Document:

<PAGE>

                                  EXHIBIT 10.1

                        Pooling and Servicing Agreement
                                January 1, 2001
<PAGE>

                      FIRST HORIZON ASSET SECURITIES INC.

                                   Depositor

                      FIRST HORIZON HOME LOAN CORPORATION

                           Seller and Master Servicer

                                      and

                             THE BANK OF NEW YORK,

                                    Trustee

             _____________________________________________________

                        POOLING AND SERVICING AGREEMENT

                           Dated as of March 1, 2001

             _____________________________________________________

                FIRST HORIZON MORTGAGE PASS-THROUGH TRUST 2001-2

               MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2001-2
<PAGE>

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                   Page
                                                                                                                   ----
<S>            <C>                                                                                                 <C>
ARTICLE I - DEFINITIONS.........................................................................................    6

ARTICLE II - CONVEYANCE OF MORTGAGE LOANS; REPRESENTATIONS AND WARRANTIES.......................................   34
SECTION 2.1    Conveyance of Mortgage Loans.....................................................................   34
SECTION 2.2    Acceptance by Trustee of the Mortgage Loans......................................................   38
SECTION 2.3    Representations, Warranties and Covenants of the Seller and Master Servicer......................   39
SECTION 2.4    Representations and Warranties of the Depositor as to the Mortgage Loans.........................   41
SECTION 2.5    Delivery of Opinion of Counsel in Connection with Substitutions..................................   42
SECTION 2.6    Execution and Delivery of Certificates...........................................................   42
SECTION 2.7    REMIC Matters....................................................................................   42
SECTION 2.8    Covenants of the Master Servicer.................................................................   44

ARTICLE III - ADMINISTRATION AND SERVICING OF MORTGAGE LOANS....................................................   45
SECTION 3.1    Master Servicer to Service Mortgage Loans........................................................   45
SECTION 3.2    Subservicing; Enforcement of the Obligations of Servicers........................................   46
SECTION 3.3    Rights of the Depositor and the Trustee in Respect of the Master Servicer........................   46
SECTION 3.4    Trustee to Act as Master Servicer................................................................   47
SECTION 3.5    Collection of Mortgage Loan Payments; Certificate Account; Distribution Account..................   47
SECTION 3.6    Collection of Taxes, Assessments and Similar Items; Escrow Accounts..............................   50
SECTION 3.7    Access to Certain Documentation and Information Regarding the Mortgage Loans.....................   50
SECTION 3.8    Permitted Withdrawals from the Certificate Account and Distribution Account......................   51
SECTION 3.9    Maintenance of Hazard Insurance; Maintenance of Primary Insurance Policies.......................   52
SECTION 3.10   Enforcement of Due-on-Sale Clauses; Assumption Agreements........................................   54
SECTION 3.11   Realization Upon Defaulted Mortgage Loans; Repurchase of Certain Mortgage Loans..................   55
SECTION 3.12   Trustee to Cooperate; Release of Mortgage Files..................................................   57
SECTION 3.13   Documents Records and Funds in Possession of Master Servicer to be Held for the Trustee..........   58
SECTION 3.14   Master Servicing Compensation....................................................................   58
SECTION 3.15   Access to Certain Documentation..................................................................   59
SECTION 3.16   Annual Statement as to Compliance................................................................   59
SECTION 3.17   Annual Independent Public Accountants' Servicing Statement; Financial Statements.................   59
SECTION 3.18   Errors and Omissions Insurance; Fidelity Bonds...................................................   60
</TABLE>

                                       i
<PAGE>

<TABLE>
<CAPTION>
<S>            <C>                                                                                                 <C>
ARTICLE IV - DISTRIBUTIONS AND ADVANCES BY THE MASTER SERVICER..................................................   60
SECTION 4.1    Advances.........................................................................................   60
SECTION 4.2    Priorities of Distribution.......................................................................   61
SECTION 4.3    Method of Distribution...........................................................................   65
SECTION 4.4    Allocation of Losses.............................................................................   65
SECTION 4.5    [Reserved].......................................................................................   67
SECTION 4.6    Monthly Statements to Certificateholders.........................................................   67
SECTION 4.7    Determination of Pass-Through Rates for LIBOR Certificates.......................................   69
SECTION 4.8    Principal Distributions on the Retail Certificates...............................................   70

ARTICLE V - THE CERTIFICATES....................................................................................   75
SECTION 5.1    The Certificates.................................................................................   75
SECTION 5.2    Certificate Register; Registration of Transfer and Exchange of Certificates......................   76
SECTION 5.3    Mutilated, Destroyed, Lost or Stolen Certificates................................................   80
SECTION 5.4    Persons Deemed Owners............................................................................   80
SECTION 5.5    Access to List of Certificateholders' Names and Addresses........................................   80
SECTION 5.6    Maintenance of Office or Agency..................................................................   81

ARTICLE VI - THE DEPOSITOR AND THE MASTER SERVICER..............................................................   81
SECTION 6.1    Respective Liabilities of the Depositor and the Master Servicer..................................   81
SECTION 6.2    Merger or Consolidation of the Depositor or the Master Servicer..................................   81
SECTION 6.3    Limitation on Liability of the Depositor, the Seller, the Master Servicer and Others.............   82
SECTION 6.4    Limitation on Resignation of Master Servicer.....................................................   82

ARTICLE VII - DEFAULT...........................................................................................   83
SECTION 7.1    Events of Default................................................................................   83
SECTION 7.2    Trustee to Act; Appointment of Successor.........................................................   84
SECTION 7.3    Notification to Certificateholders...............................................................   85

ARTICLE VIII - CONCERNING THE TRUSTEE...........................................................................   85
SECTION 8.1    Duties of Trustee................................................................................   85
SECTION 8.2    Certain Matters Affecting the Trustee............................................................   87
SECTION 8.3    Trustee Not Liable for Certificates or Mortgage Loans............................................   88
SECTION 8.4    Trustee May Own Certificates.....................................................................   88
SECTION 8.5    Trustee's Fees and Expenses......................................................................   88
SECTION 8.6    Eligibility Requirements for Trustee.............................................................   89
SECTION 8.7    Resignation and Removal of Trustee...............................................................   89
SECTION 8.8    Successor Trustee................................................................................   90
SECTION 8.9    Merger or Consolidation of Trustee...............................................................   91
SECTION 8.10   Appointment of Co-Trustee or Separate Trustee....................................................   91
SECTION 8.11   Tax Matters......................................................................................   92
SECTION 8.12   Periodic Filings.................................................................................   94
</TABLE>

                                      ii
<PAGE>

<TABLE>
<CAPTION>
<S>                 <C>                                                                                            <C>
ARTICLE IX - TERMINATION...................................................................................        94
     SECTION 9.1    Termination upon Liquidation or Purchase of all Mortgage Loans.........................        94
     SECTION 9.2    Final Distribution on the Certificates.................................................        95
     SECTION 9.3    Additional Termination Requirements....................................................        96

ARTICLE X - [RESERVED].....................................................................................        97

ARTICLE XI - MISCELLANEOUS PROVISIONS......................................................................        97
     SECTION 11.1   Amendment..............................................................................        97
     SECTION 11.2   Recordation of Agreement; Counterparts.................................................        98
     SECTION 11.3   Governing Law..........................................................................        98
     SECTION 11.4   Intention of Parties...................................................................        99
     SECTION 11.5   Notices................................................................................        99
     SECTION 11.6   Severability of Provisions.............................................................       100
     SECTION 11.7   Assignment.............................................................................       100
     SECTION 11.8   Limitation on Rights of Certificateholders.............................................       101
     SECTION 11.9   Inspection and Audit Rights............................................................       101
     SECTION 11.10  Certificates Nonassessable and Fully Paid..............................................       102
     SECTION 11.11  Limitations on Actions; No Proceedings.................................................       102
</TABLE>
                                   SCHEDULES
<TABLE>
<CAPTION>
<S>            <C>                                                                                            <C>
Schedule I:    Mortgage Loan Schedule......................................................................     S-I-1
Schedule II:   Representations and Warranties of the Seller/Master Servicer................................    S-II-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
</TABLE>
                                   EXHIBITS
<TABLE>
<CAPTION>
<S>              <C>                                                                                               <C>
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 March 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"), 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 and the Rounding Accounts
for federal income tax purposes will consist of two separate REMICs.  The
Certificates will represent the entire beneficial ownership interest in the
Trust Fund. The Regular Certificates will represent "regular interests" in the
Upper REMIC.  The Class A-RU Certificates will represent the sole class of
residual interests in the Upper REMIC and the Class A-RL Certificates will
represent the sole class of residual interests in the Lower REMIC, as described
in Section 2.7.  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               $26,000,000           7.00%         $   25,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-2               $11,854,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-3               $ 6,479,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-4               $ 7,727,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-5               $ 4,072,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-6               $ 7,205,949           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-7               $ 5,554,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-8               $ 2,577,176           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-9               $ 1,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-10              $ 1,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-11              $ 1,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-12              $ 1,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-13              $ 2,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-14              $ 2,000,000           7.00%         $    1,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-15              $42,322,667          6.250%         $   25,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-16              $22,565,333       Variable (2)      $   25,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-17                   (1)          Variable (3)      $2,000,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-18              $ 4,212,000          6.500%         $   25,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-19              $17,325,875           7.00%         $   25,000            $1,000
-------------------------------------------------------------------------------------------------
Class A-RU              $        50           7.00%         $       50              N/A
-------------------------------------------------------------------------------------------------
Class A-RL              $        50           7.00%         $       50              N/A
-------------------------------------------------------------------------------------------------
Class B-1               $ 3,292,000           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
Class B-2               $ 1,559,000           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
Class B-3               $   866,000           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
Class B-4               $   693,000           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
Class B-5               $   433,000           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
Class B-6               $520,657.75           7.00%         $  100,000            $1,000
-------------------------------------------------------------------------------------------------
</TABLE>
-----------------------

(1) The Notional Amount with respect to any Distribution Date (and the related
    Interest Accrual Period) of the Class A-17 Certificates will equal the Class
    Certificate Balance of the Class A-16 Certificates immediately preceding
    such Distribution Date.

                                      -2-
<PAGE>

(2) The Pass-Through Rate with respect to any Distribution Date (and the related
    Interest Accrual Period) for the Class A-16 Certificates is the per annum
    rate equal to (a) 5.965% with respect to the first Distribution Date, and
    (b) thereafter, the lesser of (i) LIBOR plus 0.40% and (ii) 8.50%, subject
    to a minimum rate of 0.40%.

(3) The Pass-Through Rate with respect to any Distribution Date (and the related
    Interest Accrual Period) for the Class A-17 Certificates is the per annum
    rate equal to (a) 2.535% with respect to the first Distribution Date, and
    (b) thereafter, 8.10% minus LIBOR, subject to a minimum rate of 0.00%.

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

Accrual Certificates:         The Class A-12 Certificates.

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.

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

Floating Rate Certificates:  The Class A-16 and Class A-17 Certificates.

Interest Only Certificates:  The Class A-17 Certificates.

Inverse Floating Rate
Certificates:                The Class A-17 Certificates.

COFI Certificates:                      None.

LIBOR Certificates:          The Class A-16 and Class A-17 Certificates.

Non-Delay Certificates:      The LIBOR Certificates.

Notional Amount
Certificates:                The Class A-17 Certificates.

                                      -3-
<PAGE>

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

Physical Certificates:       The Private Certificates and the Residual
  Certificates.

Planned Principal Classes:   The Primary Planned Principal Classes and
                               Secondary Planned Principal Classes.

Primary Planned Principal
Classes:                     The Class A-15, Class A-16 and Class A-18
                               Certificates.

Principal Only
Certificates:                None.

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

Rating Agencies:             Fitch and Moody's.

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

Residual Certificates:       The Class A-RU and Class A-RL Certificates.

Retail Certificates:         The Class A-13 and Class A-14 Certificates.

Scheduled Principal
Classes:                     None.

Secondary Planned Principal
Class:                       The Class A-1 Certificates.

Senior Certificates:         The Class A-1, Class A-2, Class A-3, Class A-4,
                             Class A-5, Class A-6, Class A-7, Class A-8,
                             Class A-9, Class A-10, Class A-11, Class A-12,
                             Class A-1 3, Class A-14, Class A-15, Class A-16,
                             Class A-17, Class A-18, Class A-19, Class A-RU and
                             Class A-RL 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:             The Class A-2, Class A-3, Class A-4, Class A-5,
                             Class A-6, Class A-7, Class A-8, Class A-9,
                             Class A-10, Class A-11, Class A-12, Class A-13
                             and Class A-14 Certificates.

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

                                      -4-
<PAGE>

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.

                                      -5-
<PAGE>

                                   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: For the Class A-12 Certificates, the earlier of
(a) the Cross-Over Date, and (b) the Distribution Date on which the Class
Certificate Balance of each of the Class A-9, Class A-10 and Class A-11
Certificates has been reduced to zero.

     Accrual Amount:  For the Class of Accrual Certificates and each
Distribution Date through the Accretion Termination Date, an amount equal to the
sum of (a) the Accrued Certificate Interest distributable in respect of such
Class of Accrual Certificates in accordance with Section 4.2(a)(i), and (b) any
available amounts allocable to such Class in accordance with Section 4.2(a)(ii).

     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
(or Notional Amount, in the case of the Class A-17 Certificates) 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 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

                                      -6-
<PAGE>

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;

     .    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

                                      -7-
<PAGE>

          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 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 2001-2."

     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,

     (1)  as reduced by:

                                      -8-
<PAGE>

     .    all amounts distributed on previous Distribution Dates on such
          Certificate on account of principal;

     .    the principal portion of all Realized Losses previously allocated to
          such Certificate;

     .    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; and

     (2) in the case of the Accrual Certificates, as increased by all Accrued
     Certificate Interest added to the Certificate Principal Balance thereof on
     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-19 Distribution Percentage:  As to any Distribution Date, 0%
through the Distribution Date in March 2006; thereafter, 30% of the Class A-19
Percentage through the Distribution Date in March 2007; thereafter, 40% of the
Class A-19 Percentage through the Distribution Date in March 2008; thereafter,
60% of the Class A-19 Percentage  through the Distribution Date in March 2009;
thereafter, 80% of the Class A-19 Percentage through the Distribution Date in
March 2010; and thereafter, 100% of the Class A-19 Percentage.

     Class A-19 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-19 Certificates immediately preceding such
Distribution Date by (2) the aggregate Class Certificate Balance of all
Certificates immediately preceding such Distribution Date.

     Class A-19 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

                                      -9-
<PAGE>

such date multiplied by the Class A-19 Distribution Percentage for such date.
Notwithstanding the foregoing, (1) on the Group I Final Distribution Date, the
Class A-19 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-19 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:  March 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.

     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

                                      -10-
<PAGE>

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 2001-2), 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: As described in Section 2.7.

     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 March 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:  March 1, 2001.

     Cut-off Date Pool Principal Balance: $173,258,758.

     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 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: With respect to a Holder of any Retail Certificate, as
defined in Section 4.8(b).

                                      -11-
<PAGE>

     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.

     Discount Mortgage Loan:  Any Mortgage Loan with a Mortgage Rate of less
than 7.25% 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

                                      -12-
<PAGE>

designated "The Bank of New York, in trust for registered Holders of First
Horizon Asset Securities Inc. Mortgage Pass-Through Certificates, Series 2001-
2." 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 April 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 Qualifying Underwriting: With respect to any ERISA-Restricted
Certificate that is not a Residual Certificate, a best efforts or firm
commitment underwriting or private placement that meets the requirements of
Prohibited Transaction Exemption 90-30 (55 Fed. Reg. 21,461, September 25,
1989), as amended by Prohibited Transaction Exemption 2000-58 (65 Fed. Reg.
67765, November 13, 2000) (or any successor thereto), or any substantially
similar administrative exemption granted by the U.S. Department of Labor (an
"Underwriter's Exemption").

     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.

                                      -13-
<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, $1,732,587.  As of any
Distribution Date prior to the fourth anniversary of the Cut-off Date, the Fraud
Loss Coverage Amount will equal $1,732,587 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 fourth 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

                                      -14-
<PAGE>

most recent anniversary of the Cut-off Date and (b) 0.5% 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-3, Class A-
4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-
11, Class A-12, Class A-13, Class A-14, Class A-15, Class A-16, Class A-18,
Class A-RU and Class A-RL Certificates, collectively.

     Index: LIBOR.

     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: $102,400.

     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.

                                      -15-
<PAGE>

     Interest Determination Date: With respect to any Interest Accrual Period
for any LIBOR Certificates, the second Business Day prior to the first day of
such Interest Accrual Period.

     Last Scheduled Distribution Date:  For each Class of Offered Certificates
is the Distribution Date occurring in April 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: The London interbank offered rate for one-month United States dollar
deposits calculated in the manner described in Section 4.08.

     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:   Any Certificate Owner of a Retail Certificate, other than
a Deceased Holder.

     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: The segregated pool of assets consisting of the Trust Fund and
the Rounding Accounts but excluding the Retained Yield and the Lower REMIC
Interests.

     Lower REMIC Interests: The regular REMIC interests issued by the Lower
REMIC, as set forth in Section 2.7.

                                      -16-
<PAGE>

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

     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 7.006%.

     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

                                      -17-
<PAGE>

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:

     (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.

                                      -18-
<PAGE>

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

     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: With respect to the Class A-17 Certificates and any
Distribution Date, an amount equal to the Class Certificate Balance of the Class
A-16 Certificates immediately prior to such Distribution Date.

     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

                                      -19-
<PAGE>

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, 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

                                      -20-
<PAGE>

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:

          (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

                                      -21-
<PAGE>

     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;

          (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 any 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

                                      -22-
<PAGE>

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.

     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: With respect to a Planned Principal Class and any
Distribution Date, the balance for such Class and such Distribution Date as
reflected in the Principal Balance Schedule.

     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: The schedules attached hereto as Schedule V.

                                      -23-
<PAGE>

     Principal Distribution Request:  Any request for a distribution in
reduction of the Certificate Principal Balance of any Retail Certificate,
submitted in writing to a Depository Participant or Indirect Participant (or, if
such Retail Certificate is no longer represented by a Book-Entry Certificate, to
the Trustee) by the Holder of such Retail Certificate pursuant to Section 4.8(c)
or 4.8(g), as 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.

     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.

     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:  With respect to any Class of Retail Certificate and any
Distribution Date, the method by which the Depository will determine which
Retail Certificates of such Class will be paid, using its established random lot
procedures or, if such Class of Retail Certificates is no longer represented by
a Book-Entry Certificate, using the Trustee's procedures.

     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

                                      -24-
<PAGE>

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 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.

                                      -25-
<PAGE>

     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.

     Required Coupon: 7.25% 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: The Class A-13 and Class A-14 Certificates.

     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:  With respect to a Class of Retail Certificates, the
account created and maintained pursuant to Section 4.8(e).

     Scheduled Balances: Not applicable.

     Scheduled Classes: Not applicable.

                                      -26-
<PAGE>

     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 Clauses:  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.

     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

                                      -27-
<PAGE>

           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 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>
April 2001 - March 2006      100%
--------------------------------------------------------------------------------------
April 2006 - March 2007      Senior Percentage plus 70% of the Subordinated Percentage
--------------------------------------------------------------------------------------
April 2007 - March 2008      Senior Percentage plus 60% of the Subordinated Percentage
--------------------------------------------------------------------------------------
April 2008 - March 2009      Senior Percentage plus 40% of the Subordinated Percentage
--------------------------------------------------------------------------------------
April 2009 - March 2010      Senior Percentage plus 20% of the Subordinated Percentage
--------------------------------------------------------------------------------------
April 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

                                      -28-
<PAGE>

          (2) cumulative Realized Losses do not exceed:

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

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

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

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

               (e) 50% of the Original Subordinated Principal Balance if such
          Distribution Date occurs during or after April 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 April 2006 and March
          2007;

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

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

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

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

                                      -29-
<PAGE>

     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 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.

                                      -30-
<PAGE>

     Special Hazard Loss Coverage Amount: Upon the initial issuance of the
Certificates, $866,294.  As of any Distribution Date, the Special Hazard Loss
Coverage Amount will equal the greater of

     .    0.5% (or if greater than 0.5%, 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,

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.

                                      -31-
<PAGE>

     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;

          (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,

                                      -32-
<PAGE>

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.

     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-RU and the Class A-RL
Certificates, each 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 7.006% 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 any

                                      -33-
<PAGE>

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:  Bear, Stearns & Co. Inc.

     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, (a) 98%
of all Voting Rights will be allocated among all Holders of the Certificates,
other than the Class A-RU and Class A-RL Certificates, in proportion to their
then outstanding Class Certificate Balances; (b) 1% of all Voting Rights shall
be allocated among the Holders of the Class A-17 Certificates in proportion to
their then outstanding Notional Amounts; and (c) 0.50% of all Voting Rights will
be allocated among the Holders of each of the Class A-RU and Class A-RL
Certificates, in each case in proportion to their respective outstanding Class
Certificate Balances.

                                  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 Depositor,
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
Depositor or, at the Depositor's direction, to the Trustee or other designee of
the Depositor, 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 Seller and
Depositor, 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 Seller 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 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

                                      -34-
<PAGE>

representation or warranty made herein by the Seller or to repurchase or
substitute for any affected Mortgage Loan in accordance herewith.

     (c) In connection with the transfer and assignment set forth in clause (b)
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:

                                      -35-
<PAGE>

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

                                      -36-
<PAGE>

applicable title insurer, but in no event shall any such delivery of the
original or duplicate original lender's 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.

                                      -37-
<PAGE>

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.

     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 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

                                      -38-
<PAGE>

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 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 M. 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 hereto, and by this reference incorporated herein, to 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 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

                                      -39-
<PAGE>

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 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 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

                                      -40-
<PAGE>

designee, the Trustee's interest in any Deleted Mortgage Loan substituted for
pursuant to this Section 2.3.

     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 any Person to cure,
repurchase or replace any Mortgage Loan as to which a breach has occurred and is
continuing shall constitute the sole remedy against such Persons respecting such
breach available to Certificateholders, the Depositor or the Trustee on their
behalf.

     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 Seller, 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.

                                      -41-
<PAGE>

     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 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 any REMIC created hereunder to fail to qualify as a REMIC at any time that
any Certificates are outstanding.

     (b) Upon discovery by 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
in the Upper REMIC.  Each interest identified in the table below by a
designation beginning with "L" shall be a "regular interest" in the

                                      -42-
<PAGE>

Lower REMIC and the Class A-RL Certificates shall be the sole class of residual
interest in the Lower REMIC. The Lower REMIC Interests shall be uncertificated
and shall be held by the Trustee as assets of the Upper REMIC. The assets of the
Lower REMIC shall be as set forth in the definition thereof. 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. Each REMIC's taxable year shall
be the calendar year and its accounts shall be maintained using the accrual
method.

<TABLE>
<CAPTION>

   Lower                             Lower            Corresponding Class of
   REMIC                             REMIC                Certificates              Latest Possible
Interest or        Lower REMIC      Interest     -----------------------------       Maturity Date
Certificate     Interest Balance      Rate          Interest        Principal      (Payment Date in)
----------------------------------------------------------------------------------------------------
<S>              <C>                 <C>            <C>               <C>            <C>
   LTA-1            $26,000,000       7.00%            A-1             A-1           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-2            $11,854,000       7.00%            A-2             A-2           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-3            $ 6,479,000       7.00%            A-3             A-3           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-4            $ 7,727,000       7.00%            A-4             A-4           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-5            $ 4,072,000       7.00%            A-5             A-5           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-6            $ 7,205,949       7.00%            A-6             A-6           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-7            $ 5,554,000       7.00%            A-7             A-7           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-8            $ 2,577,176       7.00%            A-8             A-8           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-9            $ 1,000,000       7.00%            A-9             A-9           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-10           $ 1,000,000       7.00%           A-10            A-10           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-11           $ 1,000,000       7.00%           A-11            A-11           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-12           $ 1,000,000       7.00%           A-12            A-12           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-13           $ 2,000,000       7.00%           A-13            A-13           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-14           $ 2,000,000       7.00%           A-14            A-14           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-15           $42,322,667       7.00%    A-15, A-17(1),(4)      A-15           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-16           $22,565,333       7.00%    A-16, A-17(1),(4)      A-16           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-18           $ 4,212,000       7.00%    A-18, A-17(1),(4)      A-18           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-19           $17,325,875       7.00%           A-19            A-19           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTA-RU           $        50       7.00%           A-RU            A-RU           April 25, 2034
----------------------------------------------------------------------------------------------------
   Class A-RL       $        50       7.00%            N/A             N/A           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTB-1            $ 3,292,000       7.00%            B-1             B-1           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTB-2            $ 1,559,000       7.00%            B-2             B-2           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTB-3            $   866,000       7.00%            B-3             B-3           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTB-4            $   693,000       7.00%            B-4             B-4           April 25, 2034
----------------------------------------------------------------------------------------------------
</TABLE>

                                      -43-
<PAGE>

<TABLE>
<S>              <C>                 <C>            <C>               <C>            <C>
----------------------------------------------------------------------------------------------------
   LTB-5            $   433,000       7.00%            B-5             B-5           April 25, 2034
----------------------------------------------------------------------------------------------------
   LTB-6            $520,657.75       7.00%            B-6             B-6           April 25, 2034
----------------------------------------------------------------------------------------------------
</TABLE>

-------------
(1) The Notional Amount with respect to any Distribution Date (and the related
    Interest Accrual Period) of the Class A-17 Certificates will equal the Class
    Certificate Balance of the Class A-16 Certificates immediately preceding
    such Distribution Date.

(2) The Pass-Through Rate with respect to any Distribution Date (and the related
    Interest Accrual Period) for the Class A-16 Certificates is the per annum
    rate equal to (a) 5.965% with respect to the first Distribution Date, and
    (b) thereafter, the lesser of (i) LIBOR plus 0.40% and (ii) 8.50%, subject
    to a minimum rate of 0.40%.

(3) The Pass-Through Rate with respect to any Distribution Date (and the related
    Interest Accrual Period) for the Class A-17 Certificates is the per annum
    rate equal to (a) 2.535% with respect to the first Distribution Date, and
    (b) thereafter, 8.10% minus LIBOR, subject to a minimum rate of 0.00%.

(4) Interest accruing monthly at a per annum rate of 0.75% and 0.50% on the
    Lower REMIC Interest principal balances of the LTA-15 and LTA-18,
    respectively, shall be used to pay the Class A-17 Certificates.  Interest
    accruing monthly on the Lower REMIC Interest LTA-16 in excess of the per
    annum rate of the Class A-16 Certificates shall be used to pay the Class A-
    17 Certificates.

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

     On each Distribution Date Available Funds shall be distributed with respect
to the Lower REMIC Interests and the Class A-RL Certificate in a manner such
that:

     (i)   interest accrued on each Lower REMIC Interest is distributed with
           respect to each such Lower REMIC Interest in the same manner that
           Accrued Certificate Interest is distributed with respect to the
           Corresponding Class of Certificates pursuant to Section 4.2(a)(i) and
           (ii);

     (ii)  interest accrued on the Class A-RL Certificate is distributed in the
           manner provided in Section 4.2(a)(i) and (ii);

     (iii) principal is distributed on each Lower REMIC Interest, such that the
           principal balance of each such Lower REMIC Interest always equals the
           principal balance of its Corresponding Class of Certificates; and

     (iv)  principal is distributed on the Class A-RL Certificate as provided in
           Section 4.2(b)(ii)(1).

     Losses allocated to the Certificates pursuant to Section 4.4 shall be
allocated to the corresponding class of Lower REMIC Interest as set forth in the
above table.

     SECTION 2.8  Covenants of the Master Servicer.

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

                                      -44-
<PAGE>

     (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 any 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 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

                                      -45-
<PAGE>

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 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

                                      -46-
<PAGE>

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 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.

                                      -47-
<PAGE>

     (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 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

                                      -48-
<PAGE>

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 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

                                      -49-
<PAGE>

     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 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 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.

     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

                                      -50-
<PAGE>

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 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;

          (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

                                      -51-
<PAGE>

          (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 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

                                      -52-
<PAGE>

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.

     (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

                                      -53-
<PAGE>

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 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

                                      -54-
<PAGE>

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, 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

                                      -55-
<PAGE>

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 any REMIC hereunder as defined in section 860F
of the Code or cause any 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 any 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 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

                                      -56-
<PAGE>

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 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

                                      -57-
<PAGE>

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 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.

                                      -58-
<PAGE>

     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 2000 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.

     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

                                      -59-
<PAGE>

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 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.

                                      -60-
<PAGE>

     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;
     provided, however, that on each Distribution Date through the Accretion
     Termination Date, such amounts with respect to the Accrual Certificates
     will not be distributed on such Certificates under this Section 4.2(a)(i)
     but will instead be added to the Class Certificate Balance thereof and
     distributed in accordance with Section 4.2(b) below;

          (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; provided, however, that on each
     Distribution Date through the Accretion Termination Date, such amounts with
     respect to the Accrual Certificates will not be distributed on such
     Certificates under this Section 4.2(a)(ii) but will instead be added to the
     Class Certificate Balance thereof and distributed in accordance with
     Section 4.2(b) below unless such amounts have already been added to the
     Class Certificate Balance of the Accrual Certificates, as provided in
     Section 4.2(a)(i) above;

          (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;

          (iv) 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;

          (v) 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;

          (vi) 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)

                                      -61-
<PAGE>

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

          (vii)  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.

          (viii)  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

          (ix) 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.

     On each Distribution Date, before distributions are made pursuant to the
following paragraph, an amount equal to the Accrual Amount for the Class A-12
Certificates will be distributed sequentially to the Class A-9 , Class A-10,
Class A-11 and Class A-12 Certificates, in that order, in reduction of their
Class Certificate Balances until their Class Certificate Balances have been
reduced to zero such that no such amounts will be distributed to any Class until
the Class Principal Balance of each such Class with a lower class designation
has been reduced to zero.

     (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-19 Certificates, in an amount equal to the Class
     A-19 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-19 Principal
     Distribution Amount, in the following order of priority:

               (1)  concurrently, to the Class A-RU Certificates and Class A-RL
          Certificates pro rata, until their Class Certificate Balances have
          been reduced to zero; and

               (2) concurrently, 66.66666719173% to the Class A-15 Certificates
          and 33.33333280827% to the Class A-16 Certificates, until their
          respective Class Certificate Balances have been reduced to their
          respective Planned Balances (as set forth in the Principal Balance
          Schedules) for such Distribution Date; and

               (3) concurrently, 75.00000000000% to the Class A-18 Certificates
          and 25.00000000000% to the Class A-16 Certificates, until their
          respective Class

                                      -62-
<PAGE>

          Certificate Balances have been reduced to their respective Planned
          Balances (as set forth in the Principal Balance Schedules) for such
          Distribution Date; and

               (4) to the Class A-1 Certificates until their Class Certificate
          Balance has been reduced to their Planned Balance (as set forth in the
          Principal Balance Schedules) for such Distribution Date; and

               (5) concurrently, 74.76977418948% to the Class A-2 Certificates
          until their Class Certificate Balance has been reduced to zero and
          25.23022581052% sequentially to the Class A-9, Class A-10, Class A-11
          and Class A-12 Certificates, in that order, until their respective
          Class Certificate Balances have been reduced to zero; and

               (6) sequentially, to the Class A-3, Class A-4 and Class A-5
          Certificates, in that order, until their Class Certificate Balances
          have been reduced to zero; and

               (7) concurrently, to the Class A-6 and Class A-13 Certificates,
          pro rata, until their Class Certificate Balances have been reduced to
          zero; and

               (8) concurrently, to the Class A-7 and Class A-14 Certificates,
          pro rata, until their Class Certificate Balances have been reduced to
          zero; and

               (9) to the Class A-8 Certificates until their Class Certificate
          Balance has been reduced to zero; and

               (10) to the Class A-1 Certificates, without regard to their
          Planned Balances (as set forth in the Principal Balance Schedules)
          until their Class Certificate Balance has been reduced to zero; and

               (11) concurrently, 66.66666719173% to the Class A-15 Certificates
          and 33.33333280827% to the  Class A-16 Certificates, without regard to
          their respective Planned Balances, until the Class Certificate Balance
          of the Class A-15 Certificates has been reduced to zero; and

               (12) concurrently, 75.00000000000% to the Class A-18 Certificates
          and 25.00000000000% to the Class A-16 Certificates, without regard to
          their respective Planned Balances, until their respective Class
          Certificate Balances have been reduced to zero; and

               (13) to the Class A-19 Certificates until their Class Certificate
          Balance has 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.

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<PAGE>

     (c) On each Distribution Date, the Trustee shall distribute to the Holders
of the Class A-RU or Class A-RL Certificates any Available Funds remaining in
the related REMIC for such Distribution Date after application of all amounts
described in clauses (a) and (b) of this Section 4.2 on such Distribution Date.
Any distributions pursuant to this subsection (c) shall not reduce the Class
Certificate Balance of the Class A-RU and Class A-RL 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

                                      -64-
<PAGE>

principal portion of any such Realized Loss previously allocated with respect to
such Mortgage Loan (or Loans).

     SECTION 4.3  Method of Distribution.

     (a)  Except as otherwise provided in Section 4.8, 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.

                                      -65-
<PAGE>

     (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:

               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; provided, that any
          such loss allocated to the Accrual Certificates shall be allocated on
          the basis of the lesser of (x) the Class Certificate Balance thereof
          immediately prior to the applicable Distribution Date and (y) the
          Class Certificate Balance thereof on the Closing Date (as reduced by
          any Realized Losses previously allocated thereto).

     (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; provided, that any such loss
allocated to the Accrual Certificates shall be allocated on the basis of the
lesser of (x) the Class Certificate Balance thereof immediately prior to the
applicable Distribution Date and (y) the Class Certificate Balance thereof on
the Closing Date (as reduced by any Realized Losses previously allocated
thereto).

     (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 (i) in

                                      -66-
<PAGE>

the case of the principal portion thereof, after giving effect to distributions
made on such Distribution Date, and (ii) in the case of the interest portion
thereof, after giving effect to the calculation of the Accrual Amount for the
Class A-12 Certificates for 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 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;

          (ii)  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;

                                      -67-
<PAGE>

          (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;

          (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

                                      -68-
<PAGE>

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  Determination of Pass-Through Rates for LIBOR Certificates.

     (a) On each Interest Determination Date so long as any LIBOR Certificates
are outstanding, the Trustee will determine LIBOR on the basis of the British
Bankers' Association ("BBA") "Interest Settlement Rate" for one-month deposits
in U.S. dollars as found on Telerate page 3750 as of 11:00 a.m. London time on
each LIBOR Determination Date. Interest Settlement Rates currently are based on
rates quoted by sixteen BBA designated banks as being, in the view of such
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. Such Interest Settlement Rates are calculated by
eliminating the four highest rates and the four lowest rates, averaging the
eight remaining rates, carrying the result (expressed as a percentage) out to
six decimal places, and rounding to five decimal places.  "Telerate Page 3750"
means the display page currently so designated on the Bridge Telerate Service
(formerly the Dow Jones Markets) (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices.)

     (b) If LIBOR cannot be determined as provided in paragraph (A) of this
Section 4.07, the Trustee shall either (i) request each Reference Bank to inform
the Trustee of the quotation offered by its principal London office for making
one-month United States dollar deposits in leading banks in the London interbank
market, as of 11:00 a.m. (London time) on such Interest Determination Date or
(ii) in lieu of making any such request, rely on such Reference Bank quotations
that appear at such time on the Reuters Screen LIBO Page (as defined in the
International Swap Dealers Association Inc. Code of Standard Wording,
Assumptions and Provisions for Swaps, 1986 Edition), to the extent available.
LIBOR for the next Interest Accrual Period will be established by the Trustee on
each interest Determination Date as follows:

           (i) If on any interest Determination Date two or more Reference Banks
     provide such offered quotations, LIBOR for the next Interest Accrual Period
     shall be the arithmetic mean of such offered quotations (rounding such
     arithmetic mean upwards if necessary to the nearest whole multiple of
     1/32%).

          (ii) If on any Interest Determination Date only one or none of the
     Reference Banks provides such offered quotations, LIBOR for the next
     Interest Accrual Period shall be whichever is the higher of (i) LIBOR as
     determined on the previous Interest Determination Date or (ii) the Reserve
     Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
     which the Trustee determines to be either (i) the arithmetic mean (rounded
     upwards if necessary to the nearest whole multiple of 1/32%) of the one-
     month United States dollar lending rates that New York City banks selected
     by the Trustee are quoting, on the relevant

                                      -69-
<PAGE>

     Interest Determination Date, to the principal London offices of at least
     two of the Reference Banks to which such quotations are, in the opinion of
     the Trustee, being so made, or (ii) in the event that the Trustee can
     determine no such arithmetic mean, the lowest one-month United States
     dollar lending rate which New York City banks selected by the Trustee are
     quoting on such Interest Determination Date to leading European banks.

          (iii)  If on any interest Determination Date the trustee is required
     but is unable to determine the Reserve Interest Rate in the manner provided
     in paragraph (b) above, LIBOR shall be LIBOR as determined on the preceding
     Interest Determination Date.

     Until all of the LIBOR Certificates are paid in full, the Trustee will at
all times retain at least four Reference Banks for the purpose of determining
LIBOR with respect to each Interest Determination Date. The Master Servicer
initially shall designate the Reference Banks. Each "Reference Bank" shall be a
leading bank engaged in transactions in Eurodollar deposits in the international
Eurocurrency market, shall not control, be controlled by, or be under common
control with, the Trustee and shall have an established place of business in
London. If any such Reference Bank should be unwilling or unable to act as such
or if the Master Servicer should terminate its appointment as Reference Bank,
the Trustee shall promptly appoint or cause to be appointed another Reference
Bank. The Trustee shall have no liability or responsibility to any Person for
(i) the selection of any Reference Bank for purposes of determining LIBOR or
(ii) any inability to retain at least four Reference Banks which is caused by
circumstances beyond its reasonable control.

     (c) The Pass-Through Rate for each Class of LIBOR Certificates for each
Interest Accrual Period shall be determined by the Trustee on each Interest
Determination Date so long as the LIBOR Certificates are outstanding on the
basis of LIBOR and the respective formulae appearing in footnotes corresponding
to the LIBOR Certificates in the table relating to the Certificates in the
Preliminary Statement.

     In determining LIBOR, any Pass-Through Rate for the LIBOR Certificates, any
Interest Settlement Rate, or any Reserve Interest Rate, the Trustee may
conclusively rely and shall be protected in relying upon the offered quotations
(whether written, oral or on the Dow Jones Markets) from the BBA designated
banks, the Reference Banks or the New York City banks as to LIBOR, the Interest
Settlement Rate or the Reserve Interest Rate, as appropriate, in effect from
time to time. The Trustee shall not have any liability or responsibility to any
Person for (i) the Trustee's selection of New York City banks for purposes of
determining any Reserve Interest Rate or (ii) its inability, following a good-
faith reasonable effort, to obtain such quotations from, the BBA designated
banks, the Reference Banks or the New York City banks or to determine such
arithmetic mean, all as provided for in this Section 4.07.

     The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.

     SECTION 4.8  Principal Distributions on the Retail Certificates.

     (a) Except as provided in subsections (d) and (f) below, on each
Distribution Date on which distributions in reduction of the Certificate
Principal Balance of a Class of Retail Certificates are made, such distributions
will be made in the following order of priority:

                                      -70-
<PAGE>

     (i)  first, in respect of any Principal Distribution Request by the
          personal representative of a Deceased Holder of such Class of
          Certificates, a surviving tenant by the entirety, a surviving joint
          tenant, a surviving tenant in common or such other Person empowered to
          act on behalf of such Deceased Holder upon his or her death, in an
          amount up to but not exceeding $100,000 per request; and

     (ii) second, in respect of any Principal Distribution Request by a Living
          Holder of such Class of Certificates, in an amount up to but not
          exceeding $10,000 per request.

     Thereafter, distributions in respect of such Class of Certificates
submitted on behalf of each Deceased Holder will be made as provided in clause
(i) above up to a second $100,000 per request and distributions in respect of
such Class of Certificates submitted on behalf of each Living Holder will be
made as provided in clause (ii) above up to a second $10,000 per request.  This
sequence of priorities will be repeated until all such requests have been
honored to the extent of amounts available for distribution in reduction of the
Certificate Principal Balance of such Class of Retail Certificates.

     Principal Distribution Requests presented on behalf of Deceased Holders in
accordance with the provisions of clause (i) above will be accepted in the order
of their receipt by the Depository. Principal Distribution Requests presented in
accordance with the provisions of clause (ii) above will be accepted in the
order of their receipt by the Depository after all requests presented in
accordance with clause (i) have been honored.  All Principal Distribution
Requests with respect to any Distribution Date shall be made in accordance with
Section 4.8(c) below and must be received by the Depository no later than the
close of business on the related Record Date.  Principal Distribution Requests
that are received by the Depository after the related Record Date and requests,
in either case, for distributions timely received but not accepted with respect
to any Distribution Date, will be treated as Principal Distribution Requests on
the next succeeding Distribution Date, and each succeeding Distribution Date
thereafter, until each such request is accepted or is withdrawn as provided in
Section 4.8(c).  Requests on behalf of Deceased Holders that are not so
withdrawn shall retain their order of priority, all in accordance with the
procedures of the Depository and the Trustee. Upon the transfer of beneficial
ownership of any Retail Certificate, any Principal Distribution Request
previously submitted with respect to such Certificate will be deemed to have
been withdrawn only upon the receipt by the Trustee of notification of such
withdrawal using a form required by the Depository.

     Principal Distribution Requests for a Class of Retail Certificates will be
applied, in the aggregate, in an amount equal to the portion of the Available
Funds distributable to such Class of Certificates pursuant to Section 4.2, plus
any amounts available for distribution from the Rounding Account for such Class
pursuant to paragraph (e), provided that the aggregate distribution in reduction
                           --------
of the Certificate Principal Balance of a Class of Retail Certificates on any
Distribution Date shall be made in an integral multiple of $1,000, subject to
Section 4.8(f).

     (b) A "Deceased Holder" is a beneficial owner of a Retail Certificate who
was living at the time such interest was acquired and whose authorized personal
representative, surviving tenant by the entirety, surviving joint tenant or
surviving tenant in common or other Person empowered to act on behalf of such
beneficial owner upon his or her death, causes to be furnished to the Trustee a
certified copy of the death certificate of such Deceased Holder, evidence of
such  person's status as an authorized representative of the Deceased Holder,
such as surviving tenant (whether by the

                                      -71-
<PAGE>

entirety, joint tenancy or tenancy in common), which evidence shall be
satisfactory to the Trustee, and any additional evidence of death required by
and satisfactory to the Trustee and any tax waivers requested by the Trustee.
Retail Certificates beneficially owned by tenants by the entirety, joint tenants
or tenants in common will be considered to be beneficially owned by a single
owner. The death of a tenant by the entirety, joint tenant or tenant in common
will be deemed to be the death of the beneficial owner, and any Retail
Certificates so beneficially owned will be eligible for priority with respect to
distributions in reduction of the Certificate Principal Balance of such
Certificates, subject to the limitations contained in this Section 4.8. Retail
Certificates beneficially owned by a trust will be considered to be beneficially
owned by each beneficiary of the trust to the extent of such beneficiary's
beneficial interest therein, but in no event will a trust's beneficiaries
collectively be deemed to be beneficial owners of a number of individual Retail
Certificates greater than the number of individual Retail Certificates of which
such trust is the beneficial owner. The death of a beneficiary of a trust will
be deemed to be the death of a beneficial owner of the Retail Certificates
beneficially owned by the trust to the extent of such beneficiary's beneficial
interest in such trust. The death of an individual who was a tenant by the
entirety, joint tenant or tenant in common in a tenancy that is the beneficiary
of a trust will be deemed to be the death of the beneficiary of the trust. The
death of a person who, immediately prior to his or her death, was entitled to
substantially all of the beneficial ownership interest in a Retail Certificate
will be deemed to be the death of the beneficial owner of such Certificate
regardless of the registration of ownership of such Certificate, if such
beneficial ownership interest can be established to the satisfaction of the
Trustee. The Trustee's decision regarding whether a Deceased Holder's beneficial
interest is substantial for purposes of the preceding sentence shall be
conclusive and binding. Such beneficial interest will be deemed to exist in
typical cases of street name or nominee ownership, ownership by a trustee,
ownership under the applicable Uniform Gifts to Minors Act or Uniform Transfers
to Minors Act, as the case may be, and community property or other joint
ownership arrangements between a husband and wife. Beneficial interests shall
include the power to sell, transfer or otherwise dispose of a Retail
Certificate, and the right to receive the proceeds therefrom, as well as
interest and distributions in reduction of the Certificate Principal Balance of
such Certificates payable with respect thereto. The Trustee shall not be under
any duty to determine independently the occurrence of the death of any
beneficial owner. The Trustee may rely entirely upon documentation delivered to
it in establishing the eligibility of any beneficial owner to receive the
priority accorded Deceased Holders in Section 4.8(a). Expenses incurred by the
Trustee in an effort to determine the beneficial ownership interest with respect
to any Principal Distribution Request presented on behalf of a Deceased Holder,
including, without limitation, attorneys fees, shall be paid by the Person
presenting such Principal Distribution Request.

     (c) Requests for distributions in reduction of the Certificate Principal
Balance of the Retail Certificates must be made by delivering a Principal
Distribution Request therefor to the Depository Participant or Indirect
Participant that maintains the account evidencing the beneficial owner's
interest in such Certificate.  Such Depository Participant or Indirect
Participant should in turn make the request of the Depository (or, in the case
of an Indirect Participant, such Indirect Participant should notify the related
Depository Participant of such request, which Depository Participant should make
the request of the Depository) on a form required by the Depository and provided
to the Depository Participant.  In the case of a request on behalf of a Deceased
Holder, a certified copy of the death certificate and any additional appropriate
evidence of death and any tax waivers must be forwarded to the Trustee under
separate cover.  Any such requests of Deceased Holders that are incomplete may
not be honored by the Trustee and, if not honored, will lose their priority and
must be resubmitted in proper form.  Upon receipt of such Principal Distribution

                                      -72-
<PAGE>

Request, the Depository will date and time stamp such request and forward such
request to the Trustee.  Such requests will be honored on any Distribution Date
only to the extent that they are received by the Depository on or before the
Record Date for such Distribution Date.  The Depository may establish such
procedures as it deems fair and equitable to establish the order of receipt of
requests for such distributions received by it on the same day.  Principal
Distribution Requests delivered to the Depository after the Record Date for a
particular Distribution Date and requests received in a timely manner but not
accepted with respect to a particular Distribution Date will be treated as
Principal Distribution Requests for the next succeeding Distribution Date and
each succeeding Distribution Date thereafter until each request is accepted or
is withdrawn as provided below.  In the case of Principal Distribution Requests
on behalf of Living Holders, the Depository will establish a new order of
priority for each Distribution Date.  This order will apply both to previously
unsatisfied Principal Distribution Requests and to newly submitted requests.  A
Principal Distribution Request submitted on behalf of a Living Holder who later
dies will become entitled to the priority of a newly submitted request on behalf
of a Deceased Holder upon satisfaction of the requirements set forth above for
requests of a Deceased Holder.  Such priority will be effective for each
subsequent Distribution Date if the Trustee has received a certified copy of the
death certificate for such Deceased Holder and any additional appropriate
evidence of death and any requested tax waivers by the last business day of the
preceding calendar month.  Each Principal Distribution Request submitted by a
beneficial owner of a Retail Certificate will be held by the Depository until
such request has been accepted or has been withdrawn in writing as provided
herein.  None of the Trustee, the Master Servicer, the Seller or the Depositor
shall be liable for any delay in delivery of Principal Distribution Requests or
Withdrawals (as defined below) of such requests by the Depository, a Depository
Participant or any Indirect Participant.

     In the event that any Principal Distribution Requests are rejected by the
Trustee for failure to comply with the requirements of this Section 4.8, the
Trustee shall return such requests to the appropriate Depository Participant
with a copy to the Depository with an explanation as to the reason for such
rejection.

     The Trustee shall maintain a list of those Depository Participants
representing the Certificate Owners of Retail Certificates that have submitted
Principal Distribution Requests, together with the order of receipt and the
amounts of such requests.  The Trustee shall notify the Depository and the
appropriate Depository Participants as to which requests should be honored on
each Distribution Date.  Requests shall be honored by the Depository in
accordance with the procedures, and subject to the priorities and limitations,
described in this Section 4.8.  The exact procedures to be followed by the
Trustee and the Depository for purposes of determining such priorities and
limitations shall be those established from time to time by the Trustee or the
Depository, as the case may be.  The decisions of the Trustee and the Depository
concerning such matters shall be final and binding on all affected Persons.

     Any beneficial owner of a Retail Certificate that has made a Principal
Distribution Request may withdraw its request by so notifying in writing the
Depository Participant or Indirect Participant that maintains such beneficial
owner's account (each such withdrawal, a  "Withdrawal").  The Depository
Participant should forward the Withdrawal to the Depository on a form required
by the Depository.  In the event that such account is maintained by an Indirect
Participant, such Indirect Participant should notify the related Depository
Participant which in turn should forward the Withdrawal of such request, on a
form required by the Depository, to the Depository.  If such Withdrawal has not
been received by the Depository and forwarded to the Trustee on or before the

                                      -73-
<PAGE>

Record Date for the next Distribution Date, the previously made Principal
Distribution Request will be irrevocable with respect to the making of
distributions in reduction of the Certificate Principal Balance of such
Certificate on such Distribution Date.

     (d) To the extent, if any, that amounts available for distribution in
reduction of the Certificate Principal Balance of a Class of Retail Certificates
on a Distribution Date pursuant to Section 4.2 exceed the dollar amount of
Principal Distribution Requests that have been received in respect of such Class
of Certificates by the related Record Date, as provided in Section 4.8(c) above,
distributions in reduction of the Certificate Principal Balance of such Class of
Certificates will be made by mandatory distributions on a Random Lot basis, in
integral multiples equal to $1,000, in reduction thereof without regard to
whether the related Certificate Owners have submitted Principal Distribution
Requests.  The Trustee shall notify the Depository of the aggregate amount of
the mandatory distribution by Random Lot in reduction of the Certificate
Principal Balance of such Class of Certificates to be made on the next
Distribution Date.  The Depository shall then allocate such aggregate amount
among its Depository Participants on a Random Lot basis.  Each Depository
Participant and, in turn, each Indirect Participant, will then select, in
accordance with its own procedures, Retail Certificates of such Class from among
those held in its accounts to receive mandatory distributions in reduction of
the Certificate Principal Balance of such Class of Certificates, such that the
total amount so selected is equal to the aggregate amount of such mandatory
distributions allocated to such Depository Participant by the Depository and to
such Indirect Participant by its related Depository Participant, as the case may
be.  Depository Participants and Indirect Participants that hold a Class of
Retail Certificates selected for mandatory distributions in reduction of the
Certificate Principal Balance thereof should provide notice of such mandatory
distributions to the affected Certificate Owners.

     (e) No later than the Closing Date, the Trustee will establish and maintain
with itself for each Class of Retail Certificates a segregated trust account
that is an Eligible Account, which shall be titled (x) in the case of the Class
A-13 Certificates: "Rounding Account, The Bank of New York, as Trustee for the
registered Holders of First Horizon Mortgage Pass-Through Certificates, Series
2001-2, Class A-13" and (y) in the case of the Class A-14 Certificates:
"Rounding Account, The Bank of New York, as Trustee for the registered Holders
of First Horizon Mortgage Pass-Through Certificates, Series 2001-2, Class A-14."
On the Closing Date, the Underwriter shall deposit with the Trustee, and the
Trustee shall deposit into each Rounding Account, cash in an amount equal to
$999.99.  Amounts held in a Rounding Account shall not be invested in any
investment which produces income.  Each Rounding Account will be included in the
Lower REMIC.

     On each Distribution Date on which a distribution is to be made in
reduction of the Certificate Principal Balance of a Class of Retail Certificates
pursuant to Section 4.2, funds on deposit in the related Rounding Account shall
be, to the extent needed, withdrawn by the Trustee and applied to round upward
to an integral multiple of $1,000 the aggregate distribution in reduction of the
Certificate Principal Balance to be made thereon.  Rounding of such distribution
on a Class of Retail Certificates shall be accomplished, on the first such
Distribution Date, by withdrawing from the related Rounding Account the amount
of funds, if any, needed to round the amount otherwise available for such
distribution in reduction of the Certificate Principal Balance of such Class of
Certificates upward to the next integral multiple of $1,000.  On each succeeding
Distribution Date on which distributions in reduction of the Certificate
Principal Balance of a Class of Retail Certificates are to be made pursuant to
Section 4.2, the aggregate amount of such distributions allocable to such Class
of Certificates shall be applied first to repay any funds withdrawn from the

                                      -74-
<PAGE>

related Rounding Account and not previously repaid, and then the remainder of
such allocable amount, if any, shall be similarly rounded upward to the next
integral multiple of $1,000 and applied as distributions in reduction of the
Certificate Principal Balance of such Class of Retail Certificates; this process
shall continue on succeeding principal Distribution Dates prior to the earlier
to occur of the Cross-Over Date and the next Distribution Date after the
Distribution Date on which the principal portion of any Realized Loss is
allocated to such Class of Retail Certificates until the Certificate Principal
Balance thereof has been reduced to zero.  On the earliest of (1) the Cross-Over
Date, (2) the next Distribution Date after the Distribution Date on which the
principal portion of any Realized Loss is allocated to a Class of Retail
Certificates and (3) the first Distribution Date after the Certificate Principal
Balance of such Class of Retail Certificates has been reduced to zero, any
remaining amounts in the related Rounding Account shall be distributed to the
Holders of the Class A-RL Certificates.

     (f) Notwithstanding any provisions herein to the contrary, on each
Distribution Date coinciding with or after the earlier to occur of the Cross-
Over Date and the next Distribution Date after the Distribution Date on which
the principal portion of any Realized Loss is allocated to a Class of Retail
Certificates, all distributions in reduction of the Certificate Principal
Balance of such Retail Certificates will be made among the Holders and
Certificate Owners of such Class of Certificates, pro rata, based on their
Certificate Principal Balances, and will not be made in integral multiples of
$1,000 or pursuant to requested distributions or mandatory distributions by
Random Lot.

     (g) In the event that Definitive Certificates representing a Class of
Retail Certificates are issued pursuant to Section 5.2(e) (other than Section
5.2(e)(z)), all requests for distributions or withdrawals of such requests
relating to such Class of Certificates must be submitted to the Trustee, and the
Trustee shall perform the functions described in Section 4.8(a) through (d)
using its own procedures, which procedures shall, to the extent practicable, be
consistent with the procedures described in Section 4.8(a) through (d).  In the
event that Definitive Certificates representing a Class of  Retail Certificates
are issued pursuant to Section 5.2(e)(z), all distributions of principal shall
be made pro rata in accordance with Section 4.8(f).

                                   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

                                      -75-
<PAGE>

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 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

                                      -76-
<PAGE>

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 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 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.

                                      -77-
<PAGE>

     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 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

                                      -78-
<PAGE>

     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 Seller or the Master
Servicer, to the effect that the elimination of such restrictions will not cause
any 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
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

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<PAGE>

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 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.

                                      -80-
<PAGE>

     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.

     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.

                                      -81-
<PAGE>

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

     None of the Depositor, the Seller, the Master Servicer or any of the
directors, officers, employees or agents of 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 Depositor, the Seller, the Master Servicer
or any such Person against any breach of representations or warranties made by
it herein or protect 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 Depositor,
the Seller, the Master Servicer and any director, officer, employee or agent of
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 Depositor, the Seller, the Master
Servicer and any director, officer, employee or agent of 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 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 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 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
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.

                                      -82-
<PAGE>

                                  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

          (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

                                      -83-
<PAGE>

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 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

                                      -84-
<PAGE>

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 VII
                            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,

                                      -85-
<PAGE>

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;

          (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

                                      -86-
<PAGE>

     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 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;

                                      -87-
<PAGE>

          (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 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

                                      -88-
<PAGE>

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 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

                                      -89-
<PAGE>

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.

     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

                                      -90-
<PAGE>

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.

     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;

                                      -91-
<PAGE>

          (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 any REMIC election is
to be made, as set forth in the preliminary statement shall constitute, and that
the conduct of matters relating to such 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

                                      -92-
<PAGE>

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.

     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

                                      -93-
<PAGE>

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), any tax
allocable to the Lower REMIC shall be paid from Available Funds and any tax
allocable to the Upper REMIC shall be paid from amounts distributable on the
Lower REMIC Interests.

     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 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

                                      -94-
<PAGE>

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.

     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

                                      -95-
<PAGE>

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-RU 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 any 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.

     (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.

                                      -96-
<PAGE>

                                   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 any REMIC as a REMIC under the
Code, (ii) avoid or minimize the risk of the imposition of any tax on any 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),
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

                                      -97-
<PAGE>

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 any REMIC or the Certificateholders or cause any 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 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

                                      -98-
<PAGE>

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 Depositor 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 Seller to the
Depositor.  However, in the event that, notwithstanding the intent of the
parties, such assets are held to be the property of the Seller, 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 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, 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 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.

     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:

                                      -99-
<PAGE>

     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 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; (d) 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.

     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.

                                     -100-
<PAGE>

     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 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

                                     -101-
<PAGE>

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.

                                  * * * * * *

                                     -102-
<PAGE>

     IN WITNESS WHEREOF, the Depositor, the Trustee, 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:   /s/ Wade Walker
                                   --------------------------------------------
                                   Wade Walker
                                   Senior Vice President - Asset Securitization

                              THE BANK OF NEW YORK,
                                as Trustee

                              By:  /s/ Diane Pickett
                                   -------------------------------------------
                                   Name:  Diane Pickett
                                   Title: Vice President

                              FIRST HORIZON HOME LOAN CORPORATION,
                                as Seller and Master Servicer

                              By:  /s/ Wade Walker
                                   --------------------------------------------
                                   Wade Walker
                                   Senior Vice President - Asset Securitization<PAGE>

                                                                    Exhibit 4(d)

          This Note is a global security and is registered in the name of CEDE &
CO., as nominee of the despositary, The Depository Trust Company. Unless and
until this Note is exchanged for Notes in definitive form, this Note may not be
transferred except as a whole by the depositary or a nominee of the depositary
to the depositary or another depositary or by the depositary or any such nominee
to a successor depositary or a nominee of such successor depositary.

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

                             Wal-Mart Stores, Inc.

                             4.625% NOTES DUE 2003

Number __                                                CUSIP No.: 931142BK8
$___________                                             ISIN No.:  US931142BK83
                                                         Common Code:  012808879

          WAL-MART STORES, INC., a corporation duly organized and existing under
the laws of the State of Delaware, and any successor corporation pursuant to the
Indenture (herein referred to as the "Company"), for value received, hereby
promises to pay to CEDE & CO. or registered assigns, the principal sum of
_________________________ DOLLARS on April 15, 2003 in such coin or currency of
the United States of America as at the time of payment shall be legal tender for
the payment of public and private debts, and to pay interest, computed on the
basis of a 360-day year of twelve 30-day months, semi-annually in arrears on
April 15 and October 15 of each year, or if any such day is not a Business Day,
on the next succeeding Business Day (each, an "Interest Payment Date"),
commencing on October 15, 2001, on said principal sum in like coin or currency,
at the rate per annum specified in the title of this Note from April 11, 2001 or
from the most recent April 15 or October 15 to which interest has been paid or
duly provided for.  The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will be paid to the person in whose
name this Note is registered (the "holder") at the close of business on the
preceding April 1, in the case of an Interest Payment Date of April 15, and on
the preceding October 1, in the case of an Interest Payment Date of October 15
(each, a "Record Date").

          Reference is made to the further provisions of this Note set forth on
the succeeding sections hereof.  Such further provisions shall for all purposes
have the same effect as though fully set forth at this place.

          This Note shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been signed by the
Trustee under the Indenture referred to in Section 1 hereof.

          IN WITNESS WHEREOF, the Company has caused this instrument to be
signed by its Chairman of the Board, its Vice Chairman, its President or one of
its Vice Presidents by manual or facsimile signature under its corporate seal,
attested by its Secretary, one of its Assistant Secretaries, its Treasurer or
one of its Assistant Treasurers by manual or facsimile signature.

                                        Wal-Mart Stores, Inc.
<PAGE>

                                                                               2

                                        By:_______________________________
                                           Name:
                                           Title:

[SEAL]                                  Attest:____________________________
                                                   Name:
                                                   Title:

Dated:  April 11, 2001

                    TRUSTEE'S CERTIFICATE OF AUTHENTICATION

          This is one of the Securities of the series designated herein referred
to in the within-mentioned Indenture.

                                        Bank One Trust Company, NA,
                                         as successor in interest to
                                        The First National Bank of Chicago,
                                         as Trustee

                                        By:_______________________________
                                           Authorized Signatory
<PAGE>

                                                                               3

                             Wal-Mart Stores, Inc.

                             4.625% NOTES DUE 2003

          1.   Indenture; Notes.  This Note is one of a duly authorized series
of Securities of the Company designated as the "4.625% Notes due 2003" (the
"Notes"), initially issued in an aggregate principal amount of $500,000,000 on
April 11, 2001. Such series of Securities has been established pursuant to, and
is one of an indefinite number of series of debt securities of the Company,
issued or issuable under and pursuant to, the Indenture, dated as of April 1,
1991 as supplemented by a First Supplemental Indenture, dated as of September 9,
1992 and as further supplemented by a Second Supplemental Indenture, dated as of
June 1, 2000 (collectively, the "Indenture"), duly executed and delivered by the
Company and Bank One Trust Company, NA, as successor in interest to The First
National Bank of Chicago, as trustee (the "Trustee"), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
rights, limitations of rights, obligations, duties and immunities thereunder of
the Trustee, the Company and the holders of the Notes and of the terms upon
which this Note is, and is to be, authenticated and delivered. The terms,
conditions and provisions of the Notes are those stated in the Indenture, those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended the "Trust Indenture Act"), and those set forth in this Note. To the
extent that the terms, conditions and other provisions of this Note modify,
supplement or are inconsistent with those of the Indenture, then the terms,
conditions and other provisions of this Note shall govern.

          All capitalized terms which are used but not defined in this Note
shall have the meanings assigned to them in the Indenture.

          The Company may, without the consent of the holders, issue and sell
additional Securities ranking equally with the Notes and otherwise identical in
all respects (except for their date of issue, issue price and the date from
which interest payments thereon shall accrue) so that such additional Securities
shall be consolidated and form a single series with the Notes; provided,
however, that no additional Securities of any existing or new series may be
issued under the Indenture if an Event of Default has occurred and remains
uncured thereunder.

          2.   Ranking.  The Notes shall constitute the senior unsecured debt
obligations of the Company and shall rank equally in right of payment among
themselves and with all other existing and future senior, unsecured and
unsubordinated debt obligations of the Company.

          3.   Payment of Overdue Amounts.  The Company shall pay interest,
calculated on the basis of a 360-day year of twelve 30-day months, on overdue
principal and overdue installments of interest, if any, from time to time on
demand at the interest rate borne by the Notes to the extent lawful.

          4.   Payment of Additional Amounts; Redemption Upon a Tax Event.
(a)  Payment of Additional Amounts.  The Company shall pay to the holder of this
Note who is a United States Alien (as defined below) such additional amounts as
may be necessary so that every net payment of principal of and interest on this
Note to such holder, after deduction or
<PAGE>

                                                                               4

withholding for or on account of any present or future tax, assessment or other
governmental charge imposed upon such holder by the United States of America or
any taxing authority thereof or therein, will not be less than the amount
provided in the Notes to be then due and payable (such amounts, the "Additional
Amounts"); provided, however, that the Company shall not be required to make any
payment of Additional Amounts for or on account of:

          (i)    any tax, assessment or other governmental charge that would not
     have been imposed but for (A) the existence of any present or former
     connection between such holder, or between a fiduciary, settler,
     beneficiary of, member or shareholder of, or possessor of a power over,
     such holder, if such holder is an estate, trust, partnership or
     corporation, and the United States including, without limitation, such
     holder, or such fiduciary, settlor, beneficiary, member, shareholder or
     possessor, being or having been a citizen or resident of the United States
     of America or treated as a resident thereof or being or having been engaged
     in trade or business or present in the United States of America, or (B) the
     presentation of this Note for payment on a date more than 30 days after the
     later of (x) the date on which such payment becomes due and payable and (y)
     the date on which payment thereof is duly provided for;

          (ii)   any estate, inheritance, gift, sales, transfer, excise,
     personal property or similar tax, assessment or other governmental charge;

          (iii)  any tax, assessment or other governmental charge imposed by
     reason of such holder's past or present status as a passive foreign
     investment company, a controlled foreign corporation, a personal holding
     company or foreign personal holding company with respect to the United
     States of America, or as a corporation which accumulates earnings to avoid
     United States federal income tax;

          (iv)   any tax, assessment or other governmental charge which is
     payable otherwise than by withholding from payment of principal of or
     interest on this Note;

          (v)    any tax, assessment or other governmental charge required to be
     withheld by any paying agent from any payment of principal of or interest
     on this Note if such payment can be made without withholding by any other
     paying agent;

          (vi)   any tax, assessment or other governmental charge which would
     not have been imposed but for the failure to comply with certification,
     information, documentation or other reporting requirements concerning the
     nationality, residence, identity or connections with the United States of
     America of the holder or beneficial owner of this Note, if such compliance
     is required by statute or by regulation of the United States Treasury
     Department as a precondition to relief or exemption from such tax,
     assessment or other governmental charge;

          (vii)  any tax, assessment or other governmental charge imposed on
     interest received by (A) a 10% shareholder (as defined in Section
     871(h)(3)(B) of the United States Internal Revenue Code of 1986, as amended
     (the "Code"), and the regulations that
<PAGE>

                                                                               5

     may be promulgated thereunder) of the Company or (B) a controlled foreign
     corporation with respect to the Company within the meaning of the Code; or

          (viii) any combination of items (i), (ii), (iii), (iv), (v), (vi) and
     (vii) in this Section 4(a);

nor shall any Additional Amounts be paid to any holder who is a fiduciary or
partnership or other than the sole beneficial owner of this Note to the extent
that a beneficiary or settlor with respect to such fiduciary, or a member of
such partnership or a beneficial owner thereof would not have been entitled to
the payment of such Additional Amounts had such beneficiary, settlor, member or
beneficial owner been the holder.

          "United States Alien" means any corporation, partnership, individual
or fiduciary that is, as to the United States of America, a foreign corporation,
a non-resident alien individual who has not made a valid election to be treated
as a United States resident, a non-resident fiduciary of a foreign estate or
trust, or a foreign partnership one or more of the members of which is, as to
the United States of America, a foreign corporation, a non-resident alien
individual or a non-resident fiduciary of a foreign estate or trust.

          (b)  Redemption Upon a Tax Event.  The Notes may be redeemed at the
option of the Company in whole, but not in part, on a date (such date, the "Tax
Redemption Date") to be fixed by the Company on not more than 60 days' and not
less than 30 days' notice, at a redemption price equal to 100% of the principal
amount of the Notes (the "Redemption Price") plus accrued but unpaid interest,
if any, thereon, if the Company determines that as a result of any change in or
amendment to the laws, treaties, regulations or rulings of the United States of
America or any political subdivision or taxing authority thereof, or any
proposed change in such laws, treaties, regulations or rulings, or any change in
the official application, enforcement or interpretation of such laws, treaties,
regulations or rulings, including a holding by a court of competent jurisdiction
in the United States of America, or any other action, other than an action
predicated on laws generally known on or before April 6, 2001 except for
proposals before the U.S. Congress before such date, taken by any taxing
authority or a court of competent jurisdiction in the United States of America,
or the official proposal of any such action, whether or not such action or
proposal was taken or made with respect to the Company, (A) the Company has or
will become obligated to pay Additional Amounts or (B) there is a substantial
possibility that the Company will be required to pay such Additional Amounts.

          Prior to the publication of any notice of redemption pursuant to
Section 15 hereof, the Company shall deliver to the Trustee (1) an Officers'
Certificate stating that the Company is entitled to effect such redemption and
setting forth a statement of facts showing that the conditions precedent to the
rights of the Company so to redeem have occurred and (2) an Opinion of Counsel
to such effect based on such statement of facts.

          If the Company elects to redeem the Notes pursuant to this Section
4(b), then it shall give notice to the holders pursuant to Section 15 hereof.

          The notice of redemption, shall specify the following:

          (i)    the Tax Redemption Date;
<PAGE>

                                                                               6

          (ii)   a brief statement to the effect that the Notes are being
     redeemed at the option of the Company pursuant to this Section 4(b) and a
     brief statement of the facts permitting such redemption;

          (iii)  that on the Tax Redemption Date, the Redemption Price, plus
     accrued but unpaid interest on the Notes, if any, will become due and
     payable;

          (iv)   the amount of the Redemption Price and accrued but unpaid
     interest, if any, that will be due and payable on the Notes on the Tax
     Redemption Date;

          (v)    the place or places of payment of the amounts due under clause
     (iv) above;

          (vi)   that payment of the amounts due under clause (iv) above will be
     made upon presentation and surrender of the Notes; and

          (vii)  that, following the redemption of the Notes pursuant to this
     Section 4(b), interest shall cease to accrue thereon.

          The notice of redemption regarding the Notes shall be, at the election
of the Company, given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.

          On or before the opening of business on any Tax Redemption Date, the
Company shall deposit with the Trustee or with the Paying Agent or, if the
Company is acting as its own paying agent, segregate and hold in trust as
provided in Section 3.06(c) of the Indenture, an amount of money sufficient to
pay the Redemption Price of, and except if the Tax Redemption Date shall be an
Interest Payment Date, accrued but unpaid interest on, the Notes to be redeemed
on the Tax Redemption Date.

          The notice of redemption having been given as specified above, the
Notes shall, on the Tax Redemption Date, become due and payable at the
Redemption Price, and from and after such date, unless the Company shall default
in the payment of the Redemption Price and accrued but unpaid interest, if any,
the Notes shall cease to bear interest. Upon surrender of the Notes for
redemption in accordance with such notice, the Notes shall be paid by the
Company at the Redemption Price, together with accrued but unpaid interest, if
any, to the Tax Redemption Date.

          If the Notes, having been called for redemption, shall not be so paid
upon surrender thereof for redemption, the Redemption Price shall, until paid,
bear interest from the Tax Redemption Date at the interest rate borne by this
Note.

          5.   Place and Method of Payment.  Subject to the last paragraph of
Section 11 hereof, the Company shall pay principal of and interest on the Notes
at the office or agency of the Company in the Borough of Manhattan, The City of
New York; provided, however, that at the option of the Company, the Company may
pay interest by check mailed to the person entitled thereto at such person's
address as it appears on the register of the Company.
<PAGE>

                                                                               7

          6.   Defeasance of the Notes.  Section 11.05 of the Indenture shall
apply to the Notes.

          7.   No Redemption; Sinking Fund.  The Notes are not redeemable prior
to maturity, other than as set forth in Section 4(b) hereof, and are not subject
to a sinking fund.

          8.   Amendment and Modification.   Article Nine of the Indenture
contains provisions for the amendment or modification of the Indenture and the
Notes without the consent of the holders in certain circumstances and requiring
the consent of holders of not less than 66?% in aggregate principal amount of
the Notes and Securities of other series that would be affected in certain other
circumstances.  However, the Indenture requires the consent of each holder of
the Notes and Securities of other series that would be affected for certain
specified amendments or modifications of the Indenture and the Notes.  These
provisions of the Indenture, which provide for, among other things, the
execution of supplemental indentures, are applicable to the Notes.

          9.   Default; Waiver; Enforcement.  (a)  If an Event of Default with
respect to the Notes shall have occurred and be continuing, the principal of all
outstanding Notes may be declared, and upon such declaration shall become, due
and payable, in the manner, with the effect and subject to the conditions
provided in the Indenture.  The Indenture provides that in the event of such a
declaration, the holders of a majority in aggregate principal amount of all of
the Notes then outstanding, voting as a separate class (or, in certain cases,
some or all of the other Securities then outstanding, voting as a single class),
in accordance with the provisions of, and in the circumstances provided by, the
Indenture, may rescind the declaration and its consequences and the related
default and its consequences may be waived with respect to all of the Notes.
The Indenture also provides that the holders of a majority in aggregate
principal amount of the Notes at the time outstanding may, on behalf of the
holders of all of the Notes, waive, prior to such a declaration, any past
default under the Indenture with respect to the Notes and its consequences,
except a default in the payment of principal of or interest on any Note.

          (b)  As provided in and subject to the provisions of the Indenture, no
holder of this Note shall have the right to institute any suit, action or
proceeding with respect to the Indenture, or for appointment of any receiver or
trustee or for any other remedy thereunder, unless such holder previously shall
have given the Trustee written notice of default and the continuance thereof,
the holders of not less than 25% in aggregate principal amount of the Notes then
outstanding shall have made written request to the Trustee to institute such
suit, action or proceeding and shall have offered to the Trustee reasonable
indemnity and the Trustee, for 60 days after the receipt of such notice, request
and offer of indemnity, shall have neglected or refused to institute the same
and shall not have received any direction inconsistent therewith from the
holders of a majority in aggregate principal amount of all affected Securities
then outstanding (which holders, voting as a single class, shall be entitled to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee with respect to the Notes); provided, however, that,
pursuant to the Indenture, each of the holders of the Notes covenants that no
one or more holders of the Notes shall have any right in any manner whatsoever
by virtue or by availing of any provision of the Indenture to affect, disturb or
prejudice the rights of any other holders of the Notes or to obtain or seek to
obtain priority over
<PAGE>

                                                                               8

or preference to any other holders of the Notes or to enforce any rights under
the Indenture except as provided in the Indenture and for the equal, ratable and
common benefit of all of the holders of the Notes.

          (c)  Any consent, waiver or other action by the holder of this Note
provided pursuant to this Note or the Indenture (unless effectively revoked as
provided in the Indenture) shall be conclusive and binding upon such holder and
upon all future holders of this Note and of any Note issued in exchange or
substitution herefor, irrespective of whether or not any notification of such
consent or waiver is made upon this Note or such other Note.

          10.  Absolute Obligation.  No reference herein to the Indenture and no
provisions of the Notes or of the Indenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the time and in the coin or currency
herein prescribed.

          11.  Form and Denominations; Global Notes; Certificated Notes.  The
Notes are being issued in registered form without coupons in denominations of
$1,000 and multiples of $1,000.

          The Notes have been issued in the form of global notes (each, a
"Global Note"), evidencing all or any portion of the Notes and registered in the
name of The Depository Trust Company ("DTC") or its nominee (including their
respective successors).

          The Company shall only issue the Notes in certificated form (each such
note, a "Certificated Note"), or exchange Global Notes for Certificated Notes,
if:

          (a)  DTC has notified the Company that (1) it is unwilling or unable
     to continue as depositary or (2) has ceased to be a clearing agency
     registered under the Securities Exchange Act of 1934, as amended, and,
     after the Company receives notice or becomes aware of such ineligibility or
     unwillingness, the Company has not appointed a successor depositary within
     90 days of either event set forth in this clause (a);

          (b)  there shall have occurred and be continuing an Event of Default
     with respect to the Notes; or

          (c)  the Company decides that the Notes shall no longer be represented
     by Global Notes.

          If the Company is required, or decides, to issue Certificated Notes,
then the Company shall issue, pursuant to Sections 2.04 and 2.05 of the
Indenture, Certificated Notes in exchange for Global Notes, and such
Certificated Notes shall have an aggregate principal amount equal to the
aggregate principal amount of the Global Notes to be exchanged; provided,
however, that if DTC surrenders Global Notes in exchange for Certificated Notes,
in whole or in part, then the Company shall issue Certificated Notes, pursuant
to Sections 2.04 and 2.05 of the Indenture, to:
<PAGE>

                                                                               9

          (a)  each person specified by DTC as requested by such person in
     aggregate principal amount equal to, and in exchange for, such person's
     beneficial ownership interest in the Global Note; and

          (b)  DTC in a denomination equal to the difference, if any, between
     the principal amount of the surrendered Global Note and the aggregate
     principal amount of Certificated Notes delivered to the holders thereof
     pursuant to the immediately preceding clause (a).

          In addition, if the Company issues Certificated Notes, then the
Company will make payments of principal of and interest on the Notes to the
holders thereof in whose names the Certificated Notes are registered at the
close of business, as the case may be, on the maturity of the Notes and on the
Record Dates, respectively.  If the Notes are represented by Certificated Notes,
then the Company will make payments of principal against the surrender of these
Certificated Notes at the office of the Paying Agent in the Borough of
Manhattan, The City of New York.  The Company will make payments of interest on
the Notes to holders by check delivered to the addresses of the holders as their
addresses appear on the register of the Company or by transfer to an account
maintained by that holder with a bank located in the United States.

          12.  Registration; Transfer and Exchange; Registration of Transfer and
Exchange.  As provided in the Indenture and subject to certain limitations
therein set forth, the Company shall provide for the registration of the Notes
and the transfer and exchange of the Notes, whether in global or certificated
form.  At the option of the holders, either at the office or agency to be
designated and maintained by the Company for such purpose in the Borough of
Manhattan, The City of New York or in the City of Chicago, Illinois, or at any
of such other offices or agencies as may be designated and maintained by the
Company for such purpose pursuant to the provisions of the Indenture, and in the
manner and subject to the limitations provided in the Indenture, but without the
payment of any service charge, except for any tax or other governmental charges
imposed in connection therewith subject to Section 4 hereof, the Notes may be
transferred or exchanged for an equal aggregate principal amount of the Notes of
like tenor and of other authorized denominations upon surrender and cancellation
of the Notes upon any such transfer.

          The Company, the Trustee, and any agent of the Company or of the
Trustee may deem and treat the holder as the absolute owner of this Note
(whether or not the Notes shall be overdue and notwithstanding any notation of
ownership or other writing hereon), for the purpose of receiving payments
hereon, or on account hereof, and for all other purposes, and neither the
Company nor the Trustee nor any agent of the Company or of the Trustee shall be
affected by any notice to the contrary.  All such payments made to or upon the
order of such holder shall, to the extent of the amount or amounts paid,
effectually satisfy and discharge liability for moneys payable on this Note.

          The following provisions shall apply regarding the registration of
transfer or exchange of a Global Note:

          (a)  Notwithstanding any other provision of the Indenture or the
     Notes, a Global Note may not be exchanged in whole or in part for Notes
     registered, and no
<PAGE>

                                                                              10

     transfer of a Global Note in whole or in part may be registered, in the
     name of any person other than DTC or a nominee thereof unless the limited
     circumstances set forth in the third paragraph of Section 11 hereof shall
     have occurred.

          (b)  Subject to clause (a) of this paragraph, any exchange of a Global
     Note for other Notes may be made in whole or in part, and all Notes issued
     in exchange for a Global Note or any portion of a Global Note shall be
     registered in such names and delivered to such persons as DTC shall direct.

          (c)  Every Note authenticated and delivered upon registration or
     transfer of, or in exchange for or in lieu of, a Global Note or any portion
     hereof shall be issued and authenticated in the form of, and shall be, a
     Global Note, shall bear such legends as DTC may require and shall be
     delivered to DTC or a nominee thereof or custodian therefor, unless such
     Note is registered in the name of a person other than DTC or a nominee
     thereof.

          If the Company issues Certificated Notes, the following provisions
regarding the registration, transfer and exchange of Certificated Notes shall
apply:

          (a)  Each time, if any, that the Company transfers or exchanges a new
     Certificated Note for another Certificated Note, and after the Transfer
     Agent receives a completed assignment form, then (A) the Registrar (as
     defined below) will record such transfer on the register of the Company and
     (B) the Company will make available for delivery the new Certificated Note,
     authenticated pursuant to Section 2.04 of the Indenture, at, as the case
     may be, the office of the Transfer Agent in, at the option of the holder,
     the Borough of Manhattan, The City of New York or the City of Chicago,
     Illinois.  Alternatively, at the option of the person requesting the
     transfer or exchange, the Company will mail, at that person's risk, the new
     Certificated Note to the address of that person which is specified in the
     assignment form.

          (b)  Upon the exchange of a Global Note for a Certificated Note, (i)
     the Transfer Agent in, at the option of the holder, the Borough of
     Manhattan, The City of New York or the City of Chicago, Illinois, will
     cancel the Global Note so exchanged and (ii) the Registrar will register
     the Certificated Notes issued in exchange for Global Notes pursuant to the
     first two paragraphs of this Section 12 in such names and in such
     authorized denominations as the depositary for such Global Notes being
     exchanged shall instruct the Registrar.

          (c)  The holder of any Certificated Note may transfer such Note in
     whole or in part upon the surrender of the Certificated Note to be
     transferred, together with a completed and executed assignment form
     endorsed on such Certificated Note, at the office of the Transfer Agent in,
     at the option of the holder, the Borough of Manhattan, The City of New York
     or the City of Chicago, Illinois.

          13.  No Recourse Against Others.  No recourse for the payment of the
principal of or the interest on the Notes, or for any claim based hereon or
otherwise in respect hereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the
<PAGE>

                                                                              11

Indenture or any supplemental indenture or in any Note, or because of the
creation of any debt obligations represented hereby or thereby, shall be had
against any incorporator, stockholder, officer or director, as such, past,
present or future, of the Company or of any successor corporation, either
directly or through the Company or any successor corporation, whether by virtue
of any constitution, statute or rule of law or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.

          14.  Appointment of Agents.  Bank One Trust Company, NA is hereby
appointed the registrar for the purpose of registering the Notes and transfers
and exchanges of the Notes pursuant to the Indenture and this Note (the
"Registrar"), paying agent pursuant to Section 3.06 of the Indenture (the
"Paying Agent") and transfer agent (the "Transfer Agent") with respect to the
Notes at its offices in the Borough of Manhattan, The City of New York and in
the City of Chicago, Illinois.

          15.  Notices.  If the Company is required to give notice to the
holders of the Notes, then it shall do so by (a) publication and (b) mail.

          The Company shall give notices to the holders of the Notes by
publication in a leading daily newspaper in The City of New York and in London.
Initially, such publication shall be made in The City of New York in The Wall
Street Journal and in London in the Financial Times.  Any notice shall be deemed
to have been given on the date of publication or, if published more than once,
on the date of the first publication.

          The Company shall give notice to the holders of the Notes by mail by
the following methods:

          (a)  if the Notes are represented by registered Global Notes, then the
     Company shall mail the notice to DTC by overnight mail; and

          (b)  if the Notes have been exchanged for a Certificated Note, then
     the Company shall mail the notice by first class mail, postage pre-paid or
     by overnight courier to the address of the holder as set forth in the
     register of the Company.

Any such notice shall be conclusively presumed to have been received by such
holders.  In any case where notice to any of the holders of the Notes is given
by mail, neither the failure to mail such notice to any of the holders nor any
defect in any notice so mailed to any of the holders shall affect the
sufficiency of such notice with respect to the other holders of the Notes.  In
the event of suspension of regular mail service or for any other reason it shall
be impracticable to give such notice by mail, then such a notification as shall
be made with the approval of the Trustee shall constitute a sufficient
notification for every purpose hereunder.  Notice to any holder by mail will be
deemed to have been given on the date of such mailing.

          Where the Indenture or the Notes provide for notice in any manner,
such notice may be waived in writing by the person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice.  Waivers of notice by the holder of
<PAGE>

                                                                              12

this Note shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.

          All requests, demands, authorizations, directions, notices, consents,
waivers and other communications required or permitted under the Indenture and
the Notes shall be in writing in the English language.

          16.  Separability.  In case any provision of the Indenture or the
Notes shall, for any reason, be held to be invalid, illegal or unenforceable,
then the validity, legality and enforceability of the remaining provisions
thereof and hereof shall not in any way be affected or impaired thereby.

          17.  GOVERNING LAW.  THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>

                                                                              13

                                ASSIGNMENT FORM

To assign this Note, fill in the form below:

     For the value received, the undersigned hereby assigns and transfers the
within Note, and all rights thereunder, to:

--------------------------------------------------------------------------------
                        (Insert assignee's legal name)

--------------------------------------------------------------------------------
       (Insert assignee's social security or tax identification number)

--------------------------------------------------------------------------------
             (Print or type assignee's name, address and zip code)

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

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

and irrevocably appoint
                       ---------------------------------------------------------

to transfer this Note on the books of Wal-Mart Stores, Inc.  The agent may
substitute another to act for it.

                              Your Signature:___________________________________

                                             (Sign exactly as your name appears
                                              on the face of this Note)

Date: ___________________

Signature Guarantee

The signature(s) should be Guaranteed by an Eligible Guarantor Institution
pursuant to Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended.

                               *   *   *   *   *

     The following abbreviations, when used in the inscription on the face of
the within Note, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM -  as tenants in common
TEN ENT -  as tenants by the entireties
JT ENT -   as joint tenants with right
           of survivorship and not as
           tenants in common
___________ UNIF GIFT MIN ACT - ______ Custodian _______ under the Uniform Gifts
                                (Cust)           (Minor)
to Minors Act _______
              (State)
<PAGE>

                                                                              14

Additional abbreviations may also be used although not in the above list.

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