Document:

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                                                                   EXHIBIT 10.74

This document contains confidential information which is not
being provided to the Public.

                               HEMOPHILIA PRODUCT
                           VOLUME COMMITMENT AGREEMENT

         This Hemophilia Product Volume Commitment Agreement is made and entered
into this 19th day of December, 2001, by and between Baxter Healthcare
Corporation, a Delaware corporation, through its BioScience Division, with
offices at One Baxter Parkway, Deerfield, Illinois 60015 (hereinafter referred
to as "Baxter") and Coram, Inc. with offices at 1675 Broadway #900, Denver, CO
80202 (hereinafter referred to as "Purchaser"). Baxter and Purchaser are
collectively referred to hereinafter as the "Parties," or individually as a
"Party."

         WHEREAS Baxter produces and distributes a number of therapeutic protein
products derived from blood plasma and recombinant sources for the treatment of
hemophilia (hereinafter and as defined below, "Therapeutic Products"); and

         WHEREAS Baxter intends to appoint Hemophilia Specialty Pharmacy
Providers to distribute Baxter's Therapeutic Products to hemophilia patients and
provide essential services in support thereof; and

         WHEREAS Purchaser has the management expertise and capital and will
acquire the facilities and systems required to distribute Baxter's Therapeutic
Products to hemophilia patients and provide essential services in support
thereof; and

         WHEREAS Baxter is willing to commit a supply of Therapeutic Products to
Purchaser and to appoint Purchaser as a nonexclusive Hemophilia Specialty
Pharmacy Provider of its Therapeutic Products on the terms and conditions set
forth herein; and

         WHEREAS Purchaser is willing to accept such appointment.

         NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:

1.       DEFINITIONS

         For purposes of this Agreement, the following terms will have the
following meanings:

1.1      "Affiliate" means, with respect to any Person, any other Person (i)
         that controls, is controlled by or is under common control with such
         specified Person or (ii) which beneficially owns 50% or more of the
         equity securities of such specified Person. For purposes of the
         definition of Affiliate, the term "beneficially owns" means possesses,
         directly or indirectly, the power to vote (or direct the voting of) or
         dispose of (or direct the disposition of) an equity security. For
         purposes of the definition of Affiliate, the term "control" (including
         the terms "controls," "controlled by," and "under common control with")
         means the possession, direct or

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         indirect, of the power to direct or cause the direction of the
         management and policies of a Person, whether through the ownership of
         voting securities, by contract or otherwise.

1.2      "Base Level Product Volumes" means the annual volume of Recombinant
         Hemophilia Product for each year as set forth on Schedule A.

1.3      "Competitor" means (i) those entities listed on Schedule B attached
         hereto and (ii) any person or entity which either itself or through any
         of its affiliates manufactures, or is actively seeking government or
         regulatory approval to manufacture or market, any recombinant or plasma
         derived therapeutic protein product for the treatment of hemophilia
         that could reasonably be expected to serve as substitutes for Plasma
         Based Hemophilia Products and Recombinant Hemophilia Product.

1.4      "Effective Date" means the date of this Agreement, as referenced in the
         first paragraph of this Agreement.

1.5      "Government Program" means any purchasing program that includes
         Therapeutic Products sponsored, financially supported or paid for, in
         whole or in part, by (i) any federal, state or municipal government
         agency, (ii) any covered entity eligible the price discounts pursuant
         to Section 602 of the Veterans' Health Care Act of 1992, or (iii)
         Medicaid, Medicare, Children's Medical Services or other government or
         similar programs.

1.6      "Home Care Patients" means hemophilia and other patients who use or can
         use Therapeutic Products and associated services by having such
         products and services delivered to their homes or to such other
         residence, office or other locations as they may specify.

1.7      "New Therapeutic Products" means therapeutic protein products
         constituting substantial improvements to Therapeutic Products that
         Baxter may introduce from time to time, as well as new therapeutic
         protein products for the treatment of hemophilia that Baxter may
         introduce from time to time.

1.8      "Person" means any individual, corporation, limited liability company,
         partnership, joint venture, association, trust, unincorporated
         organization, governmental body or authority or any other entity.

1.9      "Plasma Based Hemophilia Products" means Hemofil M AHF and FEIBA VH
         Anti-Inhibitor Coagulation Concentrate.

1.10     "Other Products" means commercially available Proplex T Factor IX and
         Bebulin VH Factor IX Complex.

1.11     "Recombinant Hemophilia Product" means Recombinate rAHF.

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1.12     "Territory" means the United States excluding the Commonwealth of
         Puerto Rico and other territories.

1.13     "Therapeutic Products" means Recombinant Hemophilia Product and Plasma
         Based Hemophilia Products.

1.14     "Quarterly Base Level Product Volume" shall mean one-fourth of the Base
         Level Product Volume for the then current calendar year.

2.       APPOINTMENT AND NON-EXCLUSIVITY

2.1      Appointment. Subject to the terms and conditions contained herein,
         Baxter hereby appoints Purchaser and Purchaser hereby accepts an
         appointment as a nonexclusive Hemophilia Specialty Pharmacy Provider of
         Therapeutic Products to Home Care Patients in the Territory. Purchaser
         will sell and distribute Therapeutic Products purchased from Baxter
         hereunder only to Home Care Patients for whom Purchaser holds an active
         prescription and to whom Purchaser provides home care services for the
         treatment of hemophilia. Purchaser will only sell and distribute
         Therapeutic Products directly to Home Care Patients. Without Baxter's
         prior written consent, Purchaser will not, directly or indirectly, (i)
         sell or distribute Therapeutic Products to other Persons for commercial
         re-sale (including distributors and hospitals), (ii) barter or trade
         Therapeutic Products, or (iii) sell or distribute Therapeutic Products
         outside the Territory or otherwise make them available for export.
         Purchaser represents and warrants that all of the entities to whom it
         is currently providing Therapeutic Products for commercial resale and
         for which Baxter has previously consented are set forth in Schedule D,
         attached. Baxter hereby consents to Purchaser continuing to provide
         Therapeutic Products to such entities until the earlier of i) the
         expiration of the initial term of this agreement, or ii) the expiration
         of such arrangements between Purchaser and the other entities listed on
         Schedule D in accordance with their terms as of the effective date of
         this agreement.

2.2      Non-Exclusivity. Purchaser's appointment under this Agreement as a
         Hemophilia Specialty Pharmacy Provider is nonexclusive. Purchaser may
         purchase therapeutic protein products for the treatment of hemophilia
         from suppliers other than Baxter during the term hereof. Baxter may
         sell Therapeutic Products to distributors or providers other than
         Purchaser during the term of this Agreement and may sell or distribute
         directly to users, subject to the provisions of Section 3.2 of this
         Agreement. Baxter reserves the right to appoint other Hemophilia
         Specialty Pharmacy Providers and to sell or distribute Therapeutic
         Products to, without limitation, distributors, hospitals, wholesalers,
         hemophilia treatment centers, hemophilia home care providers and other
         third parties.

3.       TERM AND TERMINATION

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3.1

3.2

3.3

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3.4

3.5

4.       PRICING, PRICING PROTECTION, TERMS AND SUBSTITUTION

4.1      Prices. Purchaser will purchase Therapeutic Products for Home Care
         Patients from Baxter and Baxter will sell Therapeutic Products for Home
         Care Patients to Purchaser at the prices specified in Schedule C. The
         prices specified in Schedule C will be in effect from the Effective
         Date until December 31, 2002. Effective January 1, 2003, Baxter may
         increase the prices specified in Schedule C for

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         calendar year 2002 by up to five percent (5%). On January 1 and for
         each subsequent year this Agreement remains in effect, Baxter may
         increase the prices by up to five (5%) per cent over the prices for the
         previous year except as provided in Section 4.2 below.

4.2      Pricing Protection. Beginning on January 1, 2002, Baxter's prices to
         Purchaser for Recombinant Hemophilia Product under this Agreement will
         not exceed the lowest prices charged by Baxter to any other third party
         provider of Recombinant Hemophilia Product to Home Care Patients who
         purchases similar volumes of Recombinant Hemophilia Product from Baxter
         for Home Care Patients in similar circumstances on an annual basis. In
         the event such prices to another third party provider in such similar
         circumstances become more favorable, Baxter will adjust Purchaser's
         pricing to such more favorable prices effective on a retroactive basis
         to the date such more favorable prices went into effect and will
         provide Purchaser with prompt notice of such adjustment. This Section
         4.2 does not apply to the prices charged in connection with any
         Government Program.

4.3      Terms. Baxter will provide Purchaser with an invoice for payment upon
         the delivery of Therapeutic Products. Payment of an invoice in full
         within thirty (30) days of the invoice date will entitle Purchaser to a
         1% discount off the invoice price. Invoices will be paid in full not
         later than thirty-one (31) days after the invoice date. If unpaid after
         31 days of the invoice date, the invoice will be considered past due
         and will bear a service charge at the rate of 1.0% per month (or the
         highest amount allowed by law, if lower) of the invoiced amount.

4.4      Product Supply: Baxter shall ship the Therapeutic Products to
         Purchaser, FOB Purchaser's facility, freight prepaid. Baxter shall ship
         Purchaser's orders for Therapeutic Products within five (5) business
         days after Baxter's receipt of Purchaser's orders. Baxter shall accept
         returns of Therapeutic Products in accordance with Baxter's Returned
         Good Policy attached hereto as Schedule E.

5.       MINIMUM SUPPLY/PURCHASE COMMITMENTS

5.1      Recombinant Hemophilia Product Minimum Supply/Purchase Commitments. For
         each year this Agreement remains in effect, Baxter will supply
         Purchaser, and Purchaser will purchase from Baxter, the annual Base
         Level Product Volumes of Recombinant Hemophilia Product set forth in
         Schedule A for each year. At the end of any year that this Agreement is
         in effect, if Purchaser's purchases have not met such minimum purchase
         thresholds, Baxter shall provide Purchaser with written notice of the
         unit amount of the shortfall. Purchaser shall have 30 days from receipt
         of such notice to make such purchases of Recombinant Hemophilia Product
         necessary to meet the minimum unit purchase requirements. In the event
         Purchaser breaches this Agreement by failing to satisfy its unit
         purchase commitments for Recombinant Hemophilia Product, as set forth
         under this Section 5.1, then Baxter,

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         in addition to any other relief available to it, will be entitled to
         monetary damages for lost profits for such shortfall. In the event
         Baxter fails to make delivery or repudiates or Purchaser rightfully
         rejects or justifiably revokes acceptance, then with respect to the
         Therapeutic Products involved, Baxter shall either i) offer substitute
         therapeutics (recombinant derived product for Recombinant Hemophilia
         Products, plasma derived product for Plasma Based Hemophilia Products),
         as an accommodation, or ii) Baxter shall pay to the Purchaser an amount
         equal to ten percent (10%) of the then applicable invoice price for the
         Therapeutic Products involved as liquidated damages, which figure shall
         include both incidental and consequential damages. Baxter shall in each
         quarter tender delivery and Purchaser will purchase at least eighty
         percent (80%) of the then applicable Quarterly Base Level Product
         Volume of Recombinate Hemophilia Product for such quarter.

5.2      Adjustments to Base Level Product Volumes. Within five (5) business
         days after each calendar quarter, Purchaser will provide to Baxter a
         written statement of its Base Level Product Volumes adjusted to include
         purchases of Recombinant Hemophilia Product attributable to entities
         acquired by Purchaser during the immediately prior quarter. If the
         acquired entity either has recorded Recombinant Hemophilia Product
         sales or a Base Level Product Volume, Purchaser may elect to receive up
         to 110% of the acquired entities' purchases of Recombinant Hemophilia
         Product in the most recent calendar year prior to their acquisition by
         Purchaser. The total unit volume provided to Purchaser will be
         calculated by identifying recorded sales made by Baxter to the acquired
         entity up to the date of acquisition in the current year and
         subtracting this unit volume from the number of units Purchaser elected
         to receive. This unit volume will be incorporated into the Base Level
         Product Volume for purposes of this Agreement. For acquisitions made
         prior to December 31, 2001, the Base Level Product Volumes adjustment
         will be the in the amount up to 135% of the acquired entity's 2000
         calendar year purchases of Recombinant Hemophilia Product.

5.3      Additional Supply. If Purchaser's forecasted demand for Recombinant
         Hemophilia Product exceeds the Base Level Product Volumes, (subject to
         terms of Sections 6.1 and 10.1), Baxter will use reasonable efforts to
         provide available Recombinant Hemophilia Product to Purchaser to meet
         this excess forecasted demand, on a priority basis. As supply
         increases, Baxter will endeavor to make additional quantities of
         Recombinant Hemophilia Product available to Purchaser to meet increased
         demands arising from the conversion of existing patients to Recombinant
         Hemophilia Product, from the addition of new patients or from the
         increased usage of product by existing patients due to prescribed
         prophylactic dosing or other existing patient requirements. This
         priority commitment shall be on a pro-rata basis among (i) Hemophilia
         Specialty Pharmacy Providers, (ii) firm product supply commitments made
         to customers purchasing under committed volume contracts in effect as
         of the Effective Date ("Prior Committed Volumes"), (iii) product supply
         commitments required by any Government Program ("Government Program

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         Committed Volumes"), and (iv) volume commitments/obligations to PHS
         customers ("PHS Committed Volumes"). In order to be eligible for
         priority under this Section 5.3, Purchaser must notify Baxter of its
         desire to purchase Recombinant Hemophilia Product in amounts exceeding
         the Base Level Product Volumes.

5.4      Supply Constraints. In the event a Force Majeure event described in
         Section 10.1 hereof requires Baxter to limit deliveries and
         redistribute available supply of Recombinant Hemophilia Product, then
         Baxter will be relieved of its Base Level Product Volumes commitment.
         In such an event, Baxter will first make Recombinant Hemophilia Product
         available to meet Purchaser and other Hemophilia Specialty Pharmacy
         Providers' Base Level Product Volumes, the Prior Committed Volumes, the
         Government Program Committed Volumes and the PHS Committed Volumes (all
         four collectively referred to as "Firm Commitments"). If a Force
         Majeure event prevents Baxter from supplying the Firm Commitments, then
         Baxter's available supply will be made available on a pro-rata basis to
         (i) customers with Firm Commitments, (ii) Baxter's emergency needs
         inventory, and (iii) customers with previously accepted firm orders for
         delivery in that quarter. If Baxter's supply of Recombinant Hemophilia
         Product to Purchaser is reduced as a result of pro-rata distribution
         pursuant to this Section 5.4, Purchaser's commitments to purchase
         Recombinant Hemophilia Product set forth in Sections 5.1 will be
         reduced by an equivalent amount.

5.5      Hemofil M AHF Product Supply/Purchase Commitments. Purchaser commits to
         the following minimum purchase requirements for Hemofil M AHF Product:

         a.       Hemofil M AHF Product. For each year this Agreement remains in
                  effect, Baxter will supply Purchaser, and Purchaser will
                  purchase from Baxter, a minimum, the stated quantity of units
                  of Hemofil M AHF product as specified in Schedule C here to.

         b.       After Acquired Businesses. Purchaser's purchase commitments
                  with respect to Hemofil M AHF product under this Section 5.5
                  will include the requirements of any person hereinafter
                  acquired by Purchaser with such inclusion beginning ninety
                  (90) days following the date of their acquisition by
                  Purchaser.

         c.       Notice. At the end of any year that this Agreement is in
                  effect, if Purchaser's purchases of Hemofil M AHF product have
                  not met such minimum purchase thresholds, Baxter shall provide
                  Purchaser with written notice of the unit amount of the
                  shortfall. Purchaser shall have 30 days from receipt of such
                  notice to make such purchases necessary to meet the minimum
                  purchase requirements.

         d.       Purchase Commitment Shortfall. In the event Purchaser breaches
                  this Agreement by failing to satisfy its minimum purchase
                  commitments for

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                  Hemofil M AHF product, as set forth under this Section 5.5.
                  then Baxter, in addition to any other relief available to it,
                  will be entitled to monetary damages for lost profits for such
                  shortfall. In the event Baxter fails to make delivery or
                  repudiates or Purchaser rightfully rejects or justifiably
                  revokes acceptance, then with respect to the Hemofil M AHF
                  product involved, Baxter shall either i) offer substitute
                  therapeutics (plasma derived product for Hemofil M AHF), as an
                  accommodation, or ii) Baxter shall pay to the Purchaser an
                  amount equal to ten percent (10%) of the then applicable
                  invoice price for the Hemofil M AHF product involved as
                  liquidated damages, which figure shall include both incidental
                  and consequential damages.

5.6      New Therapeutic Products. Baxter will make available to Purchaser a
         preferred supply of all New Therapeutic Products at the same time and
         on substantially the same terms and conditions that it makes New
         Therapeutic Products available to Hemophilia Specialty Pharmacy
         Providers, The Parties will negotiate in good faith terms and
         conditions to add New Therapeutic Products to this Agreement upon their
         introduction including mutually agreeable minimum supply and purchase
         commitments. Baxter will use commercially reasonable efforts to make
         additional quantities of New Therapeutic Products available to
         Purchaser to meet increased demands arising from the conversion of
         existing patients to Therapeutic Products, from the addition of new
         patients or from the increased usage of product by existing patients
         due to prescribed prophylactic dosing or other existing patient
         requirements.

6.       PRODUCT FORECASTS, ORDERING PROCEDURES, SALES REPORTING, DATA
         COLLECTION AND RECORD KEEPING

6.1      Forecast. Within five (5) business days after the Effective Date of
         this Agreement, and at least forty-five (45) days prior to each
         succeeding calendar quarter, Purchaser will provide Baxter with a
         written forecast of its anticipated purchases of each Therapeutic
         Product for the next four (4) quarters of this Agreement. Baxter will
         use such forecasts submitted by Purchaser in production planning,
         provided, however, that in no event will any such forecast hereunder
         constitute an order, create any right or expectation in Purchaser or be
         binding in any respect upon Baxter.

6.2      Redistribution Data. Purchaser will use reasonable efforts to provide
         Baxter on a monthly basis non-patient specific clinical information
         regarding Therapeutic Product utilization by Therapeutic Product and
         number of units dispensed by prescribing physician's zip code in the
         previous month, within five (5) business days of month end. Baxter
         agrees that such data will not be disclosed or distributed to any
         outside or third party without Purchaser's written permission and, upon
         Purchaser's prior written request, any reports compiled by Baxter
         solely from Purchaser data will be provided to Purchaser for their
         internal review.

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6.3      Record Keeping. Purchaser will retain sales transaction data for
         Therapeutic Products for a three-year period, such period to commence
         with the date of individual sales.

7.       REGULATORY RESPONSIBILITY

7.1      Labeling. Baxter will be responsible at its sole expense for complying
         with all applicable regulatory requirements relating to the manufacture
         and labeling of Therapeutic Products. Baxter will provide all artwork,
         labeling, product inserts and packaging for Therapeutic Products.
         Purchaser will not change the artwork, labels, inserts or packaging for
         Therapeutic Products without Baxter's prior written consent. Each use
         of a trademark, trade name or logo, owned or used by Baxter or its
         affiliated companies, on or in connection with Therapeutic Products
         (other than Purchasers trademarks, trade names and logos) will inure to
         the benefit of Baxter and its parent company. Should any such use vest
         in Purchaser any rights in such a trademark, trade name or logo,
         Purchaser will transfer such right to Baxter or its designee upon
         Baxter's request. Except as provided in this Agreement, Purchaser will
         not use any trademark, trade name, or logo used or claimed by Baxter or
         any confusingly similar trademark, trade name or logo during or after
         the term of this Agreement. Purchaser will be responsible at its sole
         expense for complying with all applicable regulatory requirements
         imposed on Purchaser and relating to Purchaser's possession,
         distribution and sale of Therapeutic Products.

7.2      Recalls. If requested to do so in writing by Baxter, Purchaser will
         cooperate fully with Baxter in recalling or returning any Therapeutic
         Product that Baxter believes should not be sold or used. Purchaser will
         use reasonable efforts to maintain complete and accurate records of all
         Therapeutic Products sold or used by it in order to facilitate
         compliance with this Section 7.2. Purchaser will comply with Baxter's
         written instructions concerning communications with Purchaser customers
         or the public regarding the procedures to be observed during a recall
         or return of any Therapeutic Product. Baxter will reimburse Purchaser
         for the reasonable direct costs of a product recall, including the cost
         of notifying customers; the cost of collection and return of any
         recalled Therapeutic Product up to a maximum of the price Purchaser
         paid Baxter for Therapeutic Product; and actual shipping costs incurred
         from Purchaser's facility to Baxter's facility.

7.3      Complaints. Purchaser will notify Baxter promptly of any complaint it
         receives concerning any Therapeutic Product, or any other information
         it receives relating to the safety and effectiveness of any Therapeutic
         Product.

7.4      Licenses and Records. Purchaser will maintain all pharmacy licenses
         necessary for the purchase and dispensing of prescription therapeutics.
         Upon request, Purchaser will forward a copy of such licenses to Baxter.
         Purchaser will ship or dispense Therapeutic Products pursuant to a
         prescription or authorized purchase order solely

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         in compliance with applicable federal or state laws, regulations and
         orders including pharmacy laws. Purchaser will maintain such pharmacy
         records as are required by applicable federal and state law,
         regulations and orders.

8.       WARRANTY

8.1      Product Warranty. Baxter warrants that any therapeutic product pursuant
         to this Agreement which includes without limitation Therapeutic
         Products, Other Products and New Therapeutic Products, which is shipped
         or delivered to Purchaser will not, at the time of shipment by Baxter,
         be adulterated or misbranded within the meaning of the Federal Food,
         Drug and Cosmetic Act, as amended, nor will such therapeutic product be
         an article which may not, under the provisions of Sections 404 and 505
         of said Act, be introduced into interstate commerce. Baxter further
         warrants that all therapeutic products delivered to Purchaser will have
         been manufactured in accordance with current Good Manufacturing
         Practices promulgated by the federal Food and Drug Administration.
         Baxter and its affiliates represent and warrant that all therapeutic
         products delivered to Purchaser when stored and used in accordance
         with the directions on the labeling are fit for the purposes and
         indications described in the labeling unless the therapeutic product is
         used in accordance with its instructions, these warranties are void and
         of no effect. EXCEPT FOR THE WARRANTIES PROVIDED IN THIS SECTION 8.1,
         BAXTER DISCLAIMS ALL WARRANTIES (EXPRESS OR IMPLIED) WITH REGARD TO THE
         PRODUCT, INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND
         FITNESS FOR A PARTICULAR PURPOSE. BAXTER AND ITS AFFILIATES SOLE
         OBLIGATION AND PURCHASER'S EXCLUSIVE REMEDY FOR BREACH OF ANY WARRANTY
         SHALL BE AT BAXTER'S OPTION TO REPAIR OR REPLACE THE THERAPEUTIC
         PRODUCT. NEITHER BAXTER NOR ITS AFFILIATES SHALL BE LIABLE FOR
         PROXIMATE, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES.

8.2      Expiration Dates. All Therapeutic Products and Other Products sold to
         Purchaser will have expiration dates at least six (6) months after the
         shipping date unless otherwise approved in writing by Purchaser.

9.       INDEMNIFICATION

9.1      Baxter's Indemnification of Purchaser. Baxter will at all times during
         the term of this Agreement and thereafter defend, indemnify and hold
         Purchaser and its officers, directors, agents and employees harmless
         from and against any and all claims, suits, damages, liabilities, costs
         and expenses, including but not limited to court costs and reasonable
         attorneys' fees, incurred in connection with any third-party claim
         arising out of this Agreement, including, without limitation, the use
         of any Therapeutic Product by an end-user, except to the extent caused
         by (i) the

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         negligence or intentional misconduct of Purchaser or any of its
         officers, directors, agents or employees: (ii) breach by Purchaser of
         any of the terms of this Agreement: or (iii) acts of Purchaser or any
         of its officers, directors, agents or employees which are outside the
         scope of this Agreement.

9.2      Purchaser's Indemnification of Baxter. Purchaser will at all times
         during the terms of this Agreement and hereafter defend, indemnify and
         hold Baxter and its officers, directors, agents and employees harmless
         from and against any and all claims, suits, damages, liabilities, costs
         and expenses, including but not limited to court costs and reasonable
         attorneys' fees, incurred in connection with any third-party claim
         arising out this Agreement caused by (i) negligence or intentional
         misconduct of Purchaser or any of its officers, directors, agents or
         employees; (ii) breach by Purchaser of any of the terms of this
         Agreement; or (iii) acts of Purchaser or any of its officers,
         directors, agents or employees which are outside the scope of this
         Agreement.

9.3      Indemnification Procedure. A Party seeking indemnification under this
         Section 9.3 will give prompt notice of the claim to the other Party
         and, provided that the indemnifying Party is not contesting the
         indemnity obligation, will permit the indemnifying Party to control any
         litigation relating to such claim and disposition of any such claim
         provided that the indemnifying Party will act reasonably and in good
         faith with respect to all matters relating to the settlement or
         disposition of any claim as the settlement or disposition relates to
         the parties being indemnified under this Section 9.3 and the
         indemnifying Party will not settle or otherwise resolve any claim
         without the prior written consent of the indemnified Party. If the
         indemnified party does not consent to a proposed settlement, the
         indemnified party agrees to assume the full cost of its own defense of
         the action, and may employ its own counsel at its sole cost. The
         indemnified Party will cooperate with the indemnifying Party in its
         defense of any claim for which indemnification is sought hereunder.

9.4      Patent Indemnification. Baxter will indemnify Purchaser for all losses
         arising from, and defend Purchaser against, all charges that
         Purchaser's sale or use of the Products in accordance with their
         labeling infringes the patent(s) of a third party. Baxter will bear
         sole expense of any litigation arising from such alleged infringement
         and will have sole discretion and control with regard to such
         litigation. Purchaser may choose to be represented by its own counsel
         in any such litigation but such representation will be at Purchaser's
         sole expense.

9.5      Compliance With Law. Baxter will fully and accurately report any
         discounts on any invoice, coupon, or statement submitted to Purchaser.
         Purchaser acknowledges that the dollar value of any products or
         services which Purchaser receives but does not pay for will be a
         "discount or other reduction in price" and may be subject to the
         disclosure requirements of Section 1128(b)(3)(A) of the Social
         Security Act, 42

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         U.S.C. Section 1320a-7b(b)(3)(A). Purchaser will disclose this discount
         or reduction in price under any state or federal program that provides
         cost or charge-based reimbursement to the participating institution for
         products or services covered in this Agreement.

10.      FORCE MAJEURE

10.1     Nonperformance of either Party will be excused to the extent the
         nonperforming Party is prevented from performing its obligations under
         this Agreement by extraordinary events, including acts of God, fires,
         earthquakes, strikes and labor disputes, acts of war, civil unrest, the
         acts or intervention of any governmental or regulatory authority,
         material changes in regulatory, product performance or safety
         requirements, reasonable and necessary manufacturing adjustments, slow
         downs and stoppages, facility changes and modifications or a shortage
         of supplies or raw materials. The nonperforming Party will be excused
         from performance for the duration of such events, will promptly notify
         the other Party of the reasons for non-performance and will diligently
         and continuously attempt to resume its performance.

11.      JOINT REVIEW MEETINGS

11.1     Baxter and Purchaser agree to cooperate in good faith to administer the
         terms of this Agreement. To facilitate that cooperation, each Party
         will appoint senior management representative(s) to meet twice each
         year to discuss means for successfully administering this Agreement.
         The schedule, agendas and procedures for such meetings will be mutually
         agreed upon and each Party will be responsible for its own expenses
         incurred from such meetings.

12.      AUDIT PROCEDURE

12.1     In the event either Party to this Agreement has a reasonable basis to
         question the accuracy of any representation, report or information
         provided by the other Party pursuant to this Agreement or the other
         Party's compliance with any provision hereof, then the Party
         questioning the accuracy of the representation, report or information
         or the other Party's compliance with any provision hereof may propose
         in writing to the other Party that an independent accountant,
         reasonably acceptable to the other, perform an audit to determine
         compliance with such provision or the accuracy of the representation,
         report or information. The accountant will provide the Party subject to
         the audit with appropriate assurances that all information it reviews
         and receives pursuant to the audit will be maintained in complete
         confidence and not disclosed to either Party or any other person or
         entity without the express written permission of the Party subject to
         the audit. Upon receipt of such assurances, the Party subject to the
         audit will permit the accountant to conduct an audit of the pertinent
         records to assess, as applicable, compliance with such

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<PAGE>

         provision or the accuracy of the representation, report or information.
         Notice of an audit under this Section 12.1 shall be given at least
         thirty (30) days in advance of said audit and shall include a detailed
         description of the proposed scope of the audit. At the conclusion of
         the audit, the accountant will advise the parties whether such
         provision of the agreement is being complied with or the
         representation, report or information was accurate, and if not, what,
         in its judgment, constitutes noncompliance or what the representation,
         report or information should have been. The entire cost of the audit
         will borne by the Party requesting the audit. In the event the
         accountant determines and issues a written report that a Party is
         noncompliant with a provision hereof or the representation, report or
         information was inaccurate, then the parties shall review such report
         and discuss in good faith appropriate revisions to the representation,
         report or information called into question that was the subject of the
         audit or appropriate actions to remedy such noncompliance. Anything to
         the contrary in this Section 12.1 notwithstanding, a Party may invoke
         the audit protection provided by this Section 12.1 no more than once
         each year during the term of this Agreement.

13.      ARBITRATION

13.1     In the event of any dispute, controversy or claim arising out of or
         relating to this Agreement or to a breach hereof, including
         interpretation, performance or termination, the parties agree to
         proceed as follows:

         a.       Mediation/Third Party Accountant. The parties will commence
                  good faith discussions between their designees toward
                  resolution of such issues. If, after thirty (30) days, the
                  parties are unable to reach a resolution, the parties will
                  within fifteen (15) days make a determination as to whether
                  such issue is to be resolved by a third party accountant. If
                  the parties determine that such issue is to be resolved by a
                  third party accountant, then the issue will be submitted to a
                  firm of independent public accountants with substantial
                  experience in auditing healthcare companies (the "Third Party
                  Accountant") selected by the independent public accountants of
                  Baxter and Purchaser to resolve the dispute. The Third Party
                  Accountant's resolution of the issue will be final and binding
                  upon the parties hereto. All fees and expenses of the Third
                  Party Accountant will be shared equally between the parties.

         b.       Arbitration. Should the parties disagree upon submission of
                  the issue to the Third Party Accountant or make a
                  determination that the issue is not proper for resolution by a
                  Third Party Accountant, such issues will be finally resolved
                  by binding arbitration in accordance with the Center for
                  Public Resources ("CPR") Model Procedure and the CPR
                  Non-Administered Arbitration Rules in effect on the date of
                  this Agreement. The binding arbitration hereunder will be by
                  three independent and impartial arbitrators, one of which will
                  be selected by Baxter, one of which will be selected by

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<PAGE>

                  Purchaser and one of which will be selected by the other two
                  chosen arbitrators. The arbitration will be governed by the
                  United States Arbitration Act, 9 U.S.C. Sections 1-16, and
                  judgment upon the award rendered by the arbitrator(s) may be
                  entered by any court having jurisdiction thereof. The place of
                  the arbitration will be Chicago, Illinois. The arbitration
                  will be no more than three full days in length and take place
                  within one hundred and twenty (120) days of the initiation of
                  arbitration. The expense of the arbitration (including,
                  without limitation, the award of attorneys' fees to the
                  prevailing party) will be paid as the arbitrators determine.
                  The arbitrators are not empowered to award punitive or
                  exemplary damages and each party hereby irrevocably waives any
                  right to recover such damages.

         c.       Discovery. In the event of binding arbitration, the parties
                  agree that limited discovery will be allowed in accordance
                  with the Federal Rules of Civil Procedure, Rule 26(a)(1)-(3),
                  as in effect on the Effective Date, which disclosure will be
                  made within sixty (60) days of the initiation of arbitration.
                  All issues regarding compliance with this mandatory disclosure
                  will be decided by the arbitrator(s) pursuant to the Federal
                  Rules of Civil Procedure. 1.2.

         d.       Provisional Remedies. The procedures specified in this
                  Section 13.1 will be the sole and exclusive procedures for the
                  resolution of disputes between the parties arising out of or
                  relating to this Agreement; provided, however, that a party,
                  without prejudice to the above procedures, may file a
                  complaint to seek a preliminary injunction or other
                  provisional judicial relief. Despite such action the parties
                  will continue to participate in good faith in the procedures
                  specified in this Section 13.1.

14.      NOTICES

14.1     Notices pursuant to this Agreement will be in writing and will be
         effective when delivered personally, delivered via telefax receipt
         acknowledged, or upon receipt if sent via United States mail or courier
         service and delivered to:

         If to Purchaser:

                  Coram
                  1675 Broadway #900
                  Denver, CO 80202

                  FAX
                  Attention:   President

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<PAGE>

                  with a copy to:

                  Coram
                  1675 Broadway #900
                  Denver, CO 80202
                  Attn: Law Department

                  Purchaser shall designate in writing (and shall provide
                  written updates noting any changes) the person at Purchaser
                  who is responsible for Therapeutic Product supply matters.

         If to Baxter:

                  Baxter Healthcare Corporation
                  BioScience
                  1627 Lake Cook Road
                  Deerfield, Illinois 60015
                  FAX 847.940.
                  Attention: President

                  with a copy to:

                  Baxter Healthcare Corporation
                  One Baxter Parkway
                  Deerfield, Illinois 60015
                  FAX 847.948.2450
                  Attention: General Counsel

15.      ENTIRE AGREEMENT

15.1     This Agreement constitutes the entire and only agreement between the
         Parties relating to the subject matter hereof, and all prior
         negotiations, understandings, representations, or agreements between
         the Parties are hereby superseded. None of the terms or conditions of
         this Agreement will be deemed to be waived or amended unless a written
         waiver or amendment that specifically references this Agreement has
         been signed by the Party to be bound and delivered to the other Party.
         Any such waiver will not be deemed a waiver of any subsequent event, or
         a continuing waiver.

16.      ASSIGNMENT

16.1     This Agreement will be binding upon and inure to the benefit of the
         Parties and their successors and assigns. Any assignment of this
         Agreement by one Party

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<PAGE>

         (other than to the purchaser of substantially all of the assets of that
         Party to which this Agreement relates) requires the written consent of
         the other Party. Such consent will not be unreasonably withheld. This
         Section 16.1 will not affect Baxter's right to terminate this Agreement
         under Section 3.5 hereof in the event of a Change in Control as therein
         defined.

17.      GOVERNING LAW

17.1     This Agreement will be governed by the laws of the State of Illinois
         applicable to contracts to be performed in Illinois.

18.      SEVERABILITY

18.1     If any portion of this Agreement is determined by a court of competent
         jurisdiction to be violative of an applicable law or regulation, only
         that portion of this Agreement will be invalidated. All other portions
         of this Agreement will remain in full force and effect.

19.      CONSTRUCTION AND HEADINGS

19.1     The Parties acknowledge and agree that they participated equally in the
         preparation of this Agreement and neither Party will be treated as the
         author for purposes of resolving any ambiguity. The headings of the
         Paragraphs of this Agreement are for reference only and will have no
         effect on interpretation of the terms and conditions of this Agreement.

20.      ACCESS TO BOOKS AND RECORDS

20.1     The Panics agree, to the extent necessary to permit receipt of
         reimbursement for services under this Agreement by either Baxter or
         Purchaser, to make available to the Secretary of Health and Human
         Services, the Comptroller General of the General Accounting Office, or
         their authorized representatives, this Agreement and any books,
         documents and records in their possession relating to the nature and
         extent of the cost of services hereunder fix a period of for (4) years
         after the provision of said services. Each Party will protect the
         confidentiality of any patient medical records and to comply with all
         laws and regulations relating to such records.

21.      CONFIDENTIALITY

21.1     The Parties shall take all reasonable steps and do all things
         reasonably necessary to ensure that any information relating to the
         Therapeutic Products, including the terms of this Agreement or to the
         business of the disclosing Party ("Confidential Information"), that is
         acquired from the disclosing party shall not be disclosed or made use
         of outside this Agreement. The Parties acknowledge that Baxter's notice

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<PAGE>

         under Section 3.2 and/or Purchaser's notice under Section 3.5 may
         constitute material non-public information. The Parties agree to:
         (i) keep such information confidential, (ii) limit its representatives
         who have access to this information, (iii) inform the representatives
         that do have access to this information of the confidential nature of
         this information, and (iv) be responsible for the breach of these
         confidentiality obligations by any if its representatives. Information
         shall not be deemed confidential to the extent it:

                  (i) is already in the receiving party's possession, provided
                  that such information is not known by the receiving party's to
                  be subject to another confidentiality agreement with the
                  disclosing party, or

                  (ii) becomes generally available to the public other than as a
                  result of a disclosure by the receiving party or its
                  representatives in violation of this Agreement, or

                  (iii) becomes available to the receiving parry on a
                  non-confidential basis from a source other than the disclosing
                  party or its representatives, provided that such source is not
                  known by the receiving party to be bound by a confidentiality
                  agreement with the disclosing party.

         The foregoing shall not limit Purchaser's disclosure of the cost of
         Therapeutic Products or the term of this Agreement in connection with
         claims for reimbursement or payor audits. In no event shall Baxter use
         any Confidential Information of Purchaser in connection of the sale or
         distribution of Therapeutic Products by Baxter to Home Care Patients.
         The foregoing shall not apply to information which is required to be
         disclosed pursuant to court order or which in the written opinion of
         legal counsel is required to be disclosed pursuant to federal or state
         law or regulation (including, without limitation, securities laws);
         provided that a reasonable opportunity is afforded the disclosing Party
         to challenge the requirement for such disclosure and/or request
         confidential treatment. This Section 21.1 shall survive any termination
         of this Agreement for a period of three (3) years.

22.      RELATIONSHIP

22.1     Neither Party is in any way the legal representative or agent of the
         other, nor authorized or empowered to assume any obligation of any
         kind, implied or expressed, on behalf of the other Party, without the
         express written consent of the other.

23.      NON-SOLICITATION OF EMPLOYEES

23.1     Neither Baxter BioScience North America Region nor Purchaser shall
         during the term of this agreement and for a period of one (1) year
         after its expiration or early

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<PAGE>

         termination directly or indirectly solicit the employees of the other
         for employment or consultation with respect to the sale or provision of
         homecare services involving the Therapeutic Products. To the extent
         that either party hires any former employee of the other, then the
         party hiring such employee shall not induce or otherwise attempt to
         compel the employee, either directly or otherwise, to disclose any
         confidential or proprietary information of his former employer,
         including but not limited to patient information, pricing, and customer
         data.

24.      SUBSTITUTED AGREEMENT

24.1     This agreement is in substitution of the agreement between Baxter
         Healthcare Corporation ("Baxter") and Coram under date of January 1,
         2001, and which term was to expire on December 31, 2001 ("the former
         Agreement"). In consideration of this agreement, Baxter and Coram each
         shall be relieved and discharged from any and all further obligations
         to perform under the former Agreement and shall be fully relieved of
         further liability to the other party arising out of the former
         Agreement from and after December 14, 2001. This shall not terminate or
         otherwise impair the obligations of Baxter and Coram to the other for
         services performed or unpaid invoices for deliveries made prior to
         December 31, 2001.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized representatives:

CORAM, INC.                                 BAXTER HEALTHCARE CORPORATION

By: /s/ FRANK GEIGER                        By: /s/ PETER O'MALLEY
    ---------------------------                 -----------------------------
Title: Senior Vice President MM             Title: VP/GM
       ------------------------                    --------------------------
Date: 12/28/01                              Date: 1/7/02
      -------------------------                   ---------------------------

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<PAGE>

                                   SCHEDULE A

                         Recombinant Hemophilia Product

                           Base Level Product Volumes

<Table>
<Caption>
Year                 Base Level Volumes (In Units)
----                 -----------------------------
<S>                  <C>
2001

2002

2003

2004
</Table>

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<PAGE>

                                   SCHEDULE B

                                   Competitors

Alpha Therapeutics (including Affiliates, successors and assigns)
American Red Cross (including Affiliates, successors and assigns)
Aventis Behring (including Affiliates, successors and assigns)
Bayer Corporation (including Affiliates, successors and assigns)
CSL/ZLB (including Affiliates, successors and assigns)
Genetics Institute (including Affiliates, successors and assigns)
Novartis (including Affiliates, successors and assigns)
Novo Nordisk (including Affiliates, successors and assigns)
Octapharma (including Affiliates, successors and assigns)

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<PAGE>
                                   SCHEDULE C

                                     PRICES

            IN EFFECT FROM EFFECTIVE DATE THROUGH DECEMBER 31, 2001

<Table>
<Caption>
    THERAPEUTIC PROTEIN                LIST NUMBER          PRICE/UNIT
    -------------------                -----------          ----------
<S>                              <C>                        <C>
Factor VIII Hemofil* M AHF       060-792:060-793:060-795
Factor VIII Recombinate* rAHF    060-351:060-352:060-353
FEIBA** VH Anti-Inhibitor                922204
Coagulation Concentrate
</Table>

         IN EFFECT BEGINNING JANUARY 1, 2002 THROUGH DECEMBER 31, 2002

                         PRICES AND VOLUME COMMITMENTS

<Table>
<Caption>
                                                                            VOLUME
    THERAPEUTIC PROTEIN                LIST NUMBER          PRICE/UNIT    COMMITMENT
    -------------------                -----------          ----------    ----------
<S>                              <C>                        <C>
Factor VIII Hemofil* M AHF       060-792:060-793:060-795
Factor VIII Recombinate* rAHF    060-351:060-352:060-353
FEIBA** VH Anti-Inhibitor                922204
Coagulation Concentrate
Bebulin VH Factor IX Complex             924402
Proplex T Factor IX                      060-739
</Table>

----------
 * Hemofil, Proplex and Recombinate are trademarks of Baxter International Inc.
   Hemofil and Proplex are registered with the US Patent and Trademark Office.

** FEIBA and Bebulin are trademarks of Baxter AG and are registered with the
   US Patent and Trademark Office.

<PAGE>
                                   SCHEDULE D

                      PURCHASER COMMERCIAL RESALE ACCOUNTS
<PAGE>
                                   SCHEDULE E

                          BAXTER RETURNED GOODS POLICY

Baxter can accept for credit only those Therapeutics and related devices, which
do not perform satisfactorily under the specified condition, Therapeutics and
related devices which may have been damaged during transportation, or which
Customer may have received in error. Due to the biological nature of the
Therapeutics and related devices and the government regulations involved, return
of the Therapeutics and related devices must be authorized before any returns
will be accepted. Customer shall contact Baxter Customer Service for
instructions on the return procedure to be followed.<PAGE>

                                                                  Execution Copy

                                                                     Exhibit 4.1

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

                     NOVASTAR MORTGAGE FUNDING CORPORATION,
                                   as Company

                            NOVASTAR MORTGAGE, INC.,
                            as Servicer and as Seller

                           FIRST UNION NATIONAL BANK,
                          as Certificate Administrator

                                       and

                              JPMORGAN CHASE BANK,
                                   as Trustee

                         POOLING AND SERVICING AGREEMENT

                            Dated as of March 1, 2002

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

                 NovaStar Mortgage Funding Trust, Series 2002-1

       NovaStar Home Equity Loan Asset-Backed Certificates, Series 2002-1

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 ----
<S>      <C>          <C>                                                                                         <C>
ARTICLE I DEFINITIONS 1

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

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

         SECTION 2.01 CONVEYANCE OF MORTGAGE LOANS AND MI POLICIES..................................................2
         SECTION 2.02 ACCEPTANCE OF MORTGAGE LOANS BY CERTIFICATE ADMINISTRATOR, ON BEHALF OF THE TRUSTEE...........5
         SECTION 2.03 REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS BY THE SELLER....................................7
         SECTION 2.04 ACKNOWLEDGEMENT OF TRUSTEE....................................................................9
         SECTION 2.05 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SERVICER.....................................9
         SECTION 2.06 REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................10
         SECTION 2.07 ISSUANCE OF CERTIFICATES.....................................................................11
         SECTION 2.08 CONVEYANCE OF THE SUBSEQUENT MORTGAGE LOANS..................................................12
         SECTION 2.09 MISCELLANEOUS REMIC PROVISIONS...............................................................12

ARTICLE III ADMINISTRATION AND SERVICING OF THE MORTGAGE LOANS.....................................................19

         SECTION 3.01 SERVICER TO ASSURE SERVICING.................................................................19
         SECTION 3.02 SUBSERVICING AGREEMENTS BETWEEN SERVICER AND SUBSERVICERS....................................20
         SECTION 3.03 SUCCESSOR SUBSERVICERS.......................................................................21
         SECTION 3.04 LIABILITY OF THE SERVICER....................................................................21
         SECTION 3.05 ASSUMPTION OR TERMINATION OF SUBSERVICING AGREEMENTS BY THE CERTIFICATE ADMINISTRATOR........22
         SECTION 3.06 COLLECTION OF MORTGAGE LOAN PAYMENTS.........................................................22
         SECTION 3.07 WITHDRAWALS FROM THE COLLECTION ACCOUNT......................................................24
         SECTION 3.08 COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS; SERVICING ACCOUNTS.......................26
         SECTION 3.09 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING THE MORTGAGE LOANS.................27
         SECTION 3.10 [RESERVED]...................................................................................27
         SECTION 3.11 MAINTENANCE OF HAZARD INSURANCE AND FIDELITY COVERAGE........................................27
         SECTION 3.12 DUE-ON-SALE CLAUSES; ASSUMPTION AGREEMENTS...................................................29
         SECTION 3.13 REALIZATION UPON DEFAULTED MORTGAGE LOANS....................................................30
         SECTION 3.14 CERTIFICATE ADMINISTRATOR TO COOPERATE; RELEASE OF MORTGAGE FILES............................31
         SECTION 3.15 SERVICING COMPENSATION.......................................................................32

                                                           i
<PAGE>

         SECTION 3.16 ANNUAL STATEMENTS OF COMPLIANCE..............................................................33
         SECTION 3.17 ANNUAL INDEPENDENT PUBLIC ACCOUNTANTS' SERVICING REPORT......................................33
         SECTION 3.18 OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS................................................34
         SECTION 3.19 INFORMATION REQUIRED BY THE INTERNAL REVENUE SERVICE GENERALLY AND REPORTS OF
                             FORECLOSURES AND ABANDONMENTS OF MORTGAGED PROPERTY...................................34
         SECTION 3.20 PURCHASE OF CONVERTED MORTGAGE LOANS.........................................................34
         SECTION 3.21 [RESERVED]...................................................................................34
         SECTION 3.22 SERVICING AND ADMINISTRATING OF THE MI POLICIES..............................................34
         SECTION 3.23 DETERMINATION DATE REPORTS...................................................................36
         SECTION 3.24 ADVANCES.....................................................................................36
         SECTION 3.25 COMPENSATING INTEREST PAYMENTS...............................................................37

ARTICLE IV FLOW OF FUNDS...........................................................................................37

         SECTION 4.01 DISTRIBUTIONS................................................................................37
         SECTION 4.02 PAYMENT ACCOUNT AND DISTRIBUTION ACCOUNT.....................................................42
         SECTION 4.03 STATEMENTS...................................................................................44
         SECTION 4.04 SUPPLEMENTAL INTEREST TRUST..................................................................47
         SECTION 4.05 PRE-FUNDING ACCOUNT..........................................................................48
         SECTION 4.06 INTEREST COVERAGE ACCOUNT....................................................................49
         SECTION 4.07 ALLOCATION OF REALIZED LOSSES................................................................50

ARTICLE V THE CERTIFICATES.........................................................................................51

         SECTION 5.01 THE CERTIFICATES.............................................................................51
         SECTION 5.02 REGISTRATION OF TRANSFER AND EXCHANGE OF CERTIFICATES........................................52
         SECTION 5.03 MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES............................................56
         SECTION 5.04 PERSONS DEEMED OWNERS........................................................................57
         SECTION 5.05 APPOINTMENT OF PAYING AGENT..................................................................57

ARTICLE VI THE SERVICER AND THE COMPANY............................................................................57

         SECTION 6.01 LIABILITY OF THE SERVICER AND THE COMPANY....................................................57
         SECTION 6.02 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE OBLIGATIONS OF, THE SERVICER OR THE
                             COMPANY...............................................................................58
         SECTION 6.03 LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS...........................................58
         SECTION 6.04 SERVICER NOT TO RESIGN.......................................................................59
         SECTION 6.05 DELEGATION OF DUTIES.........................................................................59
         SECTION 6.06 SERVICER TO PAY TRUSTEE'S, AND CERTIFICATE ADMINISTRATOR'S FEES AND EXPENSES;
                             INDEMNIFICATION.......................................................................59

ARTICLE VII DEFAULT ...............................................................................................61

         SECTION 7.01 SERVICING DEFAULT............................................................................61
         SECTION 7.02 CERTIFICATE ADMINISTRATOR TO ACT; APPOINTMENT OF SUCCESSOR...................................62
         SECTION 7.03 WAIVER OF DEFAULTS...........................................................................64
         SECTION 7.04 NOTIFICATION TO CERTIFICATEHOLDERS...........................................................64
         SECTION 7.05 SURVIVABILITY OF SERVICER LIABILITIES........................................................65

                                                              ii
<PAGE>

ARTICLE VIII THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR.........................................................65

         SECTION 8.01 DUTIES OF THE TRUSTEE AND THE CERTIFICATE ADMINISTRATOR......................................65
         SECTION 8.02 RIGHTS OF TRUSTEE AND CERTIFICATE ADMINISTRATOR..............................................67
         SECTION 8.03 INDIVIDUAL RIGHTS OF TRUSTEE AND CERTIFICATE ADMINISTRATOR...................................68
         SECTION 8.04 TRUSTEE'S AND CERTIFICATE ADMINISTRATOR'S DISCLAIMER.........................................69
         SECTION 8.05 NOTICE OF SERVICING DEFAULT..................................................................69
         SECTION 8.06 [RESERVED]...................................................................................69
         SECTION 8.07 COMPENSATION AND INDEMNITY...................................................................69
         SECTION 8.08 REPLACEMENT OF TRUSTEE OR CERTIFICATE ADMINISTRATOR..........................................69
         SECTION 8.09 SUCCESSOR TRUSTEE OR CERTIFICATE ADMINISTRATOR BY MERGER.....................................70
         SECTION 8.10 APPOINTMENT OF CO-TRUSTEE OR SEPARATE TRUSTEE................................................71
         SECTION 8.11 ELIGIBILITY; DISQUALIFICATION................................................................72
         SECTION 8.12 [RESERVED]...................................................................................72
         SECTION 8.13 REPRESENTATIONS AND WARRANTIES...............................................................72
         SECTION 8.14 DIRECTIONS TO TRUSTEE AND CERTIFICATE ADMINISTRATOR..........................................73
         SECTION 8.15 THE AGENTS...................................................................................74
         SECTION 8.16 REPORTS BY THE CERTIFICATE ADMINISTRATOR; TRUST FISCAL YEAR..................................74

ARTICLE IX [RESERVED] .............................................................................................75

ARTICLE X REMIC ADMINISTRATION.....................................................................................75

         SECTION 10.01 REMIC ADMINISTRATION........................................................................75
         SECTION 10.02 PROHIBITED TRANSACTIONS AND ACTIVITIES......................................................77

ARTICLE XI TERMINATION.............................................................................................77

         SECTION 11.01 TERMINATION.................................................................................77
         SECTION 11.02 ADDITIONAL TERMINATION REQUIREMENTS.........................................................79

ARTICLE XII MISCELLANEOUS PROVISIONS...............................................................................79

         SECTION 12.01 AMENDMENT...................................................................................79
         SECTION 12.02 RECORDATION OF AGREEMENT; COUNTERPARTS......................................................81
         SECTION 12.03 LIMITATION ON RIGHTS OF CERTIFICATEHOLDERS..................................................81
         SECTION 12.04 GOVERNING LAW; JURISDICTION.................................................................82
         SECTION 12.05 NOTICES.....................................................................................82
         SECTION 12.06 SEVERABILITY OF PROVISIONS..................................................................83
         SECTION 12.07 ARTICLE AND SECTION REFERENCES..............................................................84
         SECTION 12.08 FURTHER ASSURANCES..........................................................................84
         SECTION 12.09 BENEFITS OF AGREEMENT.......................................................................84
         SECTION 12.10 ACTS OF CERTIFICATEHOLDERS..................................................................84
</TABLE>

                                                       iii

<PAGE>

EXHIBITS:

Exhibit A-1    Form of Class A-1 Certificates
Exhibit A-2    Form of Class A-2 Certificates
Exhibit A-3    Form of Class M-1 Certificates
Exhibit A-4    Form of Class M-2 Certificates
Exhibit A-5    Form of Class M-3 Certificates
Exhibit A-6    Form of Class B Certificates
Exhibit A-7    Form of Class I Certificates
Exhibit A-8    Form of Class AIO Certificates
Exhibit A-9    Form of Class O Certificates
Exhibit A-10   Form of Class P Certificates
Exhibit A-11   Form of Class RL Certificates
Exhibit A-12   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
Exhibit I      Notional Amount Schedule for Cap Agreement
Exhibit J      Form of Notional Amount Test Event Notice

                                       iv

<PAGE>

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

                                   ARTICLE I

                                   DEFINITIONS

          Section 1.01 Defined Terms.

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

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

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

          (c) "or" is not exclusive;

          (d) "including" means including without limitation;

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

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

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

          Section 1.02 Accounting.

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

<PAGE>

          Section 1.03 Allocation of Certain Interest Shortfalls.

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

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

          Section 1.04 Calculation of Interest on Certificates.

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

                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

          Section 2.01 Conveyance of Mortgage Loans and Other Trust Assets.

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

                                       2
<PAGE>

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

          In connection with such transfer and assignment, the Seller, on behalf
of the Company, does hereby deliver to, and deposit with the Certificate
Administrator, as the Trustee's designated agent, the following documents or
instruments with respect to each Initial Mortgage Loan so transferred and
assigned and the Seller, on behalf of the Company, shall, in accordance with
Section 2.08, 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 "JPMorgan Chase Bank, as
     Trustee for the NovaStar Home Equity Loan Asset-Backed Certificates, Series
     2002-1";

          (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 the original Mortgage certified by the Seller or the
     public recording office in which such original Mortgage has been recorded,
     and if the Mortgage Loan is registered on the MERS System, such Mortgage
     shall include thereon a statement that it is a MOM Loan and shall include
     the MIN for such Mortgage Loan;

          (iii) unless the Mortgage Loan is registered on the MERS System, an
     original assignment (which may be included in one or more blanket
     assignments if permitted by applicable law) of the Mortgage endorsed to
     "JPMorgan Chase Bank, as Trustee for the NovaStar Home Equity Loan
     Asset-Backed Certificates, Series 2002-1", and otherwise in recordable
     form;

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

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

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

          If a material defect in any Mortgage File is discovered which may
materially and adversely affect the value of the related Mortgage Loan, or the
interests of the Trustee or the Certificateholders in such Mortgage Loan,
including if any document required to be delivered to the Certificate
Administrator has not been delivered (provided that a Mortgage File will not be

                                       3
<PAGE>

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 or repurchase the related Mortgage Loan at the
Repurchase Price or substitute an Eligible Substitute Mortgage Loan for the
related Mortgage Loan upon the same terms and conditions set forth in Section
3.01 of the Purchase Agreement as to the 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, excluding any Mortgage Loan that is
registered on the MERS System, if MERS is identified on the Mortgage, or on a
properly recorded assignment of Mortgage as the mortgagee of record. While such
assignment to be recorded is being recorded, the Certificate Administrator shall
retain a photocopy of such assignment. If any assignment is lost or returned
unrecorded to the Certificate Administrator because of any defect therein, the
Seller is required to prepare a substitute assignment or cure such defect, as
the case may be, and the Seller shall cause such substitute assignment to be
recorded in accordance with this paragraph.

          In instances where an original Mortgage or any original intervening
assignment of Mortgage is not, in accordance with clause (ii) or (iv) above,
delivered by the Seller to the Certificate Administrator, on behalf of the
Trustee, prior to or on the Closing Date in the case of an 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.

          In connection with the assignment of any Mortgage Loan registered on
the MERS System, 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 further agrees that it will cause, at the
Seller's own expense, the MERS System to indicate that such Mortgage Loan has
been assigned by the Seller to the Trustee in accordance with this Agreement for
the benefit of the Certificateholders by including (or deleting, in the case of
Mortgage Loans which are repurchased in accordance with this Agreement) in its
computer files (a) the applicable Trustee code in the field "[IDENTIFY THE FIELD
NAME FOR TRUSTEE]" which identifies the Trustee and (b) the code "NovaStar
2002-1" (or its equivalent) in the field "Pool Field" which identifies the
series of the Certificates issued in connection with such Mortgage Loans. The
Seller further agrees that it will not, and will not permit the Servicer to, and
the Servicer agrees that it will not, alter the codes referenced in this
paragraph with respect to any such Mortgage Loan during the term of this
Agreement unless and until such Mortgage Loan is repurchased in accordance with
the terms of this Agreement.

                                       4
<PAGE>

          Effective on the Closing Date, the Trustee, on behalf of the
Certificateholders, 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 Company, shall be
entitled to all scheduled principal payments due after the Cut-off Date, all
other payments of principal due and collected after the Cut-off Date, and all
payments of interest on the 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 Company pursuant to the terms of the Purchase Agreement. Any
late payment charges collected in connection with a Mortgage Loan shall be paid
to the Servicer as provided in Section 3.15(b) hereof.

          The parties hereto intend that the transactions set forth herein
constitute a sale by the Company to the Trust on the Closing Date of all the
Company's right, title and interest in and to the 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 Company
hereby grants to the Trustee, on behalf of the Certificateholders, as of the
Closing Date a security interest in all of the Company's right, title and
interest in, to and under the Initial Mortgage Loans and such other property, to
secure all of the Company's obligations hereunder and this Agreement shall
constitute a security agreement under applicable law and in such event, the
parties hereto acknowledge that the Certificate Administrator, in addition to
holding the Initial Mortgage Loans on behalf of the Trustee for the benefit of
the Certificateholders, holds the Initial Mortgage Loans as designee of the
Company. The Seller agrees to take or cause to be taken such actions and to
execute such documents, including without limitation the filing of all necessary
UCC-1 financing statements in the State of Virginia (which shall have been
submitted for filing as of the Closing Date 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 state of incorporation of the Seller, as are
necessary to perfect and protect the interests of the Trust and its 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.

          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,

                                       5
<PAGE>

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.

          (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

                                       6
<PAGE>

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
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.

                                       7
<PAGE>

          (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 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.

                                       8
<PAGE>

          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
Company, as the case may be, shall repurchase or, subject to the limitations set
forth in Section 2.03(d), substitute one or more Eligible Substitute Mortgage
Loans for the affected Mortgage Loan within 90 days of the earlier of discovery
or receipt of such notice with respect to such affected Mortgage Loan. Such
repurchase or substitution shall be made by the Seller. Any such repurchase or
substitution shall be made in the same manner as set forth in Section 2.03(a).
The Certificate Administrator, on behalf of the Trustee, shall reconvey to the
Seller, the Mortgage Loan to be released pursuant hereto in the same manner, and
on the same terms and conditions, as it would a Mortgage Loan repurchased for
breach of a representation or warranty.

          Section 2.04 Acknowledgement of Trustee.

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

          Section 2.05 Representations, Warranties and Covenants of the
Servicer.

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

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

                                       9
<PAGE>

     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;

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

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

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

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

          Section 2.06 Representations and Warranties of the Company.

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

                                       10
<PAGE>

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

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

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

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

          Section 2.07 Issuance of Certificates.

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

                                       11
<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. The Seller shall deliver a Mortgage File (as
described in Section 2.01) with respect to such Subsequent Mortgage Loans.

          Section 2.09 Designation Under REMIC Provisions.

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

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

          (i) Mortgage Loans, the Accounts (other than the non-REMIC Accounts),
     any REO Property and any proceeds of the foregoing. REMIC I will be
     evidenced by the Class I-A Interest, the Class I-B Interest, the Class I-C
     Interest REMIC I will consist of all of the assets of the Trust, including
     the, the Class I-D Interest, the Class I-E Interest and the Class I-P
     Interest (collectively, the "REMIC I Regular Interests") which will be
     uncertificated and will represent the "regular interests" in REMIC I. The
     Class R-I Interest will represent the sole class of residual interest in
     REMIC I;

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

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

          (iv) The Master REMIC will consist of the REMIC III Regular Interests
     and will be evidenced by the Class A-1 (other than the right to receive
     Supplemental Interest Payments), Class A-2 (other than the right to receive
     Supplemental Interest Payments), Class M-1 (other than the right to receive
     Supplemental Interest Payments), Class M-2 (other than the right to receive
     Supplemental Interest

                                       12
<PAGE>

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

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

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

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

     ----------------- ------------------------- ---------------------
           REMIC               Initial               Pass-Through
         Interest         Principal Balance              Rate
     ----------------- ------------------------- ---------------------
            I-A              $125,000,000               Net WAC
     ----------------- ------------------------- ---------------------
            I-B              $125,000,000               Net WAC
     ----------------- ------------------------- ---------------------
            I-C              $ 25,000,000               Net WAC
     ----------------- ------------------------- ---------------------
            I-D              $ 25,000,000               Net WAC
     ----------------- ------------------------- ---------------------
            I-E              $187,000,000               Net WAC
     ----------------- ------------------------- ---------------------
            I-P                  $100                     (1)
     ----------------- ------------------------- ---------------------

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

          On each Distribution Date, all Realized Losses, prepayments and
payments of scheduled principal generated with respect to the Mortgage Loans
shall be allocated in the following order: (i) first to the Class I-E Interest,
until such Class is paid in full or eliminated by such losses; (ii) second, to
the Class I-A Interest, until such Class is paid in full or eliminated by such
losses; (iii) third, to the Class I-B Interest, until such Class is paid in full
or eliminated by such losses; (iv) fourth, to the Class I-C Interest, until such
Class is paid in full or eliminated by such losses; (v) fifth, to the Class I-D
Interest, until such Class is paid in full or eliminated by such losses;
provided, however, that on the earlier of (x) the 35th Distribution Date and (y)
the Distribution Date on which the principal balance of the Mortgage Loans has
been reduced by $457,500,000, $100 shall be paid to the Class I-P Interest.

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

                                       13
<PAGE>

   ----------------------------------------------------------------------------
     REMIC Interest    Initial Principal Balance        Pass-Through Rate
   ----------------------------------------------------------------------------
        II-A1               $ 83,333,333.33                   (2)
   ----------------------------------------------------------------------------
        II-A2               $ 41,666,666.67                   (3)
   ----------------------------------------------------------------------------
        II-A3                      (1)                        (4)
   ----------------------------------------------------------------------------
        II-B1               $ 83,333,333.33                   (6)
   ----------------------------------------------------------------------------
        II-B2               $ 41,666,666.67                   (7)
   ----------------------------------------------------------------------------
        II-B3                      (5)                        (8)
   ----------------------------------------------------------------------------
        II-C1               $ 16,666,666.67                  (10)
   ----------------------------------------------------------------------------
        II-C2               $ 83,333,333.33                  (11)
   ----------------------------------------------------------------------------
        II-C3                      (9)                       (12)
   ----------------------------------------------------------------------------
        II-D1               $ 16,666,666.67                  (14)
   ----------------------------------------------------------------------------
        II-D2               $ 83,333,333.33                  (15)
   ----------------------------------------------------------------------------
        II-D3                      (13)                      (16)
   ----------------------------------------------------------------------------
        II-E                $187,000,000                     (17)
   ----------------------------------------------------------------------------
        II-P                $        100                     (18)
   ----------------------------------------------------------------------------

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

(2)      The pass-through rate for the Class II-A1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2003, 1.5 multiplied by (Net WAC minus
         3.226%); (ii) for all Distribution Dates thereafter, Net WAC.

(3)      The pass-through rate for the Class II-A2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2003, 3 multiplied by 1-month LIBOR,
         subject to a cap of 9.678%; (ii) for all Distribution Dates thereafter,
         Net WAC.

(4)      The pass-through rate for the Class II-A3 Interest will be equal to
         3.226% minus 1-Month LIBOR, subject to a floor of zero.

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

(6)      The pass-through rate for the Class II-B1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2003, 1.5 multiplied by (Net WAC minus
         3.856%); (ii) for all Distribution Dates thereafter, Net WAC.

(7)      The pass-through rate for the Class II-B2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2003, 3 multiplied by 1-month LIBOR,
         subject to a cap of 11.568%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(8)      The pass-through rate for the Class II-B3 Interest will be equal to
         3.856% minus 1-Month LIBOR, subject to a floor of zero.

14
<PAGE>

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

(10)     The pass-through rate for the Class II-C1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2004, 1.5 multiplied by (Net WAC minus
         3.810%); (ii) for all Distribution Dates thereafter, Net WAC.

(11)     The pass-through rate for the Class II-C2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in November 2004, 3 multiplied by 1-month LIBOR,
         subject to a cap of 11.430%; (ii) for all Distribution Dates
         thereafter, Net WAC.

(12)     The pass-through rate for the Class II-C3 Interest will be equal to
         3.810% minus 1-Month LIBOR, subject to a floor of zero.

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

(14)     The pass-through rate for the Class II-D1 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2004, 1.5 multiplied by (Net WAC minus
         4.490%); (ii) for all Distribution Dates thereafter, Net WAC.

(15)     The pass-through rate for the Class II-D2 Interest will be as follows:
         (i) commencing on the first Distribution Date through and including the
         Distribution Date in December 2004, 3 multiplied by 1-month LIBOR,
         subject to cap of 13.470%; (ii) for all Distribution Dates thereafter,
         Net WAC.

(16)     The pass-through rate for the Class II-D3 Interest will be equal to
         4.490% minus 1-Month LIBOR, subject to a floor of zero.

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

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

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

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

                                       15
<PAGE>

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

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

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

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

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

                                       16
<PAGE>

         All payments of scheduled principal and prepayments of principal with
     respect to the Mortgage Loans shall be allocated 50% to the Class
     III-Accrual Interest and 50% as follows: (i) first, to the Class III-A-1,
     Class III-A-2 Interests (to each such Class in an amount equal to 1/2 of
     the principal paid in reduction of the principal balance of the
     Corresponding Class of Master REMIC Interest) until paid in full and (ii)
     second, to the Class III-M-1, Class M-2, Class M-3, Class B and Class O
     Interests (to each such Class in an amount equal to 1/2 of the principal
     paid in reduction of the principal balance of the Corresponding Class of
     Master REMIC Interest) until paid in full. Notwithstanding the above,
     principal payments allocated to the Class AIO Certificates that result in
     the reduction of the Over-collateralization Amount shall be allocated to
     the Class III-Accrual Interest until paid in full. Liquidated Loan Losses
     shall be applied so that after all distributions have been made on each
     Distribution Date the principal balances of the Class III-A-1, Class
     III-A-2, Class III-M-1, Class III-M-2, Class III-M-3 , Class III-B and
     Class III-O are each equal to 50% of the principal balance of its
     Corresponding Class and the Class III-Accrual Interest is equal to 50% of
     the principal balance of the Mortgage Loans.

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

      ---------------------------- ----------------------- ---------------------
                                     Initial Certificate           REMIC
                                          Principal             Pass-Through
           Class of Certificates           Balance                  Rate
      ---------------------------- ----------------------- ---------------------
       Class A-1                        $ 316,900,000         LIBOR + .28% (1)
      ---------------------------- ----------------------- ---------------------
       Class A-2                        $ 140,600,000         LIBOR + .30% (1)
      ---------------------------- ----------------------- ---------------------
       Class M-1                        $ 12,500,000          LIBOR + .82% (1)
      ---------------------------- ----------------------- ---------------------
       Class M-2                        $ 10,000,000         LIBOR + 1.52% (1)
      ---------------------------- ----------------------- ---------------------
       Class M-3                         $ 7,500,000         LIBOR + 2.00% (1)
      ---------------------------- ----------------------- ---------------------
       Class AIO                             (2)                    (2)
      ---------------------------- ----------------------- ---------------------
       Class B                           $3,750,000              4.75% (1)
      ---------------------------- ----------------------- ---------------------
       Class I                               (3)                    (4)
      ---------------------------- ----------------------- ---------------------
       Class O                           $8,750,000                 (5)
      ---------------------------- ----------------------- ---------------------
       Class P                              $100                    (6)
      ---------------------------- ----------------------- ---------------------
       Class R                               (7)                    (7)
      ---------------------------- ----------------------- ---------------------

(1)  Subject to the REMIC Available Funds Cap.

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

                                       17
<PAGE>

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

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

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

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

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

          (g) For federal income tax purposes, the "latest possible maturity
date" for each of the REMIC I Regular Interests, REMIC II Regular Interests,
REMIC III Regular Interests and Master REMIC Regular Interests is hereby set to
be the Distribution Date of September, 2032.

                                       18
<PAGE>

                                  ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

          Section 3.01 Servicer to Assure Servicing.

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

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

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

                                       19
<PAGE>

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

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

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

          Section 3.02 Subservicing Agreements Between Servicer and
Subservicers.

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

                                       20
<PAGE>

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

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

          Section 3.03 Successor Subservicers.

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

          Section 3.04 Liability of the Servicer.

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

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

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<PAGE>

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

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

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

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

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

          Section 3.06 Collection of Mortgage Loan Payments.

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

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

                                       22
<PAGE>

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

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

          (d) The Servicer shall establish a segregated account in the name of
the Trustee (the "Collection Account"), which shall be an Eligible Account, in
which the Servicer shall deposit or cause to be deposited any amounts
representing payments on and any collections in respect of the Mortgage Loans
received by it after the Cut-Off Date 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;

          (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;

                                       23
<PAGE>

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

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

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

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

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

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

          Section 3.07 Withdrawals from the Collection Account.

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

                                       24
<PAGE>

          (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
     Mortgaged Property which was damaged by the uninsured cause or in
     connection with the liquidation of such Mortgage Loan;

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

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

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

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

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<PAGE>

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

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

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

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

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

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

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

                                       26
<PAGE>

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 Servicer and any
Subservicer shall not be required to provide access to such documentation if the
provision thereof would violate the legal right to privacy of any Mortgagor;
provided, further, however, that the Certificate Administrator and the Trustee
shall coordinate their requests for such access so as not to impose an
unreasonable burden on, or cause an unreasonable interruption of, the business
of the Servicer or any Subservicer. The Servicer, the Subservicers, the Trustee
and the Certificate Administrator shall allow representatives of the above
entities to photocopy any of the documentation and shall provide equipment for
that purpose at a charge that covers their own actual out-of-pocket costs.

          Section 3.10 [reserved]

          Section 3.11 Maintenance of Hazard Insurance and Fidelity Coverage.

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

                                       27
<PAGE>

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

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

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

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

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

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

                                       28
<PAGE>

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

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

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

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

                                       29
<PAGE>

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

          Section 3.13 Realization Upon Defaulted Mortgage Loans.

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

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

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

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

                                       30
<PAGE>

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

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

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

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

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

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

                                       31
<PAGE>

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

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

          Section 3.15 Servicing Compensation.

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

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

                                       32
<PAGE>

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

          Section 3.16 Annual Statements of Compliance.

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

          Section 3.17 Annual Independent Public Accountants' Servicing Report.

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

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

                                       33
<PAGE>

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.

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

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

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

          Section 3.20 Purchase of Converted Mortgage Loans.

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

          Section 3.21 [Reserved]

          Section 3.22 Servicing and Administrating of the MI Policies.

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

                                       34
<PAGE>

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

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

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

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

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

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

                                       35
<PAGE>

          Section 3.23 Determination Date Reports.

          On the second Business Day following each Determination Date, the
Servicer shall deliver to the Certificate Administrator a report, prepared as of
the close of business on the Determination Date (the "Determination Date
Report"), and shall forward to the Certificate Administrator in the form of
computer readable electromagnetic tape or disk a copy of such report. The
Determination Date Report and any written information supplemental thereto shall
include such information with respect to the Mortgage Loans that is reasonably
available to the Servicer and that is required by the Certificate Administrator
for purposes of making the calculations and providing the reports referred to in
this Agreement, as set forth in written specifications or guidelines issued by
the Certificate Administrator from time to time. Such information shall include
the aggregate amounts required to be withdrawn from the Collection Account and
deposited into the 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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<PAGE>

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

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

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

                                       37
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       38
<PAGE>

          (G) seventh, payable from both the Group I Interest Remittance Amount
and the Group II Interest Remittance Amount, to the Holders of the Class 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 Certificate Administrator, on
     behalf of the Trustee, shall (based solely on the information provided to
     the Trustee by the Certificate Administrator pursuant to Section 4.03
     hereof) withdraw from the Distribution Account that portion of the REMIC
     Available Funds for such Distribution Date consisting of the Principal
     Remittance Amount and make the following disbursements and transfers in the
     order of priority described below:

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

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

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

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

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

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

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

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

                                       39
<PAGE>

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

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

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

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

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

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

          (J) tenth, payable from both the Group I Principal Remittance Amount
and the Group II Principal Remittance Amount, to the Holders of the Class 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 Certificate
     Administrator, on behalf of the Trustee, shall (based solely on the
     information provided to the Trustee by the Certificate Administrator
     pursuant to Section 4.03 hereof) withdraw from the Distribution Account
     that portion of the REMIC Available Funds for such Distribution Date
     consisting of the Principal Remittance Amount and make the following
     disbursements and transfers in the order of priority described below:

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

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

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

                                       40
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       41
<PAGE>

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

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

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

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

          Section 4.02 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, First Union National Bank, as
Certificate Administrator for the registered holders of NovaStar Mortgage
Funding Trust 2002-1, Home Equity Loan Asset-Backed Certificates, Series 2002-1"
(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

                                       42
<PAGE>

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 deposit into the Distribution Account funds to pay the
     distributions described in Section 4.01 hereof;

          (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) [reserved].

          (e) No later than the Closing Date, the Certificate Administrator, on
behalf of the Trustee, shall establish and maintain a segregated trust account
that is an Eligible Account, which shall be titled "Distribution Account,
JPMorgan Chase Bank, as Trustee for the registered holders of NovaStar Mortgage
Funding Trust 2002-1, Home Equity Loan Asset-Backed Certificates, Series 2002-1"
(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 Certificate Administrator, on behalf of
the Trustee, for the Certificateholders for the uses and purposes set forth
herein.

          (f) The Certificate Administrator, on behalf of 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
Certificate Administrator, on behalf of the Trustee, or an Affiliate manages or
advises such investment, and (ii) no later than the date on which such funds are
required to be withdrawn from such account pursuant to this Agreement, if the
Certificate Administrator, on behalf of the Trustee, or an Affiliate manages or
advises such investment. All income or other gain from such investments may be
released from the Distribution Account and paid to the Certificate Adinistrator,
from time to time as part of its compensation for acting as Certificate
Administrator.

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

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

                                       43
<PAGE>

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

          Section 4.03 Statements.

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

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

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

          (iii) the Pool Balance 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;

                                       44
<PAGE>

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

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

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

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

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

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

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

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

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

          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

                                       45
<PAGE>

Certificateholder. Such obligation of the Certificate Administrator shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be prepared and furnished by the Certificate Administrator to
Certificateholders pursuant to any requirements of the Code as are in force from
time to time.

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

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

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

          (f) No later than noon on the third Business Day prior to each
Distribution Date, the Certificate Administrator will verify that no Notional
Amount Test Event is scheduled to occur on the related Distribution Date. In the
event a Notional Amount Test Event would otherwise occur on the related
Distribution Date, the Certificate Administrator will immediately provide notice
in the form of Exhibit J to the appropriate NovaStar entity (which shall be
NovaStar Financial Inc. in the case of MSCS and Novastar Mortgage, Inc. in the
case of CSFB) and release in $25,000,000 increments from the affected Swap
Agreement on the day immediately preceding that Distribution Date until no
Notional Amount Test Event will occur on the related Distribution Date. The
Certificate Administrator shall release the first $25,000,000 notional amount
from the Swap Counterparty with the earliest maturity Swap Agreement and shall
subsequently release from the Trust in $25,000,000 notional amounts from the
alternate Swap Counterparty and continue in this manner until the two-year
duration Swap Agreements have been reduced to a zero notional amount. The
Certificate Administrator shall repeat the process of notional amount reduction
described above until the remaining three-year Swap Agreements have been reduced
to a zero notional amount. Once such Swap Agreements have

                                       46
<PAGE>

been released from the Trust, the related Swap Counterparty will have no
obligation to, nor interest in, the Trust.

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

          Section 4.04 Supplemental Interest Trust.

          (a) (i) The parties do hereby create and establish a sub-trust of the
Trust Fund, which shall hold an account, which, no later than the Closing Date,
the Certificate Administrator shall, at the direction of the Servicer, establish
and maintain, on behalf of the Trustee, as a segregated trust account that is an
Eligible Account, which shall be titled "Supplemental Interest Trust, First
Union National Bank, as Certificate Administrator for the registered holders of
NovaStar Mortgage Funding Trust 2002-1, Home Equity Loan Asset-Backed
Certificates, Series 2002-1." The Certificate Administrator shall, promptly upon
receipt, deposit in the Supplemental Interest Trust each distribution of the
Class AIO Current Interest pursuant to Section 4.01(a)(i)(B)(III) and each
distribution of the Class I Monthly Interest Distributable Amount pursuant to
Section 4.01(a)(i)(B). Funds deposited in the Supplemental Interest Trust shall
be held in trust by the Certificate Administrator for the Certificateholders for
the uses and purposes set forth herein. Neither the Supplemental Interest Trust
nor the Supplemental Interest Account shall be an asset of any of the REMICs
created hereunder.

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

          On each Distribution Date commencing in February, 2005 through
October, 2008, the funds in the Supplemental Interest Trust (as reduced from
time to time in accordance with this Section 4.04) will equal the sum of (x) any
amounts received under the Cap Agreement pursuant to Section 4.04(d) and (y) the
Class AIO Monthly Interest Distributable Amount.

          (b) The Certificate Administrator will invest funds deposited in the
Supplemental Interest Trust as directed in writing by the Servicer in 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. All income and gain realized from
investment of funds deposited in the Supplemental Interest Trust shall be
credited to such Account. The Supplemental Interest Trust will not be an asset
of any of the REMICs created hereunder.

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

                                       47
<PAGE>

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

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

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

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

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

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

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

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

          On each Distribution Date commencing in February, 2005, and through
October, 2008, the Supplemental Interest Trust may receive payments from the Cap
Agreement equal to the product of (x) the excess, if any, of LIBOR over 10.00%;
and (y) the scheduled notional amount for that Distribution Date as set forth in
Exhibit I.

          Section 4.05 Pre-Funding Account.

          (a) No later than the Closing Date, the Certificate Administrator, at
the direction of the Servicer, 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
2002-1, Home Equity Loan Asset-Backed Certificates, Series 2002-1" (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 Company. 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

                                       48
<PAGE>

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 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 100% 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 Company 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 of 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 REMIC I on the date of
withdrawal.

          Section 4.06 Interest Coverage Account.

          (a) No later than the Closing Date, the Certificate Administrator, at
the direction of the Servicer, 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
2002-1, Home Equity Loan Asset-Backed Certificates, Series 2002-1"

                                       49
<PAGE>

(the "Interest Coverage Account"). The Certificate Administrator shall, promptly
upon receipt, deposit in the Interest Coverage Account and retain therein (i)
the Interest Coverage Amount (which amount is $100,000) remitted on the Closing
Date to the Certificate Administrator by the Company 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 the
greater of (i) the income and gain realized from investments in the Pre-Funding
Account and deposited in the Interest Coverage Account since the prior
Distribution Date, or (ii) the difference between (A) the sum of the REMIC
Monthly Interest Distributable Amounts for each of the Class A Certificates, the
Mezzanine Certificates and the Class B Certificates for such Distribution Date,
and (B) the Interest Remittance Amount for such Distributable Date (excluding
the amount of interest included pursuant to clause (vi) of the definition of
REMIC Available Funds), but not less than zero. Such withdrawal and deposit
shall be treated as a contribution of cash by the Company to REMIC I on the date
thereof.

          (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.

          Section 4.07 Allocation of Realized Losses.

          All Realized Losses on the Mortgage Loans shall be allocated by the
Certificate Administrator on each Distribution Date as follows: first, to the
Class O Certificates, until the Certificate Principal Balance thereof has been
reduced to zero; second, to the Class B Certificates, until the Certificate
Principal Balance thereof has been reduced to zero; third, to the Class M-3
Certificates, until the Certificate Principal Balance thereof has been reduced
to zero; fourth, to the Class M-2 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero; and fifth, to the Class M-1
Certificates, until the Certificate Principal Balance

                                       50
<PAGE>

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

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

                                   ARTICLE V

                                THE CERTIFICATES

          Section 5.01 The Certificates.

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

          The Certificates shall be executed on behalf of the Trust by manual or
facsimile signature on behalf of the Trustee by a Responsible Officer.
Certificates bearing the manual or facsimile signatures of individuals who were,
at the time when such signatures were affixed, authorized to sign on behalf of
the Trustee shall bind the Trust, notwithstanding that such individuals or any
of them have ceased to be so authorized prior to the authentication and delivery
of such Certificates or did not hold such offices at the date of such
Certificate. No Certificate shall be entitled to any benefit under this
Agreement or be valid for any purpose, unless such Certificate shall have been
manually authenticated by the Certificate Administrator (or, in the case of the
initial Certificates issued on the Closing Date, by the Certificate
Administrator, on behalf of the Trustee) substantially in the form provided for
herein, and such authentication upon any Certificate shall be conclusive
evidence, and the only evidence, that such Certificate has been duly
authenticated and delivered hereunder. All Certificates shall be dated the date
of their authentication. Subject to Section 5.02(c), the Underwritten
Certificates,

                                       51
<PAGE>

the Class B Certificates, the Class AIO Certificates and the Class P
Certificates shall be Book-Entry Certificates. The other Classes of Certificates
shall be Definitive Certificates.

          Section 5.02 Registration of Transfer and Exchange of Certificates.

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

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

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

          (b) Except as provided in paragraph (c) below, the Book-Entry
Certificates shall at all times remain registered in the name of the Depository
or its nominee and at all times: (i) registration of such Certificates may not
be transferred by the Certificate Administrator except to another Depository;
(ii) the Depository shall maintain book-entry records with respect to the
Certificate Owners and with respect to ownership and transfers of such
Certificates; (iii) ownership and transfers of registration of such Certificates
on the books of the Depository shall be governed by applicable rules established
by the Depository; (iv) the Depository may collect its usual and customary fees,
charges and expenses from its Depository Participants; (v) the Certificate
Administrator shall for all purposes deal with the Depository as representative
of the Certificate Owners of the Certificates for purposes of exercising the
rights of Holders under this Agreement, and requests and directions for and
votes of such representative shall not be deemed to be inconsistent if they are
made with respect to different Certificate Owners; (vi) the Certificate
Administrator may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its Depository Participants and
furnished by the Depository Participants with respect to indirect participating
firms and Persons shown on the books of such indirect participating firms as
direct or indirect Certificate Owners; and (vii) the direct participants of the
Depository shall have no rights under this Agreement under or with

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<PAGE>

respect to any of the Certificates held on their behalf by the Depository, and
the Depository may be treated by the Trustee, the Certificate Administrator and
its agents, employees, officers and directors as the absolute owner of the
Certificates for all purposes whatsoever.

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

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

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

                                       53
<PAGE>

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

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

          Prior to the later of the expiration of the Funding Period and the
publication of final amendments to the Underwriter's exemption from the
Department of Labor to extend exemptive relief to subordinate certificates, no
transfer of Mezzanine Certificates or any interest therein shall be made to a
Person acquiring such Certificates with Plan Assets.

          Each person who acquires any Ownership Interest in such class of
Certificates prior to the later of such dates 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
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 Company or its designee as its attorney-in-fact
to negotiate the terms of any mandatory sale under clause (v) below and to
execute all instruments of transfer and to do all other things necessary in
connection with any such sale, and the rights of each Person acquiring any
Ownership Interest in a Residual Certificate are expressly subject to the
following provisions:

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

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<PAGE>

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

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

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

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

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

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

                                       55
<PAGE>

     in the event that the Certificate Administrator determines that the Holder
     of such Residual Certificate may be liable for any amount due under this
     Section or any other provisions of this Agreement, the Certificate
     Administrator may withhold a corresponding amount from such remittance as
     security for such claim. The terms and conditions of any sale under this
     clause (v) shall be determined in the sole discretion of the Certificate
     Administrator and it shall not be liable to any Person having an Ownership
     Interest in a Residual Certificate as a result of its exercise of such
     discretion.

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

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

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

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

          Section 5.03 Mutilated, Destroyed, Lost or Stolen Certificates.

          If (i) any mutilated Certificate is surrendered to the Certificate
Registrar or the Certificate Registrar receives evidence to its satisfaction of
the destruction, loss or theft of any Certificate and (ii) there is delivered to
the Trustee, the Certificate Administrator, the Company and the Certificate
Registrar such security or indemnity as may be required by them to save each of
them harmless, then, in the absence of notice to the Certificate Administrator
or the Certificate Registrar that such Certificate has been acquired by a bona
fide purchaser, the Trustee or the Certificate Administrator shall execute on
behalf of the Trust, authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
tenor and Percentage Interest. Upon the issuance of any new Certificate under
this Section, the Trustee, the Certificate Administrator or the Certificate
Registrar may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee, the Certificate
Administrator and the Certificate Registrar) in connection therewith. Any
duplicate Certificate issued pursuant to this Section, shall constitute complete
and

                                       56
<PAGE>

indefeasible evidence of ownership in the Trust, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be found at any
time.

          Section 5.04 Persons Deemed Owners.

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

          Section 5.05 Appointment of Paying Agent.

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

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

                                   ARTICLE VI

                          THE SERVICER AND THE COMPANY

          Section 6.01 Liability of the Servicer and the Company.

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

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<PAGE>

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

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

          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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<PAGE>

          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 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.

                                       59
<PAGE>

          (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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<PAGE>

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

                                  ARTICLE VII

                                     DEFAULT

          Section 7.01 Servicing Default.

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

          (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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<PAGE>

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

          (v) The Cumulative Loss Percentage exceeds (a) with respect to the
     first 12 Distribution Dates, 1.00% of the Cut-off Date Aggregate Principal
     Balance, (b) with respect to the next 12 Distribution Dates, 1.25% of the
     Cut-off Date Aggregate Principal Balance, (c) with respect to the next 12
     Distribution Dates, 1.50% of the Cut-off Date Aggregate Principal Balance,
     (d) with respect to the next 12 Distribution Dates, 1.75% of the Cut-off
     Date Aggregate Principal Balance, (e) with respect to the next 12
     Distribution Dates, 2.50% of the Cut-off Date Aggregate Principal Balance,
     (f) and with respect to all Distribution Dates thereafter, 4.00% of the
     Cut-off Date Aggregate Principal Balance; or

          (vi) Realized Losses on the Mortgage Loans over any twelve-month
     period exceeds 1.00% of the 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 90 Day Delinquency Percentage exceeds 17%.

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

          Section 7.02 Trustee to Act; Appointment of Successor.

          (a) Within 90 days of the time the Servicer (and the Trustee or the
Certificate Administrator, if notice is sent by the Holders) receives a notice
of termination pursuant to

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Section 7.01, the Trustee (or such other successor Servicer as is approved in
accordance with this Agreement) shall be the successor in all respects to the
Servicer in its capacity as servicer under this Agreement and the transactions
set forth or provided for herein and shall be subject to all the
responsibilities, duties and liabilities relating thereto placed on the Servicer
by the terms and provisions hereof arising on and after its succession.
Notwithstanding the foregoing, the parties hereto agree that the Trustee, in its
capacity as successor Servicer, immediately will assume all of the obligations
of the Servicer to make Advances; provided however, that the obligation of the
Trustee to make Advances is subject to the standards set forth in Section 3.24
hereof. Notwithstanding the foregoing, the Trustee, in its capacity as successor
Servicer, shall not be responsible for the lack of information and/or documents
that it cannot obtain through reasonable efforts. As compensation therefor, the
Trustee (or such other successor Servicer) shall be entitled to such
compensation as the Servicer would have been entitled to hereunder if no such
notice of termination had been given. Notwithstanding the above, (i) if the
Trustee is unwilling to act as successor Servicer or (ii) if the Trustee is
legally unable so to act, the Trustee shall appoint or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution, bank or other mortgage loan or home equity loan servicer having a
net worth of not less than $10,000,000 as the successor to the Servicer
hereunder in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer hereunder; provided, that the appointment of any
such successor Servicer will not result in the qualification, reduction or
withdrawal of the ratings assigned to the Certificates by the Rating Agencies as
evidenced by a letter to such effect from the Rating Agencies. Pending
appointment of a successor to the Servicer hereunder, unless the Trustee is
prohibited by law from so acting, the Trustee shall act in such capacity as
hereinabove provided. In connection with such appointment and assumption, the
successor shall be entitled to receive compensation out of payments on Mortgage
Loans in an amount equal to the compensation which the Servicer would otherwise
have received pursuant to Section 3.18 (or such other compensation as the
Trustee and such successor shall agree, not to exceed the Servicing Fee). The
appointment of a successor Servicer shall not affect any liability of the
predecessor Servicer which may have arisen under this Agreement prior to its
termination as Servicer to pay any deductible under an insurance policy pursuant
to Section 3.14 or to indemnify the Certificate Administrator and the Trustee
pursuant to Section 3.06), nor shall any successor Servicer be liable for any
acts or omissions of the predecessor Servicer or for any breach by such Servicer
of any of its representations or warranties contained herein or in any related
document or agreement. The Trustee and such successor shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession. All Servicing Transfer Costs shall be paid by the predecessor
Servicer upon presentation of reasonable documentation of such costs, and if
such predecessor Servicer defaults in its obligation to pay such costs, such
costs shall be paid by the successor Servicer, the Certificate Administrator or
the Trustee (in which case the successor Servicer, the Certificate Administrator
or the Trustee, as applicable, shall be entitled to reimbursement therefor from
the assets of the Trust).

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

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          (c) In connection with the termination or resignation of the Servicer
hereunder, either (i) the successor Servicer, shall represent and warrant that
it is a member of MERS in good standing and shall agree to comply in all
material respects with the rules and procedures of MERS in connection with the
servicing of the Mortgage Loans that are registered with MERS, in which case the
predecessor Servicer shall cooperate with the successor Servicer in causing MERS
to revise its records to reflect the transfer of servicing to the successor
Servicer as necessary under MERS' rules and regulations, or (ii) the predecessor
Servicer shall cooperate with the successor Servicer in causing MERS to execute
and deliver an assignment of Mortgage in recordable form to transfer the
Mortgages from MERS to the Trustee and to execute and deliver such other
notices, documents and other instruments as may be necessary or desirable to
effect a transfer of such Mortgage Loans or servicing of such Mortgage Loan on
the MERS System to the successor Servicer. The predecessor Servicer shall file
or cause to be filed any such assignment in the appropriate recording offices.
The predecessor Servicer shall bear any and all fees of MERS, costs of preparing
any assignments of Mortgage, and fees and costs of filing any assignments of
Mortgage that may be required under this subsection (c). The successor Servicer
shall cause assignment to be delivered to the Trustee promptly upon receipt of
the original with evidence of recording thereon or a copy certified by the
public recording office in which such assignment was recorded.

          Section 7.03 Waiver of Defaults.

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

          Section 7.04 Notification to Certificateholders.

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

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

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

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

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

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

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

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

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

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

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

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

          The Trustee and the Certificate Administrator are hereby authorized to
execute and shall execute this Agreement, the Purchase Agreement, and the
Converted Loan Purchase Agreement, and shall perform their respective duties and
satisfy their respective obligations thereunder. Every provision of this
Agreement relating to the conduct or affecting the liability of

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or affording protection to the Trustee or the Certificate Administrator shall
apply to the Trustee's and the Certificate Administrator's execution of this
Agreement, the Purchase Agreement, and the Converted Loan Purchase Agreement,
and the performance of their respective duties and satisfaction of its
obligations hereunder and thereunder.

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

          Section 8.02 Rights of Trustee and Certificate Administrator.

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

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

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

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

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

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          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 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.

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

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

          Section 8.05 Notice of Servicing Default.

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

          Section 8.06 [Reserved].

          Section 8.07 Compensation and Indemnity.

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

          Section 8.08 Replacement of Trustee or Certificate Administrator.

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

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          (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 Company shall promptly appoint a
successor Trustee or Certificate Administrator.

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

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

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

          Section 8.09 Successor Trustee or Certificate Administrator by Merger.

          If the Trustee or the Certificate Administrator consolidates with,
merges or converts into, or transfers all or substantially all of its corporate
trust business or assets to, another corporation or banking association, the
resulting, surviving or transferee corporation, without any further act, shall
be the successor Trustee or successor Certificate Administrator, as

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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.

          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

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

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

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

          Section 8.11 Eligibility; Disqualification.

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

          Section 8.12 [Reserved]

          Section 8.13 Representations and Warranties.

          (a) The Trustee hereby represents that:

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

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

          (iii) The consummation of the transactions contemplated by this
     Agreement and the fulfillment of the terms hereof do not conflict with,
     result in any breach of any of the terms and provisions of, or constitute
     (with or without notice or lapse

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     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, 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;

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<PAGE>

          (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, 2003, the
Certificate Administrator, shall file a Form 15 Suspension Notification with
respect to the Trust Fund, if applicable. Prior to March 31, 2003, the
Certificate Administrator, on behalf of the Trust, shall file a Form 10-K, in
substance conforming to industry standards, with respect to the Trust Fund. The
Trust hereby grants to the Certificate Administrator, a limited power of
attorney to execute and file each such document on behalf of the Trust. Such
power of attorney shall continue until the termination of the Trust Fund. The
Certificate Administrator, on behalf of the Trust, shall deliver to the Seller
and the Trustee within three Business Days after filing any Form 8-K or Form
10-K pursuant to this Section 8.16 a copy of such Form 8-K or Form 10-K, as the
case may be; and

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

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

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                                   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 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

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<PAGE>

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 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.

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<PAGE>

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

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

          Section 10.02 Prohibited Transactions and Activities.

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

                                   ARTICLE XI

                                   TERMINATION

          Section 11.01 Termination.

          (a) The respective obligations and responsibilities of the Seller, the
Servicer, the Company, the Certificate Administrator and the Trustee created
hereby (other than the obligation of the Certificate Administrator to make
certain payments to Certificateholders after the final Distribution Date and the
obligation of the Servicer to send certain notices as hereinafter set forth)
shall terminate upon notice to the Trustee or the Certificate Administrator upon
the earliest of (i) the Distribution Date on which the Certificate Principal
Balances of the Regular Certificates have been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage Loan in the Trust, (iii) the
optional purchase by the Servicer of the Mortgage Loans as described below and
(iv) the Distribution Date in September 2032. 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").

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<PAGE>

          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) In the event that the Certificate Principal Balances of all of the
Class A Certificates have not been reduced to zero by the Distribution Date on
September 2032, the Certificate Administrator, on behalf of the Trustee, shall
(i) sign a plan of complete liquidation of each REMIC created hereunder meeting
the requirements of a "Qualified Liquidation" under Section 860F of the Code and
any regulations thereunder, (ii) sell all of the assets of the Trust Fund for
cash in a commercially reasonable manner to maximize the value thereof, pursuant
to the terms of the plan of complete liquidation, (iii) distribute the proceeds
of the sale to the Certificateholders in accordance with Section 4.01 hereof,
and (iv) terminate the Trust. By their acceptance of Certificates, the Holders
thereof hereby agree to appoint the Certificate Administrator as their attorney
in fact to: (i) adopt such a plan of complete liquidation (and the
Certificateholders hereby appoint the Certificate Administrator as their
attorney in fact to sign such a plan) as appropriate and (ii) to take such other
action in connection therewith as may be reasonably required to carry out such
plan of complete liquidation in accordance with the terms thereof.

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

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

          (e) In the event that all Certificateholders shall not surrender their
Certificates for final payment and cancellation on or before such final
Distribution Date, the Certificate Administrator shall promptly following such
date cause all funds in the 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

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<PAGE>

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

          Section 11.02 Additional Termination Requirements.

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

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

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

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

                                  ARTICLE XII

                            MISCELLANEOUS PROVISIONS

          Section 12.01 Amendment.

          This Agreement may be amended from time to time by the parties hereto,
and without the consent of the Certificateholders or the Swap Counterparties (i)
to cure any ambiguity, (ii) to correct or supplement any provisions herein which
may be defective or inconsistent with any other provisions herein or (iii) to
make any other provisions with respect to

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<PAGE>

matters or questions arising under this Agreement which shall not be
inconsistent with the provisions of this Agreement; provided, however, that any
such action listed in clause (i) through (iii) above shall be deemed not to
adversely affect in any respect the interests of (A) any Certificateholder, if
evidenced by (i) written notice to the Company, the Servicer, the Certificate
Administrator and the Trustee from the Rating Agencies that such action will not
result in the reduction or withdrawal of the rating of any outstanding Class of
Certificates with respect to which it is a Rating Agency or (ii) an Opinion of
Counsel delivered to the Servicer, the Certificate Administrator, the Company
and the Trustee and (B) any Swap Counterparty, if evidenced by an Opinion of
Counsel delivered to the Servicer, the Certificate Administrator, the Company,
the Trustee and each Swap Counterparty. This Agreement may be amended by the
parties hereto without the consent of the Swap Counterparties after the Class I
Termination Date.

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

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

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

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

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<PAGE>

          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 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

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<PAGE>

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 Company:

                      NovaStar Mortgage Funding Corporation
                      1901 W. 47th Place
                      Suite 105
                      Westwood, Kansas 66205
                      Attention:  Kelly Meinders

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

                      NovaStar Mortgage, Inc.
                      1900 W.  47th Place
                      Suite 205
                      Westwood, Kansas 66205
                      Attention:  Kelly Meinders

          (c) in the case of Rating Agencies:

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<PAGE>

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

                      Standard & Poor's
                      26 Broadway
                      New York, New York 10004-1064
                      Attention:  Scott Mason

          (d) in the case of the Certificate Administrator:

                      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 2002-1)

          (e) in the case of the Trustee:

                      JPMorgan Chase Bank
                      450 West 33rd Street, 14th Floor
                      New York, NY 10001
                      Attention: Institutional Trust Services
                      (NovaStar Mortgage Funding Trust, Series 2002-1)

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.

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<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, the Swap
Counterparties and the parties hereto and their successors hereunder, any
benefit or any legal or equitable right, remedy or claim under this Agreement.

          Section 12.10 Acts of Certificateholders.

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

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

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

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<PAGE>

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

                                 NOVASTAR MORTGAGE FUNDING CORPORATION,
                                 as Company

                                 By: /s/ Kelly Meinders
                                    -----------------------------------
                                     Name:   Kelly Meinders
                                     Title:  Vice President

                                 NOVASTAR MORTGAGE, INC.,
                                 As Servicer and as Seller

                                 By: /s/ Kelly Meinders
                                    -----------------------------------
                                     Name:   Kelly Meinders
                                     Title:  Vice President

                                 FIRST UNION NATIONAL BANK,
                                 as Certificate Administrator

                                 By: /s/ Robert Ashbaugh
                                    -----------------------------------
                                     Name:   Robert Ashbaugh
                                     Title:  Director

                                 JPMORGAN CHASE BANK,
                                 as Trustee

                                 By: /s/ Craig M. Kantor
                                    -----------------------------------
                                     Name:   Craig M. Kantor
                                     Title:  Vice President

                [Pooling and Servicing Agreement Signature Page]

                                       85
<PAGE>

STATE OF KANSAS       )
                      ) ss.:
COUNTY OF JOHNSON     )

                  On the ____ day of March, 2002 before me, a notary public in
and for said State, personally appeared Kelly Meinders known to me (or proved to
me on the basis of satisfactory evidence) to be a Vice President of NovaStar
Mortgage Funding Corporation, a Delaware corporation that executed the within
instrument, and also known to me (or proved to me on the basis of satisfactory
evidence) to be the person who executed it on behalf of said corporation, and
acknowledged to me that such corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                    --------------------------------
Seal                                Notary Public

                                       86
<PAGE>

STATE OF KANSAS       )
                      ) ss.:
COUNTY OF JOHNSON     )

                  On the ____ day of March, 2002 before me, a notary public in
and for said State, personally appeared Kelly Meinders known to me (or proved to
me on the basis of satisfactory evidence) to be a Vice President of NovaStar
Mortgage, Inc., a Virginia corporation that executed the within instrument, and
also known to me (or proved to me on the basis of satisfactory evidence) to be
the person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                            --------------------------------
Seal                                        Notary Public

                                       87
<PAGE>

STATE OF KANSAS       )
                      ) ss.:
COUNTY OF JOHNSON     )

                  On the ____ day of March, 2002 before me, a notary public in
and for said State, personally appeared ___________________ known to me (or
proved to me on the basis of satisfactory evidence) to be a
_____________________ of First Union National Bank, a national banking
association that executed the within instrument, and also known to me (or proved
to me on the basis of satisfactory evidence) to be the person who executed it on
behalf of said corporation, and acknowledged to me that such corporation
executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                            --------------------------------
Seal                                        Notary Public

                                       88
<PAGE>

STATE OF KANSAS      )
                     ) ss.:
COUNTY OF JOHNSON    )

                  On the _____ day of March, 2002 before me, a notary public in
and for said State, personally appeared __________, known to me (or proved to me
on the basis of satisfactory evidence) to be ___________________ of JPMorgan
Chase Bank that executed the within instrument, and also known to me (or proved
to me on the basis of satisfactory evidence) to be the person who executed it on
behalf of said association, and acknowledged to me that such corporation
executed the within instrument.

                  IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.

                                            --------------------------------
Seal                                        Notary Public

                                       89

<PAGE>

                                   APPENDIX A

                                   DEFINITIONS

         "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 applicable 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 Company'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 four
Business Days prior to the related Subsequent Transfer Date and shall be
substantially in the form attached hereto as Exhibit C.

         "Additional Mortgage Loan": A Mortgage Loan added to the Mortgage Pool
between the Statistical Calculation Date and the Closing Date as discussed in
the Prospectus Supplement.

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

         "Adjustment Date": With respect to each Adjustable Rate Mortgage Loan,
each adjustment date, on which the Mortgage Rate of such Mortgage Loan changes
pursuant to the related Mortgage Note.

         "Administrative Fee": With respect to each Distribution Date, the sum
of the MI Premium, the Servicing Fee and the Certificate Administrator Fee with
respect to such Distribution Date.

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

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

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

         "Affiliate": With respect to any Person, any other Person controlling,
controlled by or under common control with such Person. For purposes of this
definition, "control" means the power to direct the management and policies of a
Person, directly or indirectly, whether through

<PAGE>

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.

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

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

         "Appraised Value": The appraised value of a Mortgaged Property based
upon the appraisal made at the time of the origination of the related Mortgage
Loan. With respect to a Mortgage Loan the proceeds of which were used to
refinance an existing Mortgage Loan, the appraised value of the Mortgaged
Property based upon the appraisal with the lowest appraised value (as reviewed
and approved by the Seller) obtained within 12 months of the time of
refinancing.

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

         "Assumed Final Maturity Date": As to each Class of Certificates, the
Distribution Date in September 2032.

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

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

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

                                       2
<PAGE>

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

         "Base Prospectus": The base Prospectus, dated March 13, 2002, 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 Certificates, the Class AIO Certificates, the Class P
Certificates, the Mezzanine Certificates, and the Class B Certificates shall be
Book-Entry Certificates.

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

         "Cap Agreement": The interest rate cap agreement between the Trustee,
on behalf of the Trust, and Citibank, N.A. New York, which constitutes an asset
of the Supplemental Interest Trust and not an asset of any of the REMICs created
hereunder.

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

         "Certificate": Any Regular Certificate or Class R Certificate.

         "Certificate Administrator": 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": 0.006% 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.

                                       3
<PAGE>

         "Certificate Margin": With respect to the Class A-1 Certificates on
each Distribution Date (A) on or prior to the Rate Step-Up Date, 0.280% per
annum and (B) after the Rate Step-Up Date, 0.560% per annum. With respect to the
Class A-2 Certificates on each Distribution Date (A) on or prior to the Rate
Step-Up Date, 0.300% per annum and (B) after the Rate Step-Up Date, 0.600% per
annum. With respect to the Class M-1 Certificates on each Distribution Date (A)
on or prior to the Rate Step-Up Date, 0.820% per annum and (B) after the Rate
Step-Up Date, 1.230% per annum. With respect to the Class M-2 Certificates on
each Distribution Date (A) on or prior to the Rate Step-Up Date, 1.520% per
annum and (B) after the Rate Step-Up Date, 2.280% per annum. With respect to the
Class M-3 Certificates on each Distribution Date (A) on or prior to the Rate
Step-Up Date, 2.000% per annum and (B) after the Rate Step-Up Date, 3.000% per
annum. With respect to the Class B Certificates on each Distribution Date (A) on
or prior to the Rate Step-Up Date, 4.750% per annum and (B) after the Rate
Step-Up Date, 7.125% per annum.

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

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

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

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

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

         "Class A Certificate": Any Class A-1 Certificate or Class A-2
Certificate.

         "Class A Principal Distribution Amount": The excess of (x) the
Certificate Principal Balance of the Class A Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 83.00% and
(ii) the sum of the Pool Balance as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal

                                       4
<PAGE>

received during the related Prepayment Period) plus any amounts or deposit in
the Pre-Funding Account and (B) the Pool Balance as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus $2,500,000.

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

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

         "Class A-1 Principal Distribution Amount": For any Distribution Date,
the product of (i) the Class A Principal Distribution Amount for such
Distribution Date and (ii) the percentage equivalent of a fraction, the
numerator of which is (x) the Group I Principal Remittance Amount for such
Distribution Date and the denominator of which is (y) the Principal Remittance
Amount for such Distribution Date.

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

         "Class A-2 Principal Distribution Amount": For any Distribution Date,
the product of (i) the Class A Principal Distribution Amount for such
Distribution Date, and (ii) the percentage equivalent of a fraction, the
numerator of which is (x) the Group II Principal Remittance Amount for such
Distribution Date, and the denominator of which is (y) the Principal Remittance
Amount for such Distribution Date.

         "Class AIO Certificate": Any one of the Class AIO Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-7, representing the right to distributions
as set forth herein and therein and evidencing one or more regular interests in
the Master REMIC.

         "Class AIO Current Interest": With respect to any Distribution Date is
equal to the excess of (x) Interest Remittance Formula Amount for that
Distribution Date less (y) the sum of (i) the Administrative Fees, (ii) the
Class I Monthly Distributable Amount, (iii) the REMIC Current Interest for the
Class A-1 Certificates, (iv) the REMIC Current Interest for the Class A-2
Certificates, (v) the REMIC Current Interest for the Class M-1 Certificates,
(vi) the REMIC Current Interest for the Class M-2 Certificates, (vii) the REMIC
Current Interest for the Class M-3 Certificates and (viii) the REMIC Current
Interest for the Class B Certificates.

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

                                       5
<PAGE>

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

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

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

         "Class B Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the payment of the Class
M-2 Principal Distribution Amount on such Distribution Date) (iv) the
Certificate Principal Balance of the Class M-3 Certificates (after taking into
account the payment of the Class M-3 Principal Distribution Amount on such
Distribution Date) and (v) the Certificate Principal Balance of the Class B
Certificates immediately prior to such Distribution Date over (y) the lesser of
(A) the product of (i) 96.50% and (ii) the sum of the Pool Balance as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) plus any amounts on deposit in the Pre-Funding Account and (B) the Pool
Balance as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) minus $2,500,000.

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

         "Class I Monthly Interest Distributable Amount": On each Distribution
Date commencing on the first Distribution Date through and including the
Distribution Date in

                                       6
<PAGE>

November 2003, an amount equal to the (positive) product of (x) 3.64% minus
LIBOR (on an actual/360 basis), and (y) a $300,000,000 notional amount; for the
Distribution Date in December 2003, an amount equal to the (positive) product of
(x) 3.94% minus LIBOR (on an actual/360 basis), and (y) a $175,000,000 notional
amount; for the Distribution Date in January 2004 through and including November
2004, an amount equal to the (positive) product of (x) 4.15% minus LIBOR (on an
actual/360 basis), and (y) a $50,000,000 notional amount; for the final
Distribution Date, which shall be the Distribution Date in December 2004, an
amount equal to the (positive) product of (x) 4.49% minus LIBOR (on an
actual/360 basis), and (y) a $25,000,000 notional amount. In the event that the
Class I Monthly Interest Distributable Amount is not a positive number, no
payment will be made in respect of the Class I Monthly Interest Distributable
Amount.

         "Class I Termination Date": December 27, 2004.

         "Class M-1 Certificate": Any one of the Class M-1 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-3, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-1 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date) and (ii) the Certificate Principal Balance of the Class M-1 Certificates
immediately prior to such Distribution Date over (y) the lesser of (A) the
product of (i) 88.00% and (ii) the sum of the Pool Balance as of the last day of
the related Due Period (after giving effect to scheduled payments of principal
due during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) plus any amounts on deposit in the Pre-Funding Account and (B) the Pool
Balance as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) minus $2,500,000.

         "Class M-2 Certificate": Any one of the Class M-2 Certificates
executed, authenticated and delivered pursuant to Section 5.01, substantially in
the form annexed hereto as Exhibit A-4, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-2 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date) and (iii) the Certificate Principal Balance of
the Class M-2 Certificates immediately prior to such Distribution Date over (y)
the lesser of (A) the product of (i) 92.00% and (ii) the sum of the Pool Balance
as of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period,

                                       7
<PAGE>

to the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) plus any amounts on deposit in
the Prefunding Account and (B) the Pool Balance as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus $2,500,000.

         "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-5, representing the right to distributions
as set forth herein and therein and evidencing a regular interest in the Master
REMIC.

         "Class M-3 Principal Distribution Amount": The excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class A Certificates
(after taking into account the payment of the Class A-1 Principal Distribution
Amount, and the Class A-2 Principal Distribution Amount on such Distribution
Date), (ii) the Certificate Principal Balance of the Class M-1 Certificates
(after taking into account the payment of the Class M-1 Principal Distribution
Amount on such Distribution Date), (iii) the Certificate Principal Balance of
the Class M-2 Certificates (after taking into account the payment of the Class
M-2 Principal Distribution Amount on such Distribution Date) and (iv) the
Certificate Principal Balance of the Class M-3 Certificates immediately prior to
such Distribution Date over (y) the lesser of (A) the product of (i) 95.00% and
(ii) the sum of the Pool Balance as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) plus any amounts on
deposit in the Pre-Funding Account and (B) the Pool Balance as of the last day
of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus $2,500,000.

         "Class O Certificate": Any one of the Class O Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-9, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

         "Class P Certificate": Any one of the Class P Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-10, representing the right to distributions as set
forth herein and therein and evidencing a regular interest in the Master REMIC.

         "Class P Monthly Distribution Amount": An amount equal to all
prepayment penalties on a Distribution Date received on the Mortgage Pool during
the prior Prepayment Period.

         "Class P Principal Distribution Date": The earlier of (i) the 35th
Distribution Date and (ii) the Distribution Date on which the Certificate
Principal Balances for all of the Class A Certificates are reduced to zero.

                                       8
<PAGE>

         "Class R Certificate": Any one of the Class R Certificates executed,
authenticated and delivered pursuant to Section 5.01, substantially in the form
annexed hereto as Exhibit A-10, representing the right to distributions as set
forth herein, and evidencing the R-I Interest, the R-II Interest, the R-III
Interest and the R-IV Interest, each the sole "residual interest" in REMIC I,
REMIC II, REMIC III and the Master REMIC, respectively.

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

         "Closing Date": March 28, 2002.

         "Closing Date Mortgage Loans": The Initial Mortgage Loans plus the
Additional Mortgage Loans.

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

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

         "Commission": The Securities and Exchange Commission.

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

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

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

         "Converted Loan Purchase Agreement": The Converted Loan Purchase
Agreement, dated as of March 1, 2002, among the Converted Loan Purchaser, the
Certificate Administrator, the Trustee and the Servicer.

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

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

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

         "Corporate Trust Office": With respect to the Trustee and the Paying
Agent, the principal corporate trust office at which at any particular time its
corporation trust business shall be

                                       9
<PAGE>

administered, which office at the date of execution of this Agreement is located
at 111 Wall Street, 14th Floor, New York, New York 10005, Attention: Capital
Markets Fiduciary Services, NovaStar 2002-1. 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 2002-1).

         "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, the
Class B Certificates, and the Class O Certificates, and (y) the denominator of
which is the sum of (i) the Pool Balance and (ii) for any Distribution Date
occurring before the expiration of the Funding Period, 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 earlier to occur of (i) the Distribution Date on
which the aggregate certificate balance of the Class A Certificates is reduced
to zero; and (ii) the later to occur of (x) the Distribution Date in April 2005
and (y) the first Distribution Date on which the credit enhancement percentage
for the Class A Certificates (calculated for this purpose only after taking into
account distributions of principal on the mortgage loans but prior to the
principal distributions to the certificates) is greater than or equal to 17%.

         "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.

         "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,
2002.

         "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 of $395,120,259.44.

         "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.

                                       10
<PAGE>

         "Deferred Interest": With respect to any REO Property, the current
portion of interest not currently paid by the Mortgagor that is added to the
principal balance of such REO Property.

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

         "Definitive Certificates": The Class O, Class I and Class R
Certificates, and such other Classes of Certificates as become Definitive
Certificates pursuant to Section 5.02(c) hereof.

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

         "30-Day Delinquency Percentage": As of the last day of any Due Period,
the percentage equivalent of a fraction, (i) the numerator of which equals the
aggregate Principal Balance of the Mortgage Loans that are 30 or more days
delinquent, in foreclosure or converted to REO Properties as of such last day of
such Due Period, and (ii) the denominator of which is the Pool Balance as of the
last day of such Due Period.

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

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

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

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

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

                                       11
<PAGE>

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

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

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

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

         "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, 2002.

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

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

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

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

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

         (ii) (A) demand and time deposits in, Certificates of deposit of,
banker's acceptances issued by or federal funds sold by any depository
institution or trust company (including the Trustee, the Certificate
Administrator or their agents acting in their respective commercial

                                       12
<PAGE>

capacities) incorporated under the laws of the United States of America or any
State thereof and subject to supervision and examination by federal and/or state
authorities, so long as at the time of such investment or contractual commitment
providing for such investment, such depository institution or trust company has
a short-term unsecured debt rating in the highest available rating category of
each of the Rating Agencies and provided that each such investment has an
original maturity of no more than 365 days, and (B) any other demand or time
deposit or deposit which is fully insured by the Federal Deposit Insurance
Corporation;

         (iii) repurchase obligations with a term not to exceed 30 days with
respect to any security described in clause (i) above and entered into with a
depository institution or trust company (acting as a principal) rated "A-1+" or
higher by S&P and A2 or higher by Moody's; provided, however, that collateral
transferred pursuant to such repurchase obligation must (A) be valued daily at
current market price plus accrued interest, (B) pursuant to such valuation,
equal, at all times, 105% of the cash transferred in exchange for such
collateral and (C) be delivered in such a manner as to accomplish perfection of
a security interest in the collateral by possession of certificated securities.

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

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

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

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

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

                                       13
<PAGE>

         "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.

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

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

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

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

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

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

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

                                       14
<PAGE>

         "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, 2002.

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

         "Group I Cross Collateralization Amount": For any Distribution Date,
the portion of the Group I Interest Remittance Amount remaining after payment of
the REMIC Monthly Interest Distributable Amount on the Class A-1 Certificates.

         "Group I Mortgage Loans": The Mortgage Loans allocated to Group I which
primarily support the Class A-1 Certificates.

         "Group I Interest Remittance Amount": For any Distribution Date, the
portion of the Interest Remittance Amount that was collected or advanced on the
Group I Mortgage Loans.

         "Group I Principal Remittance Amount": For any Distribution Date, the
portion of the Principal Remittance Amount that was collected or advanced on the
Group I Mortgage Loans.

         "Group II Cross Collateralization Amount": For any Distribution Date,
the portion of the Group II Interest Remittance Amount remaining after payment
of the REMIC Monthly Interest Distributable Amounts on the Class A-2
Certificates.

         "Group II Interest Remittance Amount": For any Distribution Date, the
portion of the Interest Remittance Amount that was collected or advanced on the
Group II Mortgage Loans.

         "Group II Mortgage Loans:" The Mortgage Loans allocated to Group II
which primarily support the Class A-2 Certificates.

         "Group II Principal Remittance Amount": For any Distribution Date, the
portion of the Principal Remittance Amount that was collected or advanced on the
Group II Mortgage Loans.

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

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

                                       15
<PAGE>

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

         "Initial Mortgage Loan": The Mortgage Loans which are described (with
complete statistical information included) in the Prospectus Supplement.

         "Insurance Proceeds": Proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan which are required to be remitted to
the Servicer, including MI Insurance Proceeds in the case of Mortgage Loans
covered under a MI Policy, or amounts required to be paid by the Servicer
hereunder, net of any component thereof (i) covering any expenses incurred by or
on behalf of the Servicer in connection with obtaining such proceeds, (ii) that
is applied to the restoration or repair of the related Mortgaged Property or
(iii) released to the Mortgagor in accordance with the Servicer's normal
servicing procedures.

         "Interest 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 Company to the
Certificate Administrator for deposit in the Interest Coverage Account on the
Closing Date pursuant to Section 4.06, which amount is $100,000.

         "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.

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

         "Lender Letter": The lender letter #LL03-00 dated April 11, 2000 for
Fannie Mae Sellers.

         "LIBOR": All references to LIBOR herein are references to One-Month
LIBOR. With respect to any Accrual Period, the rate determined by the
Certificate Administrator on the related Interest Determination Date on the
basis of the offered rates of the Reference Banks for one-month United States
dollar deposits, as such rates appear on the Telerate Page 3750, as of 11:00
a.m. (London time) on such Interest Determination Date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the rates at which deposits in United States dollars are offered by the
Reference Banks at approximately 11:00 a.m., London time, on that day to prime
banks in the London interbank market for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period). The Certificate
Administrator will request the principal London office of each of the Reference

                                       16
<PAGE>

Banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate for that day will be the arithmetic mean of the quotations.
If fewer than two quotations are provided as requested, the rate for that day
will be the arithmetic mean of the rates quoted by major banks in New York City,
selected by the Certificate Administrator, at approximately 11:00 a.m., New York
City time, on that day for loans in United States dollars to leading European
banks for a period equal to the relevant Accrual Period (commencing on the first
day of such Accrual Period).

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

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

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

         "Liquidated Mortgage Loan": With respect to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in Article III hereof, as of the end of
the related Prepayment Period that substantially 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.

                                       17
<PAGE>

         "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.

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

         "Master REMIC": The REMIC established pursuant to Section 2.09 hereof.
The assets of the Master REMIC shall be the REMIC III Regular Interests.

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

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

         "Master REMIC Regular Interests": As defined in Section 2.09(c) hereof.

         "Maximum Collateral Amount": The sum of the Principal Balance as of the
Cut-off Date of the Closing Date 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.

         "MERS": Mortgage Electronic Registration Systems, Inc., a corporation
organized and existing under the laws of the State of Delaware, or any successor
thereto.

         "MERS System": The system of recording transfers of Mortgages
electronically maintained by MERS.

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

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

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

         "MI Insurer": Each of (i) PMI Mortgage Insurance Co., an Arizona
mortgage insurance company and (ii) Mortgage Guaranty Insurance Corporation, a
Wisconsin private mortgage insurance company, and their successors and assigns.

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

                                       18
<PAGE>

under the related MI Policy, the determination by the Servicer that such MI
Insurer is insolvent or unable to pay its obligations as they become due, (C)
the long-term rating on the claims paying ability of the MI Insurer shall be
lowered by Moody's below A-2, if such MI Insurer is then rated by Moody's, or
shall be lowered by S&P below AA, if such MI Insurer is then rated by S&P.

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

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

         "MIN": The Mortgage Identification Number for Mortgage Loans registered
with MERS on the MERS System.

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

         "MOM Loan": With respect to any Mortgage Loan, MERS acting as the
mortgagee of such Mortgage Loan, solely as nominee for the originator of such
Mortgage Loan and its successors and assigns, at the origination thereof.

         "Monthly Payment": With respect to any Mortgage Loan (including any REO
Property) and any Due Date, the payment of principal and interest due thereon in
accordance with the amortization schedule at the time applicable thereto (after
adjustment, if any, for partial Principal Prepayments and for Deficient
Valuations occurring prior to such Due Date but before any 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 Closing
Date 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;

                                       19
<PAGE>

        (iii)   the Mortgage Rate at origination;

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

        (v)     the maturity date;

        (vi)    the original principal balance;

        (vii)   the first Distribution Date;

        (viii)  the type of Mortgaged Property;

        (ix)    the Monthly Payment in effect as of the Cut-off Date (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;

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

                                       20
<PAGE>

        (xxiv)  if the Mortgage Loan is registered with MERS on the MERS System,
the MIN.

         The Mortgage Loan Schedule shall set forth the total of the amounts
described under (x) above for all of the Mortgage Loans.

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

         "Net Prepayment Interest Shortfall": On any Distribution Date, the
excess, if any of (i) any Prepayment Interest Shortfall and (ii) any payments of
Compensating Interest made by the Servicer.

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

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

         "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.

                                       21
<PAGE>

         "Notional Amount Test Event": Occurs when the Certificate Administrator
determines, pursuant to Section 4.03(f), that the scheduled notional amount that
would be used to calculate the Class I Monthly Interest Distributable Amount
exceeds the aggregate Underwritten Certificates (and the Class B Certificates if
held by an entity unrelated to the Seller) Principal Balance on such
Distribution Date.

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

         "Offered Certificates": Collectively, the Class A Certificates, the
Class AIO Certificates, the Mezzanine Certificates and the Class P Certificates.

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

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

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

         "Original Pre-Funded Amount": The amount deposited by the Company in
the Pre-Funding Account on the Closing Date, which amount is approximately
$104,879,840.56.

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

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

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

         "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 or
the Class B Certificates, a fraction, expressed as a percentage, the numerator
of which is the Initial Certificate Principal Balance represented by such
Certificate and the denominator of which is the Initial Certificate Principal
Balance of the related Class. With respect to a Class I Certificate, Class AIO
Certificate, Class P Certificate, Class O Certificate or Residual Certificate,
the portion of the Class evidenced thereby, expressed as a percentage, as stated
on the face of such

                                       22
<PAGE>

Certificate; provided, however, that the sum of all such percentages for each
such Class totals 100%.

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

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

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

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

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

         "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 Principal Prepayment
of such Mortgage Loan in accordance with the terms thereof.

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

                                       23
<PAGE>

         "Prepayment Period": For any Distribution Date, the period commencing
on the day after the Determination Date in the month preceding the month in
which such Distribution Date falls (or, in the case of the first Distribution
Date, from the Cut-off Date) and ending on the Determination Date of the
calendar month in which such Distribution Date falls.

         "Principal Balance": With respect to any Mortgage Loan or related REO
Property, at any given time, (i) the Principal Balance of the Mortgage Loan as
of the Cut-off Date or Subsequent Cut-off Date, as applicable, minus (ii) the
sum of (a) the principal portion of the Monthly Payments due with respect to
such Mortgage Loan or REO Property during each Due Period ending prior to the
most recent Distribution Date which were received or with respect to which an
Advance was made, and (b) all Principal Prepayments with respect to such
Mortgage Loan or REO Property, and all Insurance Proceeds, Liquidation Proceeds
and REO Proceeds, to the extent applied by the Servicer as recoveries of
principal in accordance with Section 3.13 hereof with respect to such Mortgage
Loan or REO Property, and (c) the principal portion of any Realized Loss with
respect thereto for any previous Distribution Date.

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

         "Principal Remittance Amount": With respect to any Distribution Date,
the sum of (i) each scheduled payment of principal collected or advanced on the
Mortgage Loans by the Servicer that were due during the related Due Period, (ii)
the principal portion of all partial and full Principal Prepayments of the
Mortgage Loans applied by the Servicer during the related Prepayment Period,
(iii) the principal portion of all related Net Liquidation Proceeds and
Insurance Proceeds received during such Prepayment Period, (iv) that portion of
the Repurchase Price, representing principal of any repurchased Mortgage Loan,
deposited to the Collection Account during such Prepayment Period, (v) the
principal portion of any related Substitution Adjustment Amounts deposited in
the Collection Account during such Prepayment Period, (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
13, 2002 relating to the public offering of the Offered Certificates.

         "Purchase Agreement": The agreement, dated as of March 1, 2002, between
the Seller, the Company, the Trustee and the Certificate Administrator,
regarding the transfer of the Mortgage Loans by the Seller to or at the
direction of the Company.

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

                                       24
<PAGE>

         "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.

         "Rate Step-up Date": The first Distribution Date to occur after the
Optional Termination Date has occurred.

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

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

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

                                       25
<PAGE>

         "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.

         "Regular Certificate": Any of the Class A Certificates, Mezzanine
Certificates, Class B Certificates, Class I Certificates, Class AIO
Certificates, Class O Certificates or Class P Certificates.

         "Related Documents": With respect to each Mortgage Loan, the documents
specified in Section 2.01 hereof and any documents required to be added to such
documents pursuant to this Agreement, 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 at
such time, and (vi) on each Payment Date on or prior to the Distribution Date in
June 2002, 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
Class I Monthly Interest Distributable Amount and Administrative Fees for that
Distribution Date, and the denominator of which is the product of (1) the actual
number of days in the related Accrual Period, divided by 360 and (2) the

                                       26
<PAGE>

aggregate Certificate Principal Balances of the Underwritten Certificates and
the Class B Certficates immediately prior to such Distribution Date.

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

         "REMIC I Balance": As to each Class of REMIC I Interests and any
Distribution Date, the Initial REMIC I Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "REMIC II Balance": As to each Class of REMIC II Interests and any
Distribution Date, the Initial REMIC II Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "REMIC III Balance": As to each Class of REMIC III Interests and any
Distribution Date, the Initial REMIC III Balance as set forth in Section 2.09
hereof, minus all amounts distributed as principal of such Class on previous
Distribution Dates.

         "REMIC Current Interest": For any Distribution Date and each Class of
Underwritten Certificates and Class B Certificates, the amount of interest
accrued during the related Accrual Period at the related REMIC Pass-Through Rate
on the Certificate Principal Balance of such Class immediately prior to such
Distribution Date, in each case, reduced by any Net Prepayment Interest
Shortfalls and any Relief Act Shortfalls allocated to that Class (allocated to
each Certificate based on its respective entitlements to interest irrespective
of any Net Prepayment Interest Shortfalls or Relief Act Shortfalls for that
Distribution Date).

         "REMIC I Interests": As defined in Section 2.09 hereof.

         "REMIC II Interests": As defined in Section 2.09 hereof.

         "REMIC III Interests": As defined in Section 2.09 hereof.

         "REMIC Interests Sale Agreement": The REMIC Interests Sale Agreement,
dated as of March 1, 2002, between the Company and NRFC.

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

                                       27
<PAGE>

         "REMIC I Pass-Through Rate": As to each of the respective REMIC I
Interests, the applicable "REMIC I Pass-Through Rate" set forth in Section 2.09
hereof.

         "REMIC II Pass-Through Rate": As to each of the respective REMIC II
Interests, the applicable "REMIC II Pass-Through Rate" set forth in Section 2.09
hereof.

         "REMIC III Pass-Through Rate": As to each of the respective REMIC III
Interests, the applicable "REMIC III Pass-Through Rate" set forth in Section
2.09 hereof.

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

         "REMIC Regular Interests": The REMIC I Regular Interests, the REMIC II
Regular Interests, the REMIC III Regular Interests and the Master REMIC Regular
Interests.

         "REMIC I Regular Interests": As defined in Section 2.09 hereof.

         "REMIC II Regular Interests": As defined in Section 2.09 hereof.

         "REMIC III Regular Interests": As defined in Section 2.09 hereof.

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

         "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.

                                       28
<PAGE>

         "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 R Certificates representing
beneficial ownership of the Class R-I, Class R-II, Class R-III and Class R-IV
Interests.

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

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

         "Retained Certificates": The Class I Certificates, Class O
Certificates, the Class P Certificates, the Class R Certificates and the Class
AIO Certificates.

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

                                       29
<PAGE>

(or 1 and 2 in the case of the first two Distribution Dates, as applicable) most
recently ended Due Periods.

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

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

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

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

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

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

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

         "Servicing Fee": With respect to the Mortgage Loans and any
Distribution Date, the product of (i) the Servicing Fee Rate divided by 12 and
(ii) the Pool Balance as of the first day of the related Due Period.

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

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

         "Servicing Transfer Costs": Reasonable and necessary costs and expenses
incurred, by or on behalf of the Trustee, Certificate Administrator or successor
Servicer in connection with the transfer of servicing in the event of
termination of the Servicer as servicer hereunder and the resulting transfer to
the successor Servicer.

                                       30
<PAGE>

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

         "Startup Day": As defined in Section 10.01(a) hereof.

         "Statistical Calculation Date": February 1, 2002.

         "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 Company 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 Company
substantially in the form attached hereto as Exhibit D, by which Subsequent
Mortgage Loans are transferred to the Trust Fund.

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

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

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

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

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

         "Supplemental Interest Account": An account established by the
Certificate Administrator pursuant to Section 4.04 and is otherwise acceptable
to the applicable Servicer.

         "Supplemental Interest Trust": The trust established and maintained
pursuant to Section 4.04.

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

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

                                       31
<PAGE>

         (i) for the Class A-1 Certificates, the lesser of (x) the Supplemental
Interest Amount Due for the Class A-1 Certificates and (y) the amounts on
deposit and available for distribution in the Supplemental Interest Trust on
that Distribution Date;

         (ii) for the Class A-2 Certificates, the lesser of (x) the Supplemental
Interest Amount Due for the Class A-2 Certificates and (y) the amounts on
deposit and available for distribution in the Supplemental Interest Trust on
that Distribution Date;

         (iii) for the Class M-1 Certificates, the lesser of (x) the
Supplemental Interest Amount Due for the Class M-1 Certificates and (y) any
remaining amounts on deposit and available for distribution in the Supplemental
Interest Trust after giving effect to the payment of the Supplemental Interest
Payment Amount for the Class A-1 and Class A-2 Certificates on that Distribution
Date;

         (iv) for the Class M-2 Certificates, the lesser of (x) the Supplemental
Interest Amount Due for the Class M-2 Certificates and (y) any remaining amounts
on deposit and available for distribution in the Supplemental Interest Trust
after giving effect to the payment of the Supplemental Interest Amount Due for
the Class A-1, Class A-2, and the Class M-1 Certificates on that Distribution
Date; and

         (v) for the Class M-3 Certificates, the lesser of (x) the Supplemental
Interest Payment Amount Due for the Class M-3 Certificates and (y) any remaining
amounts on deposit and available for distribution in the Supplemental Interest
Trust after giving effect to the payment of the Supplemental Interest Amounts
Due for the Class A-1, Class A-2, Class M-1 and Class M-2 Certificates on that
Distribution Date.

         (vi) for the Class B Certificates, the lesser of (x) the Supplemental
Interest Payment Amount Due for the Class B Certificates and (y) any remaining
amounts on deposit and available for distribution in the Supplemental Interest
Trust after giving effect to the payment of the Supplemental Interest Amount Due
for the Class A-1, Class A-2, Class M-1, Class M-2 and Class M-3 Certificates on
that Distribution Date.

         "Swap Agreement": Any of the four interest rate Swap Agreements between
the Trustee, on behalf of the Trust and a Swap Counterparty which are deemed to
be assets of the Supplemental Interest Trust and not an asset of any one of the
REMICs created hereunder.

         "Swap Amount": Shall mean, on each Distribution Date prior to the Class
I Termination Date, the product of (x) the related fixed rate of interest minus
LIBOR (so long as such calculation results in a positive number) and (y) the
related notional amount, which after the occurrence of a Notional Amount Test
Event, shall be calculated pursuant to Section 4.03(f).

         "Swap Counterparty": Shall mean each of Credit Suisse First Boston
International and Morgan Stanley Capital Services Inc., as applicable.

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

                                       32
<PAGE>

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

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

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

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

         "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 17.00% of the current Pool Balance.

         "Trust": NovaStar Mortgage Funding Trust 2002-1, the trust created
hereunder.

         "Trust Fund": All of the assets of the Trust, which is the trust
created hereunder consisting of the REMIC I, REMIC II, REMIC III, the Master
REMIC, the Interest Coverage Account, the Pre-Funding Account and the
Supplemental Interest Trust.

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

         "Underwriters": First Union Securities, Inc., Morgan Stanley & Co.
Incorporated, Greenwich Capital Markets, Inc. and their successors and assigns.

         "Underwriting Agreement": The Underwriting Agreement dated March 13,
2002 among the Underwriters, the Company and the Seller with respect to the
offer and sale of the Underwritten Certificates, as the same may be amended from
time to time.

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

                                       33
<PAGE>

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

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

         "Unpaid Interest Shortfall Amount": With respect to each Class of
Underwritten Certificates and the Class B Certificates and (i) the first
Distribution Date, zero, and (ii) any Distribution Date after the first
Distribution Date, the sum of (a) the Unpaid Interest Shortfall Amount for that
Class as of the prior Distribution Date, (b) the excess of the amount of the
REMIC Current Interest due with respect to that Class on the prior Distribution
Date over the amount actually distributed to the Holders of that Class on
account of the REMIC Current Interest on the prior Distribution Date and (c)
interest on the sum of (a) and (b) to the extent permitted by law, at the
Formula Rate for such Class for the related Accrual Period.

         "Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. At all times the Class A
Certificates, the Mezzanine Certificates and Class B Certificates shall have 95%
of the Voting Rights (allocated among the Holders of the Class A Certificates
and the Mezzanine Certificates in proportion to the then outstanding Certificate
Principal Balances of their respective Certificates), the Class AIO Certificates
shall have 1% of the Voting Rights, the Class O Certificates shall have 1% of
the Voting Rights, the Class I Certificates shall have 1% of the Voting Rights,
the Class P Certificates shall have 1% of the Voting Rights and the Class R
Certificates shall have 1% of the Voting Rights. The Voting Rights allocated to
any Class of Certificates (other than the Class AIO Certificates, Class O
Certificates, Class P Certificates, Class I Certificates and the Class R
Certificates) shall be allocated among all Holders of each such Class in
proportion to the outstanding Certificate Principal Balance of such Certificates
and the Voting Rights allocated to the Class AIO Certificates, Class O
Certificates, Class I Certificates, Class P Certificates and the Class R
Certificates shall be allocated among all Holders of each such Class in
proportion to such Holders' respective Percentage Interest; provided, however
that when none of the Regular Certificates are outstanding, 100% of the Voting
Rights shall be allocated among Holders of the Class R Certificates in
accordance with such Holders' respective Percentage Interests in the
Certificates of such Class.

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

                                       34

<PAGE>

                                                                     Exhibit A-1

                          Form of Class A-1 Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-1 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

         (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans and
other assets held in the Trust Fund.)

No.:  A-1-1                     Date:  March 28, 2002   CUSIP:
                                                              -----------------

Original Principal Balance:     Registered Owner:       Final Scheduled
$316,900,000                    CEDE & CO.              Distribution Date:
                                                        April 25, 2032

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Group I Mortgage Loan identified on the Mortgage
Loan Schedule attached as Exhibit B to that certain Pooling and Servicing
Agreement dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by
and among NovaStar Mortgage Funding Corporation, as the company (the "Company"),
JPMorgan Chase Bank, as trustee (the "Trustee"), First Union National Bank as
the certificate administrator (the "Certificate Administrator"), and NovaStar
Mortgage, Inc. as servicer (the "Servicer") and as seller (the "Seller"),
including the related Cut-off Date Principal Balance, all interest accruing
thereon on and after the Cut-off Date and all collections in respect of interest
and principal due after the Cut-off Date; (ii) property which

<PAGE>

secured each such Mortgage Loan and which has been acquired by foreclosure or
deed in lieu of foreclosure; (iii) the Company's interest in any insurance
policies in respect of such Mortgage Loans; (iv) all proceeds of any of the
foregoing; (v) the rights of the Company under the Purchase Agreement and (vi)
all other assets included or to be included in the Trust Fund. Such assignment
includes all interest and principal due to the Company or the Servicer after the
Cut-off Date with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class A-1 Certificates on March 1,
2002 which aggregate amount was $316,900,000. 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, 2002 (the first Distribution Date) will be less than the
Original Principal Amount set forth above.

         In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

         SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT
CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G
AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

         THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

         NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-1, 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 the Class AIO Certificates, Class A-2 Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                                     A-1-2
<PAGE>

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing April 25, 2002, the owners of the Class A-1 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to the distribution
described in Article IV of the Pooling and Servicing Agreement, relating to such
Distribution Date. Distributions will be made in immediately available fluids to
such owners, by wire transfer or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register.

         Each owner of record of a Class A-1 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class A-1 Certificates. The Percentage
Interest of each Class A-1 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class A-1 Certificate by $316,900,000.

         The Certificate Administrator is required to duly and punctually pay
distributions with respect to this Certificate in accordance with the terms
hereof and the Pooling and Servicing Agreement. Amounts properly withheld under
the Code or applicable to any owner shall be considered as having been paid by
the Certificate Administrator to such owner for all purposes of the Pooling and
Servicing Agreement.

         The Mortgage Loans will be serviced by the Servicer pursuant to the
Pooling and Servicing Agreement. The Pooling and Servicing Agreement permits the
Servicer to enter into Sub-Servicing Agreements with certain institutions
eligible for appointment as Sub-Servicers for the servicing and administration
of certain Mortgage Loans. No appointment of any Sub-Servicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

         This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

         No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

         Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Certificate or to institute suit
for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such owner.

                                     A-1-3
<PAGE>

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and the REMIC I, REMIC II and REMIC III pursuant to the Pooling and
Servicing Agreement. In addition, under certain circumstances relating to the
qualification of either the Master REMIC or any of REMIC I, REMIC II or REMIC
III as a REMIC under the Code, the Mortgage Loans may be sold, thereby affecting
the early retirement of the Certificates. Notwithstanding the foregoing, in no
event shall the Trust hereby continue beyond the expiration of 21 years from the
death of the last survivor of the descendants of Joseph P. Kennedy, the late
ambassador of the United States to the Court of St. James, living on the date of
the Pooling and Servicing Agreement.

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

         The Certificate Administrator shall give written notice of termination
of the Pooling and Servicing Agreement to each owner in the manner set forth
therein.

         As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

         The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

         The Class A-1 Certificates are issuable only as registered Certificates
in denominations of $25,000 Original Principal Amount and integral multiples of
$1,000. As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class A-1 Certificates are exchangeable
for new Class A-1 Certificates of authorized denominations evidencing the same
aggregate principal amount.

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and

                                     A-1-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-1-5
<PAGE>

         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                   JPMORGAN CHASE BANK, not in its individual
                                       capacity, but solely in its capacity as
                                       Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

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

                                     A-1-6
<PAGE>

                                                                     Exhibit A-2

                          Form of Class A-2 Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS A-2 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                Mortgage Loans The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

         (This certificate does not represent an interest in, or an obligation
of, nor are the underlying Mortgage Loans insured or guaranteed by, NovaStar
Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar Financial, Inc.,
NovaStar Capital, Inc. or any of their subsidiaries and affiliates. This
certificate is comprised of a Certificate representing a fractional ownership
interest in distributions in certain Accounts created pursuant to the Pooling
and Servicing Agreement and certain other rights relating thereto and is payable
only from amounts received by the Trustee relating to the Mortgage Loans and
other assets held in the Trust Fund.)

No.:  A-2-1                     Date:  March 28, 2002     CUSIP:

Original Principal Balance:     Registered Owner:         Final Scheduled
$140,600,000                    CEDE & CO.                Distribution Date:
                                                          March 25, 2032

Percentage Interest:  100%

         The registered owner named above is the registered owner of a
fractional interest in (i) each Group II Mortgage Loan identified on the
Mortgage Loan Schedule attached as Exhibit B to that certain Pooling and
Servicing Agreement dated as of March 1, 2002 (the "Pooling and Servicing
Agreement") by and among NovaStar Mortgage Funding Corporation, as the company
(the "Company"), JPMorgan Chase Bank, as trustee (the "Trustee"), First Union
National Bank as the certificate administrator (the "Certificate
Administrator"), and NovaStar Mortgage, Inc. as servicer (the "Servicer") and as
seller (the "Seller"), including the related Cut-off Date Principal Balance, all
interest accruing thereon on and after the Cut-off Date and all collections in
respect of interest and principal due after the Cut-off Date; (ii) property
which secured each such Mortgage Loan and which has been acquired by foreclosure
or deed in lieu of

<PAGE>

foreclosure; (iii) the Company's interest in any insurance policies in respect
of such Mortgage Loans; (iv) all proceeds of any of the foregoing; (v) the
rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust Fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

         The Original Principal Amount set forth above is equal to the product
of (i) the Percentage Interest represented by this Certificate and (ii) the
aggregate Original Principal Amount of the Class A-2 Certificates on March 1,
2002 which aggregate amount was $140,600,000. The owner hereof is entitled to
principal payments on each Distribution Date, which will fully amortize such
Original Principal Amount over the period from the date of initial delivery
hereof to the final Distribution Date of the Class A-2 Certificates. Therefore,
the actual outstanding principal amount of this Certificate, on any date
subsequent to April 25, 2002 (the first Distribution Date) will be less than the
Original Principal Amount set forth above.

         In order to receive the final distribution hereon, the owner hereof is
required to present this Certificate to the Trustee. The Pooling and Servicing
Agreement provides that, in any event, upon the making of the final distribution
due on this Certificate, this Certificate shall be deemed cancelled for all
purposes under the Pooling and Servicing Agreement.

         SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE REPRESENTS AN
INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE MORTGAGE INVESTMENT
CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G
AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

         THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

         NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

         This Certificate is one of a Class of duly-authorized Certificates
designated as NovaStar Home Equity Loan Asset-Backed Certificates, Series
2002-1, Class A-2 Certificates (the "Class A-2 Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are the Class AIO Certificates, Class A-1 Certificates, Class M-1
Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                                     A-2-2
<PAGE>

         Terms capitalized herein and not otherwise defined herein shall have
the respective meanings set forth in the Pooling and Servicing Agreement.

         On the 25th day of each month, or, if such day is not a Business Day,
then the next succeeding Business Day (each such day being a "Distribution
Date") commencing April 25, 2002, the owners of the Class A-2 Certificates as of
the close of business on the business day immediately preceding such
Distribution Date (the "Record Date") will be entitled to the distribution
described in Article IV of the Pooling and Servicing Agreement, relating to such
Distribution Date. Distributions will be made in immediately available funds to
such owners, by wire transfer or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register.

         Each owner of record of a Class A-2 Certificate will be entitled to
receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class A-2 Certificates. The Percentage
Interest of each Class A-2 Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class A-2 Certificate by $140,600,000.

         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 SubServicer shall release the
Servicer from any of its obligations under the Pooling and Servicing Agreement.

         This Certificate does not represent a deposit or other obligation of,
or an interest in, nor are the underlying Mortgage Loans insured or guaranteed
by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Capital, Inc., NovaStar Financial Inc., or any of their subsidiaries and
affiliates and are not insured or guaranteed by the Federal Deposit Insurance
Corporation, the Government National Mortgage Association, or any other
governmental agency. This Certificate is limited in right of payment to certain
collections and recoveries relating to the Mortgage Loans and amounts on deposit
in the Accounts (except as otherwise provided in the Pooling and Servicing
Agreement) all as more specifically set forth hereinabove and in the Pooling and
Servicing Agreement.

         No owner shall have any right to institute any proceeding, judicial or
otherwise, with respect to the Pooling and Servicing Agreement for the
appointment of a receiver or trustee, or for any other remedy under the Pooling
and Servicing Agreement except in compliance with the terms thereof.

         Notwithstanding any other provisions in the Pooling and Servicing
Agreement, the owner of any Certificate shall have the right which is absolute
and unconditional to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such

                                     A-2-3
<PAGE>

Certificate or to institute suit for the enforcement of any such distribution,
and such right shall not be impaired without the consent of such owner.

         The Pooling and Servicing Agreement will terminate upon notice to the
Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II or REMIC III as a REMIC under the Code, the Mortgage Loans may be sold,
thereby affecting the early retirement of the Certificates. Notwithstanding the
foregoing, in no event shall the Trust hereby continue beyond the expiration of
21 years from the death of the last survivor of the descendants of Joseph P.
Kennedy, the late ambassador of the United States to the Court of St. James,
living on the date of the Pooling and Servicing Agreement.

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

         The Certificate Administrator shall give written notice of termination
of the Pooling and Servicing Agreement to each owner in the manner set forth
therein.

         As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

         The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

         The Class A-2 Certificates are issuable only as registered Certificates
in denominations of $25,000 Original Principal Amount and integral multiples of
$1,000. As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, Class A-2 Certificates are exchangeable
for new Class A-2 Certificates of authorized denominations evidencing the same
aggregate principal amount.

                                     A-2-4
<PAGE>

         Each of the Trustee, the Certificate Administrator and any agent
thereof may treat the person in whose name this Certificate is registered as the
owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-2-5
<PAGE>

         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed on behalf of the Trust.

                                     JPMORGAN CHASE BANK, not in its individual
                                         capacity, but solely in its capacity as
                                         Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

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

                                     A-2-6
<PAGE>

                                                                     Exhibit A-3

                          Form of Class M-1 Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-1 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

No.:  M-1-1                    Date:  March 28, 2002      CUSIP:
                                                                ---------------

Original Principal Balance:    Registered Owner:          Final Scheduled
$12,500,000                    CEDE & CO.                 Distribution Date:
                                                          March 25, 2032

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company, (the "Company"), JPMorgan
Chase Bank, as trustee (the "Trustee"), First Union National Bank as the
certificate administrator (the "Certificate Administrator"), and NovaStar
Mortgage, Inc. as servicer (the "Servicer") and as seller (the "Seller"),
including the related Cut-off Date Principal Balance, all interest accruing
thereon on and after the Cut-off Date and all collections in respect of interest
and principal due after the Cut-off Date; (ii) property which secured each such
Mortgage Loan and which has been acquired by foreclosure or deed in lieu of
foreclosure; (iii) the Company's interest in any insurance policies in respect
of the Mortgage Loans; (iv) all proceeds of any of the foregoing; (v) the rights
of the Company under the Purchase Agreement and (vi) all other assets included
or to be included in the Trust fund. Such assignment includes all

<PAGE>

interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-1 Certificates on March
1, 2002 which aggregate amount was $12,500,000. 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, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                                     A-3-2
<PAGE>

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class M-1
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-1 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-1 Certificates. The
Percentage Interest of each Class M-1 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-1 Certificate by $12,500,000.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                                     A-3-3
<PAGE>

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II and REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  The Class M-1 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-1 Certificates are
exchangeable for new Class M-1 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and

                                     A-3-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-3-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                     JPMORGAN CHASE BANK, not in its individual
                                         capacity, but solely in its capacity as
                                         Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

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

                                     A-3-6
<PAGE>

                                                                     Exhibit A-4

                          Form of Class M-2 Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-2 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

No.:  M-2-1                     Date:  March 28, 2002      CUSIP:
                                                                 --------------

Original Principal Balance:     Registered Owner:          Final Scheduled
$10,000,000                     CEDE & CO.                 Distribution Date:
                                                           March 25, 2032

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (I) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v)

<PAGE>

the rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-2 Certificates on March
1, 2002 which aggregate amount was $10,000,000. 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, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                                     A-4-2
<PAGE>

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class M-2
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-2 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-2 Certificates. The
Percentage Interest of each Class M-2 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-2 Certificate by $10,000,000.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                                     A-4-3
<PAGE>

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  The Class M-2 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-2 Certificates are
exchangeable for new Class M-2 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and

                                     A-4-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-4-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                     JPMORGAN CHASE BANK, not in its individual
                                       capacity, but solely in its capacity as
                                       Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
  but solely in its capacity as Trustee

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

                                     A-4-6
<PAGE>

                                                                     Exhibit A-5

                          Form of Class M-3 Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS M-3 CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

No.:  M-3-1                      Date:  March 28, 2002      CUSIP:
                                                                  -------------

Original Principal Balance:      Registered Owner:          Final Scheduled
$7,500,000                       CEDE & CO.                 Distribution Date:
                                                            March 25, 2032

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v)

<PAGE>

the rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class M-3 Certificates on March
1, 2002 which aggregate amount was $7,500,000. 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, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-2 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                                     A-5-2
<PAGE>

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class M-3
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class M-3 Certificate will be
entitled to receive such owner's Percentage Interest in the amounts distributed
on such Distribution Date to the owners of the Class M-3 Certificates. The
Percentage Interest of each Class M-3 Certificate as of any date of
determination will be equal to the percentage obtained by dividing the Original
Principal Amount set forth on such Class M-3 Certificate by $7,500,000.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                                     A-5-3
<PAGE>

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  The Class M-3 Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class M-3 Certificates are
exchangeable for new Class M-3 Certificates of authorized denominations
evidencing the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and

                                     A-5-4
<PAGE>

none of the Trustee, the Certificate Administrator or any such agent shall be
affected by notice to the contrary.

                                     A-5-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                      JPMORGAN CHASE BANK, not in its individual
                                        capacity, but solely in its capacity as
                                        Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
    but solely in its capacity as Trustee

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

                                     A-5-6
<PAGE>

                                                                     Exhibit A-6

                           Form of Class B Certificate
                           ---------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS B CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                  THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW
OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE
WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION
WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH
THE PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

<PAGE>

No.:  B-1                         Date:  March 28, 2002    CUSIP:
                                                                 ---------------

Original Principal Balance:       Registered Owner:        Final Scheduled
$3,750,000                                                 Distribution Date:
                                  ----------------         March 25, 2032

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  The Original Principal Amount set forth above is equal to the
product of (i) the Percentage Interest represented by this Certificate and (ii)
the aggregate Original Principal Amount of the Class B Certificates on March 1,
2002 which aggregate amount was $3,750,000. The owner hereof is entitled to
principal payments on each Distribution Date, as hereinafter described, which
will fully amortize such Original Principal Amount over the period from the date
of initial delivery hereof to the final Distribution Date of the Class B
Certificates. Therefore, the actual outstanding principal amount of this
Certificate, on any date subsequent to April 25, 2002 (the first Distribution
Date) will be less than the Original Principal Amount set forth above.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                                     A-6-2
<PAGE>

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, Class B Certificates (the "Class B Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-2 Certificates, Class
M-3 Certificates, Class I Certificates, Class P Certificates, Class O
Certificates, and Class R Certificates, and all such Certificates are
collectively referred to as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class B
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class B Certificate will be entitled
to receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class B Certificates. The Percentage
Interest of each Class B Certificate as of any date of determination will be
equal to the percentage obtained by dividing the Original Principal Amount set
forth on such Class B Certificate by $3,750,000.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or

                                     A-6-3
<PAGE>

any of their subsidiaries and affiliates and are not insured or guaranteed by
the Federal Deposit Insurance Corporation, the Government National Mortgage
Association, or any other governmental agency. This Certificate is limited in
right of payment to certain collections and recoveries relating to the Mortgage
Loans and amounts on deposit in the Accounts (except as otherwise provided in
the Pooling and Servicing Agreement) all as more specifically set forth
hereinabove and in the Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is

                                     A-6-4
<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.

                  The Class B Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class B Certificates are
exchangeable for new Class B Certificates of authorized denominations evidencing
the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-6-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                     JPMORGAN CHASE BANK, not in its individual
                                       capacity, but solely in its capacity as
                                       Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
  but solely in its capacity as Trustee

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

                                     A-6-6
<PAGE>

                                                                     Exhibit A-7

                           Form of Class I Certificate
                           ---------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS I CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                  THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW
OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE
WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION
WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH
THE PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

<PAGE>

No.:  I-1                       Date:  March 28, 2002       CUSIP:
                                                                   -------------
                                Registered Owner:           Final Scheduled
                                                            Distribution Date:
                                ----------------            December 25, 2004

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to that certain Pooling and Servicing Agreement
dated as of March 1, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  Each owner of record of a Class I 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 GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                                     A-7-2
<PAGE>

                  THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, Class I Certificates (the "Class I Certificates") and issued
under and subject to the terms, provisions and conditions of the Pooling and
Servicing Agreement, to which the owner of this Certificate, by virtue of
acceptance hereof assents, and is bound. Also issued under the Pooling and
Servicing Agreement are the Class AIO Certificates, Class A-1 Certificates,
Class A-2 Certificates, Class M-1 Certificates, Class M-2 Certificates, Class
M-3 Certificates, Class B Certificates, Class P Certificates, Class O
Certificates, and Class R Certificates, and all such Certificates are
collectively referred to as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class I
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by wire transfer or by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register.

                  Each owner of record of a Class I Certificate will be entitled
to receive such owner's Percentage Interest in the amounts distributed on such
Distribution Date to the owners of the Class I Certificates. The Percentage
Interest of each Class I 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 I Certificate by
$___________.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit

                                     A-7-3
<PAGE>

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 September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of

                                     A-7-4
<PAGE>

transfer at the office designated as the location of the Certificate Register,
and thereupon one or more new certificates of like class, tenor and Percentage
Interest will be issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  The Class I Certificates are issuable only as registered
Certificates in denominations of $25,000 Original Principal Amount and integral
multiples of $1,000. As provided in the Pooling and Servicing Agreement and
subject to certain limitations therein set forth, Class I Certificates are
exchangeable for new Class I Certificates of authorized denominations evidencing
the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-7-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                      JPMORGAN CHASE BANK, not in its individual
                                        capacity, but solely in its capacity as
                                        Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
  but solely in its capacity as Trustee

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

                                     A-7-6
<PAGE>

                                                                     Exhibit A-8

                          Form of Class AIO Certificate
                          -----------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                             CLASS AIO CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.:  AIO-1                     Date:  April  25, 2002       CUSIP:
                                                                   -------------

Notional Amount:                Registered Owner:            Final Scheduled
$500,000,000                    Cede & Co.                   Distribution Date:
                                                             March 25, 2032

Percentage Interest:  100%

                  The registered owner named above is the registered owner of a
fractional interest in (i) each Mortgage Loan identified on the Mortgage Loan
Schedule attached as Exhibit B to

<PAGE>

that certain Pooling and Servicing Agreement dated as of March 1, 2002 (the
"Pooling and Servicing Agreement") by and among NovaStar Mortgage Funding
Corporation as the company (the "Company"), the Trustee, First Union National
Bank as the certificate administrator (the "Certificate Administrator"), and
NovaStar Mortgage, Inc. as servicer (the "Servicer") and as seller (the
"Seller"), including the related Cut-off Date Principal Balance, all interest
accruing thereon on and after the Cut-off Date and all collections in respect of
interest and principal due after the Cut-off Date; (ii) property which secured
each such Mortgage Loan and which has been acquired by foreclosure or deed in
lieu of foreclosure; (iii) the Company's interest in any insurance policies in
respect of the Mortgage Loans; (iv) all proceeds of any of the foregoing; (v)
the rights of the Company under the Purchase Agreement and (vi) all other assets
included or to be included in the Trust Fund. Such assignment includes all
interest and principal due to the Company or the Servicer after the Cut-off Date
with respect to the Mortgage Loans.

                  Each owner of record of a Class AIO Certificate will be
entitled to interest payments only on each Distribution Date, which shall be
calculated based on a notional principal balance equal to the aggregate
outstanding principal balance of the Mortgage Loans. The owner hereof will not
receive any distributions of principal.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN ONE OR MORE CLASSES OF "REGULAR INTERESTS" IN A "REAL
ESTATE MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED,
RESPECTIVELY, IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE "CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS
860A THROUGH 860G) OF THE CODE.

                  DISTRIBUTIONS ON THIS CERTIFICATE WILL BE MADE TO THE OWNER
HEREOF FOLLOWING THE PRIOR FUNDING OF AMOUNTS OWED TO CERTAIN SWAP
COUNTERPARTIES, AND FOLLOWING THE FUNDING OF SUPPLEMENTAL INTEREST PAYMENTS TO
CERTAIN OTHER CLASSES OF CERTIFICATES.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                                     A-8-2
<PAGE>

                  THIS CERTIFICATE IS AN INTEREST ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF PRINCIPAL WITH
RESPECT TO THE MORTGAGE LOANS.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class A-1 Certificates, Class A-2 Certificates,
Class M-1 Certificates, Class M-2 Certificates, Class M-3 Certificates, Class B
Certificates, Class I Certificates, Class P Certificates, Class O Certificates,
and Class R Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class AIO
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
Class AIO Distribution Amount relating to such Distribution Date. Distributions
will be made in immediately available funds to such owners, by wire transfer or
by check mailed to the address of the person entitled thereto as it appears on
the Certificate Register.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                                     A-8-3
<PAGE>

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                                     A-8-4
<PAGE>

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth, Class AIO Certificates are
exchangeable for new Class AIO Certificates of authorized denominations
evidencing the same aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-8-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                   JPMORGAN CHASE BANK,
                                     not in its individual capacity, but solely
                                     in its capacity as Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK,
  not in its individual capacity, but solely in
  its capacity as Trustee

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

                                     A-8-6
<PAGE>

                                                                     Exhibit A-9

                           Form of Class P Certificate
                           ---------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS P CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

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

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans held in the Trust Fund.)

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.:  P-1                         Date:  April 25, 2002     CUSIP:

Original Principal Balance:       Registered Owner:        Final Scheduled
$100                              CEDE & CO.               Distribution Date:
                                                           March 25, 2032

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, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTION 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  THE HOLDER OF THIS CERTIFICATE IS ENTITLED TO PREPAYMENT
CHARGES COLLECTED WITH RESPECT TO THE MORTGAGE LOANS AND A SINGLE PRINCIPAL
PAYMENT OF $100 ON THE 35TH DISTRIBUTION DATE. THE HOLDERS OF THIS CERTIFICATE
IS NOT ENTITLED TO ANY DISTRIBUTIONS OF INTEREST WITH RESPECT TO THE MORTGAGE
LOANS.

                                     A-9-2
<PAGE>

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class A-1 Certificates, Class A-2 Certificates,
Class AIO Certificates, Class M-1 Certificates, Class M-2 Certificates, Class
M-3 Certificates, Class B Certificates, Class I Certificates, Class O
Certificates, and Class R Certificates, and all such Certificates are
collectively referred to as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class P
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the Prepayment Charges relating to such Distribution Date. Furthermore, on the
35th Distribution Date, the owner of the Class P Certificates on the Record Date
will be entitled to the Certificate Principal Balance on the Class P
Certificates. Distributions will be made in immediately available funds to such
owners, by wire transfer or by check mailed to the address of the person
entitled thereto as it appears on the Certificate Register.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any Sub-Servicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  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,

                                     A-9-3
<PAGE>

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 September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                                     A-9-4
<PAGE>

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth, Class P Certificates are exchangeable
for new Class P Certificates of authorized denominations evidencing the same
aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-9-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                 JPMORGAN CHASE BANK,
                                   not in its individual capacity, but solely in
                                   its capacity as Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK,
  not in its individual capacity, but solely in
  its capacity as Trustee

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

                                     A-9-6
<PAGE>

                                                                    Exhibit A-10

                           Form of Class O Certificate
                           ---------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS O CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans and other assets held in the Trust Fund.)

                  THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW
OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE
WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION
WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH
THE PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.:  O-1                       Date:  March 28, 2002      Final Scheduled
                                                           Distribution Date:
                                                           March 25, 2032
Original Principal Balance:
$8,750,000

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, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  Each owner of record of a Class O Certificate will be entitled
to certain distributions, as described under Article IV of the Pooling and
Servicing Agreement.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS AN INTEREST IN A CLASS OF "REGULAR INTERESTS" IN A "REAL ESTATE
MORTGAGE INVESTMENT CONDUIT" ("REMIC") AS THOSE TERMS ARE DEFINED, RESPECTIVELY,
IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), ASSUMING COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH
860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  NEITHER THIS CERTIFICATE NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  THIS CERTIFICATE IS A PRINCIPAL ONLY CERTIFICATE. THE HOLDER
OF THIS CERTIFICATE SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OF INTEREST WITH
RESPECT TO THE MORTGAGE LOANS.

                                     A-10-2
<PAGE>

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1, 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 the Class A-1 Certificates, Class A-2 Certificates,
Class AIO Certificates, Class M-1 Certificates, Class M-2 Certificates, Class
M-3 Certificates, Class B Certificates, Class I Certificates, Class P
Certificates, and Class R Certificates, and all such Certificates are
collectively referred to as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class O
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the Class O Distribution Amount relating to such Distribution Date.
Distributions will be made in immediately available funds to such owners, by
wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                                     A-10-3
<PAGE>

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the last survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the United States to
the Court of St. James, living on the date of the Pooling and Servicing
Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  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.

                                     A-10-4
<PAGE>

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-10-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                      JPMORGAN CHASE BANK, not in its individual
                                        capacity, but solely in its capacity as
                                        Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
  but solely in its capacity as Trustee

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

                                     A-10-6

<PAGE>

                                                                    Exhibit A-11

                           Form of Class R Certificate
                           ---------------------------

                 NOVASTAR MORTGAGE FUNDING TRUST, SERIES 2002-1
                    HOME EQUITY LOAN ASSET-BACKED CERTIFICATE
                              CLASS R CERTIFICATES

                     Comprised of a Certificate Representing
                     Certain Interests Relating to a Pool of
                                 Mortgage Loans
                       The Mortgage Loans are Serviced by

                      NOVASTAR MORTGAGE, INC., as Servicer

                  (This certificate does not represent an interest in, or an
obligation of, nor are the underlying Mortgage Loans insured or guaranteed by,
NovaStar Mortgage, Inc., NovaStar Mortgage Funding Corporation, NovaStar
Financial, Inc., NovaStar Capital, Inc. or any of their subsidiaries and
affiliates. This certificate is comprised of a Certificate representing a
fractional ownership interest in distributions in certain Accounts created
pursuant to the Pooling and Servicing Agreement and certain other rights
relating thereto and is payable only from amounts received by the Trustee
relating to the Mortgage Loans held in the Trust Fund.)

                  THIS CERTIFICATE HAS NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAW
OF ANY STATE. ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE
WITHOUT SUCH REGISTRATION OR QUALIFICATION MAY BE MADE ONLY IN A TRANSACTION
WHICH DOES NOT REQUIRE SUCH REGISTRATION OR QUALIFICATION AND IN ACCORDANCE WITH
THE PROVISIONS OF THE POOLING AND SERVICING AGREEMENT.

                  NO TRANSFER OF THIS CERTIFICATE OR ANY INTEREST THEREIN SHALL
BE MADE TO ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT, INCLUDING
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES AND KEOGH PLANS, THAT IS SUBJECT TO
TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986 (EACH, A "PLAN")
OR TO ANY ENTITY THE ASSETS OF WHICH CONSTITUTE ASSETS OF A PLAN.

No.:  R-[I/II/III/IV]         Date:  March 28, 2002         Final Scheduled
                                                            Distribution Date:
                                                            March 25, 2032

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, 2002 (the "Pooling and Servicing Agreement") by and among
NovaStar Mortgage Funding Corporation as the company (the "Company"), the
Trustee, First Union National Bank as the certificate administrator (the
"Certificate Administrator"), and NovaStar Mortgage, Inc. as servicer (the
"Servicer") and as seller (the "Seller"), including the related Cut-off Date
Principal Balance, all interest accruing thereon on and after the Cut-off Date
and all collections in respect of interest and principal due after the Cut-off
Date; (ii) property which secured each such Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of foreclosure; (iii) the Company's
interest in any insurance policies in respect of the Mortgage Loans; (iv) all
proceeds of any of the foregoing; (v) the rights of the Company under the
Purchase Agreement and (vi) all other assets included or to be included in the
Trust Fund. Such assignment includes all interest and principal due to the
Company or the Servicer after the Cut-off Date with respect to the Mortgage
Loans.

                  Each owner of record of a Class R Certificate will be entitled
to certain distributions as described in Section 2.09 of the Pooling and
Servicing Agreement.

                  In order to receive the final distribution hereon, the owner
hereof is required to present this Certificate to the Trustee. The Pooling and
Servicing Agreement provides that, in any event, upon the making of the final
distribution due on this Certificate, this Certificate shall be deemed cancelled
for all purposes under the Pooling and Servicing Agreement.

                  SOLELY FOR FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE
REPRESENTS "RESIDUAL INTERESTS" IN FOUR "REAL ESTATE MORTGAGE INVESTMENT
CONDUITS" ("REMICs") AS THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G
AND 860D OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), ASSUMING
COMPLIANCE WITH THE REMIC PROVISIONS (SECTIONS 860A THROUGH 860G) OF THE CODE.

                  THIS CERTIFICATE IS A PASS-THROUGH CERTIFICATE ONLY AND,
NOTWITHSTANDING REFERENCES HEREIN TO PRINCIPAL AND INTEREST, NO DEBT OF ANY
PERSON IS REPRESENTED HEREBY (OTHER THAN AS REQUIRED FOR FEDERAL INCOME TAX
PURPOSES).

                  TRANSFER OF THIS CLASS R CERTIFICATE IS RESTRICTED AS SET
FORTH IN THE POOLING AND SERVICING AGREEMENT. NO TRANSFER OF THIS CLASS R
CERTIFICATE MAY BE MADE TO A "DISQUALIFIED ORGANIZATION" AS DEFINED IN SECTION
860 E (5) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). SUCH
TERM INCLUDES THE UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, ANY AGENCY OR
INSTRUMENTALITY OF ANY OF THE FOREGOING (OTHER THAN CERTAIN TAXABLE
INSTRUMENTALITIES), ANY COOPERATIVE ORGANIZATION FURNISHING ELECTRIC ENERGY OR
PROVIDING THEREOF SERVICE TO PERSONS IN RURAL AREAS, OR ANY ORGANIZATION (OTHER
THAN A FARMERS' COOPERATIVE) THAT IS EXEMPT FROM FEDERAL INCOME TAX UNLESS SUCH
ORGANIZATION IS SUBJECT TO THE TAX ON UNRELATED BUSINESS INCOME. NO TRANSFER OF
THIS CLASS R

                                     A-11-2
<PAGE>

CERTIFICATE WILL BE REGISTERED BY THE TRUSTEE UNLESS THE PROPOSED TRANSFEREE HAS
DELIVERED AN AFFIDAVIT AFFIRMING, AMONG OTHER THINGS, THAT THE PROPOSED
TRANSFEREE IS NOT A DISQUALIFIED ORGANIZATION AND IS NOT ACQUIRING THE CLASS R
CERTIFICATE FOR THE ACCOUNT OF A DISQUALIFIED ORGANIZATION. A COPY OF THE FORM
OF AFFIDAVIT REQUIRED OF EACH PROPOSED TRANSFEREE IS ON FILE AND AVAILABLE FROM
THE TRUSTEE.

                  A TRANSFER IN VIOLATION OF THE APPLICABLE RESTRICTIONS MAY
GIVE RISE TO A SUBSTANTIAL TAX UPON THE TRANSFEROR OR, IN CERTAIN CASES, UPON AN
AGENT ACTING FOR THE TRANSFEREE. A PASS-THRU ENTITY THAT HOLDS THIS CLASS 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 GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION OR ANY OTHER GOVERNMENTAL AGENCY.

                  This Certificate is one of a Class of duly-authorized
Certificates designated as NovaStar Home Equity Loan Asset-Backed Certificates,
Series 2002-1 Class R Certificates (the "Class R Certificates") and issued under
and subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which the owner of this Certificate, by virtue of acceptance
hereof assents, and is bound. Also issued under the Pooling and Servicing
Agreement are Class A-1 Certificates, Class A-2 Certificates, Class AIO
Certificates, Class M-1 Certificates, Class M-2 Certificates, Class M-3
Certificates, Class B Certificates, Class I Certificates, Class P Certificates
and Class O Certificates, and all such Certificates are collectively referred to
as the "Certificates."

                  Terms capitalized herein and not otherwise defined herein
shall have the respective meanings set forth in the Pooling and Servicing
Agreement.

                  On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day (each such day being a
"Distribution Date") commencing April 25, 2002, the owners of the Class R
Certificates as of the close of business on the business day immediately
preceding such Distribution Date (the "Record Date") will be entitled to receive
the distribution described in Article IV of the Pooling and Servicing Agreement
relating to such Distribution Date. Distributions will be made in immediately
available funds to such owners, by

                                     A-11-3
<PAGE>

wire transfer or by check mailed to the address of the person entitled thereto
as it appears on the Certificate Register.

                  The Certificate Administrator is required to duly and
punctually pay distributions with respect to this Certificate in accordance with
the terms hereof and the Pooling and Servicing Agreement. Amounts properly
withheld under the Code or applicable to any owner shall be considered as having
been paid by the Certificate Administrator to such owner for all purposes of the
Pooling and Servicing Agreement.

                  The Mortgage Loans will be serviced by the Servicer pursuant
to the Pooling and Servicing Agreement. The Pooling and Servicing Agreement
permits the Servicer to enter into Sub-Servicing Agreements with certain
institutions eligible for appointment as Sub-Servicers for the servicing and
administration of certain Mortgage Loans. No appointment of any SubServicer
shall release the Servicer from any of its obligations under the Pooling and
Servicing Agreement.

                  This Certificate does not represent a deposit or other
obligation of, or an interest in, nor are the underlying Mortgage Loans insured
or guaranteed by, NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, NovaStar Capital, Inc., NovaStar Financial Inc., or any of their
subsidiaries and affiliates and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Government National Mortgage Association, or
any other governmental agency. This Certificate is limited in right of payment
to certain collections and recoveries relating to the Mortgage Loans and amounts
on deposit in the Accounts (except as otherwise provided in the Pooling and
Servicing Agreement) all as more specifically set forth hereinabove and in the
Pooling and Servicing Agreement.

                  No owner shall have any right to institute any proceeding,
judicial or otherwise, with respect to the Pooling and Servicing Agreement for
the appointment of a receiver or trustee, or for any other remedy under the
Pooling and Servicing Agreement except in compliance with the terms thereof.

                  Notwithstanding any other provisions in the Pooling and
Servicing Agreement, the owner of any Certificate shall have the right which is
absolute and unconditional to receive distributions to the extent provided in
the Pooling and Servicing Agreement with respect to such Certificate or to
institute suit for the enforcement of any such distribution, and such right
shall not be impaired without the consent of such owner.

                  The Pooling and Servicing Agreement will terminate upon notice
to the Trustee or the Certificate Administrator upon the earliest of (i) the
Distribution Date on which the Certificate Principal Balances of the Regular
Certificates have been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Servicer of the Mortgage Loans as described below, (iv) the Distribution
Date in September 2032 and (v) at any time when a Qualified Liquidation of the
Master REMIC and REMIC I, REMIC II, REMIC III is effected pursuant to the
Pooling and Servicing Agreement. In addition, under certain circumstances
relating to the qualification of either the Master REMIC or any of REMIC I,
REMIC II and REMIC III as a REMIC under the Code, the Mortgage Loans may be
sold, thereby affecting the early retirement of the Certificates.
Notwithstanding the foregoing, in no event shall the Trust hereby continue
beyond the expiration of 21 years from the death of the

                                     A-11-4
<PAGE>

last survivor of the descendants of Joseph P. Kennedy, the late ambassador of
the United States to the Court of St. James, living on the date of the Pooling
and Servicing Agreement.

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

                  The Certificate Administrator shall give written notice of
termination of the Pooling and Servicing Agreement to each owner in the manner
set forth therein.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth and referred to on the face hereof, the
transfer of this Certificate is registerable in the Certificate Register upon
surrender of this Certificate for registration of transfer at the office
designated as the location of the Certificate Register, and thereupon one or
more new certificates of like class, tenor and Percentage Interest will be
issued to the designated transferee or transferees.

                  The Certificate Administrator is required to furnish certain
information on each Distribution Date to the owner of this Certificate, as more
fully described in the Pooling and Servicing Agreement.

                  As provided in the Pooling and Servicing Agreement and subject
to certain limitations therein set forth, Class R Certificates are exchangeable
for new Class R Certificates of authorized denominations evidencing the same
aggregate principal amount.

                  Each of the Trustee, the Certificate Administrator and any
agent thereof may treat the person in whose name this Certificate is registered
as the owner hereof for all purposes, and none of the Trustee, the Certificate
Administrator or any such agent shall be affected by notice to the contrary.

                                     A-11-5
<PAGE>

                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed on behalf of the Trust.

                                    JPMORGAN CHASE BANK, not in its individual
                                      capacity, but solely in its capacity as
                                      Trustee

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

Trustee Authentication

JPMORGAN CHASE BANK, not in its individual capacity,
  but solely in its capacity as Trustee

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

                                     A-11-6
<PAGE>

                                                                       Exhibit B

                             Mortgage Loan Schedule
                             ----------------------

                       [On file with Dewey Ballantine LLP]

<PAGE>

                                                                       Exhibit C

                             Form of Addition Notice
                             -----------------------

                              ______________, 2002

VIA FEDERAL EXPRESS
-------------------

First Union National Bank
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
         Series 2002-1

         Re:   Mortgage Loan Purchase Agreement, dated as of March 1, 2002 (the
               "Purchase Agreement"), among NovaStar Mortgage, Inc. (the
               "Seller"), NovaStar Mortgage Funding Corporation (the "Company"),
               First Union National Bank, as certificate administrator (the
               "Certificate Administrator") and JPMorgan Chase Bank, as trustee
               (the "Trustee"), relating to NovaStar Home Equity Loan
               Asset-Backed Certificates, Series 2002-1

Ladies and Gentlemen:

                  Pursuant to Section 2.02(b)(i) of the above-captioned Purchase
Agreement, the Seller has designated the Subsequent Mortgage Loans (see
subsequent mortgage loan schedule attached hereto) to be sold to the Company,
and then sold by the Company to the Trust, on _____________, 2002, with an
aggregate principal balance of $______________. Capitalized terms not otherwise
defined herein have the meaning set forth in the Purchase Agreement.

                  Please acknowledge your receipt of this notice by
countersigning the enclosed copy in the space indicated below and returning it
to the attention of the undersigned.

                                               Very truly yours,

                                               NOVASTAR MORTGAGE, INC.

                                               By:
                                                  -----------------------------
                                                      Kelly Meinders
                                                      Vice President

Acknowledged and agreed:

FIRST UNION NATIONAL BANK,
solely in its capacity as
Certificate Administrator

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

<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 National Bank
       as Certificate Administrator

       Re:   Pooling and Servicing Agreement, dated as of March 1, 2002
             NovaStar Home Equity Loan Asset-Backed Certificates, Series 2002-1
             ------------------------------------------------------------------

             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 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) ___________________________________________________
----------- -------------------------------------------------------------------

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

<PAGE>

                  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:_________________________

                                      E-2

<PAGE>

                                                                     Exhibit F-1

                     Form of Trustee's Initial Certification
                     ---------------------------------------

                                                   [Date]

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

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

First Union National Bank
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
         Series 2002-1

         Re:   Pooling and Servicing Agreement, dated as of March 1, 2002 (the
               "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage
               Funding Corporation, First Union National Bank, (the "Certificate
               Administrator") and JPMorgan Chase Bank (the "Trustee"), relating
               to the NovaStar Mortgage Funding Trust, Series 2002-1 Home Equity
               Loan Asset-Backed Certificates
               -----------------------------------------------------------------

Gentlemen:

                  In accordance with Section 2.03 of the above-captioned
Agreement, and Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as
of March 1, 2002 (the "Purchase Agreement" and, together with the Agreement, the
"Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Certificate Administrator, the Trustee and First Union National
Bank, the undersigned, as Certificate Administrator, on behalf of the Trustee,
hereby certifies that as to each Mortgage Loan listed in the Mortgage Loan
Schedule (other than any Mortgage Loan paid in full or listed on the attachment
hereto) it has reviewed the Mortgage File and the Mortgage Loan Schedule and has
determined that: (i) all documents required to be included in the Mortgage File
are in its possession; (ii) such documents have been reviewed by it and appear
regular on their face and relate to such Mortgage Loan; and (iii) based on
examination by it, and only as to such documents, the information set forth in
items (i) - (vii) and (xiv) of the definition or description of "Mortgage Loan
Schedule" is correct.

                  The Certificate Administrator, on behalf of the Trustee, has
made no independent examination of any documents contained in each Mortgage File
beyond the review specifically required in the above-referenced Agreements. The
Certificate Administrator, on behalf of the Trustee, makes no representation
that any documents specified in clause (vi) of Section 2.01(c) of the Purchase
Agreement should be included in any Mortgage File. The Certificate

<PAGE>

Administrator, on behalf of the Trustee, makes no representations as to and
shall not be responsible to verify: (i) the validity, legality, sufficiency,
enforceability, due authorization, recordability or genuineness of any of the
documents contained in each Mortgage File of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, (ii) the collectability, insurability,
effectiveness or suitability of any such Mortgage Loan, or (iii) the existence
of any assumption, modification, written assurance or substitution agreement
with respect to any Mortgage File if no such documents appear in the Mortgage
File delivered to the Certificate Administrator, on behalf of the Trustee.

                  Capitalized words and phrases used herein shall have the
respective meanings assigned to them in the above-captioned Agreement.

                               FIRST UNION NATIONAL BANK, not in its
                               individual capacity but solely as Certificate
                               Administrator

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

                                       F-2

<PAGE>

                                                                     Exhibit F-2

                      Form of Trustee's Final Certification
                      -------------------------------------

                                                     [Date]

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

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

First Union National Bank
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
       Series 2002-1

       Re:    Pooling and Servicing Agreement, dated as of March 1, 2002 (the
              "Agreement"), among NovaStar Mortgage, Inc., NovaStar Mortgage
              Funding Corporation, First Union National Bank (the "Certificate
              Administrator") and JPMorgan Chase Bank (the "Trustee") relating
              to the NovaStar Mortgage Funding Trust, Series 2002-1 Home Equity
              Loan Asset-Backed Certificates
              -----------------------------------------------------------------

Gentlemen:

                  In accordance with Section 2.03 of the above-captioned
Agreement, and Section 2.01(c) of the Mortgage Loan Purchase Agreement, dated as
of March 1, 2002 (the " Purchase Agreement" and, together with the Agreement,
the "Agreements"), among NovaStar Mortgage, Inc., NovaStar Mortgage Funding
Corporation, the Certificate Administrator and the Trustee, the undersigned, as
Certificate Administrator, on behalf of the Trustee, hereby certifies that as to
each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage
Loan paid in full or listed on the attachment hereto) it has received the
documents set forth in Section 2.01(c) of the Mortgage Loan Purchase Agreement.

                  The Certificate Administrator, on behalf of the Trustee, has
made no independent examination of any documents contained in each Mortgage File
beyond the review specifically required in the Agreements. The Certificate
Administrator, on behalf of the Trustee, makes no representation that any
documents specified in clause (vi) of Section 2.01(c) should be included in any
Mortgage File. The Certificate Administrator, on behalf of the Trustee, makes no
representations as to and shall not be responsible to verify: (i) the validity,
legality, sufficiency, enforceability, due authorization, recordability or
genuineness of any of the documents contained in each Mortgage File of any of
the Mortgage Loans identified on the Mortgage Loan Schedule, (ii) the
collectability, insurability, effectiveness or suitability of any such Mortgage
Loan or (iii) the existence of any assumption, modification, written assurance
or substitution agreement with

<PAGE>

respect to any Mortgage File if no such documents appear in the Mortgage File
delivered to the Certificate Administrator, on behalf of the Trustee.

                  Capitalized words and phrases used herein shall have the
respective meanings assigned to them in the above-captioned Agreement.

                                FIRST UNION NATIONAL BANK, not in its
                                individual capacity but solely as Certificate
                                Administrator

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

                                     F-2-2

<PAGE>

                                                                       Exhibit G

                            Form of Investment Letter
                            -------------------------

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

First Union National Bank
401 South Tryon Street, 12th Floor
Charlotte, North Carolina 28202
Attn:  NovaStar Mortgage Funding Trust,
         Series 2002-1

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"), (vii) a business development
                    company as defined in Section 202(a)(22) of the Investment
                    Advisors Act of 1940, as amended, (viii) an organization
                    described in Section 501(c)(3) of the Internal Revenue Code,
                    corporation (other than a bank as defined in Section 3(a)(2)
                    of the Securities Act or a savings and
------------------- ------------------------------------------------------------

<PAGE>
------------------- ------------------------------------------------------------
                    loan association or other institution referenced in Section
                    3(a)(2) of the Securities Act or a foreign bank or savings
                    and loan association or equivalent institution),
                    partnership, or Massachusetts or similar business trust; or
                    (ix) an investment advisor registered under the Investment
                    Advisors Act of 1940, as amended, which, for each of (i)
                    through (ix), owns and invests on a discretionary basis at
                    least $100 million in securities other than securities of
                    issuers affiliated with the Transferee, securities issued or
                    guaranteed by the United States or a person controlled or
                    supervised by and acting as an instrumentality of the
                    government of the United States pursuant to authority
                    granted by the Congress of the United States, bank deposit
                    notes and certificates of deposit, loan participations,
                    repurchase agreements, securities owned but subject to a
                    repurchase agreement, and currency, interest rate and
                    commodity swaps (collectively, "Excluded Securities");
------------------- ------------------------------------------------------------
          __        a dealer registered pursuant to Section 15 of the Securities
                    Exchange Act of 1934, as amended (the "Exchange Act") that
                    in the aggregate owns and invests on a discretionary basis
                    at least $10 million of securities other than Excluded
                    Securities and securities constituting the whole or part of
                    an unsold allotment to, or subscription by, Transferee as a
                    participant in a public offering;
------------------- ------------------------------------------------------------
          __        an investment company registered under the Investment
                    Company Act that is part of a family of investment companies
                    (as defined in Rule 144A of the Securities and Exchange
                    Commission) which own in the aggregate at least $100 million
                    in securities other than Excluded Securities and securities
                    of issuers that are part of such family of investment
                    companies;
------------------- ------------------------------------------------------------
          __        an entity, all of the equity owners of which are entities
                    described in this Paragraph A(I);
------------------- ------------------------------------------------------------
          __        a bank as defined in Section 3(a)(2) of the Securities Act,
                    any savings and loan association or other institution as
                    referenced in Section 3(a)(5)(A) of the Securities Act, or
                    any foreign bank or savings and loan association or
                    equivalent institution that in the aggregate owns and
                    invests on a discretionary basis at least $100 million in
                    securities other than Excluded Securities and has an audited
                    net worth of at least $25 million as demonstrated in its
                    latest annual financial statements, as of a date not more
                    than 16 months preceding the date of transfer of the
                    Certificates to the Transferee in the case of a U.S. Bank or
                    savings and loan association, and not more than 18 months
                    preceding such date in the case of a foreign bank or savings
                    association or equivalent institution.
------------------- ------------------------------------------------------------

                                      G-2

<PAGE>

                  II. The Transferee is acquiring such Certificates solely for
its own account, for the account of one or more others, all of which are
"Qualified Institutional Buyers" within the meaning of Rule 144A, or in its
capacity as a dealer registered pursuant to Section 15 of the Exchange Act
acting in a riskless principal transaction on behalf of a "Qualified
Institutional Buyer". The Transferee is not acquiring such Certificates with a
view to or for the resale, distribution, subdivision or fractionalization
thereof which would require registration of the Certificates under the
Securities Act.

                  D. The Transferee represents that either it is not (i) an
employee benefit plan (as defined in section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) subject to the provisions of
Title I of ERISA, (ii) a plan described in section 4975(e)(1) of the Internal
Revenue Code of 1986, or (iii) an entity whose underlying assets are deemed to
be assets of a plan described in (i) or (ii) above by reason so such plan's
investment in the entity.

                                            Very truly yours,

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

Dated:
       ------------

                                      G-3
<PAGE>

                                                                       Exhibit H

                 Form of Residual Certificate Transfer Affidavit
                 -----------------------------------------------

AFFIDAVIT PURSUANT TO SECTION 860E OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED

STATE OF          )
                  )  ss:
COUNTY OF         )

                  [NAME OF OFFICER], being first duly sworn, deposes and says:

                  1. That he is [Title of Officer] of [Name of Investor] (the
"Investor"), a [savings institution] [corporation] duly organized and existing
under the laws of [the State of_____[the United States], on behalf of which he
makes this affidavit.

                  2. That (i) the Investor is not a "disqualified organization"
and will not be a "disqualified organization" as of [date of transfer] (for this
purpose, a "disqualified organization" means the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax unless such organization is subject to the tax on unrelated business
income); (ii) it is not acquiring the Class R Certificate for the account of a
disqualified organization; (iii) it consents to any amendment of the Pooling and
Servicing Agreement dated as of March 1, 2002 among NovaStar Funding
Corporation, as Company, NovaStar Mortgage, Inc., as Servicer, First Union
National Bank, as Certificate Administrator, and JPMorgan Chase Bank, as
Trustee, that shall be deemed necessary by the Trustee (upon advice of counsel)
to constitute a reasonable arrangement to ensure that the Class R Certificates
will not be owned directly or indirectly by a disqualified organization; and
(iv) it will not transfer such Class R Certificate unless (a) it has received
from the transferee an affidavit in substantially the same form as this
affidavit containing these same four representations and (b) as of the time of
the transfer, it does not have actual knowledge that such affidavit is false.

<PAGE>

                  IN WITNESS WHEREOF, the Investor has caused this instrument to
be executed on its behalf, pursuant to authority of its Board of Directors, by
its [Title of Officer] and its corporate seal to be hereunto attached, attested
by its [Assistant] Secretary, this ____ day of ____________, ____.

                                            [NAME OF INVESTOR]

                                            By:
                                               -----------------------------
                                            [Name of Officer]
                                            [Title of Officer]
[Corporate Seal]

Attest:

-----------------------------
[Assistant] Secretary

                  Personally appeared before me the above-named [Name of
Officer], known or proved to be the same person who executed the foregoing
instrument and to be the [Title of Officer] of the Investor, and acknowledged to
me that he executed the same as his free act and deed and the free act and deed
of the Investor.

                  Subscribed and sworn before me this ____ day of _______, ____.

---------------------------
NOTARY PUBLIC

COUNTY OF _______________

STATE OF _________________

                  My commission expires the ____ day of ________, ____.

                                      H-2

<PAGE>

                                                                       Exhibit I

                   Notional Amount Schedule for Cap Agreement
                   ------------------------------------------

             Distribution Date                             Notional Amount

             February 25, 2005                             $ 20,000,000.00
             March 25, 2005                                  20,000,000.00
             April 25, 2005                                  20,000,000.00
             May 25, 2005                                    20,000,000.00
             June 25, 2005                                   20,000,000.00
             July 25, 2005                                   20,000,000.00
             August 25, 2005                                 20,000,000.00
             September 25, 2005                              20,000,000.00
             October 25, 2005                                20,000,000.00
             November 25, 2005                               20,000,000.00
             December 25, 2005                               15,000,000.00
             January 25, 2006                                15,000,000.00
             February 25, 2006                               15,000,000.00
             March 25, 2006                                  15,000,000.00
             April 25, 2006                                  15,000,000.00
             May 25, 2006                                    15,000,000.00
             June 25, 2006                                   15,000,000.00
             July 25, 2006                                   15,000,000.00
             August 25, 2006                                 15,000,000.00
             September 25, 2006                              15,000,000.00
             October 25, 2006                                10,000,000.00
             November 25, 2006                               10,000,000.00
             December 25, 2006                               10,000,000.00
             January 25, 2007                                10,000,000.00
             February 25, 2007                               10,000,000.00
             March 25, 2007                                  10,000,000.00
             April 25, 2007                                  10,000,000.00
             May 25, 2007                                    10,000,000.00
             June 25, 2007                                   10,000,000.00
             July 25, 2007                                   10,000,000.00
             August 25, 2007                                  5,000,000.00
             September 25, 2007                               5,000,000.00
             October 25, 2007                                 5,000,000.00
             November 25, 2007                                5,000,000.00
             December 25, 2007                                5,000,000.00
             January 25, 2008                                 5,000,000.00
             February 25, 2008                                5,000,000.00
             March 25, 2008                                   5,000,000.00
             April 25, 2008                                   5,000,000.00
             May 25, 2008                                     5,000,000.00
             June 25, 2008                                    5,000,000.00
             July 25, 2008                                    5,000,000.00
             August 25, 2008                                  5,000,000.00
             September 25, 2008                               5,000,000.00
             October 25, 2008                                 5,000,000.00

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