Document:

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                                                                    Exhibit 4.7

                          REGISTRATION RIGHTS AGREEMENT

                  THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made
and entered into as of April 25, 2001, by and between CARNIVAL CORPORATION, a
corporation organized and existing pursuant to the laws of the Republic of
Panama (the "Company") and MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED (the "Initial Purchaser").

                  This Agreement is made pursuant to the Purchase Agreement,
dated April 20, 2001 (the "Purchase Agreement"), between the Company, as issuer
of the 2% Convertible Senior Debentures due 2021 (the "Debentures"), and the
Initial Purchaser, which provides for, among other things, the sale by the
Company to the Initial Purchaser of the aggregate principal amount at maturity
of Debentures specified therein. In order to induce the Initial Purchaser to
enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement. The execution of this Agreement
is a condition to the closing under the Purchase Agreement.

                  The Company agrees with the Initial Purchaser, (i) for its
benefit as Initial Purchaser and (ii) for the benefit of the beneficial owners
(including the Initial Purchaser) from time to time of the Debentures, and the
beneficial owners from time to time of the Underlying Common Stock (as defined
herein) issued upon conversion of, if any, (each of the foregoing a "Holder" and
together the "Holders"), as follows:

         SECTION 1. DEFINITIONS. Capitalized terms used herein without
definition shall have their respective meanings set forth in the Purchase
Agreement. As used in this Agreement, the following terms shall have the
following meanings:

                  "Affiliate" With respect to any specified person, an
"affiliate," as defined in Rule 144, of such person.

                  "Applicable Conversion Price" The Applicable Conversion Price
as of any date of determination means per $1,000 principal amount at maturity of
Debentures as of such date of determination divided by the Conversion Rate in
effect as of such date of determination or, if no Debentures are then
outstanding, the Conversion Rate that would be in effect were Debentures then
outstanding.

                  "Business Day" Each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to close.

                  "Common Stock" The Common Stock, $0.01 par value, of the
Company and any other shares of common stock as may constitute "Common Stock"
for purposes of the Indenture, including the Underlying Common Stock.

                  "Company" See the first paragraph hereof.

                  "Conversion Rate" Conversion Rate shall have the meaning
assigned to such term in the Indenture.
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                  "Damages Accrual Period" See Section 2(e) hereof.

                  "Damages Payment Date" Each April 15 and October 15.

                  "Debentures" See the second paragraph hereof.

                  "Deferral Notice" See Section 3(h) hereof.

                  "Deferral Period" See Section 3(h) hereof.

                  "Effectiveness Deadline Date" See Section 2(a) hereof.

                  "Effectiveness Period" The period of two years from the Issue
Date or such shorter period ending on the date that all Registrable Securities
have ceased to be Registrable Securities.

                  "Event" See Section 2(e) hereof.

                  "Event Date" See Section 2(e) hereof.

                  "Event Termination Date" See Section 2(e) hereof.

                  "Exchange Act" The Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.

                  "Filing Deadline Date"  See Section 2(a) hereof.

                  "Holder" See the third paragraph hereof.

                  "Indenture" The Indenture, dated as of the date hereof,
between the Company and U.S. Bank Trust National Association, as trustee, as
amended and supplemented by the First Supplemental Indenture, dated as of April
25, 2001, pursuant to which the Debentures are being issued.

                  "Initial Purchaser" See the first paragraph of this Agreement.

                  "Initial Shelf Registration Statement" See Section 2(a)
hereof.

                  "Issue Date" means April 25, 2001.

                  "Liquidated Damages Amount"  See Section 2(e) hereof.

                  "Material Event"  See Section 3(h) hereof.

                  "Notice and Questionnaire" A written notice delivered to the
Company containing substantially the information called for by the Selling
Securityholder Notice and Questionnaire attached as Annex A to the Offering
Memorandum of the Company, dated April 20, 2001, relating to the Debentures.

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                  "Notice Holder" On any date, any Holder that has delivered a
Notice and Questionnaire to the Company on or prior to such date.

                  "Prospectus" The prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 415 promulgated under the
Securities Act), as amended or supplemented by any amendment or prospectus
supplement, including post-effective amendments, and all materials incorporated
by reference in such Prospectus.

                  "Purchase Agreement" See the second paragraph of hereof.

                  "Record Date" With respect to any Damages Payment Date
relating to any Debenture or Underlying Common Stock as to which any Liquidated
Damages Amount has accrued, (i) the 15th day immediately preceding such Damages
Payment Date if the Damages Accrual Period has not ended, or (ii) the date of
the end Damages Accrual Period.

                  "Record Holder" With respect to any Damages Payment Date
relating to any Debenture or Underlying Common Stock as to which any Liquidated
Damages Amount has accrued, the registered holder of such Debenture or
Underlying Common Stock, as the case may be, on the Record Date.

                  "Registrable Securities" The Securities, until such securities
have been converted or exchanged and, at all times subsequent to any such
conversion or exchange, any securities into or for which such securities have
been converted or exchanged, and any security issued with respect thereto upon
any stock dividend, split, merger or similar event until, in the case of any
such security, the earliest of (i) its effective registration under the
Securities Act and resale in accordance with the Registration Statement covering
it, (ii) expiration of the holding period that would be applicable thereto under
Rule 144(k) were it not held by an Affiliate of the Company or (iii) its sale to
the public pursuant to Rule 144.

                  "Registration Expenses"  See Section 5 hereof.

                  "Registration Statement" Any registration statement of the
Company that covers any of the Registrable Securities pursuant to the provisions
of this Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all materials incorporated by reference in such registration statement.

                  "Restricted Securities" As this term is defined in Rule 144.

                  "Rule 144" Rule 144 under the Securities Act, as such Rule may
be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.

                  "Rule 144A" Rule 144A under the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.

                  "SEC" The Securities and Exchange Commission.

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                  "Securities" Collectively means the Debentures and the
Underlying Common Stock.

                  "Securities Act" The Securities Act of 1933, as amended, and
the rules and regulations promulgated by the SEC thereunder.

                  "Shelf Registration Statement" See Section 2(a) hereof.

                  "Subsequent Shelf Registration Statement" See Section 2(b)
hereof.

                  "TIA" The Trust Indenture Act of 1939, as amended.

                  "Trustee" U.S. Bank Trust Company (or any successor entity),
the Trustee under the Indenture.

                  "Underlying Common Stock" The Common Stock into which the
Debentures are convertible or issued upon any such conversion.

         SECTION 2. SHELF REGISTRATION.

                  (a) The Company shall prepare and file or cause to be prepared
and filed with the SEC no later than a date which is ninety (90) days after the
Issue Date (the "Filing Deadline Date") a Registration Statement for an offering
to be made on a delayed or continuous basis pursuant to Rule 415 of the
Securities Act (a "Shelf Registration Statement") registering the resale from
time to time by Holders thereof of all of the Registrable Securities (the
"Initial Shelf Registration Statement"). The Initial Shelf Registration
Statement shall be on Form S-3 or another appropriate form permitting
registration of such Registrable Securities for resale by such Holders in
accordance with the methods of distribution reasonably elected by the Holders
and set forth in the Initial Shelf Registration Statement; provided, that in no
event will such method(s) of distribution take the form of an underwritten
offering of the Registrable Securities without the prior agreement of the
Company. The Company shall use commercially reasonable efforts to cause the
Initial Shelf Registration Statement to be declared effective under the
Securities Act by the date (the "Effectiveness Deadline Date") that is one
hundred and eighty (180) days after the Issue Date, and to keep the Initial
Shelf Registration Statement (or any Subsequent Shelf Registration Statement)
continuously effective under the Securities Act until the expiration of the
Effectiveness Period subject to the rights of the Company under Section 3(h) to
create a Deferral Period. At the time the Initial Shelf Registration Statement
is declared effective, each Holder that became a Notice Holder on or prior to
the date 10 Business Days prior to such time of effectiveness shall be named as
a selling securityholder in the Initial Shelf Registration Statement and the
related Prospectus in such a manner as to permit such Holder to deliver such
Prospectus to purchasers of Registrable Securities in accordance with applicable
law under ordinary circumstances, subject to compliance with blue sky laws. The
Company shall not permit any of its securityholders (other than the Holders of
Registrable Securities) to include any of the Company's securities in the Shelf
Registration Statement.

                  (b) If the Initial Shelf Registration Statement or any
Subsequent Shelf Registration Statement ceases to be effective other than during
a Deferral Period for any reason at any time during the Effectiveness Period,
the Company shall use reasonable efforts to obtain

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the prompt withdrawal of any order suspending the effectiveness thereof, and in
any event shall within thirty (30) days of such cessation of effectiveness amend
the Shelf Registration Statement in a manner reasonably expected by the Company
to obtain the withdrawal of the order suspending the effectiveness thereof, or
file an additional Shelf Registration Statement covering all of the Securities
that as of the date of such filing are Registrable Securities (a "Subsequent
Shelf Registration Statement"). If a Subsequent Shelf Registration Statement is
filed, the Company shall use reasonable efforts to cause the Subsequent Shelf
Registration Statement to become effective as promptly as reasonably practicable
after such filing, unless during a Deferral Period, or, if filed during a
Deferral Period, after the expiration of a Deferral Period, and to keep such
Registration Statement (or subsequent Shelf Registration Statement) continuously
effective until the end of the Effectiveness Period.

                  (c) The Company shall supplement and amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement if required by the Securities Act.

                  (d) Each Holder of Registrable Securities agrees that if such
Holder wishes to sell Registrable Securities pursuant to a Shelf Registration
Statement and related Prospectus, it will do so only in accordance with this
Section 2(d) and Section 3(h). Each Holder of Registrable Securities wishing to
sell Registrable Securities pursuant to a Shelf Registration Statement and
related Prospectus agrees to deliver a Notice and Questionnaire to the Company
at least ten (10) Business Days prior to any intended distribution of
Registrable Securities under the Shelf Registration Statement. From and after
the date the Initial Shelf Registration Statement is declared effective, the
Company shall, as promptly as reasonably practicable after the date a Notice and
Questionnaire is delivered, (i) if required by applicable law, file with the SEC
a post-effective amendment to the Shelf Registration Statement or prepare and,
if required by applicable law, file a supplement to the related Prospectus or a
supplement or amendment to any document incorporated therein by reference or
file any other document required by the SEC so that the Holder delivering such
Notice and Questionnaire is named as a selling securityholder in the Shelf
Registration Statement and the related Prospectus in such a manner as to permit
such Holder to deliver such Prospectus to purchasers of the Registrable
Securities in accordance with applicable law and, if the Company shall file a
post-effective amendment to the Shelf Registration Statement, use reasonable
efforts to cause such post-effective amendment to be declared effective under
the Securities Act as promptly as reasonably practicable; (ii) provide such
Holder copies of any documents filed pursuant to Section 2(d)(i); and (iii)
notify such Holder as promptly as reasonably practicable after the effectiveness
under the Securities Act of any post-effective amendment filed pursuant to
Section 2(d)(i); provided, that if such Notice and Questionnaire is delivered
during a Deferral Period, the Company shall so inform the Holder delivering such
Notice and Questionnaire and shall take the actions set forth in clauses (i),
(ii) and (iii) above upon expiration of the Deferral Period in accordance with
Section 3(h). Notwithstanding anything contained herein to the contrary, the
Company shall be under no obligation to name any Holder that is not a Notice
Holder as a selling securityholder in any Registration Statement or related
Prospectus; provided, however, that any Holder that becomes a Notice Holder
pursuant to the provisions of Section 2(d) of this Agreement (whether or not
such Holder was a Notice Holder at the time the Registration Statement was
initially declared effective) shall be named as a selling securityholder in the
Registration Statement or related Prospectus subject to and in accordance with
the requirements of this Section 2(d).

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                  (e) The parties hereto agree that the Holders of Registrable
Securities will suffer damages, and that it would not be feasible to ascertain
the extent of such damages with precision, if (i) the Initial Shelf Registration
Statement has not been filed on or prior to the Filing Deadline Date, (ii) the
Initial Shelf Registration Statement has not been declared effective under the
Securities Act on or prior to the Effectiveness Deadline Date, or (iii) the
aggregate duration of Deferral Periods in any period exceeds the number of days
permitted in respect of such period pursuant to Section 3(h) hereof (each of the
events of a type described in any of the foregoing clauses (i) through (iii) are
individually referred to herein as an "Event," and the Filing Deadline Date in
the case of clause (i), the Effectiveness Deadline Date in the case of clause
(ii), and the date on which the aggregate duration of Deferral Periods in any
period exceeds the number of days permitted by Section 3(h) hereof in the case
of clause (iii), being referred to herein as an "Event Date"). Events shall be
deemed to continue until the "Event Termination Date," which shall be the
following dates with respect to the respective types of Events: the date the
Initial Shelf Registration Statement is filed in the case of an Event of the
type described in clause (i), the date the Initial Shelf Registration Statement
is declared effective under the Securities Act in the case of an Event of the
type described in clause (ii), termination of the Deferral Period that caused
the limit on the aggregate duration of Deferral Periods in a period set forth in
Section 3(h) to be exceeded in the case of the commencement of an Event of the
type described in clause (iii).

                  Accordingly, commencing on (and including) any Event Date and
ending on (but excluding) the next date on which there are no Events that have
occurred and are continuing (a "Damages Accrual Period"), the Company agrees to
pay, as liquidated damages and not as a penalty, an amount (the "Liquidated
Damages Amount"), payable on the Damages Payment Dates to Record Holders of then
outstanding Debentures that are Registrable Securities, of then outstanding
shares of Underlying Common Stock issued upon conversion of Debentures that are
Registrable Securities, if any, as the case may be, accruing, for each portion
of such Damages Accrual Period beginning on and including a Damages Payment Date
(or, in respect of the first time that the Liquidation Damages Amount is to be
paid to Record Holders on a Damages Payment Date as a result of the occurrence
of any particular Event, beginning on and including the Event Date) and ending
on but excluding the first to occur of (A) the date of the end of the Damages
Accrual Period or (B) the next Damages Payment Date, at a rate per annum equal
to one-quarter of one percent (0.25%) for the first 90-day period from the Event
Date, and thereafter at a rate per annum equal to one-half of one percent
(0.50%) of the aggregate principal amount of such Debentures or the aggregate
Applicable Conversion Price of the shares of Underlying Common Stock, as the
case may be, in each case determined as of the Record Date; provided, that any
Liquidated Damages Amount accrued with respect to any Debenture or portion
thereof called for redemption on a redemption date or converted into Underlying
Common Stock on a conversion date prior to the Damages Payment Date, shall, in
any such event, be paid instead to the Holder who submitted such Debenture or
portion thereof for redemption or conversion on the applicable redemption date
or conversion date, as the case may be, on such date (or promptly following the
conversion date, in the case of conversion). Notwithstanding the foregoing, no
Liquidated Damages Amounts shall accrue as to any Registrable Security from and
after the earlier of (x) the date such security is no longer a Registrable
Security and (y) expiration of the Effectiveness Period. The rate of accrual of
the Liquidated Damages Amount with respect to any period shall not exceed the
rate provided for in this paragraph notwithstanding the occurrence of multiple
concurrent Events. Following the cure of all Events requiring the payment by the
Company of Liquidated Damages Amounts to the

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Holders of Registrable Securities pursuant to this Section, the accrual of
Liquidated Damages Amounts will cease (without in any way limiting the effect of
any subsequent Event requiring the payment of the Liquidated Damages Amount by
the Company).

                  The Trustee shall be entitled, on behalf of Holders of
Debentures or Underlying Common Stock, to seek any available remedy for the
enforcement of this Agreement, including for the payment of any Liquidated
Damages Amount. Notwithstanding the foregoing, the parties agree that the sole
remedy for a violation of the terms of this Agreement with respect to which
liquidated damages are expressly provided shall be such liquidated damages.

                  All of the Company's obligations set forth in this Section
2(e) that are outstanding with respect to any Registrable Security at the time
such Security ceases to be a Registrable Security shall survive until such time
as all such obligations with respect to such security have been satisfied in
full (notwithstanding termination of this Agreement pursuant to Section 8(j)).

                  The parties hereto agree that the liquidated damages provided
for in this Section 2(e) constitute a reasonable estimate of the damages that
may be incurred by Holders of Registrable Securities by reason of the failure of
the Shelf Registration Statement to be filed or declared effective or available
for effecting resales of Registrable Securities in accordance with the
provisions hereof.

         SECTION 3. REGISTRATION PROCEDURES. In connection with the registration
obligations of the Company under Section 2 hereof, the Company shall:

                  (a) Subject to section 3(h), prepare and file with the SEC
such amendments and post-effective amendments to each Registration Statement as
may be necessary to keep such Registration Statement continuously effective for
the applicable period specified in Section 2(a); cause the related Prospectus to
be supplemented by any required Prospectus supplement, and as so supplemented to
be filed pursuant to Rule 424 (or any similar provisions then in force) under
the Securities Act; and use reasonable efforts to comply with the provisions of
the Securities Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement during the Effectiveness
Period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement as so amended or such
Prospectus as so supplemented.

                  (b) As promptly as reasonably practicable give notice to the
Notice Holders and the Initial Purchaser (i) when any Prospectus, Prospectus
supplement, Registration Statement or post-effective amendment to a Registration
Statement has been filed with the SEC and, with respect to a Registration
Statement or any post-effective amendment, when the same has been declared
effective, (ii) of any request, following the effectiveness of the Initial Shelf
Registration Statement under the Securities Act, by the SEC or any other federal
or state governmental authority for amendments or supplements to any
Registration Statement or related Prospectus or for additional information,
(iii) of the issuance by the SEC or any other federal or state governmental
authority of any stop order suspending the effectiveness of any Registration
Statement or the initiation or threatening of any proceedings for that purpose,
(iv) of the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or

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the initiation or threatening of any proceeding for such purpose, (v) of the
occurrence of (but not the nature of or details concerning) a Material Event
(provided, however, that no notice by the Company shall be required pursuant to
this clause (v) in the event that the Company either promptly files a Prospectus
supplement to update the Prospectus or a Form 8-K or other appropriate Exchange
Act report that is incorporated by reference into the Registration Statement,
which, in either case, contains the requisite information with respect to such
Material Event that results in such Registration Statement no longer containing
any untrue statement of material fact or omitting to state a material fact
necessary to make the statements contained therein not misleading) and (vi) of
the determination by the Company that a post-effective amendment to a
Registration Statement will be filed with the SEC, which notice may, at the
discretion of the Company (or as required pursuant to Section 3(h)), state that
it constitutes a Deferral Notice, in which event the provisions of Section 3(h)
shall apply.

                  (c) Use reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement or the lifting of
any suspension of the qualification (or exemption from qualification) of any of
the Registrable Securities for sale in any jurisdiction in which they have been
qualified for sale, in either case at the earliest possible moment or, if a
Deferral Period is in effect, at the earliest possible moment after the Deferral
Period.

                  (d) If reasonably requested by the Initial Purchaser or any
Notice Holder, as promptly as reasonably practicable incorporate in a Prospectus
supplement or post-effective amendment to a Registration Statement such
information as the Initial Purchaser or such Notice Holder shall, on the basis
of an opinion of nationally-recognized counsel experienced in such matters,
determine to be required to be included therein by applicable law and make any
required filings of such Prospectus supplement or such post-effective amendment;
provided, that the Company shall not be required to take any actions under this
Section 3(d) that are not, in the reasonable opinion of counsel for the Company,
in compliance with applicable law or to include the disclosure which at the time
would have an adverse effect on the business or operation of the Company and/ or
its Subsidiaries, as determined in good faith by the Company.

                  (e) As promptly as reasonably practicable furnish to each
Notice Holder and the Initial Purchaser, upon their request and without charge,
at least one (1) conformed copy of the Registration Statement and any amendment
thereto, including financial statements, but excluding schedules, all documents
incorporated or deemed to be incorporated therein by reference and all exhibits
(unless requested in writing to the Company by such Notice Holder or the Initial
Purchaser, as the case may be).

                  (f) During the Effectiveness Period, deliver to each Notice
Holder in connection with any sale of Registrable Securities pursuant to a
Registration Statement, without charge, as many copies of the Prospectus or
Prospectuses relating to such Registrable Securities (including each preliminary
prospectus) and any amendment or supplement thereto as such Notice Holder may
reasonably request; and the Company hereby consents (except during such periods
that a Deferral Notice is outstanding and has not been revoked) to the use of
such Prospectus or each amendment or supplement thereto by each Notice Holder in
connection with any offering and sale of the Registrable Securities covered by
such Prospectus or any amendment or supplement thereto in the manner set forth
therein.

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                  (g) Subject to Section 3(h), prior to any public offering of
the Registrable Securities pursuant to the Shelf Registration Statement, use
commercially reasonable efforts to register or qualify or cooperate with the
Notice Holders in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Notice Holder reasonably requests
in writing (which request may be included in the Notice and Questionnaire) it
being agreed that no such registration or qualification will be made unless so
requested; prior to any public offering of the Registrable Securities pursuant
to the Shelf Registration Statement, use reasonable efforts to keep each such
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period in connection with such Notice Holder's offer and sale of
Registrable Securities pursuant to such registration or qualification (or
exemption therefrom) and do any and all other acts or things necessary to enable
the disposition in such jurisdictions of such Registrable Securities in the
manner set forth in the relevant Registration Statement and the related
Prospectus; provided, that the Company will not be required to (i) qualify as a
foreign corporation or as a dealer in securities in any jurisdiction where it is
not otherwise qualified but for this Agreement or (ii) take any action that
would subject it to general service of process in suits or to taxation in any
such jurisdiction where it is not then so subject.

                  (h) Upon (A) the issuance by the SEC of a stop order
suspending the effectiveness of the Shelf Registration Statement or the
initiation of proceedings with respect to the Shelf Registration Statement under
Section 8(d) or 8(e) of the Securities Act, (B) the occurrence of any event or
the existence of any fact (a "Material Event") as a result of which any
Registration Statement shall contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or any Prospectus shall contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or (C) the
occurrence or existence of any corporate development that, in the discretion of
the Company, makes it appropriate to suspend the availability of the Shelf
Registration Statement and the related Prospectus, (i) in the case of clause (B)
above, subject to the next sentence, as promptly as reasonably practicable
prepare and file a post-effective amendment to such Registration Statement or a
supplement to the related Prospectus or any document incorporated therein by
reference or file any other required document that would be incorporated by
reference into such Registration Statement and Prospectus so that such
Registration Statement does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and such Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, as
thereafter delivered to the purchasers of the Registrable Securities being sold
thereunder, and, in the case of a post-effective amendment to a Registration
Statement, subject to the next sentence, use reasonable efforts to cause it to
be declared effective as promptly as is reasonably practicable, and (ii) give
notice to the Notice Holders that the availability of the Shelf Registration
Statement is suspended (a "Deferral Notice") and, upon receipt of any Deferral
Notice, each Notice Holder agrees to suspend the use of the Prospectus and not
to sell any Registrable Securities pursuant to the Registration Statement until
such Notice Holder's receipt of copies of the supplemented or amended Prospectus
provided for in clause (i)

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above, or until it is advised in writing by the Company that the Prospectus may
be used, and has received copies of any additional or supplemental filings that
are incorporated or deemed incorporated by reference in such Prospectus. The
Company will use all reasonable efforts to ensure that the use of the Prospectus
may be resumed (x) in the case of clause (A) above, as promptly as reasonably
practicable, (y) in the case of clause (B) above, as soon as, in the sole
judgment of the Company, public disclosure of such Material Event would not be
prejudicial to or contrary to the interests of the Company or, if necessary to
avoid unreasonable burden or expense, as soon as reasonably practicable
thereafter and (z) in the case of clause (C) above, as soon as, in the
discretion of the Company, such suspension is no longer appropriate. The period
during which the availability of the Registration Statement and any Prospectus
is suspended (the "Deferral Period") shall, without the Company incurring any
obligation to pay liquidated damages pursuant to Section 2(e), not exceed sixty
(60) days in any three (3) month period or one hundred and twenty (120) days in
any twelve (12) month period.

                  (i) If reasonably requested in writing in connection with a
disposition of Registrable Securities pursuant to a Registration Statement, make
reasonably available for inspection during normal business hours by a
representative for the Notice Holders of such Registrable Securities and any
broker-dealers, attorneys and accountants retained by such Notice Holders, all
relevant financial and other records, pertinent corporate documents and
properties of the Company and its subsidiaries, and cause the appropriate
executive officers, directors and designated employees of the Company and its
subsidiaries to make reasonably available for inspection during normal business
hours all relevant information reasonably requested by such representative for
the Notice Holders or any such broker-dealers, attorneys or accountants in
connection with such disposition, in each case as is customary for similar "due
diligence" examinations; provided, however, that such persons shall first agree
in writing with the Company that any information that is reasonably designated
by the Company in writing as confidential at the time of delivery of such
information shall be kept confidential by such persons and shall be used solely
for the purposes of exercising rights under this Agreement and such person shall
comply with applicable securities laws, unless (i) disclosure of such
information is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities, (ii) disclosure of such
information is required by law (including any disclosure requirements pursuant
to federal securities laws in connection with the filing of any Registration
Statement or the use of any Prospectus referred to in this Agreement), (iii)
such information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by any such person or (iv) such
information becomes available to any such person from a source other than the
Company and such source is not bound by a confidentiality agreement or fiduciary
obligations; and provided further, that the foregoing inspection and information
gathering shall, to the greatest extent possible, be coordinated on behalf of
all the Notice Holders and the other parties entitled thereto by the counsel
referred to in Section 5.

                  (j) Comply with all applicable rules and regulations of the
SEC and make generally available to its securityholders earning statements
(which need not be audited) satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule promulgated under
the Securities Act) no later than 90 days after the end of the first 12-month
period constituting a fiscal year commencing on the first day of the first
fiscal quarter of the first fiscal year of the Company commencing after the
effective date of a Registration Statement, which statements shall cover said
12-month periods.

                                       10
<PAGE>

                  (k) Cooperate with each Notice Holder to facilitate the timely
preparation and delivery of certificates representing Registrable Securities
sold pursuant to a Registration Statement, and cause such Registrable Securities
to be in such denominations as are permitted by the Indenture and registered in
such names as such Notice Holder may request in writing at least two Business
Days prior to any sale of such Registrable Securities.

                  (l) Provide a CUSIP number for all Registrable Securities
covered by each Registration Statement not later than the effective date of such
Registration Statement and provide the Trustee for the Debentures and the
transfer agent for the Common Stock with certificates for the Registrable
Securities that are in a form eligible for deposit with The Depository Trust
Company.

                  (m) Make reasonable effort to provide such information as is
required for any filings required to be made with the National Association of
Securities Dealers, Inc.

                  (n) Enter into such customary agreements and take all such
other reasonable necessary actions in connection therewith (including those
reasonably requested by the holders of a majority of the Registrable Securities
being sold) in order to expedite or facilitate the registration or the
disposition of such Registrable Securities; provided that the Company shall not
be required to take any action in connection with an underwritten offering
without its consent; and

                  (o) Cause the Indenture to be qualified under the TIA not
later than the effective date of any Registration Statement; and in connection
therewith, cooperate with the Trustee to effect such changes to the Indenture as
may be required for the Indenture to be so qualified in accordance with the
terms of the TIA and execute, and use reasonable efforts to cause the Trustee to
execute, all documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner.

         SECTION 4. HOLDER'S OBLIGATIONS. Each Holder agrees, by acquisition of
the Registrable Securities, that no Holder of Registrable Securities shall be
entitled to sell any of such Registrable Securities pursuant to a Registration
Statement or to receive a Prospectus relating thereto, unless such Holder has
furnished the Company with a Notice and Questionnaire as required pursuant to
Section 2(d) hereof (including the information required to be included in such
Notice and Questionnaire) and the information set forth in the next sentence.
Each Notice Holder agrees promptly to furnish to the Company all information
required to be disclosed in order to make the information previously furnished
to the Company by such Notice Holder not misleading and any other information
regarding such Notice Holder and the distribution of such Registrable Securities
as may be required to be disclosed in the Registration Statement under
applicable law or pursuant to SEC comments. Each Holder further agrees to notify
the Company within 10 business days of request, of the amount of Registrable
Securities sold pursuant to the Registration Statement and, in the absence of a
response, the Company may assume that all of the Holder's Registrable Securities
were so sold.

                  In addition, each Holder agrees that:

                                       11
<PAGE>

                  (a) upon receipt of a Deferral Notice, it will keep the fact
of such notice confidential, forthwith discontinue disposition of its
Registrable Securities pursuant to the Registration Statement, and will not
deliver any Prospectus forming part thereof until receipt of the amended or
supplemented Registration Statement or Prospectus, as applicable, or until it is
advised in writing by the Company that the Prospectus may be used and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus;

                  (b) if so directed by the Company in the Deferral Notice, it
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in its possession, of the Prospectus; and

                  (c) the sale of the Registrable Securities pursuant to a
Registration Statement shall only be made in the manner set forth in such
currently effective Registration Statement.

         SECTION 5. REGISTRATION EXPENSES. The Company shall bear all fees and
expenses incurred in connection with the performance by the Company of its
obligations under Sections 2 and 3 of this Agreement whether or not any of the
Registration Statements are declared effective. Such fees and expenses shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (x) with respect to filings required to be
made with the National Association of Securities Dealers, Inc. and (y) of
compliance with federal and state securities or Blue Sky laws to the extent such
filings or compliance are required pursuant to this Agreement (including fees
and expenses of the Company's counsel)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities
in a form eligible for deposit with The Depository Trust Company), (iii)
duplication expenses relating to copies of any Registration Statement or
Prospectus delivered to any Holders hereunder, (iv) fees and disbursements of
counsel for the Company in connection with the Shelf Registration Statement, and
(v) reasonable fees and disbursements of the Trustee and its counsel and of the
registrar and transfer agent for the Common Stock. In addition, the Company
shall pay the internal expenses of the Company (including, without limitation,
all salaries and expenses of officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange on which the same securities of the Company are then listed
and the fees and expenses of any person, including special experts, retained by
the Company.

         SECTION 6. INDEMNIFICATION; CONTRIBUTION.

                  (a) The Company agrees to indemnify and hold harmless the
Initial Purchaser and each holder of Registrable Securities and each person, if
any, who controls the Initial Purchaser or any holder of Registrable Securities
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, as follows:

                           (i) against any and all loss, liability, claim,
                  damage and expense whatsoever, as incurred, arising out of any
                  untrue statement or alleged untrue statement of a material
                  fact contained in the Registration Statement (or any amendment
                  thereto), or the omission or alleged omission therefrom of a
                  material

                                       12
<PAGE>

                  fact required to be stated therein or necessary to make the
                  statements therein not misleading or arising out of any untrue
                  statement or alleged untrue statement of a material fact
                  included in any preliminary prospectus or the Prospectus (or
                  any amendment or supplement thereto), or the omission or
                  alleged omission therefrom of a material fact necessary in
                  order to make the statements therein, in the light of the
                  circumstances under which they were made, not misleading;

                           (ii) against any and all loss, liability, claim,
                  damage and expense whatsoever, as incurred, to the extent of
                  the aggregate amount paid in settlement of any litigation, or
                  any investigation or proceeding by any governmental agency or
                  body, commenced or threatened, or of any claim whatsoever
                  based upon any such untrue statement or omission, or any such
                  alleged untrue statement or omission, provided that (subject
                  to Section 6(d) below) any such settlement is effected with
                  the prior written consent of the Company; and

                           (iii) against any and all expense whatsoever, as
                  incurred (including the fees and disbursements of counsel
                  chosen by the Initial Purchaser), reasonably incurred in
                  investigating, preparing or defending against any litigation,
                  or any investigation or proceeding by any governmental agency
                  or body, commenced or threatened, or any claim whatsoever
                  based upon any such untrue statement or omission, or any such
                  alleged untrue statement or omission, to the extent that any
                  such expense is not paid under (i) or (ii) above;

PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by the
Initial Purchaser, such holder of Registrable Securities (which also
acknowledges the indemnity provisions herein) or any person, if any, who
controls the Initial Purchaser or any such holder of Registrable Securities
expressly for use in the Registration Statement (or any amendment thereto) or
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); provided, further, that this indemnity agreement shall not apply to
any loss, liability, claim, damage or expense (1) arising from an offer or sale
of Registrable Securities occurring during a Deferral Period, if a Deferral
Notice was given to such Notice Holder in accordance with Section 8(b), or (2)
if the Holder fails to deliver at or prior to the written confirmation of sale,
the most recent Prospectus, as amended or supplemented, and such Prospectus, as
amended or supplemented, would have corrected such untrue statement or omission
or alleged untrue statement or omission of a material fact.

                  (b) In connection with any Shelf Registration in which a
holder, including, without limitation, the Initial Purchaser, of Registrable
Securities is participating, in furnishing information relating to such holder
of Registrable Securities to the Company in writing expressly for use in such
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto, the holders of such Registrable Securities
agree, severally and not jointly, to indemnify and hold harmless the Initial
Purchaser and each person, if any, who controls the Initial Purchaser within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act and the Company, and each person, if any, who controls the Company within
the meaning of either such Section, against any and all loss, liability, claim,

                                       13
<PAGE>

damage and expense described in the indemnity contained in subsection (a) of
this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such holder of Registrable Securities (which also acknowledges the indemnity
provisions herein) or any person, if any, who controls any such holder of
Registrable Securities expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).

                  The Initial Purchaser agrees to indemnify and hold harmless
the Company, the holders of Registrable Securities, and each person, if any, who
controls the Company or any holder of Registrable Securities within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto), or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by the Initial Purchaser expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).

                  (c) Each indemnified party shall give notice as promptly as
reasonably practicable to each indemnifying party of any action commenced
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability hereunder to the extent it is not materially prejudiced as a
result thereof and in any event shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. The indemnifying
party, upon request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party and any
others the indemnifying party may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel), whose fees must be reasonable, for the Initial
Purchaser, Holders of Registrable Securities, and all persons, if any, who
control the Initial Purchaser or Holders of Registrable Securities within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, collectively (b) the fees and expenses of more than one separate firm (in
addition to any local counsel), whose fees must be reasonable, for the Company,
and each person, if any, who controls the Company within the meaning of either
such Section, and that all fees and expenses payable under (a) and (b) above
shall be reimbursed as

                                       14
<PAGE>

they are incurred. In the case of any such separate firm for the Initial
Purchaser, Holders of Registrable Securities, and control persons of the Initial
Purchaser and Holders of Registrable Securities, such firm shall be designated
in writing by the Initial Purchaser. In the case of any such separate firm for
the Company, and control persons of the Company, such firm shall be designated
in writing by the Company. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final non-appealable judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.

                  (d) If at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
written consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement. Notwithstanding the immediately
preceding sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its consent if such
indemnifying party (1) reimburses such indemnified party in accordance with such
request to the extent it considers such request to be reasonable and (2)
provides written notice to the indemnified party substantiating the unpaid
balance as unreasonable, in each case prior to the date of such settlement.

                  (e) If the indemnification to which an indemnified party is
entitled under this Section 6 is for any reason unavailable to or insufficient
although applicable in accordance with its terms to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying party
on the one hand and the indemnified party on the other hand from the offering of
the Registrable Securities or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.

                                       15
<PAGE>

                  The relative fault of the Company on the one hand and the
holders of the Registrable Securities or the Initial Purchaser on the other hand
shall be determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the holder of the Registrable Securities or the Initial Purchaser and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

                  The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(e) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 6(e). The
aggregate amount of losses, liabilities, claims, damages, and expenses incurred
by an indemnified party and referred to above in this Section 6(e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.

                  Notwithstanding the provisions of this Section 6, neither the
holder of any Registrable Securities nor the Initial Purchaser, shall be
required to indemnify or contribute any amount in excess of the amount by which
the total price at which the Registrable Securities sold by such holder of
Registrable Securities or by the Initial Purchaser, as the case may be, and
distributed to the public were offered to the public exceeds the amount of any
damages that such holder of Registrable Securities or the Initial Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.

                  No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

                  For purposes of this Section 6(e), each person, if any, who
controls the Initial Purchaser or any holder of Registrable Securities within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as the Initial Purchaser or such
holder, and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.

         SECTION 7. INFORMATION REQUIREMENTS. The Company covenants that, if at
any time before the end of the Effectiveness Period the Company is not subject
to the reporting requirements of the Exchange Act, the Company will cooperate
with any Holder of Registrable Securities and take such further reasonable
action as any Holder of Registrable Securities may reasonably request in writing
(including, without limitation, making such reasonable representations as any
such Holder may reasonably request), all to the extent required from time to
time to enable such Holder to sell Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 and Rule 144A under the Securities Act and customarily taken in
connection with sales pursuant to such exemptions.

                                       16
<PAGE>

         SECTION 8. MISCELLANEOUS; NO CONFLICTING AGREEMENTS. Except for such
agreements that will be waived or amended prior to the filing of the
Registration Statement, the Company is not, as of the date hereof, a party to,
nor shall the Company, on or after the date of this Agreement, enter into any
agreement with respect to its securities that conflicts with the rights granted
to the Holders of Registrable Securities in this Agreement. Except for such
agreements that will be waived or amended prior to the filing of the
Registration Statement, the Company represents and warrants that the rights
granted to the Holders of Registrable Securities hereunder do not in any way
conflict with the rights granted to the holders of either the Company's or the
Guarantor's respective other issued and outstanding securities under any other
agreements.

                  (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of a majority of the then outstanding Underlying Common Stock constituting
Registrable Securities (with Holders of Debentures deemed to be the Holders, for
purposes of this Section, of the number of outstanding shares of Underlying
Common Stock into which such Debentures are or would be convertible or
exchangeable as of the date on which such consent is requested). Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect the
rights of other Holders of Registrable Securities may be given by Holders of at
least a majority of the Registrable Securities being sold by such Holders
pursuant to such Registration Statement; provided, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence. Each Holder of Registrable
Securities outstanding at the time of any such amendment, modification,
supplement, waiver or consent or thereafter shall be bound by any such
amendment, modification, supplement, waiver or consent effected pursuant to this
Section 8(a), whether or not any notice, writing or marking indicating such
amendment, modification, supplement, waiver or consent appears on the
Registrable Securities or is delivered to such Holder.

                  (b) NOTICES. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand delivery, by telecopier,
by courier guaranteeing overnight delivery or by first-class mail, return
receipt requested, and shall be deemed given (i) when made, if made by hand
delivery, (ii) upon confirmation, if made by telecopier, (iii) one (1) Business
Day after being deposited with such courier, if made by overnight courier or
(iv) on the date indicated on the notice of receipt, if made by first-class
mail, to the parties as follows:

                  (w) if to a Holder of Registrable Securities that is not a
Notice Holder, at the address for such Holder then appearing in the Registrar
(as defined in the Indenture);

                  (x) if to a Notice Holder, at the most current address given
by such Holder to the Company in a Notice and Questionnaire or any amendment
thereto;

                  (y) if to the Company, to:

                                       17
<PAGE>

                           Carnival Corporation
                           3655 N.W. 87th Avenue
                           Miami, FL 33178-2428
                           Attention: Arnaldo Perez, Esq., General Counsel
                           Telecopier No.:

                           with a copy to:

                           Paul, Weiss, Rifkind, Wharton & Garrison
                           1285 Avenue of the Americas
                           New York, N.Y.  10019
                           Attention: John C. Kennedy, Esq.
                           Telecopier No.:  (212) 373-2042

                           and

                  (z) if to the Initial Purchaser, to:

                           Merrill Lynch & Co.,
                           Merrill Lynch, Pierce, Fenner & Smith
                                       Incorporated
                           North Tower
                           World Financial Center
                           New York, New York 10080
                           Attention: Mark Hagan
                           Telecopy No.:  (212) 449-9143

or to such other address as such person may have furnished to the other persons
identified in this Section 8(c) in writing in accordance herewith.

                  (c) APPROVAL OF HOLDERS. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its affiliates (as such
term is defined in Rule 405 under the Securities Act) (other than the Initial
Purchaser or subsequent Holders of Registrable Securities if such subsequent
Holders are deemed to be such affiliates solely by reason of their holdings of
such Registrable Securities) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.

                  (d) SUCCESSORS AND ASSIGNS. Any person who purchases any
Registrable Securities from the Initial Purchaser shall be deemed, for purposes
of this Agreement, to be an assignee of the Initial Purchaser. This Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties and shall inure to the benefit of and be binding upon each
Holder of any Registrable Securities.

                  (e) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be original and all of which taken
together shall constitute one and the same agreement.

                                       18
<PAGE>

                  (f) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

                  (g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

                  (h) SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated thereby, and the parties hereto
shall use their best efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision, covenant or restriction, it being intended that all of the rights and
privileges of the parties shall be enforceable to the fullest extent permitted
by law.

                  (i) ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and is intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and the
registration rights granted by the Company with respect to the Registrable
Securities. Except as provided in the Purchase Agreement, there are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein, with respect to the registration rights granted by the
Company with respect to the Registrable Securities. This Agreement supersedes
all prior agreements and undertakings among the parties solely with respect to
such registration rights.

                  (j) TERMINATION. This Agreement and the obligations of the
parties hereunder shall terminate upon the end of the Effectiveness Period,
except for any liabilities or obligations under Sections 4, 5 or 6 hereof and
the obligations to make payments of and provide for Liquidated Damages under
Section 2(e) hereof to the extent such damages accrue prior to the end of the
Effectiveness Period, each of which shall remain in effect in accordance with
its terms.

                                       19
<PAGE>

                  IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.

                                       CARNIVAL CORPORATION

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

Accepted as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
                      INCORPORATED

By:
   -------------------------------------
           Authorized Signatory<PAGE>

                                                                    EXHIBIT 10.1

                      FIRST HORIZON ASSET SECURITIES INC.

                                   Depositor

                      FIRST HORIZON HOME LOAN CORPORATION

                          Seller and Master Servicer

                   FIRST TENNESSEE BANK NATIONAL ASSOCIATION

                                   Purchaser

                                      and

                             THE BANK OF NEW YORK

                                    Trustee

              ___________________________________________________

                        POOLING AND SERVICING AGREEMENT

                            Dated as of May 1, 2001

              ___________________________________________________

               FIRST HORIZON MORTGAGE PASS-THROUGH TRUST 2001-3

               MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2001-3
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                           Page
                                                                                                                           ----
<S>                                                                                                                        <C>
ARTICLE I - DEFINITIONS.................................................................................................      4

ARTICLE II - CONVEYANCE OF MORTGAGE LOANS; REPRESENTATIONS AND WARRANTIES...............................................     31
     SECTION 2.1  Conveyance of Mortgage Loans..........................................................................     31
     SECTION 2.2  Acceptance by Trustee of the Mortgage Loans...........................................................     35
     SECTION 2.3  Representations, Warranties and Covenants of the Seller and Master Servicer...........................     37
     SECTION 2.4  Representations and Warranties of the Depositor as to the Mortgage Loans..............................     39
     SECTION 2.5  Delivery of Opinion of Counsel in Connection with Substitutions.......................................     40
     SECTION 2.6  Execution and Delivery of Certificates................................................................     40
     SECTION 2.7  REMIC Matters.........................................................................................     40
     SECTION 2.8  Covenants of the Master Servicer......................................................................     40

ARTICLE III - ADMINISTRATION AND SERVICING OF MORTGAGE LOANS............................................................     41
     SECTION 3.1  Master Servicer to Service Mortgage Loans.............................................................     41
     SECTION 3.2  Subservicing; Enforcement of the Obligations of Servicers.............................................     42
     SECTION 3.3  Rights of the Depositor and the Trustee in Respect of the Master Servicer.............................     42
     SECTION 3.4  Trustee to Act as Master Servicer.....................................................................     43
     SECTION 3.5  Collection of Mortgage Loan Payments; Certificate Account; Distribution Account.......................     43
     SECTION 3.6  Collection of Taxes, Assessments and Similar Items; Escrow Accounts...................................     46
     SECTION 3.7  Access to Certain Documentation and Information Regarding the Mortgage Loans..........................     46
     SECTION 3.8  Permitted Withdrawals from the Certificate Account and Distribution Account...........................     47
     SECTION 3.9  Maintenance of Hazard Insurance; Maintenance of Primary Insurance Policies............................     48
     SECTION 3.10 Enforcement of Due-on-Sale Clauses; Assumption Agreements.............................................     50
     SECTION 3.11 Realization Upon Defaulted Mortgage Loans; Repurchase of Certain Mortgage Loans.......................     51
     SECTION 3.12 Trustee to Cooperate; Release of Mortgage Files.......................................................     53
     SECTION 3.13 Documents Records and Funds in Possession of Master Servicer to be Held for the Trustee...............     54
     SECTION 3.14 Master Servicing Compensation.........................................................................     54
     SECTION 3.15 Access to Certain Documentation.......................................................................     55
     SECTION 3.16 Annual Statement as to Compliance.....................................................................     55
     SECTION 3.17 Annual Independent Public Accountants' Servicing Statement; Financial Statements......................     55
     SECTION 3.18 Errors and Omissions Insurance; Fidelity Bonds........................................................     56
</TABLE>

                                       i

<PAGE>

<TABLE>
<S>                                                                                                                              <C>
ARTICLE IV - DISTRIBUTIONS AND ADVANCES BY THE MASTER SERVICER...............................................................    56
     SECTION 4.1  Advances...................................................................................................    56
     SECTION 4.2  Priorities of Distribution.................................................................................    57
     SECTION 4.3  Method of Distribution.....................................................................................    59
     SECTION 4.4  Allocation of Losses.......................................................................................    60
     SECTION 4.5  [Reserved].................................................................................................    61
     SECTION 4.6  Monthly Statements to Certificateholders...................................................................    61
     SECTION 4.7  [Reserved.]................................................................................................    63
     SECTION 4.8  [Reserved.]................................................................................................    63

ARTICLE V - THE CERTIFICATES.................................................................................................    63
     SECTION 5.1  The Certificates...........................................................................................    63
     SECTION 5.2  Certificate Register; Registration of Transfer and Exchange of Certificates................................    64
     SECTION 5.3  Mutilated, Destroyed, Lost or Stolen Certificates..........................................................    68
     SECTION 5.4  Persons Deemed Owners......................................................................................    68
     SECTION 5.5  Access to List of Certificateholders' Names and Addresses..................................................    69
     SECTION 5.6  Maintenance of Office or Agency............................................................................    69

ARTICLE VI - THE DEPOSITOR AND THE MASTER SERVICER...........................................................................    69
     SECTION 6.1  Respective Liabilities of the Depositor and the Master Servicer............................................    69
     SECTION 6.2  Merger or Consolidation of the Depositor or the Master Servicer............................................    69
     SECTION 6.3  Limitation on Liability of the Purchaser, the Depositor, the Seller, the Master Servicer and Others........    70
     SECTION 6.4  Limitation on Resignation of Master Servicer...............................................................    70

ARTICLE VII - DEFAULT........................................................................................................    71
     SECTION 7.1  Events of Default..........................................................................................    71
     SECTION 7.2  Trustee to Act; Appointment of Successor...................................................................    72
     SECTION 7.3  Notification to Certificateholders.........................................................................    73

ARTICLE VIII - CONCERNING THE TRUSTEE........................................................................................    73
     SECTION 8.1  Duties of Trustee..........................................................................................    73
     SECTION 8.2  Certain Matters Affecting the Trustee......................................................................    75
     SECTION 8.3  Trustee Not Liable for Certificates or Mortgage Loans......................................................    76
     SECTION 8.4  Trustee May Own Certificates...............................................................................    76
     SECTION 8.5  Trustee's Fees and Expenses................................................................................    77
     SECTION 8.6  Eligibility Requirements for Trustee.......................................................................    77
     SECTION 8.7  Resignation and Removal of Trustee.........................................................................    78
     SECTION 8.8  Successor Trustee..........................................................................................    78
     SECTION 8.9  Merger or Consolidation of Trustee.........................................................................    79
     SECTION 8.10 Appointment of Co-Trustee or Separate Trustee..............................................................    79
     SECTION 8.11 Tax Matters................................................................................................    80
     SECTION 8.12 Periodic Filings...........................................................................................    82
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                                      <C>
ARTICLE IX - TERMINATION.........................................................................         82
     SECTION 9.1   Termination upon Liquidation or Purchase of all Mortgage Loans................         82
     SECTION 9.2   Final Distribution on the Certificates........................................         83
     SECTION 9.3   Additional Termination Requirements...........................................         84

ARTICLE X - [RESERVED]...........................................................................         84

ARTICLE XI - MISCELLANEOUS PROVISIONS............................................................         85
     SECTION 11.1  Amendment.....................................................................         85
     SECTION 11.2  Recordation of Agreement; Counterparts........................................         86
     SECTION 11.3  Governing Law.................................................................         86
     SECTION 11.4  Intention of Parties..........................................................         87
     SECTION 11.5  Notices.......................................................................         87
     SECTION 11.6  Severability of Provisions....................................................         88
     SECTION 11.7  Assignment....................................................................         88
     SECTION 11.8  Limitation on Rights of Certificateholders....................................         89
     SECTION 11.9  Inspection and Audit Rights...................................................         89
     SECTION 11.10 Certificates Nonassessable and Fully Paid.....................................         90
     SECTION 11.11 Limitations on Actions; No Proceedings........................................         90

                                                        SCHEDULES

   Schedule I:      Mortgage Loan Schedule.......................................................      S-I-1
   Schedule II-A:   Representations and Warranties of the Seller/Master Servicer.................   S-II-A-1
   Schedule II-B:   Representations and Warranties of the Purchaser..............................   S-II-B-1
   Schedule III:    Representations and Warranties as to the Mortgage Loans......................    S-III-1
   Schedule IV:     Form of Monthly Master Servicer Report.......................................     S-IV-1
   Schedule V:      Principal Balance Schedules..................................................      S-V-1

                                                        EXHIBITS

   Exhibit A:       Form of Senior Certificate...................................................        A-1
   Exhibit B:       Form of Subordinated Certificate.............................................        B-1
   Exhibit C:       Form of Residual Certificate.................................................        C-1
   Exhibit D:       Form of Reverse of Certificates..............................................        D-1
   Exhibit E:       Form of Initial Certification................................................        E-1
   Exhibit F:       Form of Delay Delivery Certification.........................................        F-1
   Exhibit G:       Form of Final Certification of Custodian.....................................        G-1
   Exhibit H:       Transfer Affidavit...........................................................        H-1
   Exhibit I:       Form of Transferor Certificate...............................................        I-1
   Exhibit J:       Form of Investment Letter [Non-Rule 144A]....................................        J-1
   Exhibit K:       Form of Rule 144A Letter.....................................................        K-1
   Exhibit L:       Request for Release (for Trustee)............................................        L-1
   Exhibit M:       Request for Release (Mortgage Loan)..........................................        M-1
</TABLE>

                                      iii
<PAGE>

     THIS POOLING AND SERVICING AGREEMENT, dated as of May 1, 2001, among FIRST
HORIZON ASSET SECURITIES INC., a Delaware corporation, as depositor (the
"Depositor"), FIRST HORIZON HOME LOAN CORPORATION, a Kansas corporation, as
seller (in such capacity, the "Seller") and as master servicer (in such
capacity, the "Master Servicer"), FIRST TENNESSEE BANK NATIONAL ASSOCIATION (the
"Purchaser") and THE BANK OF NEW YORK, a banking corporation organized under the
laws of the State of New York, as trustee (the "Trustee").

                                WITNESSETH THAT

     In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:

                             PRELIMINARY STATEMENT

     The Depositor is the owner of the Trust Fund that is hereby conveyed to the
Trustee in return for the Certificates. The Trust Fund for federal income tax
purposes will consist of a single REMIC. The Certificates will represent the
entire beneficial ownership interest in the Trust Fund. The Regular Certificates
will represent "regular interests" in the REMIC and the Residual Certificates
will represent the sole class of residual interests in the REMIC.  The "latest
possible maturity date" for federal income tax purposes of all interests created
hereby will be the Latest Possible Maturity Date.

     The following table sets forth characteristics of the Certificates,
together with the minimum denominations and integral multiples in excess thereof
in which such Classes shall be issuable (except that one Certificate of each
Class of Certificates may be issued in a different amount and, in addition, one
Residual Certificate representing the Tax Matters Person Certificate may be
issued in a different amount):

                  [Remainder of Page Intentionally Left Blank]
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
   Class          Initial Class      Pass-Through     Minimum     Integral Multiples in
Designation    Certificate Balance       Rate       Denomination    in Excess Minimum
---------------------------------------------------------------------------------------
<S>            <C>                   <C>            <C>           <C>
 Class A-1        $89,267,400.00         6.75%        $ 25,000           $1,000
---------------------------------------------------------------------------------------
 Class A-2        $19,098,000.00         6.75%        $  1,000           $1,000
---------------------------------------------------------------------------------------
 Class A-3        $24,000,000.00         6.75%        $ 25,000           $1,000
---------------------------------------------------------------------------------------
 Class A-4        $91,483,000.00         6.75%        $ 25,000           $1,000
---------------------------------------------------------------------------------------
 Class A-5        $ 5,000,000.00         6.75%        $ 25,000           $1,000
---------------------------------------------------------------------------------------
 Class A-6        $11,882,500.00         6.75%        $ 25,000           $1,000
---------------------------------------------------------------------------------------
 Class A-R        $       100.00         6.75%        $    100             N/A
---------------------------------------------------------------------------------------
 Class B-1        $ 3,502,000.00         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
 Class B-2        $ 2,501,000.00         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
 Class B-3        $ 1,376,000.00         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
 Class B-4        $   625,000.00         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
 Class B-5        $   500,000.00         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
 Class B-6        $   875,420.20         6.75%        $100,000           $1,000
---------------------------------------------------------------------------------------
</TABLE>

_____________________

Accrual Certificates:      None.

Accrual Components:        None.

Book-Entry Certificates:   All Classes of Certificates other than the Physical
                           Certificates.

Component Certificates:    None.

Components:                For purposes of calculating distributions, the
                           Component Certificates will be comprised of multiple
                           payment components having the designations, Initial
                           Component Balances and Pass-Through Rates set forth
                           below:

                                           Initial Component
                             Designation        Balance       Pass-Through Rate
                             -----------   -----------------  -----------------
                                 N/A              N/A                N/A

Delay Certificates:        All interest-bearing Classes of Certificates other
                           than the Non-Delay Certificates, if any.

                                      -2-
<PAGE>

ERISA-Restricted
Certificates:                The Residual Certificates and the Private
                             Certificates.

Floating Rate Certificates:  None.

Interest Only Certificates:  None.

Inverse Floating Rate
Certificates:                None.

COFI Certificates:           None.

LIBOR Certificates:          None.

Non-Delay Certificates:      None.

Notional Amount
Certificates:                None.

Offered Certificates:        All Classes of Certificates other than the Private
                             Certificates.

Physical Certificates:       The Private Certificates and the Residual
                             Certificates.

Planned Principal Classes:   None.

Primary Planned Principal
Classes:                     None.

Principal Only
Certificates:                None.

Private Certificates:        Class B-4, Class B-5 and Class B-6 Certificates.

Rating Agencies:             S&P and Moody's.

Regular Certificates:        All Classes of Certificates, other than the
                             Residual Certificates.

Residual Certificates:       The Class A-R Certificates.

Retail Certificates:         The Class A-2 Certificates.

Scheduled Principal
Classes:                     None.

Secondary Planned Principal
Class:                       None.

                                      -3-
<PAGE>

Senior Certificates:         The Class A-1, Class A-2, Class A-3, Class A-4,
                             Class A-5, Class A-6 and Class A-R Certificates.

Subordinated Certificates:   Class B-1, Class B-2, Class B-3, Class B-4, Class
                             B-5 and Class B-6 Certificates.

Support Classes:             None.

Targeted Principal
Classes:                     None.

     With respect to any of the foregoing designations as to which the
corresponding reference is "None," all defined terms and provisions herein
relating solely to such designations shall be of no force or effect, and any
calculations herein incorporating references to such designations shall be
interpreted without reference to such designations and amounts. Defined terms
and provisions herein relating to statistical rating agencies not designated
above as Rating Agencies shall be of no force or effect.

                                   ARTICLE I
                                  DEFINITIONS

     Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:

     Accrual Certificates: As described in the Preliminary Statement.

     Accretion Termination Date: Not applicable.

     Accrual Amount: Not applicable.

     Accrual Termination Date: Not applicable.

     Accrued Certificate Interest: For any Class of Certificates for any
Distribution Date, the interest accrued during the related Interest Accrual
Period at the applicable Pass-Through Rate on the Certificate Principal Balance
of such Class of Certificates immediately prior to such Distribution Date, less
such Class' share of any Net Interest Shortfall.

     Adjusted Mortgage Rate: As to each Mortgage Loan, and at any time, the per
annum rate equal to the Mortgage Rate less the Master Servicing Fee Rate.

     Adjusted Net Mortgage Rate: As to each Mortgage Loan, and at any time, the
per annum rate equal to the Mortgage Rate less the related Expense Rate.

     Advance: The payment required to be made by the Master Servicer with
respect to any Distribution Date pursuant to Section 4.1, the amount of any such
payment being equal to the aggregate of payments of principal and interest (net
of the Master Servicing Fee and net of any net income in the case of any REO
Property) on the Mortgage Loans that were due on the related Due

                                      -4-
<PAGE>

Date and not received as of the close of business on the related Determination
Date, less the aggregate amount of any such delinquent payments that the Master
Servicer has determined would constitute a Nonrecoverable Advance if advanced.

     Agreement: This Pooling and Servicing Agreement and all amendments or
supplements hereto.

     Allocable Share: With respect to any Class of Subordinated Certificates on
any Distribution Date, such Class's pro rata share (based on the Class
Certificate Balance of each Class entitled thereto) of each of the components of
the Subordinated Optimal Principal Amount described below; provided, that,
except as provided in this Agreement, no Class B Certificates (other than the
Class B-1 Certificates) shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (2), (3) and (5) of the definition of
Subordinated Optimal Principal Amount unless the Class Prepayment Distribution
Trigger for the related Class is satisfied for such Distribution Date.

     Amount Held for Future Distribution: As to any Distribution Date, the
aggregate amount held in the Certificate Account at the close of business on the
related Determination Date on account of (i) Principal Prepayments received
after the related Prepayment Period and Liquidation Proceeds received in the
month of such Distribution Date and (ii) all Scheduled Payments due after the
related Due Date.

     Appraised Value: With respect to any Mortgage Loan, the Appraised Value of
the related Mortgaged Property shall be: (i) with respect to a Mortgage Loan
other than a Refinancing Mortgage Loan, the lesser of (a) the value of the
Mortgaged Property based upon the appraisal made at the time of the origination
of such Mortgage Loan and (b) the sales price of the Mortgaged Property at the
time of the origination of such Mortgage Loan; (ii) with respect to a
Refinancing Mortgage Loan other than a Streamlined Documentation Mortgage Loan,
the value of the Mortgaged Property based upon the appraisal made at the time of
the origination of such Refinancing Mortgage Loan; and (iii) with respect to a
Streamlined Documentation Mortgage Loan, (a) if the loan-to-value ratio with
respect to the Original Mortgage Loan at the time of the origination thereof was
90% or less, the value of the Mortgaged Property based upon the appraisal made
at the time of the origination of the Original Mortgage Loan and (b) if the
loan-to-value ratio with respect to the Original Mortgage Loan at the time of
the origination thereof was greater than 90%, the value of the Mortgaged
Property based upon the appraisal (which may be a drive-by appraisal) made at
the time of the origination of such Streamlined Documentation Mortgage Loan.

     Available Funds: With respect to any Distribution Date, an amount equal to
the sum of:

     .    all scheduled installments of interest, net of the Master Servicing
          Fee, the Trustee Fee and any amounts due to First Horizon in respect
          of the Retained Yield on such Distribution Date, and all scheduled
          installments of principal due on the Due Date in the month in which
          the Distribution Date occurs and received before the related
          Determination Date, together with any Advances in respect thereof;

     .    all Insurance Proceeds and all Liquidation Proceeds during the
          calendar month before the Distribution Date, which in each case is net
          of unreimbursed expenses incurred in connection with a liquidation or
          foreclosure and unreimbursed Advances, if any;

                                      -5-
<PAGE>

     .    all Principal Prepayments received during the related Prepayment
          Period, plus interest received thereon, net of any Prepayment Interest
          Excess;

     .    any Compensating Interest in respect of Principal Prepayments in Full
          received during the related Prepayment Period; and

     .    any Substitution Adjustment Amount or the Purchase Price for any
          Deleted Mortgage Loan or a Mortgage Loan repurchased by the Seller or
          the Master Servicer as of such Distribution Date, reduced by amounts
          in reimbursement for Advances previously made and other amounts that
          the Master Servicer is entitled to be reimbursed for out of the
          Certificate Account pursuant to this Agreement.

     Bankruptcy Code: The United States Bankruptcy Reform Act of 1978, as
amended.

     Bankruptcy Coverage Termination Date: The date on which the Bankruptcy Loss
Coverage Amount is reduced to zero.

     Bankruptcy Loss: With respect to any Mortgage Loan, a Deficient Valuation
or Debt Service Reduction; provided, however, that a Bankruptcy Loss shall not
be deemed a Bankruptcy Loss hereunder so long as the Master Servicer has
notified the Trustee in writing that the Master Servicer is diligently pursuing
any remedies that may exist in connection with the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any related escrow payments in respect of such
Mortgage Loan are being advanced on a current basis by the Master Servicer, in
either case without giving effect to any Debt Service Reduction or Deficient
Valuation.

     Bankruptcy Loss Coverage Amount: As of any Determination Date, the
Bankruptcy Loss Coverage Amount shall equal the Initial Bankruptcy Coverage
Amount as reduced by (i) the aggregate amount of Bankruptcy Losses allocated to
the Certificates since the Cut-off Date and (ii) any permissible reductions in
the Bankruptcy Loss Coverage Amount as evidenced by a letter of each Rating
Agency to the Trustee to the effect that any such reduction will not result in a
downgrading of the then current ratings assigned to the Classes of Certificates
rated by it.

     Blanket Mortgage: The mortgage or mortgages encumbering the Cooperative
Property.

     Book-Entry Certificates: As specified in the Preliminary Statement.

     Business Day: Any day other than (i) a Saturday or a Sunday, or (ii) a day
on which banking institutions in the City of Dallas, or the State of Texas or
the city in which the Corporate Trust Office of the Trustee is located are
authorized or obligated by law or executive order to be closed.

     Certificate: Any one of the Certificates executed by the Trustee in
substantially the forms attached hereto as exhibits.

     Certificate Account: The separate Eligible Account or Accounts created and
maintained by the Master Servicer pursuant to Section 3.5 with a depository
institution in the name of the Master

                                      -6-
<PAGE>

Servicer for the benefit of the Trustee on behalf of Certificateholders and
designated "First Horizon Home Loan Corporation in trust for the registered
holders of First Horizon Asset Securities Inc. Mortgage Pass-Through
Certificates, Series 2001-3."

     Certificate Principal Balance: With respect to any Certificate and as of
any Distribution Date, the Certificate Principal Balance on the date of the
initial issuance of such Certificate, as reduced by:

     (1)  all amounts distributed on previous Distribution Dates on such
          Certificate on account of principal;

     (2)  the principal portion of all Realized Losses previously allocated to
          such Certificate; and

     (3)  in the case of a Subordinated Certificate, such Certificate's pro rata
          share, if any, of the Subordinated Certificate Writedown Amount for
          previous Distribution Dates.

     Certificate Owner: With respect to a Book-Entry Certificate, the Person who
is the beneficial owner of such Book-Entry Certificate.

     Certificate Register: The register maintained pursuant to Section 5.2
hereof.

     Certificateholder or Holder: The person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of
giving any consent pursuant to this Agreement, any Certificate registered in the
name of the Depositor or any affiliate of the Depositor shall be deemed not to
be Outstanding and the Percentage Interest evidenced thereby shall not be taken
into account in determining whether the requisite amount of Percentage Interests
necessary to effect such consent has been obtained; provided, however, that if
any such Person (including the Depositor) owns 100% of the Percentage Interests
evidenced by a Class of Certificates, such Certificates shall be deemed to be
Outstanding for purposes of any provision hereof that requires the consent of
the Holders of Certificates of a particular Class as a condition to the taking
of any action hereunder. The Trustee is entitled to rely conclusively on a
certification of the Depositor or any affiliate of the Depositor in determining
which Certificates are registered in the name of an affiliate of the Depositor.

     Class: All Certificates bearing the same class designation as set forth in
the Preliminary Statement.

     Class A-3 Distribution Percentage: As to any Distribution Date, 0% through
the Distribution Date in May 2006; thereafter, 30% of the Class A-3 Percentage
through the Distribution Date in May 2007; thereafter, 40% of the Class A-3
Percentage through the Distribution Date in May 2008; thereafter, 60% of the
Class A-3 Percentage through the Distribution Date in May 2009; thereafter, 80%
of the Class A-3 Percentage through the Distribution Date in May 2010; and
thereafter, 100% of the Class A-3 Percentage.

     Class A-3 Percentage: For any Distribution Date, the percentage (carried to
six places rounded up) obtained by dividing (1) the aggregate Class Certificate
Balance of the Class A-3

                                      -7-
<PAGE>

Certificates immediately preceding such Distribution Date by (2) the aggregate
Class Certificate Balance of all Certificates immediately preceding such
Distribution Date.

     Class A-3 Principal Distribution Amount: For any Distribution Date, the sum
of the amounts described in clauses (1) through (5) of the definition of Senior
Optimal Principal Amount (determined without application of the Senior
Percentage or the Senior Prepayment Percentage) for such date multiplied by the
Class A-3 Distribution Percentage for such date. Notwithstanding the foregoing,
(1) on the Group I Final Distribution Date, the Class A-3 Principal Distribution
Amount will be increased by any Senior Optimal Principal Amount remaining after
distributions of principal have been made on the Group I Senior Certificates,
and (2) following the Group I Final Distribution Date, the Class A-3 Principal
Distribution Amount will equal the Senior Optimal Principal Amount.

     Class B Certificates: The Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates, collectively.

     Class Certificate Balance: With respect to any Class of Certificates and as
of any Distribution Date, the aggregate of the Certificate Principal Balances of
all Certificates of such Class as of such date.

     Class Prepayment Distribution Trigger: For a Class of Class B Certificates
(other than the Class B-1 Certificates), a trigger that is satisfied on any
Distribution Date on which a fraction (expressed as a percentage), the numerator
of which is the aggregate Class Certificate Balance of such Class and each Class
subordinate thereto, if any, and the denominator of which is the Pool Principal
Balance with respect to such Distribution Date, equals or exceeds such
percentage calculated as of the Closing Date.

     Closing Date: May 30, 2001

     Code: The Internal Revenue Code of 1986, including any successor or
amendatory provisions.

     COFI: Not applicable.

     COFI Certificates: Not applicable.

     Compensating Interest: As to any Distribution Date and any Principal
Prepayment in respect of a Mortgage Loan that is received during the period from
the sixteenth day of the month prior to the month of such Distribution Date
through the last day of such month, an additional payment made by the Master
Servicer, to the extent funds are available from the Master Servicing Fee, equal
to the amount of interest at the Adjusted Net Mortgage Rate for that Mortgage
Loan from the date of the prepayment to the related Due Date; provided that the
aggregate of all such payments shall not exceed 0.0083% of the Pool Principal
Balance as of the related Determination Date, and provided further that if a
partial Principal Prepayment is applied as of the first of the month following
the month of receipt, no additional payment is required for such Principal
Prepayment.

     Component: Not applicable.

                                      -8-
<PAGE>

     Component Balance: Not applicable.

     Component Certificates: Not applicable.

     Cooperative Corporation: The entity that holds title (fee or an acceptable
leasehold estate) to the real property and improvements constituting the
Cooperative Property and which governs the Cooperative Property, which
Cooperative Corporation must qualify as a Cooperative Housing Corporation under
Section 216 of the Code.

     Coop Shares: Shares issued by a Cooperative Corporation.

     Cooperative Loan: Any Mortgage Loan secured by Coop Shares and a
Proprietary Lease.

     Cooperative Property: The real property and improvements owned by the
Cooperative Corporation, including the allocation of individual dwelling units
to the holders of the Coop Shares of the Cooperative Corporation.

     Cooperative Unit: A single family dwelling located in a Cooperative
Property.

     Corporate Trust Office: The designated office of the Trustee in the State
of New York at which at any particular time its corporate trust business with
respect to this Agreement shall be administered, which office at the date of the
execution of this Agreement is located at The Bank of New York, 101 Barclay
Street, 12E New York, New York 10286 (Attn: Corporate Trust Mortgage-Backed
Securities Group, First Horizon Asset Securities Inc. Series 2001-3), facsimile
no. (212) 815-4135, and which is the address to which notices to and
correspondence with the Trustee should be directed.

     Corresponding Classes of Certificates: Not applicable.

     Cross-Over Date: The Distribution Date on which the respective Class
Certificate Balances of the Subordinated Certificates have been reduced to zero.

     Custodial Agreement: The Custodial Agreement dated as of May 30, 2001 by
and among the Trustee, the Master Servicer and the Custodian.

     Custodian: LaSalle Bank National Association, a national banking
association, and its successors and assigns, as custodian under the Custodial
Agreement.

     Cut-off Date: May 1, 2001.

     Cut-off Date Pool Principal Balance: $250,110,420.

     Cut-off Date Principal Balance: As to any Mortgage Loan, the Stated
Principal Balance thereof as of the close of business on the Cut-off Date.

     Debt Service Reduction: With respect to any Mortgage Loan, a reduction by a
court of competent jurisdiction in a proceeding under the Bankruptcy Code in the
Scheduled Payment for

                                      -9-
<PAGE>

such Mortgage Loan which became final and non-appealable, except such a
reduction resulting from a Deficient Valuation or any reduction that results in
a permanent forgiveness of principal.

     Deceased Holder: Not applicable.

     Defective Mortgage Loan: Any Mortgage Loan which is required to be
repurchased pursuant to Section 2.2 or 2.3.

     Deficient Valuation: With respect to any Mortgage Loan, a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then-outstanding indebtedness under the Mortgage Loan, or any reduction in
the amount of principal to be paid in connection with any Scheduled Payment that
results in a permanent forgiveness of principal, which valuation or reduction
results from an order of such court which is final and non-appealable in a
proceeding under the Bankruptcy Code.

     Definitive Certificates: Any Certificate evidenced by a Physical
Certificate and any Certificate issued in lieu of a Book-Entry Certificate
pursuant to Section 5.2(e).

     Delay Certificates: As specified in the Preliminary Statement.

     Delay Delivery Mortgage Loans: The Mortgage Loans for which all or a
portion of a related Mortgage File is not delivered to Trustee on the Closing
Date. The number of Delay Delivery Mortgage Loans shall not exceed 25% of the
aggregate number of Mortgage Loans as of the Closing Date.

     Deleted Mortgage Loan: As defined in Section 2.3(c) hereof.

     Denomination: With respect to each Certificate, the amount set forth on the
face thereof as the "Initial Certificate Balance of this Certificate" or the
Percentage Interest appearing on the face thereof.

     Depositor: First Horizon Asset Securities Inc., a Delaware corporation, or
its successor in interest.

     Depository: The initial Depository shall be The Depository Trust Company,
the nominee of which is CEDE & Co., as the registered Holder of the Book-Entry
Certificates. The Depository shall at all times be a "clearing corporation" as
defined in Section 8-102(a)(5) 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: As to any Distribution Date, the earlier of (i) the
third Business Day after the 15th day of each month, and (ii) the second
Business Day prior to the related Distribution Date.

                                     -10-
<PAGE>

     Discount Mortgage Loan:  Any Mortgage Loan with a Mortgage Rate of less
than 7.00% per annum.

     Distribution Account:  The separate Eligible Account created and maintained
by the Trustee pursuant to Section 3.5 in the name of the Trustee for the
benefit of the Certificateholders and designated "The Bank of New York, in trust
for registered Holders of First Horizon Asset Securities Inc. Mortgage Pass-
Through Certificates, Series 2001-3." Funds in the Distribution Account shall be
held in trust for the Certificateholders for the uses and purposes set forth in
this Agreement.

     Distribution Account Deposit Date:  As to any Distribution Date, 1:30 p.m.
Central time on the Business Day immediately preceding such Distribution Date.

     Distribution Date:  The 25th day of each calendar month after the initial
issuance of the Certificates, or if such 25th day is not a Business Day, the
next succeeding Business Day, commencing in June 2001.

     Due Date:  With respect to any Distribution Date, the first day of the
month in which the related Distribution Date occurs.

     Eligible Account:  Any of (i) an account or accounts maintained with a
federal or state chartered depository institution or trust company the short-
term unsecured debt obligations of which (or, in the case of a depository
institution or trust company that is the principal subsidiary of a holding
company, the debt obligations of such holding company) have the highest short-
term ratings of each Rating Agency at the time any amounts are held on deposit
therein, or (ii) an account or accounts in a depository institution or trust
company in which such accounts are insured by the FDIC or the SAIF (to the
limits established by the FDIC or the SAIF, as applicable) and the uninsured
deposits in which accounts are otherwise secured such that, as evidenced by an
Opinion of Counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders have a claim with respect to the funds in such account or a
perfected first priority security interest against any collateral (which shall
be limited to Permitted Investments) securing such funds that is superior to
claims of any other depositors or creditors of the depository institution or
trust company in which such account is maintained, or (iii) a trust account or
accounts maintained with (a) the trust department of a federal or state
chartered depository institution or (b) a trust company, acting in its fiduciary
capacity or (iv) any other account acceptable to each Rating Agency.  Eligible
Accounts may bear interest, and may include, if otherwise qualified under this
definition, accounts maintained with the Trustee.

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

     ERISA-Restricted Certificate:  As specified in the Preliminary Statement.

     Escrow Account:  The Eligible Account or Accounts established and
maintained pursuant to Section 3.6(a) hereof.

     Event of Default:  As defined in Section 7.1 hereof.

                                     -11-
<PAGE>

     Excess Loss:  The amount of any (i) Fraud Loss realized after the Fraud
Loss Coverage Termination Date, (ii) Special Hazard Loss realized after the
Special Hazard Coverage Termination Date or (iii) Deficient Valuation realized
after the Bankruptcy Coverage Termination Date.

     Excess Proceeds:  With respect to any Liquidated Mortgage Loan, the amount,
if any, by which the sum of any Liquidation Proceeds of such Mortgage Loan
received in the calendar month in which such Mortgage Loan became a Liquidated
Mortgage Loan, net of any amounts previously reimbursed to the Master Servicer
as Nonrecoverable Advance(s) with respect to such Mortgage Loan pursuant to
Section 3.8(a)(iii), exceeds (i) the unpaid principal balance of such Liquidated
Mortgage Loan as of the Due Date in the month in which such Mortgage Loan became
a Liquidated Mortgage Loan plus (ii) accrued interest at the Mortgage Rate from
the Due Date as to which interest was last paid or advanced (and not reimbursed)
to Certificateholders up to the Due Date applicable to the Distribution Date
immediately following the calendar month during which such liquidation occurred.

     Expense Rate:  As to each Mortgage Loan, the sum of the related Master
Servicing Fee Rate and the Trustee Fee Rate.

     FDIC:  The Federal Deposit Insurance Corporation, or any successor thereto.

     FHLMC:  The Federal Home Loan Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.

     FIRREA:  The Financial Institutions Reform, Recovery, and Enforcement Act
of 1989.

     First Horizon:  First Horizon Home Loan Corporation, a Kansas corporation
and an indirect wholly owned subsidiary of First Tennessee National Corporation,
a Tennessee corporation.

     Fitch:  Fitch, Inc., or any successor thereto. If Fitch is designated as a
Rating Agency in the Preliminary Statement, for purposes of Section 10.05(b) the
address for notices to Fitch shall be Fitch, Inc., One State Street Plaza, New
York, New York 10004, Attention: Residential Mortgage Surveillance Group, or
such other address as Fitch may hereafter furnish to the Depositor and the
Master Servicer.

     FNMA:  The Federal National Mortgage Association, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, or any successor thereto.

     Fraud Loan:  A Liquidated Mortgage Loan as to which a Fraud Loss has
occurred.

     Fraud Loss Coverage Amount:  As of the Closing Date, $2,501,104.  As of any
Distribution Date prior to the third anniversary of the Cut-off Date, the Fraud
Loss Coverage Amount will equal $2,501,104 minus the aggregate amount of Fraud
Losses that would have been allocated to the Subordinated Certificates in the
absence of the Loss Allocation Limitation since the Cut-off Date. As of any
Distribution Date from the third to the fifth anniversaries of the Cut-off Date,
the Fraud Loss Coverage Amount will equal (1) the lesser of (a) the Fraud Loss
Coverage Amount as of the

                                     -12-
<PAGE>

most recent anniversary of the Cut-off Date and (b) 1.0% of the aggregate
outstanding principal balance of all of the mortgage loans as of the most recent
anniversary of the Cut-off Date minus (2) the Fraud Losses that would have been
allocated to the Subordinated Certificates in the absence of the Loss Allocation
Limitation since the most recent anniversary of the Cut-off Date. As of any
Distribution Date on or after the earlier of the Cross-Over Date or the fifth
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount shall be zero.

     Fraud Loss Coverage Termination Date:  The point in time at which the Fraud
Loss Coverage Amount is reduced to zero.

     Fraud Losses:  Realized Losses on Mortgage Loans as to which a loss is
sustained by reason of a default arising from fraud, dishonesty or
misrepresentation in connection with the related Mortgage Loan, including a loss
by reason of the denial of coverage under any related Primary Insurance Policy
because of such fraud, dishonesty or misrepresentation.

     Group I Final Distribution Date:  The Distribution Date on which the Class
Certificate Balance of each of the Group I Senior Certificates has been reduced
to zero.

     Group I Senior Certificates:  The Class A-1, Class A-2, Class A-4, Class A-
5, Class A-6 and Class A-R Certificates, collectively.
     Index:  Not applicable.

     Indirect Participant:  A broker, dealer, bank or other financial
institution or other Person that clears through or maintains a custodial
relationship with a Depository Participant.

     Initial Bankruptcy Coverage Amount:  $100,000.

     Initial Component Balance:  Not applicable.

     Insurance Policy:  With respect to any Mortgage Loan included in the Trust
Fund, any insurance policy, including all riders and endorsements thereto in
effect, including any replacement policy or policies for any Insurance Policies.

     Insurance Proceeds:  Proceeds paid by an insurer pursuant to any Insurance
Policy, in each case other than any amount included in such Insurance Proceeds
in respect of Insured Expenses.

     Insured Expenses:  Expenses covered by an Insurance Policy or any other
insurance policy with respect to the Mortgage Loans.

     Interest Accrual Period:  With respect to each Class of Delay Certificates
and any Distribution Date, the calendar month prior to the month of such
Distribution Date. With respect to any Non-Delay Certificates and any
Distribution Date, the one month period commencing on the 25th day of the month
preceding the month in which such Distribution Date occurs and ending on the
24th day of the month in which such Distribution Date occurs.

     Interest Determination Date:  Not applicable.

                                     -13-
<PAGE>

     Last Scheduled Distribution Date:  For each Class of Offered Certificates
is the Distribution Date occurring in June 2031.

     Latest Possible Maturity Date:  The Distribution Date following the third
anniversary of the scheduled maturity date of the Mortgage Loan having the
latest scheduled maturity date as of the Cut-off Date.

     Lender PMI Mortgage Loan:  Not applicable.

     LIBOR:  Not Applicable.

     LIBOR Certificates:  As specified in the Preliminary Statement.

     Liquidated Mortgage Loan:  With respect to any Distribution Date, a
defaulted Mortgage Loan (including any REO Property) which was liquidated in the
calendar month preceding the month of such Distribution Date and as to which the
Master Servicer has determined (in accordance with this Agreement) that it has
received all amounts it expects to receive in connection with the liquidation of
such Mortgage Loan, including the final disposition of an REO Property.

     Liquidation Proceeds:  Amounts, including Insurance Proceeds, received in
connection with the partial or complete liquidation of defaulted Mortgage Loans,
whether through trustee's sale, foreclosure sale or otherwise or amounts
received in connection with any condemnation or partial release of a Mortgaged
Property and any other proceeds received in connection with an REO Property,
less the sum of related unreimbursed Master Servicing Fees, Servicing Advances
and Advances.

     Living Holder:   Not applicable.

     Loan-to-Value Ratio:  With respect to any Mortgage Loan and as to any date
of determination, the fraction (expressed as a percentage) the numerator of
which is the principal balance of the related Mortgage Loan at such date of
determination and the denominator of which is the Appraised Value of the related
Mortgaged Property.

     Loss Allocation Limitation:  As defined in Section 4.4(g).

     Lost Mortgage Note:  Any Mortgage Note the original of which was
permanently lost or destroyed and has not been replaced.

     Lower REMIC: Not applicable.

     Lower REMIC Interests: Not applicable.

     Maintenance:  With respect to any Cooperative Unit, the rent paid by the
Mortgagor to the Cooperative Corporation pursuant to the Proprietary Lease.

                                     -14-
<PAGE>

     Majority in Interest:  As to any Class of Regular Certificates, the Holders
of Certificates of such Class evidencing, in the aggregate, at least 51% of the
Percentage Interests evidenced by all Certificates of such Class.

     Master Servicer:  First Horizon Home Loan Corporation, a Kansas
corporation, and its successors and assigns, in its capacity as master servicer
hereunder.

     Master Servicer Advance Date:  As to any Distribution Date, 1:30 p.m.
Central time on the Business Day immediately preceding such Distribution Date.

     Master Servicing Fee:  As to each Mortgage Loan and any Distribution Date,
an amount payable out of each full payment of interest received on such Mortgage
Loan and equal to one-twelfth of the Master Servicing Fee Rate multiplied by the
Stated Principal Balance of such Mortgage Loan as of the Due Date in the month
of such Distribution Date (prior to giving effect to any Scheduled Payments due
on such Mortgage Loan on such Due Date), subject to reduction as provided in
Section 3.14.

     Master Servicing Fee Rate:  For each Mortgage Loan, other than the Discount
Mortgage Loans, a per annum rate equal to 0.244%.  For each Discount Mortgage
Loan, a per annum rate equal to the excess, if any, of the Mortgage Rate thereof
over 6.756%.

     Monthly Statement: The statement delivered to the Certificateholders
pursuant to Section 4.6.

     Moody's:  Moody's Investors Service, Inc., or any successor thereto. If
Moody's is designated as a Rating Agency in the Preliminary Statement, for
purposes of Section 10.05(b) the address for notices to Moody's shall be Moody's
Investors Service, Inc., 99 Church Street, New York, New York 10007, Attention:
Residential Pass-Through Monitoring, or such other address as Moody's may
hereafter furnish to the Depositor or the Master Servicer.

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

     Mortgage File:  The mortgage documents listed in Section 2.1 hereof
pertaining to a particular Mortgage Loan and any additional documents delivered
to the Trustee to be added to the Mortgage File pursuant to this Agreement.

     Mortgage Loans:  Such of the mortgage loans transferred and assigned to the
Trustee pursuant to the provisions hereof as from time to time are held as a
part of the Trust Fund (including any REO Property), the mortgage loans so held
being identified in the Mortgage Loan Schedule, notwithstanding foreclosure or
other acquisition of title of the related Mortgaged Property.

     Mortgage Loan Schedule:  The list of Mortgage Loans (as from time to time
amended by the Master Servicer to reflect the addition of Substitute Mortgage
Loans and the deletion of Deleted Mortgage Loans pursuant to the provisions of
this Agreement) transferred to the Trustee as part of the Trust Fund and from
time to time subject to this Agreement, attached hereto as Schedule I, setting
forth the following information with respect to each Mortgage Loan:

                                     -15-
<PAGE>

     (i)     the loan number;

     (ii)    the Mortgagor's name and the street address of the Mortgaged
             Property, including the zip code;

     (iii)   the maturity date;

     (iv)    the original principal balance;

     (v)     the Cut-off Date Principal Balance;

     (vi)    the first payment date of the Mortgage Loan;

     (vii)   the Scheduled Payment in effect as of the Cut-off Date;

     (viii)  the Loan-to-Value Ratio at origination;

     (ix)    a code indicating whether the residential dwelling at the time of
             origination was represented to be owner-occupied;

     (x)     a code indicating whether the residential dwelling is either (a) a
             detached single family dwelling (b) a dwelling in a de minimis PUD,
             (c) a condominium unit or PUD (other than a de minimis PUD), (d) a
             two- to four-unit residential property or (e) a Cooperative Unit;

     (xi)    the Mortgage Rate;

     (xii)   the purpose for the Mortgage Loan;

     (xiii)  the type of documentation program pursuant to which the Mortgage
             Loan was originated; and

     (xiv)   the Master Servicing Fee for the Mortgage Loan.

     Such schedule shall also set forth the total of the amounts described under
(iv) and (v) above for all of the 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:  The annual rate of interest borne by a Mortgage Note from
time to time, net of any insurance premium charged by the mortgagee to obtain or
maintain any Primary Insurance Policy.

     Mortgaged Property:  The underlying property securing a Mortgage Loan,
which, with respect to a Cooperative Loan, is the related Coop Shares and
Proprietary Lease.

                                     -16-
<PAGE>

     Mortgagor:  The obligor(s) on a Mortgage Note.

     National Cost of Funds Index:  The National Monthly Median Cost of Funds
Ratio to SAIF-Insured Institutions published by the Office of Thrift
Supervision.

     Net Interest Shortfall:  For any Distribution Date, the sum of (a) the
amount of interest which would otherwise have been received for any Mortgage
Loan that was the subject of (x) a Relief Act Reduction or (y) a Special Hazard
Loss, Fraud Loss, or Deficient Valuation, after the exhaustion of the respective
amounts of coverage provided by the Subordinated Certificates for those types of
losses; and (b) any Net Prepayment Interest Shortfalls.  Net Interest Shortfalls
on any Distribution Date will be allocated pro rata among all Classes of
Certificates entitled to receive distributions of interest on that Distribution
Date, based on the amount of interest each of those Classes of Certificates
would otherwise be entitled to receive on that Distribution Date before taking
into account any reduction amounts resulting from Net Interest Shortfalls.

     Net Prepayment Interest Shortfalls:  As to any Distribution Date, the
amount by which the aggregate of Prepayment Interest Shortfalls during the
related Prepayment Period exceeds an amount equal to the Compensating Interest,
if any, for such Distribution Date.

     Non-Delay Certificates:  As specified in the Preliminary Statement.

     Non-Excess Loss:  Any Realized Loss other than an Excess Loss.

     Nonrecoverable Advance:  Any portion of an Advance previously made or
proposed to be made by the Master Servicer that, in the good faith judgment of
the Master Servicer, will not be ultimately recoverable by the Master Servicer
from the related Mortgagor, related Liquidation Proceeds or otherwise.

     Notice of Final Distribution:  The notice to be provided pursuant to
Section 9.2 to the effect that final distribution on any of the Certificates
shall be made only upon presentation and surrender thereof.

     Notional Amount:  Not applicable.

     Notional Amount Certificates:  As specified in the Preliminary Statement.

     Offered Certificates:  As specified in the Preliminary Statement.

     Officer's Certificate:  A Certificate (i) signed by the Chairman of the
Board, the Vice Chairman of the Board, the President, a Managing Director, a
Vice President (however denominated), an Assistant Vice President, the
Treasurer, the Secretary, or one of the Assistant Treasurers or Assistant
Secretaries of the Depositor or the Master Servicer, or (ii), if provided for in
this Agreement, signed by a Servicing Officer, as the case may be, and delivered
to the Depositor and the Trustee, as the case may be, as required by this
Agreement.

     Opinion of Counsel:  A written opinion of counsel, who may be counsel for
the Depositor or the Master Servicer, including, in-house counsel, reasonably
acceptable to the Trustee; provided,

                                     -17-
<PAGE>

however, that with respect to the interpretation or application of the REMIC
Provisions, such counsel must (i) in fact be independent of the Depositor and
the Master Servicer, (ii) not have any direct financial interest in the
Depositor or the Master Servicer or in any affiliate of either, and (iii) not be
connected with the Depositor or the Master Servicer as an officer, employee,
promoter, underwriter, trustee, partner, director or person performing similar
functions.

     Optional Termination:  The termination of the trust created hereunder in
connection with the purchase of the Mortgage Loans pursuant to Section 9.1
hereof.

     Original Mortgage Loan:  The Mortgage Loan refinanced in connection with
the origination of a Refinancing Mortgage Loan.

     Original Subordinated Principal Balance:  The aggregate of the Class
Certificate Balances of the Subordinated Certificates as of the Closing Date.

     OTS:  The Office of Thrift Supervision.

     Outside Reference Date:  Not applicable.

     Outstanding:  With respect to the Certificates as of any date of
determination, all Certificates theretofore executed and authenticated under
this Agreement except:

     (i) Certificates theretofore canceled by the Trustee or delivered to the
     Trustee for cancellation; and

     (ii) Certificates in exchange for which or in lieu of which other
          Certificates have been executed and delivered by the Trustee pursuant
          to this Agreement.

     Outstanding Mortgage Loan:  As of any Due Date, a Mortgage Loan with a
Stated Principal Balance greater than zero which was not the subject of a
Principal Prepayment in Full prior to such Due Date and which did not become a
Liquidated Mortgage Loan prior to such Due Date.

     Ownership Interest:  As to any Residual Certificate, any ownership 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.

     Pass-Through Rate:  For any interest bearing Class of Certificates or
Component, the per annum rate set forth or calculated in the manner described in
the Preliminary Statement.

     Percentage Interest:  As to any Certificate, the percentage interest
evidenced thereby in distributions required to be made on the related Class,
such percentage interest being set forth on the face thereof or equal to the
percentage obtained by dividing the Denomination of such Certificate by the
aggregate of the Denominations of all Certificates of the same Class.

     Permitted Investments:  At any time, any one or more of the following
obligations and securities:

                                     -18-
<PAGE>

     (i)     obligations of the United States or any agency thereof, provided
             such obligations are backed by the full faith and credit of the
             United States;

     (ii)    general obligations of or obligations guaranteed by any state of
             the United States or the District of Columbia receiving the highest
             long-term debt rating of each Rating Agency, or such lower rating
             as will not result in the downgrading or withdrawal of the ratings
             then assigned to the Certificates by each Rating Agency;

     (iii)   commercial or finance company paper which is then receiving the
             highest commercial or finance company paper rating of each Rating
             Agency, or such lower rating as will not result in the downgrading
             or withdrawal of the ratings then assigned to the Certificates by
             each Rating Agency;

     (iv)    certificates of deposit, demand or time deposits, or bankers'
             acceptances issued by any depository institution or trust company
             incorporated under the laws of the United States or of any state
             thereof and subject to supervision and examination by federal
             and/or state banking authorities, provided that the commercial
             paper and/or long term unsecured debt obligations of such
             depository institution or trust company (or in the case of the
             principal depository institution in a holding company system, the
             commercial paper or long-term unsecured debt obligations of such
             holding company, but only if Moody's is not a Rating Agency) are
             then rated one of the two highest long-term and the highest short-
             term ratings of each Rating Agency for such securities, or such
             lower ratings as will not result in the downgrading or withdrawal
             of the rating then assigned to the Certificates by either Rating
             Agency;

     (v)     demand or time deposits or certificates of deposit issued by any
             bank or trust company or savings institution to the extent that
             such deposits are fully insured by the FDIC;

     (vi)    guaranteed reinvestment agreements issued by any bank, insurance
             company or other corporation containing, at the time of the
             issuance of such agreements, such terms and conditions as will not
             result in the downgrading or withdrawal of the rating then assigned
             to the Certificates by either Rating Agency;

     (vii)   repurchase obligations with respect to any security described in
             clauses (i) and (ii) above, in either case entered into with a
             depository institution or trust company (acting as principal)
             described in clause (iv) above;

     (viii)  securities (other than stripped bonds, stripped coupons or
             instruments sold at a purchase price in excess of 115% of the face
             amount thereof) bearing interest or sold at a discount issued by
             any corporation incorporated under the laws of the United States or
             any state thereof which, at the time of such investment, have one
             of the two highest ratings of each Rating Agency (except if the
             Rating Agency is Moody's, such rating shall be the highest
             commercial paper rating of Moody's for any such securities), or
             such lower rating as will not result in the downgrading or
             withdrawal of the rating then assigned to the Certificates by
             either Rating Agency as evidenced by a signed writing delivered by
             each Rating Agency;

                                     -19-
<PAGE>

     (ix)    units of a taxable money-market portfolio having the highest rating
             assigned by each Rating Agency (except if Fitch is a Rating Agency
             and has not rated the portfolio, the highest rating assigned by
             Moody's) and restricted to obligations issued or guaranteed by the
             United States of America or entities whose obligations are backed
             by the full faith and credit of the United States of America and
             repurchase agreements collateralized by such obligations; and

     (x)     such other investments bearing interest or sold at a discount
             acceptable to each Rating Agency as will not result in the
             downgrading or withdrawal of the rating then assigned to the
             Certificates by either Rating Agency, as evidenced by a signed
             writing delivered by each Rating Agency;

     provided that no such instrument shall be a Permitted Investment if such
     instrument evidences the right to receive interest only payments with
     respect to the obligations underlying such instrument.

     Permitted Transferee: Any person other than (i) the United States, any
State or political subdivision thereof, or any agency or instrumentality of any
of the foregoing, (ii) a foreign government, International Organization or any
agency or instrumentality of either of the foregoing, (iii) an organization
(except certain farmers' cooperatives described in section 521 of the Code)
which is exempt from tax imposed by Chapter 1 of the Code (including the tax
imposed by section 511 of the Code on unrelated business taxable income) on any
excess inclusions (as defined in section 860E(c)(l) of the Code) with respect to
any Residual Certificate, (iv) rural electric and telephone cooperatives
described in section 1381(a)(2)(C) of the Code, (v) an "electing large
partnership" as defined in section 775 of the Code, (vi) a Person that is not
(a) a citizen or resident of the United States, (b) a corporation, partnership,
or other entity created or organized in or under the laws of the United States,
any state thereof or the District of Columbia, (c) an estate whose income 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 (d) 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 the
authority to control all substantial decisions of the trust, unless such Person
has furnished the transferor and the Trustee with a duly completed Internal
Revenue Service Form W-8ECI or any applicable successor form, and (vii) any
other Person so designated by the Depositor based upon an Opinion of Counsel
that the Transfer of an Ownership Interest in a Residual Certificate to such
Person may cause the REMIC created hereunder to fail to qualify as a REMIC at
any time that the Certificates are outstanding; provided, however, that if a
                                                --------
person is classified as a partnership under the Code, such person shall only be
a Permitted Transferee if all of its beneficial owners are described in
subclauses (a), (b), (c) or (d) of clause (vi) and the governing documents of
such person prohibits a transfer of any interest in such person to any person
described in clause (vi). The terms "United States," "State" and "International
Organization" shall have the meanings set forth in section 7701 of the Code or
successor provisions. A corporation will not be treated as an instrumentality of
the United States or of any State or political subdivision thereof for these
purposes if all of its activities are subject to tax and, with the exception of
the Federal Home Loan Mortgage Corporation, a majority of its board of directors
is not selected by such government unit.

                                     -20-
<PAGE>

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

     Physical Certificate:  As specified in the Preliminary Statement.

     Planned Balance:  Not applicable.

     Planned Principal Classes:  As specified in the Preliminary Statement.

     Pool Principal Balance:  As to any Distribution Date, the aggregate of the
Stated Principal Balances of the Mortgage Loans which were Outstanding Mortgage
Loans on the Due Date in the month preceding the month of such Distribution
Date.

     Prepayment Interest Excess:  As to any Principal Prepayment received by the
Master Servicer from the first day through the fifteenth day of any calendar
month (other than the calendar month in which the Cut-off Date occurs), all
amounts paid by the related Mortgagor in respect of interest on such Principal
Prepayment. All Prepayment Interest Excess shall be paid to the Master Servicer
as additional master servicing compensation.

     Prepayment Interest Shortfall:  As to any Distribution Date, Mortgage Loan
and Principal Prepayment received (a) during the period from the sixteenth day
of the month preceding the month of such Distribution Date through the last day
of such month, in the case of a Principal Prepayment in full, or (b) during the
month preceding the month of such Distribution Date, in the case of a partial
Principal Prepayment, the amount, if any, by which one month's interest at the
related Adjusted Mortgage Rate on such Principal Prepayment exceeds the amount
of interest actually paid by the Mortgagor in connection with such Principal
Prepayment.

     Prepayment Period:  (a) With respect to any Principal Prepayments in Full
and any Distribution Date, the period from the sixteenth day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, from the Cut-off Date) through the fifteenth day of the month
of such Distribution Date, and (b) with respect to any other Principal
Prepayments and any Distribution Date, the month preceding the month of such
Distribution Date.

     Primary Insurance Policy:  Each policy of primary mortgage guaranty
insurance or any replacement policy therefor with respect to any Mortgage Loan.

     Primary Planned Principal Classes:  As specified in the Preliminary
Statement.

     Principal Balance Schedules:  Not applicable.

     Principal Prepayment:  Any payment of principal by a Mortgagor on a
Mortgage Loan that is received in advance of its scheduled Due Date and is not
accompanied by an amount representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment. Partial
Principal Prepayments shall be applied by the Master Servicer in accordance with
the terms of the related Mortgage Note.

                                     -21-
<PAGE>

     Principal Prepayment in Full:  Any Principal Prepayment made by a Mortgagor
of the entire principal balance of a Mortgage Loan.

     Private Certificate:  As specified in the Preliminary Statement.

     Proprietary Lease:  With respect to any Cooperative Unit, a lease or
occupancy agreement between a Cooperative Corporation and a holder of related
Coop Shares.

     PUD:  Planned Unit Development.

     Purchase Price:  With respect to any Mortgage Loan required to be purchased
by the Seller pursuant to Section 2.2 or 2.3 hereof or purchased at the option
of the Master Servicer pursuant to Section 3.11, an amount equal to the sum of
(i) 100% of the unpaid principal balance of the Mortgage Loan on the date of
such purchase, and (ii) accrued interest thereon at the applicable Mortgage Rate
(or at the applicable Adjusted Mortgage Rate if (x) the purchaser is the Master
Servicer or (y) if the purchaser is the Seller and the Seller is the Master
Servicer) from the date through which interest was last paid by the Mortgagor to
the Due Date in the month in which the Purchase Price is to be distributed to
Certificateholders.

     Purchaser:  First Tennessee Bank National Association.

     Qualified Insurer:  A mortgage guaranty insurance company duly qualified as
such under the laws of the state of its principal place of business and each
state having jurisdiction over such insurer in connection with the insurance
policy issued by such insurer, duly authorized and licensed in such states to
transact a mortgage guaranty insurance business in such states and to write the
insurance provided by the insurance policy issued by it, approved as a FNMA-
approved mortgage insurer and having a claims paying ability rating of at least
"AA" or equivalent rating by a nationally recognized statistical rating
organization. Any replacement insurer with respect to a Mortgage Loan must have
at least as high a claims paying ability rating as the insurer it replaces had
on the Closing Date.

     Random Lot:  Not applicable.

     Rating Agency:  Each of the Rating Agencies specified in the Preliminary
Statement. If any such organization or a successor is no longer in existence,
"Rating Agency" shall be such nationally recognized statistical rating
organization, or other comparable Person, as is designated by the Depositor,
notice of which designation shall be given to the Trustee. References herein to
a given rating category of a Rating Agency shall mean such rating category
without giving effect to any modifiers.

     Realized Loss: With respect to each Liquidated Mortgage Loan, an amount
(not less than zero or more than the Stated Principal Balance of the Mortgage
Loan) as of the date of such liquidation, equal to (i) the Stated Principal
Balance of the Liquidated Mortgage Loan as of the date of such liquidation, plus
(ii) interest at the Adjusted Net Mortgage Rate from the Due Date as to which
interest was last paid or advanced (and not reimbursed) to Certificateholders up
to the Due Date in the month in which Liquidation Proceeds are required to be
distributed on the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any, received during
the month in which such liquidation occurred, to the extent applied

                                     -22-
<PAGE>

as recoveries of interest at the Adjusted Net Mortgage Rate and to principal of
the Liquidated Mortgage Loan. With respect to each Mortgage Loan which has
become the subject of a Deficient Valuation, if the principal amount due under
the related Mortgage Note has been reduced, 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.

     Recognition Agreement:  With respect to any Cooperative Loan, an agreement
between the Cooperative Corporation and the originator of such Mortgage Loan
which establishes the rights of such originator in the Cooperative Property.

     Record Date:  With respect to any Distribution Date, the close of business
on the last Business Day of the month preceding the month in which such
Distribution Date occurs.

     Reference Bank:  Not applicable.

     Refinancing Mortgage Loan:  Any Mortgage Loan originated in connection with
the refinancing of an existing mortgage loan.

     Regular Certificates:  As specified in the Preliminary Statement.

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

     Relief Act Reductions:  With respect to any Distribution Date and any
Mortgage Loan as to which there has been a reduction in the amount of interest
collectible thereon for the most recently ended calendar month as a result of
the application of the Relief Act, the amount, if any, by which interest
collectible on such Mortgage Loan for the most recently ended calendar month is
less than interest accrued thereon for such month pursuant to the Mortgage Note.

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

     REMIC Change of Law:  Any proposed, temporary or final regulation, revenue
ruling, revenue procedure or other official announcement or interpretation
relating to REMICs and the REMIC Provisions issued after the Closing Date.

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

     REO Property:  A Mortgaged Property acquired by the Trust Fund through
foreclosure or deed-in-lieu of foreclosure in connection with a defaulted
Mortgage Loan.

     Request for Release:  The Request for Release submitted by the Master
Servicer to the Trustee, substantially in the form of Exhibits L and M, as
appropriate.

                                     -23-
<PAGE>

     Required Coupon:  7.00% per annum.

     Required Insurance Policy:  With respect to any Mortgage Loan, any
insurance policy that is required to be maintained from time to time under this
Agreement.

     Required Recordation States:   The states of Florida, Maryland,
Mississippi, South Carolina and Tennessee.

     Residual Certificates:  As specified in the Preliminary Statement.

     Responsible Officer:  When used with respect to the Trustee, any Vice
President, any Assistant Vice President, the Secretary, any Assistant Secretary,
any Trust Officer or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
having direct responsibility for the administration of this Agreement and also
to whom, with respect to a particular matter, such matter is referred because of
such officer's knowledge of and familiarity with the particular subject.

     Retail Certificates:  As specified in the Preliminary Statement.

     Retained Yield:  As to each Mortgage Loan and any Distribution Date, an
amount payable to First Horizon Home Loan Corporation out of each full payment
of interest received on such Mortgage Loan and equal to one-twelfth of the
Retained Yield Rate multiplied by the Stated Principal Balance of such Mortgage
Loan as of the Due Date in the month of such Distribution Date (prior to giving
effect to any Scheduled Payments due on such Mortgage Loan on such Due Date).

     Retained Yield Rate:  For any Mortgage Loan, other than the Discount
Mortgage Loans, a per annum rate equal to the excess of (a) the applicable
Adjusted Net Mortgage Rate over (b) the Required Coupon. For any Discount
Mortgage Loan, 0%.

     Rounding Account:  Not applicable.

     Scheduled Balances:  Not applicable.

     Scheduled Classes:  Not applicable.

     Scheduled Payment:  The scheduled monthly payment on a Mortgage Loan due on
any Due Date allocable to principal and/or interest on such Mortgage Loan which,
unless otherwise specified herein, shall give effect to any related Debt Service
Reduction and any Deficient Valuation that affects the amount of the monthly
payment due on such Mortgage Loan.

     Secondary Planned Principal Classes:  As specified in the Preliminary
Statement.

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

     Seller:  First Horizon Home Loan Corporation, a Kansas corporation, and its
successors and assigns, in its capacity as seller of the Mortgage Loans to the
Depositor.

                                     -24-
<PAGE>

     Senior Certificates:  As specified in the Preliminary Statement.

     Senior Final Distribution Date:  For any Class of Senior Certificates, the
Distribution Date on which the Class Certificate Balance of such Class of Senior
Certificates has been reduced to zero.

     Senior Optimal Principal Amount:  With respect to each Distribution Date,
an amount equal to the sum of:

          (1)  the Senior Percentage of all Scheduled Payments of principal due
     on each Mortgage Loan on the first day of the month in which the
     Distribution Date occurs, as specified in the amortization schedule at the
     time applicable thereto after adjustment for previous principal prepayments
     and the principal portion of Debt Service Reductions after the Bankruptcy
     Loss Coverage Amount has been reduced to zero, but before any adjustment to
     such amortization schedule by reason of any other bankruptcy or similar
     proceeding or any moratorium or similar waiver or grace period;

          (2)  the Senior Prepayment Percentage of the Stated Principal Balance
     of each Mortgage Loan which was the subject of a prepayment in full
     received by the Master Servicer during the applicable Prepayment Period;

          (3)  the Senior Prepayment Percentage of all partial prepayments of
     principal received during the applicable Prepayment Period;

          (4)  the lesser of:

               (a)  the Senior Prepayment Percentage of the sum of (x) the net
          Liquidation Proceeds allocable to principal on each Mortgage Loan
          which became a Liquidated Mortgage Loan during the related Prepayment
          Period, other than Mortgage Loans described in clause (y), and (y) the
          principal balance of each Mortgage Loan that was purchased by a
          private mortgage insurer during the related Prepayment Period as an
          alternative to paying a claim under the related Insurance Policy; and

               (b)  (i) the Senior Percentage of the sum of (x) the Stated
          Principal Balance of each Mortgage Loan which became a Liquidated
          Mortgage Loan during the related Prepayment Period, other than
          Mortgage Loans described in clause (y), and (y) the Stated Principal
          Balance of each Mortgage Loan that was purchased by a private mortgage
          insurer during the related Prepayment Period as an alternative to
          paying a claim under the related Insurance Policy minus (ii) the
          Senior Percentage of the principal portion of Excess Losses (other
          than Debt Service Reductions) during the related Prepayment Period;
          and

          (5)  the Senior Prepayment Percentage of the sum of (a) the Stated
     Principal Balance of each Mortgage Loan which was repurchased by the seller
     in connection with such Distribution Date and (b) the difference, if any,
     between the Stated Principal Balance of a Mortgage Loan that has been
     replaced by the seller with a Substitute Mortgage Loan pursuant

                                     -25-
<PAGE>

     to the agreement in connection with such Distribution Date and the Stated
     Principal Balance of such Substitute Mortgage Loan.

     Senior Percentage:  On any Distribution Date, the lesser of 100% and the
percentage (carried to six places rounded up) obtained by dividing the aggregate
Class Certificate Balances of all Classes of Senior Certificates immediately
preceding such Distribution Date by the aggregate Class Certificate Balances of
all Classes of the Certificates immediately preceding such Distribution Date.

     Senior Prepayment Percentage:  On any Distribution Date occurring during
the periods set forth below, the Senior Prepayment Percentages described below:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
 Period (Dates Inclusive)                 Senior Prepayment Percentage
-------------------------------------------------------------------------------------
<S>                         <C>
June 2001 - May 2006        100%
-------------------------------------------------------------------------------------
June 2006 - May 2007        Senior Percentage plus 70% of the Subordinated Percentage
-------------------------------------------------------------------------------------
June 2007 - May 2008        Senior Percentage plus 60% of the Subordinated Percentage
-------------------------------------------------------------------------------------
June 2008 - May 2009        Senior Percentage plus 40% of the Subordinated Percentage
-------------------------------------------------------------------------------------
June 2009 - May 2010        Senior Percentage plus 20% of the Subordinated Percentage
-------------------------------------------------------------------------------------
June 2010 and thereafter    Senior Percentage
-------------------------------------------------------------------------------------
</TABLE>

     Notwithstanding the foregoing, if the Senior Percentage on any Distribution
Date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date will equal 100%.

     In addition, no reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any Distribution Date unless, as of the last day of the
month preceding such Distribution Date, either:

          (A)(1) the aggregate Stated Principal Balance of Mortgage Loans
     delinquent 60 days or more (including for this purpose any Mortgage Loans
     in foreclosure and Mortgage Loans with respect to which the related
     Mortgaged Property has been acquired by the Trust Fund) does not exceed 50%
     of the aggregate Class Certificate Balance of  the Subordinated
     Certificates as of such date; and

          (2)  cumulative Realized Losses do not exceed:

               (a)  30% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2006 and May 2007;

               (b)  35% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2007 and May 2008;

               (c)  40% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2008 and May 2009;

                                     -26-
<PAGE>

               (d)  45% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2009 and May 2010;
          and

               (e)  50% of the Original Subordinated Principal Balance if such
          Distribution Date occurs during or after June 2010; or

          (B)(1) the aggregate Stated Principal Balance of Mortgage Loans
     delinquent 60 days or more (including for this purpose any Mortgage Loans
     in foreclosure and Mortgage Loans with respect to which the related
     Mortgaged Property has been acquired by the Trust Fund), averaged over the
     last three months, as a percentage of the aggregate Stated Principal
     Balance of all Mortgage Loans averaged over the last three months, does not
     exceed 4%; and

          (2)  cumulative Realized Losses do not exceed:

               (a)  10% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2006 and May 2007;

               (b)  15% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2007 and May 2008;

               (c)  20% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2008 and May 2009;

               (d)  25% of the Original Subordinated Principal Balance if such
          Distribution Date occurs between and including June 2009 and May 2010;
          and

               (e)  30% of the Original Subordinated Principal Balance if such
          Distribution Date occurs during or after June 2010.

     Servicing Advances:  All customary, reasonable and necessary "out of
pocket" costs and expenses incurred in the performance by the Master Servicer of
its servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of a Mortgaged Property, (ii) any
expenses reimbursable to the Master Servicer pursuant to Section 3.11 and any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of any REO Property and (iv) compliance with the
obligations under Section 3.9.

     Servicing Officer:  Any officer of the Master Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans whose
name and facsimile signature appear on a list of servicing officers furnished to
the Trustee by the Master Servicer on the Closing Date pursuant to this
Agreement, as such list may from time to time be amended.

     Special Hazard Coverage Termination Date:  The point in time at which the
Special Hazard Loss Coverage Amount is reduced to zero.

     Special Hazard Loss:  Any Realized Loss suffered by a Mortgaged Property on
account of direct physical loss but not including (i) any loss of a type covered
by a hazard insurance policy or

                                     -27-
<PAGE>

a flood insurance policy required to be maintained with respect to such
Mortgaged Property pursuant to Section 3.9 to the extent of the amount of such
loss covered thereby, or (ii) any loss caused by or resulting from:

          (a)  normal wear and tear;

          (b)  fraud, conversion or other dishonest act on the part of the
     Trustee, the Master Servicer or any of their agents or employees (without
     regard to any portion of the loss not covered by any errors and omissions
     policy);

          (c)  errors in design, faulty workmanship or faulty materials, unless
     the collapse of the property or a part thereof ensues and then only for the
     ensuing loss;

          (d)  nuclear or chemical reaction or nuclear radiation or radioactive
     or chemical contamination, all whether controlled or uncontrolled, and
     whether such loss be direct or indirect, proximate or remote or be in whole
     or in part caused by, contributed to or aggravated by a peril covered by
     the definition of the term "Special Hazard Loss";

          (e)  hostile or warlike action in time of peace and war, including
     action in hindering, combating or defending against an actual, impending or
     expected attack:

               1.   by any government or sovereign power, de jure or de facto,
          or by any authority maintaining or using military, naval or air
          forces; or

               2.   by military, naval or air forces; or

               3.   by an agent of any such government, power, authority or
          forces;

          (f)  any weapon of war employing nuclear fission, fusion or other
     radioactive force, whether in time of peace or war; or

          (g)  insurrection, rebellion, revolution, civil war, usurped power or
     action taken by governmental authority in hindering, combating or defending
     against such an occurrence, seizure or destruction under quarantine or
     customs regulations, confiscation by order of any government or public
     authority or risks of contraband or illegal transportation or trade.

     Special Hazard Loss Coverage Amount: Upon the initial issuance of the
Certificates, $2,501,104.  As of any Distribution Date, the Special Hazard Loss
Coverage Amount will equal the greater of

     .    1.0% (or if greater than 1.0%, the highest percentage of Mortgage
          Loans by principal balance secured by Mortgaged Properties in any
          single California zip code) of the outstanding principal balance of
          all the Mortgage Loans as of the related Determination Date; and

     .    twice the outstanding principal balance of the Mortgage Loan which has
          the largest outstanding principal balance as of the related
          Determination Date,

                                     -28-
<PAGE>

less, in each case, the aggregate amount of Special Hazard Losses that would
have been previously allocated to the subordinated certificates in the absence
of the Loss Allocation Limitation. As of any Distribution Date on or after the
Cross-Over Date, the Special Hazard Loss Coverage Amount will be zero.

     Special Hazard Mortgage Loan:  A Liquidated Mortgage Loan as to which a
Special Hazard Loss has occurred.

     S&P:  Standard & Poor's Corporation, a division of The McGraw-Hill
Companies, Inc. If S&P is designated as a Rating Agency in the Preliminary
Statement, for purposes of Section 10.05(b) the address for notices to S&P shall
be Standard & Poor's, 26 Broadway, 15th Floor, New York, New York 10004,
Attention: Mortgage Surveillance Monitoring, or such other address as S&P may
hereafter furnish to the Depositor and the Master Servicer.

     Startup Day:  The Closing Date.

     Stated Principal Balance:  As to any Mortgage Loan and Due Date, the unpaid
principal balance of such Mortgage Loan as of such Due Date as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such amortization schedule by reason of any moratorium or similar waiver or
grace period) after giving effect to any previous partial Principal Prepayments
and Liquidation Proceeds allocable to principal (other than with respect to any
Liquidated Mortgage Loan) and to the payment of principal due on such Due Date
and irrespective of any delinquency in payment by the related Mortgagor.

     Streamlined Documentation Mortgage Loan:  Any Mortgage Loan originated
pursuant to the Seller's Streamlined Loan Documentation Program then in effect.

     Subordinated Certificates:  As specified in the Preliminary Statement.

     Subordinated Certificate Writedown Amount:  As of any Distribution Date,
the amount by which (a) the sum of the Class Certificate Balances of all of the
Certificates, after giving effect to the distribution of principal and the
allocation of Realized Losses in reduction of the Class Certificate Balances of
all of the Certificates on such Distribution Date, exceeds (b) the Pool
Principal Balance on the first day of the month of such Distribution Date less
any Deficient Valuations occurring before the Bankruptcy Loss Coverage Amount
has been reduced to zero.

     Subordinated Optimal Principal Amount:  With respect to each Distribution
Date, an amount equal to the sum of the following (but in no event greater than
the aggregate Class Certificate Balances of the Subordinated Certificates
immediately prior to such Distribution Date):

          (1)  the Subordinated Percentage of all Scheduled Payments of
     principal due on each outstanding Mortgage Loan on the first day of the
     month in which the Distribution Date occurs, as specified in the
     amortization schedule at the time applicable thereto, after adjustment for
     previous principal prepayments and the principal portion of Debt Service
     Reductions after the Bankruptcy Loss Coverage Amount has been reduced to
     zero, but before any adjustment to such amortization schedule by reason of
     any other bankruptcy or similar proceeding or any moratorium or similar
     waiver or grace period;

                                     -29-
<PAGE>

          (2)  the Subordinated Prepayment Percentage of the Stated Principal
     Balance of each Mortgage Loan which was the subject of a prepayment in full
     received by the Master Servicer during the related Prepayment Period;

          (3)  the Subordinated Prepayment Percentage of all partial prepayments
     of principal received during the related Prepayment Period, plus, on the
     Senior Final Distribution Date, 100% of any Senior Optimal Principal Amount
     remaining undistributed on such date;

          (4)  the amount, if any, by which the sum of (a) the net Liquidation
     Proceeds allocable to principal received during the related Prepayment
     Period in respect of each Liquidated Mortgage Loan, other than Mortgage
     Loans described in clause (b) and (b) the principal balance of each
     Mortgage Loan that was purchased by a private mortgage insurer during the
     related Prepayment Period as an alternative to paying a claim under the
     related Insurance Policy exceeds (c) the sum of the amounts distributable
     to the Senior Certificateholders under clause (4) of the definition of
     Senior Optimal Principal Amount on such Distribution Date; and

          (5)  the Subordinated Prepayment Percentage of the sum of (a) the
     Stated Principal Balance of each Mortgage Loan which was repurchased by the
     seller in connection with such Distribution Date and (b) the difference, if
     any, between the Stated Principal Balance of a Mortgage Loan that has been
     replaced by the seller with a Substitute Mortgage Loan pursuant to the
     Agreement in connection with such Distribution Date and the Stated
     Principal Balance of such Substitute Mortgage Loan.

     Subordinated Percentage:  For any Distribution Date, 100% minus the Senior
Percentage.

     Subordinated Prepayment Percentage:  For any Distribution Date, 100% minus
the Senior Prepayment Percentage, except that on any Senior Final Distribution
Date, the Subordinated Prepayment Percentage will equal 100%.

     Subservicer:  Any person to whom the Master Servicer has contracted for the
servicing of all or a portion of the Mortgage Loans pursuant to Section 3.2
hereof.

     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 a Request for Release, substantially in the form of Exhibit L, (i) have a
Stated Principal Balance, after deduction of the principal portion of the
Scheduled Payment due in the month of substitution, not in excess of, and not
more than 10% less than the Stated Principal Balance of the Deleted Mortgage
Loan; (ii) be accruing interest at a rate no lower than and not more than 1% per
annum higher than, that of the Deleted Mortgage Loan; (iii) have a Loan-to-Value
Ratio no higher than that of the Deleted Mortgage Loan; (iv) have a remaining
term to maturity no greater than (and not more than one year less than that of)
the Deleted Mortgage Loan; (v) not be a Cooperative Loan unless the Deleted
Mortgage Loan was a Cooperative Loan and (vi) comply with each representation
and warranty set forth in Section 2.3 hereof.

                                     -30-
<PAGE>

     Substitution Adjustment Amount:  The meaning ascribed to such term pursuant
to Section 2.3.

     Support Classes:  As specified in the Preliminary Statement.

     Targeted Balances:  Not applicable.

     Targeted Principal Classes:  Not applicable.

     Tax Matters Person:  The person designated as "tax matters person" in the
manner provided under Treasury regulation (S) 1.860F-4(d) and Treasury
regulation (S) 301.6231(a)(7)-1. Initially, the Tax Matters Person shall be the
Trustee.

     Tax Matters Person Certificate:  The Class A-R Certificates, with a
Denomination of $0.01.

     Transfer: Any direct or indirect transfer or sale of any Ownership Interest
in a Residual Certificate.

     Trustee:  The Bank of New York and its successors and, if a successor
trustee is appointed hereunder, such successor.

     Trustee Fee:  As to any Distribution Date, an amount equal to one-twelfth
of the Trustee Fee Rate multiplied by the Pool Principal Balance with respect to
such Distribution Date; provided that, solely for purposes of this calculation,
the Pool Principal Balance shall be deemed to exclude the principal balance of
any Mortgage Loan with a Mortgage Rate of less than 6.756% per annum.

     Trustee Fee Rate:  With respect to each Mortgage Loan, the per annum rate
agreed upon in writing on or prior to the Closing Date by the Trustee and the
Depositor.

     Trust Fund:  The corpus of the trust created hereunder consisting of (i)
the Mortgage Loans and all interest and principal received on or with respect
thereto after the Cut-off Date to the extent not applied in computing the Cut-
off Date Principal Balance thereof; (ii) the Certificate Account and the
Distribution Account and all amounts deposited therein pursuant to the
applicable provisions of this Agreement; (iii) property that secured a Mortgage
Loan and has been acquired by foreclosure, deed-in-lieu of foreclosure or
otherwise; and (iv) all proceeds of the conversion, voluntary or involuntary, of
any of the foregoing; provided that solely for designating the assets included
in the REMIC created hereunder for federal income tax purposes, the Trust Fund
shall exclude the Retained Yield.

     Unanticipated Recovery:  As defined in Section 4.2(f).

     Underwriter:  Merrill Lynch, Pierce, Fenner & Smith Incorporated.

     Voting Rights:  The portion of the voting rights of all of the Certificates
which is allocated to any Certificate.  As of any date of determination, Voting
Rights will be allocated among all Holders of the Certificates in proportion to
their then outstanding Class Certificate Balances.

                                     -31-
<PAGE>

                                  ARTICLE II
                         CONVEYANCE OF MORTGAGE LOANS;
                        REPRESENTATIONS AND WARRANTIES

     SECTION 2.1  Conveyance of Mortgage Loans.

     (a)  The Seller, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the
Purchaser, without recourse, all the right, title and interest of the Seller in
and to the Mortgage Loans, including all interest and principal received or
receivable by the Seller on or with respect to the Mortgage Loans after the Cut-
off Date and all interest and principal payments on the Mortgage Loans received
on or prior to the Cut-off Date in respect of installments of interest and
principal due thereafter, but not including payments of principal and interest
due and payable on the Mortgage Loans on or before the Cut-off Date or amounts
attributable to Retained Yield. On or prior to the Closing Date, the Seller
shall deliver to the Purchaser or its designee, the Mortgage File for each
Mortgage Loan listed in the Mortgage Loan Schedule (except that, in the case of
the Delay Delivery Mortgage Loans, such delivery may take place within thirty
(30) days following the Closing Date). Such delivery of the Mortgage Files shall
be made against payment by the Purchaser of the purchase price, previously
agreed to by the Seller and Purchaser, for the Mortgage Loans. With respect to
any Mortgage Loan that does not have a first payment date on or before the Due
Date in the month of the first Distribution Date, the Purchaser shall deposit
into the Distribution Account on or before the Distribution Account Deposit Date
relating to the first Distribution Date, an amount equal to one month's interest
at the related Adjusted Mortgage Rate on the Cut-off Date Principal Balance of
such Mortgage Loan.

     (b)  The Purchaser, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the
Depositor, without recourse, all the right, title and interest of the Purchaser
in and to the Mortgage Loans, including all interest and principal received or
receivable by the Purchaser on or with respect to the Mortgage Loans after the
Cut-off Date and all interest and principal payments on the Mortgage Loans
received on or prior to the Cut-off Date in respect of installments of interest
and principal due thereafter, but not including payments of principal and
interest due and payable on the Mortgage Loans on or before the Cut-off Date or
amounts attributable to Retained Yield. On or prior to the Closing Date, the
Purchaser shall deliver or cause to be delivered to the Depositor or, at the
Depositor's direction, to the Trustee or the Custodian, the Mortgage File for
each Mortgage Loan listed in the Mortgage Loan Schedule (except that, in the
case of the Delay Delivery Mortgage Loans, such delivery may take place within
thirty (30) days following the Closing Date). Such delivery of the Mortgage
Files shall be made against payment by the Depositor of the purchase price,
previously agreed to by the Purchaser and Depositor, for the Mortgage Loans.

     (c)  The Depositor, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the Trustee
for the benefit of the Certificateholders, without recourse, all the right,
title and interest of the Depositor in and to the Trust Fund together with the
Depositor's right to require the Seller to cure any breach of a representation
or warranty made herein by the Seller or to repurchase or substitute for any
affected Mortgage Loan in accordance herewith.

                                     -32-
<PAGE>

     (d)  In connection with the transfer and assignment set forth in clause (c)
above, the Depositor has delivered or caused to be delivered to the Trustee or
the Custodian on its behalf (or, in the case of the Delay Delivery Mortgage
Loans, will deliver or cause to be delivered to the Trustee or the Custodian on
its behalf within thirty (30) days following the Closing Date) for the benefit
of the Certificateholders the following documents or instruments with respect to
each Mortgage Loan so assigned:

          (i)       (A) the original Mortgage Note endorsed by manual or
     facsimile signature in blank in the following form: "Pay to the order of
     ________________, without recourse," with all intervening endorsements
     showing a complete chain of endorsement from the originator to the Person
     endorsing the Mortgage Note (each such endorsement being sufficient to
     transfer all right, title and interest of the party so endorsing, as
     noteholder or assignee thereof, in and to that Mortgage Note); or

                    (B) with respect to any Lost Mortgage Note, a lost note
     affidavit from the Seller stating that the original Mortgage Note was lost
     or destroyed, together with a copy of such Mortgage Note;

          (ii)      except as provided below, the original recorded Mortgage or
     a copy of such Mortgage certified by the Seller as being a true and
     complete copy of the Mortgage;

          (iii)     a duly executed assignment of the Mortgage in blank (which
     may be included in a blanket assignment or assignments), together with,
     except as provided below, all interim recorded assignments of such mortgage
     (each such assignment, when duly and validly completed, to be in recordable
     form and sufficient to effect the assignment of and transfer to the
     assignee thereof, under the Mortgage to which the assignment relates);
     provided that, if the related Mortgage has not been returned from the
     applicable public recording office, such assignment of the Mortgage may
     exclude the information to be provided by the recording office;

          (iv)      the original or copies of each assumption, modification,
     written assurance or substitution agreement, if any;

          (v)       either the original or duplicate original title policy
     (including all riders thereto) with respect to the related mortgaged
     property, if available, provided that the title policy (including all
     riders thereto) will be delivered as soon as it becomes available, and if
     the title policy is not available, and to the extent required pursuant to
     the second paragraph below or otherwise in connection with the rating of
     the Certificates, a written commitment or interim binder or preliminary
     report of the title issued by the title insurance or escrow company with
     respect to the mortgaged property, and

          (vi)      in the case of a Cooperative Loan, the originals of the
     following documents or instruments:

          (a)       The Coop Shares, together with a stock power in blank;
          (b)       The executed Security Agreement;
          (c)       The executed Proprietary Lease;

                                     -33-
<PAGE>

          (d)       The executed Recognition Agreement;
          (e)       The executed UCC-1 financing statement with evidence of
                    recording thereon which have been filed in all places
                    required to perfect the Seller's interest in the Coop Shares
                    and the Proprietary Lease; and
          (f)       Executed UCC-3 financing statements or other appropriate UCC
                    financing statements required by state law, evidencing a
                    complete and unbroken line from the mortgagee to the Trustee
                    with evidence of recording thereon (or in a form suitable
                    for recordation).

     In the event that in connection with any Mortgage Loan the Depositor cannot
deliver (a) the original recorded Mortgage or (b) all interim recorded
assignments satisfying the requirements of clause (ii) or (iii) above,
respectively, concurrently with the execution and delivery hereof because such
document or documents have not been returned from the applicable public
recording office, the Depositor shall promptly deliver to the Trustee or the
Custodian on its behalf such original Mortgage or such interim assignment, as
the case may be, with evidence of recording indicated thereon upon receipt
thereof from the public recording office, or a copy thereof, certified, if
appropriate, by the relevant recording office, but in no event shall any such
delivery of the original Mortgage and each such interim assignment or a copy
thereof, certified, if appropriate, by the relevant recording office, be made
later than one year following the Closing Date; provided, however, in the event
the Depositor is unable to deliver by such date each Mortgage and each such
interim assignment by reason of the fact that any such documents have not been
returned by the appropriate recording office, or, in the case of each such
interim assignment, because the related Mortgage has not been returned by the
appropriate recording office, the Depositor shall deliver such documents to the
Trustee or the Custodian on its behalf as promptly as possible upon receipt
thereof and, in any event, within 720 days following the Closing Date. The
Depositor shall forward or cause to be forwarded to the Trustee or the Custodian
on its behalf (a) from time to time additional original documents evidencing an
assumption or modification of a Mortgage Loan and (b) any other documents
required to be delivered by the Depositor or the Master Servicer to the Trustee.
In the event that the original Mortgage is not delivered and in connection with
the payment in full of the related Mortgage Loan and the public recording office
requires the presentation of a "lost instruments affidavit and indemnity" or any
equivalent document, because only a copy of the Mortgage can be delivered with
the instrument of satisfaction or reconveyance, the Master Servicer shall
execute and deliver or cause to be executed and delivered such a document to the
public recording office. In the case where a public recording office retains the
original recorded Mortgage or in the case where a Mortgage is lost after
recordation in a public recording office, the Seller shall deliver to the
Trustee a copy of such Mortgage certified by such public recording office to be
a true and complete copy of the original recorded Mortgage.

     In addition, in the event that in connection with any Mortgage Loan the
Depositor cannot deliver the original or duplicate original lender's title
policy (together with all riders thereto), satisfying the requirements of clause
(v) above, concurrently with the execution and delivery hereof because the
related Mortgage has not been returned from the applicable public recording
office, the Depositor shall promptly deliver to the Trustee or the Custodian on
its behalf such original or duplicate original lender's title policy (together
with all riders thereto) upon receipt thereof from the applicable title insurer,
but in no event shall any such delivery of the original or duplicate original
lender's

                                     -34-
<PAGE>

title policy be made later than one year following the Closing Date; provided,
however, in the event the Depositor is unable to deliver by such date the
original or duplicate original lender's title policy (together with all riders
thereto) because the related Mortgage has not been returned by the appropriate
recording office, the Depositor shall deliver such documents to the Trustee or
the Custodian on its behalf as promptly as possible upon receipt thereof and, in
any event, within 720 days following the Closing Date. Notwithstanding the
preceding, in connection with any Mortgage Loan for which either the original or
duplicate original title policy has not been delivered to the Trust, if at any
time during the term of this Agreement the parent company of the Seller does not
have a long term senior debt rating of A- or higher from S&P and A- or higher
from Fitch (if rated by Fitch), then the Depositor shall within 30 days deliver
to the Trustee or the Custodian on its behalf (if it has not previously done so)
a written commitment or interim binder or preliminary report of the title issued
by the title insurance or escrow company with respect to the mortgaged property.

     Subject to the immediately following sentence, as promptly as practicable
subsequent to such transfer and assignment, and in any event, within thirty (30)
days thereafter, the Master Servicer shall (i) affix the Trustee's name to each
assignment of Mortgage, as the assignee thereof, (ii) cause such assignment to
be in proper form for recording in the appropriate public office for real
property records and (iii) cause to be delivered for recording in the
appropriate public office for real property records the assignments of the
Mortgages to the Trustee, except that, with respect to any assignments of
Mortgage as to which the Master Servicer has not received the information
required to prepare such assignment in recordable form, the Master Servicer's
obligation to do so and to deliver the same for such recording shall be as soon
as practicable after receipt of such information and in any event within thirty
(30) days after receipt thereof.  Notwithstanding the foregoing, the Master
Servicer need not cause to be recorded any assignment which relates to a
Mortgage Loan in any state other than  the Required Recordation States.

     In the case of Mortgage Loans that have been prepaid in full as of the
Closing Date, the Depositor, in lieu of delivering the above documents to the
Trustee or the Custodian on its behalf, will deposit in the Certificate Account
the portion of such payment that is required to be deposited in the Certificate
Account pursuant to Section 3.8 hereof.

     Notwithstanding anything to the contrary in this Agreement, within thirty
days after the Closing Date, the Seller shall either (i) deliver to the Trustee
or the Custodian on its behalf the Mortgage File as required pursuant to this
Section 2.1 for each Delay Delivery Mortgage Loan or (ii) (A) substitute a
Substitute Mortgage Loan for the Delay Delivery Mortgage Loan or (B) repurchase
the Delay Delivery Mortgage Loan, which substitution or repurchase shall be
accomplished in the manner and subject to the conditions set forth in Section
2.3 (treating each Delay Delivery Mortgage Loan as a Deleted Mortgage Loan for
purposes of such Section 2.3), provided, however, that if the Seller fails to
deliver a Mortgage File for any Delay Delivery Mortgage Loan within the thirty-
day period provided in the prior sentence, the Seller shall use its best
reasonable efforts to effect a substitution, rather than a repurchase of, such
Deleted Mortgage Loan and provided further that the cure period provided for in
Section 2.2 or in Section 2.3 shall not apply to the initial delivery of the
Mortgage File for such Delay Delivery Mortgage Loan, but rather the Seller shall
have five (5) Business Days to cure such failure to deliver. At the end of such
thirty-day period, the Trustee or the Custodian, on behalf of the Trustee shall
send a Delay Delivery Certification for the Delay Delivery Mortgage Loans
delivered during such thirty-day period in accordance with the provisions of
Section 2.2.   Notwithstanding anything to the contrary contained in this
Agreement, none of the Mortgage Loans in the Trust Fund is or will be Delay
Delivery Mortgage Loans.

                                     -35-
<PAGE>

     SECTION 2.2  Acceptance by Trustee of the Mortgage Loans.

     The Trustee or the Custodian, on behalf of the Trustee acknowledges receipt
of the documents identified in the Initial Certification in the form annexed
hereto as Exhibit E and declares that it or the Custodian holds and will hold
such documents and the other documents delivered to it constituting the Mortgage
Files, and that it or the Custodian holds or will hold such other assets as are
included in the Trust Fund, in trust for the exclusive use and benefit of all
present and future Certificateholders. The Trustee acknowledges that the
Custodian will maintain possession of the Mortgage Notes in the State of
Illinois, unless otherwise permitted by the Rating Agencies.

     The Trustee agrees to execute and deliver or to cause the Custodian to
execute and deliver on the Closing Date to the Depositor, the Master Servicer
and the Seller an Initial Certification in the form annexed hereto as Exhibit E.
Based on its or the Custodian's review and examination, and only as to the
documents identified in such Initial Certification, the Custodian, on behalf of
the Trustee acknowledges that such documents appear regular on their face and
relate to such Mortgage Loan. Neither the Trustee nor the Custodian shall be
under any duty or obligation to inspect, review or examine said documents,
instruments, certificates or other papers to determine that the same are
genuine, enforceable or appropriate for the represented purpose or that they
have actually been recorded in the real estate records or that they are other
than what they purport to be on their face.

     On or about the thirtieth (30th) day after the Closing Date, the Trustee
shall deliver or shall cause the Custodian to deliver to the Depositor, the
Master Servicer and the Seller a Delay Delivery Certification in the form
annexed hereto as Exhibit F, with any applicable exceptions noted thereon.
Notwithstanding anything to the contrary contained in this Agreement, none of
the Mortgage Loans in the Trust Fund is or will be Delay Delivery Mortgage
Loans.

     Not later than 90 days after the Closing Date, the Trustee shall deliver or
shall cause the Custodian to deliver to the Purchaser, the Depositor, the Master
Servicer and the Seller a Final Certification in the form annexed hereto as
Exhibit G, with any applicable exceptions noted thereon.

     If, in the course of such review, the Trustee or the Custodian, on behalf
of the Trustee finds any document constituting a part of a Mortgage File which
does not meet the requirements of Section 2.1, the Trustee shall list or shall
cause the Custodian to list such as an exception in the Final Certification;
provided, however that neither the Trustee nor the Custodian shall make any
determination as to whether (i) any endorsement is sufficient to transfer all
right, title and interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note or (ii) any assignment is in recordable
form or is sufficient to effect the assignment of and transfer to the assignee
thereof under the mortgage to which the assignment relates. The Seller shall
promptly correct or cure such defect within 90 days from the date it was so
notified of such defect and, if the Seller does not correct or cure such defect
within such period, the Seller shall either (a) substitute for the related
Mortgage Loan a Substitute Mortgage Loan, which substitution shall be
accomplished in the manner and subject to the conditions set forth in Section
2.3, or (b) purchase such Mortgage Loan from the Trustee within 90 days from the
date the Seller was notified of such defect in writing at the Purchase Price of
such Mortgage Loan; provided, however, that in no event shall such substitution
or purchase occur more than 540 days from the Closing Date, except that if the
substitution or purchase of a Mortgage Loan pursuant to this provision is
required by reason of a delay in delivery of any documents by the appropriate
recording office, and there is a dispute

                                     -36-
<PAGE>

between either the Master Servicer or the Seller and the Trustee over the
location or status of the recorded document, then such substitution or purchase
shall occur within 720 days from the Closing Date. The Trustee shall deliver
written notice to each Rating Agency within 270 days from the Closing Date
indicating each Mortgage Loan (a) which has not been returned by the appropriate
recording office or (b) as to which there is a dispute as to location or status
of such Mortgage Loan. Such notice shall be delivered every 90 days thereafter
until the related Mortgage Loan is returned to the Trustee or the Custodian on
its behalf. Any such substitution pursuant to (a) above or purchase pursuant to
(b) above shall not be effected prior to the delivery to the Trustee of the
Opinion of Counsel required by Section 2.5 hereof, if any, and any substitution
pursuant to (a) above shall not be effected prior to the additional delivery to
the Trustee of a Request for Release substantially in the form of Exhibit L. No
substitution is permitted to be made in any calendar month after the
Determination Date for such month. The Purchase Price for any such Mortgage Loan
shall be deposited by the Seller in the Certificate Account on or prior to the
Distribution Account Deposit Date for the Distribution Date in the month
following the month of repurchase and, upon receipt of such deposit and
certification with respect thereto in the form of Exhibit M hereto, the Trustee
shall cause the Custodian to release the related Mortgage File to the Seller and
shall execute and deliver at the Seller's request such instruments of transfer
or assignment prepared by the Seller, in each case without recourse, as shall be
necessary to vest in the Seller, or a designee, the Trustee's interest in any
Mortgage Loan released pursuant hereto.

     The Trustee shall retain or shall cause the Custodian to retain possession
and custody of each Mortgage File in accordance with and subject to the terms
and conditions set forth herein. The Master Servicer shall promptly deliver to
the Trustee or the Custodian on its behalf, upon the execution or receipt
thereof, the originals of such other documents or instruments constituting the
Mortgage File as come into the possession of the Master Servicer from time to
time.

     It is understood and agreed that the obligation of the Seller to substitute
for or to purchase any Mortgage Loan which does not meet the requirements of
Section 2.1 above shall constitute the sole remedy respecting such defect
available to the Trustee, the Depositor and any Certificateholder against the
Seller.

     SECTION 2.3  Representations, Warranties and Covenants of the Seller and
Master Servicer.

     (a)  First Horizon Home Loan Corporation, in its capacities as Seller and
Master Servicer, hereby makes the representations and warranties set forth in
Schedule II-A hereto, and by this reference incorporated herein, to the
Purchaser, the Depositor and the Trustee, as of the Closing Date, or if so
specified therein, as of the Cut-off Date.

     (b)  The Seller, in its capacity as Seller, hereby makes the
representations and warranties set forth in Schedule III hereto, and by this
reference incorporated herein, to the Purchaser, the Depositor and the Trustee,
as of the Closing Date, or if so specified therein, as of the Cut-off Date.

     (c)  Upon discovery by any of the parties hereto of a breach of a
representation or warranty made pursuant to Section 2.3(b) that materially and
adversely affects the interests of the Certificateholders in any Mortgage Loan,
the party discovering such breach shall give prompt notice thereof to the other
parties. The Seller hereby covenants that within 90 days of the earlier of its
discovery or its receipt of written notice from any party of a breach of any
representation or warranty

                                     -37-
<PAGE>

made pursuant to Section 2.3(b) which materially and adversely affects the
interests of the Certificateholders in any Mortgage Loan, it shall cure such
breach in all material respects, and if such breach is not so cured, shall, (i)
if such 90-day period expires prior to the second anniversary of the Closing
Date, remove such Mortgage Loan (a "Deleted Mortgage Loan") from the Trust Fund
and substitute in its place a Substitute Mortgage Loan, in the manner and
subject to the conditions set forth in this Section; or (ii) repurchase the
affected Mortgage Loan or Mortgage Loans from the Trustee at the Purchase Price
in the manner set forth below; provided, however, that any such substitution
pursuant to (i) above shall not be effected prior to the delivery to the Trustee
of the Opinion of Counsel required by Section 2.5 hereof, if any, and any such
substitution pursuant to (i) above shall not be effected prior to the additional
delivery to the Trustee or the Custodian on its behalf of a Request for Release
substantially in the form of Exhibit M and the Mortgage File for any such
Substitute Mortgage Loan. The Seller shall promptly reimburse the Master
Servicer and the Trustee for any expenses reasonably incurred by the Master
Servicer or the Trustee in respect of enforcing the remedies for such breach.
With respect to the representations and warranties described in this Section
which are made to the best of the Seller's knowledge, if it is discovered by
either the Purchaser, the Depositor, the Seller or the Trustee that the
substance of such representation and warranty is inaccurate and such inaccuracy
materially and adversely affects the value of the related Mortgage Loan or the
interests of the Certificateholders therein, notwithstanding the Seller's lack
of knowledge with respect to the substance of such representation or warranty,
such inaccuracy shall be deemed a breach of the applicable representation or
warranty.

     With respect to any Substitute Mortgage Loan or Loans, the Seller shall
deliver to the Trustee or the Custodian on its behalf for the benefit of the
Certificateholders the Mortgage Note, the Mortgage, the related assignment of
the Mortgage, and such other documents and agreements as are required by Section
2.1, with the Mortgage Note endorsed and the Mortgage assigned as required by
Section 2.1. No substitution is permitted to be made in any calendar month after
the Determination Date for such month. Scheduled Payments due with respect to
Substitute Mortgage Loans in the month of substitution shall not be part of the
Trust Fund and will be retained by the Seller on the next succeeding
Distribution Date. For the month of substitution, distributions to
Certificateholders will include the monthly payment due on any Deleted Mortgage
Loan for such month and thereafter the Seller shall be entitled to retain all
amounts received in respect of such Deleted Mortgage Loan. The Master Servicer
shall amend the Mortgage Loan Schedule for the benefit of the Certificateholders
to reflect the removal of such Deleted Mortgage Loan and the substitution of the
Substitute Mortgage Loan or Loans and the Master Servicer shall deliver the
amended Mortgage Loan Schedule to the Trustee.  Upon such substitution, the
Substitute Mortgage Loan or Loans shall be subject to the terms of this
Agreement in all respects, and the Seller shall be deemed to have made with
respect to such Substitute Mortgage Loan or Loans, as of the date of
substitution, the representations and warranties made pursuant to Section 2.3(b)
with respect to such Mortgage Loan. Upon any such substitution and the deposit
to the Certificate Account of the amount required to be deposited therein in
connection with such substitution as described in the following paragraph, the
Trustee shall release or shall cause the Custodian to release the Mortgage File
held for the benefit of the Certificateholders relating to such Deleted Mortgage
Loan to the Seller and shall execute and deliver at the Seller's direction such
instruments of transfer or assignment prepared by the Seller, in each case
without recourse, as shall be necessary to vest title in the Seller, or its
designee, the Trustee's interest in any Deleted Mortgage Loan substituted for
pursuant to this Section 2.3.

                                     -38-
<PAGE>

     For any month in which the Seller substitutes one or more Substitute
Mortgage Loans for one or more Deleted Mortgage Loans, the Master Servicer will
determine the amount (if any) by which the aggregate principal balance of all
such Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all such Deleted Mortgage Loans (after
application of the scheduled principal portion of the monthly payments due in
the month of substitution). The amount of such shortage (the "Substitution
Adjustment Amount") plus an amount equal to the aggregate of any unreimbursed
Advances with respect to such Deleted Mortgage Loans shall be deposited in the
Certificate Account by the Seller on or before the Distribution Account Deposit
Date for the Distribution Date in the month succeeding the calendar month during
which the related Mortgage Loan became required to be purchased or replaced
hereunder.

     In the event that the Seller shall have repurchased a Mortgage Loan, the
Purchase Price therefor shall be deposited in the Certificate Account pursuant
to Section 3.5 on or before the Distribution Account Deposit Date for the
Distribution Date in the month following the month during which the Seller
became obligated hereunder to repurchase or replace such Mortgage Loan and upon
such deposit of the Purchase Price, the delivery of the Opinion of Counsel
required by Section 2.5 and receipt of a Request for Release in the form of
Exhibit M hereto, the Trustee shall release or shall cause the Custodian to
release the related Mortgage File held for the benefit of the Certificateholders
to such Person, and the Trustee shall execute and deliver or shall cause the
Custodian to execute and deliver at such Person's direction such instruments of
transfer or assignment prepared by such Person, in each case without recourse,
as shall be necessary to transfer title from the Trustee. It is understood and
agreed that the obligation under this Agreement of the Seller to cure,
repurchase or replace any Mortgage Loan as to which a breach has occurred and is
continuing shall constitute the sole remedy against the Seller respecting such
breach available to Certificateholders, the Depositor, the Purchaser or the
Trustee on their behalf.  It is further understood and agreed that the Purchaser
shall have no obligation to cure, repurchase or replace any Mortgage Loan as to
which a breach has occurred or is continuing.

     The representations and warranties made pursuant to this Section 2.3 shall
survive delivery of the respective Mortgage Files to the Trustee or the
Custodian for the benefit of the Certificateholders.

     SECTION 2.4  Representations and Warranties of the Depositor as to the
Mortgage Loans.

     The Depositor hereby represents and warrants to the Trustee with respect to
each Mortgage Loan as of the date hereof or such other date set forth herein
that as of the Closing Date, and following the transfer of the Mortgage Loans to
it by the Purchaser, the Depositor had good title to the Mortgage Loans and the
Mortgage Notes were subject to no offsets, defenses or counterclaims.

     The Depositor hereby assigns, transfers and conveys to the Trustee all of
its rights with respect to the Mortgage Loans including, without limitation, the
representations and warranties of the Seller made pursuant to Section 2.3(b)
hereof, together with all rights of the Depositor to require the Seller to cure
any breach thereof or to repurchase or substitute for any affected Mortgage Loan
in accordance with this Agreement.

     It is understood and agreed that the representations and warranties set
forth in this Section 2.4 shall survive delivery of the Mortgage Files to the
Trustee. Upon discovery by the Depositor or

                                     -39-
<PAGE>

the Trustee of a breach of any of the foregoing representations and warranties
set forth in this Section 2.4 (referred to herein as a "breach"), which breach
materially and adversely affects the interest of the Certificateholders, the
party discovering such breach shall give prompt written notice to the others and
to each Rating Agency.

     SECTION 2.5  Delivery of Opinion of Counsel in Connection with
Substitutions.

     (a)  Notwithstanding any contrary provision of this Agreement, no
substitution pursuant to Section 2.2 or Section 2.3 shall be made more than 90
days after the Closing Date unless the Seller delivers to the Trustee an Opinion
of Counsel, which Opinion of Counsel shall not be at the expense of either the
Trustee or the Trust Fund, addressed to the Trustee, to the effect that such
substitution will not (i) result in the imposition of the tax on "prohibited
transactions" on the Trust Fund or contributions after the Startup Date, as
defined in Sections 860F(a)(2) and 860G(d) of the Code, respectively, or (ii)
cause the REMIC created hereunder to fail to qualify as a REMIC at any time that
any Certificates are outstanding.

     (b)  Upon discovery by the Purchaser, the Depositor, the Seller, the Master
Servicer 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 promptly (and in any event within five (5) Business
Days of discovery) give written notice thereof to the other parties. In
connection therewith, the Trustee shall require the Seller, at the Seller's
option, to either (i) substitute, if the conditions in Section 2.3(c) with
respect to substitutions are satisfied, a Substitute Mortgage Loan for the
affected Mortgage Loan, or (ii) repurchase the affected Mortgage Loan within 90
days of such discovery in the same manner as it would a Mortgage Loan for a
breach of representation or warranty made pursuant to Section 2.3. The Trustee
shall reconvey or shall cause the Custodian to 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 contained in Section 2.3.

     SECTION 2.6  Execution and Delivery of Certificates.

     The Trustee acknowledges the transfer and assignment to it of the Trust
Fund and, concurrently with such transfer and assignment, has executed and
delivered to or upon the order of the Depositor, the Certificates in authorized
denominations evidencing directly or indirectly the entire ownership of the
Trust Fund. The Trustee agrees to hold the Trust Fund and exercise the rights
referred to above for the benefit of all present and future Holders of the
Certificates and to perform the duties set forth in this Agreement to the best
of its ability, to the end that the interests of the Holders of the Certificates
may be adequately and effectively protected.

     SECTION 2.7  REMIC Matters.

     The Preliminary Statement sets forth the designations and "latest possible
maturity date" for federal income tax purposes of all interests created hereby.
The "Startup Day" for purposes of the REMIC Provisions shall be the Closing
Date.  The "tax matters person" with respect to each REMIC hereunder shall be
the Trustee and the Trustee shall hold the Tax Matters Person Certificate.  The
REMIC's fiscal year shall be the calendar year and its accounts shall be
maintained using the accrual method.

                                     -40-
<PAGE>

     SECTION 2.8  Covenants of the Master Servicer.

     The Master Servicer hereby covenants to the Depositor and the Trustee as
follows:

     (a)  the Master Servicer shall comply in the performance of its obligations
under this Agreement with all reasonable rules and requirements of the insurer
under each Required Insurance Policy; and

     (b)  no written information, certificate of an officer, statement furnished
in writing or written report delivered to the Depositor, any affiliate of the
Depositor or the Trustee and prepared by the Master Servicer pursuant to this
Agreement will contain any untrue statement of a material fact or omit to state
a material fact necessary to make such information, certificate, statement or
report not misleading.

                                  ARTICLE III
                         ADMINISTRATION AND SERVICING
                               OF MORTGAGE LOANS

     SECTION 3.1  Master Servicer to Service Mortgage Loans.

     For and on behalf of the Certificateholders, the Master Servicer shall
service and administer the Mortgage Loans in accordance with the terms of this
Agreement and customary and usual standards of practice of prudent mortgage loan
servicers. In connection with such servicing and administration, the Master
Servicer shall have full power and authority, acting alone and/or through
Subservicers as provided in Section 3.2 hereof, to do or cause to be done any
and all things that it may deem necessary or desirable in connection with such
servicing and administration, including but not limited to, the power and
authority, subject to the terms hereof (i) to execute and deliver, on behalf of
the Certificateholders and the Trustee, customary consents or waivers and other
instruments and documents, (ii) to consent to transfers of any Mortgaged
Property and assumptions of the Mortgage Notes and related Mortgages (but only
in the manner provided in this Agreement), (iii) to collect any Insurance
Proceeds and other Liquidation Proceeds, and (iv) to effectuate foreclosure or
other conversion of the ownership of the Mortgaged Property securing any
Mortgage Loan; provided that the Master Servicer shall not take any action that
is inconsistent with or prejudices the interests of the Trust Fund or the
Certificateholders in any Mortgage Loan or the rights and interests of the
Depositor, the Trustee and the Certificateholders under this Agreement. The
Master Servicer shall represent and protect the interests of the Trust Fund in
the same manner as it protects its own interests in mortgage loans in its own
portfolio in any claim, proceeding or litigation regarding a Mortgage Loan, and
shall not make or permit any modification, waiver or amendment of any Mortgage
Loan which would cause the REMIC created hereunder to fail to qualify as a REMIC
or result in the imposition of any tax under Section 860F(a) or Section 860G(d)
of the Code. Without limiting the generality of the foregoing, the Master
Servicer, in its own name or in the name of the Depositor and the Trustee, is
hereby authorized and empowered by the Depositor and the Trustee, when the
Master Servicer believes it appropriate in its reasonable judgment, to execute
and deliver, on behalf of the Trustee, the Depositor, the Certificateholders or
any of them, any and all instruments of satisfaction or cancellation, or of
partial or full release or discharge and all other comparable instruments, with
respect to the Mortgage Loans, and with respect to the Mortgaged Properties held
for the benefit of the Certificateholders. The Master Servicer shall prepare and
deliver to the

                                     -41-
<PAGE>

Depositor and/or the Trustee such documents requiring execution and delivery by
either or both of them as are necessary or appropriate to enable the Master
Servicer to service and administer the Mortgage Loans to the extent that the
Master Servicer is not permitted to execute and deliver such documents pursuant
to the preceding sentence. Upon receipt of such documents, the Depositor and/or
the Trustee shall execute such documents and deliver them to the Master
Servicer.

     In accordance with the standards of the preceding paragraph, the Master
Servicer shall advance or cause to be advanced funds as necessary for the
purpose of effecting the payment of taxes and assessments on the Mortgaged
Properties, which advances shall be reimbursable in the first instance from
related collections from the Mortgagors pursuant to Section 3.6, and further as
provided in Section 3.8. The costs incurred by the Master Servicer, if any, in
effecting the timely payments of taxes and assessments on the Mortgaged
Properties and related insurance premiums shall not, for the purpose of
calculating monthly distributions to the Certificateholders, be added to the
Stated Principal Balances of the related Mortgage Loans, notwithstanding that
the terms of such Mortgage Loans so permit.

     SECTION 3.2  Subservicing; Enforcement of the Obligations of Servicers.

     (a)  The Master Servicer may arrange for the subservicing of any Mortgage
Loan by a Subservicer pursuant to a subservicing agreement; provided, however,
that such subservicing arrangement and the terms of the related subservicing
agreement must provide for the servicing of such Mortgage Loans in a manner
consistent with the servicing arrangements contemplated hereunder. Unless the
context otherwise requires, references in this Agreement to actions taken or to
be taken by the Master Servicer in servicing the Mortgage Loans include actions
taken or to be taken by a Subservicer on behalf of the Master Servicer.
Notwithstanding the provisions of any subservicing agreement, any of the
provisions of this Agreement relating to agreements or arrangements between the
Master Servicer and a Subservicer or reference to actions taken through a
Subservicer or otherwise, the Master Servicer shall remain obligated and liable
to the Depositor, the Trustee and the Certificateholders for the servicing and
administration of the Mortgage Loans in accordance with the provisions of this
Agreement without diminution of such obligation or liability by virtue of such
subservicing agreements or arrangements or by virtue of indemnification from the
Subservicer and to the same extent and under the same terms and conditions as if
the Master Servicer alone were servicing and administering the Mortgage Loans.
All actions of each Subservicer performed pursuant to the related subservicing
agreement shall be performed as an agent of the Master Servicer with the same
force and effect as if performed directly by the Master Servicer.

     (b)  For purposes of this Agreement, the Master Servicer shall be deemed to
have received any collections, recoveries or payments with respect to the
Mortgage Loans that are received by a Subservicer regardless of whether such
payments are remitted by the Subservicer to the Master Servicer.

     SECTION 3.3  Rights of the Depositor and the Trustee in Respect of the
Master Servicer.

     The Depositor may, but is not obligated to, enforce the obligations of the
Master Servicer hereunder and may, but is not obligated to, perform, or cause a
designee to perform, any defaulted obligation of the Master Servicer hereunder
and in connection with any such defaulted obligation to exercise the related
rights of the Master Servicer hereunder; provided that the Master Servicer

                                     -42-
<PAGE>

shall not be relieved of any of its obligations hereunder by virtue of such
performance by the Depositor or its designee. Neither the Trustee nor the
Depositor shall have any responsibility or liability for any action or failure
to act by the Master Servicer nor shall the Trustee or the Depositor be
obligated to supervise the performance of the Master Servicer hereunder or
otherwise.

     SECTION 3.4  Trustee to Act as Master Servicer.

     In the event that the Master Servicer shall for any reason no longer be the
Master Servicer hereunder (including by reason of an Event of Default), the
Trustee or its successor shall thereupon assume all of the rights and
obligations of the Master Servicer hereunder arising thereafter (except that the
Trustee shall not be (i) liable for losses of the Master Servicer pursuant to
Section 3.9 hereof or any acts or omissions of the predecessor Master Servicer
hereunder), (ii) obligated to make Advances if it is prohibited from doing so by
applicable law, (iii) obligated to effectuate repurchases or substitutions of
Mortgage Loans hereunder including, but not limited to, repurchases or
substitutions of Mortgage Loans pursuant to Section 2.2 or 2.3 hereof, (iv)
responsible for expenses of the Master Servicer pursuant to Section 2.3 or (v)
deemed to have made any representations and warranties of the Master Servicer
hereunder). Any such assumption shall be subject to Section 7.2 hereof. If the
Master Servicer shall for any reason no longer be the Master Servicer (including
by reason of any Event of Default), the Trustee or its successor shall succeed
to any rights and obligations of the Master Servicer under each subservicing
agreement.

     The Master Servicer shall, upon request of the Trustee, but at the expense
of the Master Servicer, deliver to the assuming party all documents and records
relating to each subservicing agreement or substitute subservicing agreement and
the Mortgage Loans then being serviced thereunder and an accounting of amounts
collected or held by it and otherwise use its best efforts to effect the orderly
and efficient transfer of the substitute subservicing agreement to the assuming
party.

     SECTION 3.5  Collection of Mortgage Loan Payments; Certificate Account;
Distribution Account.

     (a)  The Master Servicer shall make reasonable efforts in accordance with
the customary and usual standards of practice of prudent mortgage servicers to
collect all payments called for under the terms and provisions of the Mortgage
Loans to the extent such procedures shall be consistent with this Agreement and
the terms and provisions of any related Required Insurance Policy. Consistent
with the foregoing, the Master Servicer may in its discretion (i) waive any late
payment charge or any prepayment charge or penalty interest in connection with
the prepayment of a Mortgage Loan and (ii) extend the due dates for payments due
on a Mortgage Note for a period not greater than 180 days; provided, however,
that the Master Servicer cannot extend the maturity of any such Mortgage Loan
past the date on which the final payment is due on the latest maturing Mortgage
Loan as of the Cut-off Date. In the event of any such arrangement, the Master
Servicer shall make Advances on the related Mortgage Loan in accordance with the
provisions of Section 4.1 during the scheduled period in accordance with the
amortization schedule of such Mortgage Loan without modification thereof by
reason of such arrangements. The Master Servicer shall not be required to
institute or join in litigation with respect to collection of any payment
(whether under a Mortgage, Mortgage Note or otherwise or against any public or
governmental authority with respect to a taking

                                     -43-
<PAGE>

or condemnation) if it reasonably believes that enforcing the provision of the
Mortgage or other instrument pursuant to which such payment is required is
prohibited by applicable law.

     (b)  The Master Servicer shall establish and maintain a Certificate Account
into which the Master Servicer shall deposit or cause to be deposited no later
than two Business Days after receipt, except as otherwise specifically provided
herein, the following payments and collections remitted by Subservicers or
received by it in respect of Mortgage Loans subsequent to the Cut-off Date
(other than in respect of principal and interest due on the Mortgage Loans on or
before the Cut-off Date) and the following amounts required to be deposited
hereunder:

          (i)    all payments on account of principal on the Mortgage Loans,
     including Principal Prepayments;

          (ii)   all payments on account of interest on the Mortgage Loans, net
     of the related Master Servicing Fee, any Prepayment Interest Excess and,
     for so long as First Horizon is the Master Servicer, any Retained Yield;

          (iii)  all Insurance Proceeds and Liquidation Proceeds, other than
     proceeds to be applied to the restoration or repair of the Mortgaged
     Property or released to the Mortgagor in accordance with the Master
     Servicer's normal servicing procedures;

          (iv)   any amount required to be deposited by the Master Servicer
     pursuant to Section 3.5(c) in connection with any losses on Permitted
     Investments;

          (v)    any amounts required to be deposited by the Master Servicer
     pursuant to Section 3.9(b), 3.9(d), and in respect of net monthly rental
     income from REO Property pursuant to Section 3.11 hereof;

          (vi)   all Substitution Adjustment Amounts;

          (vi)   all Advances made by the Master Servicer pursuant to Section
     4.1; and

          (viii) any other amounts required to be deposited hereunder.

     In addition, with respect to any Mortgage Loan that is subject to a buydown
agreement, on each Due Date for such Mortgage Loan, in addition to the monthly
payment remitted by the Mortgagor, the Master Servicer shall cause funds to be
deposited into the Certificate Account in an amount required to cause an amount
of interest to be paid with respect to such Mortgage Loan equal to the amount of
interest that has accrued on such Mortgage Loan from the preceding Due Date at
the related Adjusted Mortgage Rate on such date.

     The foregoing requirements for remittance by the Master Servicer shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of prepayment penalties, late payment
charges, assumption fees or amounts attributable to reimbursements of Advances,
if collected, need not be remitted by the Master Servicer. In the event that the
Master Servicer shall remit any amount not required to be remitted, it may at
any time withdraw or direct the institution maintaining the Certificate Account
to withdraw such amount from

                                     -44-
<PAGE>

the Certificate Account, any provision herein to the contrary notwithstanding.
Such withdrawal or direction may be accomplished by delivering written notice
thereof to the Trustee or such other institution maintaining the Certificate
Account which describes the amounts deposited in error in the Certificate
Account. The Master Servicer shall maintain adequate records with respect to all
withdrawals made pursuant to this Section. All funds deposited in the
Certificate Account shall be held in trust for the Certificateholders until
withdrawn in accordance with Section 3.8.

     (c)  The Trustee shall establish and maintain, on behalf of the
Certificateholders, the Distribution Account. The Trustee shall, promptly upon
receipt, deposit in the Distribution Account and retain therein the following:

          (i)    the aggregate amount remitted by the Master Servicer to the
     Trustee pursuant to Section 3.8(a)(ix);

          (ii)   any amount deposited by the Master Servicer pursuant to this
     Section 3.5(c) in connection with any losses on Permitted Investments; and

          (iii)  any other amounts deposited hereunder which are required to be
     deposited in the Distribution Account.

     In the event that the Master Servicer shall remit any amount not required
to be remitted, it may at any time direct the Trustee to withdraw such amount
from the Distribution Account, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officer's
Certificate to the Trustee which describes the amounts deposited in error in the
Distribution Account. All funds deposited in the Distribution Account shall be
held by the Trustee in trust for the Certificateholders until disbursed in
accordance with this Agreement or withdrawn in accordance with Section 3.8. In
no event shall the Trustee incur liability for withdrawals from the Distribution
Account at the direction of the Master Servicer.

          (iv)   The institutions at which the Certificate Account and the
     Distribution Account are maintained shall invest funds as directed by the
     Master Servicer in Permitted Investments which in both cases shall mature
     not later than (i) in the case of the Certificate Account, the second
     Business Day next preceding the related Distribution Account Deposit Date
     (except that if such Permitted Investment is an obligation of the
     institution that maintains such account, then such Permitted Investment
     shall mature not later than the Business Day next preceding such
     Distribution Account Deposit Date) and (ii) in the case of the Distribution
     Account, the Business Day next preceding the Distribution Date (except that
     if such Permitted Investment is an obligation of the institution that
     maintains such fund or account, then such Permitted Investment shall mature
     not later than such Distribution Date) and, in each case, shall not be sold
     or disposed of prior to its maturity. All such Permitted Investments shall
     be made in the name of the Trustee, for the benefit of the
     Certificateholders. All income and gain net of any losses realized from any
     such investment of funds on deposit in the Certificate Account shall be for
     the benefit of the Master Servicer as servicing compensation and all income
     and gain net of any losses realized from any such investment of funds on
     deposit in the Distribution Account shall be for the benefit of the
     Trustee. The amount of any Realized Losses in the Certificate Account in
     respect of any such investments shall promptly be deposited by the Master
     Servicer in the Certificate Account

                                     -45-
<PAGE>

     and the amount of any Realized Losses in the Distribution Account in
     respect of any such investments shall promptly be deposited by the Trustee
     into the Distribution Account. All reinvestment income earned on amounts on
     deposit in the Distribution Account shall be for the benefit of the
     Trustee. The Trustee in its fiduciary capacity shall not be liable for the
     amount of any loss incurred in respect of any investment or lack of
     investment of funds held in the Certificate Account and made in accordance
     with this Section 3.5.

          (v)  The Master Servicer shall give notice to the Trustee, the Seller,
     each Rating Agency, the Purchaser and the Depositor of any proposed change
     of the location of the Certificate Account prior to any change thereof. The
     Trustee shall give notice to the Master Servicer, the Seller, each Rating
     Agency, the Purchaser and the Depositor of any proposed change of the
     location of the Distribution Account prior to any change thereof.

     SECTION 3.6  Collection of Taxes, Assessments and Similar Items; Escrow
Accounts.

     (a)  To the extent required by the related Mortgage Note and not violative
of current law, the Master Servicer shall establish and maintain one or more
accounts (each, an "Escrow Account") and deposit and retain therein all
collections from the Mortgagors (or advances by the Master Servicer) for the
payment of taxes, assessments, hazard insurance premiums or comparable items for
the account of the Mortgagors. Nothing herein shall require the Master Servicer
to compel a Mortgagor to establish an Escrow Account in violation of applicable
law.

     (b)  Withdrawals of amounts so collected from the Escrow Accounts may be
made only to effect timely payment of taxes, assessments, hazard insurance
premiums, condominium or PUD association dues, or comparable items, to reimburse
the Master Servicer out of related collections for any payments made pursuant to
Sections 3.1 hereof (with respect to taxes and assessments and insurance
premiums) and 3.9 hereof (with respect to hazard insurance), to refund to any
Mortgagors any sums determined to be overages, to pay interest, if required by
law or the terms of the related Mortgage or Mortgage Note, to Mortgagors on
balances in the Escrow Account or to clear and terminate the Escrow Account at
the termination of this Agreement in accordance with Section 9.1 hereof. The
Escrow Accounts shall not be a part of the Trust Fund.

     (c)  The Master Servicer shall advance any payments referred to in Section
3.6(a) that are not timely paid by the Mortgagors on the date when the tax,
premium or other cost for which such payment is intended is due, but the Master
Servicer shall be required so to advance only to the extent that such advances,
in the good faith judgment of the Master Servicer, will be recoverable by the
Master Servicer out of Insurance Proceeds, Liquidation Proceeds or otherwise.

     SECTION 3.7  Access to Certain Documentation and Information Regarding the
Mortgage Loans.

     The Master Servicer shall afford the Depositor and the Trustee reasonable
access to all records and documentation regarding the Mortgage Loans and all
accounts, insurance information and other matters relating to this Agreement,
such access being afforded without charge, but only upon reasonable request and
during normal business hours at the office designated by the Master Servicer.

                                     -46-
<PAGE>

     Upon reasonable advance notice in writing, the Master Servicer will provide
to each Certificateholder which is a savings and loan association, bank or
insurance company certain reports and reasonable access to information and
documentation regarding the Mortgage Loans sufficient to permit such
Certificateholder to comply with applicable regulations of the OTS or other
regulatory authorities with respect to investment in the Certificates; provided
that the Master Servicer shall be entitled to be reimbursed by each such
Certificateholder for actual expenses incurred by the Master Servicer in
providing such reports and access.

     SECTION 3.8  Permitted Withdrawals from the Certificate Account and
Distribution Account.

     (a)  The Master Servicer may from time to time make withdrawals from the
Certificate Account for the following purposes:

          (i)     to the extent not previously retained by the Master Servicer,
     to pay to First Horizon the Retained Yield and to pay to the Master
     Servicer the master servicing compensation to which it is entitled pursuant
     to Section 3.14, and earnings on or investment income with respect to funds
     in or credited to the Certificate Account as additional servicing
     compensation;

          (ii)    to the extent not previously retained by the Master Servicer,
     to reimburse the Master Servicer for unreimbursed Advances made by it, such
     right of reimbursement pursuant to this subclause (ii) being limited to
     amounts received on the Mortgage Loan(s) in respect of which any such
     Advance was made;

          (iii)   to reimburse the Master Servicer for any Nonrecoverable
     Advance previously made;

          (iv)    to reimburse the Master Servicer for Insured Expenses from the
     related Insurance Proceeds;

          (v)     to reimburse the Master Servicer for (a) unreimbursed
     Servicing Advances, the Master Servicer's right to reimbursement pursuant
     to this clause (a) with respect to any Mortgage Loan being limited to
     amounts received on such Mortgage Loan(s) which represent late recoveries
     of the payments for which such advances were made pursuant to Section 3.1
     or Section 3.6 and (b) for unpaid Master Servicing Fees as provided in
     Section 3.11 hereof;

          (vi)    to pay to the purchaser, with respect to each Mortgage Loan or
     property acquired in respect thereof that has been purchased pursuant to
     Section 2.2, 2.3 or 3.11, all amounts received thereon after the date of
     such purchase;

          (vii)   to reimburse the Seller, the Master Servicer, the Purchaser or
     the Depositor for expenses incurred by any of them and reimbursable
     pursuant to Section 6.3 hereof;

          (viii)  to withdraw any amount deposited in the Certificate Account
     and not required to be deposited therein;

                                     -47-
<PAGE>

          (ix)   on or prior to the Distribution Account Deposit Date, to
     withdraw an amount equal to the related Available Funds and the Trustee Fee
     for such Distribution Date and remit such amount to the Trustee for deposit
     in the Distribution Account; and

          (x)    to clear and terminate the Certificate Account upon termination
     of this Agreement pursuant to Section 9.1 hereof.

     The Master Servicer shall keep and maintain separate accounting, on a
Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Certificate Account pursuant to such subclauses (i), (ii),
(iv), (v) and (vi). Prior to making any withdrawal from the Certificate Account
pursuant to subclause (iii), the Master Servicer shall deliver to the Trustee an
Officer's Certificate of a Servicing Officer indicating the amount of any
previous Advance determined by the Master Servicer to be a Nonrecoverable
Advance and identifying the related Mortgage Loans(s), and their respective
portions of such Nonrecoverable Advance.

     The Master Servicer shall distribute the Retained Yield, if any, to First
Horizon on each Distribution Account Deposit Date during the term of this
Agreement.

     (b)  The Trustee shall withdraw funds from the Distribution Account for
distributions to Certificateholders in the manner specified in this Agreement
(and to withhold from the amounts so withdrawn, the amount of any taxes that it
is authorized to withhold pursuant to the last paragraph of Section 8.11). In
addition, the Trustee may prior to making the distribution pursuant to Section
4.2 from time to time make withdrawals from the Distribution Account for the
following purposes:

          (i)    to pay to itself the Trustee Fee for the related Distribution
     Date;

          (ii)   to pay to itself earnings on or investment income with respect
     to funds in the Distribution Account;

          (iii)  to withdraw and return to the Master Servicer any amount
     deposited in the Distribution Account and not required to be deposited
     therein; and

          (iv)   to clear and terminate the Distribution Account upon
     termination of the Agreement pursuant to Section 9.1 hereof.

     SECTION 3.9  Maintenance of Hazard Insurance; Maintenance of Primary
Insurance Policies.

     (a)  The Master Servicer shall cause to be maintained, for each Mortgage
Loan, hazard insurance with extended coverage in an amount that is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan or (ii) the greater of (y) the outstanding principal
balance of the Mortgage Loan and (z) an amount such that the proceeds of such
policy shall be sufficient to prevent the Mortgagor and/or the mortgagee from
becoming a co-insurer. Each such policy of standard hazard insurance shall
contain, or have an accompanying endorsement that contains, a standard mortgagee
clause. Any amounts collected by the Master Servicer under any such policies
(other than the amounts to be applied to the restoration or repair of the
related Mortgaged Property or amounts released to the Mortgagor in accordance
with the Master Servicer's

                                     -48-
<PAGE>

normal servicing procedures) shall be deposited in the Certificate Account. Any
cost incurred by the Master Servicer in maintaining any such insurance shall
not, for the purpose of calculating monthly distributions to the
Certificateholders or remittances to the Trustee for their benefit, be added to
the principal balance of the Mortgage Loan, notwithstanding that the terms of
the Mortgage Loan so permit. Such costs shall be recoverable by the Master
Servicer out of late payments by the related Mortgagor or out of Liquidation
Proceeds to the extent permitted by Section 3.8 hereof. It is understood and
agreed that no earthquake or other additional insurance is to be required of any
Mortgagor or maintained on property acquired in respect of a Mortgage other than
pursuant to such applicable laws and regulations as shall at any time be in
force and as shall require such additional insurance. If the Mortgaged Property
is located at the time of origination of the Mortgage Loan in a federally
designated special flood hazard area and such area is participating in the
national flood insurance program, the Master Servicer shall cause flood
insurance to be maintained with respect to such Mortgage Loan. Such flood
insurance shall be in an amount equal to the least of (i) the original principal
balance of the related Mortgage Loan, (ii) the replacement value of the
improvements which are part of such Mortgaged Property, and (iii) the maximum
amount of such insurance available for the related Mortgaged Property under the
national flood insurance program.

     (b)  In the event that the Master Servicer shall obtain and maintain a
blanket policy insuring against hazard losses on all of the Mortgage Loans, it
shall conclusively be deemed to have satisfied its obligations as set forth in
the first sentence of this Section, it being understood and agreed that such
policy may contain a deductible clause on terms substantially equivalent to
those commercially available and maintained by comparable servicers. If such
policy contains a deductible clause, the Master Servicer shall, in the event
that there shall not have been maintained on the related Mortgaged Property a
policy complying with the first sentence of this Section, and there shall have
been a loss that would have been covered by such policy, deposit in the
Certificate Account the amount not otherwise payable under the blanket policy
because of such deductible clause. In connection with its activities as Master
Servicer of the Mortgage Loans, the Master Servicer agrees to present, on behalf
of itself, the Depositor, and the Trustee for the benefit of the
Certificateholders, claims under any such blanket policy.

     (c)  The Master Servicer shall not take any action which would result in
non-coverage under any applicable Primary Insurance Policy of any loss which,
but for the actions of the Master Servicer, would have been covered thereunder.
The Master Servicer shall not cancel or refuse to renew any such Primary
Insurance Policy that is in effect at the date of the initial issuance of the
Certificates and is required to be kept in force hereunder unless the
replacement Primary Insurance Policy for such canceled or non-renewed policy is
maintained with a Qualified Insurer.

     The Master Servicer shall not be required to maintain any Primary Insurance
Policy (i) with respect to any Mortgage Loan with a Loan-to-Value Ratio less
than or equal to 80% as of any date of determination or, based on a new
appraisal, the principal balance of such Mortgage Loan represents 80% or less of
the new appraised value or (ii) if maintaining such Primary Insurance Policy is
prohibited by applicable law.

     The Master Servicer agrees to effect the timely payment of the premiums on
each Primary Insurance Policy, and such costs not otherwise recoverable shall be
recoverable by the Master Servicer from the related liquidation proceeds.

                                     -49-
<PAGE>

     (d)  In connection with its activities as Master Servicer of the Mortgage
Loans, the Master Servicer agrees to present on behalf of itself, the Trustee
and Certificateholders, claims to the insurer under any Primary Insurance
Policies and, in this regard, to take such reasonable action as shall be
necessary to permit recovery under any Primary Insurance Policies respecting
defaulted Mortgage Loans. Any amounts collected by the Master Servicer under any
Primary Insurance Policies shall be deposited in the Certificate Account.

     SECTION 3.10  Enforcement of Due-on-Sale Clauses; Assumption Agreements.

     (a)  Except as otherwise provided in this Section, when any property
subject to a Mortgage has been conveyed by the Mortgagor, the Master Servicer
shall to the extent that it has knowledge of such conveyance, enforce any due-
on-sale clause contained in any Mortgage Note or Mortgage, to the extent
permitted under applicable law and governmental regulations, but only to the
extent that such enforcement will not adversely affect or jeopardize coverage
under any Required Insurance Policy. Notwithstanding the foregoing, the Master
Servicer is not required to exercise such rights with respect to a Mortgage Loan
if the Person to whom the related Mortgaged Property has been conveyed or is
proposed to be conveyed satisfies the terms and conditions contained in the
Mortgage Note and Mortgage related thereto and the consent of the mortgagee
under such Mortgage Note or Mortgage is not otherwise so required under such
Mortgage Note or Mortgage as a condition to such transfer. In the event that the
Master Servicer is prohibited by law from enforcing any such due-on-sale clause,
or if coverage under any Required Insurance Policy would be adversely affected,
or if nonenforcement is otherwise permitted hereunder, the Master Servicer is
authorized, subject to Section 3.10(b), to take or enter into an assumption and
modification 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
Mortgage Note and, unless prohibited by applicable state law, the Mortgagor
remains liable thereon, provided that the Mortgage Loan shall continue to be
covered (if so covered before the Master Servicer enters such agreement) by the
applicable Required Insurance Policies. The Master Servicer, subject to Section
3.10(b), is also authorized with the prior approval of the insurers under any
Required Insurance Policies to enter into a substitution of liability agreement
with such Person, pursuant to which the original Mortgagor is released from
liability and such Person is substituted as Mortgagor and becomes liable under
the Mortgage Note. Notwithstanding the foregoing, the Master Servicer shall not
be deemed to be in default under this Section by reason of any transfer or
assumption which the Master Servicer reasonably believes it is restricted by law
from preventing, for any reason whatsoever.

     (b) Subject to the Master Servicer's duty to enforce any due-on-sale clause
to the extent set forth in Section 3.10(a) hereof, in any case in which a
Mortgaged Property has been conveyed to a Person by a Mortgagor, and such Person
is to enter into an assumption agreement or modification agreement or supplement
to the Mortgage Note or Mortgage that requires the signature of the Trustee, or
if an instrument of release signed by the Trustee is required releasing the
Mortgagor from liability on the Mortgage Loan, the Master Servicer shall prepare
and deliver or cause to be prepared and delivered to the Trustee for signature
and shall direct, in writing, the Trustee to execute the assumption agreement
with the Person to whom the Mortgaged Property is to be conveyed and such
modification agreement or supplement to the Mortgage Note or Mortgage or other
instruments as are reasonable or necessary to carry out the terms of the
Mortgage Note or Mortgage or otherwise to comply with any applicable laws
regarding assumptions or the transfer of the Mortgaged Property to such Person.
In connection with any such assumption, no material term

                                     -50-
<PAGE>

of the Mortgage Note may be changed. In addition, the substitute Mortgagor and
the Mortgaged Property must be acceptable to the Master Servicer in accordance
with its underwriting standards as then in effect. Together with each such
substitution, assumption or other agreement or instrument delivered to the
Trustee for execution by it, the Master Servicer shall deliver an Officer's
Certificate signed by a Servicing Officer stating that the requirements of this
subsection have been met in connection therewith. The Master Servicer shall
notify the Trustee that any such substitution or assumption agreement has been
completed by forwarding to the Trustee the original of such substitution or
assumption agreement, which in the case of the original shall be added to the
related Mortgage File and 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. Any fee collected by the Master Servicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer as additional servicing compensation.

     SECTION 3.11  Realization Upon Defaulted Mortgage Loans; Repurchase of
Certain Mortgage Loans.

     The Master Servicer shall use reasonable efforts to foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such foreclosure or other conversion, the Master Servicer shall
follow such practices and procedures as it shall deem necessary or advisable and
as shall be normal and usual in its general mortgage servicing activities and
meet the requirements of the insurer under any Required Insurance Policy;
provided, however, that the Master Servicer shall not be required to expend its
own funds in connection with any foreclosure or towards the restoration of any
property unless it shall determine (i) that such restoration and/or foreclosure
will increase the proceeds of liquidation of the Mortgage Loan after
reimbursement to itself of such expenses and (ii) that such expenses will be
recoverable to it through Liquidation Proceeds (respecting which it shall have
priority for purposes of withdrawals from the Certificate Account). The Master
Servicer shall be responsible for all other costs and expenses incurred by it in
any such proceedings; provided, however, that it shall be entitled to
reimbursement thereof from the liquidation proceeds with respect to the related
Mortgaged Property, as provided in the definition of Liquidation Proceeds. If
the Master Servicer has knowledge that a Mortgaged Property which the Master
Servicer is contemplating acquiring in foreclosure or by deed in lieu of
foreclosure is located within a 1 mile radius of any site listed in the
Expenditure Plan for the Hazardous Substance Clean Up Bond Act of 1984 or other
site with environmental or hazardous waste risks known to the Master Servicer,
the Master Servicer will, prior to acquiring the Mortgaged Property, consider
such risks and only take action in accordance with its established environmental
review procedures.

     With respect to any REO Property, the deed or certificate of sale shall be
taken in the name of the Trustee for the benefit of the Certificateholders, or
its nominee, on behalf of the Certificateholders. The Trustee's name shall be
placed on the title to such REO Property solely as the Trustee hereunder and not
in its individual capacity. The Master Servicer shall ensure that the title to
such REO Property references the Pooling and Servicing Agreement and the
Trustee's capacity thereunder. Pursuant to its efforts to sell such REO
Property, the Master Servicer shall either itself or through an agent selected
by the Master Servicer protect and conserve such REO Property in the same manner
and to such extent as is customary in the locality where such REO Property is
located and may, incident to its conservation and protection of the interests of
the Certificateholders,

                                     -51-
<PAGE>

rent the same, or any part thereof, as the Master Servicer deems to be in the
best interest of the Certificateholders for the period prior to the sale of such
REO Property. The Master Servicer shall prepare for and deliver to the Trustee a
statement with respect to each REO Property that has been rented showing the
aggregate rental income received and all expenses incurred in connection with
the management and maintenance of such REO Property at such times as is
necessary to enable the Trustee to comply with the reporting requirements of the
REMIC Provisions. The net monthly rental income, if any, from such REO Property
shall be deposited in the Certificate Account no later than the close of
business on each Determination Date. The Master Servicer shall perform the tax
reporting and withholding required by Sections 1445 and 6050J of the Code with
respect to foreclosures and abandonments, the tax reporting required by Section
6050H of the Code with respect to the receipt of mortgage interest from
individuals and any tax reporting required by Section 6050P of the Code with
respect to the cancellation of indebtedness by certain financial entities, by
preparing such tax and information returns as may be required, in the form
required, and delivering the same to the Trustee for filing.

     In the event that the Trust Fund acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, the Master Servicer shall dispose of such Mortgaged Property
prior to the close of the third taxable year after its acquisition by the Trust
Fund unless the Trustee shall have been supplied with an Opinion of Counsel to
the effect that the holding by the Trust Fund of such Mortgaged Property
subsequent to such three-year period will not result in the imposition of taxes
on "prohibited transactions" of the REMIC hereunder as defined in section 860F
of the Code or cause the REMIC created hereunder to fail to qualify as a REMIC
at any time that any Certificates are outstanding, in which case the Trust Fund
may continue to hold such Mortgaged Property (subject to any conditions
contained in such Opinion of Counsel). Notwithstanding any other provision of
this Agreement, no Mortgaged Property acquired by the Trust Fund shall be rented
(or allowed to continue to be rented) or otherwise used for the production of
income by or on behalf of the Trust Fund in such a manner or pursuant to any
terms that would (i) cause such Mortgaged Property to fail to qualify as
"foreclosure property" within the meaning of section 860G(a)(8) of the Code or
(ii) subject the REMIC hereunder to the imposition of any federal, state or
local income taxes on the income earned from such Mortgaged Property under
Section 860G(c) of the Code or otherwise, unless the Master Servicer has agreed
to indemnify and hold harmless the Trust Fund with respect to the imposition of
any such taxes.

     In the event of a default on a Mortgage Loan one or more of whose obligor
is not a United States Person, as that term is defined in Section 7701(a)(30) of
the Code, in connection with any foreclosure or acquisition of a deed in lieu of
foreclosure (together, "foreclosure") in respect of such Mortgage Loan, the
Master Servicer will cause compliance with the provisions of Treasury Regulation
Section 1.1445-2(d)(3) (or any successor thereto) necessary to assure that no
withholding tax obligation arises with respect to the proceeds of such
foreclosure except to the extent, if any, that proceeds of such foreclosure are
required to be remitted to the obligors on such Mortgage Loan.

     The decision of the Master Servicer to foreclose on a defaulted Mortgage
Loan shall be subject to a determination by the Master Servicer that the
proceeds of such foreclosure would exceed the costs and expenses of bringing
such a proceeding. The income earned from the management of any REO Properties,
net of reimbursement to the Master Servicer for expenses incurred (including any
property or other taxes) in connection with such management and net of
unreimbursed Master Servicing Fees, Advances and Servicing Advances, shall be
applied to the payment of principal of

                                     -52-
<PAGE>

and interest on the related defaulted Mortgage Loans (with interest accruing as
though such Mortgage Loans were still current) and all such income shall be
deemed, for all purposes in this Agreement, to be payments on account of
principal and interest on the related Mortgage Notes and shall be deposited into
the Certificate Account. To the extent the net income received during any
calendar month is in excess of the amount attributable to amortizing principal
and accrued interest at the related Mortgage Rate on the related Mortgage Loan
for such calendar month, such excess shall be considered to be a partial
prepayment of principal of the related Mortgage Loan.

     The proceeds from any liquidation of a Mortgage Loan, as well as any income
from an REO Property, will be applied in the following order of priority: first,
to reimburse the Master Servicer for any related unreimbursed Servicing Advances
and Master Servicing Fees; second, to reimburse the Master Servicer for any
unreimbursed Advances; third, to reimburse the Certificate Account for any
Nonrecoverable Advances (or portions thereof) that were previously withdrawn by
the Master Servicer pursuant to Section 3.8(a)(iii) that related to such
Mortgage Loan; fourth, to accrued and unpaid interest (to the extent no Advance
has been made for such amount or any such Advance has been reimbursed) on the
Mortgage Loan or related REO Property, at the Adjusted Net Mortgage Rate to the
Due Date occurring in the month in which such amounts are required to be
distributed; and fifth, as a recovery of principal of the Mortgage Loan. Excess
Proceeds, if any, from the liquidation of a Liquidated Mortgage Loan will be
retained by the Master Servicer as additional servicing compensation pursuant to
Section 3.14.

     The Master Servicer, in its sole discretion, shall have the right to
purchase for its own account from the Trust Fund any Mortgage Loan which is 91
days or more delinquent at a price equal to the Purchase Price. The Purchase
Price for any Mortgage Loan purchased hereunder shall be deposited in the
Certificate Account and the Trustee, upon receipt of a certificate from the
Master Servicer in the form of Exhibit M hereto, shall release or cause to be
released to the purchaser of such Mortgage Loan the related Mortgage File and
shall execute and deliver such instruments of transfer or assignment prepared by
the purchaser of such Mortgage Loan, in each case without recourse, as shall be
necessary to vest in the purchaser of such Mortgage Loan any Mortgage Loan
released pursuant hereto and the purchaser of such Mortgage Loan shall succeed
to all the Trustee's right, title and interest in and to such Mortgage Loan and
all security and documents related thereto. Such assignment shall be an
assignment outright and not for security. The purchaser of such Mortgage Loan
shall thereupon own such Mortgage Loan, and all security and documents, free of
any further obligation to the Trustee or the Certificateholders with respect
thereto.

     SECTION 3.12  Trustee to Cooperate; Release of Mortgage Files.

     Upon the payment in full of any Mortgage Loan, or the receipt by the Master
Servicer of a notification that payment in full will be escrowed in a manner
customary for such purposes, the Master Servicer will immediately notify the
Trustee by delivering, or causing to be delivered a "Request for Release"
substantially in the form of Exhibit M. Upon receipt of such request, the
Trustee shall or shall cause the Custodian to promptly release the related
Mortgage File to the Master Servicer, and the Trustee shall at the Master
Servicer's direction execute and deliver to the Master Servicer the request for
reconveyance, deed of reconveyance or release or satisfaction of mortgage or
such instrument releasing the lien of the Mortgage in each case provided by the
Master Servicer, together with the Mortgage Note with written evidence of
cancellation thereon. Expenses incurred in connection with any instrument of
satisfaction or deed of reconveyance shall be chargeable to the

                                     -53-
<PAGE>

related Mortgagor. From time to time and as shall be appropriate for the
servicing or foreclosure of any Mortgage Loan, including for such purpose,
collection under any policy of flood insurance, any fidelity bond or errors or
omissions policy, or for the purposes of effecting a partial release of any
Mortgaged Property from the lien of the Mortgage or the making of any
corrections to the Mortgage Note or the Mortgage or any of the other documents
included in the Mortgage File, the Trustee shall, upon delivery to the Trustee
of a Request for Release in the form of Exhibit L signed by a Servicing Officer,
release the Mortgage File to the Master Servicer. Subject to the further
limitations set forth below, the Master Servicer shall cause the Mortgage File
or documents so released to be returned to the Trustee or its Custodian when the
need therefor by the Master Servicer no longer exists, unless the Mortgage Loan
is liquidated and the proceeds thereof are deposited in the Certificate Account,
in which case the Master Servicer shall deliver to the Trustee a Request for
Release in the form of Exhibit M, signed by a Servicing Officer.

     If the Master Servicer at any time seeks to initiate a foreclosure
proceeding in respect of any Mortgaged Property as authorized by this Agreement,
the Master Servicer shall deliver or cause to be delivered to the Trustee, for
signature, as appropriate, any court pleadings, requests for trustee's sale or
other documents necessary to effectuate such foreclosure or any legal action
brought to obtain judgment against the Mortgagor on the Mortgage Note or the
Mortgage or to obtain a deficiency judgment or to enforce any other remedies or
rights provided by the Mortgage Note or the Mortgage or otherwise available at
law or in equity.

     SECTION 3.13  Documents Records and Funds in Possession of Master Servicer
to be Held for the Trustee.

     Notwithstanding any other provisions of this Agreement, the Master Servicer
shall transmit to the Trustee as required by this Agreement all documents and
instruments in respect of a Mortgage Loan coming into the possession of the
Master Servicer from time to time and shall account fully to the Trustee for any
funds received by the Master Servicer or which otherwise are collected by the
Master Servicer as Liquidation Proceeds or Insurance Proceeds in respect of any
Mortgage Loan. All Mortgage Files and funds collected or held by, or under the
control of, the Master Servicer in respect of any Mortgage Loans, whether from
the collection of principal and interest payments or from Liquidation Proceeds,
including but not limited to, any funds on deposit in the Certificate Account,
shall be held by the Master Servicer for and on behalf of the Trustee and shall
be and remain the sole and exclusive property of the Trustee, subject to the
applicable provisions of this Agreement. The Master Servicer also agrees that it
shall not create, incur or subject any Mortgage File or any funds that are
deposited in the Certificate Account, Distribution Account or any Escrow
Account, or any funds that otherwise are or may become due or payable to the
Trustee for the benefit of the Certificateholders, to any claim, lien, security
interest, judgment, levy, writ of attachment or other encumbrance, or assert by
legal action or otherwise any claim or right of setoff against any Mortgage File
or any funds collected on, or in connection with, a Mortgage Loan, except,
however, that the Master Servicer shall be entitled to set off against and
deduct from any such funds any amounts that are properly due and payable to the
Master Servicer under this Agreement.

     SECTION 3.14  Master Servicing Compensation.

     As compensation for its activities hereunder, the Master Servicer shall be
entitled to retain or withdraw from the Certificate Account an amount equal to
the Master Servicing Fee for each

                                     -54-
<PAGE>

Mortgage Loan, provided that the aggregate Master Servicing Fee with respect to
any Distribution Date shall be reduced (i) by the amount of any Compensating
Interest paid by the Master Servicer with respect to such Distribution Date, and
(ii) with respect to the first Distribution Date, an amount equal to any amount
to be deposited into the Distribution Account by the Depositor pursuant to
Section 2.1(a) and not so deposited.

     Additional servicing compensation in the form of (i) Retained Yield, Excess
Proceeds, Prepayment Interest Excess, and all income and gain net of any losses
realized from Permitted Investments and (ii) prepayment penalties, assumption
fees and late payment charges in each case under the circumstances and in the
manner set forth in the applicable Mortgage Note or Mortgage shall be retained
by the Master Servicer to the extent not required to be deposited in the
Certificate Account pursuant to Section 3.5 hereof; provided that in the event
the Master Servicer is terminated pursuant to Section 7.1, the Retained Yield
shall be payable to First Horizon Home Loan Corporation in its individual
capacity and shall not be payable to the Trustee or any successor to the Master
Servicer. The Master Servicer shall be required to pay all expenses incurred by
it in connection with its master servicing activities hereunder (including
payment of any premiums for hazard insurance and any Primary Insurance Policy
and maintenance of the other forms of insurance coverage required by this
Agreement) and shall not be entitled to reimbursement therefor except as
specifically provided in this Agreement.

     SECTION 3.15  Access to Certain Documentation.

     The Master Servicer shall provide to the OTS and the FDIC and to comparable
regulatory authorities supervising Holders of Subordinated Certificates and the
examiners and supervisory agents of the OTS, the FDIC and such other
authorities, access to the documentation regarding the Mortgage Loans required
by applicable regulations of the OTS and the FDIC. Such access shall be afforded
without charge, but only upon reasonable and prior written request and during
normal business hours at the offices designated by the Master Servicer. Nothing
in this Section shall limit the obligation of the Master Servicer to observe any
applicable law prohibiting disclosure of information regarding the Mortgagors
and the failure of the Master Servicer to provide access as provided in this
Section as a result of such obligation shall not constitute a breach of this
Section.

     SECTION 3.16  Annual Statement as to Compliance.

     The Master Servicer shall deliver to the Depositor and the Trustee on or
before 120 days after the end of the Master Servicer's fiscal year, commencing
with its 2001 fiscal year, an Officer's Certificate stating, as to the signer
thereof, that (i) a review of the activities of the Master Servicer during the
preceding calendar year and of the performance of the Master Servicer under this
Agreement has been made under such officer's supervision and (ii) to the best of
such officer's knowledge, based on such review, the Master Servicer has
fulfilled all its obligations under this Agreement throughout 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. The
Trustee shall forward a copy of each such statement to each Rating Agency.

     SECTION 3.17  Annual Independent Public Accountants' Servicing Statement;
Financial Statements.

                                     -55-
<PAGE>

     On or before 120 days after the end of the Master Servicer's fiscal year,
commencing with its 2000 fiscal year, the Master Servicer at its expense shall
cause a nationally or regionally recognized firm of independent public
accountants (who may also render other services to the Master Servicer, the
Seller or any affiliate thereof) which is a member of the American Institute of
Certified Public Accountants to furnish a statement to the Trustee and the
Depositor to the effect that-such firm has examined certain documents and
records relating to the servicing of the Mortgage Loans under this Agreement or
of mortgage loans under pooling and servicing agreements substantially similar
to this Agreement (such statement to have attached thereto a schedule setting
forth the pooling and servicing agreements covered thereby) and that, on the
basis of such examination, conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FNMA and FHLMC, such servicing has been conducted in
compliance with such pooling and servicing agreements except for such
significant exceptions or errors in records that, in the opinion of such firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FNMA and FHLMC requires it to report. In rendering
such statement, such firm may rely, as to matters relating to direct servicing
of mortgage loans by Subservicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FNMA and FHLMC (rendered within one year of such statement) of independent
public accountants with respect to the related Subservicer. Copies of such
statement shall be provided by the Trustee to any Certificateholder upon request
at the Master Servicer's expense, provided such statement is delivered by the
Master Servicer to the Trustee.

     SECTION 3.18  Errors and Omissions Insurance; Fidelity Bonds.

     The Master Servicer shall for so long as it acts as master servicer under
this Agreement, obtain and maintain in force (a) a policy or policies of
insurance covering errors and omissions in the performance of its obligations as
Master Servicer hereunder and (b) a fidelity bond in respect of its officers,
employees and agents. Each such policy or policies and bond shall, together,
comply with the requirements from time to time of FNMA or FHLMC for persons
performing servicing for mortgage loans purchased by FNMA or FHLMC. In the event
that any such policy or bond ceases to be in effect, the Master Servicer shall
obtain a comparable replacement policy or bond from an insurer or issuer,
meeting the requirements set forth above as of the date of such replacement.

                                  ARTICLE IV
                               DISTRIBUTIONS AND
                        ADVANCES BY THE MASTER SERVICER

     SECTION 4.1   Advances.

     The Master Servicer shall determine on or before each Master Servicer
Advance Date whether it is required to make an Advance pursuant to the
definition thereof. If the Master Servicer determines it is required to make an
Advance, it shall, on or before the Master Servicer Advance Date, either (i)
deposit into the Certificate Account an amount equal to the Advance or (ii) make
an appropriate entry in its records relating to the Certificate Account that any
Amount Held for Future Distribution has been used by the Master Servicer in
discharge of its obligation to make any such Advance. Any funds so applied shall
be replaced by the Master Servicer by deposit in the Certificate Account no
later than the close of business on the next Master Servicer Advance Date. The
Master

                                     -56-
<PAGE>

Servicer shall be entitled to be reimbursed from the Certificate Account for all
Advances of its own funds made pursuant to this Section as provided in Section
3.08. The obligation to make Advances with respect to any Mortgage Loan shall
continue if such Mortgage Loan has been foreclosed or otherwise terminated and
the related Mortgaged Property has not been liquidated.

     The Master Servicer shall deliver to the Trustee on the related Master
Servicer Advance Date an Officer's Certificate of a Servicing Officer indicating
the amount of any proposed Advance determined by the Master Servicer to be a
Nonrecoverable Advance.

     SECTION 4.2  Priorities of Distribution.

     (a) On each Distribution Date, the Trustee shall withdraw the Available
Funds from the Distribution Account and apply such funds to distributions on the
Certificates in the following order and priority and, in each case, to the
extent of Available Funds remaining:

          (i)   to the Classes of Senior Certificates, the Accrued Certificate
     Interest on each such class for such Distribution Date, any shortfall in
     available amounts being allocated among such classes in proportion to the
     amount of Accrued Certificate Interest otherwise distributable thereon;

          (ii)  to the Classes of Senior Certificates, any Accrued Certificate
     Interest thereon remaining undistributed from previous Distribution Dates,
     to the extent of remaining Available Funds, any shortfall in available
     amounts being allocated among such classes in proportion to the amount of
     such Accrued Certificate Interest remaining undistributed for each such
     Class for such Distribution Date;

          (iii) to the Classes of Senior Certificates entitled to principal
     distributions, in reduction of the Class Certificate Balances thereof, to
     the extent of remaining Available Funds, the Senior Optimal Principal
     Amount for such Distribution Date, in the order of priority set forth
     below:

                (1)   to the Class B-1 Certificates, to the extent of remaining
                      Available Funds, in the following order: (1) the Accrued
                      Certificate Interest thereon for such Distribution Date,
                      (2) any Accrued Certificate Interest thereon remaining
                      undistributed from previous Distribution Dates and (3)
                      such Class's Allocable Share for such Distribution Date;

                (2)   the Class B-2 Certificates, to the extent of remaining
                      Available Funds, in the following order: (1) the Accrued
                      Certificate Interest thereon for such Distribution Date,
                      (2) any Accrued Certificate Interest thereon remaining
                      undistributed from previous Distribution Dates and (3)
                      such Class's Allocable Share for such Distribution Date;

                (3)   the Class B-3 Certificates, to the extent of remaining
                      Available Funds, in the following order: (1) the Accrued
                      Certificate Interest thereon for such Distribution Date,
                      (2) any Accrued Certificate

                                     -57-
<PAGE>

                      Interest thereon remaining undistributed from previous
                      Distribution Dates and (3) such Class's Allocable Share
                      for such Distribution Date; and

               (4)    to the Class B-4 Certificates, to the extent of remaining
                      Available Funds: (1) the Accrued Certificate Interest
                      thereon for such Distribution Date, (2) any Accrued
                      Certificate Interest thereon remaining undistributed from
                      previous Distribution Dates and (3) such Class's Allocable
                      Share for such Distribution Date.

               (5)    to the Class B-5 Certificates, to the extent of remaining
                      Available Funds: (1) the Accrued Certificate Interest
                      thereon for such Distribution Date, (2) any Accrued
                      Certificate Interest thereon remaining undistributed from
                      previous Distribution Dates and (3) such Class's Allocable
                      Share for such Distribution Date; and

               (6)    to the Class B-6 Certificates, to the extent of remaining
                      Available Funds: (1) the Accrued Certificate Interest
                      thereon for such Distribution Date, (2) any Accrued
                      Certificate Interest thereon remaining undistributed from
                      previous Distribution Dates and (3) such Class's Allocable
                      Share for such Distribution Date.

     (b)  Amounts allocated to the Senior Certificates pursuant to Section
4.2(a)(iii) above will be distributed concurrently, as follows:

          (i)  to the Class A-3 Certificates, in an amount equal to the Class A-
     3 Principal Distribution Amount for such Distribution Date, until the Class
     Certificate Balance thereof has been reduced to zero; and

          (ii) to the remaining Classes of Senior Certificates, an amount equal
     to the Senior Optimal Principal Amount less the Class A-3 Principal
     Distribution Amount, in the following order:

               .   concurrently, (A) 50.0% of the remaining amount sequentially
          to the Class A-R, Class A-1 and Class A-2 Certificates, in that order,
          until their respective Class Certificate Balances have been reduced to
          zero and (B) 50.0% of such amount sequentially to the Class A-4, Class
          A-5 and Class A-6 Certificates, in that order, until their respective
          Class Certificate Balances have been reduced to zero.

     On each Distribution Date after the Cross-Over Date, distributions of
principal on the outstanding Senior Certificates entitled to principal
distributions will be made pro rata among all such Certificates, regardless of
the allocation, or sequential nature, of principal payments described above.

     (c)  On each Distribution Date, the Trustee shall distribute to the Holders
of the Class A-R Certificates any Available Funds remaining in the REMIC for
such Distribution Date after application of all amounts described in clauses (a)
and (b) of this Section 4.2 on such Distribution

                                     -58-
<PAGE>

Date. Any distributions pursuant to this subsection (c) shall not reduce the
Class Certificate Balance of the Class A-R Certificates.

     (d)  If on any Distribution Date the Class Certificate Balances of the
Subordinated Certificates have each been reduced to zero, the amount
distributable to the Senior Certificates pursuant to Section 4.2(a)(iii) for
such Distribution Date and each succeeding Distribution Date shall be allocated
among such Classes of Senior Certificates, pro rata, on the basis of their
respective Class Certificate Balances immediately prior to such Distribution
Date, regardless of the priorities and amounts set forth in Section 4.2(a)(iii).

     (e)  If on any Distribution Date (i) the Class Certificate Balance of any
Class of Class B Certificates (other than the Class B-1 Certificates) for which
the related Class Prepayment Distribution Trigger was satisfied on such
Distribution Date is reduced to zero and (ii) amounts distributable to such
Class of Class B Certificates pursuant to clauses (2), (3) and (5) of the
Subordinated Optimal Principal Amount remain undistributed on such Distribution
Date after all amounts otherwise distributable on such date pursuant to clauses
(v) through (ix) of Section 4.2(a) have been distributed, such amounts shall be
distributed on such Distribution Date to the remaining Classes of Subordinated
Certificates in order of priority, such that no such distribution shall be made
to any Class of Certificates while a prior such Class is outstanding.

     (f)  In the event that in any calendar month the Master Servicer recovers
an amount (an "Unanticipated Recovery") in respect of principal of a Mortgage
Loan which had previously been allocated as a Realized Loss to any Class of
Certificates pursuant to Section 4.4, on the Distribution Date in the next
succeeding calendar month the Trustee shall withdraw from the Distribution
Account and distribute to the Holders of each outstanding Class to which such
Realized Loss had previously been allocated its share (determined as described
in the succeeding paragraph) of such Unanticipated Recovery in an amount not to
exceed the amount of such Realized Loss previously allocated to such Class. When
the Class Certificate Balance of a Class of Certificates has been reduced to
zero, the Holders of such Class shall not be entitled to any share of an
Unanticipated Recovery, and such Unanticipated Recovery shall be allocated among
all outstanding Classes of Certificates entitled thereto in accordance with the
preceding sentence, subject to the remainder of this subsection (f). In the
event that (i) any Unanticipated Recovery remains undistributed in accordance
with the preceding sentence or (ii) the amount of an Unanticipated Recovery
exceeds the amount of the Realized Loss previously allocated to any outstanding
Classes with respect to the related Mortgage Loan, on the applicable
Distribution Date the Trustee shall distribute to the Holders of all outstanding
Classes of the related Certificates to which Realized Losses had previously been
allocated and not reimbursed their pro rata share (determined as described
below) of such excess in an amount not to exceed the aggregate amount of any
Realized Loss previously allocated to such Class with respect to any other
Mortgage Loan that has not been recovered in accordance with this subsection
(f). Any distributions made pursuant to this subsection (f) shall not reduce the
Class Certificate Balance of the related Certificate.

     For purposes of the preceding paragraph, the share of an Unanticipated
Recovery allocable to any Class of Certificates with respect to a Mortgage Loan
shall be based on its pro rata share (in proportion to the Class Certificate
Balances thereof with respect to such Distribution Date) of the principal
portion of any such Realized Loss previously allocated with respect to such
Mortgage Loan (or Loans).

                                     -59-
<PAGE>

     SECTION 4.3  Method of Distribution.

     (a)  All distributions with respect to each Class of Certificates on each
Distribution Date shall be made pro rata among the outstanding Certificates of
such Class, based on the Percentage Interest in such Class represented by each
Certificate. Payments to the Certificateholders on each Distribution Date will
be made by the Trustee to the Certificateholders of record on the related Record
Date by check or money order mailed to a Certificateholder at the address
appearing in the Certificate Register, or upon written request by such
Certificateholder to the Trustee made not later than the applicable Record Date,
by wire transfer to a U.S. depository institution acceptable to the Trustee, or
by such other means of payment as such Certificateholder and the Trustee shall
agree.

     (b)  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 financial
intermediary for which it acts as agent. Each such financial intermediary 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 applicable Certificates. Neither the
Trustee nor the Master Servicer shall have any responsibility therefor except as
otherwise provided by applicable law.

     (c)  The Trustee shall withhold or cause to be withheld such amounts as it
reasonably determines are required by the Code (giving full effect to any
exemptions from withholding and related certifications required to be furnished
by Certificateholders or Certificate Owners and any reductions to withholding by
virtue of any bilateral tax treaties and any applicable certification required
to be furnished by Certificateholders or Certificate Owners with respect
thereto) from distributions to be made to Non-U.S. Persons. If the Trustee
reasonably determines that a more accurate determination of the amount required
to be withheld for a distribution can be made within a reasonable period after
the scheduled date for such distribution, it may hold such distribution in trust
for a Holder of a Residual Certificate until such determination can be made. For
the purposes of this paragraph, a "Non-U.S. Person" is (i) an individual other
than a citizen or resident of the United States, (ii) a partnership, corporation
or entity treated as a partnership or corporation for U.S. federal income tax
purposes not formed under the laws of the United States, any state thereof or
the District of Columbia (unless, in the case of a partnership, Treasury
regulations provide otherwise), (iii) any estate, the income of which is not
subject to U.S. federal income taxation, regardless of source, and (iv) any
trust, other than a trust that a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust.

     SECTION 4.4  Allocation of Losses.

     (a)  On or prior to each Determination Date, the Master Servicer shall
determine the amount of any Realized Loss in respect of each Mortgage Loan that
occurred during the immediately preceding calendar month.

     (b)  With respect to any Distribution Date, the principal portion of each
Realized Loss (other than any Excess Loss) shall be allocated in the following
order of priority:

                                     -60-
<PAGE>

               first, to the Class B-6 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               second, to the Class B-5 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               third, to the Class B-4 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               fourth, to the Class B-3 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               fifth, to the Class B-2 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               sixth, to the Class B-1 Certificates until the Class Certificate
          Balance thereof has been reduced to zero;

               seventh, to the Classes of Senior Certificates, pro rata, in
          accordance with their Class Certificate Balances.

     (c)  With respect to any Distribution Date, the principal portion of any
Excess Loss (other than Excess Bankruptcy Losses attributable to Debt Service
Reductions) shall be allocated to each Class of Certificates, pro rata, based on
the respective Class Certificate Balances thereof.

     (d)  Any Realized Losses allocated to a Class of Certificates pursuant to
Section 4.4(b) or (c) shall be allocated among the Certificates of such Class in
proportion to their respective Certificate Principal Balances.  Any allocation
of Realized Losses pursuant to this paragraph (d) shall be accomplished by
reducing the Certificate Principal Balances of the related Certificates on the
related Distribution Date in accordance with Section 4.4(e).

     (e)  Realized Losses allocated in accordance with this Section 4.4 shall be
allocated on the Distribution Date in the month following the month in which
such loss was incurred and, in the case of the principal portion thereof, after
giving effect to distributions made on such Distribution Date.

     (f)  On each Distribution Date, the Master Servicer shall determine the
Subordinated Certificate Writedown Amount, if any.  Any such Subordinated
Certificate Writedown Amount shall effect, without duplication of any other
provision in this Section 4.4 that provides for a reduction in the Class
Certificate Balance of the Subordinated Certificates, a corresponding reduction
in the Class Certificate Balance of the Subordinated Certificates, which
reduction shall occur on such Distribution Date after giving effect to
distributions made on such Distribution Date.

     (g)  Notwithstanding the foregoing, no such allocation of any Realized Loss
shall be made on a Distribution Date to a Class of Certificates to the extent
that such allocation would result in the reduction of the aggregate Certificate
Principal Balances of all the Certificates as of such Distribution Date, after
giving effect to all distributions and prior allocations of Realized Losses on
such date, to an amount less than the aggregate Scheduled Principal Balance of
the Mortgage Loans

                                     -61-
<PAGE>

as of the first day of the month of such Distribution Date, less any Deficient
Valuations occurring on or prior to the Bankruptcy Coverage Termination Date
(such limitation, the "Loss Allocation Limitation").

     SECTION 4.5  [Reserved.]

     SECTION 4.6  Monthly Statements to Certificateholders.

     (a)  Not later than each Distribution Date, the Trustee shall prepare and
cause to be forwarded by first class mail to each Certificateholder, the Master
Servicer, the Depositor and each Rating Agency a statement setting forth with
respect to the related distribution and may post such statement on its website
located at www.mbsreporting.com:

          (i)     the amount thereof allocable to principal, separately
     identifying the aggregate amount of any Principal Prepayments and
     Liquidation Proceeds included therein;

          (ii)    the amount thereof allocable to interest, the amount of any
     Compensating Interest included in such distribution and any remaining Net
     Interest Shortfalls after giving effect to such distribution;

          (iii)   if the distribution to the Holders of such Class of
     Certificates is less than the full amount that would be distributable to
     such Holders if there were sufficient funds available therefor, the amount
     of the shortfall and the allocation thereof as between principal and
     interest;

          (iv)    the Class Certificate Balance of each Class of Certificates
     after giving effect to the distribution of principal on such Distribution
     Date;

          (v)     the Pool Principal Balance for the following Distribution
     Date;

          (vi)    the Senior Percentage and Subordinated Percentage for the
     following Distribution Date;

          (vii)   the amount of the Master Servicing Fees paid to or retained by
     the Master Servicer with respect to such Distribution Date;

          (viii)  the Pass-Through Rate for each such Class of Certificates with
     respect to such Distribution Date;

          (ix)    the amount of Advances included in the distribution on such
     Distribution Date and the aggregate amount of Advances outstanding as of
     the close of business on such Distribution Date;

          (x)     the number and aggregate principal amounts of Mortgage Loans
     (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30
     days (2) 31 to 60 days (3) 61 to 90 days and (4) 91 or more days and (B) in
     foreclosure and delinquent (1) 1 to 30 days (2) 31 to 60 days (3) 61 to 90
     days and (4) 91 or more days, as of the close of business on the last day
     of the calendar month preceding such Distribution Date;

                                     -62-
<PAGE>

          (xi)   with respect to any Mortgage Loan that became an REO Property
     during the preceding calendar month, the loan number and Stated Principal
     Balance of such Mortgage Loan as of the close of business on the
     Determination Date preceding such Distribution Date and the date of
     acquisition thereof;

          (xii)  the total number and principal balance of any REO Properties
     (and market value, if available) as of the close of business on the
     Determination Date preceding such Distribution Date;

          (xiii) the Senior Prepayment Percentage for the following Distribution
     Date;

          (xiv)  the aggregate amount of Realized Losses incurred during the
     preceding calendar month;

          (xv)   the cumulative amount of Realized Losses applied in reduction
     of the principal balance of each class of Certificates since the Closing
     Date;

          (xvi)  the Special Hazard Loss Coverage Amount, the Fraud Loss
     Coverage Amount and the Bankruptcy Loss Coverage Amount, in each case as of
     the related Determination Date; and

          (xvii) with respect to the second Distribution Date, the number and
     aggregate balance of any Delay Delivery Mortgage Loans not delivered within
     thirty days after the Closing Date;

     (b)  The Trustee's responsibility for disbursing the above information to
the Certificateholders is limited to the availability, timeliness and accuracy
of the information provided by the Master Servicer.

     (c)  On or before the fifth Business Day following the end of each
Prepayment Period (but in no event later than the third Business Day prior to
the related Distribution Date), the Master Servicer shall deliver to the Trustee
(which delivery may be by electronic data transmission) a report in
substantially the form set forth as Schedule IV hereto.

     (d)  Within a reasonable period of time after the end of each calendar
year, the Trustee shall cause to be furnished to each Person who at any time
during the calendar year was a Certificateholder, a statement containing the
information set forth in clauses (a)(i), (a)(ii) and (a)(vii) of this Section
4.6 aggregated for such calendar year or applicable portion thereof during which
such Person was a Certificateholder. Such obligation of the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code as from time to time in effect.

     SECTION 4.7 [Reserved.]

     SECTION 4.8 [Reserved.]

                                     -63-
<PAGE>

                                   ARTICLE V
                               THE CERTIFICATES

     SECTION 5.1  The Certificates.

     The Certificates shall be substantially in the forms attached hereto as
exhibits. The Certificates shall be issuable in registered form, in the minimum
denominations, integral multiples in excess thereof (except that one Certificate
in each Class may be issued in a different amount which must be in excess of the
applicable minimum denomination) and aggregate denominations per Class set forth
in the Preliminary Statement.

     Subject to Section 9.2 hereof respecting the final distribution on the
Certificates, on each Distribution Date the Trustee shall make distributions to
each Certificateholder of record on the preceding Record Date either (x) by wire
transfer in immediately available funds to the account of such Holder at a bank
or other entity having appropriate facilities therefor, if (i) such Holder has
so notified the Trustee at least five Business Days prior to the related Record
Date and (ii) such Holder shall hold (A) 100% of the Class Certificate Balance
of any Class of Certificates or (B) Certificates of any Class with aggregate
principal Denominations of not less than $1,000,000 or (y) by check mailed by
first class mail to such Certificateholder at the address of such Holder
appearing in the Certificate Register.

     The Certificates shall be executed by manual or facsimile signature on
behalf of the Trustee by an authorized 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 Trustee, notwithstanding that such individuals or any of them have ceased to
be so authorized prior to the countersignature 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 countersigned by the Trustee by manual signature, and such
countersignature upon any Certificate shall be conclusive evidence, and the only
evidence, that such Certificate has been duly executed and delivered hereunder.
All Certificates shall be dated the date of their countersignature. On the
Closing Date, the Trustee shall countersign the Certificates to be issued at the
direction of the Depositor, or any affiliate thereof.

     The Depositor shall provide, or cause to be provided, to the Trustee on a
continuous basis, an adequate inventory of Certificates to facilitate transfers.

     SECTION 5.2  Certificate Register; Registration of Transfer and Exchange of
Certificates.

     (a)  The Trustee shall maintain, or cause to be maintained in accordance
with the provisions of Section 5.6 hereof, a Certificate Register for the Trust
Fund in which, subject to the provisions of subsections (b) and (c) below and to
such reasonable regulations as it may prescribe, the Trustee shall provide for
the registration of Certificates and of transfers and exchanges of Certificates
as herein provided. Upon surrender for registration of transfer of any
Certificate, the Trustee shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Certificates of the same
Class and aggregate Percentage Interest.

     At the option of a Certificateholder, Certificates may be exchanged for
other Certificates of the same Class in authorized denominations and evidencing
the same aggregate Percentage Interest

                                     -64-
<PAGE>

upon surrender of the Certificates to be exchanged at the office or agency of
the Trustee. Whenever any Certificates are so surrendered for exchange, the
Trustee shall execute, 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 be
accompanied by a written instrument of transfer in form satisfactory to the
Trustee duly executed by the Holder thereof or his attorney duly authorized in
writing.

     No service charge to the Certificateholders shall be made for any
registration of transfer or exchange of Certificates, but 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 may be required.

     All Certificates surrendered for registration of transfer or exchange shall
be cancelled and subsequently destroyed by the Trustee in accordance with the
Trustee's customary procedures.

     (b)  No transfer of a Private Certificate shall be made unless such
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under said Act and such state securities laws. In the
event that a transfer is to be made in reliance upon an exemption from the
Securities Act and such laws, in order to assure compliance with the Securities
Act and such laws, the Certificateholder desiring to effect such transfer and
such Certificateholder's prospective transferee shall each certify to the
Trustee in writing the facts surrounding the transfer in substantially the forms
set forth in Exhibit I (the "Transferor Certificate") and (i) deliver a letter
in substantially the form of either Exhibit J (the "Investment Letter") or
Exhibit K (the "Rule 144A Letter") or (ii) there shall be delivered to the
Trustee at the expense of the transferor an Opinion of Counsel that such
transfer may be made pursuant to an exemption from the Securities Act. The
Depositor shall provide to any Holder of a Private Certificate and any
prospective transferee designated by any such Holder, information regarding the
related Certificates and the Mortgage Loans and such other information as shall
be necessary to satisfy the condition to eligibility set forth in Rule
144A(d)(4) for transfer of any such Certificate without registration thereof
under the Securities Act pursuant to the registration exemption provided by Rule
144A. The Trustee and the Master Servicer shall cooperate with the Depositor in
providing the Rule 144A information referenced in the preceding sentence,
including providing to the Depositor such information regarding the
Certificates, the Mortgage Loans and other matters regarding the Trust Fund as
the Depositor shall reasonably request to meet its obligation under the
preceding sentence. Each Holder of a Private Certificate desiring to effect such
transfer shall, and does hereby agree to, indemnify the Trustee and the
Purchaser, the Depositor, the Seller and the Master Servicer 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 an ERISA-Restricted Certificate shall be made unless the
Trustee shall have received either (i) a representation from the transferee of
such Certificate acceptable to and in form and substance satisfactory to the
Trustee (in the event such Certificate is a Private Certificate, such
requirement is satisfied only by the Trustee's receipt of a representation
letter from the transferee substantially in the form of Exhibit J or Exhibit K),
to the effect that such transferee is not an employee benefit plan or
arrangement subject to Section 406 of ERISA or a plan or arrangement subject to
Section 4975 of the Code, nor a person acting on behalf of any such plan or
arrangement, nor using the assets of any such plan or arrangement to effect such
transfer, (ii) in the case of a Private Certificate or a Residual Certificate,
if the purchaser is an insurance company, a

                                     -65-
<PAGE>

representation that the purchaser is an insurance company which is purchasing
such Certificates with funds contained in an "insurance company general account"
(as such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of such
Certificates are covered under PTCE 95-60 or (iii) in the case of any such
ERISA-Restricted Certificate presented for registration in the name of an
employee benefit plan subject to ERISA, or a plan or arrangement subject to
Section 4975 of the Code (or comparable provisions of any subsequent
enactments), or a trustee of any such plan or any other person acting on behalf
of any such plan or arrangement, or using such plan's or arrangement's assets,
an Opinion of Counsel satisfactory to the Trustee, which Opinion of Counsel
shall not be an expense of either the Trustee or the Trust Fund, addressed to
the Trustee to the effect that the purchase or holding of such ERISA-Restricted
Certificate will not result in the assets of the Trust Fund being deemed to be
"plan assets" and subject to the prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee to any obligation in addition to those
expressly undertaken in this Agreement or to any liability. Notwithstanding
anything else to the contrary herein, any purported transfer of an ERISA-
Restricted Certificate to or on behalf of an employee benefit plan subject to
ERISA or to the Code without the delivery to the Trustee of an Opinion of
Counsel satisfactory to the Trustee as described above shall be void and of no
effect.

     To the extent permitted under applicable law (including, but not limited
to, ERISA), the Trustee shall be under no liability to any Person for any
registration of transfer of any ERISA-Restricted Certificate that is in fact not
permitted by this Section 5.2(b) or for making any payments due on such
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 transfer was
registered by the Trustee in accordance with the foregoing requirements.

     (c)  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
the rights of each Person acquiring any Ownership Interest in a Residual
Certificate are expressly subject to the following provisions:

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

          (ii)  No Ownership Interest in a Residual Certificate may be
     registered on the Closing Date or thereafter transferred, and the Trustee
     shall not register the Transfer of any Residual Certificate unless, in
     addition to the certificates required to be delivered to the Trustee under
     subparagraph (b) above, the Trustee shall have been furnished with an
     affidavit (a "Transfer Affidavit") of the initial owner or the proposed
     transferee in the form attached hereto as Exhibit H.

          (iii) Each Person holding or acquiring any Ownership Interest in a
     Residual Certificate shall agree (A) to obtain a Transfer Affidavit from
     any other Person to whom such Person attempts to Transfer its Ownership
     Interest in a Residual Certificate, (B) to obtain a Transfer Affidavit from
     any Person for whom such Person is acting as nominee, trustee or agent in
     connection with any Transfer of a Residual Certificate and (C) not to
     Transfer its Ownership Interest in a Residual Certificate or to cause the
     Transfer of an Ownership Interest

                                     -66-
<PAGE>

     in a Residual Certificate to any other Person if it has actual knowledge
     that such Person is not a Permitted Transferee.

          (iv) Any attempted or purported Transfer of any Ownership Interest in
     a Residual Certificate in violation of the provisions of this Section
     5.2(c) shall be absolutely null and void and shall vest no rights in the
     purported Transferee. If any purported transferee shall become a Holder of
     a Residual Certificate in violation of the provisions of this Section
     5.2(c), then the last preceding Permitted Transferee shall be restored to
     all rights as Holder thereof retroactive to the date of registration of
     Transfer of such Residual Certificate. The Trustee shall be under no
     liability to any Person for any registration of Transfer of a Residual
     Certificate that is in fact not permitted by Section 5.2(b) and this
     Section 5.2(c) or for making any payments due on such 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 Transfer was registered
     after receipt of the related Transfer Affidavit, Transferor Certificate and
     either the Rule 144A Letter or the Investment Letter. The Trustee shall be
     entitled but not obligated to recover from any Holder of a Residual
     Certificate that was in fact not a Permitted Transferee at the time it
     became a Holder or, at such subsequent time as it became other than a
     Permitted Transferee, all payments made on such Residual Certificate at and
     after either such time. Any such payments so recovered by the Trustee shall
     be paid and delivered by the Trustee to the last preceding Permitted
     Transferee of such Certificate.

          (v)  The Depositor shall use its best efforts to make available, upon
     receipt of written request from the Trustee, all information necessary to
     compute any tax imposed under Section 860E(e) of the Code as a result of a
     Transfer of an Ownership Interest in a Residual Certificate to any Holder
     who is not a Permitted Transferee.

     The restrictions on Transfers of a Residual Certificate set forth in this
Section 5.2(c) shall cease to apply (and the applicable portions of the legend
on a Residual Certificate may be deleted) with respect to Transfers occurring
after delivery to the Trustee of an Opinion of Counsel, which Opinion of Counsel
shall not be an expense of the Trust Fund, the Trustee, the Purchaser, the
Seller or the Master Servicer, to the effect that the elimination of such
restrictions will not cause the REMIC created hereunder to fail to qualify as a
REMIC at any time that the Certificates are outstanding or result in the
imposition of any tax on the Trust Fund, a Certificateholder or another Person.
Each Person holding or acquiring any Ownership Interest in a Residual
Certificate hereby consents to any amendment of this Agreement which, based on
an Opinion of Counsel furnished to the Trustee, is reasonably necessary (a) to
ensure that the record ownership of, or any beneficial interest in, a Residual
Certificate is not transferred, directly or indirectly, to a Person that is not
a Permitted Transferee and (b) to provide for a means to compel the Transfer of
a Residual Certificate which is held by a Person that is not a Permitted
Transferee to a Holder that is a Permitted Transferee.

     (d)  The preparation and delivery of all certificates and opinions referred
to above in this Section 5.2 in connection with transfer shall be at the expense
of the parties to such transfers.

     (e)  Except as provided 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 the Certificates may not be transferred by the
Trustee except to another Depository; (ii) the Depository shall maintain book-
entry records with respect to the Certificate Owners and with respect to

                                     -67-
<PAGE>

ownership and transfers of such Book-Entry Certificates; (iii) ownership and
transfers of registration of the Book-Entry Certificates on the books of the
Depository shall be governed by applicable rules established by the Depository;
(iv) the Depository may collect its usual and customary fees, charges and
expenses from its Depository Participants; (v) the Trustee shall deal with the
Depository, Depository Participants and indirect participating firms as
representatives of the Certificate Owners of the Book-Entry Certificates for
purposes of exercising the rights of holders under this Agreement, and requests
and directions for and votes of such representatives shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; and
(vi) the Trustee may rely and shall be fully protected in relying upon
information furnished by the Depository with respect to its Depository
Participants and furnished by the Depository Participants with respect to
indirect participating firms and persons shown on the books of such indirect
participating firms as direct or indirect Certificate Owners.

     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 Owner. Each Depository
Participant shall only transfer Book-Entry Certificates of Certificate Owners it
represents or of brokerage firms for which it acts as agent in accordance with
the Depository's normal procedures.

     If (x) (i) the Depository or the Depositor advises the Trustee in writing
that the Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (ii) the Trustee or the Depositor is unable
to locate a qualified successor, (y) the Depositor at its option advises the
Trustee in writing that it elects to terminate the book-entry system through the
Depository or (z) after the occurrence of an Event of Default, Certificate
Owners representing at least 51% of the Class Certificate Balance of the Book-
Entry Certificates together advise the Trustee and the Depository through the
Depository Participants in writing that the continuation of a book-entry system
through the Depository is no longer in the best interests of the Certificate
Owners, the Trustee shall notify all Certificate Owners, through the Depository,
of the occurrence of any such event and of the availability of definitive,
fully-registered Certificates (the "Definitive Certificates") to Certificate
Owners requesting the same. Upon surrender to the Trustee of the related Class
of Certificates by the Depository, accompanied by the instructions from the
Depository for registration, the Trustee shall issue the Definitive
Certificates. Neither the Master Servicer, the Depositor nor the Trustee shall
be liable for any delay in delivery of such instruction and each may
conclusively rely on, and shall be protected in relying on, such instructions.
The Master Servicer shall provide the Trustee with an adequate inventory of
certificates to facilitate the issuance and transfer of Definitive Certificates.
Upon the issuance of Definitive Certificates all references herein to
obligations imposed upon or to be performed by the Depository shall be deemed to
be imposed upon and performed by the Trustee, to the extent applicable with
respect to such Definitive Certificates and the Trustee shall recognize the
Holders of the Definitive Certificates as Certificateholders hereunder; provided
that the Trustee shall not by virtue of its assumption of such obligations
become liable to any party for any act or failure to act of the Depository.

     SECTION 5.3  Mutilated, Destroyed, Lost or Stolen Certificates.

     If (a) any mutilated Certificate is surrendered to the Trustee, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate and (b) there is delivered to the Master Servicer and the
Trustee such security or indemnity as may be required by them to save each of
them harmless, then, in the absence of notice to the Trustee that such
Certificate has been acquired

                                     -68-
<PAGE>

by a bona fide purchaser, the Trustee shall execute, countersign and deliver, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Certificate, a new Certificate of like Class, tenor and Percentage Interest. In
connection with the issuance of any new Certificate under this Section 5.3, the
Trustee 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) connected therewith.
Any replacement Certificate issued pursuant to this Section 5.3 shall constitute
complete and indefeasible evidence of ownership, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be found at any
time.

     SECTION 5.4  Persons Deemed Owners.

     The Master Servicer, the Trustee and any agent of the Master Servicer or
the Trustee may treat the Person in whose name any Certificate is registered as
the owner of such Certificate for the purpose of receiving distributions as
provided in this Agreement and for all other purposes whatsoever, and neither
the Master Servicer, the Trustee nor any agent of the Master Servicer or the
Trustee shall be affected by any notice to the contrary.

     SECTION 5.5  Access to List of Certificateholders' Names and Addresses.

     If three or more Certificateholders (a) request such information in writing
from the Trustee, (b) state that such Certificateholders desire to communicate
with other Certificateholders with respect to their rights under this Agreement
or under the Certificates, and (c) provide a copy of the communication which
such Certificateholders propose to transmit, or if the Depositor or Master
Servicer shall request such information in writing from the Trustee, then the
Trustee shall, within ten Business Days after the receipt of such request,
provide the Depositor, the Master Servicer or such Certificateholders at such
recipients' expense the most recent list of the Certificateholders of such Trust
Fund held by the Trustee, if any. The Depositor and every Certificateholder, by
receiving and holding a Certificate, agree that the Trustee shall not be held
accountable by reason of the disclosure of any such information as to the list
of the Certificateholders hereunder, regardless of the source from which such
information was derived.

     SECTION 5.6  Maintenance of Office or Agency.

     The Trustee will maintain or cause to be maintained at its expense an
office or offices or agency or agencies in New York City where Certificates may
be surrendered for registration of transfer or exchange. The Trustee initially
designates its Corporate Trust Office for such purposes. The Trustee will give
prompt written notice to the Certificateholders of any change in such location
of any such office or agency.

                                  ARTICLE VI
                     THE DEPOSITOR AND THE MASTER SERVICER

     SECTION 6.1  Respective Liabilities of the Depositor and the Master
Servicer.

     The Depositor and the Master Servicer shall each be liable in accordance
herewith only to the extent of the obligations specifically and respectively
imposed upon and undertaken by them herein.

                                     -69-
<PAGE>

     SECTION 6.2  Merger or Consolidation of the Depositor or the Master
Servicer.

     The Depositor and the Master Servicer will each keep in full effect its
existence, rights and franchises as a corporation under the laws of the United
States or under the laws of one of the states thereof and will each obtain and
preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Agreement, or any of the Mortgage Loans and
to perform its respective duties under this Agreement.

     Any Person into which the Depositor or the Master Servicer may be merged or
consolidated, or any Person resulting from any merger or consolidation to which
the Depositor or the Master Servicer shall be a party, or any person succeeding
to the business of the Depositor or the Master Servicer, shall be the successor
of the Depositor or the Master Servicer, 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 or surviving Person to the Master Servicer shall be
qualified to sell mortgage loans to, and to service mortgage loans on behalf of,
FNMA or FHLMC.

     SECTION 6.3  Limitation on Liability of the Purchaser, the Depositor, the
Seller, the Master Servicer and Others.

     None of the Purchaser, the Depositor, the Seller, the Master Servicer or
any of the directors, officers, employees or agents of the Purchaser, the
Depositor, the Seller or the Master Servicer shall be under any liability to the
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Purchaser, the
Depositor, the Seller, the Master Servicer or any such Person against any breach
of representations or warranties made by it herein or protect the Purchaser, the
Depositor, the Seller, the Master Servicer or any such Person from any liability
which would otherwise be imposed by reasons of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of reckless disregard
of obligations and duties hereunder. The Purchaser, the Depositor, the Seller,
the Master Servicer and any director, officer, employee or agent of the
Purchaser, the Depositor, the Seller or the Master 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 Purchaser, the
Depositor, the Seller, the Master Servicer and any director, officer, employee
or agent of the Purchaser, the Depositor, the Seller or the Master Servicer
shall be indemnified by the Trust Fund and held harmless against any loss,
liability or expense incurred in connection with any audit, controversy or
judicial proceeding relating to a governmental taxing authority or any legal
action relating to this Agreement or the Certificates, 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 willful misfeasance, bad faith or gross negligence in the performance
of duties hereunder or by reason of reckless disregard of obligations and duties
hereunder.  None of the Purchaser, the Depositor, the Seller or the Master
Servicer shall be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective duties hereunder and which
in its opinion may involve it in any expense or liability; provided, however,
that any of the Purchaser, the Depositor, the Seller or the Master Servicer may
in its discretion undertake any such action that it may deem necessary or
desirable in respect of this Agreement and the rights and duties of the parties
hereto and interests of the Trustee and the

                                     -70-
<PAGE>

Certificateholders hereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom shall be expenses, costs and
liabilities of the Trust Fund, and the Purchaser, the Depositor, the Seller and
the Master Servicer shall be entitled to be reimbursed therefor out of the
Certificate Account.

     SECTION 6.4  Limitation on Resignation of Master Servicer.

     The Master Servicer shall not resign from the obligations and duties hereby
imposed on it except (a) upon appointment of a successor servicer and receipt by
the Trustee of a letter from each Rating Agency that such a resignation and
appointment will not result in a downgrading of the rating of any of the
Certificates, or (b) upon determination that its duties hereunder are no longer
permissible under applicable law. Any such determination under clause (b)
permitting the resignation of the Master Servicer shall be evidenced by an
Opinion of Counsel to such effect delivered to the Trustee. No such resignation
shall become effective until the Trustee or a successor master servicer shall
have assumed the Master Servicer's responsibilities, duties, liabilities and
obligations hereunder.

                                  ARTICLE VII
                                    DEFAULT

     SECTION 7.1  Events of Default.

     "Event of Default," wherever used herein, means any one of the following
events:

          (i)    any failure by the Master Servicer to deposit in the
     Certificate Account or remit to the Trustee any payment required to be made
     under the terms of this Agreement, which failure shall continue unremedied
     for five days after the date upon which written notice of such failure
     shall have been given to the Master Servicer by the Trustee or the
     Depositor or to the Master Servicer and the Trustee by the Holders of
     Certificates having not less than 25% of the Voting Rights evidenced by the
     Certificates; or

          (ii)   any failure by the Master Servicer to observe or perform in any
     material respect any other of the covenants or agreements on the part of
     the Master Servicer contained in this Agreement, which failure materially
     affects the rights of Certificateholders, which failure continues
     unremedied for a period of 60 days after the date on which written notice
     of such failure shall have been given to the Master Servicer by the Trustee
     or the Depositor, or to the Master Servicer and the Trustee by the Holders
     of Certificates evidencing not less than 25% of the Voting Rights evidenced
     by the Certificates; provided, however, that the 60-day cure period shall
     not apply to the initial delivery of the Mortgage File for Delay Delivery
     Mortgage Loans nor the failure to substitute or repurchase in lieu thereof;
     or

          (iii)  a decree or order of a court or agency or supervisory authority
     having jurisdiction in the premises for the appointment of a receiver or
     liquidator in any insolvency, readjustment of debt, marshalling of assets
     and liabilities or similar proceedings, or for the winding-up or
     liquidation of its affairs, shall have been entered against the Master
     Servicer and such decree or order shall have remained in force undischarged
     or unstayed for a period of 60 consecutive days; or

                                     -71-
<PAGE>

          (iv)  the Master Servicer shall consent to the appointment of a
     receiver or liquidator in any insolvency, readjustment of debt, marshalling
     of assets and liabilities or similar proceedings of or relating to the
     Master Servicer or all or substantially all of the property of the Master
     Servicer; or

          (v)   the Master Servicer shall admit in writing its inability to pay
     its debts generally as they become due, file a petition to take advantage
     of, or commence a voluntary case under, any applicable insolvency or
     reorganization statute, make an assignment for the benefit of its
     creditors, or voluntarily suspend payment of its obligations.

     If an Event of Default described in clauses (i) to (v) of this Section
shall occur, then, and in each and every such case, so long as such Event of
Default shall not have been remedied, the Trustee may, or at the direction of
the Holders of Certificates evidencing not less than 66 2/3% of the Voting
Rights evidenced by the Certificates, the Trustee shall by notice in writing to
the Master Servicer (with a copy to each Rating Agency), terminate all of the
rights and obligations of the Master Servicer under this Agreement and in and to
the Mortgage Loans and the proceeds thereof, other than its rights as a
Certificateholder hereunder. On and after the receipt by the Master Servicer of
such written notice, all authority and power of the Master Servicer hereunder,
whether with respect to the Mortgage Loans or otherwise, shall pass to and be
vested in the Trustee. The Trustee, in its capacity as successor to the Master
Servicer, shall thereupon make any Advance which the Master Servicer failed to
make subject to Section 4.1 hereof.  The Trustee is hereby authorized and
empowered to execute and deliver, on behalf of the Master Servicer, as attorney-
in-fact or otherwise, any and all documents and other instruments, and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the transfer and
endorsement or assignment of the Mortgage Loans and related documents, or
otherwise.  Unless expressly provided in such written notice, no such
termination shall affect any obligation of the Master Servicer to pay amounts
owed pursuant to Article VIII.  The Master Servicer agrees to cooperate with the
Trustee in effecting the termination of the Master Servicer's responsibilities
and rights hereunder, including, without limitation, the transfer to the Trustee
of all cash amounts which shall at the time be credited to the Certificate
Account, or thereafter be received with respect to the Mortgage Loans.  All
expenses incurred in the transferring of the servicing duties from the Master
Servicer to a Successor Servicer shall be paid by the Master Servicer, and if
not paid by the Master Servicer, shall be paid from amounts on deposit in the
Certificate Account.

     Notwithstanding any termination of the activities of the Master Servicer
hereunder, the Master Servicer shall be entitled to receive, out of any late
collection of a Scheduled Payment on a Mortgage Loan which was due prior to the
notice terminating such Master Servicer's rights and obligations as Master
Servicer hereunder and received after such notice, that portion thereof to which
such Master Servicer would have been entitled pursuant to Sections 3.8(a)(i)
through (viii),and any other amounts payable to such Master Servicer hereunder
the entitlement to which arose prior to the termination of its activities
hereunder.

     SECTION 7.2  Trustee to Act; Appointment of Successor.

     On and after the time the Master Servicer receives a notice of termination
pursuant to Section 7.1 hereof, the Trustee shall, subject to and to the extent
provided in Section 3.4, be the successor to the Master Servicer in its capacity
as master servicer under this Agreement and the transactions set forth or
provided for herein and shall be subject to all the responsibilities, duties and
liabilities

                                     -72-
<PAGE>

relating thereto placed on the Master Servicer by the terms and provisions
hereof and applicable law including the obligation to make Advances pursuant to
Section 4.1. As compensation therefor, the Trustee shall be entitled to all
funds relating to the Mortgage Loans that the Master Servicer would have been
entitled to charge to the Certificate Account or Distribution Account if the
Master Servicer had continued to act hereunder. Notwithstanding the foregoing,
if the Trustee has become the successor to the Master Servicer in accordance
with Section 7.1 hereof, the Trustee may, if it shall be unwilling to so act, or
shall, if it is prohibited by applicable law from making Advances pursuant to
Section 4.1 hereof or if it is otherwise unable to so act, appoint, or petition
a court of competent jurisdiction to appoint, any established mortgage loan
servicing institution the appointment of which does not adversely affect the
then current rating of the Certificates by each Rating Agency as the successor
to the Master Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer hereunder. Any
successor to the Master Servicer shall be an institution which is a FNMA and
FHLMC approved seller/servicer in good standing, which has a net worth of at
least $10,000,000, and which is willing to service the Mortgage Loans and
executes and delivers to the Depositor and the Trustee an agreement accepting
such delegation and assignment, which contains an assumption by such Person of
the rights, powers, duties, responsibilities, obligations and liabilities of the
Master Servicer (other than liabilities of the Master Servicer under Section 6.3
hereof incurred prior to termination of the Master Servicer under Section 7.1),
with like effect as if originally named as a party to this Agreement; and
provided further that each Rating Agency acknowledges that its rating of the
Certificates in effect immediately prior to such assignment and delegation will
not be qualified or reduced, as a result of such assignment and delegation.
Pending appointment of a successor to the Master Servicer hereunder, the
Trustee, unless the Trustee is prohibited by law from so acting, shall, subject
to Section 3.4 hereof, act in such capacity as provided above. In connection
with such appointment and assumption, the Trustee may make such arrangements for
the compensation of such successor out of payments on Mortgage Loans as it and
such successor shall agree; provided, however, that no such compensation shall
be in excess of the Master Servicing Fee permitted the Master Servicer
hereunder. The Trustee and such successor shall take such action, consistent
with this Agreement, as shall be necessary to effectuate any such succession.
Neither the Trustee nor any other successor master servicer shall be deemed to
be in default hereunder by reason of any failure to make, or any delay in
making, any distribution hereunder or any portion thereof or any failure to
perform, or any delay in performing, any duties or responsibilities hereunder,
in either case caused by the failure of the Master Servicer to deliver or
provide, or any delay in delivering or providing, any cash, information,
documents or records to it.

     Any successor to the Master Servicer as master servicer shall give notice
to the Mortgagors of such change of servicer and shall, during the term of its
service as master servicer maintain in force the policy or policies that the
Master Servicer is required to maintain pursuant to Section 6.5.

     SECTION 7.3  Notification to Certificateholders.

     (a) Upon any termination of or appointment of a successor to the Master
Servicer, the Trustee shall give prompt written notice thereof to
Certificateholders and to each Rating Agency.

     (b) Within 60 days after the occurrence of any Event of Default, the
Trustee shall transmit by mail to all Certificateholders notice of each such
Event of Default hereunder known to the Trustee, unless such Event of Default
shall have been cured or waived.

                                  ARTICLE VIII

                                     -73-
<PAGE>

                            CONCERNING THE TRUSTEE

     SECTION 8.1  Duties of Trustee.

     The Trustee, prior to the occurrence of an Event of Default of which a
Responsible Officer of the Trustee has actual knowledge and after the curing of
all Events of Default that may have occurred, shall undertake to perform such
duties and only such duties as are specifically set forth in this Agreement. In
case an Event of Default of which a Responsible Officer of the Trustee has
actual knowledge has occurred and remains uncured, the Trustee shall exercise
such of the rights and powers vested in it by this Agreement, and use the same
degree of care and skill in their exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs.

     The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee that are specifically required to be furnished pursuant to any provision
of this Agreement shall examine them to determine whether they are in the form
required by this Agreement; provided, however, that the Trustee shall not be
responsible for the accuracy or content of any such resolution, certificate,
statement, opinion, report, document, order or other instrument.  If any such
instrument is found not to conform in any material respect to the requirements
of this Agreement, the Trustee shall notify the Certificateholders of such
instrument in the event that the Trustee, after so requesting, does not receive
a satisfactorily corrected instrument.

     No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act or
its own willful misconduct; provided, however, that:

          (i)    unless an Event of Default of which a Responsible Officer of
     the Trustee has actual knowledge shall have occurred and be continuing, the
     duties and obligations of the Trustee shall be determined solely by the
     express provisions of this Agreement, the Trustee shall not be liable
     except for the performance of such duties and obligations as are
     specifically set forth in this Agreement, no implied covenants or
     obligations shall be read into this Agreement against the Trustee and the
     Trustee may conclusively rely, as to the truth of the statements and the
     correctness of the opinions expressed therein, upon any certificates or
     opinions furnished to the Trustee and conforming to the requirements of
     this Agreement which it believed in good faith to be genuine and to have
     been duly executed by the proper authorities respecting any matters arising
     hereunder;

          (ii)   the Trustee shall not be liable for an error of judgment made
     in good faith by a Responsible Officer or Responsible Officers of the
     Trustee, unless it shall be finally proven that the Trustee was negligent
     in ascertaining the pertinent facts;

          (iii)  the Trustee shall not be liable with respect to any action
     taken, suffered or omitted to be taken by it in good faith in accordance
     with the direction of Holders of Certificates evidencing not less than 25%
     of the Voting Rights of Certificates relating to the time, method and place
     of conducting any proceeding for any remedy available to the Trustee, or
     exercising any trust or power conferred upon the Trustee under this
     Agreement;

                                     -74-
<PAGE>

          (iv)   the Trustee shall not be required to expend or risk its own
     funds or otherwise incur financial liability in the performance of any of
     its duties hereunder or the exercise of any of its rights or powers if
     there is reasonable ground for believing that the repayment of such funds
     or adequate indemnity against such risk or liability is not assured to it,
     and none of the provisions contained in this Agreement shall in any event
     require the Trustee to perform, or be responsible for the manner of
     performance of, any of the obligations of the Master Servicer under this
     Agreement except during such time, if any, as the Trustee shall be the
     successor to, and be vested with the rights, duties, powers and privileges
     of, the Master Servicer; and

          (v)    without limiting the generality of this Section 8.1, the
     Trustee shall have no duty (A) to see to any recording, filing, or
     depositing of this Agreement or any agreement referred to herein or any
     financing statement or continuation statement evidencing a security
     interest, or to see to the maintenance of any such recording or filing or
     deposit 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 (D)
     to confirm or verify the contents of any reports or certificates of the
     Servicer delivered to the Trustee pursuant to this Agreement believed by
     the Trustee to be genuine and to have been signed or presented by the
     proper party or parties.

     SECTION 8.2  Certain Matters Affecting the Trustee.

     Except as otherwise provided in Section 8.1:

          (i)    the Trustee may request and rely upon and shall be protected in
     acting or refraining from acting upon any resolution, Officers'
     Certificate, certificate of auditors or any other certificate, statement,
     instrument, opinion, report, notice, request, consent, order, appraisal,
     bond or other paper or document believed by it to be genuine and to have
     been signed or presented by the proper party or parties and the Trustee
     shall have no responsibility to ascertain or confirm the genuineness of any
     signature of any such party or parties;

          (ii)   the Trustee may consult with counsel, financial advisers or
     accountants and the advice of any such counsel, financial advisers or
     accountants and any Opinion of Counsel shall be full and complete
     authorization and protection in respect of any action taken or suffered or
     omitted by it hereunder in good faith and in accordance with such Opinion
     of Counsel;

          (iii)  the Trustee shall not be liable for any action taken, suffered
     or omitted by it in good faith and believed by it to be authorized or
     within the discretion or rights or powers conferred upon it by this
     Agreement;

          (iv)   the Trustee shall not be bound to make any investigation into
     the facts or matters stated in any resolution, certificate, statement,
     instrument, opinion, report, notice, request, consent, order, approval,
     bond or other paper or document, unless requested in writing so to do by
     Holders of Certificates evidencing not less than 25% of the Voting Rights
     allocated to each Class of Certificates; provided, however, that if the
     payment within a

                                     -75-
<PAGE>

     reasonable time to the Trustee of the costs, expenses or liabilities likely
     to be incurred by it in the making of such investigation is, in the opinion
     of the Trustee, not assured to the Trustee by the security afforded to it
     by the terms of this Agreement, the Trustee may require indemnity
     satisfactory to the Trustee 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 Master Servicer or, if paid by the
     Trustee, shall be repaid by the Master Servicer upon demand from the
     Servicer's own funds.

          (v)    the Trustee may execute any of the trusts or powers hereunder
     or perform any duties hereunder either directly or by or through agents,
     accountants or attorneys and the Trustee shall not be responsible for any
     misconduct or negligence on the part of such agent, accountant or attorney
     appointed by the Trustee with due care;

          (vi)   the Trustee shall not be required to risk or expend its own
     funds or otherwise incur any financial liability in the performance of any
     of its duties or in the exercise of any of its rights or powers hereunder
     if it shall have reasonable grounds for believing that repayment of such
     funds or adequate indemnity against such risk or liability is not assured
     to it;

          (vii)  the Trustee shall not be liable for any loss on any investment
     of funds pursuant to this Agreement (other than as issuer of the investment
     security);

          (viii) the Trustee shall not be deemed to have knowledge of an Event
     of Default until a Responsible Officer of the Trustee shall have received
     written notice thereof and in the absence of such notice, the Trustee may
     conclusively assume that there is no Event of Default;

          (ix)   the Trustee shall be under no obligation to exercise any of the
     trusts, rights or powers vested in it by this Agreement or to institute,
     conduct or defend any litigation hereunder or in relation hereto at the
     request, order or direction of any of the Certificateholders, pursuant to
     the provisions of this Agreement, unless such Certificateholders shall have
     offered to the Trustee reasonable security or indemnity satisfactory to the
     Trustee against the costs, expenses and liabilities which may be incurred
     therein or thereby;

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

          (xi)   the Trustee shall not be required to give any bond or surety in
     respect of the execution of the Trust Fund created hereby or the powers
     granted hereunder.

     SECTION 8.3  Trustee Not Liable for Certificates or Mortgage Loans.

     The recitals contained herein and in the Certificates shall be taken as the
statements of the Depositor or the Seller, as the case may be, and the Trustee
assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Agreement

                                     -76-
<PAGE>

or of the Certificates or of any Mortgage Loan or related document other than
with respect to the Trustee's execution and counter-signature of the
Certificates. The Trustee shall not be accountable for the use or application by
the Depositor or the Master Servicer of any funds paid to the Depositor or the
Master Servicer in respect of the Mortgage Loans or deposited in or withdrawn
from the Certificate Account by the Depositor or the Master Servicer.

     SECTION 8.4  Trustee May Own Certificates.

     The Trustee in its individual or any other capacity may become the owner or
pledgee of Certificates with the same rights as it would have if it were not the
Trustee.

     SECTION 8.5  Trustee's Fees and Expenses.

     The Trustee, as compensation for its activities prior to making the
distributions pursuant to Section 4.2 hereunder, shall be entitled to withdraw
from the Distribution Account on each Distribution Date an amount equal to the
Trustee Fee for such Distribution Date. The Trustee and any director, officer,
employee or agent of the Trustee shall be indemnified by the Master Servicer and
held harmless against any loss, liability or expense (including reasonable
attorney's fees) (i) incurred in connection with any claim or legal action
relating to (a) this Agreement, (b) the Certificates or (c) in connection with
the performance of any of the Trustee's duties hereunder, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of any of the Trustee's duties hereunder or
incurred by reason of any action of the Trustee taken at the direction of the
Certificateholders and (ii) resulting from any error in any tax or information
return prepared by the Master Servicer. Such indemnity shall survive the
termination of this Agreement or the resignation or removal of the Trustee
hereunder. Without limiting the foregoing, the Master Servicer covenants and
agrees, except as otherwise agreed upon in writing by the Depositor and the
Trustee, and except for any such expense, disbursement or advance as may arise
from the Trustee's negligence, bad faith or willful misconduct, to pay or
reimburse the Trustee, for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any of the provisions of this
Agreement with respect to: (A) the reasonable compensation and the expenses and
disbursements of its counsel not associated with the closing of the issuance of
the Certificates, (B) the reasonable compensation, expenses and disbursements of
any accountant, engineer or appraiser that is not regularly employed by the
Trustee, to the extent that the Trustee must engage such persons to perform acts
or services hereunder and (C) printing and engraving expenses in connection with
preparing any Definitive Certificates. Except as otherwise provided herein, the
Trustee shall not be entitled to payment or reimbursement for any routine
ongoing expenses incurred by the Trustee in the ordinary course of its duties as
Trustee, Registrar, Tax Matters Person or Paying Agent hereunder or for any
other expenses.

     SECTION 8.6  Eligibility Requirements for Trustee.

     The Trustee hereunder shall at all times be a corporation or association
organized and doing business under the laws of a state or the United States of
America, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, subject to super-vision or
examination by federal or state authority and with a credit rating which would
not cause either of the Rating Agencies to reduce their respective then current
ratings of the Certificates (or having provided such security from time to time
as is sufficient to avoid such

                                     -77-
<PAGE>

reduction). If such corporation or association publishes reports of condition at
least annually, pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then for the purposes of this Section 8.6
the combined capital and surplus of such corporation or association shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. In case at any time the Trustee shall cease to
be eligible in accordance with the provisions of this Section 8.6, the Trustee
shall resign immediately in the manner and with the effect specified in Section
8.7 hereof. The entity serving as Trustee may have normal banking and trust
relationships with the Depositor and its affiliates or the Master Servicer and
its affiliates; provided, however, that such entity cannot be an affiliate of
the Master Servicer other than the Trustee in its role as successor to the
Master Servicer.

     SECTION 8.7  Resignation and Removal of Trustee.

     The Trustee may at any time resign and be discharged from the trusts hereby
created by giving written notice of resignation to the Depositor and the Master
Servicer and each Rating Agency not less than 60 days before the date specified
in such notice when, subject to Section 8.8, such resignation is to take effect,
and acceptance by a successor trustee in accordance with Section 8.8 meeting the
qualifications set forth in Section 8.6. If no successor trustee meeting such
qualifications shall have been so appointed and have accepted appointment within
30 days after the giving of such notice or resignation, the resigning Trustee
may petition any court of competent jurisdiction for the appointment of a
successor trustee.

     If at any time the Trustee shall cease to be eligible in accordance with
the provisions of Section 8.6 hereof and shall fail to resign after written
request thereto by the Depositor, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged as bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or a tax
is imposed with respect to the Trust Fund by any state in which the Trustee or
the Trust Fund is located and the imposition of such tax would be avoided by the
appointment of a different trustee, then the Depositor or the Master Servicer
may remove the Trustee and appoint a successor trustee by written instrument, in
triplicate, one copy of which instrument shall be delivered to the Trustee, one
copy of which shall be delivered to the Master Servicer and one copy to the
successor trustee.

     The Holders of Certificates entitled to at least 51% of the Voting Rights
may at any time remove the Trustee and appoint a successor trustee by written
instrument or instruments, in triplicate, signed by such Holders or their
attorneys-in-fact duly authorized, one complete set of which instruments shall
be delivered by the successor Trustee to the Master Servicer, one complete set
to the Trustee so removed and one complete set to the successor so appointed.
Notice of any removal of the Trustee shall be given to each Rating Agency by the
Successor Trustee.

     Any resignation or removal of the Trustee and appointment of a successor
trustee pursuant to any of the provisions of this Section 8.7 shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 8.8 hereof.

     SECTION 8.8  Successor Trustee.

                                     -78-
<PAGE>

     Any successor trustee appointed as provided in Section 8.7 hereof shall
execute, acknowledge and deliver to the Depositor and to its predecessor trustee
and the Master Servicer an instrument accepting such appointment hereunder and
thereupon the resignation or removal of the predecessor trustee shall become
effective and such successor trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with the like effect as if originally
named as trustee herein. The Depositor, the Master Servicer and the predecessor
trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for more fully and certainly vesting and confirming
in the successor trustee all such rights, powers, duties, and obligations.

     No successor trustee shall accept appointment as provided in this Section
8.8 unless at the time of such acceptance such successor trustee shall be
eligible under the provisions of Section 8.6 hereof and its appointment shall
not adversely affect the then current rating of the Certificates.

     Upon acceptance of appointment by a successor trustee as provided in this
Section 8.8, the Depositor shall mail notice of the succession of such trustee
hereunder to all Holders of Certificates. If the Depositor fails to mail such
notice within 10 days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the expense of the
Depositor.

     SECTION 8.9  Merger or Consolidation of Trustee.

     Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the business of the Trustee, shall be the successor of
the Trustee hereunder, provided that such corporation shall be eligible under
the provisions of Section 8.6 hereof without the execution or filing of any
paper or further act on the part of any of the parties hereto, anything herein
to the contrary notwithstanding.

     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 requirements of any jurisdiction in which any
part of the Trust Fund or property securing any Mortgage Note may at the time be
located, the Master Servicer and the Trustee acting jointly shall have the power
and shall execute and deliver all instruments to appoint one or more Persons
approved by the Trustee to act as co-trustee or co-trustees jointly with the
Trustee, 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
thereof, whichever is applicable, and, subject to the other provisions of this
Section 8.10, such powers, duties, obligations, rights and trusts as the Master
Servicer and the Trustee may consider necessary or desirable. If the Master
Servicer shall not have joined in such appointment within 15 days after the
receipt by it of a request to do so, or in the case an Event of Default shall
have occurred and be continuing, the Trustee alone shall have the power to make
such appointment. No co-trustee or separate trustee hereunder shall be required
to meet the terms of eligibility as a successor trustee under Section 8.6 and no
notice to Certificateholders of the appointment of any co-trustee or separate
trustee shall be required under Section 8.8.

                                     -79-
<PAGE>

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

          (i)    To the extent necessary to effectuate the purposes of this
     Section 8.10, 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 (whether as Trustee hereunder or
     as successor to the Master Servicer hereunder), 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 applicable 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;

          (ii)   No trustee hereunder shall be held personally liable by reason
     of any act or omission of any other trustee hereunder and such appointment
     shall not, and shall not be deemed to, constitute any such separate trustee
     or co-trustee as agent of the Trustee;

          (iii)  The Trustee may at any time accept the resignation of or remove
     any separate trustee or co-trustee; and

          (iv)   The Master Servicer, and not the Trustee, shall be liable for
     the payment of reasonable compensation, reimbursement and indemnification
     to any such separate trustee or co-trustee.

     Any notice, request or other writing given to the Trustee shall be deemed
to have been given to each of the separate trustees and co-trustees, when and 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 and a copy thereof given to the
Master Servicer and the Depositor.

     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  Tax Matters.

     It is intended that the assets with respect to which the REMIC election is
to be made, as set forth in the preliminary statement shall constitute, and that
the conduct of matters relating to such

                                     -80-
<PAGE>

assets shall be such as to qualify such assets as, a "real estate mortgage
investment conduit" as defined in and in accordance with the REMIC Provisions.
In furtherance of such intention, the Trustee covenants and agrees that it shall
act as agent (and the Trustee is hereby appointed to act as agent) on behalf of
any such REMIC and that in such capacity it shall: (a) prepare and file, or
cause to be prepared and filed, in a timely manner, a U.S. Real Estate Mortgage
Investment Conduit Income Tax Return (Form 1066 or any successor form adopted by
the Internal Revenue Service) and prepare and file or cause to be prepared and
filed with the Internal Revenue Service and applicable state or local tax
authorities income tax or information returns for each taxable year with respect
to any such REMIC, containing such information and at the times and in the
manner as may be required by the Code or state or local tax laws, regulations,
or rules, and furnish or cause to be furnished to Certificateholders the
schedules, statements or information at such times and in such manner as may be
required thereby; (b) within thirty days of the Closing Date, furnish or cause
to be furnished to the Internal Revenue Service, on Forms 8811 or as otherwise
may be required by the Code, the name, title, address, and telephone number of
the person that the Holders of the Certificates may contact for tax information
relating thereto, together with such additional information as may be required
by such Form, and update such information at the time or times in the manner
required by the Code; (c) make or cause to be made elections that such assets be
treated as a REMIC on the federal tax return for its first taxable year (and, if
necessary, under applicable state law); (d) prepare and forward, or cause to be
prepared and forwarded, to the Certificateholders and to the Internal Revenue
Service and, if necessary, state tax authorities, all information returns and
reports as and when required to be provided to them in accordance with the REMIC
Provisions, including without limitation, the calculation of any original issue
discount using the prepayment assumption; (e) provide information necessary for
the computation of tax imposed on the transfer of a Residual Certificate to a
Person that is not a Permitted Transferee, or an agent (including a broker,
nominee or other middleman) of a Non-Permitted Transferee, or a pass-through
entity in which a Non-Permitted Transferee is the record holder of an interest
(the reasonable cost of computing and furnishing such information may be charged
to the Person liable for such tax); (f) to the extent that they are under its
control conduct matters relating to such assets at all times that any
Certificates are outstanding so as to maintain the status as a REMIC under the
REMIC Provisions; (g) not knowingly or intentionally take any action or omit to
take any action that would cause the termination of the REMIC status; (h) pay,
from the sources specified in the last paragraph of this Section 8.11, the
amount of any federal or state tax, including prohibited transaction taxes as
described below, imposed on any such REMIC prior to its termination when and as
the same shall be due and payable (but such obligation shall not prevent the
Trustee or any other appropriate Person from contesting any such tax in
appropriate proceedings and shall not prevent the Trustee from withholding
payment of such tax, if permitted by law, pending the outcome of such
proceedings); (i) ensure that federal, state or local income tax or information
returns shall be signed by the Trustee or such other person as may be required
to sign such returns by the Code or state or local laws, regulations or rules;
(j) maintain records relating to any such REMIC, including but not limited to
the income, expenses, assets and liabilities thereof and the fair market value
and adjusted basis of the assets determined at such intervals as may be required
by the Code, as may be necessary to prepare the foregoing returns, schedules,
statements or information; and (k) as and when necessary and appropriate,
represent any such REMIC in any administrative or judicial proceedings relating
to an examination or audit by any governmental taxing authority, request an
administrative adjustment as to any taxable year of any such REMIC, enter into
settlement agreements with any governmental taxing agency, extend any statute of
limitations relating to any tax item of any such REMIC, and otherwise act on
behalf of any such REMIC in relation to any tax matter or controversy involving
it.

                                     -81-
<PAGE>

     In order to enable the Trustee to perform its duties as set forth herein,
the Depositor shall provide, or cause to be provided, to the Trustee within ten
(10) days after the Closing Date all information or data that the Trustee
requests in writing and determines to be relevant for tax purposes to the
valuations and offering prices of the Certificates, including, without
limitation, the price, yield, prepayment assumption and projected cash flows of
the Certificates and the Mortgage Loans. Thereafter, the Depositor shall provide
to the Trustee promptly upon written request therefor, any such additional
information or data that the Trustee may, from time to time, reasonably request
in order to enable the Trustee to perform its duties as set forth herein. The
Depositor hereby indemnifies the Trustee for any losses, liabilities, damages,
claims or expenses of the Trustee arising from any errors or miscalculations of
the Trustee that result from any failure of the Depositor to provide, or to
cause to be provided, accurate information or data to the Trustee on a timely
basis.

     In the event that any tax is imposed on "prohibited transactions" of any
REMIC as defined in Section 860F(a)(2) of the Code, on the "net income from
foreclosure property" of any REMIC as defined in Section 860G(c) of the Code, on
any contribution to any REMIC after the Startup Day pursuant to Section 860G(d)
of the Code, or any other tax is imposed, if not paid as otherwise provided for
herein, such tax shall be paid by (i) the Trustee, if any such other tax arises
out of or results from a breach by the Trustee of any of its obligations under
this Agreement which breach was caused by its negligence or willful misconduct,
(ii) the Master Servicer, in the case of any such minimum tax, or if such tax
arises out of or results from a breach by the Master Servicer or Seller of any
of their obligations under this Agreement, (iii) the Seller, if any such tax
arises out of or results from the Seller's obligation to repurchase a Mortgage
Loan pursuant to Section 2.2 or 2.3 or (iv) in all other cases, or in the event
that the Trustee, the Master Servicer or the Seller fails to honor its
obligations under the preceding clauses (i), (ii) or (iii), any such tax will be
paid with amounts otherwise to be distributed to the Certificateholders, as
provided in Section 3.8(b).

     SECTION 8.12  Periodic Filings.

     Pursuant to written instructions from the Depositor, the Trustee shall
prepare, execute and file all periodic reports required under the Securities
Exchange Act of 1934 in conformity with the terms of the "no-action" relief
granted by the SEC to issuers of asset-backed securities such as the
Certificates. In connection with the preparation and filing of such periodic
reports, the Depositor and the Master Servicer shall timely provide to the
Trustee all material information available to them which is required to be
included in such reports and not known to them to be in the possession of the
Trustee and such other information as the Trustee reasonably may request from
either of them and otherwise reasonably shall cooperate with the Trustee. The
Trustee shall have no liability with respect to any failure to properly prepare
or file such periodic reports resulting from or relating to the Trustee's
inability or failure to obtain any information not resulting from its own
negligence or willful misconduct.

                                  ARTICLE IX
                                  TERMINATION

     SECTION 9.1   Termination upon Liquidation or Purchase of all Mortgage
                   Loans.

     Subject to Section 9.3, the obligations and responsibilities of the
Depositor, the Master Servicer and the Trustee created hereby with respect to
the Trust Fund shall terminate upon the

                                     -82-
<PAGE>

earlier of (a) the purchase by the Master Servicer of all Mortgage Loans (and
REO Properties) remaining in the Trust Fund at the price equal to the sum of (i)
100% of the Stated Principal Balance of each Mortgage Loan plus one month's
accrued interest thereon at the applicable Adjusted Mortgage Rate and (ii) the
lesser of (x) the appraised value of any REO Property as determined by the
higher of two appraisals completed by two independent appraisers selected by the
Master Servicer at the expense of the Master Servicer and (y) the Stated
Principal Balance of each Mortgage Loan related to any REO Property, in each
case plus accrued and unpaid interest thereon at the applicable Adjusted
Mortgage Rate and (b) the later of (i) the maturity or other liquidation (or any
Advance with respect thereto) of the last Mortgage Loan remaining in the Trust
Fund and the disposition of all REO Property and (ii) the distribution to
Certificateholders of all amounts required to be distributed to them pursuant to
this Agreement. In no event shall the trusts created hereby continue beyond the
earlier of (i) the expiration of 21 years from the death of the survivor of the
descendants of Joseph P. Kennedy, the late Ambassador of the United States to
the Court of St. James's, living on the date hereof, and (ii) the Latest
Possible Maturity Date. The right to purchase all Mortgage Loans and REO
Properties pursuant to clause (a) above shall be conditioned upon the Pool
Principal Balance, at the time of any such repurchase, aggregating less than ten
percent of the aggregate Cut-off Date Principal Balance of the Mortgage Loans.

     SECTION 9.2  Final Distribution on the Certificates.

     If on any Determination Date, the Master Servicer determines that there are
no Outstanding Mortgage Loans and no other funds or assets in the Trust Fund
other than the funds in the Certificate Account, the Master Servicer shall
direct the Trustee promptly to send a final distribution notice to each
Certificateholder. If the Master Servicer elects to terminate the Trust Fund
pursuant to clause (a) of Section 9.1, at least 20 days prior to the date notice
is to be mailed to the affected Certificateholders, the Master Servicer shall
notify the Depositor and the Trustee of the date the Master Servicer intends to
terminate the Trust Fund and of the applicable repurchase price of the Mortgage
Loans and REO Properties.

     Notice of any termination of the Trust Fund, specifying the Distribution
Date on which Certificateholders may surrender their Certificates for payment of
the final distribution and cancellation, shall be given promptly by the Trustee
by letter to Certificateholders mailed not earlier than the 10th day and no
later than the 15th day of the month next preceding the month of such final
distribution. Any such notice shall specify (a) the Distribution Date upon which
final distribution on the Certificates will be made upon presentation and
surrender of Certificates at the office therein designated, (b) the amount of
such final distribution, (c) the location of the office or agency at which such
presentation and surrender must be made, and (d) 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 therein
specified. The Master Servicer will give such notice to each Rating Agency at
the time such notice is given to Certificateholders.

     In the event such notice is given, the Master Servicer shall cause all
funds in the Certificate Account to be remitted to the Trustee for deposit in
the Distribution Account on the Business Day prior to the applicable
Distribution Date in an amount equal to the final distribution in respect of the
Certificates. Upon such final deposit with respect to the Trust Fund and the
receipt by the Trustee of a Request for Release therefor, the Trustee shall
promptly release to the Master Servicer the Mortgage Files for the Mortgage
Loans.

                                     -83-
<PAGE>

     Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed to the Certificateholders of each Class, in the order
set forth in Section 4.2 hereof, on the final Distribution Date, in the case of
the Certificateholders, in proportion to their respective Percentage Interests,
with respect to Certificateholders of the same Class, an amount equal to (i) as
to each Class of Regular Certificates, the Class Certificate Balance thereof
plus accrued interest thereon (or on their Notional Amount, if applicable) in
the case of an interest bearing Certificate, and (ii) as to the Residual
Certificates, the amount, if any, which remains on deposit in the Distribution
Account (other than the amounts retained to meet claims) after application
pursuant to clause (i) above.

     In the event that any affected Certificateholders shall not surrender
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Trustee 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
six months after the second notice all the applicable Certificates shall not
have been surrendered for cancellation, the Trustee may take appropriate steps,
or may appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the cost
thereof shall be paid out of the funds and other assets which remain a part of
the Trust Fund. If within one year after the second notice all Certificates
shall not have been surrendered for cancellation, the holders of each of the
Class A-R Certificates shall be entitled to all unclaimed funds and other assets
of the Trust Fund, held for distribution to such Certificateholders which remain
subject hereto.

     SECTION 9.3  Additional Termination Requirements.

     (a)  In the event the Master Servicer exercises its purchase option as
provided in Section 9.1, the Trust Fund shall be terminated in accordance with
the following additional requirements, unless the Trustee has been supplied with
an Opinion of Counsel, at the expense of the Master Servicer, to the effect that
the failure to comply with the requirements of this Section 9.3 will not (i)
result in the imposition of taxes on "prohibited transactions" on any REMIC as
defined in section 860F of the Code, or (ii) cause any REMIC to fail to qualify
as a REMIC at any time that any Certificates are outstanding:

          (1)  Within 90 days prior to the final Distribution Date set forth in
     the notice given by the Master Servicer under Section 9.2, the Master
     Servicer shall prepare and the Trustee, at the expense of the "tax matters
     person," shall adopt a plan of complete liquidation within the meaning of
     section 860F(a)(4) of the Code which, as evidenced by an Opinion of Counsel
     addressed to the Trustee (which opinion shall not be an expense of the
     Trustee or the Tax Matters Person), meets the requirements of a qualified
     liquidation; and

          (2)  Within 90 days after the time of adoption of such a plan of
     complete liquidation, the Trustee shall sell all of the assets of the Trust
     Fund to the Master Servicer for cash in accordance with Section 9.1.

     (b)  The Trustee as agent for the REMIC established hereunder hereby agrees
to adopt and sign such a plan of complete liquidation upon the written request
of the Master Servicer, and the receipt of the Opinion of Counsel referred to in
Section 9.3(a)(1) and to take such other action in connection therewith as may
be reasonably requested by the Master Servicer.

                                     -84-
<PAGE>

     (c)  By their acceptance of the Certificates, the Holders thereof hereby
authorize the Master Servicer to prepare and the Trustee to adopt and sign a
plan of complete liquidation.

                                   ARTICLE X
                                  [RESERVED]

                                  ARTICLE XI
                           MISCELLANEOUS PROVISIONS

     SECTION 11.1  Amendment.

     This Agreement may be amended from time to time by the Depositor, the
Master Servicer and the Trustee without the consent of any of the
Certificateholders (i) to cure any ambiguity or mistake, (ii) to correct any
defective provision herein or to supplement any provision herein which may be
inconsistent with any other provision herein, (iii) to add to the duties of the
Depositor, the Seller or the Master Servicer, (iv) to add any other provisions
with respect to matters or questions arising hereunder or (v) to modify, alter,
amend, add to or rescind any of the terms or provisions contained in this
Agreement; provided that any action pursuant to clauses (iv) or (v) above shall
not, as evidenced by an Opinion of Counsel delivered to the Trustee (which
Opinion of Counsel shall not be an expense of the Trustee or the Trust Fund),
adversely affect in any material respect the interests of any Certificateholder;
provided, however, that the amendment shall not be deemed to adversely affect in
any material respect the interests of the Certificateholders if the Person
requesting the amendment obtains a letter from each Rating Agency stating that
the amendment would not result in the downgrading or withdrawal of the
respective ratings then assigned to the Certificates; it being understood and
agreed that any such letter in and of itself will not represent a determination
as to the materiality of any such amendment and will represent a determination
only as to the credit issues affecting any such rating. The Trustee, the
Depositor and the Master Servicer also may at any time and from time to time
amend this Agreement without the consent of the Certificateholders to modify,
eliminate or add to any of its provisions to such extent as shall be necessary
or helpful to (i) maintain the qualification of the REMIC as a REMIC under the
Code, (ii) avoid or minimize the risk of the imposition of any tax on the REMIC
pursuant to the Code that would be a claim at any time prior to the final
redemption of the Certificates or (iii) comply with any other requirements of
the Code, provided that the Trustee have been provided an Opinion of Counsel,
which opinion shall be an expense of the party requesting such opinion but in
any case shall not be an expense of the Trustee or the Trust Fund, to the effect
that such action is necessary or helpful to, as applicable, (i) maintain such
qualification, (ii) avoid or minimize the risk of the imposition of such a tax
or (iii) comply with any such requirements of the Code.

     This Agreement may also be amended from time to time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of a Majority in
Interest of each Class of Certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Holders of Certificates; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing of, payments required to
be distributed on any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
Holders of any Class of Certificates in a manner other than as described in (i),

                                     -85-
<PAGE>

without the consent of the Holders of Certificates of such Class evidencing, as
to such Class, Percentage Interests aggregating 66%, or (iii) reduce the
aforesaid percentages of Certificates the Holders of which are required to
consent to any such amendment, without the consent of the Holders of all such
Certificates then outstanding.

     Notwithstanding any contrary provision of this Agreement, the Trustee shall
not consent to any amendment to this Agreement unless it shall have first
received an Opinion of Counsel, which opinion shall not be an expense of the
Trustee or the Trust Fund, to the effect that such amendment will not cause the
imposition of any tax on the REMIC or the Certificateholders or cause the REMIC
to fail to qualify as a REMIC at any time that any Certificates are outstanding.

     Promptly after the execution of any amendment to this Agreement requiring
the consent of Certificateholders, the Trustee shall furnish written
notification of the substance or a copy of such amendment to each
Certificateholder and each Rating Agency.

     It shall not be necessary for the consent of Certificateholders under this
Section to approve the particular form of any proposed amendment, but 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.

     Nothing in this Agreement shall require the Trustee to enter into an
amendment without receiving an Opinion of Counsel (which Opinion shall not be an
expense of the Trustee or the Trust Fund), satisfactory to the Trustee that (i)
such amendment is permitted and is not prohibited by this Agreement and that all
requirements for amending this Agreement have been complied with; and (ii)
either (A) the amendment does not adversely affect in any material respect the
interests of any Certificateholder or (B) the conclusion set forth in the
immediately preceding clause (A) is not required to be reached pursuant to this
Section 11.1.

     SECTION 11.2  Recordation of Agreement; Counterparts.

     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 Master Servicer at its expense, but only upon direction a
majority of the Certificateholders to the effect that such recordation
materially and beneficially affects the interests of the Certificateholders.

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

     SECTION 11.3  Governing Law.

     THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK APPLICABLE

                                     -86-
<PAGE>

TO AGREEMENTS MADE AND TO BE PERFORMED IN THE STATE OF NEW YORK AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HERETO AND THE
CERTIFICATEHOLDERS SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

     SECTION 11.4  Intention of Parties.

     (a)  It is the express intent of the parties hereto that the conveyance of
the Mortgage Loans by the Seller to the Purchaser and by the Purchaser to the
Depositor be, and be construed as, absolute sales thereof. It is, further, not
the intention of the parties that such conveyances be deemed a pledge thereof by
the Seller to the Purchaser or by the Purchaser to the Depositor. However, in
the event that, notwithstanding the intent of the parties, the Mortgage Loans
are held to be the property of the Seller or the Purchaser, respectively, or if
for any other reason this Agreement is held or deemed to create a security
interest in such assets, then (i) this Agreement shall be deemed to be a
security agreement within the meaning of the Uniform Commercial Code of the
State of New York and (ii) the conveyance of the Mortgage Loans provided for in
this Agreement shall be deemed to be an assignment and a grant by the Seller to
the Purchaser, and by the Purchaser to the Depositor, for the benefit of the
Certificateholders, of a security interest in all of the Mortgage Loans, whether
now owned or hereafter acquired.

     The Seller and the Purchaser, for the benefit of the Certificateholders,
shall, to the extent consistent with this Agreement, take such actions as may be
necessary to ensure that, if this Agreement were deemed to create a security
interest in the Mortgage Loans, such security interest would be deemed to be a
perfected security interest of first priority under applicable law and will be
maintained as such throughout the term of the Agreement. The Seller and the
Purchaser shall arrange for filing any Uniform Commercial Code continuation
statements in connection with any security interest granted or assigned to the
Depositor for the benefit of the Certificateholders.

     (b)  It is the express intent of the parties hereto that the conveyance of
the Trust Fund by the Depositor to the Trustee be, and be construed as, absolute
sales thereof to the Trustee. It is, further, not the intention of the parties
that such conveyances be deemed a pledge thereof by the Depositor to the
Trustee. However, in the event that, notwithstanding the intent of the parties,
such assets are held to be the property of the Depositor, or if for any other
reason this Agreement is held or deemed to create a security interest in such
assets, then (i) this Agreement shall be deemed to be a security agreement
within the meaning of the Uniform Commercial Code of the State of New York and
(ii) the conveyance provided for in this Agreement shall be deemed to be an
assignment and a grant by the Depositor to the Trustee, for the benefit of the
Certificateholders, of a security interest in all of the assets that constitute
the Trust Fund, whether now owned or hereafter acquired.

     The Depositor, for the benefit of the Certificateholders, shall, to the
extent consistent with this Agreement, take such actions as may be necessary to
ensure that, if this Agreement were deemed to create a security interest in the
Trust Fund, such security interest would be deemed to be a perfected security
interest of first priority under applicable law and will be maintained as such
throughout the term of the Agreement. The Depositor shall arrange for filing any
Uniform Commercial Code continuation statements in connection with any security
interest granted or assigned to the Trustee for the benefit of the
Certificateholders.

                                     -87-
<PAGE>

     SECTION 11.5  Notices.

     (a)  The Trustee shall use its best efforts to promptly provide notice to
each Rating Agency with respect to each of the following of which it has actual
knowledge:

     1.   Any material change or amendment to this Agreement;
     2.   The occurrence of any Event of Default that has not been cured;
     3.   The resignation or termination of the Master Servicer or the Trustee
          and the appointment of any successor;
     4.   The repurchase or substitution of Mortgage Loans pursuant to Section
          2.3; and
     5.   The final payment to Certificateholders.
     6.   Any rating action involving the long-term credit rating of the Master
          Servicer, which notice shall be made by first-class mail within two
          Business Days after the Trustee gains actual knowledge thereof.

     In addition, the Trustee shall promptly furnish to each Rating Agency
     copies of the following:

     1.   Each report to Certificateholders described in Section 4.6;
     2.   Each annual statement as to compliance described in Section 3.16;
     3.   Each annual independent public accountants' servicing report described
          in Section 3.17; and
     4.   Any notice of a purchase of a Mortgage Loan pursuant to Section 2.2,
          2.3 or 3.11.

     (b)  All directions, demands, authorizations, consents, waivers,
communications and notices hereunder shall be in writing and shall be deemed to
have been duly given when delivered by first class mail, facsimile or courier to
(a) in the case of the Depositor, First Horizon Asset Securities Inc., 4000
Horizon Way, Irving, Texas 75063, Attention: Wade Walker; (b) in the case of the
Master Servicer, First Horizon Home Loan Corporation, 4000 Horizon Way, Irving,
Texas 75063, Attention: Wade Walker or such other address as may be hereafter
furnished to the Depositor and the Trustee by the Master Servicer in writing;
(c) in the case of the Purchaser, First Tennessee Bank National Association, 165
Madison Avenue, Memphis, Tennessee 38103, Attention: Joel Ross or such other
address as may be hereafter furnished to the Depositor and the Trustee by the
Master Servicer in writing;(d) in the case of the Trustee, The Bank of New York,
101 Barclay Street 12E, New York, New York 10286, Attention: Diane Pickett, or
such other address as the Trustee may hereafter furnish to the Depositor or
Master Servicer; (e) in the case of the Rating Agencies, the address specified
therefor in the definition corresponding to the name of such Rating Agency.
Notices to Certificateholders shall be deemed given when mailed, first class
postage prepaid, to their respective addresses appearing in the Certificate
Register.

     SECTION 11.6  Severability of Provisions.

     If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever 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.

                                     -88-
<PAGE>

     SECTION 11.7  Assignment.

     Notwithstanding anything to the contrary contained herein, except as
provided in Section 6.02, this Agreement may not be assigned by the Master
Servicer without the prior written consent of the Trustee and Depositor.

     SECTION 11.8  Limitation on Rights of Certificateholders.

     The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the trust created hereby, nor entitle such
Certificateholder's legal representative or heirs to claim an accounting or to
take any action or commence any proceeding in any court for a petition or
winding up of the trust created hereby, or otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.

     No Certificateholder shall have any right to vote (except as provided
herein) or in any manner otherwise control the operation and management of the
Trust Fund, 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
party 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 or by availing itself
of any provisions 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 an Event
of Default and of the continuance thereof, as herein provided, and unless the
Holders of Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates shall also have made written request to 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 60 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 being understood and intended, and being
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 or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates, or to obtain or seek
to obtain priority over or preference to any other such Holder or to enforce any
right under this Agreement, except in the manner herein provided and for the
common benefit of all Certificateholders. For the protection and enforcement of
the provisions of this Section 11.8, each and every Certificateholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.

     SECTION 11.9  Inspection and Audit Rights.

     The Master Servicer agrees that, on reasonable prior notice, it will permit
and will cause each Subservicer to permit any representative of the Depositor or
the Trustee during the Master Servicer's normal business hours, to examine all
the books of account, records, reports and other papers of the Master Servicer
relating to the Mortgage Loans, to make copies and extracts therefrom, to cause
such

                                     -89-
<PAGE>

books to be audited by independent certified public accountants selected by the
Depositor or the Trustee and to discuss its affairs, finances and accounts
relating to the Mortgage Loans with its officers, employees and independent
public accountants (and by this provision the Master Servicer hereby authorizes
said accountants to discuss with such representative such affairs, finances and
accounts), all at such reasonable times and as often as may be reasonably
requested. Any out-of-pocket expense incident to the exercise by the Depositor
or the Trustee of any right under this Section 11.9 shall be borne by the party
requesting such inspection; all other such expenses shall be borne by the Master
Servicer or the related Subservicer.

     SECTION 11.10  Certificates Nonassessable and Fully Paid.

     It is the intention of the Depositor that Certificateholders shall not be
personally liable for obligations of the Trust Fund, that the interests in the
Trust Fund represented by the Certificates shall be nonassessable for any reason
whatsoever, and that the Certificates, upon due authentication thereof by the
Trustee pursuant to this Agreement, are and shall be deemed fully paid.

     SECTION 11.11  Limitations on Actions; No Proceedings.

     (a)  Other than pursuant to this Agreement, or in connection with or
incidental to the provisions or purposes of this Agreement, the trust created
hereunder shall not (i) issue debt or otherwise borrow money, (ii) merge or
consolidate with any other entity reorganize, liquidate or transfer all or
substantially all of its assets to any other entity, or (iii) otherwise engage
in any activity or exercise any power not provided for in this Agreement.

     (b)  Notwithstanding any prior termination of this Agreement, the Trustee,
the Master Servicer and the Depositor shall not, prior to the date which is one
year and one day after the termination of this Agreement, acquiesce, petition or
otherwise invoke or cause any Person to invoke the process of any court or
government authority for the purpose of commencing or sustaining a case against
the Depositor or the Trust Fund under any federal or state bankruptcy,
insolvency or similar law or appointing a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Depositor or
the Trust Fund or any substantial part of their respective property, or ordering
the winding up or liquidation of the affairs of the Depositor or the Trust Fund.

                                  * * * * * *

                                     -90-
<PAGE>

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

                              FIRST HORIZON ASSET SECURITIES INC.,
                                as Depositor

                              By:  _____________________________________________
                                   Wade Walker
                                   Senior Vice President - Asset Securitization

                              THE BANK OF NEW YORK,
                                as Trustee

                               By: _____________________________________________
                                   Diane Pickett
                                   Vice President

                              FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
                                as Purchaser

                               By: _____________________________________________
                                   Joel Ross
                                   Senior Vice President

                              FIRST HORIZON HOME LOAN CORPORATION,
                                as Seller and Master Servicer

                               By: _____________________________________________
                                   Wade Walker
                                   Senior Vice President - Asset Securitization

Pooling and Servicing Agreement - Signature Page

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