Document:

Exhibit 4.1
                                                                  Execution Copy

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                     RESIDENTIAL ASSET FUNDING CORPORATION,
                                  as Depositor

                            NOVASTAR MORTGAGE, INC.,
                            as Servicer and as Seller

                           FIRST UNION NATIONAL BANK,
                          as Certificate Administrator

                                       and

                            THE CHASE MANHATTAN BANK,
                                   as Trustee

                         POOLING AND SERVICING AGREEMENT

                            Dated as of March 1, 2000

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

                 NovaStar Mortgage Funding Trust, Series 2000-1

       NovaStar Home Equity Loan Asset-Backed Certificates, Series 2000-1

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                                TABLE OF CONTENTS
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                                    ARTICLE I

                                   DEFINITIONS

<S>                <C>                                                                                         <C>
Section 1.01.     Defined Terms..................................................................................1
Section 1.02.     Accounting....................................................................................32
Section 1.03.     Allocation of Certain Interest Shortfalls.....................................................32

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

Section 2.01.     Conveyance of Mortgage Loans, MI Policies and Cap Agreements..................................33
Section 2.02.     Acceptance of Mortgage Loans by Certificate Administrator on behalf of the
                  Trustee.......................................................................................36
Section 2.03.     Repurchase or Substitution of Mortgage Loans by the Seller....................................37
Section 2.04.     Acknowledgement of Trustee....................................................................39
Section 2.05.     Representations, Warranties and Covenants of the Servicer.....................................40
Section 2.06.     Representations and Warranties of the Depositor...............................................41
Section 2.07.     Issuance of Certificates......................................................................41
Section 2.08.     Conveyance of the Subsequent Mortgage Loans...................................................42
Section 2.09.     Miscellaneous REMIC Provisions................................................................42

                                   ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

Section 3.01.     Servicer to Assure Servicing..................................................................43
Section 3.02.     Subservicing Agreements Between Servicer and Subservicers.....................................44
Section 3.03.     Successor Subservicers........................................................................45
Section 3.04.     Liability of the Servicer.....................................................................45
Section 3.05.     Assumption or Termination of Subservicing Agreements by the Certificate
                  Administrator.................................................................................46
Section 3.06.     Collection of Mortgage Loan Payments..........................................................47
Section 3.07.     Withdrawals from the Collection Account.......................................................49
Section 3.08.     Collection of Taxes, Assessments and Similar Items; Servicing Accounts........................50
Section 3.09.     Access to Certain Documentation and Information Regarding the Mortgage Loans..................51
Section 3.10.     Administration of the Cap Agreements..........................................................51
Section 3.11.     Maintenance of Hazard Insurance and Fidelity Coverage.........................................52
Section 3.12.     Due-on-Sale Clauses; Assumption Agreements....................................................54
Section 3.13.     Realization Upon Defaulted Mortgage Loans.....................................................54
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<S>               <C>                                                                                           <C>
Section 3.14.     Certificate Administrator to Cooperate; Release of Mortgage Files.............................56
Section 3.15.     Servicing Compensation........................................................................57
Section 3.16.     Annual Statements of Compliance...............................................................57
Section 3.17.     Annual Independent Public Accountants' Servicing Report.......................................58
Section 3.18.     Optional Purchase of Defaulted Mortgage Loans.................................................58
Section 3.19.     Information Required by the Internal Revenue Service Generally and Reports of
                  Foreclosures and Abandonments of Mortgaged Property...........................................59
Section 3.20.     Purchase of Converted Mortgage Loans..........................................................59
Section 3.21.     [Reserved]....................................................................................59
Section 3.22.     Servicing and Administrating of the MI Policies...............................................59
Section 3.23.     Determination Date Reports....................................................................61
Section 3.24.     Advances......................................................................................61
Section 3.25.     Compensating Interest Payments................................................................62

                                   ARTICLE IV

                                  FLOW OF FUNDS

Section 4.01.     Distributions.................................................................................62
Section 4.02.     Payment Account and Distribution Account......................................................65
Section 4.03.     Statements....................................................................................67
Section 4.04.     Supplemental Interest Account.................................................................69
Section 4.05.     Pre-Funding Account...........................................................................70
Section 4.06.     Interest Coverage Account.....................................................................71
Section 4.07.     Allocation of Realized Losses.................................................................73

                                    ARTICLE V

                                THE CERTIFICATES

Section 5.01.     The Certificates..............................................................................73
Section 5.02.     Registration of Transfer and Exchange of Certificates.........................................74
Section 5.03.     Mutilated, Destroyed, Lost or Stolen Certificates.............................................78
Section 5.04.     Persons Deemed Owners.........................................................................79
Section 5.05.     Appointment of Paying Agent...................................................................79

                                   ARTICLE VI

                         THE SERVICER AND THE DEPOSITOR

Section 6.01.     Liability of the Servicer and the Depositor...................................................79
Section 6.02.     Merger or Consolidation of, or Assumption of the Obligations of,
                  the Servicer or the Depositor.................................................................80
Section 6.03.     Limitation on Liability of the Servicer and Others............................................80
Section 6.04.     Servicer Not to Resign........................................................................81
Section 6.05.     Delegation of Duties..........................................................................81
Section 6.06.     Servicer to Pay Trustee's, and Certificate Administrator's Fees and
                  Expenses; Indemnification.....................................................................81
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                                   ARTICLE VII

                                     DEFAULT
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<S>                  <C>                                                                                       <C>
Section 7.01.     Servicing Default.............................................................................83
Section 7.02.     Certificate Administrator to Act; Appointment of Successor....................................84
Section 7.03.     Waiver of Defaults............................................................................85
Section 7.04.     Notification to Certificateholders............................................................86
Section 7.05.     Survivability of Servicer Liabilities.........................................................86

                                  ARTICLE VIII

                  THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR

Section 8.01.     Duties of the Trustee and the Certificate Administrator.......................................86
Section 8.02.     Rights of Trustee and Certificate Administrator...............................................88
Section 8.03.     Individual Rights of Trustee and Certificate Administrator....................................90
Section 8.04.     Trustee's and Certificate Administrator's Disclaimer..........................................90
Section 8.05.     Notice of Servicing Default...................................................................90
Section 8.06.     [Reserved]....................................................................................90
Section 8.07.     Compensation and Indemnity....................................................................90
Section 8.08.     Replacement of Trustee or Certificate Administrator...........................................91
Section 8.09.     Successor Trustee or Certificate Administrator by Merger......................................92
Section 8.10.     Appointment of Co-Trustee or Separate Trustee.................................................92
Section 8.11.     Eligibility; Disqualification.................................................................93
Section 8.12.     [Reserved]....................................................................................93
Section 8.13.     Representations and Warranties................................................................94
Section 8.14.     Directions to Trustee and Certificate Administrator...........................................95
Section 8.15.     The Agents....................................................................................95
Section 8.16.     Reports by the Certificate Administrator; Trust Fiscal Year...................................95

                                   ARTICLE IX

                                   [Reserved]

                                    ARTICLE X

                              REMIC ADMINISTRATION

Section 10.01.    REMIC Administration..........................................................................96
Section 10.02.    Prohibited Transactions and Activities........................................................98

                                   ARTICLE XI

                                   TERMINATION

Section 11.01.    Termination...................................................................................98
Section 11.02.    Additional Termination Requirements..........................................................100
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                                   ARTICLE XII

                            MISCELLANEOUS PROVISIONS
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<S>              <C>                                                                                           <C>
Section 12.01.    Amendment....................................................................................101
Section 12.02.    Recordation of Agreement; Counterparts.......................................................102
Section 12.03.    Limitation on Rights of Certificateholders...................................................102
Section 12.04.    Governing Law; Jurisdiction..................................................................103
Section 12.05.    Notices......................................................................................103
Section 12.06.    Severability of Provisions...................................................................104
Section 12.07.    Article and Section References...............................................................105
Section 12.08.    Further Assurances...........................................................................105
Section 12.09.    Benefits of Agreement........................................................................105
Section 12.10.    Acts of Certificateholders...................................................................105
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EXHIBITS:

Exhibit A-1     Form of Class A-1 Certificates
Exhibit A-2     Form of Class M-1 Certificates
Exhibit A-3     Form of Class M-2 Certificates
Exhibit A-4     Form of Class M-3 Certificates
Exhibit A-5     Form of Class AIO Certificates
Exhibit A-6     Form of Class O Certificates
Exhibit A-7     Form of Class P Certificates
Exhibit A-8     Form of Class RL Certificates
Exhibit A-9     Form of Class RU Certificates
Exhibit B       Mortgage Loan Schedule
Exhibit C       Form of Addition Notice
Exhibit D       Form of Subsequent Transfer Instrument
Exhibit E       Request for Release
Exhibit F-1     Form of Trustee's Initial Certification
Exhibit F-2     Form of Trustee's Final Certification
Exhibit G       Form of Investment Letter
Exhibit H       Form of Residual Certificate Transfer Affidavit

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                  This Pooling and Servicing Agreement is dated as of March 1,
2000 (the "Agreement"), among RESIDENTIAL ASSET FUNDING CORPORATION, as
depositor (the "Depositor"), NOVASTAR MORTGAGE, INC., as servicer (the
"Servicer") and as seller (the "Seller"), FIRST UNION NATIONAL BANK, as
certificate administrator (the "Certificate Administrator") and THE CHASE
MANHATTAN BANK, as trustee (the "Trustee").

                                   ARTICLE I

                                   DEFINITIONS

                  Section 1.01. Defined Terms.

                  Whenever used in this Agreement or in the Preliminary
Statement, the following words and phrases, unless the context otherwise
requires, shall have the meanings specified in this Article. Unless otherwise
specified, all calculations in respect of interest on the Class A-1
Certificates, the Class AIO Certificates and the Mezzanine Certificates shall be
made on the basis of the actual number of days elapsed on the basis of a 360-day
year and all other calculations of interest described herein shall be made on
the basis of a 360-day year consisting of twelve 30-day months. The Class O
Certificates are not entitled to distributions in respect of interest and,
accordingly, will not accrue interest.

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

                  "Account": The Collection Account, the Pre-Funding Account,
the Interest Coverage Account, the Supplemental Interest Account, and the
Payment Account.

                  "Accrual Period": With respect to each Distribution Date, the
period commencing on the preceding Distribution Date (or in the case of the
first Accrual Period, commencing on the Closing Date) and ending on the day
preceding the current Distribution Date.

                  "Addition Notice": With respect to the transfer of Subsequent
Mortgage Loans to the Trust Fund pursuant to Section 2.08, a notice of the
Depositor's designation of the Subsequent Mortgage Loans to be sold to the Trust
Fund and the aggregate principal balance of such Subsequent Mortgage Loans as of
the Subsequent Cut-off Date. The Addition Notice shall be given not later than
six Business Days prior to the related Subsequent Transfer Date and shall be
substantially in the form attached hereto as Exhibit C.

                  "Adjustable Rate Mortgage Loan": A Mortgage Loan which
provides at any period during the life of such loan for the adjustment of the
Mortgage Rate payable in respect thereto. The Adjustable Rate Mortgage Loans are
identified as such on the Mortgage Loan Schedule.

                  "Adjustment Date": With respect to each Adjustable Rate
Mortgage Loan, each adjustment date, on which the Mortgage Rate of such Mortgage
Loan changes pursuant to the related Mortgage Note.
<PAGE>
                  "Administrative Fee": With respect to each Distribution Date,
the sum of the MI Premium, the Servicing Fee and the Certificate Administrator
Fee with respect to such Distribution Date.

                  "Administrative Fee Rate": As to each Distribution Date, the
sum of (i) the Certificate Administrator Fee Rate, (ii) the Servicing Fee Rate,
and (iii) the total MI Premiums due during the related Due Period, expressed as
an annual percentage rate of the Pool Balance as of the beginning of that Due
Period.

                  "Advance": As to any Mortgage Loan, any advance made by the
Servicer in respect of any Distribution Date pursuant to Section 3.24.

                  "Adverse REMIC Event":  As defined in Section 10.01(f) hereof.

                  "Affiliate": With respect to any Person, any other Person
controlling, controlled by or under common control with such Person. For
purposes of this definition, "control" means the power to direct the management
and policies of a Person, directly or indirectly, whether through ownership of
voting securities, by contract or otherwise and "controlling" and "controlled"
shall have meanings correlative to the foregoing.

                  "Agreement": This Pooling and Servicing Agreement and all
amendments hereof and supplements hereto.

                  "Allocable Cap Payment Amount": With respect to any Cap
Payment and Distribution Date:

                  (i) if such Distribution Date is the first Distribution Date
following the Trust's Receipt of that Cap Payment, one-third of the amount of
that Cap Payment;

                  (ii) if such Distribution Date is the second Distribution Date
following the Trust's receipt of that Cap Payment, the sum of one-third of the
amount of that Cap Payment plus any remaining portion of the one-third amount on
the prior Distribution Date which was not applied to any Supplemental Interest
Payment on the prior Distribution Date; and

                  (iii) if such Distribution Date is the third Distribution Date
following the Trust's receipt of that Cap Payment, any remaining portion thereof
which was not applied to any Supplemental Interest Payment on the prior two
Distribution Dates.

                  "Allocated Realized Loss Amount": With respect to any
Distribution Date and any Class of Mezzanine Certificates, the Realized Losses
allocated to such Class of Certificates on such Distribution Date pursuant to
Section 4.07 hereof.

                  "Applicable Regulations": As to any Mortgage Loan, all federal
and state laws, statutes, rules and regulations applicable thereto.

                  "Appraised Value": The appraised value of a Mortgaged Property
based upon the appraisal made at the time of the origination of the related
Mortgage Loan. With respect to a Mortgage Loan the proceeds of which were used
to refinance an existing mortgage loan, the

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appraised value of the Mortgaged Property based upon the appraisal (as reviewed
and approved by the Seller) obtained at the time of refinancing.

                  "Assignment of Mortgage": An assignment of Mortgage, notice of
transfer or equivalent instrument, in recordable form, which is sufficient under
the laws of the jurisdiction wherein the related Mortgaged Property is located
to reflect of record the sale of the Mortgage, which assignment, notice of
transfer or equivalent instrument may be in the form of one or more blanket
assignments covering Mortgages secured by Mortgaged Properties located in the
same county, if permitted by law.

                  "Assumed Final Maturity Date": As to each Class of
Certificates, the Distribution Date in July 25, 2030.

                  "Available Funds Cap Carryforward Amount": With respect to any
Class of Underwritten Certificates and any Distribution Date, the sum of (i) the
positive excess, if any, of (x) the aggregate, cumulative amount of REMIC
Available Funds Cap Shortfall Amounts for such Class on all prior Distribution
Dates over (y) the aggregate, cumulative amount of Supplemental Interest
Payments actually paid to the Holders of that Class on all prior Distribution
Date pursuant to those clauses of Section 4.04(c) which relate to payments to
that Class, plus (ii) interest on the amount described in clause (i) at a rate
equal to the related Formula Rate for such Class and Distribution Date.

                  "Balloon Mortgage Loan": A Mortgage Loan that provides for the
payment of the unamortized principal balance of such Mortgage Loan in a single
payment at the maturity of such Mortgage Loan that is substantially greater than
the preceding monthly payment.

                  "Balloon Payment": A payment of the unamortized principal
balance of a Mortgage Loan in a single payment at the maturity of such Mortgage
Loan that is substantially greater than the preceding Monthly Payment.

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

                  "Base Prospectus": The base Prospectus, dated September 9,
1999, with respect to the Offered Certificates.

                  "Basic Documents": This Agreement, the Purchase Agreement,
each Subsequent Transfer Instrument, the Side Indemnity Letter, the REMIC
Interests Sale Agreement, the Converted Loan Purchase Agreement, the
Underwriting Agreement, and the other documents and certificates delivered in
connection with any of the above.

                  "Book-Entry Certificates": Any of the Certificates that shall
be registered in the name of the Depository or its nominee, the ownership of
which is reflected on the books of the Depository or on the books of a Person
maintaining an account with the Depository (directly, as a Depository
Participant, or indirectly, as an indirect participant in accordance with the
rules of the Depository and as described in Section 5.02 hereof). On the Closing
Date, the Class A-1 Certificates, the Class AIO Certificates and the Mezzanine
Certificates shall be Book-Entry Certificates.

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                  "Business Day": Any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the City of New York, Delaware,
California or Kansas or in the city in which the corporate trust offices of the
Trustee and the Certificate Administrator are located, are required or
authorized by law to be closed.

                  "Cap Payment": Any payment received by the Trust under any Cap
Agreement.

                  "Cap Agreement": each of (i) the interest rate cap agreement,
dated as of July 23, 1998, from Merrill Lynch Capital Services, Inc., in the
notional principal amount of $100,000,000 with a 90-day LIBOR strike price of
5.75%, maturing July 23, 2001, (ii) the interest rate cap agreement, dated as of
December 13, 1999, from Citibank, N.A., in the notional principal amount of
$50,000,000 with a 90-day LIBOR strike price of 6.00%, maturing December 13,
2001 and (iii) the interest rate cap agreement, dated as of February 18, 2000,
from First Union National Bank, the notional principal amount of $30,000,000,
with a 90-day LIBOR strike price of 6.50%, maturing February 18, 2003.

                  "Cash Liquidation": As to any defaulted Mortgage Loan other
than a Mortgage Loan as to which an REO Acquisition occurred, a determination by
the Servicer that it has received all Liquidation Proceeds and other payments or
cash recoveries which the Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.

                  "Certificate": Any Regular Certificate, Class RL or Class RU
Certificate.

                  "Certificate Administrator": First Union National Bank, a
national banking association, and any successor thereto.

                  "Certificate Administrator Fee": With respect to each
Distribution Date, the product of (i) the Certificate Administrator Fee Rate
divided by 12 and (ii) the sum of the Principal Balance of the Mortgage Loans
and the Pre-Funded Amount as of the first day of the related Due Period.

                  "Certificate Administrator Fee Rate":  0.0125% per annum.

                  "Certificateholder" or "Holder": The Person in whose name a
Certificate is registered in the Certificate Register, except that a
Disqualified Organization or non-U.S. Person shall not be a Holder of a Residual
Certificate for any purpose hereof.

                  "Certificate Margin": With respect to the Class A-1
Certificates on each Distribution Date (A) on or prior to the Rate Step-Up Date,
0.35% per annum and (B) after the Rate Step-Up Date, 0.70% per annum. With
respect to the Class M-1 Certificates on each Distribution Date (A) on or prior
to the Rate Step-Up Date, 0.65% per annum and (B) after the Rate Step-Up Date,
0.975% per annum. With respect to the Class M-2 Certificates on each
Distribution Date (A) on or prior to the Rate Step-Up Date, 1.30% per annum and
(B) after the Rate Step-Up Date, 1.95% per annum. With respect to the Class M-3
Certificates on each Distribution Date (A) on or prior to the Rate Step-Up Date,
2.70% per annum and (B) after the Rate Step-Up Date, 4.05% per annum.

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<PAGE>
                  "Certificate Owner": With respect to each Book-Entry
Certificate, any beneficial owner thereof.

                  "Certificate Principal Balance": With respect to any Class of
Regular Certificates (other than the Class AIO Certificates, the Class O
Certificates and the Class P Certificates) immediately prior to any Distribution
Date, will be equal to the Initial Certificate Principal Balance thereof reduced
by the sum of all amounts actually distributed in respect of principal of such
Class and, in the case of a Mezzanine Certificate, Allocated Realized Loss
Amounts applied with respect to that class on all prior Distribution Dates. With
respect to the Class O Certificates as of any date of determination, an amount
equal to the excess, if any, of (A) the Principal Balances of the Mortgage Loans
over (B) the then aggregate Certificate Principal Balances of the Class A-1
Certificates and the Mezzanine Certificates then outstanding. The Class AIO
Certificates and the Class P Certificates will not have a Certificate Principal
Balance.

                  "Certificate Register": The register maintained by the
Certificate Registrar in which the Certificate Registrar shall provide for the
registration of Certificates and of transfers and exchanges of Certificates.

                  "Certificate Registrar": Initially, the Certificate
Administrator, in its capacity as Certificate Registrar, or any successor to the
Certificate Administrator in such capacity.

                  "Certificates Sale Agreement": The Certificates Sale
Agreement, dated as of March 31, 2000, between NovaStar Mortgage Funding
Corporation and NovaStar REMIC Financing Corp.

                  "Class": Collectively, Certificates which have the same
priority of payment and bear the same class designation and the form of which is
identical except for variation in the Percentage Interest evidenced thereby.

                  "Class A-1 Certificate": Any one of the Class A-1 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-1, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

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

                  "Class A-1 Principal Distribution Amount": The excess of (x)
the Certificate Principal Balance of the Class A-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
88.00% and (ii) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,150,000.

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<PAGE>
                  "Class AIO Certificate": Any one of the Class AIO Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-5, representing the right to distributions
as set forth herein and therein and evidencing one or more regular interests in
the Upper-Tier REMIC.

                  "Class AIO Current Interest": With respect to any Distribution
Date is equal to the excess of (x) Interest Remittance Formula Amount for that
Distribution Date less (y) the sum of (i) the Administrative Fees, (ii) the
REMIC Current Interest for the Class A-1 Certificates, (iii) the REMIC Current
Interest for the Class M-1 Certificates, (iv) the REMIC Current Interest for the
Class M-2 Certificates, and (v) the REMIC Current Interest for the Class M-3
Certificates. The "REMIC Current Interest" on each of the Class A-1, Class M-1,
Class M-2 and Class M-3 Certificates will be calculated for this purpose by
using the REMIC Available Funds Cap Rate.

                  "Class AIO Monthly Distributable Amount": For any Distribution
Date, the sum of (1) the Class AIO Remaining Monthly Interest Distributable
Amount for that Distribution Date and (2) Excess Supplemental Amounts for that
Distribution Date.

                  "Class AIO Monthly Interest Distributable Amount": As of any
Distribution Date, the sum of (1) the Class AIO Unpaid Interest Shortfall Amount
for that Distribution Date and (2) the Class AIO Current Interest for that
Distribution Date.

                  "Class AIO Pass-Through Rate": For any Distribution Date, the
percentage equivalent of a fraction, the numerator of which is equal to the
Class AIO Current Interest for that Distribution Date and the denominator of
which is the product of (1) the actual number of days in the related Accrual
Period, divided by 360 and (2) the aggregate Principal Balance of the Mortgage
Loans as of the first day of the preceding Due Period.

                  "Class AIO Remaining Monthly Interest Distributable Amount":
As of any Distribution Date, the excess of (i) the Class AIO Current Interest
over (ii) the sum of the Supplemental Interest Payments for all Classes of
Underwritten Certificates on that Distribution Date.

                  "Class AIO Unpaid Interest Shortfall Amount": For the first
Distribution Date, zero and for any Distribution Date after the first
Distribution Date, the amount, if any, by which (a) the Class AIO Monthly
Interest Distributable Amount for the immediately preceding Distribution Date
exceeds (b) the aggregate amount actually paid to the Holders of the Class AIO
Certificates on such immediately preceding Distribution Date pursuant to Section
4.01(a)(i)(A)(x) hereof plus the amount actually transferred to the Supplemental
Interest Account on such immediately preceding Distribution Date pursuant to
Section 4.01(a)(i)(A)(y) hereof, plus interest on such sum, at the Class AIO
Pass-Through Rate for the related Accrual Period.

                  "Class M-1 Certificate": Any one of the Class M-1 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-2, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

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

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<PAGE>
of the Class A-1Principal Distribution Amount on such Distribution Date) and
(ii) the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such Distribution Date over (y) the lesser of (A) the product of (i)
92.00% and (ii) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,150,000.

                  "Class M-2 Certificate": Any one of the Class M-2 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-3, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

                  "Class M-2 Principal Distribution Amount": The excess of (x)
the sum of (i) the Certificate Principal Balance of the Class A-1 Certificates
(after taking into account the payment of the Class A-1Principal Distribution
Amount on such Distribution Date), (ii) the Certificate Principal Balance of the
Class M-1 Certificates (after taking into account the payment of the Class M-1
Principal Distribution Amount on such Distribution Date) and (iii) the
Certificate Principal Balance of the Class M-2 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 94.40% and
(ii) the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,150,000.

                  "Class M-3 Certificate": Any one of the Class M-3 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-4, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

                  "Class M-3 Principal Distribution Amount": The excess of (x)
the sum of (i) the Certificate Principal Balance of the Class A-1 Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount on such Distribution Date), (ii) the Certificate Principal Balance of the
Class M-1 Certificates (after taking into account the payment of the Class M-1
Principal Distribution Amount on such Distribution Date), (iii) the Certificate
Principal Balance of the Class M-2 Certificates (after taking into account the
payment of the Class M-2 Principal Distribution Amount on such Distribution
Date) and (iv) the Certificate Principal Balance of the Class M-3 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 96.80% and (ii) the aggregate Principal Balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and

                                       7
<PAGE>
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $1,150,000.

                  "Class O Certificate": Any one of the Class O Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-6, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

                  "Class P Certificate": Any one of the Class P Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-7, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the
Upper-Tier REMIC.

                  "Class RL Certificate": Any one of the Class RL Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-8, representing the right to distributions
as set forth herein, and evidencing an interest designated as the "residual
interest" in the Lower-Tier REMIC for the purposes of the REMIC Provisions.

                  "Class RU Certificate": Any one of the Class RU Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-9, representing the right to distributions
as set forth herein, and evidencing an interest designated as the "residual
interest" in the Upper-Tier REMIC for the purposes of the REMIC Provisions.

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

                  "Closing Date":  March 31, 2000.

                  "Code": The Internal Revenue Code of 1986 as it may be amended
from time to time.

                  "Collection Account": The account or accounts created and
maintained by the Servicer pursuant to Section 3.06(d) hereof, which must be an
Eligible Account.

                  "Compensating Interest": With respect to any Determination
Date, an amount equal to the lesser of (i) the aggregate amount of Prepayment
Interest Shortfall for the related Prepayment Period and (ii) the Servicing Fee
for the related Distribution Date.

                  "Conversion Date": The date on which a Convertible Mortgage
Loan becomes a Converted Mortgage Loan according to the terms of the related
Mortgage Note.

                                       8
<PAGE>
                  "Converted Loan Purchase Agreement": The Converted Loan
Purchase Agreement, dated as of March 1, 2000, among the Converted Loan
Purchaser, the Certificate Administrator, the Trustee and the Servicer.

                  "Converted Loan Purchaser": NovaStar Capital, Inc., a Delaware
corporation, and any successor thereto.

                  "Converted Mortgage Loan": Any Convertible Mortgage Loan as to
which the Mortgagor has exercised the option to convert to a fixed Mortgage Rate
and satisfied all of the conditions to conversion set forth in the Mortgage
Note.

                  "Convertible Mortgage Loans": Any Mortgage Loan evidenced by a
Mortgage Note that according to its terms is convertible at the option of the
Mortgagor from a variable Mortgage Rate to a fixed Mortgage Rate, subject to
satisfaction of the conditions set forth in such note.

                  "Corporate Trust Office": With respect to the Trustee and the
Paying Agent, the principal corporate trust office at which at any particular
time its corporation trust business shall be administered, which office at the
date of execution of this Agreement is located at 450 West 33rd Street, 14th
Floor, New York, New York 10001, Attention: Capital Markets Fiduciary Services,
NovaStar 2000-1. With respect to the Certificate Administrator and the
Certificate Registrar, the principal corporate trust office at which at any
particular time its corporate trust business shall be administered, which office
at the date of the execution of this instrument is located at 401 S. Tryon
Street, NC 1179, 12th Floor, Charlotte, North Carolina 28288-1179, Attention:
Structured Finance Trust Services (NovaStar Mortgage Funding Trust, Series
2000-1).

                  "Credit Enhancement Percentage": For any Distribution Date,
the percentage equivalent of a fraction, (x) the numerator of which is the sum
of the aggregate Certificate Principal Balances of the Mezzanine Certificates
and the Class O Certificates, and (y) the denominator of which is the sum of (i)
the aggregate Principal Balance of the Mortgage Loans and (ii) the Pre-Funded
Amount, in each case calculated prior to taking into account the distribution of
the Principal Distribution Amount to the Holders of the Certificates then
entitled to distributions of principal on such Distribution Date.

                  "Crossover Date": The later to occur of (i) the Distribution
Date occurring in April 2003 and (ii) the first Distribution Date on which the
Credit Enhancement Percentage (calculated for this purpose only prior to taking
into account the distribution of the Principal Distribution Amount to the
Certificates then entitled to distributions of principal on such Distribution
Date) is equal to or greater than 12%.

                  "Cumulative Loss Percentage": As to any Distribution Date, the
percentage equivalent of the fraction obtained by dividing (i) the aggregate
amount of Realized Losses on the Mortgage Loans (after giving effect to coverage
provided by any MI Policy) from the Cut-off Date through such Distribution Date
by (ii) the sum of the aggregate Principal Balance of the Initial Mortgage Loans
as of the Cut-off Date plus the Original Pre-Funded Amount.

                                       9
<PAGE>
                  "Cut-off Date": With respect to each Initial Mortgage Loan,
the later of (i) the date of origination of such Mortgage Loan or (ii) March 1,
2000.

                  "Cut-off Date Aggregate Principal Balance": With respect to
the Mortgage Pool, the aggregate of the Cut-off Date Principal Balances of the
Initial Mortgage Loans.

                  "Cut-off Date Principal Balance": With respect to any Mortgage
Loan, the unpaid principal balance thereof as of the Cut-off Date or Subsequent
Cut-off Date, as the case may be (or as of the applicable date of substitution
with respect to an Eligible Substitute Mortgage Loan).

                  "Debt Service Reduction": With respect to any Mortgage Loan, a
reduction in the scheduled Monthly Payment for such Mortgage Loan by a court of
competent jurisdiction in a proceeding under the Bankruptcy Code, except such a
reduction resulting from a Deficient Valuation.

                  "Deficient Valuation": With respect to any Mortgage Loan, a
valuation of the related Mortgaged Property by a court of competent jurisdiction
in an amount less than the then outstanding principal balance of the Mortgage
Loan, which valuation results from a proceeding initiated under the Bankruptcy
Code.

                  "Definitive Certificates": The Class P, Class O, Class RU and
Class RL Certificates, and such other classes of certificates as become
definitive certificates pursuant to Section 5.02(c) hereof.

                  "Deleted Mortgage Loan": A Mortgage Loan replaced or to be
replaced by one or more Eligible Substitute Mortgage Loans.

                  "60-Day Delinquency Percentage": As of the last day of any Due
Period, the percentage equivalent of a fraction, (i) the numerator of which
equals the aggregate Principal Balance of the Mortgage Loans that are 60 or more
days delinquent, in foreclosure or converted to REO Properties as of such last
day of such Due Period, and (ii) the denominator of which is the aggregate
Principal Balance of the Mortgage Loans as of the last day of such Due Period.

                  "90-Day Delinquency Percentage": As of the last day of any Due
Period, the percentage equivalent of a fraction, (i) the numerator of which
equals the aggregate Principal Balance of the Mortgage Loans that are 90 or more
days delinquent, in foreclosure or converted to REO Properties as of such last
day of such Due Period, and (ii) the denominator of which is the aggregate
Principal Balance of the Mortgage Loans as of the last day of such Due Period.

                  "Delinquent": Any Mortgage Loan, the Monthly Payment due on a
Due Date which is not made by the Close of Business on the next scheduled Due
Date for such Mortgage Loan.

                  "Depositor": Residential Asset Funding Corporation, a North
Carolina corporation, or any successor in interest.

                                       10
<PAGE>
                  "Depository": The initial Depository shall be The Depository
Trust Company, whose nominee is Cede & Co., or any other organization registered
as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. The Depository shall initially be the registered Holder of the
Book-Entry Certificates. The Depository shall at all times be a "clearing
corporation" as defined in Section 8-102(3) of the Uniform Commercial Code of
the State of New York.

                  "Depository Participant": A broker, dealer, bank or other
financial institution or other person for whom from time to time a Depository
effects book-entry transfers and pledges of securities deposited with the
Depository.

                  "Determination Date": With respect to any Distribution Date,
the 15th day of the calendar month in which such Distribution Date occurs or, if
such 15th day is not a Business Day, the Business Day immediately preceding such
15th day.

                  "Determination Date Report": The meaning specified in Section
3.23 hereof.

                  "Disqualified Organization": "Disqualified Organization" shall
have the meaning set forth from time to time in the definition thereof at
Section 860E(e)(5) of the Code and applicable to the Trust.

                  "Distribution Date": The 25th day of any calendar month, or if
such 25th day is not a Business Day, the Business Day immediately following such
25th day, commencing in April 2000.

                  "Due Date": The first day of the month of the related
Distribution Date.

                  "Due Period": With respect to any Mortgage Loan and Due Date,
the period commencing on the second day of the month preceding the month of such
Distribution Date and ending on the related Due Date.

                  "Eligible Account": An account that is either: (A) a
segregated account or accounts maintained with an institution whose deposits are
insured by the FDIC, the unsecured and uncollateralized long-term debt
obligations of which institution shall be rated AA or higher by Standard &
Poor's and Aa2 or higher by Moody's and in the highest short-term rating
category by each of the Rating Agencies, and which is (i) a federal savings and
loan association duly organized, validly existing and in good standing under the
federal banking laws, (ii) an institution duly organized, validly existing and
in good standing under the applicable banking laws of any state, (iii) a
national banking association duly organized, validly existing and in good
standing under the federal banking laws, (iv) a principal subsidiary of a bank
holding company or (v) approved in writing by each Rating Agency or (B) a
segregated trust account or accounts maintained with the trust department of a
federal or state chartered depository institution acceptable to each Rating
Agency, having capital and surplus of not less than $100,000,000, acting in its
fiduciary capacity.

                  "Eligible Investments":  One or more of the following:

                                       11
<PAGE>
                  (i) direct obligations of, and obligations fully guaranteed
by, the United States of America, any of the Federal Home Mortgage Corporation,
the Federal National Mortgage Association, the Federal Home Loan Banks or any
agency or instrumentality of the United States of America the obligations of
which are backed by the full faith and credit of the United States of America;

                  (ii) (A) demand and time deposits in, certificates of deposit
of, banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Trustee, the Certificate
Administrator or their agents acting in their respective commercial capacities)
incorporated under the laws of the United States of America or any State thereof
and subject to supervision and examination by federal and/or state authorities,
so long as at the time of such investment or contractual commitment providing
for such investment, such depository institution or trust company has a
short-term unsecured debt rating in the highest available rating category of
each of the Rating Agencies and provided that each such investment has an
original maturity of no more than 365 days, and (B) any other demand or time
deposit or deposit which is fully insured by the Federal Deposit Insurance
Corporation;

                  (iii) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (i) above and entered into with
a depository institution or trust company (acting as a principal) rated "A" or
higher by S&P and A2 or higher by Moody's; provided, however, that collateral
transferred pursuant to such repurchase obligation must (A) be valued daily at
current market price plus accrued interest, (B) pursuant to such valuation,
equal, at all times, 105% of the cash transferred in exchange for such
collateral and (C) be delivered in such a manner as to accomplish perfection of
a security interest in the collateral by possession of certificated securities.

                  (iv) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of America
or any State thereof which has a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of such
investment;

                  (v) commercial paper having an original maturity of less than
365 days and issued by an institution having a short-term unsecured debt rating
in the highest available rating category of each of the Rating Agencies at the
time of such investment;

                  (vi) a guaranteed investment contract approved by each of the
Rating Agencies and issued by an insurance company or other corporation having a
long-term unsecured debt rating in the highest available rating category of each
of the Rating Agencies at the time of such investment;

                  (vii) money market funds having ratings in the highest
available long-term rating category of each of the Rating Agencies at the time
of such investment; any such money market funds which provide for demand
withdrawals being conclusively deemed to satisfy any maturity requirement for
Eligible Investments set forth in the Agreement; and

                  (viii) any investment approved in writing by each of the
Rating Agencies;

                                       12
<PAGE>
                  provided, however, that each such instrument shall be acquired
in an arm's-length transaction and no such instrument shall be an Eligible
Investment if it represents, either (1) the right to receive only interest
payments with respect to the underlying debt instrument or (2) the right to
receive both principal and interest payments derived from obligations underlying
such instrument and the principal and interest payments with respect to such
instrument provide a yield to maturity greater than 120% of the yield to
maturity at par of such underlying obligations; provided, further, however, that
each such instrument acquired shall not be acquired at a price in excess of par.
The Trustee or Certificate Administrator may purchase from or sell to itself or
an affiliate, as principal or agent, the Eligible Investments listed above.

                  "Eligible Substitute Mortgage Loan": A Mortgage Loan
substituted by the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, as confirmed in an Officer's Certificate delivered to the
Certificate Administrator, (i) have an outstanding principal balance, after
deduction of the principal portion of the monthly payment due in the month of
substitution (or in the case of a substitution of more than one Mortgage Loan
for a Deleted Mortgage Loan, an aggregate outstanding principal balance, after
such deduction), not in excess of the outstanding principal balance of the
Deleted Mortgage Loan (the amount of any shortfall to be deposited by the Seller
in the Collection Account in the month of substitution); (ii) comply in all
material respects with each representation and warranty set forth in clauses
(ii) through (lxviii) of Section 3.01(b) of the Purchase Agreement other than
clauses (iii), (v)-(xiv), (xli), (lv) and (lvi); (iii) have a Mortgage Rate and,
with respect to an Adjustable Rate Mortgage Loan, a Gross Margin no lower than
and not more than 1% per annum higher than the Mortgage Rate and Gross Margin,
respectively, of the Deleted Mortgage Loan as of the date of substitution; (iv)
have a Loan-to-Value Ratio, at the time of substitution no higher than that of
the Deleted Mortgage Loan at the time of substitution; (v) have a remaining term
to stated maturity not greater than (and not more than one year less than) that
of the Deleted Mortgage Loan; (vi) not be 30 days or more delinquent; (vii) not
be a negative amortization loan; (viii) have a lien priority equal to or
superior to the lien priority of the Deleted Mortgage Loan; and (ix) be a
Qualified Replacement Mortgage.

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

                  "Excess Supplemental Amounts": With respect to any Cap
Payment, the portion of the Allocable Cap Payment Amount remaining on any
Distribution Date following the Trustee's or Certificate Administrator's receipt
of that Cap Payment which was not applied to Supplemental Interest Payments on
that Distribution Date or on the prior two Distribution Dates.

                  "Expense Adjusted Mortgage Rate": With respect to any Mortgage
Loan, as of any date of determination, a per annum rate of interest equal to the
then applicable Mortgage Rate for such Mortgage Loan minus the Administrative
Fee Rate.

                  "Fannie Mae": Federal National Mortgage Association or any
successor thereto.

                  "FDIC": Federal Deposit Insurance Corporation or any successor
thereto.

                                       13
<PAGE>
                  "Fixed Rate Mortgage Loan": A first lien Mortgage Loan which
provides for a fixed Mortgage Rate payable with respect thereto. The Fixed Rate
Mortgage Loans are identified as such on the Mortgage Loan Schedule.

                  "Foreclosure Profit": With respect to a Liquidated Mortgage
Loan, the amount, if any, by which (i) the aggregate of its Net Liquidation
Proceeds exceeds (ii) the related Principal Balance (plus accrued and unpaid
interest thereon at the applicable Mortgage Rate from the date interest was last
paid through the date of receipt of the final Liquidation Proceeds) of such
Liquidated Mortgage Loan immediately prior to the final recovery of its
Liquidation Proceeds.

                  "Formula Rate": For any Distribution Date and the Class A-1
Certificates and the Mezzanine Certificates, LIBOR plus the related Certificate
Margin.

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

                  "Funding Period": The period beginning on the Closing Date and
ending on the earlier to occur of the date upon which (a) the amount on deposit
in the Pre-Funding Account (exclusive of investment income) has been reduced to
less than $10,000 or (b) June 25, 2000.

                  "Gross Margin": With respect to each Adjustable Rate Mortgage
Loan, the fixed percentage set forth in the related Mortgage Note that is added
to the Index on each Adjustment Date in accordance with the terms of the related
Mortgage Note used to determine the Mortgage Rate for such Mortgage Loan.

                  "Independent": When used with respect to any specified Person,
any such Person who (a) is in fact independent of the Depositor, the Servicer
and their respective Affiliates, (b) does not have any direct financial interest
in or any material indirect financial interest in the Depositor or the Servicer
or any Affiliate thereof, and (c) is not connected with the Depositor or the
Servicer or any Affiliate thereof as an officer, employee, promoter,
underwriter, trustee, partner, director or Person performing similar functions;
PROVIDED, HOWEVER, that a Person shall not fail to be Independent of the
Depositor or the Servicer or any Affiliate thereof merely because such Person is
the beneficial owner of 1% or less of any class of securities issued by the
Depositor or the Servicer or any Affiliate thereof, as the case may be.

                  "Index": With respect to each Adjustable Rate Mortgage Loan
and with respect to each related Adjustment Date, the index as specified in the
related Mortgage Note.

                  "Initial Certificate Principal Balance": With respect to any
Regular Certificate (other than a Class AIO or a Class P Certificate), the
amount designated "Initial Certificate Principal Balance" on the face thereof.

                  "Initial Mortgage Loan": Any of the Mortgage Loans included in
the Trust Fund as of the Closing Date. The aggregate principal balance of the
Initial Mortgage Loans as of the Closing Date is equal to $128,212,554.26.

                  "Insurance Proceeds": Proceeds paid by any insurer pursuant to
any insurance policy covering a Mortgage Loan which are required to be remitted
to the Servicer, including MI

                                       14
<PAGE>
Insurance Proceeds in the case of Mortgage Loans covered under a MI Policy, or
amounts required to be paid by the Servicer hereunder, net of any component
thereof (i) covering any expenses incurred by or on behalf of the Servicer in
connection with obtaining such proceeds, (ii) that is applied to the restoration
or repair of the related Mortgaged Property or (iii) released to the Mortgagor
in accordance with the Servicer's normal servicing procedures.

                  "Interest Coverage Account": The account established and
maintained pursuant to Section 4.06 , as defined therein, which must be an
Eligible Account.

                  "Interest Coverage Amount": The amount to be paid by the
Depositor to the Certificate Administrator for deposit in the Interest Coverage
Account on the Closing Date pursuant to Section 4.06, which amount is
$1,664,556.07.

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

                  "Interest Remittance Amount": With respect to any Distribution
Date, that portion of the REMIC Available Funds for such Distribution Date
allocable to interest and Prepayment Charges.

                  "Interest Remittance Formula Amount": As of any Distribution
Date is an amount equal to (1) the product of (x) 1/12 of the Weighted Average
Mortgage Rate of the Mortgage Pool as of the beginning of the prior Due Period
and (y) the aggregate Principal Balances of the Mortgage Loans as of the
beginning of the prior Due Period minus (2) the aggregate amount of Relief Act
Shortfalls and Prepayment Interest Shortfalls for the prior period.

                  "LIBOR": With respect to any Accrual Period, the rate
determined by the Certificate Administrator on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rates appear on the Telerate
Page 3750, as of 11:00 a.m. (London time) on such Interest Determination Date.
If such rate does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant Accrual Period (commencing on the first day of such
Accrual Period). The Certificate Administrator will request the principal London
office of each of the Reference Banks to provide a quotation of its rate. If at
least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Certificate Administrator, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period).

                  The establishment of LIBOR on each Interest Determination Date
by the Certificate Administrator and the Certificate Administrator's calculation
of the rate of interest applicable to the Certificates for the related Accrual
Period shall (in the absence of manifest error) be final and binding.

                                       15
<PAGE>
                  "LIBOR Business Day": Any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the State of New York or
in the city of London, England are required or authorized by law to be closed.

                  "Lifetime Rate Cap": With respect to each Adjustable Rate
Mortgage Loan with respect to which the related Mortgage Note provides for a
lifetime rate cap, the maximum Mortgage Rate permitted over the life of such
Mortgage Loan under the terms of such Mortgage Note, as set forth on the
Mortgage Loan Schedule.

                  "Liquidated Mortgage Loan": With respect to any Distribution
Date, any Mortgage Loan in respect of which the Servicer has determined, in
accordance with the servicing procedures specified in Article III hereof, as of
the end of the related Prepayment Period that substantially all Liquidation
Proceeds which it reasonably expects to recover with respect to the disposition
of the related Mortgaged Property or REO Property have been recovered.

                  "Liquidation Expenses": Out-of-pocket expenses (exclusive of
overhead) which are incurred by or on behalf of the Servicer in connection with
the liquidation of any Mortgage Loan and not recovered under any insurance
policy, such expenses, including, without limitation, legal fees and expenses,
any unreimbursed amount expended respecting the related Mortgage Loan and any
related and unreimbursed expenditures for real estate property taxes or for
property restoration, preservation or insurance against casualty loss or damage.

                  "Liquidation Proceeds": Proceeds (including Insurance
Proceeds) received in connection with the liquidation of any Mortgage Loan or
related REO Property.

                  "Loan-to-Value Ratio": With respect to any Mortgage Loan, as
of any date of determination, a fraction expressed as a percentage, the
numerator of which is the then current principal amount of the Mortgage Loan,
and the denominator of which is the lesser of the purchase price or the
Appraised Value of the related Mortgaged Property.

                  "Loan Year": With respect to any Mortgage Loan, the one year
period commencing on the day succeeding the origination of such Mortgage Loan
and ending on the anniversary date of such Mortgage Loan, and each annual period
thereafter.

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

                  "Lower-Tier Interest 1": The interest of that name established
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 2": The interest of that name established
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 3": The interest of that name established
pursuant to Section 2.09(b) hereof.

                                       16
<PAGE>
                  "Lower-Tier Interest 4": The interest of that name established
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 5": The interest of that name established
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Interest 6": The interest of that name established
pursuant to Section 2.09(b) hereof.

                  "Lower-Tier Pass-Through Rate": As to each of the respective
Lower-Tier Interests, the applicable "Lower-Tier Pass-Through Rate" set forth in
Section 2.09(b) hereof.

                  "Lower-Tier REMIC": The segregated pool of assets consisting
of the Mortgage Loans, the Accounts (other than the Non-REMIC Accounts), any REO
Property and any proceeds of the foregoing.

                  "Lower-Tier REMIC Interests": As defined in Section 2.09(b)
hereof.

                  "Lower-Tier REMIC Regular Interests": As defined in Section
2.09(b) hereof.

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

                  "Maximum Collateral Amount": The sum of the Principal Balance
as of the Cut-off Date of the Initial Mortgage Loans and the Principal Balance
of each Subsequent Mortgage Loan as of its respective Subsequent Cut-Off Date.

                  "Maximum Mortgage Rate": With respect to each Adjustable Rate
Mortgage Loan, the percentage set forth in the related Mortgage Note as the
maximum Mortgage Rate thereunder.

                  "Mezzanine Certificate": Any Class M-1 Certificate, Class M-2
Certificate or Class M-3 Certificate.

                  "MI Insurance Agreement": A private mortgage insurance
agreement issued by an MI Insurer pursuant to which MI Policies are issued on
individual Mortgage Loans.

                  "MI Insurance Proceeds": Proceeds paid by the MI Insurers
pursuant to an MI Policy.

                  "MI Insurer": each of (i) PMI Mortgage Insurance Co., an
Arizona mortgage insurance company, and (ii) Radian Guaranty Inc., a
Pennsylvania mortgage insurance company, and their successors and assigns.

                  "MI Insurer Insolvency Event": (A) The determination by the
applicable regulatory or supervisory agency having jurisdiction over an MI
Insurer that such MI Insurer is insolvent or unable to pay its obligations as
they mature, (B) following the failure of an MI Insurer to pay any claim under
the related MI Policy, the determination by the Servicer that such

                                       17
<PAGE>
MI Insurer is insolvent or unable to pay its obligations as they become due, (C)
the long-term rating on the claims paying ability of an MI Insurer shall be
lowered by Moody's below A-2, if such MI Insurer is then rated by Moody's, or
shall be lowered by S&P below A, if such MI Insurer is then rated by S&P.

                  "MI Policy": A private mortgage insurance policy underwritten
by an MI Insurer with respect to an individual Mortgage Loan, issued pursuant to
an MI Insurance Agreement.

                  "MI Premium": The primary mortgage insurance premium for each
MI Policy, payable annually to an MI Insurer, as specified in the MI Insurance
Agreement, and with respect to each monthly premium payment, 1/12 of the annual
premium.

                  "Minimum Mortgage Rate": With respect to each Adjustable Rate
Mortgage Loan, the percentage set forth in the related Mortgage Note as the
minimum Mortgage Rate thereunder.

                  "Monthly Payment": With respect to any Mortgage Loan
(including any REO Property) and any Due Date, the payment of principal and
interest due thereon in accordance with the amortization schedule at the time
applicable thereto (after adjustment, if any, for partial Principal Prepayments
and for Deficient Valuations occurring prior to such Due Date but before any
adjustment to such amortization schedule by reason of any bankruptcy, other than
a Deficient Valuation, or similar proceeding or any moratorium or similar waiver
or grace period).

                  "Moody's": Moody's Investors Service, Inc. or its successor in
interest.

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

                  "Mortgage File": The mortgage documents listed in Section 2.01
pertaining to a particular Mortgage Loan and any additional documents required
to be added to the Mortgage File pursuant to this Agreement.

                  "Mortgage Loan Schedule": With respect to any date, the
schedule of Mortgage Loans subject to this Agreement on such date. The schedule
of Initial Mortgage Loans as of the Cut-off Date is the schedule set forth in
Exhibit B hereto and the schedule or schedules of Subsequent Mortgage Loans, if
any, as of the Subsequent Cut-off Date, which schedules set forth as to each
Mortgage Loan

                  (i)   the loan number and name of the Mortgagor;

                  (ii)  the street address, city, state and zip code of the
Mortgaged Property;

                  (iii) the Mortgage Rate at origination;

                  (iv)  with respect to an Adjustable Rate Mortgage Loan, the
Maximum Rate and the Minimum Rate;

                  (v)   the maturity date;

                                       18
<PAGE>
                  (vi)    the original principal balance;

                  (vii)   the first Distribution Date;

                  (viii)  the type of Mortgaged Property;

                  (ix)    the Monthly Payment in effect as of the Cut-off Date
(with respect to an Initial Mortgage Loan) or Subsequent Cut-off Date (with
respect to a Subsequent Mortgage Loan);

                  (x)     the Principal Balance as of the Cut-off Date (with
respect to an Initial Mortgage Loan) or Subsequent Cut-off Date (with respect to
a Subsequent Mortgage Loan);

                  (xi)    with respect to an Adjustable Rate Mortgage Loan, the
Index, the Gross Margin; the Lifetime Rate Cap and the Periodic Rate Cap;

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

                  (xiii)  with respect to an Adjustable Rate Mortgage Loan, the
Adjustment Date frequency and Distribution Date frequency;

                  (xiv)   the occupancy status;

                  (xv)    the purpose of the Mortgage Loan;

                  (xvi)   the Appraised Value of the Mortgaged Property;

                  (xvii)  the original term to maturity;

                  (xviii) the paid-through date of the Mortgage Loan;

                  (xix)   the Loan-to-Value Ratio;

                  (xx)    whether the Mortgage Loan is an Adjustable Rate
Mortgage Loan or a Fixed Rate Mortgage Loan;

                  (xxi)   whether or not the Mortgage Loan was underwritten
pursuant to a limited documentation program;

                  (xxii)  whether or not the Mortgage Loan is a Convertible
Mortgage Loan; and

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

                  The Mortgage Loan Schedule shall set forth the total of the
amounts described under (x) above for all of the Mortgage Loans. The Mortgage
Loan Schedule shall set forth separately the above information as to each Group
of Mortgage Loans.

                                       19
<PAGE>
                  "Mortgage Loans": At any time, collectively, all Mortgage
Loans that have been transferred and conveyed to the Trust, in each case
together with the Related Documents, and that remain subject to the terms of the
Agreement. As applicable, Mortgage Loan shall be deemed to refer to the related
REO Property and both Initial Mortgage Loans and Subsequent Mortgage Loans.

                  "Mortgage Note": The original executed note or other evidence
of indebtedness evidencing the indebtedness of a Mortgagor under a Mortgage
Loan.

                  "Mortgage Rate": With respect to any Mortgage Loan, the annual
rate at which interest accrues on such Mortgage Loan.

                  "Mortgage Pool": The pool of Mortgage Loans, identified on
Exhibit B from time to time, and any REO Properties acquired in respect thereof
and as supplemented by any Subsequent Mortgage Loans identified on each schedule
of Subsequent Mortgage Loans attached to a Subsequent Transfer Instrument.

                  "Mortgaged Property": The underlying property, including real
property and improvements thereon, securing a Mortgage Loan.

                  "Mortgagor":  The obligor on a Mortgage Note.

                  "Net Liquidation Proceeds": With respect to any Liquidated
Mortgage Loan, Liquidation Proceeds net of Liquidation Expenses.

                  "Net Mortgage Rate": With respect to any Mortgage Loan and any
day, the related Mortgage Rate less the Administrative Fee Rate.

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

                  "Non-REMIC Accounts" The Supplemental Interest Account, the
Pre-Funding Account and the Interest Coverage Account.

                  "Nonrecoverable Advance": With respect to any Mortgage Loan,
any Advance (i) which was previously made or is proposed to be made by the
Servicer; and (ii) which, in the good faith judgment of the Servicer, will not
or, in the case of a proposed Advance, would not, be ultimately recoverable by
the Servicer from Liquidation Proceeds, Repurchase Price or future payments on
such Mortgage Loan.

                  "Notional Principal Amount": For purposes of calculating
original issue discount ("OID"), with respect to the Class AIO Certificates,
initially $19,629,136, and with respect to the Class P Certificates, initially
$3,638,713.

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

                                       20
<PAGE>
                  "Offered Certificates": Collectively, the Class A-1
Certificates, the Class AIO Certificates and the Mezzanine Certificates.

                  "Officers' Certificate": A certificate signed by the Chairman
of the Board, the Vice Chairman of the Board, the President or any vice
president (however denominated), and by the Treasurer, the Secretary, or any
assistant treasurer or assistant secretary of the applicable Person.

                  "Opinion of Counsel": A written opinion of counsel, who may,
without limitation, be a salaried counsel for the Depositor or the Servicer,
acceptable to the Certificate Administrator, except that any opinion of counsel
relating to (a) the qualification of any REMIC as a REMIC or (b) compliance with
the REMIC Provisions which must be an opinion of Independent counsel.

                  "Optional Termination Date": The first Distribution Date on
which the Servicer may opt to terminate the Trust Fund pursuant to Section
11.01.

                  "Original Pre-Funded Amount": The amount deposited by the
Depositor in the Pre-Funding Account on the Closing Date, which amount is
$101,787,440.74.

                  "Original Value": Except in the case of a refinanced Mortgage
Loan, the lesser of the Appraised Value or sales price of Mortgaged Property at
the time a Mortgage Loan is closed, and for a refinanced Mortgage Loan, the
Original Value is the value of such property set forth in an appraisal
acceptable to the Servicer.

                  "Ownership Interest": As to any Certificate, any ownership or
security interest in such Certificate, including any interest in such
Certificate as the Holder thereof and any other interest therein, whether direct
or indirect, legal or beneficial, as owner or as pledgee.

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

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

                  "Percentage Interest": With respect to any Underwritten
Certificate, a fraction, expressed as a percentage, the numerator of which is
the Initial Certificate Principal Balance represented by such Certificate and
the denominator of which is the Initial Certificate Principal Balance of the
related Class. With respect to a Class AIO Certificate, Class P Certificate,
Class O Certificate or Residual Certificate, the portion of the Class evidenced
thereby, expressed as a percentage, as stated on the face of such Certificate;
PROVIDED, HOWEVER, that the sum of all such percentages for each such Class
totals 100%.

                  "Periodic Rate Cap": With respect to each Adjustable Rate
Mortgage Loan and any Adjustment Date therefor, the fixed percentage set forth
in the related Mortgage Note, which is the maximum amount by which the Mortgage
Rate for such Mortgage Loan may increase or decrease (without regard to the
Maximum Mortgage Rate or the Minimum Mortgage Rate) on

                                       21
<PAGE>
such Adjustment Date from the Mortgage Rate in effect immediately prior to such
Adjustment Date.

                  "Permitted Transferee": Any transferee of a Residual
Certificate other than a Disqualified Organization or a non-U.S. Person.

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

                  "Plan": Any employee benefit plan or certain other retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and bank collective investment funds and insurance company general
or separate accounts in which such plans, accounts or arrangements are invested,
that are subject to ERISA and Section 4975 of the Code.

                  "Pool Balance": As of any date of determination, the aggregate
unpaid principal balance of the Mortgage Loans as of such date.

                  "Pre-Funded Amount": With respect to any date of
determination, the amount on deposit in the Pre-Funding Account.

                  "Pre-Funding Account": The account established and maintained
pursuant to Section 4.05, as defined herein, and which must be an Eligible
Account.

                  "Prepayment Assumption": As defined in the Prospectus
Supplement.

                  "Prepayment Charge": With respect to any Mortgage Loan, the
charges or premiums, if any, due in connection with a full or partial prepayment
of such Mortgage Loan in accordance with the terms thereof.

                  "Prepayment Interest Shortfall": As to any Distribution Date
and any Mortgage Loan (other than a Mortgage Loan relating to an REO Property)
that was the subject of (a) a Principal Prepayment in full during the related
Prepayment Period, an amount equal to the excess of interest accrued during the
related Prepayment Period at the Mortgage Rate (net of the Servicing Fee) on the
Principal Balance of such Mortgage Loan over the amount of interest (adjusted to
the Mortgage Rate (net of the Servicing Fee)) paid by the Mortgagor for such
Prepayment Period to the date of such Principal Prepayment in full or (b) a
partial Principal Prepayment during the prior calendar month, an amount equal to
interest accrued during the related Prepayment Period at the Mortgage Rate (net
of the Servicing Fee) on the amount of such partial Prepayment.

                  "Prepayment Period": As to any Distribution Date, the calendar
month preceding the month of such Distribution Date.

                  "Principal Balance": With respect to any Mortgage Loan or
related REO Property, at any given time, (i) the Principal Balance of the
Mortgage Loan as of the Cut-off Date or Subsequent Cut-off Date, as applicable,
minus (ii) the sum of (a) the principal portion of

                                       22
<PAGE>
the Monthly Payments due with respect to such Mortgage Loan or REO Property
during each Due Period ending prior to the most recent Distribution Date which
were received or with respect to which an Advance was made, and (b) all
Principal Prepayments with respect to such Mortgage Loan or REO Property, and
all Insurance Proceeds, Liquidation Proceeds and REO Proceeds, to the extent
applied by the Servicer as recoveries of principal in accordance with Section
3.13 hereof with respect to such Mortgage Loan or REO Property, and (c) the
principal portion of any Realized Loss with respect thereto for any previous
Distribution Date.

                  "Principal Prepayment": Any payment of principal made by the
Mortgagor on a Mortgage Loan which is received in advance of its scheduled Due
Date and which is not accompanied by an amount of interest representing the full
amount of scheduled interest due on any Due Date in any month or months
subsequent to the month of prepayment.

                  "Principal Remittance Amount": With respect to any
Distribution Date, the sum of (i) each scheduled payment of principal collected
or advanced on the Mortgage Loans by the Servicer that were due during the
related Due Period, (ii) the principal portion of all partial and full principal
prepayments of the Mortgage Loans applied by the Servicer during the related
Prepayment Period, (iii) the principal portion of all related Net Liquidation
Proceeds and Insurance Proceeds received during such Prepayment Period, (iv)
that portion of the Repurchase Price, representing principal of any repurchased
Mortgage Loan, deposited to the Collection Account during such Prepayment
Period, (v) the principal portion of any related Substitution Adjustment Amounts
deposited in the Collection Account during such Prepayment Period, (vi) in the
case of the Distribution Date immediately following the end of the Funding
Period, any amount remaining in the Pre-Funding Account not used by the Trustee
to purchase Subsequent Mortgage Loans and (vii) on the Distribution Date on
which the Trust Fund is to be terminated pursuant to Section 11.01, that portion
of the Termination Price, in respect of principal.

                  "Prospectus": The Prospectus Supplement together with the Base
Prospectus attached thereto with respect to the Offered Certificates.

                  "Prospectus Supplement": That certain Prospectus Supplement
dated March 28, 2000 relating to the public offering of the Offered
Certificates.

                  "Purchase Agreement": The agreement, dated as of March 1,
2000, between the Seller, the Transferor, the Trustee, the Certificate
Administrator and the Depositor, regarding the transfer of the Mortgage Loans by
the Seller to or at the direction of the Depositor.

                  "Qualified Liquidation": The meaning set forth from time to
time in the definition thereof at Section 860F(a)(3) of the Code and applicable
to the Trust.

                  "Qualified Mortgage": The meaning set forth from time to time
in the definition thereof at Section 860G(a)(3) of the Code and applicable to
the Trust.

                  "Qualified Replacement Mortgage": A Mortgage Loan substituted
for another pursuant to Section 3.01 of the Purchase Agreement and that
satisfies all of the criteria set forth from time to time in the definition
thereof at Section 860G(a)(4) of the Code and applicable to the Trust, all as
evidenced by an Officer's Certificate of the Seller delivered to the Certificate
Administrator on behalf of the Trustee prior to any such substitution.

                                       23
<PAGE>
                  "Rate Stepup Date": The first Distribution Date to occur after
the Optional Termination Date has occurred.

                  "Rating Agency": Any nationally recognized statistical rating
organization, or its successor, that rated the Offered Certificates at the
request of the Depositor at the time of the initial issuance of the Offered
Certificates. Initially such rating agencies shall consist of Moody's and
Standard & Poor's. If such organization or a successor is no longer in
existence, "Rating Agency" shall be such nationally recognized statistical
rating organization, or other comparable Person, designated by the Depositor,
notice of which designation shall be given to the Certificate Administrator and
the Trustee. References herein to the highest short-term unsecured rating
category of a Rating Agency shall mean A-1 or better in the case of Standard &
Poor's and P-1 or better in the case of Moody's and in the case of any other
Rating Agency shall mean such equivalent rating. References herein to the
highest long-term rating category of a Rating Agency shall mean "AAA" in the
case of Standard & Poor's and "Aaa" in the case of Moody's and in the case of
any other Rating Agency, such equivalent rating.

                  "Realized Loss": With respect to each Mortgage Loan (or REO
Property) as to which a Cash Liquidation or REO Disposition has occurred, an
amount (not less than zero) equal to (i) the Principal Balance of the Mortgage
Loan (or REO Property) as of the date of Cash Liquidation or REO Disposition,
plus (ii) interest (and REO Imputed Interest, if any) at the Net Mortgage Rate
from the Due Date as to which interest was last paid or advanced to
Certificateholders up to the last day of the month in which the Cash Liquidation
(or REO Disposition) occurred on the Principal Balance of such Mortgage Loan (or
REO Property) outstanding during each Due Period that such interest was not paid
or advanced, minus (iii) Net Liquidation Proceeds, if any, received with respect
to such Cash Liquidation (or REO Disposition), minus the portion thereof
reimbursable to the Servicer or any Subservicer with respect to related Advances
or expenses as to which the Servicer or Subservicer is entitled to reimbursement
thereunder but which have not been previously reimbursed. With respect to each
Mortgage Loan which has become the subject of a Deficient Valuation, the
difference between the principal balance of the Mortgage Loan outstanding
immediately prior to such Deficient Valuation and the principal balance of the
Mortgage Loan as reduced by the Deficient Valuation. With respect to each
Mortgage Loan which has become the object of a Debt Service Reduction, the
amount of such Debt Service Reduction.

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

                  "Reference Banks": Deutsche Bank, Barclay's Bank PLC, The Bank
of Tokyo-Mitsubishi, LTD. and National Westminster Bank PLC and their successors
in interest; provided that if any of the foregoing banks are not suitable to
serve as a Reference Bank, then any leading banks selected by the Certificate
Administrator which are engaged in transactions in Eurodollar deposits in the
international Eurocurrency market (i) with an established place of business in
London, (ii) not controlling, under the control of or under common control with
the Seller or any Affiliate thereof, (iii) whose quotations appear on the
Reuters Screen LIBO Page on the relevant Interest Determination Date and (iv)
which have been designated as such by the Certificate Administrator.

                                       24
<PAGE>
                  "Regular Certificate": Any of the Class A-1 Certificates,
Mezzanine Certificates, Class AIO Certificates, Class O Certificates or Class P
Certificates.

                  "Related Documents": With respect to each Mortgage Loan, the
documents specified in Section 2.01 hereof and any documents required to be
added to such documents pursuant to this Agreement, the Purchase Agreement or
any Subsequent Transfer Instrument.

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

                  "Relief Act Shortfall": As to any Distribution Date and any
Mortgage Loan (other than a Mortgage Loan relating to an REO Property), any
shortfalls relating to the Relief Act or similar legislation or regulations.

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

                  "REMIC Available Funds": As to each Distribution Date, an
amount equal to the amount on deposit in the Payment Account, representing the
sum of (i) the aggregate amount of scheduled payments on the related Mortgage
Loans due on the related Due Date and received on or prior to the related
Determination Date, (ii) miscellaneous fees and collections, including
prepayment penalties with respect to the Mortgage Loans (but excluding late
fees), (iii) any unscheduled payments and receipts, including Mortgagor
prepayments on the related Mortgage Loans, received during the related
Prepayment Period and proceeds of repurchases, and adjustments in the case of
substitutions and terminations, Net Liquidation Proceeds, Insurance Proceeds, MI
Insurance Proceeds and proceeds from the sale of Converted Mortgage Loans, (iv)
all Advances made for such Distribution Date in respect of the related Mortgage
Loans, (v) on the Distribution Date relating to the Due Period in which the
termination of the Funding Period occurred, the amount on deposit in the
Pre-Funding Account with respect to such Class at such time, and (vi) on each
Payment Date on or prior to the Distribution Date in June 2000, the amount, if
any, withdrawn from the Interest Coverage Account for such Class.

                  "REMIC Available Funds Cap Rate": With respect to any
Distribution Date, the percentage equivalent of a fraction, the numerator of
which is equal to the Interest Remittance Formula Amount for that Distribution
Date less the Administrative Fees for that Distribution Date, and the
denominator of which is the product of (1) the actual number of days in the
related Accrual Period, divided by 360 and (2) the aggregate Certificate
Principal Balances of the Underwritten Certificates immediately prior to such
Distribution Date.

                  "REMIC Available Funds Cap Shortfall Amount": With respect to
any Distribution Date and Class of Underwritten Certificates, the excess, if
any, of (1) the interest due on such Class calculated using the Formula Rate
applicable to such Class (less any Prepayment Interest Shortfalls and Relief Act
Shortfalls allocable to that Class) over (2) the interest due on such Class,
calculated using the REMIC Pass-Through Rate applicable to such Class (less any
Prepayment Interest Shortfalls and Relief Act Shortfalls allocable to that
Class).

                  "REMIC Current Interest": For any Distribution Date and each
Class of Underwritten Certificates, the amount of interest accrued during the
related Accrual Period at the related REMIC Pass-through Rate on the Certificate
Principal Balance of such Class

                                       25
<PAGE>
immediately prior to such Distribution Date, in each case, reduced by any
Prepayment Interest Shortfalls and any Relief Act Shortfalls allocated to that
class (allocated to each Certificate based on its respective entitlements to
interest irrespective of any Prepayment Interest Shortfalls or Relief Act
Shortfalls for that Distribution Date).

                  "REMIC Interests Sale Agreement": The REMIC Interests Sale
Agreement, dated as of March 31, 2000, between the Transferor and NRFC.

                  "REMIC Monthly Interest Distributable Amount": For any
Distribution Date and any Class of Underwritten Certificates, the sum of (1) the
Unpaid Interest Shortfall Amount for that Class and Distribution Date and (2)
the REMIC Current Interest for that Class and Distribution Date. In the event of
a shortfall in the full amount necessary to pay both the Unpaid Interest
Shortfall Amount and the REMIC Current Interest for a Class, the money will
first be applied to the Unpaid Interest Shortfall Amount and then to the REMIC
Current Interest.

                  "REMIC Pass-Through Rate": With respect to the Underwritten
Certificates (other than the Class AIO Certificates) and any Distribution Date,
the lesser of (x) the related Formula Rate for such Distribution Date and (y)
the REMIC Available Funds Cap Rate for such Distribution Date.

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

                  "REMIC Regular Interests": The Lower-Tier REMIC Regular
Interests and the Upper-Tier REMIC Regular Interests.

                  "REMIC Trust": The segregated pool of assets containing of the
Trust Fund, but excluding the Non-REMIC Accounts.

                  "REO Acquisition": The acquisition by the Servicer on behalf
of the Trustee for the benefit of the Certificateholders of any REO Property
pursuant to Section 3.13 hereof.

                  "REO Disposition": As to any REO Property, a determination by
the Servicer that it has received substantially all Insurance Proceeds,
Liquidation Proceeds, REO Proceeds and other payments and recoveries (including
proceeds of a final sale) which the Servicer expects to be finally recoverable
from the sale or other disposition of the REO Property.

                  "REO Imputed Interest": As to any REO Property, for any
period, an amount equivalent to interest (at the Net Mortgage Rate that would
have been applicable to the related Mortgage Loan had it been outstanding net,
with respect to a negative amortization loan, of amounts that would have been
Deferred Interest, if any) on the unpaid principal balance of the Mortgage Loan
as of the date of acquisition thereof for such period as such balance is reduced
pursuant to Section 3.13 hereof by any income from the REO Property treated as a
recovery of principal and with respect to a negative amortization loan, as such
balance is increased by the addition of Deferred Interest.

                                       26
<PAGE>
                  "REO Proceeds": Proceeds, net of expenses, received in respect
of any REO Property (including, without limitation, proceeds from the rental of
the related Mortgaged Property), which proceeds are required to be deposited
into the Collection Account within two days of receipt by the Servicer.

                  "REO Property": A Mortgaged Property that is acquired by the
Trust by foreclosure or by deed in lieu of foreclosure.

                  "Repurchase Event": With respect to any Mortgage Loan, either
(i) a discovery that, as of the Closing Date the related Mortgage was not a
valid lien on the related Mortgaged Property subject only to (A) the lien of
real property taxes and assessments not yet due and payable, (B) covenants,
conditions, and restrictions, rights of way, easements and other matters of
public record as of the date of recording of such Mortgage and such other
permissible title exceptions as are permitted and (C) other matters to which
like properties are commonly subject which do not materially adversely affect
the value, use, enjoyment or marketability of the related Mortgaged Property or
(ii) with respect to any Mortgage Loan as to which the Seller delivers an
affidavit certifying that the original Mortgage Note has been lost or destroyed,
a subsequent default on such Mortgage Loan if the enforcement thereof or of the
related Mortgage is materially and adversely affected by the absence of such
original Mortgage Note.

                  "Repurchase Price": With respect to any Mortgage Loan (i)
required to be repurchased on any date by the Seller pursuant to the Purchase
Agreement, (ii) permitted to be purchased by the Servicer pursuant to Article
III hereof or (iii) required to be purchased by the Converted Loan Purchaser
pursuant to the Converted Loan Purchase Agreement, an amount equal to the sum,
without duplication, of (i) 100% of the Principal Balance thereof (without
reduction for any amounts charged off) and (ii) unpaid accrued interest at the
Mortgage Rate on the outstanding principal balance thereof from the Due Date to
which interest was last paid by the Mortgagor (or with respect to which an
Advance was last made by the Servicer) to the first day of the month following
the month of purchase plus (iii) the amount of any unreimbursed Servicing
Advances or unreimbursed Advances made with respect to such Mortgage Loan plus
(iv) any other amounts owed to the Servicer or the Subservicer pursuant to
Section 3.07 hereof and not included in clause (iii) of this definition.

                  "Request for Release": A request for release in substantially
the form of Exhibit E hereto.

                  "Residual Certificate": The Class RL Certificates and the
Class RU Certificates.

                  "Residual Interest": The sole class of "residual interests" in
a REMIC within the meaning of Section 860G(a)(2) of the Code.

                  "Responsible Officer": With respect to the Trustee or the
Certificate Administrator, any officer thereof with direct responsibility for
the administration of this Agreement and also, with respect to a particular
matter, any other officer to whom such matter is referred because of such
officer's knowledge of and familiarity with the particular subject.

                  "Rolling 60-Day Delinquency Percentage": For any Distribution
Date, the average of the 60-Day Delinquency Percentages for the Mortgage Loans
as of the last day of

                                       27
<PAGE>
each of the three (or 1 and 2 in the case of the first two Distribution Dates,
as applicable) most recently ended Due Periods.

                  "Rolling 90-Day Delinquency Percentage": For any Distribution
Date, the average of the 90-Day Delinquency Percentages for the Mortgage Loans
as of the last day of each of the three (or 1, 2 and 3 in the case of the first
three Distribution Dates, as applicable) most recently ended Due Periods.

                  "Seller": NovaStar Mortgage, Inc., a Virginia corporation, and
its successors and assigns.

                  "Servicer": NovaStar Mortgage, Inc., a Virginia corporation,
and its successors and assigns.

                  "Servicer Remittance Date": The third Business Day prior to
each Distribution Date.

                  "Servicing Account": The separate trust account created and
maintained by the Servicer or each Subservicer with respect to the Mortgage
Loans or REO Property, which shall be an Eligible Account, for collection of
taxes, assessments, insurance premiums and comparable items as described in
Section 3.08 hereof.

                  "Servicing Advances": All customary, reasonable and necessary
"out of pocket" costs and expenses incurred in connection with a default,
delinquency or other unanticipated event in the performance by the Servicer of
its servicing obligations, including, without duplication, but not limited to,
the cost of (i) the preservation, restoration and protection of a Mortgaged
Property, (ii) any enforcement or judicial proceedings, including foreclosures,
(iii) the management and liquidation of any REO Property and (iv) compliance
with the obligations under Section 3.13 hereof.

                  "Servicing Default": The meaning assigned in Section 7.01
hereof.

                  "Servicing Fee": With respect to the Mortgage Loans and any
Distribution Date, the product of (i) the Servicing Fee Rate divided by 12 and
(ii) the Principal Balance of such Mortgage Loans as of such Distribution Date.

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

                  "Servicing Officer": Any officer of the Servicer involved in,
or responsible for, the administration and servicing of the Mortgage Loans whose
name and specimen signature appear on a list of servicing officers furnished to
the Certificate Administrator by the Servicer or a Subservicer, as such list may
be amended from time to time.

                  "Side Indemnity Letter": The Side Indemnity Letter dated March
24, 2000 among the Depositor, the Seller and NFI.

                  "Standard & Poor's": Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies, Inc., or its successor in interest.

                                       28
<PAGE>
                  "Startup Day":  As defined in Section 10.01(b) hereof.

                  "Subsequent Cut-off Date": With respect to those Subsequent
Mortgage Loans which are sold to the Trust pursuant to a Subsequent Transfer
Instrument, the first day of the month in which the Subsequent Transfer Date
occurs.

                  "Subsequent Mortgage Loan": A Mortgage Loan sold by the
Depositor to the Trust Fund pursuant to Section 2.08, such Mortgage Loan being
identified on the Mortgage Loan Schedule attached to a Subsequent Transfer
Instrument.

                  "Subsequent Transfer Date": With respect to each Subsequent
Transfer Instrument, the date on which the related Subsequent Mortgage Loans are
sold to the Trust Fund.

                  "Subsequent Transfer Instrument": Each Subsequent Transfer
Instrument, dated as of a Subsequent Transfer Date, executed by the Trustee and
the Depositor substantially in the form attached hereto as Exhibit D, by which
Subsequent Mortgage Loans are transferred to the Trust Fund.

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

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

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

                  "Subservicing Fee": With respect to each Mortgage Loan and any
Distribution Date, the portion of the Servicing Fee paid to a Subservicer.

                  "Substitution Adjustment Amount": As defined in Section 2.03
hereof.

                  "Supplemental Interest Account": The reserve fund established
and maintained pursuant to Section 4.04.

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

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

                  (i) for the Class A-1 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class A-1 Certificates and (y) the
Total Supplemental Interest Payment Amount Available for that Distribution Date;

                                       29
<PAGE>
                  (ii) for the Class M-1 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class M-1 Certificates and (y) any
portion of the Total Supplemental Interest Payment Amount Available not applied
to the payment of the Supplemental Interest Payment Amount for the Class A-1
Certificates on that Distribution Date;

                  (iii) for the Class M-2 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the class M-2 Certificates and (y) any
portion of the Total Supplemental Interest Payment Amount Available not applied
to the payment of the Supplemental Interest Amount Due for the Class A-1 and the
Class M-1 Certificates on that Distribution Date; and

                  (iv) for the Class M-3 Certificates, the lesser of (x) the
Supplemental Interest Payment Amount Due for the Class M-3 Certificates and (y)
any portion of the Total Supplemental Interest Payment Amount Available not
applied to the payment of the Supplemental Interest Amounts Due for the Class
A-1, Class M-1 and Class M-2 Certificates on that Distribution Date.

                  "Tax Matters Person": The tax matters person appointed
pursuant to Section 10.01(e) hereof.

                  "Tax Returns": The federal income tax return on Internal
Revenue Service Form 1066, U.S. Real Estate Mortgage Investment Conduit Income
Tax Return, including Schedule Q thereto, Quarterly Notice to Residual Interest
Holders of the REMIC Taxable Income or Net Loss Allocation, or any successor
forms, to be filed by the Certificate Administrator, as agent of the Trustee, on
behalf of each REMIC, together with any and all other information reports or
returns that may be required to be furnished to the Certificateholders or filed
with the Internal Revenue Service or any other governmental taxing authority
under any applicable provisions of federal, state or local tax laws.

                  "Termination Price":  As defined in Section 11.01(a) hereof.

                  "Telerate Page 3750": The display page currently so designated
on the Dow Jones Telerate Service (or such other page as may replace that page
on that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Certificate Administrator
and engaged in transactions in European deposits in the international
Eurocurrency market.

                  "Total Supplemental Interest Payment Amount Available": With
respect to any Distribution Date, the sum of (i) the Class AIO Current Interest
for that Payment Date and (ii) the Allocable Cap Payment Amount of each Cap
Payment previously received by the Trust.

                  "Transferor": NovaStar Mortgage Funding Corporation III, a
Delaware corporation, and its successors and assigns.

                  "Treasury Regulations": Regulations, including proposed or
temporary Regulations, promulgated under the Code. References herein to specific
provisions of proposed or temporary regulations shall include analogous
provisions of final Treasury Regulations or other successor Treasury
Regulations.

                                       30
<PAGE>
                  "Trigger Event": A Trigger Event is in effect with respect to
any Distribution Date if the Rolling 60-Day Delinquency Percentage calculated
with respect to that Distribution Date exceeds 12%.

                  "Trust": NovaStar Mortgage Funding Trust 2000-1, the trust
created hereunder.

                  "Trust Fund": All of the assets of the Trust, which is the
trust created hereunder consisting of the Lower-Tier REMIC, the Upper-Tier
REMIC, the Interest Coverage Account, the Pre-Funding Account, the Supplemental
Interest Account and the Cap Agreements.

                  "Trustee": The Chase Manhattan Bank, a New York banking
corporation, and its successors and assigns or any successor Agreement trustee
appointed pursuant to the terms of the Agreement.

                  "Trustee Fee": With respect to each Distribution Date, the
product of (i) the Trustee Fee Rate divided by 12 and (ii) the sum of the
Principal Balance of the Mortgage Loans and the Pre-Funded Amount as of such
date, which fee shall be payable from the Certificate Administrator Fee.

                  "Trustee Fee Rate":  0.004% per annum.

                  "Underwriter": First Union Securities, Inc. and its successors
and assigns.

                  "Underwriting Agreement": The Underwriting Agreement dated as
of March 24, 2000 between the Underwriter and the Depositor with respect to the
offer and sale of the Class A-1 Certificates and the Mezzanine Certificates, as
the same may be amended from time to time.

                  "Underwriting Guidelines": The underwriting guidelines set
forth in the Prospectus Supplement under the heading "Description of the
Mortgage Pool--Underwriting Standards for Mortgage Loans".

                  "Underwritten Certificates" means, collectively, the Class A-1
and Mezzanine Certificates.

                  "United States Person" or "U.S. Person": A citizen or resident
of the United States, a corporation, partnership or other entity treated as a
corporation or partnership for federal income tax purposes (other than a
partnership that is not treated as a U.S. Person pursuant to any applicable
Treasury regulations) created or organized in, or under the laws of, the United
States, any state thereof or the District of Columbia, or an estate the income
of which from sources without the United States is includible in gross income
for United States federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States, or a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. The term "United States"
shall have the meaning set forth in Section 7701 of the Code.

                  "Unpaid Interest Shortfall Amount": With respect to each Class
of Underwritten Certificates and (i) the first Distribution Date, zero, and (ii)
any Distribution Date after the first

                                       31
<PAGE>
Distribution Date, the sum of (a) the Unpaid Interest Shortfall Amount for that
Class as of the prior Distribution Date, (b) the excess of the amount of the
REMIC Current Interest due with respect to that Class on the prior Distribution
Date over the amount actually distributed to the Holders of that Class on
account of the REMIC Current Interest on the prior Distribution Date and (c)
interest on the sum of (a) and (b) to the extent permitted by law, at the
Formula Rate for such Class for the related Accrual Period.

                  "Upper-Tier REMIC": The REMIC established pursuant to Section
2.09 hereof. The assets of the Upper-Tier REMIC shall be the Lower-Tier REMIC
Regular Interests.

                  "Upper-Tier REMIC Regular Interests": As defined in Section
2.09(c) hereof.

                  "Voting Rights": The portion of the voting rights of all of
the Certificates which is allocated to any Certificate. At all times the Class
A-1 Certificates and the Mezzanine Certificates shall have 96% of the Voting
Rights (allocated among the Holders of the Class A-1Certificates and the
Mezzanine Certificates in proportion to the then outstanding Certificate
Principal Balances of their respective Certificates), the Class AIO Certificates
shall have 1% of the Voting Rights, the Class O Certificates shall have 1% of
the Voting Rights, the Class P Certificates shall have 1% of the Voting Rights
and the Class RU Certificates shall have 1% of the Voting Rights. The Voting
Rights allocated to any Class of Certificates (other than the Class AIO
Certificates, Class O Certificates, Class P Certificates and the Class RU
Certificates) shall be allocated among all Holders of each such Class in
proportion to the outstanding Certificate Principal Balance of such Certificates
and the Voting Rights allocated to the Class AIO Certificates, Class O
Certificates, Class P Certificates and the Class RU Certificates shall be
allocated among all Holders of each such Class in proportion to such Holders'
respective Percentage Interest; PROVIDED, HOWEVER that when none of the Regular
Certificates are outstanding, 100% of the Voting Rights shall be allocated among
Holders of the Class RU Certificates in accordance with such Holders' respective
Percentage Interests in the Certificates of such Class.

                  "Weighted Average Mortgage Rate": With respect to any
Distribution Date, the weighted average of the Mortgage Rates of the Mortgage
Loans (weighted by the Principal Balances of the Mortgage Loans).

                  Section 1.02. Accounting.

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

                  Section 1.03. Allocation of Certain Interest Shortfalls.

                  For purposes of calculating the amount of the REMIC Monthly
Interest Distributable Amount for the Class A-1 Certificates, the Mezzanine
Certificates and the Class AIO Certificates for any Distribution Date, (1) the
aggregate amount of any Prepayment Interest Shortfalls and any Relief Act
Shortfalls incurred in respect of the Mortgage Loans for any Distribution Date
shall be allocated on a pro rata basis based on, and to the extent of, the gross

                                       32
<PAGE>
REMIC Monthly Interest Distributable Amount for each such Class, among the Class
A-1 Certificates, the Mezzanine Certificates and the Class AIO Certificates and
(2) the aggregate amount of any Available Funds Cap Carryforward Amounts
incurred for any Distribution Date shall be allocated to the Class AIO
Certificates to the extent of the gross REMIC Monthly Interest Distributable
Amount for that Class, after deduction of any Prepayment Interest Shortfalls and
any Relief Act Shortfalls.

                  All Prepayment Interest Shortfalls and Relief Act Shortfalls
on the Lower-Tier REMIC Regular Interests shall be allocated on each
Distribution Date among the Lower-Tier REMIC Regular Interests in the proportion
that Prepayment Interest Shortfalls and Relief Act Shortfalls are allocated to
the related Upper-Tier REMIC regular interests.

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

                  Section 2.01. Conveyance of Mortgage Loans, MI Policies and
Cap Agreements.

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

                  In connection with such transfer and assignment, the Seller,
on behalf of the Depositor, does hereby deliver to, and deposit with the
Certificate Administrator, as the Trustee's designated agent, the following
documents or instruments with respect to each Initial Mortgage Loan so
transferred and assigned and the Seller, on behalf of the Depositor, shall, in
accordance with Section 2.09, deliver or caused to be delivered to the
Certificate Administrator, as the Trustee's designated agent, with respect to
each Subsequent Mortgage Loan, the following documents or instruments (with
respect to each Mortgage Loan, a "Mortgage File"):

                  (i) the original Mortgage Note endorsed to "The Chase
         Manhattan Bank, as Trustee pursuant to the Agreement dated as of March
         1, 2000, relating to the NovaStar Home Equity Loan Asset-Backed
         Certificates, Series 2000-1";

                  (ii) the original Mortgage with evidence of recording thereon,
         or, if the original Mortgage has not yet been returned from the public
         recording office, a copy of

                                       33
<PAGE>
         the original Mortgage certified by the Seller or the public recording
         office in which such original Mortgage has been recorded;

                  (iii) an original assignment (which may be included in one or
         more blanket assignments if permitted by applicable law) of the
         Mortgage endorsed to "The Chase Manhattan Bank, as Trustee pursuant to
         the Agreement dated as of March 1, 2000, relating to the NovaStar Home
         Equity Loan Asset-Backed Certificates, Series 2000-1", and otherwise in
         recordable form;

                  (iv) originals of any intervening assignments of the Mortgage,
         with evidence of recording thereon, or, if the original of any such
         intervening assignment has not yet been returned from the public
         recording office, a copy of such original intervening assignment
         certified by the Seller or the public recording office in which such
         original intervening assignment has been recorded;

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

                  (vi) with respect to each Mortgage Loan insured by a MI
         Policy, a certificate of insurance or other evidence of such MI Policy;
         and

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

                  If a material defect in any Mortgage File is discovered which
may materially and adversely affect the value of the related Mortgage Loan, or
the interests of the Trustee or the Certificateholders in such Mortgage Loan,
including if any document required to be delivered to the Certificate
Administrator has not been delivered (provided that a Mortgage File will not be
deemed to contain a defect for an unrecorded assignment under clause (iii) above
for 180 days following submission of the assignment if the Seller has submitted
such assignment for recording pursuant to the terms of the following paragraph),
the Seller shall cure such defect, repurchase the related Mortgage Loan at the
Repurchase Price or substitute an Eligible Substitute Mortgage Loan for the
related Mortgage Loan upon the same terms and conditions set forth in Section
3.01 of the Purchase Agreement as to the Initial Mortgage Loans and the
Subsequent Mortgage Loans and Section 2.02(c) of the Purchase Agreement as to
the Subsequent Mortgage Loans for breaches of representations and warranties.

                  Promptly after the Closing Date in the case of an Initial
Mortgage Loan or, in the case of a Subsequent Mortgage Loan, promptly after the
Subsequent Transfer Date (or after the date of transfer of any Eligible
Substitute Mortgage Loan), the Seller at its own expense shall complete and
submit for recording in the appropriate public office for real property records
each of the assignments referred to in clause (iii) above, with such assignment
completed in favor of the Trustee. While such assignment to be recorded is being
recorded, the Certificate Administrator shall retain a photocopy of such
assignment. If any assignment is lost or returned unrecorded to the Certificate
Administrator because of any defect therein, the Seller is required to

                                       34
<PAGE>
prepare a substitute assignment or cure such defect, as the case may be, and the
Seller shall cause such substitute assignment to be recorded in accordance with
this paragraph.

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

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

                  The Trustee, as assignee or transferee of the Transferor and
the Depositor, shall be entitled to all scheduled principal payments due after
the Cut-off Date, all other payments of principal due and collected after the
Cut-off Date, and all payments of interest on the Initial Mortgage Loans. No
scheduled payments of principal due on or before the Cut-off Date and collected
after the Cut-off Date shall belong to the Transferor or the Depositor pursuant
to the terms of the Purchase Agreement. Any late payment charges collected in
connection with a Mortgage Loan shall be paid to the Servicer as provided in
Section 3.15(b) hereof.

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

                                       35
<PAGE>
                  Section 2.02. Acceptance of Mortgage Loans by Certificate
Administrator on behalf of the Trustee.

                  (a) The Certificate Administrator, on behalf of the Trustee,
acknowledges receipt of, subject to the review described below and any
exceptions it notes pursuant to the procedures described below, the documents
(or certified copies thereof) referred to in Section 2.01 hereof and declares
that it holds and will continue to hold those documents and any amendments,
replacements or supplements thereto and all other assets of the Trust Fund in
trust for the use and benefit of all present and future Certificateholders. No
later than 45 days after the Closing Date and each Subsequent Transfer Date (or,
with respect to any Eligible Substitute Mortgage Loan, within 5 Business Days
after the receipt by the Certificate Administrator, on behalf of the Trustee,
thereof and, with respect to any documents received beyond 45 days after the
Closing Date, promptly thereafter), the Certificate Administrator, on behalf of
the Trustee, agrees, for the benefit of the Certificateholders, to review each
Mortgage File delivered to it and to execute and deliver, or cause to be
executed and delivered, to the Seller an initial certification in the form
annexed hereto as Exhibit F-1. In conducting such review, the Certificate
Administrator, on behalf of the Trustee, will ascertain whether all required
documents described in Section 2.01 hereof have been executed and received and
whether those documents relate, determined on the basis of the Mortgagor name,
original principal balance and loan number, to the Mortgage Loans it has
received, as identified in Exhibit B to this Agreement, as supplemented
(provided, however, that with respect to those documents described in subclause
(vii) of such section, the Certificate Administrator's obligations shall extend
only to documents actually delivered pursuant to such subclause). In performing
any such review, the Certificate Administrator, on behalf of the Trustee, may
conclusively rely on the purported due execution and genuineness of any such
document and on the purported genuineness of any signature thereon. If the
Certificate Administrator, on behalf of the Trustee, finds that any document
constituting part of the Mortgage File not to have been executed or received, or
to be unrelated to the Mortgage Loans identified in Exhibit B or Attachment B to
Exhibit 2 of the Purchase Agreement or to appear to be defective on its face,
the Certificate Administrator, on behalf of the Trustee, shall promptly notify
the Seller of such finding and the Seller's obligation to cure such defect or
repurchase or substitute for the related Mortgage Loan.

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

                                       36
<PAGE>
                  (c) Upon deposit of the Repurchase Price in the Collection
Account and notification of the Certificate Administrator, on behalf of the
Trustee, by a certification signed by a Servicing Officer (which certification
shall include a statement to the effect that the Repurchase Price has been
deposited in the Collection Account), the Certificate Administrator, on behalf
of the Trustee, shall cause to be released to the Seller the related Mortgage
File and shall cause to be executed and delivered all instruments of transfer or
assignment, without recourse, furnished to it by the Seller as are necessary to
vest in the Seller title to and rights under the related Mortgage Loan. Such
purchase shall be deemed to have occurred on the date on which certification of
the deposit of the Repurchase Price in the Payment Account was received by the
Trustee. The Certificate Administrator, on behalf of the Trustee, shall amend
the applicable Mortgage Loan Schedule to reflect such repurchase and shall
promptly notify the Servicer, and the Rating Agencies of such amendment. The
Trustee agrees to provide the Certificate Administrator with such power of
attorneys as are necessary for the Certificate Administrator to fulfill its
obligations under this Section 2.03 and otherwise under the Basic Documents.

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

                  (a) Upon discovery or receipt of written notice of any
materially defective document in, or that a document is missing from, a Mortgage
File or of the breach by the Seller of any representation, warranty or covenant
under the Purchase Agreement in respect of any Mortgage Loan which materially
adversely affects the value of such Mortgage Loan or the interest therein of the
Certificateholders, the Certificate Administrator shall promptly notify the
Seller and the Servicer of such defect, missing document or breach and request
that the Seller deliver such missing document or cure such defect or breach
within 90 days from the date the Seller was notified of such missing document,
defect or breach, and if the Seller does not deliver such missing document or
cure such defect or breach in all material respects during such period, the
Certificate Administrator shall enforce the Seller's obligation under the
Purchase Agreement and cause the Seller to repurchase such Mortgage Loan from
the Trust Fund at the Repurchase Price on or prior to the Determination Date
following the expiration of such 90 day period; PROVIDED that, in connection
with any such breach that could not reasonably have been cured within such 90
day period, if the Seller shall have commenced to cure such breach within such
90 day period, the Seller shall be permitted to proceed thereafter diligently
and expeditiously to cure the same within the additional period provided under
the Purchase Agreement.

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

                                       37
<PAGE>
Seller to cure or to repurchase (or to substitute for) any Mortgage Loan as to
which a document is missing, a material defect in a constituent document exists
or as to which such a breach has occurred and is continuing shall constitute the
sole remedy against the Seller respecting such omission, defect or breach
available to the Trustee or the Certificate Administrator on behalf of the
Certificateholders.

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

                  (d) Any substitution of Eligible Substitute Mortgage Loans for
Deleted Mortgage Loans made pursuant to Section 2.03(a) must be effected prior
to the last Business Day that is within two years after the Closing Date. As to
any Deleted Mortgage Loan for which the Seller substitutes an Eligible
Substitute Mortgage Loan or Loans, such substitution shall be effected by the
Seller delivering to the Certificate Administrator, for such Eligible Substitute
Mortgage Loan or Loans, the Mortgage Note, the Mortgage, the Assignment to the
Trustee, and such other documents and agreements, with all necessary
endorsements thereon, as are required by Section 2.01, together with an
Officers' Certificate providing that each such Eligible Substitute Mortgage Loan
satisfies the definition thereof and specifying the Substitution Adjustment
Amount (as described below), if any, in connection with such substitution. The
Certificate Administrator shall acknowledge receipt for such Eligible Substitute
Mortgage Loan or Loans and, within ten Business Days thereafter, shall review
such documents as specified in Section 2.02 and deliver to the Servicer, with
respect to such Eligible Substitute Mortgage Loan or Loans, a certification
substantially in the form attached hereto as Exhibit F-1, with any applicable
exceptions noted thereon. Within one year of the date of substitution, the
Certificate Administrator shall deliver to the Servicer a certification
substantially in the form of Exhibit F-2 hereto with respect to such Eligible
Substitute Mortgage Loan or Loans, with any applicable exceptions noted thereon.
Monthly Payments due with respect to Eligible Substitute Mortgage Loans in the
month of substitution are not part of the Trust Fund and will be retained by the
Seller. For the month of substitution, distributions to Certificateholders will
reflect the collections and recoveries in respect of such Deleted Mortgage Loan
in the Due Period preceding the month of substitution and the Seller shall
thereafter be entitled to retain all amounts subsequently received in respect of
such Deleted Mortgage Loan. The Seller shall give or cause to be given written
notice to the Certificateholders that such substitution has taken place, shall
amend the Mortgage Loan Schedule to reflect the removal of such Deleted Mortgage
Loan from the terms of this Agreement and the substitution of the Eligible
Substitute Mortgage Loan or Loans and shall deliver a copy of such amended
Mortgage Loan Schedule to the Certificate Administrator. Upon such substitution
by the Seller, such Eligible Substitute Mortgage Loan or Loans shall constitute
part of the Mortgage Pool and shall be subject in all respects to the terms of
this Agreement and the Purchase Agreement, including all applicable
representations and warranties thereof included in the Purchase Agreement as of
the date of substitution.

                  For any month in which the Seller substitutes one or more
Eligible Substitute Mortgage Loans for one or more Deleted Mortgage Loans, the
Servicer will determine the amount (the "Substitution Adjustment Amount"), if
any, by which the aggregate Repurchase Price of all such Deleted Mortgage Loans
exceeds the aggregate, as to each such Eligible

                                       38
<PAGE>
Substitute Mortgage Loan, of the principal balance thereof as of the date of
substitution, together with one month's interest on such principal balance at
the applicable Net Mortgage Rate. On the date of such substitution, the Seller
will deliver or cause to be delivered to the Servicer for deposit in the
Collection Account an amount equal to the Substitution Adjustment Amount, if
any, and the Certificate Administrator, upon receipt of the related Eligible
Substitute Mortgage Loan or Loans and certification by the Servicer of such
deposit, shall release to the Seller the related Mortgage File or Files and the
Certificate Administrator or the Trustee, as applicable, shall execute and
deliver such instruments of transfer or assignment, in each case without
recourse, as the Seller shall deliver to it and as shall be necessary to vest
therein any Deleted Mortgage Loan released pursuant hereto.

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

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

                  Section 2.04. Acknowledgement of Trustee.

                  The Trustee acknowledges that in the event that any of (i) the
transfer of the Initial Mortgage Loans, the MI Policies and the Cap Agreements
from the Seller to the Transferor or from the Transferor to the Depositor is
determined to constitute a financing, or (ii) the transfer of the Subsequent
Mortgage Loans from the Seller to the Transferor or from the Transferor to the
Trustee is determined to constitute a financing, then in each case the
Certificates Administrator, on behalf of the Trustee, and the Trustee hold the
Initial Mortgage Loans, the MI Policies, the Cap Agreements and the Subsequent
Mortgage Loans as the designee and bailee of the Transferor and the Depositor,
respectively, subject, however, in each case, to a prior lien in favor of the
Certificate holders pursuant to the terms of this Agreement.

                                       39
<PAGE>
                  Section 2.05. Representations, Warranties and Covenants of the
Servicer.

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

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

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

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

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

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

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

                                       40
<PAGE>
                  Section 2.06. Representations and Warranties of the Depositor.

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

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

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

                  (c) The Depositor has the power and authority to execute and
deliver this Agreement and to carry out its terms; the Depositor has full power
and authority to purchase the property to be purchased from the Transferor and
the Depositor has duly authorized such purchase by all necessary corporate
action; and the execution, delivery and performance of this Agreement have been
duly authorized by the Depositor by all necessary corporate action.

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

                  Section 2.07. Issuance of Certificates.

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

                                       41
<PAGE>
                  Section 2.08. Conveyance of the Subsequent Mortgage Loans.

                  The Trustee, or the Certificate Administrator on behalf of the
Trustee, shall purchase the Subsequent Mortgage Loans as set forth in Section
2.02 of the Purchase Agreement.

                  Section 2.09. Miscellaneous REMIC Provisions.

                  (a) The Certificate Administrator as agent of the Trustee
shall elect that each of the Lower-Tier REMIC and the Upper-Tier REMIC shall be
treated as a REMIC under Section 860D of the Code. Any inconsistencies or
ambiguities in this Agreement or in the administration of this Agreement shall
be resolved in a manner that preserves the validity of such REMIC elections. The
assets of the Lower-Tier REMIC shall include the Mortgage Loans, the Accounts
(other than the Non-REMIC Accounts), any REO Property, and any proceeds of the
foregoing. The Lower-Tier REMIC Regular Interests (as defined below) shall
constitute the assets of the Upper-Tier REMIC.

                  (b) The Lower-Tier REMIC will be evidenced by (x) Lower-Tier
Interest 1, Lower-Tier Interest 2, Lower-Tier Interest 3, Lower-Tier Interest 4,
Lower-Tier Interest 5, and Lower-Tier Interest 6 (the "Lower-Tier REMIC Regular
Interests"), which will be uncertificated and non-transferable and are hereby
designated as the "regular interests" in the Lower-Tier REMIC and (y) the Class
RL Certificate, which is hereby designated as the single "residual interest" in
the Lower-Tier REMIC (the Lower-Tier REMIC Regular Interests, together with the
Class RL Certificate, the "Lower-Tier REMIC Interests"). The Lower-Tier REMIC
Regular Interests shall be recorded on the records of the Lower-Tier REMIC as
being issued to and held by the Trustee on behalf of the Upper-Tier REMIC.

                  The Lower-Tier REMIC Interests will have the following
designations and Lower-Tier Pass-Through Rates, and distributions of principal,
interest and Realized Losses thereon shall be allocated to the Certificates in
the following manner:
<TABLE>
<CAPTION>
      Lower-Tier                                 Pass-Through         Allocation of         Allocation of
      Interests           Initial Balance            Rate             Principal (3)         Interest (4)
      ---------           ---------------            ----             -------------         ------------
       <S>                     <C>                    <C>                  <C>                  <C>
          1                  $216,200,000             (1)                   A1                 A1, AIO
          2                    $4,600,000             (1)                   M1                 M1, AIO
          3                    $2,760,000             (1)                   M2                 M2, AIO
          4                    $2,760,000             (1)                   M3                 M3, AIO
          5                    $3,680,000             (1)                   O                    AIO
          6                     (2)                   (2)                  (2)                    P
       Class RL                 (5)                   (5)                  (5)                   (5)
</TABLE>

-----------------------
(1)      The Lower-Tier Pass-Through Rate on these Lower-Tier REMIC Regular
         Interests shall at any time of determination equal the Weighted Average
         Mortgage Rate of the Mortgage Loans.

                                       42
<PAGE>
(2)      Lower-Tier REMIC Interest 6 is entitled to distributions of all
         Prepayment Charges. It is not entitled to any other distributions of
         principal or interest.
(3)      Distributions of principal and Realized Losses from the Lower-Tier
         REMIC Interests will be allocated to the related Upper-Tier REMIC
         Interests in the amounts and priorities provided for such Upper-Tier
         REMIC Interests in Section 4.1.
(4)      Distributions of interest from the Lower-Tier REMIC Interests will be
         allocated to the related Upper-Tier REMIC Interests in the amounts and
         priorities provided for such Upper-Tier REMIC Interests in Section 4.1.
(5)      On each Distribution Date, available funds, if any, remaining in the
         Lower-Tier REMIC after payments of interest and principal, as
         designated above, will be distributed to the Class RL Certificate. It
         is expected that there shall not be any distributions on the Class RL
         Certificate.

                  (c) The Class A-1, Class AIO, Class M-1, Class M-2, Class M-3,
Class O and Class P Certificates are hereby designated as "regular interests"
with respect to the Upper-Tier REMIC (the "Upper-Tier REMIC Regular Interests")
and the Class RU Certificate is hereby designated as the single "residual
interest" with respect to the Upper-Tier REMIC. On each Distribution Date,
available funds, if any, remaining in the Upper-Tier REMIC after payments of
interest and principal as designated herein shall be distributed to the Class RU
Certificates.

                  (d) For federal income tax purposes, the "latest possible
maturity date" for each of the Lower-Tier REMIC Regular Interests and Upper-Tier
REMIC Regular Interests is hereby set to be the Distribution Date of July, 2030.

                                  ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

                  Section 3.01. Servicer to Assure Servicing.

                  (a) The Servicer shall supervise, or take such actions as are
necessary to ensure, the servicing and administration of the Mortgage Loans and
any REO Property in accordance with this Agreement and its normal servicing
practices, which generally shall conform to the standards of an institution
prudently servicing mortgage loans for its own account and shall have full
authority to do anything it reasonably deems appropriate or desirable in
connection with such servicing and administration. The Servicer may perform its
responsibilities relating to servicing through other agents or independent
contractors, but shall not thereby be released from any of its responsibilities
as hereinafter set forth. Subject to Section 3.06(b), the authority of the
Servicer, in its capacity as Servicer, and any Subservicer acting on its behalf,
shall include, without limitation, the power to (i) consult with and advise any
Subservicer regarding administration of a related Mortgage Loan, (ii) approve
any recommendation by a Subservicer to foreclose on a related Mortgage Loan,
(iii) supervise the filing and collection of insurance claims and take or cause
to be taken such actions on behalf of the insured Person thereunder as shall be
reasonably necessary to prevent the denial of coverage thereunder, and (iv)
effectuate foreclosure or other conversion of the ownership of the Mortgaged
Property securing a related Mortgage Loan, including the employment of
attorneys, the institution of legal proceedings, the collection of deficiency
judgments, the acceptance of compromise proposals and any other matter
pertaining to a delinquent Mortgage Loan. The authority of the Servicer shall
include, in addition, the

                                       43
<PAGE>
power on behalf of the Certificateholders, the Trustee, or any of them to (i)
execute and deliver customary consents or waivers and other instruments and
documents, (ii) consent to transfer of any related Mortgaged Property and
assumptions of the related Mortgage Notes and Mortgages (in the manner provided
in this Agreement) and (iii) collect any Insurance Proceeds and Liquidation
Proceeds. Without limiting the generality of the foregoing, the Servicer and any
Subservicer acting on its behalf may, and is hereby authorized, and empowered by
the Trustee when the Servicer believes it is reasonably necessary in its best
judgment in order to comply with its servicing duties hereunder, to execute and
deliver, on behalf of itself, the Certificateholders, the Trustee, or any of
them, any instruments of satisfaction, cancellation, partial or full release,
discharge and all other comparable instruments, with respect to the related
Mortgage Loans, the insurance policies and the accounts related thereto, and the
Mortgaged Properties. The Servicer may exercise this power in its own name or in
the name of a Subservicer.

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

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

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

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

                  Section 3.02. Subservicing Agreements Between Servicer and
Subservicers.

                  (a) The Servicer may enter into Subservicing Agreements with
Subservicers for the servicing and administration of the Mortgage Loans and for
the performance of any and all other activities of the Servicer hereunder. Each
Subservicer shall be either (i) an institution the accounts of which are insured
by the FDIC or (ii) another entity that engages in the business of originating
or servicing mortgage loans comparable to the Mortgage Loans, and in either case
shall be authorized to transact business in the state or states in which the
related Mortgaged Properties it is to service are situated, if and to the extent
required by applicable law to enable the Subservicer to perform its obligations
hereunder and under the Subservicing Agreement. Any Subservicing Agreement
entered into by the Servicer shall include the provision that such Agreement may
be immediately terminated (i) (x) with cause and without any termination fee by
the Servicer hereunder and/or (y) without cause, in which case the Servicer
shall be solely responsible for any termination fee or penalty resulting
therefrom and (ii) at the option of the Trustee upon the termination or
resignation of the Servicer hereunder, in which case the Servicer shall be
solely responsible for any termination fee or penalty resulting therefrom. In
addition, each Subservicing Agreement shall provide for servicing of the
Mortgage Loans consistent with

                                       44
<PAGE>
the terms of this Agreement. The Servicer and the Subservicers may enter into
Subservicing Agreements and make amendments to the Subservicing Agreements or
enter into different forms of Subservicing Agreements providing for, among other
things, the delegation by the Servicer to a Subservicer of additional duties
regarding the administration of the Mortgage Loans; provided, however, that any
such amendments or different forms shall be consistent with and not violate the
provisions of this Agreement, and that no such amendment or different form shall
be made or entered into which could be reasonably expected to be materially
adverse to the interests of the Certificateholders, without the consent of the
Certificateholders holding at least 51% of the aggregate Voting Rights.

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

                  Section 3.03. Successor Subservicers.

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

                  Section 3.04. Liability of the Servicer.

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

                                       45
<PAGE>
such indemnification. For the purposes of this Agreement, the Servicer shall be
deemed to have received any payment on a Mortgage Loan on the date the
Subservicer received such payment.

                  (b) Any Subservicing Agreement that may be entered into and
any transactions or services relating to the Mortgage Loans involving a
Subservicer in its capacity as such and not as an originator shall be deemed to
be between the Subservicer and the Servicer alone, and the Certificate
Administrator, the Trustee and the Certificateholders shall not be deemed
parties thereto and shall have no claims, rights, obligations, duties or
liabilities with respect to the Subservicer except as set forth in Section 3.15.

                  Section 3.05. Assumption or Termination of Subservicing
Agreements by the Certificate Administrator.

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

                  (b) The Certificate Administrator may terminate any
Subservicer upon becoming successor Servicer.

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

                                       46
<PAGE>
                  Section 3.06. Collection of Mortgage Loan Payments.

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

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

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

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

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

                                       47
<PAGE>
                  (ii)  the aggregate Repurchase Price of the Mortgage Loans
purchased by the Servicer pursuant to Section 3.18 or by the Converted Loan
Purchaser, pursuant to Section 3.20;

                  (iii) Net Liquidation Proceeds;

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

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

                  (vi)  any Advance and any Compensating Interest payments;

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

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

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

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

                                       48
<PAGE>
remittances received from any Subservicer within one Business Day following
receipt by the Servicer.

                  Section 3.07. Withdrawals from the Collection Account.

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

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

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

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

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

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

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

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

                                       49
<PAGE>
                  (viii) to withdraw any other amount deposited in the
         Collection Account that was not required to be deposited therein
         pursuant to Section 3.06;

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

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

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

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

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

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

The Servicer shall not use any payments received under the Cap Agreements and
deposited in the Collection Account to make any of the foregoing payments, other
than pursuant to clause (xiv) above.

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

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

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

                  (b) The deposits in the Servicing Accounts shall be held in
trust by the Servicer or a Subservicer (and its successors and assigns) in the
name of the Trustee. Such Servicing Accounts shall be Eligible Accounts and, if
permitted by applicable law, invested in Eligible

                                       50
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Investments held in trust by the Servicer or a Subservicer as described above
and maturing, or be subject to redemption or withdrawal, no later than the date
on which such funds are required to be withdrawn, and in no event later than 45
days after the date of investment; withdrawals of amounts from the Servicing
Accounts may be made only to effect timely payment of taxes, assessments,
insurance premiums, or comparable items, to reimburse the Servicer or a
Subservicer for any advances made with respect to such items, to refund to any
Mortgagors any sums as may be determined to be overages, to pay interest, if
required, to Mortgagors on balances in the Servicing Accounts or to clear and
terminate the Servicing Accounts at or any time after the termination of this
Agreement. Amounts received from Mortgagors for deposit into the Servicing
Accounts shall be deposited in the Servicing Accounts by the Servicer within two
days of receipt. The Servicer shall advance from its own funds amounts needed to
pay items payable from the Servicing Accounts if the Servicer reasonably
believes that such amounts are recoverable from the related Mortgagor. The
Servicer shall comply with all laws relating to the Servicing Accounts,
including laws relating to payment of interest on the Servicing Accounts. If
interest earned by the Servicer on the Servicing Accounts is not sufficient to
pay required interest on the Servicing Accounts, the Servicer shall pay the
difference from its own funds. The Servicing Accounts shall not be the property
of the Trust.

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

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

Section 3.10. Administration of the Cap Agreements. (a) The Servicer shall take
all such actions on behalf of the Trustee as are necessary to administer the Cap
Agreements and to enforce the Trustee's rights under the Cap Agreements, which
actions shall conform to the standards of an institution prudently administering
the Cap Agreements for its own account. Except as expressly set forth herein,
the Servicer shall have full authority on behalf of the Trustee to do anything
it reasonably deems appropriate or desirable in connection with the
administration of the Cap Agreements. The Servicer shall make its best
reasonable efforts to collect or cause to be collected from the Cap Agreement
counterparties payments due to the Trustee under the Cap Agreements.

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<PAGE>
                  (b) The Servicer shall cause to be deposited into the
Supplemental Interest Account all payments received from the Cap Agreement
counterparties under the terms of the Cap Agreements.

                  (c) Notwithstanding the provisions of Subsection 3.10(a) and
(b), the Servicer shall not make any action in regard to the Cap Agreements
inconsistent with the interests of the Trustee, or the Certificateholders or
with the rights and interests of the Trustee, or the Certificateholders under
this Agreement.

                  (d) The Trustee and the Certificate Administrator shall
furnish the Servicer with any powers of attorney and other documents in form as
provided to it necessary or appropriate to enable the Servicer to service and
administer the Cap Agreements; provided, however, that neither the Trustee nor
Certificate Administrator shall not be liable for the actions of the Servicer
under such powers of attorney.

                  Section 3.11. Maintenance of Hazard Insurance and Fidelity
Coverage.

                  (a) The Servicer shall maintain and keep, or cause each
Subservicer to maintain and keep, with respect to each Mortgage Loan and each
REO Property, in full force and effect hazard insurance (fire insurance with
extended coverage) equal to at least the lesser of the Principal Balance of the
Mortgage Loan (or the combined Principal Balance owing on such Mortgage Loan and
any mortgage loan senior to such Mortgage Loan) or the current replacement cost
of the Mortgaged Property, and containing a standard mortgagee clause, provided,
however, that the amount of hazard insurance may not be less than the amount
necessary to prevent loss due to the application of any co-insurance provision
of the related policy. Unless applicable state law requires a higher deductible,
the deductible on such hazard insurance policy may be no more than $1,500 or 1%
of the applicable amount of coverage, whichever is less. In the case of a
condominium unit or a unit in a planned unit development, the required hazard
insurance shall take the form of a multi-peril policy covering the entire
condominium project or planned unit development, in an amount equal to at least
100% of the insurable value based on replacement cost. If the Servicer shall
obtain and maintain a blanket policy consistent with its general mortgage
servicing activities insuring against hazard losses on all of the Mortgage
Loans, it shall conclusively be deemed to have satisfied its obligations as set
forth in this Section 3.11(a), it being understood and agreed that such policy
may contain a deductible clause, in which case the Servicer shall, in the event
that there shall not have been maintained on the related Mortgaged Property a
policy complying with this Section 3.11(a) and there shall have been a loss
which would have been covered by such policy, deposit in the Collection Account
the amount not otherwise payable under the blanket policy because of such
deductible clause without any right of reimbursement. Any such deposit by the
Servicer shall be made on the last Business Day of the Due Period in the month
in which payments under any such policy would have been deposited in the
Collection Account. In connection with its activities as servicer of the
Mortgage Loans, the Servicer agrees to present, on behalf of itself, the Trust,
and the Trustee, claims under any such blanket policy.

                  (b) Any amounts collected by the Servicer or a Subservicer
under any such hazard insurance policy (other than amounts to be applied to the
restoration or repair of the Mortgaged Property or amounts released to the
Mortgagor in accordance with the Servicer's or a

                                       52
<PAGE>
Subservicer's normal servicing procedures, the Mortgage Note, the Mortgage or
applicable law) shall be deposited in the Collection Account.

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

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

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

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

                  (g) The Servicer shall obtain and maintain at its own expense,
and shall cause each Subservicer to obtain and maintain at its own expense, and
for the duration of this Agreement, a blanket fidelity bond and an errors and
omissions insurance policy covering the Servicer's and such Subservicer's
officers, employees and other persons acting on its behalf in connection with
its activities under this Agreement. The amount of coverage shall be consistent
with industry standards but in an amount not less than presently maintained by
the Servicer. The Servicer shall promptly notify the Certificate Administrator
and the Trustee of any material change in the terms of such bond or policy. The
Servicer shall provide annually to the Certificate Administrator and the Trustee
a certificate of insurance that such bond and policy are in effect. If any such
bond or policy ceases to be in effect, the Servicer shall, to the extent
possible, give

                                       53
<PAGE>
the Certificate Administrator and the Trustee ten days' notice prior to any such
cessation and shall use its reasonable best efforts to obtain a comparable
replacement bond or policy, as the case may be. Any amounts relating to the
Mortgage Loans collected under such bond or policy shall be deposited in the
Collection Account.

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

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

                  (b) Notwithstanding the foregoing paragraph or any other
provision of this Agreement, the Servicer shall not be deemed to be in default,
breach or any other violation of its obligations hereunder by reason of any
assumption of a Mortgage Loan by operation of law or any conveyance by the
Mortgagor of the related Mortgaged Property or assumption of a Mortgage Loan
which the Servicer reasonably believes it may be restricted by law from
preventing, for any reason whatsoever or if the exercise of such right would
impair or threaten to impair any recovery under any applicable insurance policy.

                  Section 3.13. Realization Upon Defaulted Mortgage Loans.

                  (a) The Servicer shall, or shall direct the related
Subservicer to, foreclose upon or otherwise comparably convert the ownership of
properties securing any Mortgage Loans that come into and continue in default
and as to which no satisfactory arrangements can be made for collection of
delinquent payments pursuant to Section 3.06, except that the Servicer shall
not, and shall not direct the related Subservicer to, foreclose upon or
otherwise comparably convert a Mortgaged Property if there is evidence of toxic
waste or other environmental hazards thereon

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<PAGE>
unless the Servicer follows the procedures in Subsection (c) below. In
connection with such foreclosure or other conversion, the Servicer in
conjunction with the related Subservicer, if any, shall use its best reasonable
efforts to preserve REO Property and to realize upon defaulted Mortgage Loans in
such manner as to maximize the receipt of principal and interest by the
Certificateholders, taking into account, among other things, the timing of
foreclosure and the considerations set forth in Subsection 3.13(b). The
foregoing is subject to the proviso that the Servicer shall not be required to
expend its own funds in connection with any foreclosure or towards the
restoration of any property unless it determines in good faith (i) that such
restoration or foreclosure will increase the proceeds of liquidation of the
Mortgage Loan to Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it either through
Liquidation Proceeds (respecting which it shall have priority for purposes of
reimbursements from the Collection Account pursuant to Section 3.07) or through
Insurance Proceeds (respecting which it shall have similar priority). The
Servicer shall be responsible for all costs and expenses constituting
Liquidation Expenses incurred by it in any such proceedings; provided, however,
that it shall be entitled to reimbursement thereof (as well as its normal
servicing compensation) as set forth in Section 3.07. Any income from or other
funds (net of any income taxes) generated by REO Property shall be deemed for
purposes of this Agreement to be Liquidation Proceeds.

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

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

                  (b) The Servicer shall not acquire any real property (or any
personal property incident to such real property) on behalf of the Trust Fund
except in connection with a default or reasonably foreseeable default of a
Mortgage Loan. In the event that the Servicer acquires any real property (or
personal property incident to such real property) on behalf of the Trust Fund in
connection with a default or imminent default of a Mortgage Loan, such property
shall be disposed of by the Servicer on behalf of the Trust Fund within three
years after its acquisition on behalf of the Trust Fund.

                  (c) With respect to any Mortgage Loan as to which the Servicer
or a Subservicer has received notice of, or has actual knowledge of, the
presence of any toxic or hazardous substance on the Mortgaged Property, the
Servicer shall promptly notify the Certificate Administrator and the Trustee,
and shall act in accordance with any such directions and instructions provided
by the Certificate Administrator on behalf of, and after consulting with the
Trustee. If the Certificate Administrator, on behalf of the Trustee has not
provided directions

                                       55
<PAGE>
and instructions to the Servicer in connection with any such Mortgage Loan
within 30 days of a request by the Servicer for such directions and
instructions, then the Servicer shall take such action as it deems to be in the
best economic interest of the Trust Fund (other than proceeding against the
Mortgaged Property) and is hereby authorized at such time as it deems
appropriate to release such Mortgaged Property from the lien of the related
Mortgage. The parties hereto acknowledge that the Servicer shall not obtain on
behalf of the Trust a deed as a result or in lieu of foreclosure, and shall not
otherwise acquire possession of or title to, or commence any proceedings to
acquire possession of or title to, or take any other action with respect to, any
Mortgaged Property, if the Trust could reasonably be considered to be a
responsible party for any liability arising from the presence of any toxic or
hazardous substance on the Mortgaged Property.

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

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

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

                  (c) The Servicer shall cause each Mortgage File or any
document therein released pursuant to Subsection 3.14(b) to be returned to the
Certificate Administrator when the need therefor no longer exists, and in any
event within 21 days of the Servicer's receipt thereof, unless the Mortgage Loan
has become a Liquidated Mortgage Loan and the Liquidation Proceeds relating to
the Mortgage Loan have been deposited in the Collection Account or such Mortgage
File is being used to pursue foreclosure or other legal proceedings. Prior to
return of a Mortgage File or any document to the Certificate Administrator, the
Servicer, the related insurer or Subservicer to whom such file or document was
delivered shall retain such file or document in its respective control as bailee
for the Certificate Administrator on behalf of the Trustee unless the Mortgage
File or such document has been delivered to an attorney, or to a public trustee
or other public official as required by law, to initiate or pursue legal action
or other proceedings for the foreclosure of the Mortgaged Property either
judicially or non-judicially, and the Servicer has delivered to the Certificate
Administrator and the Trustee, a certificate of a Servicing Officer

                                       56
<PAGE>
certifying as to the name and address of the Person to which such Mortgage File
or such document was delivered and the purpose or purposes of such delivery. If
a Mortgage Loan becomes a Liquidated Mortgage Loan, the Certificate
Administrator on behalf of the Trustee shall deliver the Request for Release
with respect thereto to the Servicer upon deposit of the related Liquidation
Proceeds in the Collection Account.

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

                  Section 3.15. Servicing Compensation.

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

                  (b) The Servicer may retain additional servicing compensation
in the form of late payment charges, to the extent such charges are collected
from the related Mortgagors and investment earnings on the Collection Account.
The Servicer shall be required to pay all expenses it incurs in connection with
servicing activities under this Agreement and shall not be entitled in
connection with servicing activities under this Agreement to reimbursement
except as provided in this Agreement. Expenses to be paid by the Servicer
without reimbursement under this Subsection 3.15(b) shall include payment of the
expenses of the accountants retained pursuant to Section 3.17.

                  Section 3.16. Annual Statements of Compliance.

                  Within 90 days after December 31 of each year, the Servicer at
its own expense shall deliver to the Certificate Administrator, with a copy to
the Trustee and the Rating Agencies, an Officer's Certificate stating, as to the
signer thereof, that (i) a review of the activities of the Servicer during the
preceding calendar year and of performance under this Agreement has been made
under such officer's supervision, (ii) to the best of such officer's knowledge,
based on such review, the Servicer has fulfilled its obligations under this
Agreement in all material respects for

                                       57
<PAGE>
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer and the nature
and status thereof including the steps being taken by the Servicer to remedy
such default; (iii) a review of the activities of each Subservicer during the
Subservicer's most recently ended calendar year and its performance under its
Subservicing Agreement has been made under such officer's supervision; and (iv)
to the best of the Servicing Officer's knowledge, based on his review and the
certification of an officer of the Subservicer (unless the Servicing Officer has
reason to believe that reliance on such certification is not justified), either
each Subservicer has performed and fulfilled its duties, responsibilities and
obligations under this Agreement and its Subservicing Agreement in all material
respects throughout the year, or, if there has been a default in performance or
fulfillment of any such duties, responsibilities or obligations, specifying the
nature and status of each such default known to the Servicing Officer. Copies of
such statements shall be provided by the Servicer to the Certificateholders upon
request or by the Certificate Administrator at the expense of the Servicer
should the Servicer fail to provide such copies.

                  Section 3.17. Annual Independent Public Accountants' Servicing
Report.

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

                  (b) Within 90 days after December 31 of each year, the
Servicer, at its expense, shall, and shall cause each Subservicer to cause, a
nationally recognized firm of independent certified public accountants to
furnish to the Servicer or such Subservicer, as the case may be, a report
stating that (i) it has obtained a letter of representation regarding certain
matters from the management of the Servicer or such Subservicer, as the case may
be, which includes an assertion that the Servicer or such Subservicer, as the
case may be, has complied with certain minimum mortgage loan servicing standards
identified in the Uniform Single Attestation Program for Mortgage Bankers
established by the Mortgage Bankers Association of America with respect to the
servicing of first lien conventional single family mortgage loans during the
most recently completed calendar year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that may be appropriate. Immediately upon receipt of such report, the Servicer
shall or shall cause each Subservicer to furnish a copy of such report to the
Certificate Administrator, the Trustee and the Rating Agencies.

                  Section 3.18. Optional Purchase of Defaulted Mortgage Loans.

                  The Servicer may repurchase any Mortgage Loan delinquent in
payment for a period of 90 days or longer for a price equal to the Repurchase
Price. The procedure for such repurchase shall be the same as for repurchase by
the Seller under the Purchase Agreement.

                                       58
<PAGE>
Notwithstanding any contrary provision of this Agreement, with respect to any
Mortgage Loan which is not in default or as to which no default is imminent, no
purchase or substitution pursuant to Section 2.03 or this Section 3.18 shall be
made unless the Servicer provides to the Certificate Administrator and the
Trustee, an Opinion of Counsel to the effect that such purchase or substitution
would not (i) result in the imposition of taxes on "prohibited transactions" of
the Trust Fund, as defined in Section 860F of the Code or a tax or contributions
to the Trust Fund under the REMIC Provisions, or (ii) cause the Trust Fund to
fail to qualify as a REMIC at any time that any Certificates are outstanding.
Any Mortgage Loan to be purchased or substituted pursuant to this Section 3.18
shall be purchased or substituted (subject to compliance with this Section 3.18)
upon the earlier of (x) the occurrence of a default or reasonably foreseeable
default with respect to such Mortgage Loan or (y) receipt by the Certificate
Administrator and the Trustee, of an Opinion of Counsel to the effect that such
purchase or substitution will not result in the events described in clauses (i)
and (ii) of the preceding sentence.

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

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

                  Section 3.20. Purchase of Converted Mortgage Loans.

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

                  Section 3.21. [Reserved]

                  Section 3.22. Servicing and Administrating of the MI Policies.

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

                                       59
<PAGE>
Except as expressly set forth herein, the Servicer shall have full authority on
behalf of the Trust to do anything it reasonably deems appropriate or desirable
in connection with the servicing, maintenance and administration of the MI
Policies. The Servicer shall make its best reasonable efforts to file all
insured claims under the MI Policies and collect from the MI Insurer all
Insurance Proceeds due to the Trustee under the MI Policies. The Servicer shall
not take, or permit any subservicer to take, any action which would result in
non-coverage under any applicable MI Policy of any loss which, but for the
actions of the Servicer or Subservicer, would have been covered thereunder. To
the extent coverage is available, the Servicer shall keep or cause to be kept in
full force and effect each such MI Policy for the life of the Mortgage Loan;
provided, however, that if a MI Insurer Insolvency Event has occurred and is
continuing, the Servicer may terminate the MI Policy on any Mortgage Loan that
is not then past due. The Servicer shall cooperate with the MI Insurer and shall
use its best efforts to furnish all reasonable aid, evidence and information in
the possession of the Servicer or to which the Servicer has access with respect
to any Mortgage Loan.

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

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

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

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

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

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                  Section 3.23. Determination Date Reports.

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

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

                  Section 3.24. Advances.

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

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

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

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

                  Section 3.25. Compensating Interest Payments.

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

                                   ARTICLE IV

                                  FLOW OF FUNDS

                  Section 4.01. Distributions.

                  (a) On each Distribution Date, the Trustee shall (based solely
on the information provided to the Trustee by the Certificate Administrator
pursuant to Section 4.03 hereof) withdraw from the Distribution Account that
portion of REMIC Available Funds for such Distribution Date consisting of the
Interest Remittance Amount for such Distribution Date, and make the following
disbursements and transfers in the order of priority described below, in each
case to the extent of the Interest Remittance Amount remaining for such
Distribution Date:

                  (i) On each Distribution Date, the Trustee will first
         distribute the Prepayment Charges collected during the prior Prepayment
         Period to the Holders of the Class P Certificates. After making that
         distribution, the Trustee will distribute the remaining Interest
         Remittance Amount for that Distribution Date, to the Certificate
         Administrator, the Certificate Administrator Fee which is due on that
         Distribution Date, and will then apply the remaining Interest
         Remittance Amount to the payment of interest then due on the
         certificates in the following order of priority:

                  (A) first, with respect to the Class AIO Certificates and the
         Class A-1 Certificates, the Class AIO Monthly Interest Distributable
         Amount and the REMIC Monthly Interest Distributable Amount for the
         Class A-1 Certificates, respectively; these payments are of equal
         priority to those two Classes, and, in the event that the remaining
         Interest Remittance Amount is insufficient to pay both Classes the full
         amount due, the amount paid to the Holders of each of these two Classes
         will be a pro rata portion of the remaining Interest Remittance Amount,
         with the allocation based on the relative

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         proportions of the Class AIO Monthly Interest Distributable Amount and
         the REMIC Monthly Interest Distributable Amount for the Class A-1
         Certificates; the REMIC Monthly Interest Distributable Amount for the
         Class A-1 Certificates shall be paid to the Holders of the Class A-1
         Certificates, and the Class AIO Monthly Interest Distributable Amount
         shall be paid as follows:

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

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

                  (B) second, to the Holders of the Class M-1 Certificates, the
         REMIC Monthly Interest Distributable Amount for Class M-1;

                  (C) third, to the Holders of the Class M-2 Certificates, the
         REMIC Monthly Interest Distributable Amount for Class M-2;

                  (D) fourth, to the Holders of the Class M-3 Certificates, the
         REMIC Monthly Interest Distributable Amount for Class M-3;

                  (E) fifth, to the Holders of the Class RU Certificates, any
         remainder.

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

                  (A) first, to the Holders of the Class A-1 Certificates, the
         entire amount of the Principal Remittance Amount, until the Certificate
         Principal Balance of the Class A-1 Certificates has been reduced to
         zero;

                  (B) second, to the Holders of the Class M-1 Certificates, the
         entire amount of the Principal Remittance Amount until the certificate
         principal balance of the Class M-1 Certificates has been reduced to
         zero;

                  (C) third, to the Holders of Class M-2 Certificates, the
         entire amount of the Principal Remittance Amount until the Certificate
         Principal Balance of the Class M-2 Certificates has been reduced to
         zero; and

                  (D) fourth, to the Holders of the Class M-3 Certificates, the
         entire amount of the Principal Remittance Amount until the Certificate
         Principal Balance of the Class M-3 Certificates has been reduced to
         zero;

                  (E) fifth, to the Trustee and the Certificate Administrator,
         pro rata, any amounts owed to them under the Basic Documents remaining
         unpaid;

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                  (F) sixth, to the Servicer, the amount of any reimbursement or
         indemnification owed to it by the Trust pursuant to Section 6.03
         hereof.

                  (G) seventh, to the Holders of the Class O Certificates, the
         entire amount of the Principal Distribution Amount until the
         Certificate Balance of the Class O Certificates has been reduced to
         zero; and

                  (H) eighth, to the Holders of the Class RU Certificates, any
         remainder.

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

                  (A) first, to the Holders of the Class A-1 Certificates, the
         Class A-1 Principal Distribution Amount, until the Certificate
         Principal Balance of the A-1 Certificates has been reduced to zero;

                  (B) second, to the Holders of the Class M-1 Certificates, the
         Class M-1 Principal Distribution Amount, until the Certificate
         Principal Balance of the Class M-1 Certificates has been reduced to
         zero;

                  (C) third, to the Holders of the Class M-2 Certificates, the
         Class M-2 Principal Distribution Amount, until the Certificate
         Principal Balance of the Class M-2 Certificates has been reduced to
         zero;

                  (D) fourth, to the Holders of the Class M-3 Certificates, the
         Class M-3 Principal Distribution Amount, until the Certificate
         Principal Balance of the Class M-3 Certificates has been reduced to
         zero;

                  (E) fifth, to the Trustee and the Certificate Administrator,
         pro rata, any amounts owed to them under the Basic Documents remaining
         unpaid.

                  (F) sixth, to the Servicer, the amount of any reimbursement or
         indemnification owed to it by the Trust pursuant to Section 6.03
         hereof.

                  (G) seventh, to the Holders of the Class O Certificates, the
         entire amount of the Principal Distribution Amount until the
         Certificate Balance of the Class O Certificates has been reduced to
         zero; and

                  (H) eighth, to the Holders of the Class RU Certificates, any
         remainder.

                  (b) Method of Distribution. The Trustee shall make
distributions in respect of a Distribution Date to each Certificateholder of
record on the related Record Date (other than as provided in Section 11.01
respecting the final distribution), in the case of Certificateholders of the
Regular Certificates, by check or money order mailed to such Certificateholder
at the address

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appearing in the Certificate Register, or by wire transfer. Distributions among
Certificateholders shall be made in proportion to the Percentage Interests
evidenced by the Certificates held by such Certificateholders.

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

                  Section 4.02. Payment Account and Distribution Account.

                  (a) No later than the Closing Date, the Certificate
Administrator shall establish and maintain a segregated trust account that is an
Eligible Account, which shall be titled "Payment Account, The First Union
National Bank, as Certificate Administrator for the registered holders of
NovaStar Mortgage Funding Trust 2000-1, Home Equity Loan Asset-Backed
Certificates, Series 2000-1" (the "Payment Account"). The Certificate
Administrator shall, promptly upon receipt, deposit in the Payment Account and
retain therein the Interest Remittance Amount and the Principal Remittance
Amount remitted on each Servicer Remittance Date to the Certificate
Administrator by the Servicer, as well as amounts transferred from the Interest
Coverage Account and the Pre-Funding Account. Funds deposited in the Payment
Account shall be held in trust by the Certificate Administrator for the
Certificateholders for the uses and purposes set forth herein.

                  (b) The Certificate Administrator may invest funds deposited
in the Payment Account in Permitted Investments in its discretion with a
maturity date (i) no later than the Business Day immediately preceding the date
on which such funds are required to be withdrawn from such account pursuant to
this Agreement, if a Person other than the Certificate Administrator or an
Affiliate manages or advises such investment, and (ii) no later than the date on
which such funds are required to be withdrawn from such account pursuant to this
Agreement, if the Certificate Administrator or an Affiliate manages or advises
such investment. All income or other gain from such investments may be released
from the Payment Account and paid to the Certificate Administrator, from time to
time as part of its compensation for acting as Certificate Administrator.

                  (c) Amounts on deposit in the Payment Account shall be
withdrawn by the Certificate Administrator as follows:

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

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

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

                  (d) By noon on the Business Day prior to each Distribution
Date, the Certificate Administrator shall remit funds in the Payment Account to
the Trustee.

                  (e) No later than the Closing Date, the Trustee shall
establish and maintain a segregated trust account that is an Eligible Account,
which shall be titled "Distribution Account, The Chase Manhattan Bank, as
Trustee for the registered holders of NovaStar Mortgage Funding Trust 2000-1,
Home Equity Loan Asset-Backed Certificates, Series 2000-1" (the "Distribution
Account"). The Certificate Administrator shall, promptly upon receipt, deposit
in the Distribution Account and retain therein amounts transferred from the
Payment Account. Funds deposited in the Distribution Account shall be held in
trust by the Trustee for the Certificateholders for the uses and purposes set
forth herein.

                  (f) The Trustee may invest funds deposited in the Distribution
Account in Permitted Investments in its discretion with a maturity date (i) no
later than the Business Day immediately preceding the date on which such funds
are required to be withdrawn from such account pursuant to this Agreement, if a
Person other than the Trustee or an Affiliate manages or advises such
investment, and (ii) no later than the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement, if the Trustee or an
Affiliate manages or advises such investment. All income or other gain from such
investments may be released from the Distribution Account and paid to the
Trustee, from time to time as part of its compensation for acting as Trustee.

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

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

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

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

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

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<PAGE>
                  Section 4.03. Statements.

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

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

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

                  (iii) the Pool Balance at the Close of Business at the end of
         the related Due Period;

                  (iv) the number, aggregate principal balance, and weighted
         average Mortgage Rate of the Mortgage Loans as of the related
         Determination Date and the number and aggregate principal balance of
         all Subsequent Mortgage Loans added during the preceding Prepayment
         Period;

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

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

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

                  (viii) the Certificate Principal Balance of the Class A-1
         Certificates, the Mezzanine Certificates and the Class O Certificates,
         after giving effect to the distributions made on such Distribution
         Date;

                  (ix) the Unpaid Interest Shortfall Amount, if any, with
         respect to the Class A-1 Certificates, the Mezzanine Certificates and
         the Class AIO Certificates for such Distribution Date;

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

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

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<PAGE>
                  (xii) the Available Funds Cap Carryforward Amount for the
         Class A-1 Certificates and the Mezzanine Certificates, if any, for such
         Distribution Date and the amount remaining unpaid after reimbursements
         therefor on such Distribution Date;

                  (xiii) the respective REMIC Pass-Through Rates applicable to
         the Class A-1 Certificates, the Mezzanine Certificates and the Class
         AIO Certificates for such Distribution Date and the REMIC Pass-Through
         Rate applicable to the Class A-1 Certificates and the Mezzanine
         Certificates for the immediately succeeding Distribution Date;

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

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

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

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

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

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

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

                  Section 4.04. Supplemental Interest Account.

                  (a) The parties do hereby create and establish a sub-trust of
the Trust Fund, which shall hold an account, which, no later than the Closing
Date, the Certificate Administrator shall establish and maintain, on behalf of
the Trustee, as a segregated trust account that is an Eligible Account, which
shall be titled "Supplemental Interest Account, The First Union National Bank,
as Certificate Administrator for the registered holders of NovaStar Mortgage
Funding Trust 2000-1, Home Equity Loan Asset-Backed Certificates, Series 2000-1"
(the "Supplemental Interest Account"). The Cap Agreement and the proceeds
thereof shall be the assets of such trust. The Certificate Administrator shall,
promptly upon receipt, deposit in the Supplemental Interest Account all Cap
Payments received by the Certificate Administrator, on behalf of the Trustee,
under the Cap Agreements and (ii) each distribution of the Class AIO Current
Interest pursuant to Section 4.01(a)(i)(A)(ii). Funds deposited in the
Supplemental Interest Account shall be held in trust by the Certificate
Administrator for the Certificateholders for the uses and purposes set forth
herein.

                  (b) The Certificate Administrator will invest funds deposited
in the Supplemental Interest Account as directed by the Servicer in Permitted
Investments with a maturity date (i) no later than the Business Day immediately
preceding the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement, if a Person other than the Certificate
Administrator or an Affiliate manages or advises such investment, and (ii) no
later than the date on which such funds are required to be withdrawn from such
account pursuant to this Agreement, if the Certificate Administrator or an
Affiliate manages or advises such investment. For federal income tax purposes,
the Holders of the Class AIO Certificates shall be the owners of the
Supplemental Interest Account and shall report all items of income, deduction,
gain or loss arising therefrom. All income and gain realized from investment of
funds deposited in the Supplemental Interest Account shall be credited to such
Account. At no time will the Cap Agreements or the Supplemental Interest Account
be assets of any REMIC created hereunder.

                  (c) On each Distribution Date, the Certificate Administrator
shall transfer the Supplemental Interest Payment Amount Available as follows:

                  (i) first, to pay the Supplemental Interest Payment for the
         Class A-1 Certificates;

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                  (ii) second, to pay the Supplemental Interest Payment for the
         Class M-1 Certificates;

                  (iii) third, to pay the Supplemental Interest Payment for the
         Class M-2 Certificates; and

                  (iv) fourth, to pay the Supplemental Interest Payment for the
         Class M-3 Certificates.

         The Trustee, in making the foregoing distributions, shall first apply
         in full that portion of the Total Supplemental Interest Payment Amount
         equal to the Class AIO Current Interest, and, only if that entire
         amount is exhausted, shall then apply that portion of the Total
         Supplemental Interest Payment Amount Available equal to the Allocable
         Cap Payment Amount. Any remaining amount of the Total Supplemental
         Interest Payment Amount Available for such Distribution Date shall be
         retained in the Supplemental Interest Amount, except for the portion
         thereof that is distributable as the Class AIO Monthly Distributable
         Amount pursuant to Section 4.4(d) hereof.

                  (d) On each Distribution Date, the Trustee shall distribute to
the Holders of the Class AIO Certificates, the Class AIO Monthly Distributable
Amount for such Distribution Date plus all income and gain realized on
investments in the Supplemental Interest Account which have not previously been
distributed to such Holders.

                  (e) The Certificate Administrator shall comply with all
requirements of the Code and applicable state and local law with respect to the
withholding from any distributions made by it to any Person entitled thereto of
any applicable withholding taxes imposed thereon and with respect to any
applicable reporting requirements in connection therewith.

                  (f) Notwithstanding any other provision of this Section 4.04,
the right to receive the Supplemental Interest Amount (such right, the
"Supplemental Interest Right") shall not be separately transferable from the
Underwritten Certificates.

                  Section 4.05. Pre-Funding Account.

                  (a) No later than the Closing Date, the Certificate
Administrator shall establish and maintain, on behalf of the Trustee, a
segregated trust account that is an Eligible Account, which shall be titled
"Pre-Funding Account, The First Union National Bank, as Certificate
Administrator for the registered holders of NovaStar Mortgage Funding Trust
2000-1, Home Equity Loan Asset-Backed Certificates, Series 2000-1" (the
"Pre-Funding Account"). The Certificate Administrator shall, promptly upon
receipt, deposit in the Pre-Funding Account and retain therein the Original
Pre-Funded Amount remitted on the Closing Date to the Certificate Administrator
by the Depositor. Funds deposited in the Pre-Funding Account shall be held in
trust by the Certificate Administrator, on behalf of the Trustee, for the
Certificateholders for the uses and purposes set forth herein.

                  (b) The Certificate Administrator will invest funds deposited
in the Pre-Funding Account as directed by the Servicer in Permitted Investments
with a maturity date (i) no later than the Business Day immediately preceding
the date on which such funds are required to be

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withdrawn from such account pursuant to this Agreement, if a Person other than
the Certificate Administrator or an Affiliate manages or advises such
investment, and (ii) no later than the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement, if the Certificate
Administrator or an Affiliate manages or advises such investment. For federal
income tax purposes, the Servicer shall be the owner of the Pre-Funding Account
and shall report all items of income, deduction, gain or loss arising therefrom.
All income and gain realized from investment of funds deposited in the
Pre-Funding Account shall be withdrawn and deposited in the Interest Coverage
Account. At no time will the Pre-Funding Account be an asset of any REMIC
created hereunder.

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

                  (i) On any Subsequent Transfer Date, the Certificate
         Administrator shall withdraw from the Pre-Funding Account an amount
         equal to 98.40% of the Principal Balances of the Subsequent Mortgage
         Loans transferred and assigned to the Certificate Administrator for
         deposit in the Mortgage Pool on such Subsequent Transfer Date and pay
         such amount to or upon the order of the Depositor upon satisfaction of
         the conditions set forth in Section 2.08 with respect to such transfer
         and assignment;

                  (ii) If the amount on deposit in the Pre-Funding Account
         (exclusive of investment income) has not been reduced to zero during
         the Funding Period, on the day immediately following the termination of
         the Funding Period, the Certificate Administrator shall deposit into
         the Payment Account any amounts remaining in the Pre-Funding Account
         (exclusive of investment income) for distribution in accordance with
         the terms hereof;

                  (iii) To withdraw investment income for deposit in the
         Interest Coverage Account;

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

                  (v) To clear and terminate the Pre-Funding Account upon the
         earlier to occur of (A) the Distribution Date immediately following the
         end of the Funding Period and (B) the termination of this Agreement,
         with any amounts remaining on deposit therein being paid to the Holders
         of the Certificates then entitled to distributions in respect of
         principal.

                  Withdrawals from the Pre-Funding Account pursuant to clauses
(i), (ii) and (iv) shall be treated as contributions of cash to the Lower-Tier
REMIC on the date of withdrawal.

                  Section 4.06. Interest Coverage Account.

                  (a) No later than the Closing Date, the Certificate
Administrator shall establish and maintain, on behalf of the Trustee, a
segregated trust account that is an Eligible Account, which shall be titled
"Interest Coverage Account, First Union National Bank, as Certificate
Administrator for the registered holders of NovaStar Mortgage Funding Trust
2000-1, Home Equity Loan Asset-Backed Certificates, Series 2000-1" (the
"Interest Coverage Account"). The

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Certificate Administrator shall, promptly upon receipt, deposit in the Interest
Coverage Account and retain therein (i) the Interest Coverage Amount remitted on
the Closing Date to the Certificate Administrator by the Depositor and (ii)
income and gain realized from investments in the Pre-Funding Account. Funds
deposited in the Interest Coverage Account shall be held in trust by the
Certificate Administrator on behalf of the Trustee for the Certificateholders
for the uses and purposes set forth herein.

                  (b) For federal income tax purposes, the Servicer shall be the
owner of the Interest Coverage Account and shall report all items of income,
deduction, gain or loss arising therefrom. At no time will the Interest Coverage
Account be an asset of any REMIC created hereunder. All income and gain realized
from investment of funds deposited in the Interest Coverage Account shall be for
the sole and exclusive benefit of the Servicer and shall be remitted by the
Certificate Administrator to the Servicer no later than the first Business Day
following receipt of such income and gain by the Certificate Administrator. The
Servicer shall deposit in the Interest Coverage Account the amount of any net
loss incurred in respect of any such Permitted Investment immediately upon
realization of such loss.

                  (c) On each Distribution Date during the Funding Period and on
the Distribution Date immediately following the end of the Funding Period, the
Certificate Administrator shall withdraw from the Interest Coverage Account, to
the extent funds are available therefore, and deposit in the Payment Account an
amount, as provided in the related Determination Date Report, equal to (i) 30
days' interest on the Original Pre-Funded Amount calculated at an annual rate
equal to the weighted average of the interest rate payable on the Underwritten
Certificates as of the commencement of the related Due Period, minus (ii) the
sum of (1) any interest payments received on Subsequent Mortgage Loans during
the related Due Period and (2) any Advances in respect of interest portions of
delinquent Monthly Payments on the Subsequent Mortgage Loans conveyed to the
Certificate Administrator during the related Due Period. Such withdrawal and
deposit shall be treated as a contribution of cash by the Depositor to REMIC 1
on the date thereof. Immediately following any such withdrawal and deposit, and
immediately following the conveyance of any Subsequent Mortgage Loans to the
Trust on any Subsequent Transfer Date, the Certificate Administrator shall
withdraw from the Interest Coverage Account and remit to the Depositor or its
designee an amount equal to the excess, if any, of the amount remaining in the
Interest Coverage Account over the amount that would be required to be withdrawn
therefrom (assuming sufficient funds therein) pursuant to the preceding sentence
on each subsequent Distribution Date, if any, that will occur during the Funding
Period or that will be the Distribution Date immediately following the end of
the Funding Period, if no Subsequent Mortgage Loans were acquired by the Trust
Fund after the end of the Prepayment Period relating to the current Distribution
Date.

                  (d) Upon the earliest of (i) the Distribution Date immediately
following the end of the Funding Period, (ii) the reduction of the Certificate
Principal Balances of the Certificates to zero or (iii) the termination of this
Agreement in accordance with Section 11.01, any amount remaining on deposit in
the Interest Coverage Account after distributions pursuant to paragraph (c)
above shall be withdrawn by the Certificate Administrator and paid to the
Servicer or its designee.

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                  Section 4.07. Allocation of Realized Losses.

                  (a) All Realized Losses on the Mortgage Loans shall be
allocated by the Certificate Administrator on each Distribution Date as follows:
first, to the Class O Certificates, until the Certificate Principal Balance
thereof has been reduced to zero; second, to the Class M-3 Certificates, until
the Certificate Principal Balance thereof has been reduced to zero; third, to
the Class M-2 Certificates, until the Certificate Principal Balance thereof has
been reduced to zero; and fourth, to the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero. All Realized
Losses to be allocated to the Certificate Principal Balances of all Classes on
any Distribution Date shall be so allocated after the actual distributions to be
made on such date as provided above. All references above to the Certificate
Principal Balance of any Class of Certificates shall be to the Certificate
Principal Balance of such Class immediately prior to the relevant Distribution
Date, before reduction thereof by any Realized Losses, in each case to be
allocated to such Class of Certificates, on such Distribution Date.

                  Any allocation of Realized Losses to a Class O Certificate or
to a Mezzanine Certificate on any Distribution Date shall be made by reducing
the Certificate Principal Balance thereof by the amount so allocated. No
allocations of any Realized Losses shall be made to the Certificate Principal
Balances of the Class A-1 Certificates.

                                   ARTICLE V

                                THE CERTIFICATES

                  Section 5.01. The Certificates.

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

                  The Certificates shall be executed on behalf of the Trust by
manual or facsimile signature on behalf of the Trustee by a Responsible Officer.
Certificates bearing the manual or facsimile signatures of individuals who were,
at the time when such signatures were affixed, authorized to sign on behalf of
the Trustee shall bind the Trust, notwithstanding that such individuals or any
of them have ceased to be so authorized prior to the authentication and

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delivery of such Certificates or did not hold such offices at the date of such
Certificate. No Certificate shall be entitled to any benefit under this
Agreement or be valid for any purpose, unless such Certificate shall have been
manually authenticated by the Certificate Administrator (or, in the case of the
initial Certificates issued on the Closing Date, by the Trustee) substantially
in the form provided for herein, and such authentication upon any Certificate
shall be conclusive evidence, and the only evidence, that such Certificate has
been duly authenticated and delivered hereunder. All Certificates shall be dated
the date of their authentication. Subject to Section 5.02(c), the Underwritten
Certificates and the Class AIO Certificates shall be Book-Entry Certificates.
The other Classes of Certificates shall be Definitive Certificates.

                  Section 5.02. Registration of Transfer and Exchange of
Certificates.

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

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

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

                  (b) Except as provided in paragraph (c) below, the Book-Entry
Certificates shall at all times remain registered in the name of the Depository
or its nominee and at all times: (i) registration of such Certificates may not
be transferred by the Certificate Administrator except to another Depository;
(ii) the Depository shall maintain book-entry records with respect to the
Certificate Owners and with respect to ownership and transfers of such
Certificates; (iii) ownership and transfers of registration of such Certificates
on the books of the Depository shall be governed by applicable rules established
by the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Certificate
Administrator shall for all purposes deal with the Depository as representative
of the Certificate Owners of the Certificates for purposes of exercising the
rights of Holders under this

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Agreement, and requests and directions for and votes of such representative
shall not be deemed to be inconsistent if they are made with respect to
different Certificate Owners; (vi) the Certificate Administrator may rely and
shall be fully protected in relying upon information furnished by the Depository
with respect to its Depository Participants and furnished by the Depository
Participants with respect to indirect participating firms and Persons shown on
the books of such indirect participating firms as direct or indirect Certificate
Owners; and (vii) the direct participants of the Depository shall have no rights
under this Agreement under or with respect to any of the Certificates held on
their behalf by the Depository, and the Depository may be treated by the
Trustee, the Certificate Administrator and its agents, employees, officers and
directors as the absolute owner of the Certificates for all purposes whatsoever.

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

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

                  (d) No transfer, sale, pledge or other disposition of any
Class O Certificate, Class P Certificate or Residual Certificate shall be made
unless such disposition is exempt from the registration requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and any applicable state
securities laws or is made in accordance with the 1933 Act and laws. In the

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event of any such transfer, except with respect to the initial transfers of any
Class O Certificate, Class P Certificate or Residual Certificates by the
Depositor to the Transferor and by the Transferor to NFRC, unless (i) such
transfer is made in reliance upon Rule 144A under the 1933 Act and an investment
letter, in substantially the form attached hereto as Exhibit G, is delivered by
the Transferee to the Certificate Administrator) or (ii) a written Opinion of
Counsel (which may be in-house counsel) acceptable to and in form and substance
reasonably satisfactory to the Certificate Administrator and the Depositor is
delivered to them stating that such transfer may be made pursuant to (x) the
1933 Act, or an exemption thereto, describing the applicable provision or
exemption and the basis therefor, and (y) the Investment Company Act of 1940, or
an exemption thereto, describing the applicable provision or exemption and the
basis therefor, which Opinion of Counsel shall not be an expense of the
Certificate Administrator or the Depositor. The Holder of a Class O Certificate,
Class P Certificate or Residual Certificate desiring to effect such transfer
shall, and does hereby agree to, indemnify the Certificate Administrator, the
Trustee and the Depositor against any liability that may result if the transfer
is not so exempt or is not made in accordance with such federal and state laws.

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

                  Prior to the expiration of the Funding Period, no transfer of
Class A-1 Certificates or any interest therein shall be made to any Person
acquiring such Certificates with Plan Assets. Each Person who acquires any
Ownership Interest in such class of Certificates prior to the expiration of such
Period shall be deemed, by the acceptance or acquisition of such Ownership
Interest, to represent that it is not acquiring such Ownership Interest with
Plan Assets.

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

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

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

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

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

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

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

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

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<PAGE>
         as security for such claim. The terms and conditions of any sale under
         this clause (v) shall be determined in the sole discretion of the
         Certificate Administrator and it shall not be liable to any Person
         having an Ownership Interest in a Residual Certificate as a result of
         its exercise of such discretion.

                  (vi) If any Person other than a Permitted Transferee acquires
         any Ownership Interest in a Residual Certificate in violation of the
         restrictions in this Section, then the Certificate Administrator upon
         receipt of reasonable compensation will provide to the Internal Revenue
         Service, and to the persons specified in Sections 860E(e)(3) and (6) of
         the Code, information needed to compute the tax imposed under Section
         860E(e)(5) of the Code on transfers of residual interests to
         disqualified organizations.

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

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

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

                  Section 5.03. Mutilated, Destroyed, Lost or Stolen
Certificates.

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

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                  Section 5.04. Persons Deemed Owners.

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

                  Section 5.05. Appointment of Paying Agent.

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

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

                                   ARTICLE VI

                         THE SERVICER AND THE DEPOSITOR

                  Section 6.01. Liability of the Servicer and the Depositor.

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

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

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

                  Section 6.03. Limitation on Liability of the Servicer and
Others.

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

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

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                  Section 6.04. Servicer Not to Resign.

                  Subject to the provisions of Section 6.02, the Servicer shall
not resign from the obligations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties hereunder are no
longer permissible under applicable law or (ii) upon satisfaction of the
following conditions: (a) the Servicer has proposed a successor servicer to the
Trust, the Trustee and the Certificate Administrator in writing and such
proposed successor servicer is reasonably acceptable to the Trustee and the
Certificate Administrator; and (b) each Rating Agency shall have delivered a
letter to the Trust, the Trustee, and the Certificate Administrator prior to the
appointment of the successor servicer stating that the proposed appointment of
such successor servicer as Servicer hereunder will not result in the reduction
or withdrawal of the then current rating of the Certificates; provided, however,
that no such resignation by the Servicer shall become effective until such
successor servicer or, in the case of (i) above, the Certificate Administrator
or its designee as successor Servicer shall have assumed the Servicer's
responsibilities and obligations hereunder or the Trustee or its designee as
successor Servicer shall have designated a successor servicer in accordance with
Section 7.02. Any such resignation shall not relieve the Servicer of
responsibility for any of the obligations specified in Sections 7.01 and 7.02 as
obligations that survive the resignation or termination of the Servicer. The
Servicer shall have no claim (whether by subrogation or otherwise) or other
action against any Certificateholder for any amounts paid by the Servicer
pursuant to any provision of this Pooling and Agreement. Any such determination
permitting the resignation of the Servicer under clause (i) above shall be
evidenced by an Opinion of Counsel to such effect delivered to the Certificate
Administrator, and the Trustee.

                  Section 6.05. Delegation of Duties.

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

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

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

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

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

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

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

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

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

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

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

                                  ARTICLE VII

                                     DEFAULT

                  Section 7.01. Servicing Default.

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

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

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

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

                  (iv) The Servicer shall voluntarily go into liquidation,
         consent to the appointment of a conservator, receiver, liquidator or
         similar person in any insolvency, readjustment of debt, marshaling of
         assets and liabilities or similar proceedings of or relating to the
         Servicer or of or relating to all or substantially all of its property,
         or a decree or order of a court, agency or supervisory authority having
         jurisdiction in the premises for the appointment of a conservator,
         receiver, liquidator or similar person in any insolvency, readjustment
         of debt, marshaling of assets and liabilities or similar

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         proceedings, or for the winding-up or liquidation of its affairs, shall
         have been entered against the Servicer and such decree or order shall
         have remained in force undischarged, unbonded or unstayed for a period
         of 60 days; or the Servicer shall admit in writing its inability to pay
         its debts generally as they become due, file a petition to take
         advantage of any applicable insolvency or reorganization statute, make
         an assignment for the benefit of its creditors or voluntarily suspend
         payment of its obligations;

                  (v) The Cumulative Loss Percentage exceeds 8%; or

                  (vi) Realized Losses on the Mortgage Loans over any
         twelve-month period exceeds 1.25% of the sum of the aggregate Principal
         Balance of the Initial Mortgage Loans as of the Cut-off Date and the
         Original Pre-Funded Amount; or

                  (vii) The Rolling Delinquency Percentage exceeds 15%.

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

                  Section 7.02. Certificate Administrator to Act; Appointment of
Successor.

                  (a) Within 90 days of the time the Servicer (and the Trustee
or the Certificate Administrator, if notice is sent by the Holders) receives a
notice of termination pursuant to Section 7.01, the Certificate Administrator
(or such other successor Servicer as is approved in accordance with this
Agreement) shall be the successor in all respects to the Servicer in its
capacity as servicer under this Agreement and the transactions set forth or
provided for herein and shall be subject to all the responsibilities, duties and
liabilities relating thereto placed on the Servicer by the terms and provisions
hereof arising on and after its succession. Notwithstanding the foregoing, the
parties hereto agree that the Certificate Administrator, in its capacity as

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successor Servicer, immediately will assume all of the obligations of the
Servicer to make Advances. Notwithstanding the foregoing, the Certificate
Administrator, in its capacity as successor Servicer, shall not be responsible
for the lack of information and/or documents that it cannot obtain through
reasonable efforts. As compensation therefor, the Certificate Administrator (or
such other successor Servicer) shall be entitled to such compensation as the
Servicer would have been entitled to hereunder if no such notice of termination
had been given. Notwithstanding the above, (i) if the Certificate Administrator
is unwilling to act as successor Servicer or (ii) if the Certificate
Administrator is legally unable so to act, the Certificate Administrator shall
appoint or petition a court of competent jurisdiction to appoint, any
established housing and home finance institution, bank or other mortgage loan or
home equity loan servicer having a net worth of not less than $10,000,000 as the
successor to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder; PROVIDED,
that the appointment of any such successor Servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to the
Certificates by the Rating Agencies as evidenced by a letter to such effect from
the Rating Agencies. Pending appointment of a successor to the Servicer
hereunder, unless the Certificate Administrator is prohibited by law from so
acting, the Certificate Administrator shall act in such capacity as hereinabove
provided. In connection with such appointment and assumption, the successor
shall be entitled to receive compensation out of payments on Mortgage Loans in
an amount equal to the compensation which the Servicer would otherwise have
received pursuant to Section 3.18 (or such other compensation as the Certificate
Administrator and such successor shall agree, not to exceed the Servicing Fee).
The appointment of a successor Servicer shall not affect any liability of the
predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer to pay any deductible under an insurance policy pursuant
to Section 3.14 or to indemnify the Certificate Administrator and the Trustee
pursuant to Section 3.06), nor shall any successor Servicer be liable for any
acts or omissions of the predecessor Servicer or for any breach by such Servicer
of any of its representations or warranties contained herein or in any related
document or agreement. The Certificate Administrator and such successor shall
take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession. All Servicing Transfer Costs shall be paid by
the predecessor Servicer upon presentation of reasonable documentation of such
costs, and if such predecessor Servicer defaults in its obligation to pay such
costs, such costs shall be paid by the successor Servicer or the Certificate
Administrator (in which case the successor Servicer or the Certificate
Administrator, as applicable, shall be entitled to reimbursement therefor from
the assets of the Trust).

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

                  Section 7.03. Waiver of Defaults.

                  The Majority Certificateholders may, on behalf of all
Certificateholders, waive any events permitting removal of the Servicer as
servicer pursuant to this Article VII, PROVIDED, HOWEVER, that the Majority
Certificateholders may not waive a default in making a required distribution on
a Certificate without the consent of the Holder of such Certificate. Upon any
waiver of a past default, such default shall cease to exist and any Servicing
Default arising

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<PAGE>
therefrom shall be deemed to have been remedied for every purpose of this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereto except to the extent expressly so waived.
Notice of any such waiver shall be given by the Certificate Administrator to the
Rating Agencies.

                  Section 7.04. Notification to Certificateholders.

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

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

                  Section 7.05. Survivability of Servicer Liabilities.

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

                                  ARTICLE VIII

                  THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR

                  Section 8.01. Duties of the Trustee and the Certificate
Administrator. If a Servicing Default has occurred and is continuing, each of
the Trustee and the Certificate Administrator shall exercise the rights and
powers vested in each of them by this Agreement and use the same degree of care
and skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.

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

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

                  (ii) in the absence of bad faith on its part, each of the
         Trustee and the Certificate Administrator, as the case may be, may
         conclusively rely, as to the truth of the statements and the
         correctness of the opinions expressed therein, upon certificates or
         opinions furnished to the Trustee and/or the Certificate

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<PAGE>
         Administrator, as applicable, and conforming to the requirements of
         this Agreement; provided, however, that each of the Trustee and the
         Certificate Administrator, as the case may be, shall examine the
         certificates and opinions delivered to it to determine whether or not
         they conform to the requirements of this Agreement, provided, further,
         however, that the Trustee shall have no duty or responsibility to
         review any document, certificate, instrument or opinion delivered
         solely to the Certificate Administrator.

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

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

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

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

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

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

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

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

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believed by the Certificate Administrator or the Trustee to be genuine and to
have been signed or presented by the proper party or parties.

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

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

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

                  Notwithstanding any term or provision in this Agreement to the
contrary, the rights and obligations of the Trustee as trustee under this
Agreement shall not be diminished by the fact that the Trustee may employ the
services of the Certificate Administrator to accomplish the duties of the
Trustee hereunder. Accordingly, any references in this Agreement or the other
Basic Documents alluding to a right or obligation of the Certificate
Administrator (other than the obligation of the Certificate Administrator to act
as successor Servicer pursuant to Section 7.02 hereof in the event of a
Servicing Default) shall be construed to mean such right or obligation of the
Trustee, which right or obligation may be accepted or performed by the
Certificate Administrator on behalf of the Trustee.

                  Section 8.02. Rights of Trustee and Certificate Administrator.

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

                  Before either the Trustee or the Certificate Administrator
acts or refrains from acting, it may require an Officer's Certificate or an
Opinion of Counsel reasonably satisfactory in form and substance to the Trustee
or the Certificate Administrator, as the case may be, which Officer's
Certificate or Opinion of Counsel shall not be at the expense of the Trustee,
the Certificate Administrator or the Trust Fund. Neither the Trustee nor the
Certificate

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Administrator shall be liable for any action either of them takes or omits to
take in good faith in reliance on an Officer's Certificate or Opinion of
Counsel.

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

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

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

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

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

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such examination shall be paid by the Servicer or, if paid by the Trustee or the
Certificate Administrator, shall be repaid by the Servicer upon demand from the
Servicer's own funds.

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

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

                  Section 8.03. Individual Rights of Trustee and Certificate
Administrator.

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

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

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

                  Section 8.05. Notice of Servicing Default.

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

                  Section 8.06. [Reserved].

                  Section 8.07. Compensation and Indemnity.

                  The amount of the Certificate Administrator Fee shall be paid
to the Certificate Administrator on each Distribution Date pursuant to Section
4.01(a)(i) of this Agreement, and all amounts owing to the Trustee and to the
Certificate Administrator hereunder in excess of such amount shall be paid
solely as provided in Section 6.06 hereof. On each Distribution Date, the

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Trustee shall be entitled to pay to itself the Trustee Fee pursuant to Section
4.01(a)(i). The Trustee's compensation and the Certificate Administrator's
compensation shall not be limited by any law on compensation of a trustee of an
express trust.

                  Section 8.08. Replacement of Trustee or Certificate
Administrator.

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

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

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

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

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

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

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

                  Subject to the foregoing provisions of this Section 8.08, the
Trustee may terminate the Certificate Administrator at any time for failure to
perform its obligations

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hereunder or under the Basic Documents provided it or a Certificate
Administrator acceptable to the Depositor assumes the obligations of the
Certificate Administrator.

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

                  Section 8.09. Successor Trustee or Certificate Administrator
by Merger.

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

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

                  Section 8.10. Appointment of Co-Trustee or Separate Trustee.

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

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

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

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

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

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

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

                  Section 8.11. Eligibility; Disqualification.

                   Each of the Trustee and the Certificate Administrator shall
at all times be reasonably acceptable to the Depositor and authorized to
exercise corporate trust powers. Each of the Trustee and the Certificate
Administrator shall have a combined capital and surplus of at least $50,000,000
as set forth in its most recent published annual report of condition and it or
its parent shall have a long-term debt rating of Baa3 or better by Moody's and
BBB or better by Standard & Poor's.

                  Section 8.12. [Reserved]

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                  Section 8.13. Representations and Warranties.

                  (a) The Trustee hereby represents that:

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

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

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

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

                  (b) The Certificate Administrator hereby represents that:

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

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

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

                  (iv) To the Certificate Administrator's best knowledge, there
         are no proceedings or investigations pending or threatened before any
         court, regulatory body,

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         administrative agency or other governmental instrumentality having
         jurisdiction over the Certificate Administrator or its properties: (A)
         asserting the invalidity of this Agreement, (B) seeking to prevent the
         consummation of any of the transactions contemplated by this Agreement
         or (C) seeking any determination or ruling that might materially and
         adversely affect the performance by the Certificate Administrator of
         its obligations under, or the validity or enforceability of, this
         Agreement.

                  Section 8.14. Directions to Trustee and Certificate
Administrator.

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

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

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

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

                  Section 8.15. The Agents.

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

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

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

                  (a) file with the Commission, on behalf of the Trust, the
annual reports and information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) that the Trust may be required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act. Such filings
shall be as follows: within 15 days after each Distribution Date, the
Certificate Administrator, on behalf of the Trust, shall file with the
Commission via the Electronic Data Gathering, Analysis and Retrieval System, a
Form 8-K with a copy of the statement to Certificateholders for such
Distribution Date as an exhibit thereto. Prior to January 31, 2001, the
Certificate Administrator, shall file a Form 15 Suspension Notification with
respect to the Trust Fund, if applicable. Prior to March 31, 2001, the
Certificate Administrator, on behalf of the Trust, shall file a Form 10-K, in
substance conforming to industry standards, with respect to the Trust Fund. The
Trust hereby grants to the Certificate Administrator, a limited power of
attorney to execute and file each such document on behalf of the Trust. Such
power of attorney shall continue until the termination of the Trust Fund. The
Certificate Administrator, on behalf of the Trust, shall deliver to the Seller
and the Trustee within three Business Days after filing any Form

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8-K or Form 10-K pursuant to this Section 8.16 a copy of such Form 8-K or Form
10-K, as the case may be; and

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

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

                                   ARTICLE IX

                                   [Reserved]

                                   ARTICLE X

                              REMIC ADMINISTRATION

                  Section 10.01. REMIC Administration.

                  (a) [Reserved].

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

                  (c) The Servicer shall pay any and all tax related expenses
(not including taxes) of each REMIC, including but not limited to any
professional fees or expenses related to audits or any administrative or
judicial proceedings with respect to each REMIC that involve the Internal
Revenue Service or state tax authorities, but only to the extent that (i) such
expenses are ordinary or routine expenses, including expenses of a routine audit
but not expenses of litigation (except as described in (ii)); or (ii) such
expenses or liabilities (including taxes and penalties) are attributable to the
negligence or willful misconduct of the Servicer in fulfilling its duties
hereunder. The Servicer shall be entitled to reimbursement of expenses to the
extent provided in clause (i) above from the Collection Account.

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

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withholding tax with respect to income or distributions to Certificateholders
and prepare or cause to be prepared the appropriate forms relating thereto and
(e) maintain records as required by the REMIC Provisions.

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

                  (f) The Trustee, the Servicer, the Certificate Administrator
and the Holders of Certificates shall take any action or cause the REMIC to take
any action necessary to create or maintain the status of each REMIC as a REMIC
under the REMIC Provisions and shall assist each other as necessary to create or
maintain such status. Neither the Trustee, the Certificate Administrator, the
Servicer nor the Holder of any Residual Certificate shall take any action, cause
any REMIC created hereunder to take any action or fail to take (or fail to cause
to be taken) any action that, under the REMIC Provisions, if taken or not taken,
as the case may be, could (i) endanger the status of such REMIC as a REMIC or
(ii) result in the imposition of a tax upon such REMIC (including but not
limited to the tax on prohibited transactions as defined in Code Section
860F(a)(2) and the tax on prohibited contributions set forth on Section 860G(d)
of the Code) (either such event, an "Adverse REMIC Event") unless the Trustee,
the Certificate Administrator and the Servicer have received an Opinion of
Counsel (at the expense of the party seeking to take such action) to the effect
that the contemplated action will not endanger such status or result in the
imposition of such a tax. In addition, prior to taking any action with respect
to any REMIC created hereunder or the assets therein, or causing such REMIC to
take any action, which is not expressly permitted under the terms of this
Agreement, any Holder of a Residual Certificate will consult with the Trustee,
the Certificate Administrator and the Servicer, or their respective designees,
in writing, with respect to whether such action could cause an Adverse REMIC
Event to occur with respect to any REMIC, and no such Person shall take any such
action or cause any REMIC to take any such action as to which the Trustee, the
Certificate Administrator or the Servicer has advised it in writing that an
Adverse REMIC Event could occur.

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

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available, out of other amounts held in the Payment Account, and shall reduce
amounts otherwise payable to Holders of regular interests in the related REMIC.

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

                  (i) After the Pre-Funding Period, no additional contributions
of assets shall be made to any REMIC created hereunder, except as expressly
provided in this Agreement with respect to Qualified Replacement Mortgages.

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

                  (k) The Certificate Administrator will apply for an Employee
Identification Number from the Internal Revenue Service via a Form SS-4 or other
acceptable method for the Lower-Tier REMIC and the Upper-Tier REMIC.

                  Section 10.02. Prohibited Transactions and Activities.

                  Neither the Depositor, the Servicer, the Certificate
Administrator nor the Trustee shall sell, dispose of, or substitute for any of
the Mortgage Loans, except in a disposition pursuant to (i) the foreclosure of a
Mortgage Loan, (ii) the bankruptcy of the Trust Fund, (iii) the termination,
pursuant to Article XI of this Agreement, of any REMIC created hereunder (iv) a
substitution pursuant to Article II of this Agreement or (v) a repurchase of
Mortgage Loans pursuant to Article II of this Agreement, nor acquire any assets
for any REMIC, nor sell or dispose of any investments in the Payment Account for
gain, nor accept any contributions to either REMIC after the Closing Date,
unless it has received an Opinion of Counsel (at the expense of the party
causing such sale, disposition, or substitution) that such disposition,
acquisition, substitution, or acceptance will not (a) affect adversely the
status of any REMIC created hereunder as a REMIC, or (b) cause any REMIC created
hereunder to be subject to a tax on prohibited transactions or prohibited
contributions pursuant to the REMIC Provisions.

                                   ARTICLE XI

                                   TERMINATION

                  Section 11.01. Termination.

                  (a) The respective obligations and responsibilities of the
Seller, the Servicer, the Depositor, the Certificate Administrator and the
Trustee created hereby (other than the obligation of the Certificate
Administrator to make certain payments to Certificateholders after the final
Distribution Date and the obligation of the Servicer to send certain notices as
hereinafter set forth) shall terminate upon notice to the Trustee or the
Certificate Administrator upon the earliest of (i) the Distribution Date on
which the Certificate Principal Balances of the Regular Certificates have been
reduced to zero, (ii) the final payment or other liquidation of the last

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Mortgage Loan in the Trust, (iii) the optional purchase by the Servicer of the
Mortgage Loans as described below and (iv) the Distribution Date in July 2030.
Notwithstanding the foregoing, in no event shall the trust created hereby
continue beyond the expiration of 21 years from the death of the last survivor
of the descendants of Joseph P. Kennedy, the late ambassador of the United
States to the Court of St. James, living on the date hereof.

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

                  In connection with any such purchase pursuant to the preceding
paragraph, the Servicer shall deposit in the Payment Account all amounts then on
deposit in the Collection Account, which deposit shall be deemed to have
occurred immediately preceding such purchase.

                  Any such purchase shall be accomplished by deposit into the
Payment Account on the Distribution Date of the Termination Price.

                  (b) Notice of any termination, specifying the Distribution
Date (which shall be a date that would otherwise be a Distribution Date) upon
which the Certificateholders may surrender their Certificates to the Certificate
Administrator for payment of the final distribution and cancellation, shall be
given promptly by the Certificate Administrator upon the Certificate
Administrator receiving notice of such date from the Servicer, by letter to the
Certificateholders mailed not earlier than the 15th day and not later than the
25th day of the month next preceding the month of such final distribution
specifying (1) the Distribution Date upon which final distribution of the
Certificates will be made upon presentation and surrender of such Certificates
at the office or agency of the Certificate Administrator therein designated, (2)
the amount of any such final distribution and (3) that the Record Date otherwise
applicable to such Distribution Date is not applicable, distributions being made
only upon presentation and surrender of the Certificates at the office or agency
of the Certificate Administrator therein specified.

                  (c) Upon presentation and surrender of the Certificates, the
Certificate Administrator shall cause to be distributed to the Holders of the
Certificates on the Distribution Date for such final distribution, in proportion
to the Percentage Interests of their respective Class and to the extent that
funds are available for such purpose, an amount equal to the amount required to
be distributed to such Holders in accordance with the provisions of Section 4.01
for such Distribution Date.

                  (d) In the event that all Certificateholders shall not
surrender their Certificates for final payment and cancellation on or before
such final Distribution Date, the Certificate

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Administrator shall promptly following such date cause all funds in the Payment
Account not distributed in final distribution to Certificateholders to be
withdrawn therefrom and credited to the remaining Certificateholders by
depositing such funds in a separate Servicing Account for the benefit of such
Certificateholders, and the Servicer (if the Servicer has exercised its right to
purchase the Mortgage Loans) or the Certificate Administrator (in any other
case) shall give a second written notice to the remaining Certificateholders, to
surrender their Certificates for cancellation and receive the final distribution
with respect thereto. If within nine months after the second notice all the
Certificates shall not have been surrendered for cancellation, the Residual
Certificateholder shall be entitled to all unclaimed funds and other assets
which remain subject hereto, and the Certificate Administrator, as agent of the
Trustee upon transfer of such funds shall be discharged of any responsibility
for such funds, and the Certificateholders shall look to the Residual
Certificateholder for payment.

                  Section 11.02. Additional Termination Requirements.

                  (a) In the event that the Servicer exercises its purchase
option as provided in Section 11.01, each REMIC shall be terminated in
accordance with the following additional requirements, unless the Certificate
Administrator shall have been furnished with an Opinion of Counsel to the effect
that the failure of the Trust to comply with the requirements of this Section
will not (i) result in the imposition of taxes on "prohibited transactions" of
the Trust as defined in Section 860F of the Code or (ii) cause any REMIC
constituting part of the Trust Fund to fail to qualify as a REMIC at any time
that any Certificates are outstanding:

                  (i) Within 90 days prior to the final Distribution Date, the
         Servicer shall adopt and the Certificate Administrator shall sign a
         plan of complete liquidation of each REMIC created hereunder meeting
         the requirements of a "Qualified Liquidation" under Section 860F of the
         Code and any regulations thereunder; and

                  (ii) At or after the time of adoption of such a plan of
         complete liquidation and at or prior to the final Distribution Date,
         the Certificate Administrator shall sell all of the assets of the Trust
         Fund to the Servicer for cash pursuant to the terms of the plan of
         complete liquidation.

                  (b) By their acceptance of Certificates, the Holders thereof
hereby agree to appoint the Certificate Administrator as their attorney in fact
to: (i) adopt such a plan of complete liquidation (and the Certificateholders
hereby appoint the Certificate Administrator as their attorney in fact to sign
such plan) as appropriate and (ii) to take such other action in connection
therewith as may be reasonably required to carry out such plan of complete
liquidation all in accordance with the terms hereof.

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                                  ARTICLE XII

                            MISCELLANEOUS PROVISIONS

                  Section 12.01. Amendment.

                  This Agreement may be amended from time to time by the parties
hereto, and without the consent of the Certificateholders (i) to cure any
ambiguity, (ii) to correct or supplement any provisions herein which may be
defective or inconsistent with any other provisions herein or (iii) to make any
other provisions with respect to matters or questions arising under this
Agreement which shall not be inconsistent with the provisions of this Agreement;
PROVIDED, HOWEVER, that any such action listed in clause (i) through (iii) above
shall be deemed not to adversely affect in any respect the interests of any
Certificateholder, if evidenced by (i) written notice to the Depositor, the
Servicer, the Certificate Administrator and the Trustee from the Rating Agencies
that such action will not result in the reduction or withdrawal of the rating of
any outstanding Class of Certificates with respect to which it is a Rating
Agency or (ii) an Opinion of Counsel delivered to the Servicer, the Certificate
Administrator, the Depositor and the Trustee.

                  In addition, this Agreement may be amended from time to time
by the parties hereto with the consent of the Majority Certificateholders for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Agreement or of modifying in any manner the rights
of the Holders of Certificates; PROVIDED, HOWEVER, that no such amendment or
waiver shall (x) reduce in any manner the amount of, or delay the timing of,
payments on the Certificates or distributions which are required to be made on
any Certificate without the consent of the Holder of such Certificate, (y)
adversely affect in any material respect the interests of the Holders of any
Class of Certificates in a manner other than as described in clause (x) above,
without the consent of the Holders of Certificates of such Class evidencing at
least a 66% Percentage Interest in such Class, or (z) reduce the percentage of
Voting Rights required by clause (y) above without the consent of the Holders of
all Certificates of such Class then outstanding. Upon approval of an amendment,
a copy of such amendment shall be sent to the Rating Agencies.

                  Notwithstanding any provision of this Agreement to the
contrary, the Trustee shall not consent to any amendment to this Agreement
unless it shall have first received an Opinion of Counsel, delivered by (and at
the expense of) the Person seeking such Amendment, to the effect that such
amendment will not result in the imposition of a tax on any REMIC created
hereunder constituting part of the Trust Fund pursuant to the REMIC Provisions
or cause any REMIC created hereunder constituting part of the Trust to fail to
qualify as a REMIC at any time that any Certificates are outstanding and that
the amendment is being made in accordance with the terms hereof.

                  Promptly after the execution of any such amendment the
Certificate Administrator shall furnish, at the expense of the Person that
requested the amendment if such Person is Seller or the Servicer (but in no
event at the expense of the Certificate Administrator), otherwise at the expense
of the Trust, a copy of such amendment and the Opinion of Counsel referred to in
the immediately preceding paragraph to the Servicer and each Rating Agency.

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                  It shall not be necessary for the consent of
Certificateholders under this Section 12.01 to approve the particular form of
any proposed amendment; instead it shall be sufficient if such consent shall
approve the substance thereof. The manner of obtaining such consents and of
evidencing the authorization of the execution thereof by Certificateholders
shall be subject to such reasonable regulations as the Trustee may prescribe.

                  Neither the Certificate Administrator nor the Trustee shall be
obligated to enter into any amendment pursuant to this Section 12.01 that
affects its rights, duties and immunities under this Agreement or otherwise.

                  Section 12.02. Recordation of Agreement; Counterparts.

                  To the extent permitted by applicable law, this Agreement is
subject to recordation in all appropriate public offices for real property
records in all the counties or other comparable jurisdictions in which any or
all of the properties subject to the Mortgages are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected by the Servicer at the expense of the Trust, but only upon direction of
Certificateholders accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of the
Certificateholders.

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

                  Section 12.03. Limitation on Rights of Certificateholders.

                  The death or incapacity of any Certificateholder shall not (i)
operate to terminate this Agreement or the Trust, (ii) entitle such
Certificateholder's legal representatives or heirs to claim an accounting or to
take any action or proceeding in any court for a partition or winding up of the
Trust, or (iii) otherwise affect the rights, obligations and liabilities of the
parties hereto or any of them.

                  Except as expressly provided for herein, no Certificateholder
shall have any right to vote or in any manner otherwise control the operation
and management of the Trust, or the obligations of the parties hereto, nor shall
anything herein set forth or contained in the terms of the Certificates be
construed so as to constitute the Certificateholders from time to time as
partners or members of an association; nor shall any Certificateholder be under
any liability to any third person by reason of any action taken by the parties
to this Agreement pursuant to any provision hereof.

                  No Certificateholder shall have any right by virtue of any
provision of this Agreement to institute any suit, action or proceeding in
equity or at law upon or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trustee a written notice of default
and of the continuance thereof, as hereinbefore provided, and unless also the
Holders of Certificates entitled to at least 25% of the Voting Rights shall have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require

                                      102
<PAGE>
against the costs, expenses and liabilities to be incurred therein or thereby,
and the Trustee for 15 days after its receipt of such notice, request and offer
of indemnity, shall have neglected or refused to institute any such action, suit
or proceeding. It is understood and intended, and expressly covenanted by each
Certificateholder with every other Certificateholder and the Trustee, that no
one or more Holders of Certificates shall have any right in any manner whatever
by virtue of any provision of this Agreement to affect, disturb or prejudice the
rights of the Holders of any other of such Certificates, or to obtain or seek to
obtain priority over or preference to any other such Holder, which priority or
preference is not otherwise provided for herein, or to enforce any right under
this Agreement, except in the manner herein provided and for the equal, ratable
and common benefit of all Certificateholders. For the protection and enforcement
of the provisions of this Section 12.03 each and every Certificateholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.

                  Section 12.04. Governing Law; Jurisdiction.

                  This Agreement shall be construed in accordance with the laws
of the State of New York, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws. With respect
to any claim arising out of this Agreement, each party irrevocably submits to
the exclusive jurisdiction of the courts of the State of New York and the United
States District Court located in the Borough of Manhattan in The City of New
York, and each party irrevocably waives any objection which it may have at any
time to the laying of venue of any suit, action or proceeding arising out of or
relating hereto brought in any such courts, irrevocably waives any claim that
any such suit, action or proceeding brought in any such court has been brought
in any inconvenient forum and further irrevocably waives the right to object,
with respect to such claim, suit, action or proceeding brought in any such
court, that such court does not have jurisdiction over such party, provided that
service of process has been made by any lawful means.

                  Section 12.05. Notices.

                  All demands, notices and communications hereunder shall be in
writing and shall be deemed to have been duly given if personally delivered at
or mailed by certified mail, return receipt requested, or sent by reputable
overnight courier service to:

                  (a) in the case of the Depositor:

                              Residential Asset Funding Corporation
                              301 South College Street, TW-09
                              Charlotte, NC 28288-0610
                              Attention:  General Counsel

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

                              NovaStar Mortgage, Inc.
                              1900 W.  47th Place
                              Suite 205
                              Westwood, Kansas 66205
                              Attention: Chris Miller, Senior Vice President

                                      103
<PAGE>
                  (c) in the case of Rating Agencies:

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

                            Standard & Poor's
                            26 Broadway
                            New York, New York  10004-1064
                            Attention:  Michele Loesch

                  (d) in the case of the Certificate Administrator:

                            First Union National Bank
                            401 South Tryon Street, NC1179
                            12th Floor
                            Charlotte, NC  28288-1179
                            Attention:  Structured Finance Trust Services
                            (NovaStar Mortgage Funding Trust, Series 2000-1

                  (e) in the case of the Trustee:

                            The Chase Manhattan Bank
                            450 West 33rd Street
                            14th Floor
                            New York, NY  10001
                            Attention: Capital Markets Fiduciary Services,
                            NovaStar 2000-1

or, as to each party, at such other address as shall be designated by such party
in a written notice to each other party. Any notice required or permitted to be
mailed to a Certificateholder shall be given by first class mail, postage
prepaid, at the address of such Certificateholder as shown in the Certificate
Register. Any notice so mailed within the time prescribed in this Agreement
shall be conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice. Any notice or other document required to
be delivered or mailed by the Certificate Administrator to any Rating Agency
shall be given on a reasonable efforts basis and only as a matter of courtesy
and accommodation and the Certificate Administrator shall have no liability for
failure to deliver such notice or document to any Rating Agency.

                  Section 12.06. Severability of Provisions.

                  If any one or more of the covenants, agreements, provisions or
terms of this Agreement shall for any reason whatsoever be held invalid, then
such covenants, agreements, provisions or terms shall be deemed severable from
the remaining covenants, agreements, provisions or terms of this Agreement and
shall in no way affect the validity or enforceability of the other provisions of
this Agreement or of the Certificates or the rights of the Holders thereof.

                                      104
<PAGE>
                  Section 12.07. Article and Section References.

                  All article and section references used in this Agreement,
unless otherwise provided, are to articles and sections in this Agreement.

                  Section 12.08. Further Assurances.

                  Notwithstanding any other provision of this Agreement, neither
the Certificate Administrator nor the Trustee shall have any obligation to
consent to any amendment or modification of this Agreement unless they have been
provided reasonable security or indemnity against their out-of-pocket expenses
(including reasonable attorneys' fees) to be incurred in connection therewith.

                  Section 12.09. Benefits of Agreement.

                  Nothing in this Agreement or in the Certificates, expressed or
implied, shall give to any Person, other than the Certificateholders and the
parties hereto and their successors hereunder, any benefit or any legal or
equitable right, remedy or claim under this Agreement.

                  Section 12.10. Acts of Certificateholders.

                  (a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Agreement to be given or taken
by the Certificateholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Certificateholders in
person or by agent duly appointed in writing, and such action shall become
effective when such instrument or instruments are delivered to the Trustee, the
Certificate Administrator, the Seller and the Servicer. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "act" of the Certificateholders signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Agreement and conclusive in favor of the Trustee and the Trust, if made in the
manner provided in this Section 12.10.

                  (b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Whenever
such execution is by a signer acting in a capacity other than his or her
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority.

                  (c) Any request, demand, authorization, direction, notice,
consent, waiver or other action by any Certificateholder shall bind every future
Holder of such Certificate and the Holder of every Certificate issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof, in
respect of anything done, omitted or suffered to be done by the Certificate
Administrator, the Trustee or the Trust in reliance thereon, whether or not
notation of such action is made upon such Certificate.

                                      105
<PAGE>
                  IN WITNESS WHEREOF, the Depositor, the Servicer, the Seller,
the Certificate Administrator and the Trustee have caused their names to be
signed hereto by their respective officers thereunto duly authorized, all as of
the day and year first above written.

                                          RESIDENTIAL ASSET FUNDING
                                          CORPORATION,
                                          as Depositor

                                          By:  /s/ Shanker Merchant
                                             ----------------------
                                               Name:
                                               Title: Managing Director

                                          NOVASTAR MORTGAGE, INC.,
                                          as Servicer and as Seller

                                          By:  /s/ Michael L. Bamburg
                                             ------------------------
                                               Name:
                                               Title: Senior Vice President

                                          FIRST UNION NATIONAL BANK,
                                          as Certificate Administrator

                                          By:  /s/ Robert Ashbaugh
                                             ---------------------
                                               Name:
                                               Title: Vice President

                                          THE CHASE MANHATTAN BANK,
                                          as Trustee

                                          By:  /s/ Vada Haight
                                             -----------------
                                               Name:
                                               Title: Vice President

                                      106
<PAGE>
STATE OF                                )
        --------------------------------
                                        ) ss.:
COUNTY OF                               )
          ------------------------------

                  On the ____ day of March, 2000 before me, a notary public in
and for said State, personally appeared _________________ known to me to be a
_________________ of Residential Asset Funding Corporation, a North Carolina
corporation that executed the within instrument, and also known to me to be the
person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                               _________________________________
                                                         Notary Public

                                      107
<PAGE>
STATE OF                                )
        --------------------------------
                                        ) ss.:
COUNTY OF                               )
          ------------------------------

                  On the ____ day of March, 2000 before me, a notary public in
and for said State, personally appeared ___________________ known to me to be a
_____________________ of NovaStar Mortgage, Inc., a Virginia corporation that
executed the within instrument, and also known to me to be the person who
executed it on behalf of said corporation, and acknowledged to me that such
corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                             ___________________________________
                                                         Notary Public

                                      108
<PAGE>
STATE OF                                )
        --------------------------------
                                        ) ss.:
COUNTY OF                               )
          ------------------------------

                  On the _____ day of March , 2000 before me, a notary public in
and for said State, personally appeared __________, known to me to be
___________________ of The Chase Manhattan Bank, a New York banking corporation
that executed the within instrument, and also known to me to be the person who
executed it on behalf of said association, and acknowledged to me that such
corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                    _______________________________________
                                                    Notary Public

                                      109
<PAGE>
                                                                     Exhibit A-1
                          Form of Class A-1 Certificate
                          -----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-1 CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  A-1-1                  Date:  March 31, 2000  CUSIP: 66987W AG 2

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$216,200,000                 CEDE & CO.             Date:  July 25, 2030
<PAGE>
Percentage Interest:  100%

                                       2
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class A-1 Certificates on March
31, 2000 which aggregate amount was $216,200,000. The owner hereof is entitled
to principal payments on each Distribution Date, which will fully amortize such
Original Principal Amount over the period from the date of initial delivery
hereof to the final Distribution Date of the Class A-1 Certificates. Therefore,
the actual outstanding principal amount of this Certificate, on any date
subsequent to April 25, 2000 (the first Distribution Date) will be less than the
Original Principal Amount set forth above.

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

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

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

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

                                       3
<PAGE>
                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class A-1 Certificates (the "Class A-1 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class AIO Certificates, Class M-1 Certificates, Class
M-2 Certificates, Class M-3 Certificates, Class P Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates.

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class A-1
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to the
distribution described in Section 4.01 of the Pooling and Servicing Agreement,
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class A-1 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class A-1 Certificates. The
Percentage Interest of each Class A-1 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class A-1 Certificate by $216,200,000.

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

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

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

                                       4
<PAGE>
otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                       5
<PAGE>
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                       6
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                              By:   ______________________
                                    Name:
                                    Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       7
<PAGE>
                                                                     Exhibit A-2
                          Form of Class M-1 Certificate
                          -----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-1 CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  M-1-1                  Date:  March 31, 2000  CUSIP: 66987W AH 0

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$4,600,000                   CEDE & CO.             Date:  July 25, 2030

Percentage Interest:  100%
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-1 Certificates on March
31, 2000 which aggregate amount was $4,600,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-1
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to April 25, 2000 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

                                       2
<PAGE>
                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class M-1 Certificates (the "Class M-1 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class AIO Certificates, Class A-1 Certificates, Class
M-2 Certificates, Class M-3 Certificates, Class P Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class M-1
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Section 4.01 of the Pooling and Servicing
Agreement relating to such Distribution Date. Distributions will be made in
immediately available funds to such owners, by wire transfer or by check mailed
to the address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-1 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-1 Certificates. The
Percentage Interest of each Class M-1 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-1 Certificate by $4,600,000.

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

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

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

                                       3
<PAGE>
otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                       4
<PAGE>
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                            By:  ______________________
                                 Name:
                                 Title:

Trustee Authentication

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

By: ______________________
    Name:
    Title:

                                       6
<PAGE>
                                                                     Exhibit A-3
                          Form of Class M-2 Certificate
                          -----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-2 CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  M-2-1                  Date:  March 31, 2000  CUSIP: 66987W AJ 6

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$2,760,000                   CEDE & CO.             Date:  July 25, 2030

Percentage Interest:  100%
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-2 Certificates on March
31, 2000 which aggregate amount was $2,760,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-2
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to April 25, 2000 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

                                       2
<PAGE>
                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class M-2 Certificates (the "Class M-2 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class AIO Certificates, Class A-1 Certificates, Class
M-1 Certificates, Class M-3 Certificates, Class P Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class M-2
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Section 4.01 of the Pooling and Servicing
Agreement relating to such Distribution Date. Distributions will be made in
immediately available funds to such owners, by wire transfer or by check mailed
to the address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-2 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-2 Certificates. The
Percentage Interest of each Class M-2 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-2 Certificate by $2,760,000.

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

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

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

                                       3
<PAGE>
otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                       4
<PAGE>
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                                 By:  ______________________
                                      Name:
                                      Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                     Exhibit A-4
                          Form of Class M-3 Certificate
                          -----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-3 CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  M-3-1                  Date:  March 31, 2000  CUSIP: 66987W AK 3

Original Principal Balance:  Registered Owner:      Final Scheduled Distribution
$2,760,000                   CEDE & CO.             Date:  July 25, 2030

Percentage Interest:  100%
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-3 Certificates on March
31, 2000 which aggregate amount was $2,760,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class M-3
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to April 25, 2000 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

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

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

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

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

                                       2
<PAGE>
                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class M-3 Certificates (the "Class M-3 Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class AIO Certificates, Class A-1 Certificates, Class
M-1 Certificates, Class M-2 Certificates, Class P Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class M-3
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Section 4.01 of the Pooling and Servicing
Agreement relating to such Distribution Date. Distributions will be made in
immediately available funds to such owners, by wire transfer or by check mailed
to the address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-3 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-3 Certificates. The
Percentage Interest of each Class M-3 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-3 Certificate by $2,760,000.

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

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

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

                                       3
<PAGE>
otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                       4
<PAGE>
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                              By:  ______________________
                                   Name:
                                   Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                     Exhibit A-5
                          Form of Class AIO Certificate
                          -----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                             CLASS AIO CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  AIO-1                Date:  March 31, 2000    Final Scheduled Distribution
                                                    Date:  July 25, 2030

Percentage Interest: 100%  Registered Owner:
                           NovaStar REMIC Financing
                           Corporation
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

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

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

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

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

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

                  ASSUMING THAT THE MORTGAGE LOANS PREPAY AT A RATE BASED ON
100% OF THE PREPAYMENT ASSUMPTION DESCRIBED IN THE PROSPECTUS SUPPLEMENT, THIS
CLASS A-IO CERTIFICATE HAS BEEN ISSUED WITH APPROXIMATELY $____________ OF OID
PER $1,000,000 OF CLASS A-IO NOTIONAL PRINCIPAL AMOUNT AND THE ANNUAL YIELD TO
MATURITY

                                       2
<PAGE>
WILL BE [ ]% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO THE SHORT
FIRST ACCRUAL PERIOD IS $____________ PER $1,000,000 OF CLASS A-IO NOTIONAL
PRINCIPAL AMOUNT COMPUTED USING DAILY COMPOUNDING.

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

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class AIO Certificates (the "Class AIO Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class A-1 Certificates, Class M-1 Certificates, Class
M-2 Certificates, Class M-3 Certificates, Class P Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class AIO
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the Class AIO Distribution Amount relating to such Distribution Date.
Distributions will be made in immediately available funds to such owners, by
wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

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

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

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation
III, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other

                                       3
<PAGE>
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is

                                       4
<PAGE>
registerable in the Certificate Register upon surrender of this Certificate for
registration of transfer at the office designated as the location of the
Certificate Register, and thereupon one or more new certificates of like class,
tenor and Percentage Interest will be issued to the designated transferee or
transferees.

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                              By: ______________________
                                  Name:
                                  Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                     Exhibit A-6
                           Form of Class P Certificate
                           ---------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                              CLASS P CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  P-1                   Date:  March 31, 2000   Final Scheduled Distribution
                                                    Date:  July 25, 2030
Percentage Interest: 100%   Registered Owner:
                            NovaStar REMIC Financing
                            Corporation
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

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

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

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

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

                  ASSUMING THAT THE MORTGAGE LOANS PREPAY AT A RATE BASED ON
100% OF THE PREPAYMENT ASSUMPTION DESCRIBED IN THE PROSPECTUS SUPPLEMENT, THIS
CLASS P CERTIFICATE HAS BEEN ISSUED WITH APPROXIMATELY $____________ OF OID PER
$1,000,000 OF CLASS P NOTIONAL PRINCIPAL AMOUNT AND THE ANNUAL YIELD TO MATURITY
WILL BE [ ]% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO THE SHORT
FIRST ACCRUAL PERIOD IS $____________ PER $1,000,000 OF CLASS P NOTIONAL
PRINCIPAL AMOUNT COMPUTED USING DAILY COMPOUNDING.

                                       2
<PAGE>
                  THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class P Certificates (the "Class P Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are Class A-1 Certificates, Class AIO Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class O
Certificates, Class RL Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class P
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the Prepayment Charges relating to such Distribution Date. Distributions will be
made in immediately available funds to such owners, by wire transfer or by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register.

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

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

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

                                       3
<PAGE>
                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

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

                                       4
<PAGE>
                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                            By: ______________________
                                Name:
                                Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                     Exhibit A-7

                           Form of Class O Certificate
                          -----------------------------
                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                              CLASS O CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  O-1                  Date:  March 31, 2000    Final Scheduled Distribution
                                                    Date:  July 25, 2030

Percentage Interest: 100%  Registered Owner:
                           NovaStar REMIC Financing
                           Corporation
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  Each owner of record of a Class O Certificate will be entitled
to certain distributions , as described under Section 4.01 of the Pooling and
Servicing Agreement.

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

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

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

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

                  ASSUMING THAT THE MORTGAGE LOANS PREPAY AT A RATE BASED ON
100% OF THE PREPAYMENT ASSUMPTION DESCRIBED IN THE PROSPECTUS SUPPLEMENT, THIS
CLASS O CERTIFICATE HAS BEEN ISSUED WITH APPROXIMATELY $____________ OF OID PER
$1,000,000 OF CLASS O PRINCIPAL AMOUNT AND THE ANNUAL YIELD TO MATURITY WILL BE
[ ]% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO THE

                                       2
<PAGE>
SHORT FIRST ACCRUAL PERIOD IS $____________ PER $1,000,000 OF CLASS O PRINCIPAL
AMOUNT COMPUTED USING DAILY COMPOUNDING.

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

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class O Certificates (the "Class O Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are Class A-1 Certificates, Class AIO Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class P
Certificates, Class O Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class O
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the Class O Distribution Amount relating to such Distribution Date.
Distributions will be made in immediately available funds to such owners, by
wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

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

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

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

                                       3
<PAGE>
otherwise provided in the Pooling and Servicing Agreement) all as more
specifically set forth hereinabove and in the Pooling and Servicing Agreement.

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or

                                       4
<PAGE>
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                             By: ______________________
                                 Name:
                                 Title:

Trustee Authentication

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

By: ______________________
    Name:
    Title:

                                       6
<PAGE>
                                                                     Exhibit A-8
                          Form of Class RL Certificate
                          ----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                              CLASS RL CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  RL-1                 Date:  March 31, 2000    Final Scheduled Distribution
                                                    Date:  July 25, 2030
Percentage Interest: 100%  Registered Owner:
                           NovaStar REMIC Financing
                           Corporation
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  Each owner of record of a Class RL Certificate will be
entitled to certain distributions as described in Section 4.01 of the Pooling
and Servicing Agreement.

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

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

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

                  TRANSFER OF THIS CLASS RL CERTIFICATE IS RESTRICTED AS SET
FORTH IN THE POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS RL
CERTIFICATE MAY BE MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION
860(E)(5) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH
TERM INCLUDES THE UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR
INSTRUMENTALITY OF ANY OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE
INSTRUMENTALITIES), ANY COOPERATIVE ORGANIZATION FURNISHING ELECTRIC ENERGY OR
PROVIDING THEREOF SERVICE TO PERSONS IN RURAL AREAS, OR ANY ORGANIZATION (OTHER
THAN A FARMERS' COOPERATIVE) THAT IS EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH
ORGANIZATION IS SUBJECT TO THE TAX ON UNRELATED BUSINESS INCOME. NO TRANSFER OF
THIS CLASS RL CERTIFICATE WILL BE REGISTERED BY THE TRUSTEE UNLESS THE PROPOSED

                                       2
<PAGE>
TRANSFEREE HAS DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE
PROPOSED TRANSFEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE
CLASS RL CERTIFICATE FOR THE ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF
THE FORM OF AFFIDAVIT REQUIRED OF EACH PROPOSED TRANSFEREE IS ON FILE AND
AVAILABLE FROM THE TRUSTEE.

                  A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY
GIVE RISE TO A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN
AGENT ACTING FOR THE TRANSFEREE. A PASS-THRU ENTITY THAT HOLDS THIS CLASS RL
CERTIFICATE AND THAT HAS A DISQUALIFIED ORGANIZATION AS A RECORD OWNER IN ANY
TAXABLE YEAR GENERALLY WILL BE SUBJECT TO A TAX FOR EACH SUCH YEAR EQUAL TO THE
PRODUCT OF (A) THE AMOUNT OF EXCESS INCLUSIONS WITH RESPECT TO THE PORTION OF
THIS CERTIFICATE OWNED THROUGH SUCH PASS-THRU ENTITY BY SUCH DISQUALIFIED
ORGANIZATION AND (B) THE HIGHEST MARGINAL FEDERAL TAX RATE ON CORPORATIONS. FOR
PURPOSES OF THE PRECEDING SENTENCE, THE TERM "PASS-THRU" ENTITY INCLUDES
REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, COMMON TRUST
FUNDS, PARTNERSHIPS, TRUSTS, ESTATES, COOPERATIVES TO WHICH PART I OF SUBCHAPTER
T, CHAPTER 1 OF THE CODE APPLIES AND, EXCEPT AS PROVIDED IN REGULATIONS,
NOMINEES.

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

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class RL Certificates (the "Class RL Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class A-1 Certificates, Class AIO Certificates, Class
M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class P
Certificates, Class O Certificates and Class RU Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class RL
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Section 4.01 of the Pooling and Servicing
Agreement relating to such Distribution Date. Distributions will be made in
immediately available funds to such owners, by

                                       3
<PAGE>
wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

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

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

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

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the

                                       4
<PAGE>
United States to the Court of St. James, living on the date of the Pooling and
Servicing Agreement.

                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

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

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                              By:  ______________________
                                   Name:
                                   Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                     Exhibit A-9
                          Form of Class RU Certificate
                          ----------------------------

                     NOVASTAR MORTGAGE FUNDING TRUST 2000-1
                     MORTGAGE LOAN ASSET-BACKED CERTIFICATE
                              CLASS RU CERTIFICATES

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

                       NOVASTAR MORTGAGE INC., as Servicer

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

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

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

No.:  RU-1                 Date:  March 31, 2000    Final Scheduled Distribution
                                                    Date:  July 25, 2030

Percentage Interest: 100%  Registered Owner:
                           NovaStar REMIC Financing
                           Corporation
<PAGE>
                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2000 (the "Pooling and Servicing Agreement") by and among
Residential Asset Funding Corporation (the "Depositor"), the Trustee, the
Certificate Administrator and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Depositor's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Depositor under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Depositor or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

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

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

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

                  TRANSFER OF THIS CLASS RU CERTIFICATE IS RESTRICTED AS SET
FORTH IN THE POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS RU
CERTIFICATE MAY BE MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION
860(E)(5) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH
TERM INCLUDES THE UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR
INSTRUMENTALITY OF ANY OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE
INSTRUMENTALITIES), ANY COOPERATIVE ORGANIZATION FURNISHING ELECTRIC ENERGY OR
PROVIDING THEREOF SERVICE TO PERSONS IN RURAL AREAS, OR ANY ORGANIZATION (OTHER
THAN A FARMERS' COOPERATIVE) THAT IS EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH
ORGANIZATION IS SUBJECT TO THE TAX ON UNRELATED BUSINESS INCOME. NO TRANSFER OF
THIS CLASS RU CERTIFICATE WILL BE REGISTERED BY THE TRUSTEE UNLESS THE PROPOSED
TRANSFEREE HAS DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE
PROPOSED TRANSFEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE
CLASS RU CERTIFICATE FOR THE

                                       2
<PAGE>
ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF THE FORM OF AFFIDAVIT REQUIRED
OF EACH PROPOSED TRANSFEREE IS ON FILE AND AVAILABLE FROM THE TRUSTEE.

                  A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY
GIVE RISE TO A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN
AGENT ACTING FOR THE TRANSFEREE. A PASS-THRU ENTITY THAT HOLDS THIS CLASS RU
CERTIFICATE AND THAT HAS A DISQUALIFIED ORGANIZATION AS A RECORD OWNER IN ANY
TAXABLE YEAR GENERALLY WILL BE SUBJECT TO A TAX FOR EACH SUCH YEAR EQUAL TO THE
PRODUCT OF (A) THE AMOUNT OF EXCESS INCLUSIONS WITH RESPECT TO THE PORTION OF
THIS CERTIFICATE OWNED THROUGH SUCH PASS-THRU ENTITY BY SUCH DISQUALIFIED
ORGANIZATION AND (B) THE HIGHEST MARGINAL FEDERAL TAX RATE ON CORPORATIONS. FOR
PURPOSES OF THE PRECEDING SENTENCE, THE TERM "PASS-THRU" ENTITY INCLUDES
REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, COMMON TRUST
FUNDS, PARTNERSHIPS, TRUSTS, ESTATES, COOPERATIVES TO WHICH PART I OF SUBCHAPTER
T, CHAPTER 1 OF THE CODE APPLIES AND, EXCEPT AS PROVIDED IN REGULATIONS,
NOMINEES.

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

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2000-1 Class RU Certificates (the "Class RU Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are Class A-1 Certificates, Class AIO Certificates, Class
M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class P
Certificates, Class O Certificates and Class RL Certificates, all such
Certificates are collectively referred to as the "Certificates."

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

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2000, the owners of the Class RU
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
a distribution as described in Section 4.01 of the Pooling and Servicing
Agreement relating to such Distribution Date. Distributions will be made in
immediately available funds to such owners, by wire transfer or by check mailed
to the address of the person entitled thereto as it appears on the Certificate
Register.

                                       3
<PAGE>
                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

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

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

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

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

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in July 2030 and (v) at any time when a Qualified Liquidation of the
Upper-Tier REMIC and the Lower-Tier REMIC is effected pursuant to the Pooling
and Servicing Agreement. Notwithstanding the foregoing, in no event shall the
Trust hereby continue beyond the expiration of 21 years from the death of the
last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

                                       4
<PAGE>
                  The Servicer may, at its option, terminate the Pooling and
Servicing Agreement on any date on which the aggregate of the Principal Balances
of the Mortgage Loans on such date is equal to or less than 10% of the Maximum
Collateral Amount, by purchasing, on the next succeeding Distribution Date, all
of the outstanding Mortgage Loans and REO Properties at a price equal to the
greater of the Principal Balance of the Mortgage Loans and REO Properties or the
market value of the Mortgage Loans and REO Properties, in each case plus accrued
and unpaid interest thereon at the weighted average of the Mortgage Rates
through the end of the Due Period preceding the final Distribution Date plus
unreimbursed Servicing Advances, Advances, any unpaid Servicing Fees allocable
to such Mortgage Loans and REO Properties and any accrued and unpaid Available
Funds Cap Carryover Amount. In addition, under certain circumstances relating to
the qualification of either the Upper-Tier REMIC or the Lower-Tier REMIC as a
REMIC under the Code, the Mortgage Loans may be sold, thereby affecting the
early retirement of the Certificates.

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

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

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

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

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

                                       5
<PAGE>
                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

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

                             By: ______________________
                                 Name:
                                 Title:

Trustee Authentication

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

By:  ______________________
     Name:
     Title:

                                       6
<PAGE>
                                                                       Exhibit B

                             Mortgage Loan Schedule
                             ----------------------
<PAGE>
                                                                       Exhibit C

                             Form of Addition Notice
                             -----------------------
<PAGE>
                                                                       Exhibit D

                     Form of Subsequent Transfer Instrument
                     --------------------------------------

      [See Exhibits 2(A) and 2(B) to the Mortgage Loan Purchase Agreement]
<PAGE>
                                                                       Exhibit E

                               Request for Release
                               -------------------

                                                           [date]

To:    First Union Nation Bank,
       as Certificate Administrator

       Re:  Pooling and Servicing Agreement, dated as of March 1, 2000
            NovaStar Home Equity Loan Asset-Backed Certificates, Series 2000-1
            ------------------------------------------------------------------

                  In connection with the administration of the pool of Mortgage
Loans held by you as Certificate Administrator, we request the release, and
acknowledge receipt, of the (Mortgage File/[specify document]) for the Mortgage
Loan described below, for the reason indicated.

Mortgagor's Name, Address & Zip Code:

Mortgage Loan Number:

Reason for Requesting Documents (check one)

____   1.         Mortgage Loan Paid in Full
                  (Servicer hereby certifies that all amounts received in
                  connection therewith have been credited to the Collection
                  Account and remitted to the Certificate Administrator for
                  deposit into the Payment Account pursuant to the Pooling and
                  Servicing Agreement.)

____  2.          Mortgage Loan Liquidated
                  (Servicer hereby certifies that all proceeds of foreclosure,
                  insurance or other liquidation have been finally received and
                  credited to the Collection Account and remitted to the
                  Certificate Administrator for deposit into the Payment Account
                  pursuant to the Pooling and Servicing Agreement.)

____  3.          Mortgage Loan in Foreclosure

____  4.          Mortgage Loan Purchased Pursuant to Section 11.01 of the
                  Pooling and Servicing Agreement.

____  5.          Mortgage Loan Repurchased or Substituted pursuant to Article
                  II or III of the Pooling and Servicing Agreement (Seller
                  hereby certifies that the repurchase price
<PAGE>
                  or Substitution Adjustment has been credited to the Collection
                  Account and that the substituted mortgage loan is a Qualified
                  Substitute Mortgage Loan.)

____  6.          Other
                  (explain)_____________________________________________________

                  If box 1 or 2 above is checked, and if all or part of the
Mortgage File was previously released to us, please release to us our previous
receipt on file with you, as well as any additional documents in your possession
relating to the above specified Mortgage Loan.

                  If box 3, 4, 5 or 6 above is checked, upon our return of all
of the above documents to you as Certificate Administrator, please acknowledge
your receipt by signing in the space indicated below, and returning this form.

                                                      NovaStar Mortgage, Inc.,
                                                      as [Servicer][Seller]

                                                      By:_______________________
                                                          Name:
                                                          Title:

Documents returned to Certificate Administrator:

First Union National Bank,
as Certificate Administrator

By: __________________________
    Name:
    Title:

Date: ________________________

                                       2
<PAGE>
                                                                     Exhibit F-1

                     Form of Trustee's Initial Certification
                     ---------------------------------------

                                                     [Date]
NovaStar Mortgage, Inc.
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention: Chris Miller, Senior Vice President

Residential Asset Funding Corporation
301 South College Street, TW-09
Charlotte, NC 28288-0610
Attention:  General Counsel

The Chase Manhattan Bank
450 West 33rd Street, 14th Floor
New York, NY  10001
Attention: Capital Markets Fiduciary Services, NovaStar 2000-1

         Re:      Pooling and Servicing Agreement, dated as of March 1, 2000
                  (the "Agreement"), among NovaStar Mortgage, Inc., Residential
                  Asset Funding Corporation, First Union National Bank (the
                  "Certificate Administrator") and The Chase Bank of Manhattan
                  (the "Trustee") NovaStar Mortgage Funding Trust, Series 2000-1
                  Home Equity Loan Asset-Backed Certificates
                  ------------------------------------------

Gentlemen:
                  In accordance with Section 2.03 of the above-captioned
Agreement, and Section 2.1(b) of the Mortgage Loan Purchase Agreement, dated as
of March 1, 2000, among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation III, the Depositor, the Certificate Administrator and the Trustee
(the "Purchase Agreement" and, together with the Agreement, the "Agreements"),
the undersigned, as Certificate Administrator, on behalf of the Trustee, hereby
certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule
(other than any Mortgage Loan paid in full or listed on the attachment hereto)
it has reviewed the Mortgage File and the Mortgage Loan Schedule and has
determined that: (i) all documents required to be included in the Mortgage File
are in its possession; (ii) such documents have been reviewed by it and appear
regular on their face and relate to such Mortgage Loan; and (iii) based on
examination by it, and only as to such documents, the information set forth in
items (i) - (vii) and (xiv) of the definition or description of "Mortgage Loan
Schedule" is correct.

                  The Certificate Administrator, on behalf of the Trustee, has
made no independent examination of any documents contained in each Mortgage File
beyond the review specifically required in the above-referenced Agreements. The
Certificate Administrator, on behalf of the Trustee, makes no representation
that any documents specified in clause (vi) of Section 2.1(b) of the Purchase
Agreement should be included in any Mortgage File. The Certificate
Administrator, on behalf of the Trustee, makes no representations as to and
shall not be
<PAGE>
responsible to verify: (i) the validity, legality, sufficiency, enforceability,
due authorization, recordability or genuineness of any of the documents
contained in each Mortgage File of any of the Mortgage Loans identified on the
Mortgage Loan Schedule, (ii) the collectability, insurability, effectiveness or
suitability of any such Mortgage Loan, or (iii) the existence of any assumption,
modification, written assurance or substitution agreement with respect to any
Mortgage File if no such documents appear in the Mortgage File delivered to the
Certificate Administrator, on behalf of the Trustee.

                  Capitalized words and phrases used herein shall have the
respective meanings assigned to them in the above-captioned Agreement.

                                   FIRST UNION NATIONAL BANK, not in its
                                   individual capacity but solely as Certificate
                                   Administrator

                                   By:_________________________________
                                   Name:
                                   Title:

                                       2
<PAGE>
                                                                     Exhibit F-2

                      Form of Trustee's Final Certification
                      -------------------------------------

                                                   [Date]
NovaStar Mortgage, Inc.
1900 W. 47th Place, Suite 205
Westwood, Kansas 66205
Attention: Chris Miller, Senior Vice President

Residential Asset Funding Corporation
301 South College Street, TW-09
Charlotte, NC 28288-0610
Attention:  General Counsel

The Chase Manhattan Bank
450 West 33rd Street, 14th Floor
New York, NY  10001
Attention: Capital Markets Fiduciary Services, NovaStar 2000-1

         Re:      Pooling and Servicing Agreement, dated as of March 1, 2000
                  (the "Agreement"), among NovaStar Mortgage, Inc., Residential
                  Asset Funding Corporation, First Union National Bank (the
                  "Certificate Administrator") and The Chase Bank of Manhattan
                  (the "Trustee") NovaStar Mortgage Funding Trust, Series 2000-1
                  Home Equity Loan Asset-Backed Certificates
                  --------------------------------------------------------------

Gentlemen:

                  In accordance with Section 2.03 of the above-captioned
Agreement, and Section 2.1(b) of the Mortgage Loan Purchase Agreement, dated as
of March 1, 2000, among NovaStar Mortgage, Inc., Residential Asset Funding
Corporation, the Certificate Administrator, the Trustee and NovaStar Mortgage
Funding Corporation III (the " Purchase Agreement" and, together with the
Agreement, the "Agreements"), the undersigned, as Certificate Administrator, on
behalf of the Trustee, hereby certifies that as to each Mortgage Loan listed in
the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed
on the attachment hereto) it has received the documents set forth in Section
2.1(b) of the Mortgage Loan Purchase Agreement.

                  The Certificate Administrator, on behalf of the Trustee, has
made no independent examination of any documents contained in each Mortgage File
beyond the review specifically required in the Agreements. The Certificate
Administrator, on behalf of the Trustee, makes no representation that any
documents specified in clause (vi) of Section 2.1(b) should be included in any
Mortgage File. The Certificate Administrator, on behalf of the Trustee, makes no
representations as to and shall not be responsible to verify: (i) the validity,
legality, sufficiency, enforceability, due authorization, recordability or
genuineness of any of the documents contained in each Mortgage File of any of
the Mortgage Loans identified on the Mortgage Loan Schedule,
<PAGE>
(ii) the collectability, insurability, effectiveness or suitability of any such
Mortgage Loan or (iii) the existence of any assumption, modification, written
assurance or substitution agreement with respect to any Mortgage File if no such
documents appear in the Mortgage File delivered to the Certificate
Administrator, on behalf of the Trustee.

                  Capitalized words and phrases used herein shall have the
respective meanings assigned to them in the above-captioned Agreement.

                                   FIRST UNION NATIONAL BANK, not in its
                                   individual capacity but solely as Certificate
                                   Administrator

                                   By: ______________________________
                                   Name:
                                   Title:

                                       2
<PAGE>
                                                                       Exhibit G

                            Form of Investment Letter
                            -------------------------

Residential Asset Funding Corporation
301 South College Street, TW-09
Charlotte, NC 28288-0610
Attention:  General Counsel

First Union National Bank
401 South Tryon Street, NC1179, 12th Floor
Charlotte, NC  28288-1179
Attention:        Structured Finance Trust Services
                  (NovaStar Mortgage Funding Trust, Series 2000-1)

Ladies and Gentlemen:

                  The undersigned (the "Transferee") has agreed to purchase from
__________ (the "Transferor") the following certificates:

                           Class                     Number
                           -----                     ------

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

                  I.  The Transferee is (check one):

                  ---      (i) An insurance company, as defined in Section 2(13)
                           of the Securities Act of 1933, as amended (the
                           "Securities Act"), (ii) an investment company
                           registered under the Investment Company Act of 1940,
                           as amended (the "Investment Company Act"), (iii) a
                           business development company as defined in Section
                           2(a)(48) of the Securities Act, (iv) a Small Business
                           Investment Company licensed by the U.S. Small
                           Business Administration under Section 301(c) or (d)
                           of the Small Business Investment Act of 1958, as
                           amended, (v) a plan established and maintained by a
                           state, its political subdivisions, or any agency or
                           instrumentality of a state or its political
                           subdivisions, for the benefit of its employees, (vi)
                           an employee benefit plan within the meaning of Title
                           I of the Employee Retirement Income Security Act of
                           1974, as amended ("ERISA"),
<PAGE>
                           (vii) a business development company as defined in
                           Section 202(a)(22) of the Investment Advisors Act of
                           1940, as amended, (viii) an organization described in
                           Section 501(c)(3) of the Internal Revenue Code,
                           corporation (other than a bank as defined in Section
                           3(a)(2) of the Securities Act or a savings and loan
                           association or other institution referenced in
                           Section 3(a)(2) of the Securities Act or a foreign
                           bank or savings and loan association or equivalent
                           institution), partnership, or Massachusetts or
                           similar business trust; or (ix) an investment advisor
                           registered under the Investment Advisors Act of 1940,
                           as amended, which, for each of (i) through (ix), owns
                           and invests on a discretionary basis at least $100
                           million in securities other than securities of
                           issuers affiliated with the Transferee, securities
                           issued or guaranteed by the United States or a person
                           controlled or supervised by and acting as an
                           instrumentality of the government of the United
                           States pursuant to authority granted by the Congress
                           of the United States, bank deposit notes and
                           certificates of deposit, loan participations,
                           repurchase agreements, securities owned but subject
                           to a repurchase agreement, and currency, interest
                           rate and commodity swaps (collectively, "Excluded
                           Securities");

                  ---      a dealer registered pursuant to Section 15 of the
                           Securities Exchange Act of 1934, as amended (the
                           "Exchange Act") that in the aggregate owns and
                           invests on a discretionary basis at least $10 million
                           of securities other than Excluded Securities and
                           securities constituting the whole or part of an
                           unsold allotment to, or subscription by, Transferee
                           as a participant in a public offering;

                  ---      an investment company registered under the Investment
                           Company Act that is part of a family of investment
                           companies (as defined in Rule 144A of the Securities
                           and Exchange Commission) which own in the aggregate
                           at least $100 million in securities other than
                           Excluded Securities and securities of issuers that
                           are part of such family of investment companies;

                  ---      an entity, all of the equity owners of which are
                           entities described in this Paragraph A(I);

                  ---      a bank as defined in Section 3(a)(2) of the
                           Securities Act, any savings and loan association or
                           other institution as referenced in Section 3(a)(5)(A)
                           of the Securities Act, or any foreign bank or savings
                           and loan association or equivalent institution that
                           in the aggregate owns and invests on a discretionary
                           basis at least $100 million in securities other than
                           Excluded Securities and has an audited net worth of
                           at least $25 million as demonstrated in its latest
                           annual financial statements, as of a date not more
                           than 16 months preceding the date of transfer of the
                           Certificates to the Transferee in

                                       2
<PAGE>
                           the case of a U.S. Bank or savings and loan
                           association, and not more than 18 months preceding
                           such date in the case of a foreign bank or savings
                           association or equivalent institution.

                  II. The Transferee is acquiring such Certificates solely for
its own account, for the account of one or more others, all of which are
"Qualified Institutional Buyers" within the meaning of Rule 144A, or in its
capacity as a dealer registered pursuant to Section 15 of the Exchange Act
acting in a riskless principal transaction on behalf of a "Qualified
Institutional Buyer". The Transferee is not acquiring such Certificates with a
view to or for the resale, distribution, subdivision or fractionalization
thereof which would require registration of the Certificates under the
Securities Act.

                  D. The Transferee represents that either it is not (i) an
employee benefit plan (as defined in section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) subject to the provisions of
Title I of ERISA, (ii) a plan described in section 4975(e)(l) of the Internal
Revenue Code of 1986, or (iii) an entity whose underlying assets are deemed to
be assets of a plan described in (i) or (ii) above by reason so such plan's
investment in the entity.

                                                     Very truly yours,

                                                     By:______________________
                                                     Title:___________________

Dated:____________

                                       3
<PAGE>
                                                                       Exhibit H

                 Form of Residual Certificate Transfer Affidavit
                 -----------------------------------------------

AFFIDAVIT PURSUANT TO SECTION 860(e) OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED

STATE OF        )
                )  ss:
COUNTY OF       )

                  [NAME OF OFFICER], being first duly sworn, deposes and says:

                  1. That he is [Title of Officer] of [Name of Investor] (the
"Investor"), a [savings institution] [corporation] duly organized and existing
under the laws of [the State of __________] [the United States], on behalf of
which he makes this affidavit.

                  2. That (i) the Investor is not a "disqualified organization"
and will not be a "disqualified organization" as of [date of transfer] (for this
purpose, a "disqualified organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax unless such organization is subject to the tax on unrelated business
income); (ii) it is not acquiring the Class [RU] [RL] Certificate for the
account of a disqualified organization; (iii) it consents to any amendment of
the Pooling and Servicing Agreement dated as of March 1, 2000 among Residential
Asset Funding Corporation, as Depositor, NovaStar Mortgage, Inc., as Servicer,
The Chase Manhattan Bank, as Trustee and First Union National Bank, as the
Certificate Administrator, that shall be deemed necessary by the Trustee (upon
advice of counsel) to constitute a reasonable arrangement to ensure that the
Class [RU] [RL] Certificates will not be owned directly or indirectly by a
disqualified organization; and (iv) it will not transfer such Class [RU] [RL]
Certificate unless (a) it has received from the transferee an affidavit in
substantially the same form as this affidavit containing these same four
representations and (b) as of the time of the transfer, it does not have actual
knowledge that such affidavit is false.

                  IN WITNESS WHEREOF, the Investor has caused this instrument to
be executed on its behalf, pursuant to authority of its Board of Directors, by
its [Title of Officer] and its corporate seal to be hereunto attached, attested
by its [Assistant] Secretary, this ____ day of __________, ____.

                                                     [NAME OF INVESTOR]
<PAGE>
                                                     By:
                                                        [Name of Officer]
                                                        [Title of Officer]

[Corporate Seal]

Attest:

_________________________
[Assistant] Secretary

                  Personally appeared before me the above-named [Name of
Officer], known or proved to be the same person who executed the foregoing
instrument and to be the [Title of Officer] of the Investor, and acknowledged to
me that he executed the same as his free act and deed and the free act and deed
of the Investor.

                  Subscribed and sworn before me this ____ day of _______, ____.

_________________________
NOTARY PUBLIC

COUNTY OF _______________

STATE OF ________________

                       My commission expires the ____ day of ____________, ____.

                                       2EXHIBIT 4.1

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

                         HI-RISE RECYCLING SYSTEMS, INC.

                   1998 EXECUTIVE INCENTIVE COMPENSATION PLAN

         1. PURPOSE. The purpose of this 1998 Executive Incentive Compensation
Plan (the "Plan") is to assist Hi-Rise Recycling Systems, Inc., a Florida
corporation (the "Company") and its subsidiaries in attracting, motivating,
retaining and rewarding high-quality executives and other employees, officers,
Directors and independent contractors by enabling such persons to acquire or
increase a proprietary interest in the Company in order to strengthen the
mutuality of interests between such persons and the Company's stockholders, and
providing such persons with annual and long term performance incentives to
expend their maximum efforts in the creation of shareholder value. The Plan is
also intended to qualify certain compensation awarded under the Plan for tax
deductibility under Section 162(m) of the Code (as hereafter defined) to the
extent deemed appropriate by the Committee (or any successor committee) of the
Board of Directors of the Company.

         2. DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below, in addition to such terms defined in Section 1
hereof.

                  (a) "Annual Incentive Award" means a conditional right granted
to a Participant under Section 8(c) hereof to receive a cash payment, Stock or
other Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.

                  (b) "Award" means any Option, SAR (including Limited SAR),
Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another
award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual
Incentive Award, together with any other right or interest, granted to a
Participant under the Plan.

                  (c) "Beneficiary" means the person, persons, trust or trusts
which have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or to which Awards or
other rights are transferred if and to the extent permitted under Section 10(b)
hereof. If, upon a Participant's death, there is no designated Beneficiary or
surviving designated Beneficiary, then the term Beneficiary means the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.

                  (d) "Beneficial Owner", "Beneficially Owning" and "Beneficial
Ownership" shall have the meanings ascribed to such terms in Rule 13d-3 under
the Exchange Act and any successor to such Rule.

                  (e) "Board" means the Company's Board of Directors.

                  (f) "Change in Control" means Change in Control as defined
with related terms in Section 9 of the Plan.

                  (g) "Change in Control Price" means the amount calculated in
accordance  with Section 9(c) of the Plan.

                  (h) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, including regulations thereunder and successor provisions and
regulations thereto.

                  (i) "Committee" means a committee designated by the Board to
administer the Plan; provided, however, that the Committee shall consist of at
least two directors, and each member of which

                                       1
<PAGE>

shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under
the Exchange Act, unless administration of the Plan by "non-employee directors"
is not then required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" within the meaning
of Section 162(m) of the Code, unless administration of the Plan by "outside
directors" is not then required in order to qualify for tax deductibility under
Section 162(m) of the Code.

                  (j) "Corporate Transaction" means a Corporate Transaction as
defined in Section 9(b)(i) of the Plan.

                  (k) "Covered Employee" means an Eligible Person who is a
Covered Employee as specified in Section 8(e) of the Plan.

                  (l) "Deferred Stock" means a right, granted to a Participant
under Section 6(e) hereof, to receive Stock, cash or a combination thereof at
the end of a specified deferral period.

                  (m) "Director" means a member of the Board.

                  (n) "Disability" means a permanent and total disability
(within the meaning of Section 22(e) of the Code), as determined by a medical
doctor satisfactory to the Committee.

                  (o) "Dividend Equivalent" means a right, granted to a
Participant under Section 6(g) hereof, to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments.

                  (p) "Effective Date" means the effective date of the Plan,
which shall be June 1, 1998.

                  (q) "Eligible Person" means each Executive Officer of the
Company (as defined under the Exchange Act) and other officers, Directors and
employees of the Company or of any Subsidiary, and independent contractors with
the Company or any Subsidiary. The foregoing notwithstanding, only employees of
the Company or any Subsidiary shall be Eligible Persons for purposes of
receiving any Incentive Stock Options. An employee on leave of absence may be
considered as still in the employ of the Company or a Subsidiary for purposes of
eligibility for participation in the Plan.

                  (r) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, including rules thereunder and successor
provisions and rules thereto.

                  (s) "Executive Officer" means an executive officer of the
Company as defined under the Exchange Act.

                  (t) "Fair Market Value" means the fair market value of Stock,
Awards or other property as determined by the Committee or the Board, or under
procedures established by the Committee or the Board. Unless otherwise
determined by the Committee or the Board, the Fair Market Value of Stock as of
any given date shall be the closing sale price per share reported on a
consolidated basis for stock listed on the principal stock exchange or market on
which Stock is traded on the date as of which such value is being determined or,
if there is no sale on that date, then on the last previous day on which a sale
was reported.

                  (u) "Incentive Stock Option" or "ISO" means any Option
intended to be designated as an incentive stock option within the meaning of
Section 422 of the Code or any successor provision thereto.

                  (v) "Incumbent Board" means the Incumbent Board as defined in
Section 9(b)(ii) of the Plan.

                  (w) "Limited SAR" means a right granted to a Participant under
Section 6(c) hereof.

                                       2
<PAGE>

                  (x) "Option" means a right granted to a Participant under
Section 6(b) hereof, to purchase Stock or other Awards at a specified price
during specified time periods.

                  (y) "Other Stock-Based Awards" means Awards granted to a
Participant under Section 6(h) hereof.

                  (z) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company, if each
of the corporations in the chain (other than the Company) owns stock possessing
50% or more of the combined voting power of all classes of stock in one of the
other corporations in the chain.

                  (aa) "Participant" means a person who has been granted an
Award under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.

                  (bb) "Performance Award" means a right, granted to an Eligible
Person under Section 8 hereof, to receive Awards based upon performance criteria
specified by the Committee or the Board.

                  (cc) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, and shall include a "group" as defined in Section 13(d) thereof.

                  (dd) "Restricted Stock" means Stock granted to a Participant
under Section 6(d) hereof, that is subject to certain restrictions and to a risk
of forfeiture.

                  (ee) "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and
Rule 16a-1(c)(3), as from time to time in effect and applicable to the Plan and
Participants, promulgated by the Securities and Exchange Commission under
Section 16 of the Exchange Act.

                  (ff) "Stock" means the Company's Common Stock, and such other
securities as may be substituted (or resubstituted) for Stock pursuant to
Section 10(c) hereof.

                  (gg) "Stock Appreciation Rights" or "SAR" means a right
granted to a Participant under Section 6(c) hereof.

                  (hh) "Subsidiary" means any corporation or other entity in
which the Company has a direct or indirect ownership interest of 50% or more of
the total combined voting power of the then outstanding securities or interests
of such corporation or other entity entitled to vote generally in the election
of directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% or more of the assets on liquidation or
dissolution.

         3.       ADMINISTRATION.

                  (a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered
by the Committee; provided, however, that except as otherwise expressly provided
in this Plan or in order to comply with Code Section 162(m) or Rule 16b-3 under
the Exchange Act, the Board may exercise any power or authority granted to the
Committee under this Plan. The Committee or the Board shall have full and final
authority, in each case subject to and consistent with the provisions of the
Plan, to select Eligible Persons to become Participants, grant Awards, determine
the type, number and other terms and conditions of, and all other matters
relating to, Awards, prescribe Award agreements (which need not be identical for
each Participant) and rules and regulations for the administration of the Plan,
construe and interpret the Plan and Award agreements and correct defects, supply
omissions or reconcile inconsistencies therein, and to make all other decisions
and determinations as the Committee or the Board may deem necessary or advisable
for the administration of the Plan. In exercising any discretion granted to the
Committee or the Board under the Plan or pursuant to any Award, the Committee or
the Board shall not be required to follow past practices, act in a manner
consistent with past practices, or treat any Eligible Person in a manner
consistent with the treatment of other Eligible Persons.

                                       3
<PAGE>

                  (b) MANNER OF EXERCISE OF COMMITTEE AUTHORITY. The Committee,
and not the Board, shall exercise sole and exclusive discretion on any matter
relating to a Participant then subject to Section 16 of the Exchange Act with
respect to the Company to the extent necessary in order that transactions by
such Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any
action of the Committee or the Board shall be final, conclusive and binding on
all persons, including the Company, its subsidiaries, Participants,
Beneficiaries, transferees under Section 10(b) hereof or other persons claiming
rights from or through a Participant, and stockholders. The express grant of any
specific power to the Committee or the Board, and the taking of any action by
the Committee or the Board, shall not be construed as limiting any power or
authority of the Committee or the Board. The Committee or the Board may delegate
to officers or managers of the Company or any subsidiary, or committees thereof,
the authority, subject to such terms as the Committee or the Board shall
determine, (i) to perform administrative functions, (ii) with respect to
Participants not subject to Section 16 of the Exchange Act, to perform such
other functions as the Committee or the Board may determine, and (iii) with
respect to Participants subject to Section 16, to perform such other functions
of the Committee or the Board as the Committee or the Board may determine to the
extent performance of such functions will not result in the loss of an exemption
under Rule 16b-3 otherwise available for transactions by such persons, in each
case to the extent permitted under applicable law and subject to the
requirements set forth in Section 8(d). The Committee or the Board may appoint
agents to assist it in administering the Plan.

                  (c) LIMITATION OF LIABILITY. The Committee and the Board, and
each member thereof, shall be entitled to, in good faith, rely or act upon any
report or other information furnished to him or her by any executive officer,
other officer or employee of the Company or a Subsidiary, the Company's
independent auditors, consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and the Board, and any
officer or employee of the Company or a subsidiary acting at the direction or on
behalf of the Committee or the Board, shall not be personally liable for any
action or determination taken or made in good faith with respect to the Plan,
and shall, to the extent permitted by law, be fully indemnified and protected by
the Company with respect to any such action or determination.

         4.       STOCK SUBJECT TO PLAN.

                  (a) LIMITATION ON OVERALL NUMBER OF SHARES SUBJECT TO AWARDS.
Subject to adjustment as provided in Section 10(c) hereof, the total number of
shares of Stock reserved and available for delivery in connection with Awards
under the Plan shall be the sum of (i) 1,000,000 plus (ii) the number of shares
with respect to Awards previously granted under the Plan that terminate without
being exercised, expire, are forfeited or canceled, and the number of shares of
Stock that are surrendered in payment of any Awards or any tax withholding with
regard thereto. Any shares of Stock delivered under the Plan may consist, in
whole or in part, of authorized and unissued shares or treasury shares. Subject
to adjustment as provided in Section 10(c) hereof, in no event shall the
aggregate number of shares of Stock which may be issued pursuant to ISOs exceed
1,000,000 shares.

                  (b) APPLICATION OF LIMITATIONS. The limitation contained in
Section 4(a) shall apply not only to Awards that are settleable by the delivery
of shares of Stock but also to Awards relating to shares of Stock but settleable
only in cash (such as cash-only SARs). The Committee or the Board may adopt
reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and make
adjustments if the number of shares of Stock actually delivered differs from the
number of shares previously counted in connection with an Award.

         5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted
under the Plan only to Eligible Persons. In each fiscal year during any part of
which the Plan is in effect, an Eligible Person may not be granted Awards
relating to more than 250,000 shares of Stock, subject to adjustment as provided
in Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g),
6(h), 8(b) and 8(c). In addition, the maximum amount that may be earned as an
Annual Incentive Award or other cash Award in any fiscal year by any one
Participant shall be $1,000,000, and the maximum amount that may be earned as a
Performance Award or other cash Award in respect of a performance period by any
one Participant shall be $5,000,000.

                                       4
<PAGE>

         6.       SPECIFIC TERMS OF AWARDS.

                  (a) GENERAL. Awards may be granted on the terms and conditions
set forth in this Section 6. In addition, the Committee or the Board may impose
on any Award or the exercise thereof, at the date of grant or thereafter
(subject to Section 10(e)), such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the Committee or the Board
shall determine, including terms requiring forfeiture of Awards in the event of
termination of employment by the Participant and terms permitting a Participant
to make elections relating to his or her Award. The Committee or the Board shall
retain full power and discretion to accelerate, waive or modify, at any time,
any term or condition of an Award that is not mandatory under the Plan. Except
in cases in which the Committee or the Board is authorized to require other
forms of consideration under the Plan, or to the extent other forms of
consideration must be paid to satisfy the requirements of Florida law, no
consideration other than services may be required for the grant (but not the
exercise) of any Award.

                  (b) OPTIONS. The Committee and the Board each is authorized to
grant Options to Participants on the following terms and conditions:

                      (i) EXERCISE PRICE. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee or the Board,
provided that such exercise price shall not, in the case of Incentive Stock
Options, be less than 100% of the Fair Market Value of the Stock on the date of
grant of the Option and shall not, in any event, be less than the par value of a
share of Stock on the date of grant of such Option. If an employee owns or is
deemed to own (by reason of the attribution rules applicable under Section
424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company or any Parent Corporation and an Incentive Stock Option is
granted to such employee, the option price of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be no less than 110%
of the Fair Market Value of the Stock on the date such Incentive Stock Option is
granted.

                      (ii) TIME AND METHOD OF EXERCISE. The Committee or the
Board shall determine the time or times at which or the circumstances under
which an Option may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the time
or times at which Options shall cease to be or become exercisable following
termination of employment or upon other conditions, the methods by which such
exercise price may be paid or deemed to be paid (including in the discretion of
the Committee or the Board a cashless exercise procedure), the form of such
payment, including, without limitation, cash, Stock, other Awards or awards
granted under other plans of the Company or any subsidiary, or other property
(including notes or other contractual obligations of Participants to make
payment on a deferred basis), and the methods by or forms in which Stock will be
delivered or deemed to be delivered to Participants.

                      (iii) ISOS. The terms of any ISO granted under the Plan
shall comply in all respects with the provisions of Section 422 of the Code.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to ISOs (including any SAR in tandem therewith) shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be exercised, so as to disqualify either the Plan or any ISO under Section 422
of the Code, unless the Participant has first requested the change that will
result in such disqualification. Thus, if and to the extent required to comply
with Section 422 of the Code, Options granted as Incentive Stock Options shall
be subject to the following special terms and conditions:

                      A. the Option shall not be exercisable more than ten years
after the date such Incentive Stock Option is granted; provided, however, that
if a Participant owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Parent Corporation and the Incentive
Stock Option is granted to such Participant, the term of the Incentive Stock
Option shall be (to the extent required by the Code at the time of the grant)
for no more than five years from the date of grant; and

                      B. The aggregate Fair Market Value (determined as of the
date the Incentive Stock Option is granted) of the shares of stock with respect
to which Incentive Stock Options granted

                                       5
<PAGE>

under the Plan and all other option plans of the Company or its Parent
Corporation during any calendar year exercisable for the first time by the
Participant during any calendar year shall not (to the extent required by the
Code at the time of the grant) exceed $100,000.

                  (c) STOCK APPRECIATION RIGHTS. The Committee and the Board
each is authorized to grant SAR's to Participants on the following terms and
conditions:

                       (i) RIGHT TO PAYMENT. A SAR shall confer on the
Participant to whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of stock on the date of
exercise (or, in the case of a "Limited SAR" that may be exercised only in the
event of a Change in Control, the Fair Market Value determined by reference to
the Change in Control Price, as defined under Section 9(c) hereof), over (B) the
grant price of the SAR as determined by the Committee or the Board. The grant
price of an SAR shall not be less than the Fair Market Value of a share of Stock
on the date of grant except as provided under Section 7(a) hereof.

                       (ii) OTHER TERMS. The Committee or the Board shall
determine at the date of grant or thereafter, the time or times at which and the
circumstances under which a SAR may be exercised in whole or in part (including
based on achievement of performance goals and/or future service requirements),
the time or times at which SARs shall cease to be or become exercisable
following termination of employment or upon other conditions, the method of
exercise, method of settlement, form of consideration payable in settlement,
method by or forms in which Stock will be delivered or deemed to be delivered to
Participants, whether or not a SAR shall be in tandem or in combination with any
other Award, and any other terms and conditions of any SAR. Limited SARs that
may only be exercised in connection with a Change in Control or other event as
specified by the Committee or the Board, may be granted on such terms, not
inconsistent with this Section 6(c), as the Committee or the Board may
determine. SARs and Limited SARs may be either freestanding or in tandem with
other Awards.

                  (d) RESTRICTED STOCK. The Committee and the Board each is
authorized to grant Restricted Stock to Participants on the following terms and
conditions:

                      (i) GRANT AND RESTRICTIONS. Restricted Stock shall be
subject to such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee or the Board may impose, which
restrictions may lapse separately or in combination at such times, under such
circumstances (including based on achievement of performance goals and/or future
service requirements), in such installments or otherwise, as the Committee or
the Board may determine at the date of grant or thereafter. Except to the extent
restricted under the terms of the Plan and any Award agreement relating to the
Restricted Stock, a Participant granted Restricted Stock shall have all of the
rights of a stockholder, including the right to vote the Restricted Stock and
the right to receive dividends thereon (subject to any mandatory reinvestment or
other requirement imposed by the Committee or the Board). During the restricted
period applicable to the Restricted Stock, subject to Section 10(b) below, the
Restricted Stock may not be sold, transferred, pledged, hypothecated, margined
or otherwise encumbered by the Participant.

                       (ii) FORFEITURE. Except as otherwise determined by the
Committee or the Board at the time of the Award, upon termination of a
Participant's employment during the applicable restriction period, the
Participant's Restricted Stock that is at that time subject to restrictions
shall be forfeited and reacquired by the Company; provided that the Committee or
the Board may provide, by rule or regulation or in any Award agreement, or may
determine in any individual case, that restrictions or forfeiture conditions
relating to Restricted Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Committee or the Board may
in other cases waive in whole or in part the forfeiture of Restricted Stock.

                       (iii) CERTIFICATES FOR STOCK. Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee or the Board
shall determine. If certificates representing Restricted Stock are registered in
the name of the Participant, the Committee or the Board may require that such
certificates bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock, that the Company retain
physical possession of the certificates, and

                                       6
<PAGE>

that the Participant deliver a stock power to the Company, endorsed in blank,
relating to the Restricted Stock.

                      (iv) DIVIDENDS AND SPLITS. As a condition to the grant of
an Award of Restricted Stock, the Committee or the Board may require that any
cash dividends paid on a share of Restricted Stock be automatically reinvested
in additional shares of Restricted Stock or applied to the purchase of
additional Awards under the Plan. Unless otherwise determined by the Committee
or the Board, Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be subject to
restrictions and a risk of forfeiture to the same extent as the Restricted Stock
with respect to which such Stock or other property has been distributed.

                  (e) DEFERRED STOCK. The Committee and the Board each is
authorized to grant Deferred Stock to Participants, which are rights to receive
Stock, cash, or a combination thereof at the end of a specified deferral period,
subject to the following terms and conditions:

                      (i) AWARD AND RESTRICTIONS. Satisfaction of an Award of
Deferred Stock shall occur upon expiration of the deferral period specified for
such Deferred Stock by the Committee or the Board (or, if permitted by the
Committee or the Board, as elected by the Participant). In addition, Deferred
Stock shall be subject to such restrictions (which may include a risk of
forfeiture) as the Committee or the Board may impose, if any, which restrictions
may lapse at the expiration of the deferral period or at earlier specified times
(including based on achievement of performance goals and/or future service
requirements), separately or in combination, in installments or otherwise, as
the Committee or the Board may determine. Deferred Stock may be satisfied by
delivery of Stock, cash equal to the Fair Market Value of the specified number
of shares of Stock covered by the Deferred Stock, or a combination thereof, as
determined by the Committee or the Board at the date of grant or thereafter.
Prior to satisfaction of an Award of Deferred Stock, an Award of Deferred Stock
carries no voting or dividend or other rights associated with share ownership.

                      (ii) FORFEITURE. Except as otherwise determined by the
Committee or the Board, upon termination of a Participant's employment during
the applicable deferral period thereof to which forfeiture conditions apply (as
provided in the Award agreement evidencing the Deferred Stock), the
Participant's Deferred Stock that is at that time subject to deferral (other
than a deferral at the election of the Participant) shall be forfeited; provided
that the Committee or the Board may provide, by rule or regulation or in any
Award agreement, or may determine in any individual case, that restrictions or
forfeiture conditions relating to Deferred Stock shall be waived in whole or in
part in the event of terminations resulting from specified causes, and the
Committee or the Board may in other cases waive in whole or in part the
forfeiture of Deferred Stock.

                      (iii) DIVIDEND EQUIVALENTS. Unless otherwise determined by
the Committee or the Board at date of grant, Dividend Equivalents on the
specified number of shares of Stock covered by an Award of Deferred Stock shall
be either (A) paid with respect to such Deferred Stock at the dividend payment
date in cash or in shares of unrestricted Stock having a Fair Market Value equal
to the amount of such dividends, or (B) deferred with respect to such Deferred
Stock and the amount or value thereof automatically deemed reinvested in
additional Deferred Stock, other Awards or other investment vehicles, as the
Committee or the Board shall determine or permit the Participant to elect.

                  (f) BONUS STOCK AND AWARDS IN LIEU OF OBLIGATIONS. The
Committee and the Board each is authorized to grant Stock as a bonus, or to
grant Stock or other Awards in lieu of Company obligations to pay cash or
deliver other property under the Plan or under other plans or compensatory
arrangements, provided that, in the case of Participants subject to Section 16
of the Exchange Act, the amount of such grants remains within the discretion of
the Committee to the extent necessary to ensure that acquisitions of Stock or
other Awards are exempt from liability under Section 16(b) of the Exchange Act.
Stock or Awards granted hereunder shall be subject to such other terms as shall
be determined by the Committee or the Board.

                  (g) DIVIDEND EQUIVALENTS. The Committee and the Board each is
authorized to grant Dividend Equivalents to a Participant entitling the
Participant to receive cash, Stock, other Awards, or

                                       7
<PAGE>

other property equal in value to dividends paid with respect to a specified
number of shares of Stock, or other periodic payments. Dividend Equivalents may
be awarded on a free-standing basis or in connection with another Award. The
Committee or the Board may provide that Dividend Equivalents shall be paid or
distributed when accrued or shall be deemed to have been reinvested in
additional Stock, Awards, or other investment vehicles, and subject to such
restrictions on transferability and risks of forfeiture, as the Committee or the
Board may specify.

                  (h) OTHER STOCK-BASED AWARDS. The Committee and the Board each
is authorized, subject to limitations under applicable law, to grant to
Participants such other Awards that may be denominated or payable in, valued in
whole or in part by reference to, or otherwise based on, or related to, Stock,
as deemed by the Committee or the Board to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee or the Board, and
Awards valued by reference to the book value of Stock or the value of securities
of or the performance of specified subsidiaries or business units. The Committee
or the Board shall determine the terms and conditions of such Awards. Stock
delivered pursuant to an Award in the nature of a purchase right granted under
this Section 6(h) shall be purchased for such consideration, paid for at such
times, by such methods, and in such forms, including, without limitation, cash,
Stock, other Awards or other property, as the Committee or the Board shall
determine. Cash awards, as an element of or supplement to any other Award under
the Plan, may also be granted pursuant to this Section 6(h).

         7.       CERTAIN PROVISIONS APPLICABLE TO AWARDS.

                  (a) STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS.
Awards granted under the Plan may, in the discretion of the Committee or the
Board, be granted either alone or in addition to, in tandem with, or in
substitution or exchange for, any other Award or any award granted under another
plan of the Company, any subsidiary, or any business entity to be acquired by
the Company or a subsidiary, or any other right of a Participant to receive
payment from the Company or any subsidiary. Such additional, tandem, and
substitute or exchange Awards may be granted at any time. If an Award is granted
in substitution or exchange for another Award or award, the Committee or the
Board shall require the surrender of such other Award or award in consideration
for the grant of the new Award. In addition, Awards may be granted in lieu of
cash compensation, including in lieu of cash amounts payable under other plans
of the Company or any subsidiary, in which the value of Stock subject to the
Award is equivalent in value to the cash compensation (for example, Deferred
Stock or Restricted Stock), or in which the exercise price, grant price or
purchase price of the Award in the nature of a right that may be exercised is
equal to the Fair Market Value of the underlying Stock minus the value of the
cash compensation surrendered (for example, Options granted with an exercise
price "discounted" by the amount of the cash compensation surrendered).

                  (b) TERM OF AWARDS. The term of each Award shall be for such
period as may be determined by the Committee or the Board; provided that in no
event shall the term of any Option or SAR exceed a period of ten years (or such
shorter term as may be required in respect of an ISO under Section 422 of the
Code).

                  (c) FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS.
Subject to the terms of the Plan and any applicable Award agreement, payments to
be made by the Company or a subsidiary upon the exercise of an Option or other
Award or settlement of an Award may be made in such forms as the Committee or
the Board shall determine, including, without limitation, cash, Stock that have
been held for at least 6 months, other Awards or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
settlement of any Award may be accelerated, and cash paid in lieu of Stock in
connection with such settlement, in the discretion of the Committee or the Board
or upon occurrence of one or more specified events (in addition to a Change in
Control). Installment or deferred payments may be required by the Committee or
the Board (subject to Section 10(e) of the Plan) or permitted at the election of
the Participant on terms and conditions established by the Committee or the
Board. Payments may include, without limitation, provisions for the payment or
crediting of a reasonable

                                       8
<PAGE>

interest rate on installment or deferred payments or the grant or crediting of
Dividend Equivalents or other amounts in respect of installment or deferred
payments denominated in Stock.

                  (d) EXEMPTIONS FROM SECTION 16(B) LIABILITY. It is the intent
of the Company that this Plan comply in all respects with applicable provisions
of Rule 16b-3 or Rule 16a-1(c)(3) to the extent necessary to ensure that neither
the grant of any Awards to nor other transaction by a Participant who is subject
to Section 16 of the Exchange Act is subject to liability under Section 16(b)
thereof (except for transactions acknowledged in writing to be non-exempt by
such Participant). Accordingly, if any provision of this Plan or any Award
agreement does not comply with the requirements of Rule 16b-3 or Rule
16a-1(c)(3) as then applicable to any such transaction, such provision will be
construed or deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall
avoid liability under Section 16(b). In addition, the purchase price of any
Award conferring a right to purchase Stock shall be not less than any specified
percentage of the Fair Market Value of Stock at the date of grant of the Award
then required in order to comply with Rule 16b-3.

         8.       PERFORMANCE AND ANNUAL INCENTIVE AWARDS.

                  (a) PERFORMANCE CONDITIONS. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the
Committee or the Board. The Committee or the Board may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under Sections 8(b) and 8(c) hereof in the case of a
Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m), shall be exercised by the
Committee and not the Board.

                  (b) PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that a Performance
Award to be granted to an Eligible Person who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this Section 8(b).

                      (i) PERFORMANCE GOALS GENERALLY. The performance goals for
such Performance Awards shall consist of one or more business criteria and a
targeted level or levels of performance with respect to each of such criteria,
as specified by the Committee consistent with this Section 8(b). Performance
goals shall be objective and shall otherwise meet the requirements of Code
Section 162(m) and regulations thereunder including the requirement that the
level or levels of performance targeted by the Committee result in the
achievement of performance goals being "substantially uncertain." The Committee
may determine that such Performance Awards shall be granted, exercised and/or
settled upon achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise and/or
settlement of such Performance Awards. Performance goals may differ for
Performance Awards granted to any one Participant or to different Participants.

                      (ii) BUSINESS CRITERIA. One or more of the following
business criteria for the Company, on a consolidated basis, and/or specified
subsidiaries or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used exclusively
by the Committee in establishing performance goals for such Performance Awards:
(1) total stockholder return; (2) such total stockholder return as compared to
total return (on a comparable basis) of a publicly available index such as, but
not limited to, the Standard & Poor's 500 Stock Index or the S&P Specialty
Retailer Index; (3) net income; (4) pretax earnings; (5) earnings before
interest expense, taxes, depreciation and amortization; (6) pretax operating
earnings after interest expense and before bonuses, service fees, and
extraordinary or special items; (7) operating margin; (8) earnings per share;
(9) return on equity; (10) return on capital; (11) return on investment; (12)
operating earnings; (13) working capital or

                                       9
<PAGE>

inventory; and (14) ratio of debt to stockholders' equity. One or more of the
foregoing business criteria shall also be exclusively used in establishing
performance goals for Annual Incentive Awards granted to a Covered Employee
under Section 8(c) hereof that are intended to qualify as "performanced-based
compensation under Code Section 162(m).

                      (iii) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING
PERFORMANCE GOALS. Achievement of performance goals in respect of such
Performance Awards shall be measured over a performance period of up to ten
years, as specified by the Committee. Performance goals shall be established not
later than 90 days after the beginning of any performance period applicable to
such Performance Awards, or at such other date as may be required or permitted
for "performance-based compensation" under Code Section 162(m).

                      (iv) PERFORMANCE AWARD POOL. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for purposes of
measuring Company performance in connection with Performance Awards. The amount
of such Performance Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business criteria set
forth in Section 8(b)(ii) hereof during the given performance period, as
specified by the Committee in accordance with Section 8(b)(iii) hereof. The
Committee may specify the amount of the Performance Award pool as a percentage
of any of such business criteria, a percentage thereof in excess of a threshold
amount, or as another amount which need not bear a strictly mathematical
relationship to such business criteria.

                      (v) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS.
Settlement of such Performance Awards shall be in cash, Stock, other Awards or
other property, in the discretion of the Committee. The Committee may, in its
discretion, reduce the amount of a settlement otherwise to be made in connection
with such Performance Awards. The Committee shall specify the circumstances in
which such Performance Awards shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end of a performance
period or settlement of Performance Awards.

                  (c) ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES. If and to the extent that the Committee determines that an Annual
Incentive Award to be granted to an Eligible Person who is designated by the
Committee as likely to be a Covered Employee should qualify as
"performance-based compensation" for purposes of Code Section 162(m), the grant,
exercise and/or settlement of such Annual Incentive Award shall be contingent
upon achievement of preestablished performance goals and other terms set forth
in this Section 8(c).

                      (i) ANNUAL INCENTIVE AWARD POOL. The Committee may
establish an Annual Incentive Award pool, which shall be an unfunded pool, for
purposes of measuring Company performance in connection with Annual Incentive
Awards. The amount of such Annual Incentive Award pool shall be based upon the
achievement of a performance goal or goals based on one or more of the business
criteria set forth in Section 8(b)(ii) hereof during the given performance
period, as specified by the Committee in accordance with Section 8(b)(iii)
hereof. The Committee may specify the amount of the Annual Incentive Award pool
as a percentage of any such business criteria, a percentage thereof in excess of
a threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.

                      (ii) POTENTIAL ANNUAL INCENTIVE AWARDS. Not later than the
end of the 90th day of each fiscal year, or at such other date as may be
required or permitted in the case of Awards intended to be "performance-based
compensation" under Code Section 162(m), the Committee shall determine the
Eligible Persons who will potentially receive Annual Incentive Awards, and the
amounts potentially payable thereunder, for that fiscal year, either out of an
Annual Incentive Award pool established by such date under Section 8(c)(i)
hereof or as individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section 162(m), the
amount potentially payable shall be based upon the achievement of a performance
goal or goals based on one or more of the business criteria set forth in Section
8(b)(ii) hereof in the given performance year, as specified by the Committee; in
other cases, such amount shall be based on such criteria as shall be established
by the Committee. In all cases, the maximum Annual Incentive Award of any
Participant shall be subject to the limitation set forth in Section 5 hereof.

                                       10
<PAGE>

                      (iii) PAYOUT OF ANNUAL INCENTIVE AWARDS. After the end of
each fiscal year, the Committee shall determine the amount, if any, of (A) the
Annual Incentive Award pool, and the maximum amount of potential Annual
Incentive Award payable to each Participant in the Annual Incentive Award pool,
or (B) the amount of potential Annual Incentive Award otherwise payable to each
Participant. The Committee may, in its discretion, determine that the amount
payable to any Participant as an Annual Incentive Award shall be reduced from
the amount of his or her potential Annual Incentive Award, including a
determination to make no Award whatsoever. The Committee shall specify the
circumstances in which an Annual Incentive Award shall be paid or forfeited in
the event of termination of employment by the Participant prior to the end of a
fiscal year or settlement of such Annual Incentive Award.

                  (d) WRITTEN DETERMINATIONS. All determinations by the
Committee as to the establishment of performance goals, the amount of any
Performance Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards under Section
8(b), and the amount of any Annual Incentive Award pool or potential individual
Annual Incentive Awards and the amount of final Annual Incentive Awards under
Section 8(c), shall be made in writing in the case of any Award intended to
qualify under Code Section 162(m). The Committee may not delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards if
and to the extent required to comply with Code Section 162(m).

                  (e) STATUS OF SECTION 8(B) AND SECTION 8(C) AWARDS UNDER CODE
SECTION 162(M). It is the intent of the Company that Performance Awards and
Annual Incentive Awards under Section 8(b) and 8(c) hereof granted to persons
who are designated by the Committee as likely to be Covered Employees within the
meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e), including
the definitions of Covered Employee and other terms used therein, shall be
interpreted in a manner consistent with Code Section 162(m) and regulations
thereunder. The foregoing notwithstanding, because the Committee cannot
determine with certainty whether a given Participant will be a Covered Employee
with respect to a fiscal year that has not yet been completed, the term Covered
Employee as used herein shall mean only a person designated by the Committee, at
the time of grant of Performance Awards or an Annual Incentive Award, as likely
to be a Covered Employee with respect to that fiscal year. If any provision of
the Plan or any agreement relating to such Performance Awards or Annual
Incentive Awards does not comply or is inconsistent with the requirements of
Code Section 162(m) or regulations thereunder, such provision shall be construed
or deemed amended to the extent necessary to conform to such requirements.

         9.       CHANGE IN CONTROL.

                  (a) EFFECT OF "CHANGE IN CONTROL." If and to the extent
provided in the Award, in the event of a "Change in Control," as defined in
Section 9(b), the following provisions shall apply:

                      (i) Any Award carrying a right to exercise that was not
previously exercisable and vested shall become fully exercisable and vested as
of the time of the Change in Control, subject only to applicable restrictions
set forth in Section 10(a) hereof;

                      (ii) Limited SARs (and other SARs if so provided by their
terms) shall become exercisable for amounts, in cash, determined by reference to
the Change in Control Price;

                      (iii) The restrictions, deferral of settlement, and
forfeiture conditions applicable to any other Award granted under the Plan shall
lapse and such Awards shall be deemed fully vested as of the time of the Change
in Control, except to the extent of any waiver by the Participant and subject to
applicable restrictions set forth in Section 10(a) hereof; and

                      (iv) With respect to any such outstanding Award subject to
achievement of performance goals and conditions under the Plan, such performance
goals and other conditions will be deemed to be met if and to the extent so
provided by the Committee in the Award agreement relating to such Award.

                                       11
<PAGE>

                  (b) DEFINITION OF "CHANGE IN CONTROL. A "Change in Control"
shall be deemed to have occurred upon:

                      (i) Approval by the shareholders of the Company of a
reorganization, merger, consolidation or other form of corporate transaction or
series of transactions, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger or
consolidation or other transaction do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then outstanding
voting securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company (unless such
reorganization, merger, consolidation or other corporate transaction,
liquidation, dissolution or sale (any such event being referred to as a
"Corporate Transaction") is subsequently abandoned); or

                     (ii) Individuals who, as of the date hereof, constitute the
Board (as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the Directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Securities Exchange Act) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board.

                  (c) DEFINITION OF "CHANGE IN CONTROL PRICE." The "Change in
Control Price" means an amount in cash equal to the higher of (i) the amount of
cash and fair market value of property that is the highest price per share paid
(including extraordinary dividends) in any Corporate Transaction triggering the
Change in Control under Section 9(b)(i) hereof or any liquidation of shares
following a sale of substantially all of the assets of the Company, or (ii) the
highest Fair Market Value per share at any time during the 60-day period
preceding and the 60-day period following the Change in Control.

         10.      GENERAL PROVISIONS.

                  (a) COMPLIANCE WITH LEGAL AND OTHER REQUIREMENTS. The Company
may, to the extent deemed necessary or advisable by the Committee or the Board,
postpone the issuance or delivery of Stock or payment of other benefits under
any Award until completion of such registration or qualification of such Stock
or other required action under any federal or state law, rule or regulation,
listing or other required action with respect to any stock exchange or automated
quotation system upon which the Stock or other Company securities are listed or
quoted, or compliance with any other obligation of the Company, as the Committee
or the Board, may consider appropriate, and may require any Participant to make
such representations, furnish such information and comply with or be subject to
such other conditions as it may consider appropriate in connection with the
issuance or delivery of Stock or payment of other benefits in compliance with
applicable laws, rules, and regulations, listing requirements, or other
obligations. The foregoing notwithstanding, in connection with a Change in
Control, the Company shall take or cause to be taken no action, and shall
undertake or permit to arise no legal or contractual obligation, that results or
would result in any postponement of the issuance or delivery of Stock or payment
of benefits under any Award or the imposition of any other conditions on such
issuance, delivery or payment, to the extent that such postponement or other
condition would represent a greater burden on a Participant than existed on the
90th day preceding the Change in Control.

                  (b) LIMITS ON TRANSFERABILITY; BENEFICIARIES. No Award or
other right or interest of a Participant under the Plan, including any Award or
right which constitutes a derivative security as generally defined in Rule
16a-1(c) under the Exchange Act, shall be pledged, hypothecated or otherwise
encumbered or subject to any lien, obligation or liability of such Participant
to any party (other than the Company or a Subsidiary), or assigned or
transferred by such Participant otherwise than by will or the laws of descent
and distribution or to a Beneficiary upon the death of a Participant, and such
Awards or rights that may be exercisable shall be exercised during the lifetime
of the Participant only by the Participant or his or her guardian or legal
representative, except that Awards and other rights (other than

                                       12
<PAGE>

ISOs and SARs in tandem therewith) may be transferred to one or more
Beneficiaries or other transferees during the lifetime of the Participant, and
may be exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent such transfers and exercises are permitted by the
Committee or the Board pursuant to the express terms of an Award agreement
(subject to any terms and conditions which the Committee or the Board may impose
thereon, and further subject to any prohibitions or restrictions on such
transfers pursuant to Rule 16b-3). A Beneficiary, transferee, or other person
claiming any rights under the Plan from or through any Participant shall be
subject to all terms and conditions of the Plan and any Award agreement
applicable to such Participant, except as otherwise determined by the Committee
or the Board, and to any additional terms and conditions deemed necessary or
appropriate by the Committee or the Board.

                  (c) ADJUSTMENTS. In the event that any dividend or other
distribution (whether in the form of cash, Stock, or other property),
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, share exchange, liquidation,
dissolution or other similar corporate transaction or event affects the Stock
such that a substitution or adjustment is determined by the Committee or the
Board to be appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Committee or the Board shall, in
such manner as it may deem equitable, substitute or adjust any or all of (i) the
number and kind of shares of Stock which may be delivered in connection with
Awards granted thereafter, (ii) the number and kind of shares of Stock by which
annual per-person Award limitations are measured under Section 5 hereof, (iii)
the number and kind of shares of Stock subject to or deliverable in respect of
outstanding Awards and (iv) the exercise price, grant price or purchase price
relating to any Award and/or make provision for payment of cash or other
property in respect of any outstanding Award. In addition, the Committee (and
the Board if and only to the extent such authority is not required to be
exercised by the Committee to comply with Code Section 162(m)) is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards and performance goals, and Annual Incentive
Awards and any Annual Incentive Award pool or performance goals relating
thereto) in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence, as well as acquisitions
and dispositions of businesses and assets) affecting the Company, any Subsidiary
or any business unit, or the financial statements of the Company or any
Subsidiary, or in response to changes in applicable laws, regulations,
accounting principles, tax rates and regulations or business conditions or in
view of the Committee's assessment of the business strategy of the Company, any
Subsidiary or business unit thereof, performance of comparable organizations,
economic and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall be
authorized or made if and to the extent that such authority or the making of
such adjustment would cause Options, SARs, Performance Awards granted under
Section 8(b) hereof or Annual Incentive Awards granted under Section 8(c) hereof
to Participants designated by the Committee as Covered Employees and intended to
qualify as "performance-based compensation" under Code Section 162(m) and the
regulations thereunder to otherwise fail to qualify as "performance-based
compensation" under Code Section 162(m) and regulations thereunder.

                  (d) TAXES. The Company and any Subsidiary is authorized to
withhold from any Award granted, any payment relating to an Award under the
Plan, including from a distribution of Stock, or any payroll or other payment to
a Participant, amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee or the Board may deem advisable to enable the Company
and Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award. This authority shall include
authority to withhold or receive Stock or other property and to make cash
payments in respect thereof in satisfaction of a Participant's tax obligations,
either on a mandatory or elective basis in the discretion of the Committee.

                  (e) CHANGES TO THE PLAN AND AWARDS. The Board may amend,
alter, suspend, discontinue or terminate the Plan, or the Committee's authority
to grant Awards under the Plan, without the consent of stockholders or
Participants, except that any amendment or alteration to the Plan shall be
subject to the approval of the Company's stockholders not later than the annual
meeting next following such Board action if such stockholder approval is
required by any federal or state law or regulation (including, without
limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock
exchange or

                                       13
<PAGE>

automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided that, without the
consent of an affected Participant, no such Board action may materially and
adversely affect the rights of such Participant under any previously granted and
outstanding Award. The Committee or the Board may waive any conditions or rights
under, or amend, alter, suspend, discontinue or terminate any Award theretofore
granted and any Award agreement relating thereto, except as otherwise provided
in the Plan; provided that, without the consent of an affected Participant, no
such Committee or the Board action may materially and adversely affect the
rights of such Participant under such Award. Notwithstanding anything in the
Plan to the contrary, if any right under this Plan would cause a transaction to
be ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee or the Board
may modify or adjust the right so that pooling of interest accounting shall be
available, including the substitution of Stock having a Fair Market Value equal
to the cash otherwise payable hereunder for the right which caused the
transaction to be ineligible for pooling of interest accounting.

                  (f) LIMITATION ON RIGHTS CONFERRED UNDER PLAN. Neither the
Plan nor any action taken hereunder shall be construed as (i) giving any
Eligible Person or Participant the right to continue as an Eligible Person or
Participant or in the employ of the Company or a Subsidiary; (ii) interfering in
any way with the right of the Company or a Subsidiary to terminate any Eligible
Person's or Participant's employment at any time, (iii) giving an Eligible
Person or Participant any claim to be granted any Award under the Plan or to be
treated uniformly with other Participants and employees, or (iv) conferring on a
Participant any of the rights of a stockholder of the Company unless and until
the Participant is duly issued or transferred shares of Stock in accordance with
the terms of an Award.

                  (g) UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or
obligation to deliver Stock pursuant to an Award, nothing contained in the Plan
or any Award shall give any such Participant any rights that are greater than
those of a general creditor of the Company; provided that the Committee may
authorize the creation of trusts and deposit therein cash, Stock, other Awards
or other property, or make other arrangements to meet the Company's obligations
under the Plan. Such trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Committee otherwise determines with the
consent of each affected Participant. The trustee of such trusts may be
authorized to dispose of trust assets and reinvest the proceeds in alternative
investments, subject to such terms and conditions as the Committee or the Board
may specify and in accordance with applicable law.

                  (h) NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the
Plan by the Board nor its submission to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board or a committee thereof to adopt such other incentive arrangements as it
may deem desirable including incentive arrangements and awards which do not
qualify under Code Section 162(m).

                  (i) PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES.
Unless otherwise determined by the Committee or the Board, in the event of a
forfeiture of an Award with respect to which a Participant paid cash or other
consideration, the Participant shall be repaid the amount of such cash or other
consideration. No fractional shares of Stock shall be issued or delivered
pursuant to the Plan or any Award. The Committee or the Board shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.

                  (j) GOVERNING LAW. The validity, construction and effect of
the Plan, any rules and regulations under the Plan, and any Award agreement
shall be determined in accordance with the laws of the State of Florida without
giving effect to principles of conflicts of laws, and applicable federal law.

                  (k) PLAN EFFECTIVE DATE AND STOCKHOLDER APPROVAL; TERMINATION
OF PLAN. The Plan shall become effective on the Effective Date, subject to
subsequent approval within 12 months of its adoption by the Board by
stockholders of the Company eligible to vote in the election of directors, by a

                                       14
<PAGE>

vote sufficient to meet the requirements of Code Sections 162(m) and 422, Rule
16b-3 under the Exchange Act, applicable NASDAQ requirements, and other laws,
regulations, and obligations of the Company applicable to the Plan. Awards may
be granted subject to stockholder approval, but may not be exercised or
otherwise settled in the event stockholder approval is not obtained. The Plan
shall terminate at such time as no shares of Common Stock remain available for
issuance under the Plan and the Company has no further rights or obligations
with respect to outstanding Awards under the Plan.

                                       15

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