution Date on which the Credit
Enhancement Percentage for the Class A Certificates (calculated for this purpose
only after taking into account distributions of principal on the mortgage loans
but prior to the principal distributions to the certificates) is greater than or
equal to 19%.

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

         "Cut-off Date": With respect to each Closing Date Mortgage Loan, the
later of (i) the date of origination of such Mortgage Loan or (ii) June 1, 2002.

         "Cut-off Date Aggregate Principal Balance": With respect to the
Mortgage Pool, the aggregate of the Cut-off Date Principal Balances of the
Closing Date Mortgage Loans of $310,000,100.

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

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

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

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

         "Definitive Certificates": The Class O, Class I and Class R
Certificates, and such other Classes of Certificates as become Definitive
Certificates pursuant to Section 5.02(c) hereof.

                                       10
<PAGE>

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

         "30-Day Delinquency Percentage": As of the last day of any Due Period,
the percentage equivalent of a fraction, (i) the numerator of which equals the
aggregate Principal Balance of the Mortgage Loans that are 30 or more days
delinquent, in foreclosure or converted to REO Properties as of such last day of
such Due Period, and (ii) the denominator of which is the Pool Balance as of the
last day of such Due Period.

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

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

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

         "Depository": The initial Depository shall be The Depository Trust
Company, whose nominee is Cede & Co., or any other organization registered as a
"clearing agency" pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. The Depository shall initially be the registered Holder of the
Book-Entry Certificates. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of
the State of New York.

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

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

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

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

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

                                       11
<PAGE>

         "Distribution Date": The 25th day of any calendar month, or if such
25th day is not a Business Day, the Business Day immediately following such 25th
day, commencing in July, 2002.

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

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

         "Eligible Account": An account that is either: (A) a segregated account
or accounts maintained with an institution whose deposits are insured by the
FDIC, the unsecured and uncollateralized long-term debt obligations of which
institution shall be rated AA or higher by Standard & Poor's and Aa2 or higher
by Moody's and in the highest short-term rating category by each of the Rating
Agencies, and which is (i) a federal savings and loan association duly
organized, validly existing and in good standing under the federal banking laws,
(ii) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (iii) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws, or (iv) a principal subsidiary of a bank holding company or (B) a
segregated trust account or accounts maintained with the trust department of a
federal or state chartered depository institution acceptable to each Rating
Agency, having capital and surplus of not less than $100,000,000, acting in its
fiduciary capacity.

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

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

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

         (iii) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (i) above and entered into with a
depository institution or trust company (acting as a principal) rated "A-1+" or
higher by S&P and A2 or higher by Moody's; provided, however, that collateral
transferred pursuant to such repurchase obligation must (A) be valued daily at
current market price plus accrued interest, (B) pursuant to such valuation,
equal,

                                       12
<PAGE>

at all times, 105% of the cash transferred in exchange for such collateral and
(C) be delivered in such a manner as to accomplish perfection of a security
interest in the collateral by possession of certificated securities.

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

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

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

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

         provided, however, that each such instrument shall be acquired in an
arm's-length transaction and no such instrument shall be an Eligible Investment
if it represents, either (1) the right to receive only interest payments with
respect to the underlying debt instrument or (2) the right to receive both
principal and interest payments derived from obligations underlying such
instrument and the principal and interest payments with respect to such
instrument provide a yield to maturity greater than 120% of the yield to
maturity at par of such underlying obligations; provided, further, however, that
each such instrument acquired shall not be acquired at a price in excess of par.
The Trustee or Certificate Administrator may purchase from or sell to itself or
an affiliate, as principal or agent, the Eligible Investments listed above.

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

                                       13
<PAGE>

Mortgage Loan at the time of substitution; (v) have a remaining term to stated
maturity not greater than (and not more than one year less than) that of the
Deleted Mortgage Loan; (vi) not be 30 days or more delinquent; (vii) not be a
negative amortization loan; (viii) have a lien priority equal to or superior to
the lien priority of the Deleted Mortgage Loan; and (ix) be a Qualified
Replacement Mortgage.

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

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

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

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

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

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

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       15
<PAGE>

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

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

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

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

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

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

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

         "Liquidated Mortgage Loan": With respect to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in Article III hereof, as of the end of
the related Prepayment Period that substantially

                                       16
<PAGE>

all Liquidation Proceeds which it reasonably expects to recover with respect to
the disposition of the related Mortgaged Property or REO Property have been
recovered.

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

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

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

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

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

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

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

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

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

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

         "Maximum Collateral Amount": The aggregate Principal Balance as of the
Cut-off Date of the Closing Date Mortgage Loans.

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

                                       17
<PAGE>

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

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

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

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

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

         "MI Insurer": Each of (i) PMI Mortgage Insurance Co., an Arizona
mortgage insurance company and (ii) Mortgage Guaranty Insurance Corporation, a
Wisconsin private mortgage insurance company, and their successors and assigns.

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

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

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

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

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

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

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

                                       18
<PAGE>

adjustment to such amortization schedule by reason of any bankruptcy, other than
a Deficient Valuation, or similar proceeding or any moratorium or similar waiver
or grace period).

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

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

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

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

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

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

         (iii) the Mortgage Rate at origination;

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

         (v) the maturity date;

         (vi) the original principal balance;

         (vii) the first Distribution Date;

         (viii) the type of Mortgaged Property;

         (ix) the Monthly Payment in effect as of the Cut-off Date;

         (x) the Principal Balance as of the Cut-off Date;

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

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

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

         (xiv) the occupancy status;

                                       19
<PAGE>

         (xv) the purpose of the Mortgage Loan;

         (xvi) the Appraised Value of the Mortgaged Property;

         (xvii) the original term to maturity;

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

         (xix) the Loan-to-Value Ratio;

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

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

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

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

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

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

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

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

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

         "Mortgage Pool": The pool of Mortgage Loans, identified on Exhibit B
from time to time, and any REO Properties acquired in respect thereof.

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

         "Mortgagor": The obligor on a Mortgage Note.

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

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

                                       20
<PAGE>

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

         "Net WAC": The weighted average interest rate on the Mortgage Loans,
net of Administrative Fees.

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

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

         "Notional Amount Test Event": Occurs when the Certificate Administrator
determines, pursuant to Section 4.03(f), that the scheduled notional amount that
would be used to calculate the Class I Monthly Interest Distributable Amount
exceeds the aggregate Certificate Principal Balance of the Underwritten
Certificates (and the Class B Certificates if held by an entity unrelated to the
Seller) on such Distribution Date.

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

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

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

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

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

         "Original Value": Except in the case of a refinanced Mortgage Loan, the
lesser of the Appraised Value or sales price of the Mortgaged Property at the
time a Mortgage Loan is closed, and for a refinanced Mortgage Loan, the Original
Value is the value of such property set forth in an appraisal acceptable to the
Servicer.

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

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

                                       21
<PAGE>

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

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

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

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

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

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

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

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

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

                                       22
<PAGE>

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

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

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

         "Principal Remittance Amount": With respect to any Distribution Date,
the sum of (i) each scheduled payment of principal collected or advanced on the
Mortgage Loans by the Servicer that were due during the related Due Period, (ii)
the principal portion of all partial and full Principal Prepayments of the
Mortgage Loans applied by the Servicer during the related Prepayment Period,
(iii) the principal portion of all related Net Liquidation Proceeds and
Insurance Proceeds received during such Prepayment Period, (iv) that portion of
the Repurchase Price, representing principal of any repurchased Mortgage Loan,
deposited to the Collection Account during such Prepayment Period, (v) the
principal portion of any related Substitution Adjustment Amounts deposited in
the Collection Account during such Prepayment Period, and (vi) on the
Distribution Date on which the Trust Fund is to be terminated pursuant to
Section 11.01, that portion of the Termination Price, in respect of principal.

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

         "Prospectus Supplement": That certain Prospectus Supplement dated June
17, 2002 relating to the public offering of the Offered Certificates.

         "Purchase Agreement": The agreement, dated as of June 1, 2002, between
the Seller, the Company, the Trustee and the Certificate Administrator,
regarding the transfer of the Mortgage Loans by the Seller to or at the
direction of the Company.

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

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

                                       23
<PAGE>

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

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

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

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

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

         "Reference Banks": Deutsche Bank, Barclay's Bank PLC, The Bank of
Tokyo-Mitsubishi, LTD. and National Westminster Bank PLC and their successors in
interest; provided that if any of the foregoing banks are not suitable to serve
as a Reference Bank, then any leading

                                       24
<PAGE>

banks selected by the Certificate Administrator which are engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) not controlling, under the
control of or under common control with the Seller or any Affiliate thereof,
(iii) whose quotations appear on the Reuters Screen LIBO Page on the relevant
Interest Determination Date and (iv) which have been designated as such by the
Certificate Administrator.

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

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

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

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

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

         "REMIC Available Funds": As to each Distribution Date, an amount equal
to the amount on deposit in the Distribution Account, representing the sum of
(i) the aggregate amount of scheduled payments on the related Mortgage Loans due
on the related Due Date and received on or prior to the related Determination
Date, (ii) miscellaneous fees and collections, including prepayment penalties
with respect to the Mortgage Loans (but excluding late fees), (iii) any
unscheduled payments and receipts, including Mortgagor prepayments on the
related Mortgage Loans, received during the related Prepayment Period and
proceeds of repurchases, and adjustments in the case of substitutions and
terminations, Net Liquidation Proceeds, Insurance Proceeds, MI Insurance
Proceeds and proceeds from the sale of Converted Mortgage Loans, and (iv) all
Advances made for such Distribution Date in respect of the related Mortgage
Loans.

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

         "REMIC Available Funds Cap Shortfall Amount": With respect to any
Distribution Date, Class of Underwritten Certificates and the Class B
Certificates, the excess, if any, of (1) the interest due on such Class
calculated using the Formula Rate applicable to

                                       25
<PAGE>

such Class (less any Net Prepayment Interest Shortfalls and Relief Act
Shortfalls allocable to that Class) over (2) the interest due on such Class,
calculated using the REMIC Pass-Through Rate applicable to such Class (less any
Net Prepayment Interest Shortfalls and Relief Act Shortfalls allocable to that
Class).

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

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

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

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

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

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

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

         "REMIC Interests Sale Agreement": The REMIC Interests Sale Agreement,
dated as of June 1, 2002, between the Company and NRFC.

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

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

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

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

                                       26
<PAGE>

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

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

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

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

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

         "REMIC Trust": The segregated pool of assets containing of the Trust
Fund, but excluding the Supplemental Interest Account.

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

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

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

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

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

         "Repurchase Event": With respect to any Mortgage Loan, either (i) a
discovery that, as of the Closing Date the related Mortgage was not a valid lien
on the related Mortgaged Property subject only to (A) the lien of real property
taxes and assessments not yet due and payable, (B) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of recording of such Mortgage and such other permissible title
exceptions as are permitted and (C) other matters to which like properties are
commonly subject which do not

                                       27
<PAGE>

materially adversely affect the value, use, enjoyment or marketability of the
related Mortgaged Property or (ii) with respect to any Mortgage Loan as to which
the Seller delivers an affidavit certifying that the original Mortgage Note has
been lost or destroyed, a subsequent default on such Mortgage Loan if the
enforcement thereof or of the related Mortgage is materially and adversely
affected by the absence of such original Mortgage Note.

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

         "Request for Release": A request for release in substantially the form
of Exhibit E hereto.

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

         "Residual Interest": The sole Class of "residual interests" in a REMIC
within the meaning of Section 860G(a)(2) of the Code.

         "Responsible Officer": With respect to the Trustee or the Certificate
Administrator, any officer thereof with direct responsibility for the
administration of this Agreement and also, with respect to a particular matter,
any other officer to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject.

         "Rolling 60-Day Delinquency Percentage": For any Distribution Date, the
average of the 60-Day Delinquency Percentages for the Mortgage Loans as of the
last day of each of the three (or 1 and 2 in the case of the first two
Distribution Dates, as applicable) most recently ended Due Periods.

         "Rolling 90-Day Delinquency Percentage": For any Distribution Date, the
average of the 90-Day Delinquency Percentages for the Mortgage Loans as of the
last day of each of the three (or 1 and 2 in the case of the first two
Distribution Dates, as applicable) most recently ended Due Periods.

         "Seller": NovaStar Mortgage, Inc., a Virginia corporation, and its
successors and assigns.

         "Servicer": NovaStar Mortgage, Inc., a Virginia corporation, and its
successors and assigns.

                                       28
<PAGE>

         "Servicer Remittance Date": The third Business Day prior to each
Distribution Date.

         "Servicing Account": The separate trust account created and maintained
by the Servicer or each Subservicer with respect to the Mortgage Loans or REO
Property, which shall be an Eligible Account, for collection of taxes,
assessments, insurance premiums and comparable items as described in Section
3.08 hereof.

         "Servicing Advances": All customary, reasonable and necessary "out of
pocket" costs and expenses incurred in connection with a default, delinquency or
other unanticipated event in the performance by the Servicer of its servicing
obligations, including, without duplication, but not limited to, the cost of (i)
the preservation, restoration and protection of a Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of any REO Property, (iv) compliance with the
obligations under Section 3.13 hereof, and (v) expenses incurred in connection
with any Mortgage Loan being registered on the MERS System.

         "Servicing Default": The meaning assigned in Section 7.01 hereof.

         "Servicing Fee": With respect to the Mortgage Loans and any
Distribution Date, the product of (i) the Servicing Fee Rate divided by 12 and
(ii) the Pool Balance as of the first day of the related Due Period.

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

         "Servicing Officer": Any officer of the Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans whose
name and specimen signature appear on a list of servicing officers furnished to
the Certificate Administrator by the Servicer or a Subservicer, as such list may
be amended from time to time.

         "Servicing Transfer Costs": Reasonable and necessary costs and expenses
incurred, by or on behalf of the Trustee, Certificate Administrator or successor
Servicer in connection with the transfer of servicing in the event of
termination of the Servicer as servicer hereunder and the resulting transfer to
the successor Servicer.

         "Standard & Poor's": Standard & Poor's Ratings Services, a division of
The McGraw Hill Companies, Inc., or its successor in interest.

         "Startup Day":  As defined in Section 10.01(a) hereof.

         "Statistical Calculation Date":  May 1, 2002.

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

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

                                       29
<PAGE>

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

         "Subservicing Fee": With respect to each Mortgage Loan and any
Distribution Date, the portion of the Servicing Fee paid to a Subservicer.

         "Substitution Adjustment Amount":  As defined in Section 2.03 hereof.

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

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

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

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

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

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

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

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

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

                                       30
<PAGE>

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

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

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

         "Swap Counterparty": Shall mean each of Credit Suisse First Boston
International and Morgan Stanley Capital Services Inc., as applicable.

         "Tax Matters Person": The tax matters person appointed pursuant to
Section 10.01(e) hereof.

         "Tax Returns": The federal income tax return on Internal Revenue
Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return, including Schedule Q thereto, Quarterly Notice to Residual Interest
Holders of the REMIC Taxable Income or Net Loss Allocation, or any successor
forms, to be filed by the Certificate Administrator, as agent of the Trustee, on
behalf of each REMIC, together with any and all other information reports or
returns that may be required to be furnished to the Certificateholders or filed
with the Internal Revenue Service or any other governmental taxing authority
under any applicable provisions of federal, state or local tax laws.

         "Termination Price": As defined in Section 11.01(a) hereof.

         "Telerate Page 3750": The display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and "Reference
Banks" means leading banks selected by the Certificate Administrator and engaged
in transactions in European deposits in the international Eurocurrency market.

         "Treasury Regulations": Regulations, including proposed or temporary
Regulations, promulgated under the Code. References herein to specific
provisions of proposed or temporary regulations shall include analogous
provisions of final Treasury Regulations or other successor Treasury
Regulations.

                                       31
<PAGE>

         "Trigger Event": A Trigger Event is in effect with respect to any
Distribution Date if either (i) the Rolling 60-Day Delinquency Average exceeds
15% of the Pool Balance at the end of the related Due Period, or (ii) the
Cumulative Loss Percentage for such Distribution Date is greater than the
applicable percentage set forth below with respect to such Distribution Date:

       DISTRIBUTION DATE OCCURRING IN:            PERCENTAGE
       -------------------------------            ----------

                 July 2005                           1.35%
                 August 2005                         1.38%
                 September 2005                      1.42%
                 October 2005                        1.45%
                 November 2005                       1.48%
                 December 2005                       1.52%
                 January 2006                        1.55%
                 February 2006                       1.58%
                 March 2006                          1.62%
                 April 2006                          1.65%
                 May 2006                            1.68%
                 June 2006                           1.72%
                 July 2006                           1.75%
                 August 2006                         1.77%
                 September 2006                      1.80%
                 October 2006                        1.82%
                 November 2006                       1.84%
                 December 2006                       1.86%
                 January 2007                        1.89%
                 February 2007                       1.91%
                 March 2007                          1.93%
                 April 2007                          1.95%
                 May 2007                            1.98%
                 June 2007 and thereafter            2.00%

         "Trust": NovaStar Mortgage Funding Trust 2002-2, the trust created
hereunder.

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

         "Trustee": JPMorgan Chase Bank, a New York banking corporation, and its
successors and assigns or any successor Agreement trustee appointed pursuant to
the terms of the Agreement.

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

                                       32
<PAGE>

         "Underwriting Agreement": The Underwriting Agreement dated June 17,
2002 among the Underwriters, the Company and the Seller with respect to the
offer and sale of the Underwritten Certificates, as the same may be amended from
time to time.

         "Underwriting Guidelines": The underwriting guidelines set forth in the
Prospectus Supplement under the heading "Description of the Mortgage
Pool--Underwriting Standards for Mortgage Loans".

         "Underwritten Certificates" means, collectively, the Class A
Certificates and Mezzanine Certificates.

         "United States Person" or "U.S. Person": A citizen or resident of the
United States, a corporation, partnership or other entity treated as a
corporation or partnership for federal income tax purposes (other than a
partnership that is not treated as a U.S. Person pursuant to any applicable
Treasury regulations) created or organized in, or under the laws of, the United
States, any state thereof or the District of Columbia, or an estate the income
of which from sources without the United States is includible in gross income
for United States federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. The term "United States"
shall have the meaning set forth in Section 7701 of the Code.

         "Unpaid Interest Shortfall Amount": With respect to each Class of
Underwritten Certificates and the Class B Certificates and (i) the first
Distribution Date, zero, and (ii) any Distribution Date after the first
Distribution Date, the sum of (a) the Unpaid Interest Shortfall Amount for that
Class as of the prior Distribution Date, (b) the excess of the amount of the
REMIC Current Interest due with respect to that Class on the prior Distribution
Date over the amount actually distributed to the Holders of that Class on
account of the REMIC Current Interest on the prior Distribution Date and (c)
interest on the sum of (a) and (b) to the extent permitted by law, at the
Formula Rate for such Class for the related Accrual Period.

         "Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. At all times the Class A
Certificates, the Mezzanine Certificates and Class B Certificates shall have 95%
of the Voting Rights (allocated among the Holders of the Class A Certificates
and the Mezzanine Certificates in proportion to the then outstanding Certificate
Principal Balances of their respective Certificates), the Class AIO Certificates
shall have 1% of the Voting Rights, the Class O Certificates shall have 1% of
the Voting Rights, the Class I Certificates shall have 1% of the Voting Rights,
the Class P Certificates shall have 1% of the Voting Rights and the Class R
Certificates shall have 1% of the Voting Rights. The Voting Rights allocated to
any Class of Certificates (other than the Class AIO Certificates, Class O
Certificates, Class P Certificates, Class I Certificates and the Class R
Certificates) shall be allocated among all Holders of each such Class in
proportion to the outstanding Certificate Principal Balance of such Certificates
and the Voting Rights allocated to the Class AIO Certificates, Class O
Certificates, Class I Certificates, Class P Certificates and the Class R
Certificates shall be allocated among all Holders of each such Class in
proportion to such Holders' respective Percentage Interest; provided, however
that when none of the Regular

                                       33
<PAGE>

Certificates are outstanding, 100% of the Voting Rights shall be allocated among
Holders of the Class R Certificates in accordance with such Holders' respective
Percentage Interests in the Certificates of such Class.

         "Weighted Average Mortgage Rate": With respect to any Distribution
Date, the weighted average of the Mortgage Rates of the Mortgage Loans (weighted
by the Principal Balances of the Mortgage Loans).

                                       34
<PAGE>

                                                                     Exhibit A-1

                          Form of Class A-1 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-1 CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

No.:  A-1-1                  Date: June 27, 2002   CUSIP:  66987XBM6

Original Principal Balance:  Registered Owner:     Final Scheduled Distribution
$200,000,000                 CEDE & CO.            Date: January 25, 2033

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Group I Mortgage Loan identified on the Mortgage
Loan Schedule attached as Exhibit B to that certain Pooling and Servicing
Agreement dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by
and among NovaStar Mortgage Funding Corporation, as the company (the "Company"),
JPMorgan Chase Bank, as trustee (the "Trustee"), Wachovia Bank, National
Association, as the certificate administrator (the "Certificate Administrator"),
and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as seller (the
"Seller"), including the related Cut-off Date Principal Balance, all interest
accruing thereon on and after the Cut-off Date and all collections in respect of
interest and principal due after the Cut-off Date; (ii) property

<PAGE>

which secured each such Mortgage Loan and which has been acquired by foreclosure
or deed in lieu of foreclosure; (iii) the Company's interest in any insurance
policies in respect of such Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. Such assignment
includes all interest and principal due to the Company or the Servicer after the
Cut-off Date with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class A-1 Certificates on June 27,
2002 which aggregate amount was $200,000,000. The owner hereof is entitled to
principal payments on each Distribution Date, which will fully amortize such
Original Principal Amount over the period from the date of initial delivery
hereof to the final Distribution Date of the Class A-1 Certificates. Therefore,
the actual outstanding principal amount of this Certificate, on any date
subsequent to July 25, 2002 (the first Distribution Date) will be less than the
Original Principal Amount set forth above.

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

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

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

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class A-1 Certificates (the "Class A-1 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-2 Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates." Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                                      A-1-2
<PAGE>

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class A-1 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to the distribution
described in Article IV of the Pooling and Servicing Agreement, relating to such
Distribution Date. Distributions will be made in immediately available fluids to
such owners, by wire transfer or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register.

         Each owner of record of a Class A-1 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class A-1 Certificates. The Percentage
Interest of each Class A-1 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class A-1 Certificate by $200,000,000.

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

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

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

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

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

                                      A-1-3
<PAGE>

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and the REMIC I, REMIC II and REMIC III pursuant to the Pooling and
Servicing Agreement. In addition, under certain circumstances relating to the
qualification of either the Master REMIC or any of REMIC I, REMIC II or REMIC
III as a REMIC under the Code, the Mortgage Loans may be sold, thereby affecting
the early retirement of the Certificates. Notwithstanding the foregoing, in no
event shall the Trust hereby continue beyond the expiration of 21 years from the
death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date of
the Pooling and Servicing Agreement.

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

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

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

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

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

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and

                                      A-1-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                      A-1-5
<PAGE>

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

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

                                   By: ________________________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: ___________________________________
    Name:
    Title:

                                      A-1-6
<PAGE>

                                                                     Exhibit A-2

                          Form of Class A-2 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-2 CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

No.:  A-2-1                   Date:  June 27, 2002 CUSIP:  66987XBN4

Original Principal Balance:   Registered Owner:    Final Scheduled Distribution
$80,550,000                   CEDE & CO.           Date: January 25, 2033

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Group II Mortgage Loan identified on the
Mortgage Loan Schedule attached as Exhibit B to that certain Pooling and
Servicing Agreement dated as of June 1, 2002 (the "Pooling and Servicing
Agreement") by and among NovaStar Mortgage Funding Corporation, as the company
(the "Company"), JPMorgan Chase Bank, as trustee (the "Trustee"), Wachovia Bank,
National Association, as the certificate administrator (the "Certificate
Administrator"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), including the related Cut-off Date Principal Balance, all
interest accruing thereon on and after the Cut-off Date and all collections in
respect of interest and principal due after the Cut-off Date; (ii) property
which secured each such Mortgage Loan and which has been acquired by foreclosure
or deed in

                                      A-8
<PAGE>

lieu of foreclosure; (iii) the Company's interest in any insurance policies in
respect of such Mortgage Loans; (iv) all proceeds of any of the foregoing; (v)
the rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust Fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class A-2 Certificates on June 27,
2002 which aggregate amount was $80,550,000. The owner hereof is entitled to
principal payments on each Distribution Date, which will fully amortize such
Original Principal Amount over the period from the date of initial delivery
hereof to the final Distribution Date of the Class A-2 Certificates. Therefore,
the actual outstanding principal amount of this Certificate, on any date
subsequent to July 25, 2002 (the first Distribution Date) will be less than the
Original Principal Amount set forth above.

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

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

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

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class A-2 Certificates (the "Class A-2 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                                      A-2-2
<PAGE>

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class A-2 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to the distribution
described in Article IV of the Pooling and Servicing Agreement, relating to such
Distribution Date. Distributions will be made in immediately available funds to
such owners, by wire transfer or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register.

         Each owner of record of a Class A-2 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class A-2 Certificates. The Percentage
Interest of each Class A-2 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class A-2 Certificate by $80,550,000.

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

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

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

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

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

                                      A-2-3
<PAGE>

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II or REMIC III as a REMIC under the Code, the Mortgage Loans may be sold,
thereby affecting the early retirement of the Certificates. Notwithstanding the
foregoing, in no event shall the Trust hereby continue beyond the expiration of
21 years from the death of the last survivor of the descendants of Joseph P.
Kennedy, the late ambassador of the United States to the Court of St. James,
living on the date of the Pooling and Servicing Agreement.

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

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

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

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

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

                                      A-2-4
<PAGE>

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

                                      A-2-5
<PAGE>

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

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

                                      By: ________________________________
                                          Name:
                                          Title:

Trustee Authentication

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

By: ________________________________________
    Name:
    Title:

                                      A-2-6
<PAGE>

                                                                     Exhibit A-3

                          Form of Class M-1 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-1 CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

No.:  M-1-1                  Date:  June 27, 2002  CUSIP: 66987XBP9
Original Principal Balance:  Registered Owner:     Final Scheduled Distribution
$8,525,000                   CEDE & CO.            Date: January 25, 2033
Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company, (the "Company"), JPMorgan
Chase Bank, as trustee (the "Trustee"), Wachovia Bank, National Association, as
the certificate administrator (the "Certificate Administrator"), and NovaStar
Mortgage, Inc. as servicer (the "Servicer") and as seller (the "Seller"),
including the related Cut-off Date Principal Balance, all interest accruing
thereon on and after the Cut-off Date and all collections in respect of interest
and principal due after the Cut-off Date; (ii) property which secured each such
Mortgage Loan and which has been acquired by foreclosure or deed in lieu of
foreclosure; (iii) the Company's interest in any insurance policies in respect
of the Mortgage Loans; (iv) all proceeds of any of the foregoing; (v) the rights
of the Company under the Purchase Agreement and (vi) all other assets included
or to be included in the Trust fund. Such

<PAGE>

assignment includes all interest and principal due to the Company or the
Servicer after the Cut-off Date with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class M-1 Certificates on June 27,
2002 which aggregate amount was $8,525,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-1
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to July 25, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class M-1 Certificates (the "Class M-1 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

                                     A-3-2
<PAGE>

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class M-1 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

         Each owner of record of a Class M-1 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class M-1 Certificates. The Percentage
Interest of each Class M-1 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class M-1 Certificate by $8,525,000.

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

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

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

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

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

                                      A-3-3
<PAGE>

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

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

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

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and

                                     A-3-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-3-5
<PAGE>

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

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

                                     By: _____________________________________
                                         Name:
                                         Title:

Trustee Authentication

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

By: _____________________________________
    Name:
    Title:

                                     A-3-6
<PAGE>

                                                                     Exhibit A-4

                          Form of Class M-2 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-2 CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

No.:  M-2-1                  Date:  June 27, 2002   CUSIP: 66987XBQ7

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$6,975,000                   CEDE & CO.             Date: January 25, 2033

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (I) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the

<PAGE>

foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust fund. Such assignment
includes all interest and principal due to the Company or the Servicer after the
Cut-off Date with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class M-2 Certificates on June 27,
2002 which aggregate amount was $6,975,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-2
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to July 25, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class M-2 Certificates (the "Class M-2 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-1 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

                                     A-4-2
<PAGE>

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class M-2 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

         Each owner of record of a Class M-2 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class M-2 Certificates. The Percentage
Interest of each Class M-2 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class M-2 Certificate by $6,975,000.

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

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

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

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

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

                                     A-4-3
<PAGE>

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

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

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

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and

                                     A-4-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-4-5
<PAGE>

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

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

                                   By: _________________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: _______________________________
    Name:
    Title:

                                     A-4-6
<PAGE>

                                                                     Exhibit A-5
                          Form of Class M-3 Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-3 CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

No.:  M-3-1                  Date:  June 27, 2002   CUSIP: 66987XBR5

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$5,425,000                   CEDE & CO.             Date:January 25, 2033

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the

<PAGE>

foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust fund. Such assignment
includes all interest and principal due to the Company or the Servicer after the
Cut-off Date with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class M-3 Certificates on June 27,
2002 which aggregate amount was $5,425,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-3
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to July 25, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class M-3 Certificates (the "Class M-3 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

                                     A-5-2
<PAGE>

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class M-3 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

         Each owner of record of a Class M-3 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class M-3 Certificates. The Percentage
Interest of each Class M-3 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class M-3 Certificate by $5,425,000.

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

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

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

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

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

                                     A-5-3
<PAGE>

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

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

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

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and

                                     A-5-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-5-5
<PAGE>

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

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

                                   By: _________________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: _______________________________
    Name:
    Title:

                                     A-5-6
<PAGE>

                                                                     Exhibit A-6

                           Form of Class B Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS B CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

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

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

<PAGE>

No.:  B-1                    Date:  June 27, 2002   CUSIP: 66997WAM9

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$3,100,000                   Cede & Co.             Date: January 25, 2033

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class B Certificates on June 27, 2002
which aggregate amount was $3,100,000. The owner hereof is entitled to principal
payments on each Distribution Date, as hereinafter described, which will fully
amortize such Original Principal Amount over the period from the date of initial
delivery hereof to the final Distribution Date of the Class B Certificates.
Therefore, the actual outstanding principal amount of this Certificate, on any
date subsequent to July 25, 2002 (the first Distribution Date) will be less than
the Original Principal Amount set forth above.

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

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

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

                                     A-6-2
<PAGE>

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class B Certificates (the "Class B Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class B Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

         Each owner of record of a Class B Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class B Certificates. The Percentage
Interest of each Class B Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class B Certificate by $3,100,000.

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

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

         This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or

                                     A-6-3
<PAGE>

any of their subsidiaries and affiliates and are not insured or guaranteed by
the Federal Deposit Insurance Corporation, the Government National Mortgage
Association, or any other governmental agency. This Certificate is limited in
right of payment to certain collections and recoveries relating to the Mortgage
Loans and amounts on deposit in the Accounts (except as otherwise provided in
the Pooling and Servicing Agreement) all as more specifically set forth
hereinabove and in the Pooling and Servicing Agreement.

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

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

                                     A-6-4
<PAGE>

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

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

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

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

                                     A-6-5
<PAGE>

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

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

                                   By: ______________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: ______________________________
    Name:
    Title:

                                     A-6-6
<PAGE>

                                                                     Exhibit A-7

                           Form of Class I Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS I CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

         Unless this certificate is presented by an authorized representative of
The Depository Trust Company, a New York corporation ("DTC"), to the Trust or
its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, JPMorgan Chase Bank, in its capacity as trustee of the NovaStar Mortgage
Funding Trust, Series 2002-2, has an interest herein.

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

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

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

<PAGE>

<TABLE>
<CAPTION>
<S>                                      <C>                                    <C>
No.:  I-1                                Date:  June 27, 2002                   Final Scheduled Distribution
                                                                                Date: May 25, 2005

Percentage Interest:  100%               Registered Owner:
                                         JPMorgan Chase Bank, not in its
                                         individual capacity but solely as
                                         Trustee for the NovaStar Mortgage
                                         Funding Trust, Series 2002-2

</TABLE>
         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

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

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

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

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

                                     A-7-2
<PAGE>

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class I Certificates (the "Class I Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class A-2
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class B Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class I Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

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

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

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

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

                                     A-7-3
<PAGE>

recoveries relating to the Mortgage Loans and amounts on deposit in the Accounts
(except as otherwise provided in the Pooling and Servicing Agreement) all as
more specifically set forth hereinabove and in the Pooling and Servicing
Agreement.

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

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

         As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                     A-7-4
<PAGE>

more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                     A-7-5
<PAGE>

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

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

                                   By: __________________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: __________________________________
    Name:
    Title:

                                     A-7-6
<PAGE>

                                                                     Exhibit A-8

                          Form of Class AIO Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS AIO CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

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

No.:  AIO-1                Date:  June 27, 2002    CUSIP: 66987XBS3

Notional Amount:           Registered Owner:       Final Scheduled Distribution
                           Cede & Co.              Date: January 25, 2033
$310,000,000

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to

<PAGE>

that certain Pooling and Servicing Agreement dated as of June 1, 2002 (the
"Pooling and Servicing Agreement") by and among NovaStar Mortgage Funding
Corporation as the company (the "Company"), the Trustee, Wachovia Bank, National
Association, as the certificate administrator (the "Certificate Administrator"),
and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as seller (the
"Seller"), including the related Cut-off Date Principal Balance, all interest
accruing thereon on and after the Cut-off Date and all collections in respect of
interest and principal due after the Cut-off Date; (ii) property which secured
each such Mortgage Loan and which has been acquired by foreclosure or deed in
lieu of foreclosure; (iii) the Company's interest in any insurance policies in
respect of the Mortgage Loans; (iv) all proceeds of any of the foregoing; (v)
the rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust Fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

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

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

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

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

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

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

                                     A-8-2
<PAGE>

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

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class AIO Certificates (the "Class AIO Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class A-1 Certificates, Class A-2 Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class AIO Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive Class AIO
Distribution Amount relating to such Distribution Date. Distributions will be
made in immediately available funds to such owners, by wire transfer or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register.

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

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

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

                                     A-8-3
<PAGE>

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

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

                                     A-8-4
<PAGE>

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

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

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

                                     A-8-5
<PAGE>

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

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

                                  By: ________________________________
                                      Name:
                                      Title:

Trustee Authentication

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

By: _____________________________
    Name:
    Title:

                                     A-8-6
<PAGE>

                                                                     Exhibit A-9

                           Form of Class P Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS P CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

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

No.:  P-1                     Date: June 27, 2002   CUSIP:  66987XBT1

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

Percentage Interest:  100%

<PAGE>

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

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

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

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

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

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

                                     A-9-2
<PAGE>

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class P Certificates (the "Class P Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class A-1 Certificates, Class A-2 Certificates, Class AIO
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class B Certificates, Class I Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class P Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the Prepayment
Charges relating to such Distribution Date. Furthermore, on the earlier of (i)
the distribution date on which the aggregate certificate principal balance is
reduced to zero, or (ii) the 35th Distribution Date, the owner of the Class P
Certificates on the Record Date will be entitled to the Certificate Principal
Balance on the Class P Certificates. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

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

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

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

                                     A-9-3
<PAGE>

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

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

                                     A-9-4
<PAGE>

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

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

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

                                     A-9-5
<PAGE>

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

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

                                   By: __________________________________
                                       Name:
                                       Title:

Trustee Authentication

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

By: __________________________________
    Name:
    Title:

                                     A-9-6
<PAGE>

                                                                    Exhibit A-10

                           Form of Class O Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS O CERTIFICATES

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

                      NOVASTAR MORTGAGE, INC., as Servicer

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

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

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

No.:  O-1                    Date:  June 27, 2002   Final Scheduled Distribution
                                                    Date: January 25, 2033

Original Principal Balance:  Registered Owner:
$5,425,000                   NovaStar REMIC Financing
                             Corporation
Percentage Interest:  100%

<PAGE>

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

         Each owner of record of a Class O Certificate will be entitled to
certain distributions, as described under Article IV of the Pooling and
Servicing Agreement.

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

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

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

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

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

                                     A-10-2
<PAGE>

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-2, Class O Certificates (the "Class O Certificates") and issued under and
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class A-1 Certificates, Class A-2 Certificates, Class AIO
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class B Certificates, Class I Certificates, Class P Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

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

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class O Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the Class O
Distribution Amount relating to such Distribution Date. Distributions will be
made in immediately available funds to such owners, by wire transfer or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register.

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

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

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

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

                                     A-10-3
<PAGE>

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

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

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

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

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

                                     A-10-4
<PAGE>

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

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

                                     A-10-5
<PAGE>

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

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

                                   By: ______________________________
                                       Name:
                                       Title:

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

By: ____________________________
    Name:
    Title:

                                     A-10-6
<PAGE>

                                                                    Exhibit A-11

                           Form of Class R Certificate

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-2
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS R CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

         (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans held in
the Trust Fund.)

         THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW OF
ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE WITHOUT
SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION WHICH DOES
NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH THE
PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

         NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL BE MADE
TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.:  R-[I/II/III/IV]       Date:  June 27, 2002    Final Scheduled Distribution
                                                     Date: January 25, 2033

Percentage Interest:  100%  Registered Owner:
                            NovaStar REMIC Financing
                            Corporation

<PAGE>

         The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of June 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, Wachovia Bank, National Association, as the certificate administrator
(the "Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

         Each owner of record of a Class R Certificate will be entitled to
certain distributions as described in Section 2.09 of the Pooling and Servicing
Agreement.

         In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

         SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS
"RESIDUAL INTERESTS" IN FOUR "REAL ESTATE MORTGAGE INVESTMENT CONDUITS"
("REMICs") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D
OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

         THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

         TRANSFER OF THIS CLASS R CERTIFICATE IS RESTRICTED AS SET FORTH IN THE
POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS R CERTIFICATE MAY BE
MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION 860 E (5) OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH TERM INCLUDES THE
UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN
GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR INSTRUMENTALITY OF ANY
OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE INSTRUMENTALITIES), ANY COOPERATIVE
ORGANIZATION FURNISHING ELECTRIC ENERGY OR PROVIDING THEREOF SERVICE TO PERSONS
IN RURAL AREAS, OR ANY ORGANIZATION (OTHER THAN A FARMERS' COOPERATIVE) THAT IS
EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX ON
UNRELATED BUSINESS INCOME. NO TRANSFER OF THIS CLASS R

                                     A-11-2
<PAGE>

CERTIFICATE WILL BE REGISTERED BY THE TRUSTEE UNLESS THE PROPOSED TRANSFEREE HAS
DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE PROPOSED
TRANSFEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE CLASS R
CERTIFICATE FOR THE ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF THE FORM
OF AFFIDAVIT REQUIRED OF EACH PROPOSED TRANSFEREE IS ON FILE AND AVAILABLE FROM
THE TRUSTEE.

         A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY GIVE RISE TO
A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN AGENT ACTING
FOR THE TRANSFEREE. A PASS-THRU ENTITY THAT HOLDS THIS CLASS R CERTIFICATE AND
THAT HAS A DISQUALIFIED ORGANIZATION AS A RECORD OWNER IN ANY TAXABLE YEAR
GENERALLY WILL BE SUBJECT TO A TAX FOR EACH SUCH YEAR EQUAL TO THE PRODUCT OF
(A) THE AMOUNT OF EXCESS INCLUSIONS WITH RESPECT TO THE PORTION OF THIS
CERTIFICATE OWNED THROUGH SUCH PASS-THRU ENTITY BY SUCH DISQUALIFIED
ORGANIZATION AND (B) THE HIGHEST MARGINAL FEDERAL TAX RATE ON CORPORATIONS. FOR
PURPOSES OF THE PRECEDING SENTENCE, THE TERM "PASS-THRU" ENTITY INCLUDES
REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, COMMON TRUST
FUNDS, PARTNERSHIPS, TRUSTS, ESTATES, COOPERATIVES TO WHICH PART I OF SUBCHAPTER
T, CHAPTER 1 OF THE CODE APPLIES AND, EXCEPT AS PROVIDED IN REGULATIONS,
NOMINEES.

         NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series 2002-2
Class R Certificates (the "Class R Certificates") and issued under and subject
to the terms, provisions and conditions of the Pooling and Servicing Agreement,
to which the owner of this Certificate, by virtue of acceptance hereof assents,
and is bound. Also issued under the Pooling and Servicing Agreement are Class
A-1 Certificates, Class A-2 Certificates, Class AIO Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates and Class O
Certificates, and all such Certificates are collectively referred to as the
"Certificates."

         Terms capitalized herein and not otherwise defined herein shall have
the respective meanings set forth in the Pooling and Servicing Agreement.

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing July 25, 2002, the owners of the Class R Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to receive the
distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by

                                     A-11-3
<PAGE>

wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

         The Certificate Administrator is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Certificate Administrator to such owner for all purposes of the Pooling and
Servicing Agreement.

         The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any SubServicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

         This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

         No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

         Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such owner.

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in January 2033 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the

                                     A-11-4
<PAGE>

United States to the Court of St. James, living on the date of the Pooling and
Servicing Agreement.

         The Servicer may, at its option, terminate the Pooling and Servicing
Agreement on any date on which the aggregate of the Principal Balances of the
Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryforward Amount.

         The Certificate Administrator shall give written notice of termination
of the Pooling and Servicing Agreement to each owner in the manner set forth
therein.

         As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

         The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

         As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class R Certificates are exchangeable for
new Class R Certificates of authorized denominations evidencing the same
aggregate principal amount.

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-11-5
<PAGE>

         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                   JPMORGAN CHASE BANK, not in its individual
                                     capacity, but solely in its capacity as
                                     Trustee

                                   By: _________________________________
                                       Name:
                                       Title:

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

By: __________________________________
    Name:
    Title:

                                     A-11-6
<PAGE>

                                                                       Exhibit B

                             Mortgage Loan Schedule

       [SEE EXHIBIT 1 TO THE MORTGAGE LOAN PURCHASE AGREEMENT (TAB NO. 8)]

<PAGE>

                                                                       Exhibit C

                                   [Reserved]

<PAGE>

                                                                       Exhibit D

                                   [Reserved]

<PAGE>

                                                                       Exhibit E

                               Request for Release

                                                                   [date]

To: Wachovia Bank, National Association,
    as Certificate Administrator

    Re: Pooling and  Servicing  Agreement,  dated as of June 1, 2002  NovaStar
        Home Equity Loan Asset-Backed Certificates, Series 2002-2

         In connection with the administration of the pool of Mortgage Loans
held by you as Certificate Administrator, we request the release, and
acknowledge receipt, of the (Mortgage File/[specify document]) for the Mortgage
Loan described below, for the reason indicated.

Mortgagor's Name, Address & Zip Code:

Mortgage Loan Number:

Reason for Requesting Documents (check one)

<TABLE>
<CAPTION>
---------------- --------------------------------------------------------------------------------------------
<S>              <C>
____  1.         Mortgage Loan Paid in Full
                 (Servicer hereby certifies that all amounts received in
                 connection therewith have been credited to the Collection
                 Account and remitted to the Certificate Administrator for
                 deposit into the Payment Account pursuant to the Pooling and
                 Servicing Agreement.)
---------------- --------------------------------------------------------------------------------------------
____  2.         Mortgage Loan Liquidated
                 (Servicer hereby certifies that all proceeds of foreclosure,
                 insurance or other liquidation have been finally received and
                 credited to the Collection Account and remitted to the
                 Certificate Administrator for deposit into the Payment Account
                 pursuant to the Pooling and Servicing Agreement.)
---------------- --------------------------------------------------------------------------------------------
____  3.         Mortgage Loan in Foreclosure
---------------- --------------------------------------------------------------------------------------------
____  4.         Mortgage Loan Purchased Pursuant to Section 11.01 of the Pooling and Servicing Agreement.
---------------- --------------------------------------------------------------------------------------------
____             5. Mortgage Loan Repurchased or Substituted pursuant to Article
                 II or III of the Pooling and Servicing Agreement (Seller hereby
                 certifies that the repurchase price or Substitution Adjustment
                 has been credited to the Collection Account and that the
                 substituted mortgage loan is a Qualified Substitute Mortgage
                 Loan.)
---------------- --------------------------------------------------------------------------------------------
____  6.         Other
                 (explain) ___________________________________________________
---------------- --------------------------------------------------------------------------------------------
</TABLE>

         If box 1 or 2 above is checked, and if all or part of the Mortgage File
was previously released to us, please release to us our previous receipt on file
with you, as well as any additional documents in your possession relating to the
above specified Mortgage Loan.

         If box 3, 4, 5 or 6 above is checked, upon our return of all of the
above documents to you as Certificate Administrator, please acknowledge your
receipt by signing in the space indicated below, and returning this form.

                                   NovaStar Mortgage, Inc.,
                                   as [Servicer][Seller]

                                   By: ___________________________
                                       Name:
                                       Title:

Documents returned to Certificate Administrator:

Wachovia Bank, National Association,
as Certificate Administrator

By:__________________________
   Name:
   Title:

Date:_________________________

                                      E-2

<PAGE>

                                                                     Exhibit F-1

                     Form of Trustee's Initial Certification

                                                                   [Date]

NovaStar Mortgage, Inc.
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention:  Chris Miller, Senior Vice President

NovaStar Mortgage Funding Corporation
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention:  Chris Miller, Senior Vice President

Wachovia Bank, National Association
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
          Series 2002-2

         Re:  Pooling and Servicing Agreement, dated as of June 1, 2002 (the
              "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage
              Funding Corporation, Wachovia Bank, National Association (the
              "Certificate Administrator") and JPMorgan Chase Bank (the
              "Trustee"), relating to the NovaStar Mortgage Funding Trust,
              Series 2002-2 Home Equity Loan Asset-Backed Certificates

Gentlemen:

         In accordance with Section 2.03 of the above-captioned Agreement, and
Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as of June 1,
2002 (the "Purchase Agreement" and, together with the Agreement, the
"Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Certificate Administrator, the Trustee and Wachovia Bank,
National Association, the undersigned, as Certificate Administrator, on behalf
of the Trustee, hereby certifies that as to each Mortgage Loan listed in the
Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed on
the attachment hereto) it has reviewed the Mortgage File and the Mortgage Loan
Schedule and has determined that: (i) all documents required to be included in
the Mortgage File are in its possession; (ii) such documents have been reviewed
by it and appear regular on their face and relate to such Mortgage Loan; and
(iii) based on examination by it, and only as to such documents, the information
set forth in items (i) - (vii) and (xiv) of the definition or description of
"Mortgage Loan Schedule" is correct.

         The Certificate Administrator, on behalf of the Trustee, has made no
independent examination of any documents contained in each Mortgage File beyond
the review specifically required in the above-referenced Agreements. The
Certificate Administrator, on behalf of the Trustee, makes no representation
that any documents specified in clause (vi) of Section 2.01(c)

<PAGE>

of the Purchase Agreement should be included in any Mortgage File. The
Certificate Administrator, on behalf of the Trustee, makes no representations as
to and shall not be responsible to verify: (i) the validity, legality,
sufficiency, enforceability, due authorization, recordability or genuineness of
any of the documents contained in each Mortgage File of any of the Mortgage
Loans identified on the Mortgage Loan Schedule, (ii) the collectability,
insurability, effectiveness or suitability of any such Mortgage Loan, or (iii)
the existence of any assumption, modification, written assurance or substitution
agreement with respect to any Mortgage File if no such documents appear in the
Mortgage File delivered to the Certificate Administrator, on behalf of the
Trustee.

         Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Agreement.

                                   WACHOVIA BANK, NATIONAL ASSOCIATION, not in
                                   its individual capacity but solely as
                                   Certificate Administrator

                                   By:  _________________________________
                                        Name:
                                        Title:

                                      F-2
<PAGE>

                                                                     Exhibit F-2

                      Form of Trustee's Final Certification
                                                                   [Date]

NovaStar Mortgage, Inc.
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention:  Chris Miller, Senior Vice President

NovaStar Mortgage Funding Corporation
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention:  Chris Miller, Senior Vice President

Wachovia Bank, National Association
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn: NovaStar Mortgage Funding Trust,
      Series 2002-2

         Re:  Pooling and Servicing Agreement, dated as of June 1, 2002 (the
              "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage
              Funding Corporation, Wachovia Bank, National Association (the
              "Certificate Administrator") and JPMorgan Chase Bank (the
              "Trustee") relating to the NovaStar Mortgage Funding Trust, Series
              2002-2 Home Equity Loan Asset-Backed Certificates

Gentlemen:

         In accordance with Section 2.03 of the above-captioned Agreement, and
Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as of June 1,
2002 (the " Purchase Agreement" and, together with the Agreement, the
"Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Certificate Administrator and the Trustee, the undersigned, as
Certificate Administrator, on behalf of the Trustee, hereby certifies that as to
each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage
Loan paid in full or listed on the attachment hereto) it has received the
documents set forth in Section 2.01(c) of the Mortgage Loan Purchase Agreement.

         The Certificate Administrator, on behalf of the Trustee, has made no
independent examination of any documents contained in each Mortgage File beyond
the review specifically required in the Agreements. The Certificate
Administrator, on behalf of the Trustee, makes no representation that any
documents specified in clause (vi) of Section 2.01(c) should be included in any
Mortgage File. The Certificate Administrator, on behalf of the Trustee, makes no
representations as to and shall not be responsible to verify: (i) the validity,
legality, sufficiency, enforceability, due authorization, recordability or
genuineness of any of the documents contained in each Mortgage File of any of
the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan or (iii) the existence of any assumption, modification, written assurance
or substitution agreement with

<PAGE>

respect to any Mortgage File if no such documents appear in the Mortgage File
delivered to the Certificate Administrator, on behalf of the Trustee.

         Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Agreement.

                                   WACHOVIA BANK, NATIONAL ASSOCIATION, not in
                                   its individual capacity but solely as
                                   Certificate Administrator

                                   By: _________________________________
                                       Name:
                                       Title:

                                     F-2-2
<PAGE>

                                                                       Exhibit G

                            Form of Investment Letter

NovaStar Mortgage, Inc.
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention:  Chris Miller, Senior Vice President

Wachovia Bank, National Association
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
         Series 2002-2

Ladies and Gentlemen:

         The undersigned (the "Transferee") has agreed to purchase from ________
(the "Transferor") the following certificates:

                  Class                     Number
                  -----                     ------

                  --
                  --
                  --
                  --
                  --

         I. The Transferee is (check one):

<TABLE>
<CAPTION>
<S>                             <C>
------------------------------------------------------------------------------------------------------------------------
                  __             (i) An insurance company, as defined in Section 2(13) of the Securities Act of 1933, as
                                 amended (the "Securities Act"), (ii) an investment company registered under the
                                 Investment Company Act of 1940, as amended (the "Investment Company Act"), (iii) a
                                 business development company as defined in Section 2(a)(48) of the Securities Act, (iv)
                                 a Small Business Investment Company licensed by the U.S. Small Business Administration
                                 under Section 301(c) or (d) of the Small Business Investment Act of 1958, as amended,
                                 (v) a plan established and maintained by a state, its political subdivisions, or any
                                 agency or instrumentality of a state or its political subdivisions, for the benefit of
                                 its employees, (vi) an employee benefit plan within the meaning of Title I of the
                                 Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (vii) a business
                                 development company as defined in Section 202(a)(22) of the Investment Advisors Act of
                                 1940, as amended, (viii) an organization described in Section 501(c)(3) of the Internal
                                 Revenue Code, corporation (other than a bank as defined in Section 3(a)(2) of the
                                 Securities Act or a savings and

<PAGE>

                                 loan association or other institution referenced in Section 3(a)(2) of the Securities
                                 Act or a foreign bank or savings and loan association or equivalent institution),
                                 partnership, or Massachusetts or similar business trust; or (ix) an investment advisor
                                 registered under the Investment Advisors Act of 1940, as amended, which, for each of
                                 (i) through (ix), owns and invests on a discretionary basis at least $100 million in
                                 securities other than securities of issuers affiliated with the Transferee, securities
                                 issued or guaranteed by the United States or a person controlled or supervised by and
                                 acting as an instrumentality of the government of the United States pursuant to
                                 authority granted by the Congress of the United States, bank deposit notes and
                                 certificates of deposit, loan participations, repurchase agreements, securities owned
                                 but subject to a repurchase agreement, and currency, interest rate and commodity swaps
                                 (collectively, "Excluded Securities");
------------------------------------------------------------------------------------------------------------------------
                  __             a dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as
                                 amended (the "Exchange Act") that in the aggregate owns and invests on a discretionary
                                 basis at least $10 million of securities other than Excluded Securities and securities
                                 constituting the whole or part of an unsold allotment to, or subscription by,
                                 Transferee as a participant in a public offering;
------------------------------------------------------------------------------------------------------------------------
                  __             an investment company registered under the Investment Company Act that is part of a
                                 family of investment companies (as defined in Rule 144A of the Securities and Exchange
                                 Commission) which own in the aggregate at least $100 million in securities other than
                                 Excluded Securities and securities of issuers that are part of such family of
                                 investment companies;
------------------------------------------------------------------------------------------------------------------------
                  __             an entity, all of the equity owners of which are entities described in this Paragraph
                                 A(I);
------------------------------------------------------------------------------------------------------------------------
                  __             a bank as defined in Section 3(a)(2) of the Securities Act, any savings and loan
                                 association or other institution as referenced in Section 3(a)(5)(A) of the Securities
                                 Act, or any foreign bank or savings and loan association or equivalent institution that
                                 in the aggregate owns and invests on a discretionary basis at least $100 million in
                                 securities other than Excluded Securities and has an audited net worth of at least $25
                                 million as demonstrated in its latest annual financial statements, as of a date not
                                 more than 16 months preceding the date of transfer of the Certificates to the
                                 Transferee in the case of a U.S. Bank or savings and loan association, and not more
                                 than 18 months preceding such date in the case of a foreign bank or savings association
                                 or equivalent institution.
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       G-2

<PAGE>

         II. The Transferee is acquiring such Certificates solely for its own
account, for the account of one or more others, all of which are "Qualified
Institutional Buyers" within the meaning of Rule 144A, or in its capacity as a
dealer registered pursuant to Section 15 of the Exchange Act acting in a
riskless principal transaction on behalf of a "Qualified Institutional Buyer".
The Transferee is not acquiring such Certificates with a view to or for the
resale, distribution, subdivision or fractionalization thereof which would
require registration of the Certificates under the Securities Act.

         D. The Transferee represents that either it is not (i) an employee
benefit plan (as defined in section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) subject to the provisions of Title I
of ERISA, (ii) a plan described in section 4975(e)(1) of the Internal Revenue
Code of 1986, or (iii) an entity whose underlying assets are deemed to be assets
of a plan described in (i) or (ii) above by reason of such plan's investment in
the entity.

                                   Very truly yours,

                                   By:  _____________________________
                                   Title:  ____________________________
Dated:  __________

                                      G-3
<PAGE>

                                                                       Exhibit H

                 Form of Residual Certificate Transfer Affidavit

AFFIDAVIT PURSUANT TO SECTION 860E OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED

STATE OF                   )
                           )  ss:
COUNTY OF                  )

         [NAME OF OFFICER], being first duly sworn, deposes and says:

         1. That he is [Title of Officer] of [Name of Investor] (the
"Investor"), a [savings institution] [corporation] duly organized and existing
under the laws of [the State of_____[the United States], on behalf of which he
makes this affidavit.

         2. That (i) the Investor is not a "disqualified organization" and will
not be a "disqualified organization" as of [date of transfer] (for this purpose,
a "disqualified organization" means the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing (other than certain taxable
instrumentalities), any cooperative organization furnishing electric energy or
providing telephone service to persons in rural areas, or any organization
(other than a farmers' cooperative) that is exempt from federal income tax
unless such organization is subject to the tax on unrelated business income);
(ii) it is not acquiring the Class R Certificate for the account of a
disqualified organization; (iii) it consents to any amendment of the Pooling and
Servicing Agreement dated as of June 1, 2002 among NovaStar Funding Corporation,
as Company, NovaStar Mortgage, Inc., as Servicer, Wachovia Bank, National
Association, as Certificate Administrator, and JPMorgan Chase Bank, as Trustee,
that shall be deemed necessary by the Trustee (upon advice of counsel) to
constitute a reasonable arrangement to ensure that the Class R Certificates will
not be owned directly or indirectly by a disqualified organization; and (iv) it
will not transfer such Class R Certificate unless (a) it has received from the
transferee an affidavit in substantially the same form as this affidavit
containing these same four representations and (b) as of the time of the
transfer, it does not have actual knowledge that such affidavit is false.

<PAGE>

         IN WITNESS WHEREOF, the Investor has caused this instrument to be
executed on its behalf, pursuant to authority of its Board of Directors, by its
[Title of Officer] and its corporate seal to be hereunto attached, attested by
its [Assistant] Secretary, this ____ day of ____________, ____.

                                   [NAME OF INVESTOR]

                                   By: _________________________
                                       [Name of Officer]
                                       [Title of Officer]
[Corporate Seal]

Attest:

-------------------------
[Assistant] Secretary

         Personally appeared before me the above-named [Name of Officer], known
or proved to be the same person who executed the foregoing instrument and to be
the [Title of Officer] of the Investor, and acknowledged to me that he executed
the same as his free act and deed and the free act and deed of the Investor.

         Subscribed and sworn before me this ____ day of _________, ____.

---------------------------
NOTARY PUBLIC

COUNTY OF _______________

STATE OF _________________

              My commission expires the ____ day of ________, ____.

                                      H-2

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00041-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00041-of-00352.parquet"}]]