SALOMON BROS MORT SEC VII INC AST BK FL RTE CER SE 1997-AQ2
8-K, 1997-12-10
ASSET-BACKED SECURITIES
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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    Form 8-K

                                 CURRENT REPORT

                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934


       Date of Report (Date of earliest event reported): November 25, 1997


                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

            (AS DEPOSITOR UNDER THE POOLING AND SERVICING AGREEMENT,
           DATED AS OF NOVEMBER 1, 1997, PROVIDING FOR THE ISSUANCE OF
            ASSET-BACKED FLOATING RATE CERTIFICATES, SERIES 1997-AQ2)


                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.
                 ----------------------------------------------
             (Exact name of registrant as specified in its charter)

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



           Delaware                     333-39061               13-3439681
- ----------------------------         -----------          ----------------------
(State or Other Jurisdiction         (Commission          (I.R.S. Employer
of Incorporation)                    File Number)         Identification Number)

Seven World Trade Center
New York, New York                                               10048
- -------------------------                                        -----
(Address of Principal                                            (Zip Code)
Executive Offices)

Registrant's telephone number, including area code:  (212) 783-5659



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

<PAGE>


                                       -2-


Item 2.  ACQUISITION OR DISPOSITION OF ASSETS

Description of the Certificates and the Mortgage Pool

                  On November 25, 1997, a single series of certificates,
entitled Salomon Brothers Mortgage Securities VII, Inc., Asset-Backed Floating
Rate Certificates, Series 1997-AQ2 (the "Certificates"), were issued pursuant to
a pooling and servicing agreement, dated as of November 1, 1997 (the
"Agreement"), attached hereto as Exhibit 4.1, among Salomon Brothers Mortgage
Securities VII, Inc. as depositor (the "Depositor"), Ameriquest Mortgage Company
("Ameriquest") as master servicer (in such capacity, the "Master Servicer") and
Norwest Bank Minnesota, N.A., as trustee (the "Trustee"). The Certificates
consist of eight classes of certificates (collectively, the "Certificates"). The
Certificates evidence in the aggregate the entire beneficial ownership interest
in a trust fund (the "Trust Fund"), consisting primarily of a segregated pool
(the "Mortgage Pool") of conventional, one- to four- family, adjustable rate,
first lien mortgage loans having original terms to maturity not greater than 30
years (the "Mortgage Loans"). The Mortgage Pool consists of Mortgage Loans
having an aggregate principal balance of $343,460,879.60 as of November 1, 1997
(the "Cut-off Date"). The Mortgage Loans were purchased pursuant to the Mortgage
Loan Purchase Agreement (the "Purchase Agreement"), dated November 20, 1997,
among the Depositor, Salomon Brothers Realty Corp. and Ameriquest. The
Certificates were sold by the Depositor to Salomon Brothers Inc, an affiliate of
the Depositor, pursuant to an underwriting agreement, dated November 20, 1997,
between the Depositor and Salomon.

                  The Certificates have the following initial Certificate
Balances and initial Pass- Through Rates:


                     Initial Certificate
    Class             Principal Balance          Pass-through Rate
    -----             -----------------          -----------------
     A                  $269,616,000.00              Variable
     M-1                 $31,770,000.00              Variable
     M-2                 $23,184,000.00              Variable
     M-3                 $12,021,000.00              Variable
     CE                   $6,869,579.60              Variable
     R-I                        $100.00              Variable
     R-II                       $100.00              Variable
     R-III                      $100.00              Variable


<PAGE>


                                       -3-


                  The Certificates (except for the Class CE Certificates) and
the Mortgage Loans are more particularly described in the Prospectus, dated
November 20, 1997, and the Prospectus Supplement, dated November 20, 1997, as
previously filed with the Securities and Exchange Commission pursuant to Rule
424(b). The Class CE Certificates have not been and will not be publicly offered
by the Depositor. Capitalized terms used but not otherwise defined herein shall
have the meanings assigned to them in the Prospectus Supplement.


<PAGE>


                                       -4-



Item 7.  FINANCIAL STATEMENTS AND EXHIBITS

                           (a)      Not applicable

                           (b)      Not applicable

                           (c)      Exhibits



      EXHIBIT NO.                         DESCRIPTION

          4.1                   Pooling and Servicing Agreement,
                                dated as of November 1, 1997, by and
                                among Salomon Brothers Mortgage
                                Securities VII, Inc. as Depositor,
                                Ameriquest Mortgage Company as
                                Master Servicer and Norwest Bank
                                Minnesota, N.A., as Trustee,
                                relating to the Series 1997-AQ2
                                Certificates.




<PAGE>




                                   SIGNATURES


                  Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

Dated: November 25, 1997

                                       SALOMON BROTHERS MORTGAGE
                                       SECURITIES VII, INC.



                                       By:      /s/ Susan Mills
                                           ----------------------------------
                                       Name:    Susan Mills
                                       Title:    Assistant Vice President




<PAGE>




                                INDEX TO EXHIBITS



                                                                   Sequentially
  Exhibit No.            Description                              Numbered Page
  -----------            -----------                              -------------
      4.1        Pooling and Servicing Agreement, dated as of          7
                 November 1, 1997, by and among Salomon
                 Brothers Mortgage Securities VII, Inc. as
                 Depositor, Ameriquest Mortgage Company as
                 Master Servicer and Norwest Bank Minnesota,
                 N.A. as Trustee, relating to the Series
                 1997-AQ2 Certificates.







                                   Exhibit 4.1



<PAGE>


                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

                                    Depositor




                           AMERIQUEST MORTGAGE COMPANY

                                 Master Servicer


                                       and


                  NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION

                                     Trustee



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

                         POOLING AND SERVICING AGREEMENT
                          Dated as of November 1, 1997
                    -----------------------------------------



                     Asset-Backed Floating Rate Certificates

                                 Series 1997-AQ2








<PAGE>


                                TABLE OF CONTENTS

SECTION                                                            PAGE

ARTICLE I

         DEFINITIONS

         1.01.     Defined Terms......................................4
                   Accrued Certificate Interest.......................4
                   Adjustment Date....................................4
                   Affiliate..........................................4
                   Agreement..........................................4
                   Assignment.........................................5
                   Available Distribution Amount......................5
                   Bankruptcy Amount..................................5
                   Bankruptcy Code....................................5
                   Bankruptcy Loss....................................5
                   Book-Entry Certificate.............................5
                   Book-Entry Custodian...............................6
                   Business Day.......................................6
                   Certificate........................................6
                   Certificate Factor.................................6
                   Certificateholder" or "Holder......................6
                   Certificate Owner..................................6
                   Certificate Principal Balance......................6
                   Certificate Register" and "Certificate Registrar...7
                   Class   ...........................................7
                   Class A Certificate................................7
                   Class A Principal Distribution Amount..............7
                   Class CE Certificate...............................7
                   Class M-1 Certificate..............................7
                   Class M-1 Principal Distribution Amount............7
                   Class M-2 Certificate..............................8
                   Class M-2 Principal Distribution Amount............8
                   Class M-3 Certificate..............................8
                   Class M-3 Principal Distribution Amount............8
                   Class R-I Certificate..............................8
                   Class R-II Certificate.............................9
                   Class R-III Certificates...........................9
                   Closing Date.......................................9
                   Code    ...........................................9
                   Collection Account.................................9
                   Commission.........................................9
                   Corporate Trust Office.............................9


<PAGE>


SECTION                                                              PAGE

                   Corresponding Certificate...........................9
                   Credit Enhancement Percentage.......................9
                   Cumulative Loss Percentage.........................10
                   Custodial Agreement................................10
                   Custodian..........................................10
                   Cut-off Date.......................................10
                   Debt Service Reduction.............................10
                   Deficient Valuation................................10
                   Definitive Certificates............................10
                   Deleted Mortgage Loan..............................10
                   Delinquency Percentage.............................10
                   Depositor..........................................11
                   Depository.........................................11
                   Depository Institution.............................11
                   Depository Participant.............................11
                   Determination Date.................................11
                   Directly Operate...................................11
                   Disqualified Organization..........................11
                   Distribution Account...............................12
                   Distribution Date..................................12
                   Due Date...........................................12
                   Due Period.........................................12
                   Eligible Account...................................12
                   ERISA   ...........................................12
                   Estate in Real Property............................12
                   Excess Bankruptcy Loss.............................12
                   Excess Fraud Loss..................................12
                   Excess Overcollateralized Amount...................13
                   Excess Special Hazard Loss.........................13
                   Expense Adjusted Mortgage Rate.....................13
                   Extraordinary Loss.................................13
                   Extraordinary Trust Fund Expenses..................13
                   FDIC    ...........................................13
                   FHLMC   ...........................................13
                   Final Recovery Determination.......................14
                   Fitch   ...........................................14
                   FNMA    ...........................................14
                   Fraud Loss.........................................14
                   Fraud Loss Amount..................................14
                   Gross Margin.......................................14
                   Independent........................................14
                   Independent Contractor.............................15
                   Index   ...........................................15


<PAGE>


SECTION                                                             PAGE

                   Insurance Proceeds................................15
                   Interest Accrual Period...........................15
                   Interest Carry Forward Amount.....................16
                   Interest Determination Date.......................16
                   Interest Distribution Amount......................16
                   Interest Remittance Amount........................16
                   Late Collections..................................16
                   Liquidation Event.................................16
                   Liquidation Proceeds..............................17
                   Loan-to-Value Ratio...............................17
                   London Business Day...............................17
                   Majority Class CE Certificateholder...............17
                   Master Servicer...................................17
                   Master Servicer Event of Default..................17
                   Master Servicer Remittance Date...................17
                   Master Servicer Termination Test..................17
                   Maximum I-LT6 Uncertificated Interest Deferral
                     Amount..........................................17
                   Maximum Mortgage Rate.............................18
                   Mezzanine Certificate.............................18
                   Minimum Mortgage Rate.............................18
                   Monthly Payment...................................18
                   Mortgage..........................................18
                   Mortgage File.....................................18
                   Mortgage Loan.....................................18
                   Mortgage Loan Purchase Agreement..................18
                   Mortgage Loan Schedule............................18
                   Mortgage Note.....................................20
                   Mortgage Pool.....................................20
                   Mortgage Rate.....................................20
                   Mortgaged Property................................20
                   Mortgagor.........................................21
                   Net Monthly Excess Cashflow.......................21
                   Net Mortgage Rate.................................21
                   New Lease.........................................21
                   Nonrecoverable P&I Advance........................21
                   Non-United States Person..........................21
                   Notional Amount...................................21
                   Officers' Certificate.............................21
                   One-Month LIBOR...................................22
                   One-Month LIBOR Pass-Through Rate.................22
                   Opinion of Counsel................................23
                   Original Mortgage Loan............................23
                   Originator........................................23


<PAGE>


SECTION                                                               PAGE

                   Overcollateralized Amount.........................23
                   Overcollateralization Deficiency Amount............23
                   Overcollateralization Increase Amount..............23
                   Overcollateralization Reduction Amount.............24
                   Ownership Interest.................................24
                   Pass-Through Rate..................................24
                   Percentage Interest................................25
                   Periodic Rate Cap..................................26
                   Permitted Investments..............................26
                   Permitted Transferee...............................27
                   Person  ...........................................27
                   P&I Advance........................................27
                   Plan    ...........................................27
                   Prepayment Assumption..............................27
                   Prepayment Interest Shortfall......................27
                   Prepayment Period..................................27
                   Principal Distribution Amount......................28
                   Principal Prepayment...............................28
                   Purchase Price.....................................29
                   Qualified Substitute Mortgage Loan.................29
                   Rating Agency or Rating Agencies...................30
                   Realized Loss......................................30
                   Record Date........................................31
                   Reference Banks....................................31
                   Refinanced Mortgage Loan...........................31
                   Regular Certificate................................31
                   Regular Interest...................................31
                   Relief Act.........................................31
                   Relief Act Interest Shortfall......................31
                   REMIC   ...........................................32
                   REMIC I ...........................................32
                   REMIC I Interest Loss Allocation Amount............32
                   REMIC I Overcollateralized Amount..................32
                   REMIC I Principal Loss Allocation Amount...........32
                   REMIC I Regular Interest...........................33
                   REMIC I Regular Interest I-LT1.....................33
                   REMIC I Regular Interest I-LT2.....................33
                   REMIC I Regular Interest I-LT3.....................33
                   REMIC I Regular Interest I-LT4.....................33
                   REMIC I Regular Interest I-LT5.....................33
                   REMIC I Regular Interest I-LT6.....................34
                   REMIC I Remittance Rate............................34
                   REMIC I Required Overcollateralized Amount.........34


<PAGE>


SECTION                                                              PAGE

                   REMIC II...........................................34
                   REMIC II Regular Interest..........................34
                   REMIC II Regular Interest II-LT1...................34
                   REMIC II Regular Interest II-LT2...................34
                   REMIC II Regular Interest II-LT3...................35
                   REMIC II Regular Interest II-LT4...................35
                   REMIC II Regular Interest II-LT5...................35
                   REMIC II Regular Interest II-LT6...................35
                   REMIC II Regular Interest II-LT2S..................35
                   REMIC II Regular Interest II-LT3S..................35
                   REMIC II Regular Interest II-LT4S..................35
                   REMIC II Regular Interest II-LT5S..................36
                   REMIC II Remittance Rate...........................36
                   REMIC III..........................................36
                   REMIC III Certificate..............................36
                   Remittance Report..................................36
                   Rents from Real Property...........................36
                   REO Account........................................36
                   REO Disposition....................................37
                   REO Imputed Interest...............................37
                   REO Principal Amortization.........................37
                   REO Property.......................................37
                   Request for Release................................37
                   Required Overcollateralized Amount.................37
                   Reserve Interest Rate..............................37
                   Residential Dwelling...............................37
                   Residual Certificate...............................38
                   Residual Interest..................................38
                   Responsible Officer................................38
                   Scheduled Principal Balance........................38
                   Seller  ...........................................39
                   Senior Interest Distribution Amount................39
                   Servicing Account..................................39
                   Servicing Advances.................................39
                   Servicing Fee......................................39
                   Servicing Fee Rate.................................39
                   Servicing Officer..................................39
                   Single Certificate.................................39
                   Special Hazard Amount..............................40
                   Special Hazard Loss................................40
                   S&P     ...........................................40
                   Startup Day........................................40
                   Stated Principal Balance...........................41




<PAGE>


SECTION                                                               PAGE

                   Stayed Funds.......................................41
                   Stepdown Date......................................41
                   Sub-Servicer.......................................42
                   Sub-Servicing Account..............................42
                   Sub-Servicing Agreement............................42
                   Tax Returns........................................42
                   Termination Price..................................42
                   Terminator.........................................42
                   Transfer...........................................42
                   Transferee.........................................42
                   Transferor.........................................42
                   Trigger Event......................................42
                   Trust Fund.........................................42
                   Trustee ...........................................42
                   Trustee's Fee......................................43
                   Trustee's Fee Rate.................................43
                   Uncertificated Balance.............................43
                   Uncertificated Corresponding Component.............43
                   Uncertificated Interest............................43
                   Uncertificated Notional Amount.....................44
                   Uninsured Cause....................................44
                   United States Person...............................44
                   Value   ...........................................44
                   Voting Rights......................................44
         1.02.     Allocation of Certain Interest Shortfalls..........45

ARTICLE II

         CONVEYANCE OF MORTGAGE LOANS;
         ORIGINAL ISSUANCE OF CERTIFICATES

         2.01.     Conveyance of Mortgage Loans.......................46
         2.02.     Acceptance of REMIC I by Trustee...................48
         2.03.     Repurchase or Substitution of Mortgage 
                    Loans by the Originator, the Seller or the
                    Depositor.........................................49
         2.04.     Representations and Warranties of the
                     Depositor........................................53
         2.05.     Representations, Warranties and Covenants
                     of the Master Servicer...........................55
         2.06.     Issuance of Class R-I Certificates.................57
         2.07.     Conveyance of REMIC I Regular Interests;
                     Acceptance of REMIC II by the Trustee............57
         2.08.     Issuance of Class R-II Certificates................57
         2.09.     Conveyance of REMIC II Regular Interests;
                     Acceptance of REMIC III by the Trustee...........57


<PAGE>


SECTION                                                             PAGE

         2.10.     Issuance of REMIC III Certificates.................58

ARTICLE III

         ADMINISTRATION AND SERVICING
         OF THE MORTGAGE LOANS

         3.01.     Master Servicer to Act as Master Servicer..........59
         3.02.     Sub-Servicing Agreements Between Master 
                    Servicer and Sub-Servicers........................60
         3.03.     Successor Sub-Servicers............................62
         3.04.     Liability of the Master Servicer...................62
         3.05.     No Contractual Relationship Between 
                    Sub-Servicers and Trustee or Certificateholders...62
         3.06.     Assumption or Termination of Sub-Servicing
                     Agreements by Trustee............................63
         3.07.     Collection of Certain Mortgage Loan Payments.......63
         3.08.     Sub-Servicing Accounts.............................64
         3.09.     Collection of Taxes, Assessments and Similar
                     Items; Servicing Accounts........................64
         3.10.     Collection Account and Distribution Account........65
         3.11.     Withdrawals from the Collection Account and
                     Distribution Account.............................67
         3.12.     Investment of Funds in the Collection
                     Account and the Distribution Account.............69
         3.13.     [intentionally omitted]............................70
         3.14.     Maintenance of Hazard Insurance and Errors and
                     Omissions and Fidelity Coverage..................70
         3.15.     Enforcement of Due-On-Sale Clauses; Assumption
                     Agreements.......................................72
         3.16.     Realization Upon Defaulted Mortgage Loans..........73
         3.17.     Trustee to Cooperate; Release of Mortgage Files....75
         3.18.     Servicing Compensation.............................76
         3.19.     Reports to the Trustee; Collection Account
                     Statements.......................................77
         3.20.     Statement as to Compliance.........................77
         3.21.     Independent Public Accountants' Servicing Report...77
         3.22.     Access to Certain Documentation....................78
         3.23.     Title, Management and Disposition of REO 
                    Property..........................................78
         3.24.     Obligations of the Master Servicer in Respect
                     of Prepayment Interest Shortfalls................81
         3.25.     Obligations of the Master Servicer in Respect
                     of Mortgage Rates and Monthly Payments...........82

ARTICLE IV

         PAYMENTS TO CERTIFICATEHOLDERS

         4.01.     Distributions......................................83


<PAGE>


SECTION                                                              PAGE

         4.02.     Statements to Certificateholders...................89
         4.03.     Remittance Reports; P&I Advances...................92
         4.04.     Allocation of Realized Losses......................93
         4.05.     Compliance with Withholding Requirements...........95
         4.06.     Commission Reporting...............................95

ARTICLE V

         THE CERTIFICATES

         5.01.     The Certificates...................................97
         5.02.     Registration of Transfer and Exchange of
                     Certificates.....................................99
         5.03.     Mutilated, Destroyed, Lost or Stolen 
                     Certificates....................................104
         5.04.     Persons Deemed Owners.............................104
         5.05.     Certain Available Information.....................105

ARTICLE VI

         THE DEPOSITOR AND THE MASTER SERVICER

         6.01.     Liability of the Depositor and the Master
                     Servicer........................................106
         6.02.     Merger or Consolidation of the Depositor or
                     the Master Servicer.............................106
         6.03.     Limitation on Liability of the Depositor,
                     the Master Servicer and Others..................106
         6.04.     Limitation on Resignation of the Master
                     Servicer........................................107
         6.05.     Rights of the Depositor in Respect of the
                     Master Servicer.................................108

ARTICLE VII

         DEFAULT

         7.01.     Master Servicer Events of Default.................109
         7.02.     Trustee to Act; Appointment of Successor..........111
         7.03.     Notification to Certificateholders................113
         7.04.     Waiver of Master Servicer Events of Default.......113

ARTICLE VIII

         CONCERNING THE TRUSTEE

         8.01.     Duties of Trustee.................................114
         8.02.     Certain Matters Affecting the Trustee.............115
         8.03.     Trustee Not Liable for Certificates or
                     Mortgage Loans..................................116
         8.04.     Trustee May Own Certificates......................116


<PAGE>


SECTION                                                              PAGE

         8.05.     Trustee's Fees and Expenses.......................117
         8.06.     Eligibility Requirements for Trustee..............117
         8.07.     Resignation and Removal of the Trustee............118
         8.08.     Successor Trustee.................................118
         8.09.     Merger or Consolidation of Trustee................119
         8.10.     Appointment of Co-Trustee or Separate Trustee.....119
         8.11.     Appointment of Custodians.........................120
         8.12.     Appointment of Office or Agency...................121
         8.13.     Representations and Warranties of the Trustee.....121

ARTICLE IX

         TERMINATION

         9.01      Termination Upon Repurchase or Liquidation
                     of All Mortgage Loans...........................123
         9.02      Additional Termination Requirements...............125

ARTICLE X

         REMIC PROVISIONS

         10.01.    REMIC Administration..............................126
         10.02.    Prohibited Transactions and Activities............129
         10.03.    Master Servicer and Trustee Indemnification.......129

ARTICLE XI

         MISCELLANEOUS PROVISIONS

         11.01.    Amendment.........................................130
         11.02.    Recordation of Agreement; Counterparts............131
         11.03.    Limitation on Rights of Certificateholders........131
         11.04.    Governing Law.....................................132
         11.05.    Notices...........................................132
         11.06.    Severability of Provisions........................133
         11.07.    Notice to Rating Agencies.........................133
         11.08.    Article and Section References....................134
         11.09.    Grant of Security Interest........................134


<PAGE>


         EXHIBITS
         --------

         Exhibit A-1       Form of Class A Certificate
         Exhibit A-2       Form of Class M-1 Certificate
         Exhibit A-3       Form of Class M-2 Certificate
         Exhibit A-4       Form of Class M-3 Certificate
         Exhibit A-5       Form of Class CE Certificate
         Exhibit A-6       Form of Class R-I Certificate
         Exhibit A-7       Form of Class R-II Certificate
         Exhibit A-8       Form of Class R-II Certificate
         Exhibit B         [Reserved]
         Exhibit C-1       Form of Trustee's Initial Certification
         Exhibit C-2       Form of Trustee's Final Certification
         Exhibit D         Form of Mortgage Loan Purchase Agreement
         Exhibit E-1       Request for Release
         Exhibit E-2       Request for Release Mortgage Loans paid in full
         Exhibit F-1       Form of Transferor Representation Letter and Form of
                           Transferee Representation Letter in Connection with
                           Transfer of Class CE Certificates Pursuant to Rule
                           144A Under the 1933 Act
         Exhibit F-2       Form of Transfer Affidavit and Agreement and Form of
                           Transferor Affidavit in Connection with Transfer of
                           Residual Certificates
         Exhibit G         Form of Certification with respect to ERISA and the
                           Code
         Exhibit H         Form of Custodial Agreement

         Schedule 1        Mortgage Loan Schedule


<PAGE>

         This Pooling and Servicing Agreement, is dated and effective as of
November 1, 1997, among SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., as
Depositor, AMERIQUEST MORTGAGE COMPANY, as Master Servicer and NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, as Trustee.

                             PRELIMINARY STATEMENT:

         The Depositor intends to sell pass-through certificates (collectively,
the "Certificates"), to be issued hereunder in multiple classes, which in the
aggregate will evidence the entire beneficial ownership interest in each REMIC
(as defined herein) created hereunder.

         As provided herein, the Trustee will elect to treat the segregated pool
of assets consisting of the Mortgage Loans and certain other related assets
subject to this Agreement as a REMIC for federal income tax purposes, and such
segregated pool of assets will be designated as "REMIC I." The Class R-I
Certificates will be the sole class of "residual interests" in REMIC I for
purposes of the REMIC Provisions and will have an initial Certificate Principal
Balance of $100 and a Pass-Through Rate as described herein. The following table
irrevocably sets forth the designation, the REMIC I Remittance Rate, the initial
Uncertificated Balance and, solely for purposes of satisfying Treasury
regulation Section 1.860G-1(a)(4)(iii), the "latest possible maturity date" for
each of the REMIC I Regular Interests. None of the REMIC I Regular Interests
will be certificated.


                     REMIC I               Initial            Latest Possible
  Designation    Remittance Rate    Uncertificated Balance   Maturity Date(1)
  -----------    ---------------    ----------------------   ----------------

     I-LT1         Variable(2)       $336,591,568.01        December 25, 2027
     I-LT2         Variable(2)         $2,696,160.00        December 25, 2027
     I-LT3         Variable(2)           $317,700.00        December 25, 2027
     I-LT4         Variable(2)           $231,840.00        December 25, 2027
     I-LT5         Variable(2)           $120,210.00        December 25, 2027
     I-LT6         Variable(2)         $3,503,301.59        December 25, 2027
                                                                           

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

(1)  Solely for purposes of Section 1.860G-1(a)(4)(iii) of the Treasury
     regulations, the Distribution Date immediately following the maturity date
     for the Mortgage Loan with the latest maturity date has been designated as
     the "latest possible maturity date" for each REMIC I Regular Interest.

(2)  Calculated in accordance with the definition of "REMIC I Remittance Rate"
     herein.

         As provided herein, the Trustee will elect to treat the segregated pool
of assets consisting of the REMIC I Regular Interests as a REMIC for federal
income tax purposes, and such segregated pool of assets will be designated as
"REMIC II." The Class R-II Certificates will evidence the sole class of
"residual interests" in REMIC II for purposes of the REMIC Provisions and will
have an initial Certificate Principal Balance of $100 and a Pass-Through Rate as
described herein. The following table irrevocably sets forth the designation,
the REMIC II Remittance Rate, the initial Uncertificated Balance and, solely for
purposes of satisfying Treasury 


<PAGE>


                                       -2-

regulation Section 1.860G-1(a)(4)(iii), the "latest possible maturity date" for
each of the REMIC II Regular Interests. None of the REMIC II Regular Interests
will be certificated.


                  REMIC II                Initial             Latest Possible
  Designation     Remittance Rate   Uncertificated Balance    Maturity Date(1)
  ------------    ---------------   ----------------------    -----------------
   II-LT1         Variable(2)       $   336,591,468.01       December 25, 2027
   II-LT2         Variable(2)       $     2,696,160.00       December 25, 2027
   II-LT3         Variable(2)       $       317,700.00       December 25, 2027
   II-LT4         Variable(2)       $       231,840.00       December 25, 2027
   II-LT5         Variable(2)       $       120,210.00       December 25, 2027
   II-LT6         Variable(2)       $     3,503,301.59       December 25, 2027
   II-LT2S         Variable(2)                 (3)           December 25, 2027
   II-LT3S         Variable(2)                 (3)           December 25, 2027
   II-LT4S         Variable(2)                 (3)           December 25, 2027
   II-LT5S         Variable(2)                 (3)           December 25, 2027

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

(1)  Solely for purposes of Section 1.860G-1(a)(4)(iii) of the Treasury
     regulations, the Distribution Date immediately following the maturity date
     for the Mortgage Loan with the latest maturity date has been designated as
     the "latest possible maturity date" for each REMIC II Regular Interest.

(2)  Calculated in accordance with the definition of "REMIC II Remittance Rate"
     herein.

(3)  This REMIC II Regular Interest has no Uncertificated Principal Balance but
     will accrue interest at the related REMIC II Remittance Rate on the related
     Uncertificated Notional Amount, which is equal to the Uncertificated
     Principal Balance of the Uncertificated Corresponding Component.


<PAGE>


                                       -3-


         As provided herein, the Trustee will elect to treat the segregated pool
of assets consisting of the REMIC II Regular Interests as a REMIC for federal
income tax purposes, and such segregated pool of assets will be designated as
"REMIC III." The Class R-III Certificates will evidence the sole class of
"residual interests" in REMIC III for purposes of the REMIC Provisions under
federal income tax law. The following table irrevocably sets forth the
designation, the Pass-Through Rate, the initial aggregate Certificate Principal
Balance and, solely for purposes of satisfying Treasury regulation Section
1.860G-1(a)(4)(iii), the "latest possible maturity date" for the indicated
Classes of Certificates.

<TABLE>
<CAPTION>
                                            Initial Aggregate               Latest Possible
  Designation     Pass-through Rate    Certificate Principal Balance        Maturity Date(1)
  -----------     -----------------    -----------------------------        ----------------
<S>                <C>                      <C>                             <C> 
    Class A        Variable(2)              $269,616,000.00                 December 25, 2027
    Class M-1      Variable(2)               $31,770,000.00                 December 25, 2027
    Class M-2      Variable(2)               $23,184,000.00                 December 25, 2027
    Class M-3      Variable(2)               $12,021,000.00                 December 25, 2027
    Class CE       Variable(2)               $6,869,579.60(4)               December 25, 2027
    Class R-III    Variable(2)(3)                  $100.00                       N/A
  
</TABLE>

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

(1)  Solely for purposes of Section 1.860G-1(a)(4)(iii) of the Treasury
     regulations, the Distribution Date immediately following the maturity date
     for the Mortgage Loans with the latest maturity date has been designated as
     the "latest possible maturity date" for each Class of Certificates.

(2)  Calculated in accordance with the definition of "Pass-Through Rate" herein.

(3)  The Class R-III Certificate will only receive interest on the Distribution
     Date in December 1997.

(4)  The Class CE Certificates will accrue interest at their variable
     Pass-Through Rate on the Notional Amount of the Class CE Certificates
     outstanding from time to time which shall equal the Uncertificated Balance
     of the REMIC II Regular Interests. The Class CE Certificates will not
     accrue interest on their Certificate Principal Balance.

         As of the Cut-off Date, the Original Mortgage Loans had an aggregate
Scheduled Principal Balance equal to $343,460,879.60.

                  In consideration of the mutual agreements herein contained,
the Depositor, the Master Servicer and the Trustee agree as follows:


<PAGE>


                                       -4-

                                    ARTICLE I

                                   DEFINITIONS

         SECTION 1.01. Defined Terms.

         Whenever used in this Agreement, including, without limitation, in the
Preliminary Statement hereto, the following words and phrases, unless the
context otherwise requires, shall have the meanings specified in this Article.
Unless otherwise specified, all calculations described herein shall be made on
the basis of a 360-day year consisting of twelve 30-day months.

         "Accrued Certificate Interest": With respect to any Class of
Certificates and each Distribution Date, interest accrued during the related
Interest Accrual Period at the Pass-Through Rate for such Certificate for such
Distribution Date on the Certificate Principal Balance, in the case of the Class
A Certificates, the Mezzanine Certificates and the Residual Certificates, or on
the Notional Amount, in the case of the Class CE Certificate, of such
Certificate immediately prior to such Distribution Date. All distributions of
interest on the Class A Certificates and the Mezzanine Certificates will be
calculated on the basis of a 360-day year and the actual number of days in the
applicable Interest Accrual Period. Accrued Certificate Interest with respect to
each Distribution Date, as to any Class A Certificate, Mezzanine Certificate or
Class CE Certificate, shall be reduced by an amount equal to the portion
allocable to such Certificate pursuant to Section 1.02 hereof of the sum of (a)
the aggregate Prepayment Interest Shortfall, if any, for such Distribution Date
to the extent not covered by payments pursuant to Section 3.24 and (b) the
aggregate amount of any Relief Act Interest Shortfall, if any, for such
Distribution Date. In addition, Accrued Certificate Interest with respect to
each Distribution Date, as to any Class CE Certificate, shall be reduced by an
amount equal to the portion allocable to such Class CE Certificate of Realized
Losses, if any, pursuant to Section 1.02 and Section 4.04 hereof.

         "Adjustment Date": With respect to each Mortgage Loan, the first day of
the month in which the Mortgage Rate of a Mortgage Loan changes pursuant to the
related Mortgage Note. The first Adjustment Date following the Cut-off Date as
to each Mortgage Loan is set forth in the Mortgage Loan Schedule.

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

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


<PAGE>


                                       -5-

         "Assignment": 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.

         "Available Distribution Amount": With respect to any Distribution Date,
an amount equal to (1) the sum of (a) the aggregate of the amounts on deposit in
the Collection Account and Distribution Account as of the close of business on
the related Determination Date, (b) the aggregate of any amounts received in
respect of an REO Property withdrawn from any REO Account and deposited in the
Distribution Account for such Distribution Date pursuant to Section 3.23, (c)
the aggregate of any amounts deposited in the Distribution Account by the Master
Servicer in respect of Prepayment Interest Shortfalls for such Distribution Date
pursuant to Section 3.24, (d) the aggregate of any P&I Advances made by the
Master Servicer for such Distribution Date pursuant to Section 4.03 and (e) the
aggregate of any advances made by the Trustee for such Distribution Date
pursuant to Section 7.02, reduced (to not less than zero) by (2) the sum of (x)
the portion of the amount described in clause (1)(a) above that represents (i)
Monthly Payments on the Mortgage Loans received from a Mortgagor on or prior to
the Determination Date but due during any Due Period subsequent to the related
Due Period, (ii) Principal Prepayments on the Mortgage Loans received after the
related Prepayment Period (together with any interest payments received with
such Principal Prepayments to the extent they represent the payment of interest
accrued on the Mortgage Loans during a period subsequent to the related
Prepayment Period), (iii) Liquidation Proceeds and Insurance Proceeds received
in respect of the Mortgage Loans after the related Prepayment Period, (iv)
amounts reimbursable or payable to the Depositor, the Master Servicer, the
Trustee, the Originator, the Seller or any Sub-Servicer pursuant to Section 3.11
or Section 3.12 or otherwise payable in respect of Extraordinary Trust Fund
Expenses, (v) Stayed Funds, (vi) the Trustee Fee payable from the Distribution
Account pursuant to Section 8.05 and (vii) amounts deposited in the Collection
Account or the Distribution Account in error, and (y) amounts reimbursable to
the Trustee for an advance made pursuant to Section 7.02(b) which advance the
Trustee has determined to be nonrecoverable from the Stayed Funds in respect of
which it was made.

         "Bankruptcy Amount": As of any date of determination, $100,000 minus
the aggregate amount of Bankruptcy Losses on the Mortgage Loans, if any,
previously allocated to the Mezzanine Certificates and the Class CE Certificates
in accordance with Section 4.04.

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

         "Bankruptcy Loss": With respect to any Mortgage Loan, a Realized Loss
resulting from a Deficient Valuation or Debt Service Reduction.

         "Book-Entry Certificate": The Class A Certificates and the Mezzanine
Certificates for so long as the Certificates of such Class shall be registered
in the name of the Depository or its nominee.


<PAGE>


                                       -6-

         "Book-Entry Custodian": The custodian appointed pursuant to Section
5.01.

         "Business Day": Any day other than a Saturday, a Sunday or a day on
which banking or savings and loan institutions in the State of California or the
State of New York, or in the city in which the Corporate Trust Office of the
Trustee is located, are authorized or obligated by law or executive order to be
closed.

         "Certificate": Any one of the Depositor's Asset-Backed Floating Rate
Certificates, Series 1997-AQ2, Class A, Class M-1, Class M-2, Class M-3, Class
CE, Class R-I, Class R-II or Class R-III, issued under this Agreement.

         "Certificate Factor": With respect to any Class of Regular Certificates
as of any Distribution Date, a fraction, expressed as a decimal carried to six
places, the numerator of which is the aggregate Certificate Principal Balance
(and in the case of the Class CE Certificates, the Notional Amount) of such
Class of Certificates on such Distribution Date (after giving effect to any
distributions of principal and allocations of Realized Losses in reduction of
the Certificate Principal Balance (and in the case of the Class CE Certificates,
the Notional Amount) of such Class of Certificates to be made on such
Distribution Date), and the denominator of which is the initial aggregate
Certificate Principal Balance (and in the case of the Class CE Certificates, the
Notional Amount) of such Class of Certificates as of the Closing Date.

         "Certificateholder" or "Holder": The Person in whose name a Certificate
is registered in the Certificate Register, except that a Disqualified
Organization or a Non-United States Person shall not be a Holder of a Residual
Certificate for any purposes hereof and, solely for the purposes of giving any
consent pursuant to this Agreement, any Certificate registered in the name of
the Depositor or the Master Servicer or any Affiliate thereof shall be deemed
not to be outstanding and the Voting Rights to which it is entitled shall not be
taken into account in determining whether the requisite percentage of Voting
Rights necessary to effect any such consent has been obtained, except as
otherwise provided in Section 11.01. The Trustee may conclusively rely upon a
certificate of the Depositor or the Master Servicer in determining whether a
Certificate is held by an Affiliate thereof. All references herein to "Holders"
or "Certificateholders" shall reflect the rights of Certificate Owners as they
may indirectly exercise such rights through the Depository and participating
members thereof, except as otherwise specified herein; provided, however, that
the Trustee shall be required to recognize as a "Holder" or "Certificateholder"
only the Person in whose name a Certificate is registered in the Certificate
Register.

         "Certificate Owner": With respect to a Book-Entry Certificate, the
Person who is the beneficial owner of such Certificate as reflected on the books
of the Depository or on the books of a Depository Participant or on the books of
an indirect participating brokerage firm for which a Depository Participant acts
as agent.

         "Certificate Principal Balance": With respect to each Class A
Certificate, Mezzanine Certificate or Residual Certificate as of any date of
determination, the Certificate Principal Balance of such Certificate on the
Distribution Date immediately prior to such date of


<PAGE>


                                       -7-

determination, minus all distributions allocable to principal made thereon and
Realized Losses allocated thereto on such immediately prior Distribution Date
(or, in the case of any date of determination up to and including the first
Distribution Date, the initial Certificate Principal Balance of such
Certificate, as stated on the face thereof). With respect to each Class CE
Certificate as of any date of determination, an amount equal to the Percentage
Interest evidenced by such Certificate times the excess, if any, of (A) the then
aggregate Uncertificated Balances of the REMIC II Regular Interests over (B) the
then aggregate Certificate Principal Balances of the Class A Certificates,
Mezzanine Certificates and Residual Certificates then outstanding.

         "Certificate Register" and "Certificate Registrar": The register
maintained and the registrar appointed pursuant to Section 5.02.

         "Class": Collectively, all of the Certificates bearing the same class
designation.

         "Class A Certificate": Any one of the Class A Certificates executed by
the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-1 and evidencing a Regular
Interest in REMIC III for purposes of the REMIC Provisions.

         "Class A Principal Distribution Amount": With respect to any
Distribution Date on or after the Stepdown Date and on which a Trigger Event is
not in effect, 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) 57.00% and (ii) the aggregate Stated Principal Balance
of the Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate Stated Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus $2,575,957.

         "Class CE Certificate": Any one of the Class CE Certificates executed
by the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-5 and evidencing a Regular
Interest in REMIC III for purposes of the REMIC Provisions.

         "Class M-1 Certificate": Any one of the Class M-1 Certificates executed
by the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-2 and evidencing a Regular
Interest in REMIC III for purposes of the REMIC Provisions.

         "Class M-1 Principal Distribution Amount": With respect to any
Distribution Date on or after the Stepdown Date and on which a Trigger Event is
not in effect, the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A 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)
75.50% and (ii) the aggregate Stated Principal Balance of the Mortgage Loans as
of the last day of the related Due Period and (B) the aggregate


<PAGE>


                                       -8-

Stated Principal Balance of the Mortgage Loans as of the last day of the related
Due Period minus $2,575,957.

         "Class M-2 Certificate": Any one of the Class M-2 Certificates executed
by the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-3 and evidencing a Regular
Interest in REMIC III for purposes of the REMIC Provisions.

         "Class M-2 Principal Distribution Amount": With respect to any
Distribution Date on or after the Stepdown Date and on which a Trigger Event is
not in effect, the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A 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) 89.00% and (ii) the aggregate Stated Principal Balance of
the Mortgage Loans as of the last day of the related Due Period and (B) the
aggregate Stated Principal Balance of the Mortgage Loans as of the last day of
the related Due Period minus $2,575,957.

         "Class M-3 Certificate": Any one of the Class M-3 Certificates executed
by the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-4 and evidencing a Regular
Interest in REMIC III for purposes of the REMIC Provisions.

         "Class M-3 Principal Distribution Amount": With respect to any
Distribution Date on or after the Stepdown Date and on which a Trigger Event is
not in effect, the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such Distribution Date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
Distribution Date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such Distribution Date) and (iv) the Certificate
Principal Balance of the Class M-3 Certificates immediately prior to such
Distribution Date over (y) the lesser of (A) the product of (i) 96.00% and (ii)
the aggregate Stated Principal Balance of the Mortgage Loans as of the last day
of the related Due Period and (B) the aggregate Stated Principal Balance of the
Mortgage Loans as of the last day of the related Due Period minus $2,575,957.

         "Class R-I Certificate": Any one of the Class R-I Certificates executed
by the Trustee, and authenticated and delivered by the Certificate Registrar,
substantially in the form annexed hereto as Exhibit A-6 and evidencing the
Residual Interest in REMIC I for purposes of the REMIC Provisions.


<PAGE>


                                       -9-

         "Class R-II Certificate": Any one of the Class R-II Certificates
executed by the Trustee, and authenticated and delivered by the Certificate
Registrar, substantially in the form annexed hereto as Exhibit A-7 and
evidencing the Residual Interest in REMIC II for purposes of the REMIC
Provisions.

         "Class R-III Certificates": Any one of the Class R-III Certificates
executed by the Trustee, and authenticated and delivered by the Certificate
Registrar, substantially in the form annexed hereto as Exhibit A-8 and
evidencing the Residual Interest in REMIC III for purposes of the REMIC
Provisions.

         "Closing Date": November 25, 1997.

         "Code": The Internal Revenue Code of 1986.

         "Collection Account": The account or accounts created and maintained by
the Master Servicer pursuant to Section 3.10(a), which shall be entitled
"Ameriquest Mortgage Company, as Master Servicer for Norwest Bank Minnesota,
National Association, as Trustee, in trust for the registered holders of Salomon
Brothers Mortgage Securities VII, Inc., Asset-Backed Floating Rate Certificates,
Series 1997-AQ2" The Collection Account must be an Eligible Account.

         "Commission": The Securities and Exchange Commission.

         "Corporate Trust Office": The principal corporate trust office of the
Trustee at which at any particular time its corporate trust business in
connection with this Agreement shall be administered, which office at the date
of the execution of this instrument is located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479, or at such other address as the Trustee
may designate from time to time by notice to the Certificateholders, the
Depositor and the Master Servicer.

         "Corresponding Certificate": With respect to REMIC I Regular Interests
I-LT2, REMIC I Regular Interests I-LT3, REMIC I Regular Interests I-LT4 and
REMIC I Regular Interests I-LT5, the Class A Certificates, Class M-1
Certificates, Class M-2 Certificates and Class M-3 Certificates, respectively.
With respect to REMIC II Regular Interest II-LT2, REMIC II Regular Interest
II-LT3, REMIC II Regular Interest II-LT4 and REMIC II Regular Interest II-LT5,
the Class A Certificates, Class M-1 Certificates, Class M-2 Certificates and
Class M-3 Certificates, respectively.

         "Credit Enhancement Percentage": For any Distribution Date, the
percentage equivalent of a fraction, the numerator of which is the sum of the
aggregate Certificate Principal Balances of the Mezzanine Certificates and the
Class CE Certificates, and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans, calculated after taking into account
distributions of principal on the Mortgage Loans and the distribution of the
Principal


<PAGE>


                                      -10-

Distribution Amount to the Certificates then entitled to distributions of
principal on such Distribution Date.

         "Cumulative Loss Percentage": With respect to any Distribution Date and
the percentage equivalent of a fraction, the numerator of which is the aggregate
amount of Realized Losses incurred from the Cut-off Date to the last day of the
preceding calendar month and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans as of the Cut-off Date.

         "Custodial Agreement": An agreement that may be entered into among the
Depositor, the Master Servicer, the Trustee and a Custodian in the form of
Exhibit H annexed hereto or an agreement assigned to the Trustee with respect to
the Mortgage Loans.

         "Custodian": A Custodian, which shall not be the Originator, the
Depositor, the Master Servicer, the Seller or any affiliate of any of them,
appointed pursuant to a Custodial Agreement.

         "Cut-off Date": With respect to each Original Mortgage Loan, November
1, 1997. With respect to all Qualified Substitute Mortgage Loans, their
respective dates of substitution. References herein to the "Cut-off Date," when
used with respect to more than one Mortgage Loan, shall be to the respective
Cut-off Dates for such Mortgage Loans.

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

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

         "Definitive Certificates": As defined in Section 5.01(b).

         "Deleted Mortgage Loan": A Mortgage Loan replaced or to be replaced by
a Qualified Substitute Mortgage Loan.

         "Delinquency Percentage": As of the last day of the related Due Period,
the percentage equivalent of a fraction, the numerator of which is the aggregate
Stated Principal Balance of all Mortgage Loans that, as of the last day of the
previous calendar month, are 60 or more days delinquent, are in foreclosure,
have been converted to REO Properties or have been discharged by reason of
bankruptcy, and the denominator of which is the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the previous calendar month.


<PAGE>


                                      -11-

         "Depositor": Salomon Brothers Mortgage Securities VII, Inc., a Delaware
corporation, or its successor in interest.

         "Depository": The Depository Trust Company, or any successor Depository
hereafter named. The nominee of the initial Depository, for purposes of
registering those Certificates that are to be Book-Entry Certificates, is CEDE &
Co. 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 and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended.

         "Depository Institution": Any depository institution or trust company,
including the Trustee, that (a) is incorporated under the laws of the United
States of America or any State thereof, (b) is subject to supervision and
examination by federal or state banking authorities and (c) has outstanding
unsecured commercial paper or other short-term unsecured debt obligations that
are rated F-1 by Fitch and A-1 by S&P (or comparable ratings if Fitch and S&P
are not the Rating Agencies).

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

         "Determination Date": With respect to each 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.

         "Directly Operate": With respect to any REO Property, the furnishing or
rendering of services to the tenants thereof, the management or operation of
such REO Property, the holding of such REO Property primarily for sale to
customers, the performance of any construction work thereon or any use of such
REO Property in a trade or business conducted by REMIC I other than through an
Independent Contractor; provided, however, that the Trustee (or the Master
Servicer on behalf of the Trustee) shall not be considered to Directly Operate
an REO Property solely because the Trustee (or the Master Servicer on behalf of
the Trustee) establishes rental terms, chooses tenants, enters into or renews
leases, deals with taxes and insurance, or makes decisions as to repairs or
capital expenditures with respect to such REO Property.

         "Disqualified Organization": Any of the following: (i) the United
States, any State or political subdivision thereof, any possession of the United
States, or any agency or instrumentality of any of the foregoing (other than an
instrumentality which is a corporation if all of its activities are subject to
tax and, except for the FHLMC, a majority of its board of directors is not
selected by such governmental unit), (ii) any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (iii) any organization (other than certain farmers' cooperatives
described in Section 521 of the Code) which is exempt from the tax imposed by
Chapter 1 of the Code (including the tax imposed by Section 511 of the Code on
unrelated business taxable income), (iv) rural electric and telephone
cooperatives 


<PAGE>


                                      -12-

described in Section 1381(a)(2)(C) of the Code, (v) an "electing large
partnership" and (vi) any other Person so designated by the Trustee based upon
an Opinion of Counsel that the holding of an Ownership Interest in a Residual
Certificate by such Person may cause any of REMIC I, REMIC II or REMIC III or
any Person having an Ownership Interest in any Class of Certificates (other than
such Person) to incur a liability for any federal tax imposed under the Code
that would not otherwise be imposed but for the Transfer of an Ownership
Interest in a Residual Certificate to such Person. The terms "United States,"
"State" and "international organization" shall have the meanings set forth in
Section 7701 of the Code or successor provisions.

         "Distribution Account": The trust account or accounts created and
maintained by the Trustee pursuant to Section 3.10(b) which shall be entitled
"Norwest Bank Minnesota, National Association, as Trustee, in trust for the
registered holders of Salomon Brothers Mortgage Securities VII, Inc.,
Asset-Backed Floating Rate Certificates, Series 1997-AQ2." The Distribution
Account must be an Eligible Account.

         "Distribution Date": The 25th day of any month, or if such 25th day is
not a Business Day, the Business Day immediately following such 25th day,
commencing in December 1997.

         "Due Date": With respect to each Distribution Date, the first day of
the calendar month in which such Distribution Date occurs, which is the day of
the month on which the Monthly Payment is due on a Mortgage Loan, exclusive of
any days of grace.

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

         "Eligible Account": Any of (i) an account or accounts maintained with a
federal or state chartered depository institution or trust company the
short-term unsecured debt obligations of which are rated F-1 by Fitch and A-1 by
S&P (or comparable ratings if Fitch and S&P are not the Rating Agencies) at the
time any amounts are held on deposit therein, (ii) an account or accounts the
deposits in which are fully insured by the FDIC or (iii) a trust account or
accounts maintained with the corporate trust department of a federal or state
chartered depository institution or trust company acting in its fiduciary
capacity. Eligible Accounts may bear interest.

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

         "Estate in Real Property": A fee simple estate in a parcel of land.

         "Excess Bankruptcy Loss": Any Bankruptcy Loss, or portion thereof,
which exceeds the then applicable Bankruptcy Amount.

         "Excess Fraud Loss": Any Fraud Loss, or portion thereof, which exceeds
the then applicable Fraud Loss Amount.


<PAGE>


                                      -13-

         "Excess Overcollateralized Amount": With respect to the Class A
Certificates and the Mezzanine Certificates and any Distribution Date, the
excess, if any, of (i) the Overcollateralized Amount for such Distribution Date
over (ii) the Required Overcollateralized Amount for such Distribution Date.

         "Excess Special Hazard Loss": Any Special Hazard Loss, or portion
thereof, that exceeds the then applicable Special Hazard Amount.

         "Expense Adjusted Mortgage Rate": With respect to any Mortgage Loan,
the then applicable Mortgage Rate thereon minus the sum of (i) the Trustee's Fee
Rate and (ii) the Servicing Fee Rate.

         "Extraordinary Loss": Any Realized Loss or portion thereof caused by or
resulting from:

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


          (ii)   hostile or warlike action in time of peace or war, including
                 action in hindering, combating or defending against an actual,
                 impending or expected attack by any government or sovereign
                 power, DE JURE or DE FACTO, or by any authority maintaining or
                 using military, naval or air forces, or by military, naval or
                 air forces, or by an agent of any such government, power,
                 authority or forces;

         (iii)   any weapon of war employing atomic fission or radioactive
                 forces whether in time of peace or war, and

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

         "Extraordinary Trust Fund Expenses": Any amounts reimbursable to the
Trustee, or any director, officer, employee or agent of the Trustee, from the
Trust Fund pursuant to Section 8.05, and any amounts payable from the
Distribution Account in respect of taxes pursuant to Section 10.01(g)(iii).

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

         "FHLMC": Federal Home Loan Mortgage Corporation or any successor
thereto.


<PAGE>


                                      -14-

         "Final Recovery Determination": With respect to any defaulted Mortgage
Loan or any REO Property (other than a Mortgage Loan or REO Property purchased
by the Originator, the Seller, the Depositor, the Majority Class CE
Certificateholder or the Master Servicer pursuant to or as contemplated by
Section 2.03, 3.16(c) or 9.01), a determination made by the Master Servicer that
all Insurance Proceeds, Liquidation Proceeds and other payments or recoveries
which the Master Servicer, in its reasonable good faith judgment, expects to be
finally recoverable in respect thereof have been so recovered. The Master
Servicer shall maintain records, prepared by a Servicing Officer, of each Final
Recovery Determination made thereby.

         "Fitch": Fitch Investors Service, L.P. or its successor in interest.

         "FNMA": Federal National Mortgage Association or any successor thereto.

         "Fraud Loss": Any Realized Loss or portion thereof sustained by reason
of a default arising from intentional fraud, dishonesty or misrepresentation in
connection with the related Mortgage Loan.

         "Fraud Loss Amount": As of any date of determination after the Cut-off
Date, an amount equal to: (X) prior to the first anniversary of the Cut-off
Date, 3.00% of the aggregate Stated Principal Balance of the Original Mortgage
Loans as of the Cut-off Date (initially, $10,303,827), minus the aggregate
amount of Fraud Losses on the Mortgage Loans allocated to the Mezzanine
Certificates and the Class CE Certificates in accordance with Section 4.04 since
the Cut-off Date up to such date of determination, (Y) from the first to the
second anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a)
the Fraud Loss Amount as of the first anniversary of the Cut-off Date and (b)
2.00% of the aggregate outstanding principal balance of all of the Mortgage
Loans as of the first anniversary of the Cut-off Date minus (2) the Fraud Losses
allocated to the Mezzanine Certificates and the Class CE Certificates in
accordance with Section 4.04 since the first anniversary of the Cut-off Date up
to such date of determination and (Z) from the second to the fifth anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 1.00% of
the aggregate outstanding principal balance of all of the Mortgage Loans as of
the most recent anniversary of the Cut-off Date minus (2) the Fraud Losses on
the Mortgage Loans allocated to the Mezzanine Certificates and the Class CE
Certificates in accordance with Section 4.04 since the most recent anniversary
of the Cut-off Date up to such date of determination. On and after the fifth
anniversary of the Cut-off Date the Fraud Loss Amount shall be zero.

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

         "Independent": When used with respect to any specified Person, any such
Person who (a) is in fact independent of the Depositor, the Master Servicer, the
Originator and their respective Affiliates, (b) does not have any direct
financial interest in or any material indirect financial


<PAGE>


                                      -15-

interest in the Depositor, the Originator, the Master Servicer or any Affiliate
thereof, and (c) is not connected with the Depositor, the Originator, the Master
Servicer or any Affiliate thereof as an officer, employee, promoter,
underwriter, trustee, partner, director or Person performing similar functions;
provided, however, that a Person shall not fail to be Independent of the
Depositor, the Originator, the Master Servicer or any Affiliate thereof merely
because such Person is the beneficial owner of 1% or less of any class of
securities issued by the Depositor or the Master Servicer or any Affiliate
thereof, as the case may be.

         "Independent Contractor": Either (i) any Person (other than the Master
Servicer) that would be an "independent contractor" with respect to REMIC I
within the meaning of Section 856(d)(3) of the Code if REMIC I were a real
estate investment trust (except that the ownership tests set forth in that
section shall be considered to be met by any Person that owns, directly or
indirectly, 35 percent or more of any Class of Certificates), so long as REMIC I
does not receive or derive any income from such Person and provided that the
relationship between such Person and REMIC I is at arm's length, all within the
meaning of Treasury Regulation Section 1.856- 4(b)(5), or (ii) any other Person
(including the Master Servicer) if the Trustee has received an Opinion of
Counsel to the effect that the taking of any action in respect of any REO
Property by such Person, subject to any conditions therein specified, that is
otherwise herein contemplated to be taken by an Independent Contractor will not
cause such REO Property to cease to qualify as "foreclosure property" within the
meaning of Section 860G(a)(8) of the Code (determined without regard to the
exception applicable for purposes of Section 860D(a) of the Code), or cause any
income realized in respect of such REO Property to fail to qualify as Rents from
Real Property.

         "Index": With respect to each Mortgage Loan and each related Adjustment
Date, the average of the interbank offered rates for six-month United States
dollar deposits in the London market as published in THE WALL STREET JOURNAL and
as most recently available as of the first business day 45 days prior to such
Adjustment Date, as specified in the related Mortgage Note.

         "Insurance Proceeds": Proceeds of any title policy, hazard policy or
other insurance policy covering a Mortgage Loan, to the extent such proceeds are
not to be applied to the restoration of the related Mortgaged Property or
released to the Mortgagor in accordance with the procedures that the Master
Servicer would follow in servicing mortgage loans held for its own account,
subject to the terms and conditions of the related Mortgage Note and Mortgage.

         "Interest Accrual Period": With respect to any Distribution Date after
the first Distribution Date and the Class A Certificates, the Mezzanine
Certificates, REMIC II Regular Interest II-LT2, REMIC II Regular Interest
II-LT3, REMIC II Regular Interest II-LT4 and REMIC II Regular Interest II-LT5,
REMIC I Regular Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC I Regular
Interest I-LT4 and REMIC I Regular Interest I-LT5, the period commencing on the
Distribution Date of the month immediately preceding the month in which such
Distribution Date occurs and ending on the day preceding such Distribution Date.
With respect to the first Distribution Date and the Class A Certificates,
Mezzanine Certificates, Residual Certificates, REMIC II Regular Interest II-LT2,
REMIC II Regular Interest II-LT3, REMIC II Regular Interest II-LT4 and REMIC II
Regular Interest II-LT5, REMIC I Regular Interest I-LT2,


<PAGE>


                                      -16-

REMIC I Regular Interest I-LT3, REMIC I Regular Interest I-LT4 and REMIC I
Regular Interest I-LT5, the period commencing on the Closing Date and ending on
the day preceding such Distribution Date. With respect to any Distribution Date
and the other Classes of Certificates, REMIC II Regular Interests and REMIC I
Regular Interests, the one-month period ending on the last day of the calendar
month preceding the month in which such Distribution Date occurs.

         "Interest Carry Forward Amount": With respect to any Distribution Date
and any Class of Class A Certificates or Mezzanine Certificates, the sum of (i)
the amount, if any, by which (a) the Interest Distribution Amount for such Class
of Certificates as of the immediately preceding Distribution Date exceeded (b)
the actual amount distributed on such Class of Certificates in respect of
interest on such immediately preceding Distribution Date and (ii) the amount of
any Interest Carry Forward Amount for such Class of Certificates remaining
unpaid from previous Distribution Dates. With respect to such Classes of
Certificates, any Interest Carry Forward Amount paid pursuant to Section 4.01
will include accrued interest on such amount, calculated at the related
Pass-Through Rate for each Interest Accrual Period such amount remained
outstanding.

         "Interest Determination Date": With respect to the Class A
Certificates, the Mezzanine Certificates, REMIC II Regular Interest II-LT2,
REMIC II Regular Interest II-LT2S, REMIC II Regular Interest II-LT3, REMIC II
Regular Interest II-LT3S, REMIC II Regular Interest II-LT4, REMIC II Regular
Interest II-LT4S, REMIC II Regular Interest II-LT5, REMIC II Regular Interest
II-LT5S, REMIC I Regular Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC I
Regular Interest I-LT4 and REMIC I Regular Interest I-LT5, and any Interest
Accrual Period therefor, the second London Business Day preceding the
commencement of such Interest Accrual Period.

         "Interest Distribution Amount": With respect to any Distribution Date
and any Class of Certificates, the aggregate Accrued Certificate Interest on the
Certificates of such Class for such Distribution Date.

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

         "Late Collections": With respect to any Mortgage Loan, all amounts
received subsequent to the Determination Date immediately following any Due
Period, whether as late payments of Monthly Payments or as Insurance Proceeds,
Liquidation Proceeds or otherwise, which represent late payments or collections
of principal and/or interest due (without regard to any acceleration of payments
under the related Mortgage and Mortgage Note) but delinquent for such Due Period
and not previously recovered.

         "Liquidation Event": With respect to any Mortgage Loan, any of the
following events: (i) such Mortgage Loan is paid in full; (ii) a Final Recovery
Determination is made as to such Mortgage Loan; or (iii) such Mortgage Loan is
removed from REMIC I by reason of its being purchased, sold or replaced pursuant
to or as contemplated by Section 2.03, Section 3.16(c)


<PAGE>


                                      -17-

or Section 9.01. With respect to any REO Property, either of the following
events: (i) a Final Recovery Determination is made as to such REO Property; or
(ii) such REO Property is removed from REMIC I by reason of its being purchased
pursuant to Section 9.01.

         "Liquidation Proceeds": The amount (other than Insurance Proceeds or
amounts received in respect of the rental of any REO Property prior to REO
Disposition) received by the Master Servicer in connection with (i) the taking
of all or a part of a Mortgaged Property by exercise of the power of eminent
domain or condemnation, (ii) the liquidation of a defaulted Mortgage Loan
through a trustee's sale, foreclosure sale or otherwise, or (iii) the
repurchase, substitution or sale of a Mortgage Loan or an REO Property pursuant
to or as contemplated by Section 2.03, Section 3.16(c), Section 3.23 or Section
9.01.

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

         "London Business Day": Any day on which banks in the City of London are
open and conducting transactions in United States dollars.

         "Majority Class CE Certificateholder": Any single Holder or group of
Holders of Class CE Certificates representing a greater than 50% Percentage
Interest in such Class.

         "Master Servicer": Ameriquest Mortgage Company or any successor master
servicer appointed as herein provided, in its capacity as Master Servicer
hereunder.

         "Master Servicer Event of Default": One or more of the events described
in Section 7.01.

         "Master Servicer Remittance Date": With respect to any Distribution
Date, 3:00 p.m. New York time on the 18th day of the calendar month in which
such Distribution Date occurs or, if such 18th day is not a Business Day, the
Business Day immediately preceding such 18th day; provided, however, that if
such immediately preceding Business Day is the Determination Date, the Master
Servicer Remittance Date shall be the next succeeding Business Day.

         "Master Servicer Termination Test": With respect to any Distribution
Date, the Master Servicer Termination Test will be failed if the Cumulative Loss
Percentage exceeds 5.80%.

         "Maximum I-LT6 Uncertificated Interest Deferral Amount": With respect
to any Distribution Date, the excess of (i) accrued interest at the REMIC I
Remittance Rate applicable to REMIC I Regular Interest I-LT6 for such
Distribution Date on a balance equal to the Uncertificated Balance of REMIC I
Regular Interest I-LT6 minus the REMIC I Overcollateralized Amount, in each case
for such Distribution Date, over (ii) Uncertificated Interest on REMIC I 


<PAGE>


                                      -18-

Regular Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC I Regular Interest
I-LT4 and REMIC I Regular Interest I-LT5 for such Distribution Date.

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

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

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

         "Monthly Payment": With respect to any Mortgage Loan, the scheduled
monthly payment of principal and interest on such Mortgage Loan which is payable
by the related Mortgagor from time to time under the related Mortgage Note,
determined: (a) after giving effect to (i) any Deficient Valuation and/or Debt
Service Reduction with respect to such Mortgage Loan and (ii) any reduction in
the amount of interest collectible from the related Mortgagor pursuant to the
Relief Act; (b) without giving effect to any extension granted or agreed to by
the Master Servicer pursuant to Section 3.07; and (c) on the assumption that all
other amounts, if any, due under such Mortgage Loan are paid when due.

         "Mortgage": The mortgage, deed of trust or other instrument creating a
first lien on, or first priority security interest in, a Mortgaged 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": Each mortgage loan transferred and assigned to the
Trustee pursuant to Section 2.01 or Section 2.03(d) as from time to time held as
a part of the Trust Fund, the Mortgage Loans so held being identified in the
Mortgage Loan Schedule.

         "Mortgage Loan Purchase Agreement": The agreement among the Depositor,
the Seller and the Originator, regarding the transfer of the Mortgage Loans by
the Seller to or at the direction of the Depositor, substantially in the form of
Exhibit D annexed hereto.

         "Mortgage Loan Schedule": As of any date, the list of Mortgage Loans
included in REMIC I on such date, attached hereto as Schedule 1. The Mortgage
Loan Schedule shall set forth the following information with respect to each
Mortgage Loan:

         (i)   the Originator's Mortgage Loan identifying number;

         (ii)  the Mortgagor's name;


<PAGE>


                                      -19-

        (iii)   the street address of the Mortgaged Property including the
                state and zip code;

        (iv)    a code indicating whether the Mortgaged Property is
                owner-occupied;

        (v)     the type of Residential Dwelling constituting the Mortgaged
                Property;

        (vi)    the original months to maturity;

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

       (viii)   the Mortgage Rate in effect immediately following the Cut-off
                Date;

         (ix)   the date on which the first Monthly Payment was due on the
                Mortgage Loan;

          (x)   the stated maturity date;

         (xi)   the amount of the Monthly Payment due on the first Due Date
                after the Cut-off Date;

        (xii)   the last Due Date on which a Monthly Payment was actually
                applied to the unpaid Stated Principal Balance;

        (xii)   the original principal amount of the Mortgage Loan;

        (xiv)   the Scheduled Principal Balance of the Mortgage Loan as of the
                close of business on the Cut-off Date;

         (xv)    the Gross Margin;

        (xvi)    a code indicating the purpose of the Mortgage Loan (I.E.,
                 purchase financing, rate/term refinancing, cash-out
                 refinancing);

        (xvii)   the Maximum Mortgage Rate;

       (xviii)   the Minimum Mortgage Rate;

         (xix)   the Mortgage Rate at origination;

          (xx)   the Periodic Rate Cap and the maximum first Adjustment Date
                 Mortgage Rate adjustment;

         (xxi)   a code indicating the documentation program (I.E., Full
                 Documentation, Fast Trac, QuickCredit Full Documentation,
                 QuickCredit Fast Trac, Stated Income, INSTA Credit Full
                 Documentation or INSTA Credit Fast Trac);

<PAGE>


                                      -20-

        (xxii)   the first Adjustment Date immediately following the Cut-off
                 Date;

       (xxiii)   the risk grade;

        (xxiv)   the Value of the Mortgaged Property; and

        (xxv)    the sale price of the Mortgaged Property, if applicable.

         The Mortgage Loan Schedule shall set forth the following information,
as of the Cut-off Date with respect to the Mortgage Loans in the aggregate: (1)
the number of Mortgage Loans; (2) the current principal balance of the Mortgage
Loans; (3) the weighted average Mortgage Rate of the Mortgage Loans; and (4) the
weighted average maturity of the Mortgage Loans. The Mortgage Loan Schedule
shall be amended from time to time by the Depositor in accordance with the
provisions of this Agreement. With respect to any Qualified Substitute Mortgage
Loan, Cut-off Date shall refer to the related Cut-off Date for such Mortgage
Loan, determined in accordance with the definition of Cut-off Date herein.

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

         "Mortgage Pool": The pool of Mortgage Loans, identified on Schedule 1
from time to time, and any REO Properties acquired in respect thereof.

         "Mortgage Rate": With respect to each Mortgage Loan, the annual rate at
which interest accrues on such Mortgage Loan from time to time in accordance
with the provisions of the related Mortgage Note, which rate (A) as of any date
of determination until the first Adjustment Date following the Cut-off Date
shall be the rate set forth in the Mortgage Loan Schedule as the Mortgage Rate
in effect immediately following the Cut-off Date and (B) as of any date of
determination thereafter shall be the rate as adjusted on the most recent
Adjustment Date, equal to the sum, rounded to the nearest 0.125% as provided in
the Mortgage Note, of the Index, as most recently available as of a date prior
to the Adjustment Date as set forth in the related Mortgage Note, plus the
related Gross Margin; provided that the Mortgage Rate on such Mortgage Loan on
any Adjustment Date shall never be more than the lesser of (i) the sum of the
Mortgage Rate in effect immediately prior to the Adjustment Date plus the
related Periodic Rate Cap, if any, and (ii) the related Maximum Mortgage Rate,
and shall never be less than the greater of (i) the Mortgage Rate in effect
immediately prior to the Adjustment Date less the Periodic Rate Cap, if any, and
(ii) the related Minimum Mortgage Rate. With respect to each Mortgage Loan that
becomes an REO Property, as of any date of determination, the annual rate
determined in accordance with the immediately preceding sentence as of the date
such Mortgage Loan became an REO Property.

         "Mortgaged Property": The underlying property securing a Mortgage Loan,
including any REO Property, consisting of an Estate in Real Property improved by
a Residential Dwelling.


<PAGE>


                                      -21-

         "Mortgagor": The obligor on a Mortgage Note.

         "Net Monthly Excess Cashflow": With respect to any Distribution Date,
the sum of (i) any Overcollateralization Reduction Amount for such Distribution
Date and (ii) the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such Distribution Date of (A) the
Interest Distribution Amount payable to the holders of the Class A Certificates,
the Mezzanine Certificates and the Residual Certificates and (B) the sum of the
amounts described in clauses (b)(i) through (iii) of the definition of Principal
Distribution Amount.

         "Net Mortgage Rate": With respect to any Mortgage Loan (or the related
REO Property) 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
Servicing Fee Rate.

         "Net WAC Pass-Through Rate": With respect to the REMIC II Regular
Interests, Class A Certificates, the Mezzanine Certificates and the Residual
Certificates and any Distribution Date, a per annum rate equal to the fraction,
expressed as a percentage, the numerator of which is (i) an amount equal to 1/12
of the aggregate Scheduled Principal Balance of the then outstanding Mortgage
Loans and REO Properties multiplied by the weighted average of the Expense
Adjusted Mortgage Rates on such Mortgage Loans and REO Properties, and the
denominator of which is (ii) an amount equal to (A) the sum of the aggregate
Scheduled Principal Balance of the then outstanding Mortgage Loans and REO
Properties multiplied by (B) the actual number of days elapsed in the related
Interest Accrual Period divided by 360.

         "New Lease": Any lease of REO Property entered into on behalf of REMIC
I, including any lease renewed or extended on behalf of REMIC I, if REMIC I has
the right to renegotiate the terms of such lease.

         "Nonrecoverable P&I Advance": Any P&I Advance previously made or
proposed to be made in respect of a Mortgage Loan or REO Property that, in the
good faith business judgment of the Master Servicer, will not or, in the case of
a proposed P&I Advance, would not be ultimately recoverable from related late
payments, Insurance Proceeds or Liquidation Proceeds on such Mortgage Loan or
REO Property as provided herein.

         "Non-United States Person": Any Person other than a United States
Person.

         "Notional Amount": With respect to the Class CE Certificates, for any
Distribution Date, the Uncertificated Balance of the REMIC II Regular Interests
for such Distribution Date.

         "Officers' Certificate": A certificate signed by the Chairman of the
Board, the Vice Chairman of the Board, the President or a vice president
(however denominated), and by the Treasurer, the Secretary, or one of the
assistant treasurers or assistant secretaries of the Originator, the Seller or
the Depositor, as applicable; with respect to the Master Servicer, any officer
who is authorized to act for the Master Servicer in matters relating to this
Agreement, and 


<PAGE>


                                      -22-

whose action is binding upon the Master Servicer, initially including those
individuals whose names appear on the list of authorized officers delivered at
the closing.

         "One-Month LIBOR": With respect to the Class A Certificates, the
Mezzanine Certificates and the Residual Certificates and REMIC II Regular
Interest II-LT2, REMIC II Regular Interest II-LT3, REMIC II Regular Interest
II-LT4 and REMIC II Regular Interest II-LT5 and any Interest Accrual Period
therefor, the rate determined by the Trustee on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO
Page, as of 11:00 a.m. (London time) on such Interest Determination Date. On
each Interest Determination Date, One-Month LIBOR for the related Interest
Accrual Period will be established by the Trustee as follows:

         (i)       If on such Interest Determination Date, two or more Reference
                   Banks provide such offered quotations, One-Month LIBOR for
                   the related Interest Accrual Period shall be the arithmetic
                   mean of such offered quotations (rounded upwards if necessary
                   to the nearest whole multiple of 1/16%).

         (ii)      If on such Interest Determination Date, fewer than two
                   Reference Banks provide such offered quotations, One-Month
                   LIBOR for the related Interest Accrual Period shall be the
                   higher of (i) LIBOR as determined on the previous Interest
                   Determination Date and (ii) the Reserve Interest Rate.
                   Notwithstanding the foregoing, if, under the priorities
                   described above, LIBOR for an Interest Determination Date
                   would be based on LIBOR for the previous Interest
                   Determination Date for the third consecutive Determination
                   Date, the Trustee shall select an alternative comparable
                   index (over which the Trustee has no control), used for
                   determining one-month Eurodollar lending rates that is
                   calculated and published (or otherwise made available) by an
                   independent party.

         "One-Month LIBOR Pass-Through Rate": With respect to the Class A
Certificates and REMIC II Regular Interest II-LT2 and any Distribution Date, a
per annum rate equal to One- Month LIBOR plus 0.24%, in the case of each
Distribution Date through and including the Distribution Date on which the
aggregate Stated Principal Balance of the Mortgage Loans is reduced to less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans as of the
Cut-off Date, or One-Month LIBOR plus 0.48%, in the case of any Distribution
Date thereafter.

         With respect to the Class M-1 Certificates and REMIC II Regular
Interest II-LT3 and any Distribution Date, a per annum rate equal to One-Month
LIBOR plus 0.42%, in the case of each Distribution Date through and including
the Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans is reduced to less than 10% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date, or One-Month LIBOR plus
0.63%, in the case of any Distribution Date thereafter.


<PAGE>


                                      -23-

         With respect to the Class M-2 Certificates and REMIC II Regular
Interest II-LT4 and any Distribution Date, a per annum rate equal to One-Month
LIBOR plus 0.64%, in the case of each Distribution Date through and including
the Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans is reduced to less than 10% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date, or One-Month LIBOR plus
0.96%, in the case of any Distribution Date thereafter.

         With respect to the Class M-3 Certificates and REMIC II Regular
Interest II-LT5 and any Distribution Date, a per annum rate equal to One-Month
LIBOR plus 0.97%, in the case of each Distribution Date through and including
the Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans is reduced to less than 10% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date, or One-Month LIBOR plus
1.455%, in the case of any Distribution Date thereafter.

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

         "Original Mortgage Loan": Any of the Mortgage Loans included in REMIC I
as of the Closing Date.

         "Originator": Ameriquest Mortgage Company, or its successor in
interest, in its capacity as originator under the Mortgage Loan Purchase
Agreement.

         "Overcollateralized Amount": With respect to any Distribution Date, the
excess, if any, of (a) the aggregate Stated Principal Balances of the Mortgage
Loans immediately following such Distribution Date over (b) the sum of the
aggregate Certificate Principal Balances of the Class A Certificates and the
Mezzanine Certificates as of such Distribution Date (after taking into account
the payment of the amounts described in clauses (b)(i) through (iv) of the
definition of Principal Distribution Amount on such Distribution Date).

         "Overcollateralization Deficiency Amount": With respect to any
Distribution Date, the excess, if any, of (a) the Required Overcollateralized
Amount applicable to such Distribution Date over (b) the Overcollateralized
Amount applicable to such Distribution Date prior to taking into account the
payment of any Overcollateralization Increase Amount on such Distribution Date.

         "Overcollateralization Increase Amount": With respect to any
Distribution Date, the lesser of (a) the Overcollateralization Deficiency Amount
as of such Distribution Date (after taking into account the payment of the
Principal Distribution Amount on such Distribution Date, exclusive of the
payment of any Overcollateralization Increase Amount) and (b) the amount of
Accrued Certificate Interest payable on the Class CE Certificates on such
Distribution Date 

<PAGE>


                                      -24-


as reduced by Realized Losses allocated thereto with respect to such
Distribution Date pursuant to Section 4.04.

         "Overcollateralization Reduction Amount": With respect to any
Distribution Date, an amount equal to the lesser of (a) the Excess
Overcollateralized Amount and (b) the sum of the amounts available for
distribution specified in clauses (b)(i) through (iii) of the definition of
Principal Distribution Amount.

         "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.

         "Pass-Through Rate": With respect to the Residual Certificates and the
first Distribution Date and with respect to the Class A Certificates and the
Mezzanine Certificates and any Distribution Date, a rate per annum equal to the
lesser of (i) the related One-Month LIBOR Pass-Through Rate for such
Distribution Date and (ii) the Net WAC Pass-Through Rate for such Distribution
Date. With respect to the Class CE Certificates and any Distribution Date, a
rate per annum equal to the sum of the following components:


                  (i) the REMIC II Remittance Rate for REMIC II Regular Interest
         II-LT1 minus two (2) times the weighted average of the REMIC II
         Remittance Rates for REMIC II Regular Interest II-LT2, REMIC II Regular
         Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II Regular
         Interest II-LT5 and REMIC II Regular Interest II-LT6, with the rate on
         REMIC II Regular Interest II-LT6 equal to zero for the purpose of this
         calculation, applied to an Uncertificated Notional Amount equal to the
         Uncertificated Principal Balance of REMIC II Regular Interest II-LT1;

                  (ii) the REMIC II Remittance Rate for REMIC II Regular
         Interest II-LT2 minus two (2) times the weighted average of the REMIC
         II Remittance Rates for REMIC II Regular Interest II-LT2, REMIC II
         Regular Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II
         Regular Interest II-LT5 and REMIC II Regular Interest II-LT6, with the
         rate on REMIC II Regular Interest II-LT6 equal to zero for the purpose
         of this calculation, applied to an Uncertificated Notional Amount equal
         to the Uncertificated Principal Balance of REMIC II Regular Interest
         II-LT2;

                  (iii) the REMIC II Remittance Rate for REMIC II Regular
         Interest II-LT3 minus two (2) times the weighted average of the REMIC
         II Remittance Rates for REMIC II Regular Interest II-LT2, REMIC II
         Regular Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II
         Regular Interest II-LT5 and REMIC II Regular Interest II-LT6, with the
         rate on REMIC II Regular Interest II-LT6 equal to zero for the purpose
         of this calculation, applied to an Uncertificated Notional Amount equal
         to the Uncertificated Principal Balance of REMIC II Regular Interest
         II-LT3;


<PAGE>


                                      -25-

                  (iv) the REMIC II Remittance Rate for REMIC II Regular
         Interest II-LT4 minus two (2) times the weighted average of the REMIC
         II Remittance Rates for REMIC II Regular Interests II-LT2, REMIC II
         Regular Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II
         Regular Interest II-LT5 and REMIC II Regular Interest II-LT6, with the
         rate on REMIC II Regular Interest II-LT6 equal to zero for the purpose
         of this calculation, applied to an Uncertificated Notional Amount equal
         to the Uncertificated Principal Balance of REMIC II Regular Interest
         II-LT4;

                  (v) the REMIC II Remittance Rate for REMIC II Regular Interest
         II-LT5 minus two (2) times the weighted average of the REMIC II
         Remittance Rates for REMIC II Regular Interests II-LT2, REMIC II
         Regular Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II
         Regular Interest II-LT5 and REMIC II Regular Interest II-LT6, with the
         rate on REMIC II Regular Interest II-LT6 equal to zero for the purpose
         of this calculation, applied to an Uncertificated Notional Amount equal
         to the Uncertificated Principal Balance of REMIC II Regular Interest
         II-LT5;

                  (vi) the REMIC II Remittance Rate for REMIC II Regular
         Interest II-LT6 minus two (2) times the weighted average of the REMIC
         II Remittance Rates for REMIC II Regular Interests II-LT2, REMIC II
         Regular Interest II-LT3, REMIC II Regular Interest II-LT4, REMIC II
         Regular Interest II-LT5 and REMIC II Regular Interest II-LT6, with the
         rate on REMIC II Regular Interest II-LT6 equal to zero for the purpose
         of this calculation, applied to an Uncertificated Notional Amount equal
         to the Uncertificated Principal Balance of REMIC II Regular Interest
         II-LT6;

                  (vii) 100% of the interest on REMIC II Regular Interest
         II-LT2S;

                  (viii) 100% of the interest on REMIC II Regular Interest
         II-LT3S;

                  (ix) 100% of the interest on REMIC II Regular Interest
         II-LT4S; and

                  (x) 100% of the interest on REMIC II Regular Interest II-LT5S.

         "Percentage Interest": With respect to the Class A Certificates, the
Mezzanine Certificates and the Class CE Certificates, the undivided percentage
ownership in such Class evidenced by such Certificate, 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 aggregate
initial Certificate Principal Balance of all of the Certificates of such Class.
The Class A Certificates and the Mezzanine Certificates are issuable only in
minimum Percentage Interests corresponding to minimum initial Certificate
Principal Balances of $10,000 and integral multiples of $1.00 in excess thereof.
The Class CE Certificates are issuable only in minimum Percentage Interests
corresponding to minimum initial Certificate Principal Balances of $10,000 and
integral multiples of $1.00 in excess thereof; provided, however, that a single
Certificate of such Class of Certificates may be issued having a Percentage
Interest corresponding to the remainder of the aggregate initial Certificate
Principal Balance of such Class or to an otherwise authorized denomination for
such Class plus such remainder. With respect to any Residual Certificate, the
undivided percentage ownership in such Class evidenced by such Certificate, as
set forth on the face of such Residual Certificate. The Residual Certificates
are issuable only in Percentage Interests corresponding to initial Certificate
Principal Balances of $20 and integral multiples thereof.


<PAGE>


                                      -26-

         "Periodic Rate Cap": With respect to each 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 Investments": Any one or more of the following obligations
or securities acquired at a purchase price of not greater than par, regardless
of whether issued by the Depositor, the Master Servicer, the Trustee or any of
their respective Affiliates:

                           (i) direct obligations of, or obligations fully
         guaranteed as to timely payment of principal and interest by, the
         United States or any agency or instrumentality thereof, provided such
         obligations are backed by the full faith and credit of the United
         States;

                           (ii) demand and time deposits in, certificates of
         deposit of, or bankers' acceptances (which shall each have an original
         maturity of not more than 90 days and, in the case of bankers'
         acceptances, shall in no event have an original maturity of more than
         365 days or a remaining maturity of more than 30 days) denominated in
         United States dollars and issued by, any Depository Institution;

                           (iii) repurchase obligations with respect to any
         security described in clause (i) above entered into with a Depository
         Institution (acting as principal);

                           (iv) securities bearing interest or sold at a
         discount that are issued by any corporation incorporated under the laws
         of the United States of America or any state thereof and that are rated
         by each Rating Agency in its highest long-term unsecured rating
         categories at the time of such investment or contractual commitment
         providing for such investment;

                           (v) commercial paper (including both
         non-interest-bearing discount obligations and interest-bearing
         obligations payable on demand or on a specified date not more than 30
         days after the date of acquisition thereof) that is rated by each
         Rating Agency in its highest short-term unsecured debt rating available
         at the time of such investment;

                           (vi) units of money market funds, including money
         market funds advised by the Trustee or an Affiliate thereof, that have
         been rated "AAA" by Fitch (if rated by Fitch) and "AAA" by S&P; and


<PAGE>


                                      -27-

                           (viii) if previously confirmed in writing to the
         Trustee, any other demand, money market or time deposit, or any other
         obligation, security or investment, as may be acceptable to the Rating
         Agencies as a permitted investment of funds backing securities having
         ratings equivalent to its highest initial rating of the Class A
         Certificates;

provided, however, that no instrument described hereunder shall evidence either
the right to receive (a) only interest with respect to the obligations
underlying such instrument or (b) both principal and interest payments derived
from obligations underlying such instrument and the interest and principal
payments with respect to such instrument provide a yield to maturity at par
greater than 120% of the yield to maturity at par of the underlying obligations.

         "Permitted Transferee": Any Transferee of a Residual Certificate other
than a Disqualified Organization or Non-United States Person.

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

         "P&I Advance": As to any Mortgage Loan or REO Property, any advance
made by the Master Servicer in respect of any Distribution Date pursuant to
Section 4.03.

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

         "Prepayment Assumption": A prepayment rate for the Mortgage Loans of
28% CPR. The Prepayment Assumption is used solely for determining the accrual of
original issue discount on the Certificates for federal income tax purposes. A
CPR (or Constant Prepayment Rate) represents an annualized constant assumed rate
of prepayment each month of a pool of mortgage loans relative to its outstanding
principal balance for the life of such pool.

         "Prepayment Interest Shortfall": With respect to any Distribution Date,
for each Mortgage Loan that was during the related Prepayment Period the subject
of a Principal Prepayment in full or in part that was applied by the Master
Servicer to reduce the outstanding principal balance of such loan on a date
preceding the Due Date in the succeeding Prepayment Period, an amount equal to
interest at the applicable Net Mortgage Rate on the amount of such Principal
Prepayment for the number of days commencing on the date on which the prepayment
is applied and ending on the last day of the related Prepayment Period. The
obligations of the Master Servicer in respect of any Prepayment Interest
Shortfall are set forth in Section 3.24.

         "Prepayment Period": With respect to any Distribution Date, the
calendar month preceding the calendar month in which such Distribution Date
occurs.


<PAGE>


                                      -28-

         "Principal Distribution Amount": With respect to any Distribution Date,
the lesser of:

          (a)     the excess of the Available Distribution Amount over the
                  amount payable on the Class A Certificates, the Mezzanine
                  Certificates pursuant to Section 4.01(a)(2); and

          (b)     the sum of

                  (i)      the principal portion of each Monthly Payment on the
                           Mortgage Loans due during the related Due Period,
                           whether or not received on or prior to the related
                           Determination Date;

                 (ii)      the Stated Principal Balance of any Mortgage
                           Loan that was purchased during the related Prepayment
                           Period pursuant to or as contemplated by Section
                           2.03, Section 3.16(c) or Section 9.01 and the amount
                           of any shortfall deposited in the Collection Account
                           in connection with the substitution of a Deleted
                           Mortgage Loan pursuant to Section 2.03 during the
                           related Prepayment Period;

                 (iii)     the principal portion of all other unscheduled
                           collections (including, without limitation, Principal
                           Prepayments, Insurance Proceeds, Liquidation Proceeds
                           and REO Principal Amortization) received during the
                           related Prepayment Period, net of any portion thereof
                           that represents a recovery of principal for which an
                           advance was made by the Master Servicer pursuant to
                           Section 4.03 in respect of a preceding Distribution
                           Date;

                  (iv)     the principal portion of any Realized Losses
                           incurred or deemed to have been incurred on the
                           Mortgage Loans in the calendar month preceding such
                           Distribution Date; and

                   (v)     the amount of any Overcollateralization Increase
                           Amount for such Distribution Date;

                           minus:

                   (vi)    the amount of any Overcollateralization Reduction
                           Amount for such 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.


<PAGE>


                                      -29-

         "Purchase Price": With respect to any Mortgage Loan or REO Property to
be purchased pursuant to or as contemplated by Section 2.03, Section 3.16(c) or
Section 9.01, and as confirmed by an Officers' Certificate from the Master
Servicer to the Trustee, an amount equal to the sum of (i) 100% of the Stated
Principal Balance thereof as of the date of purchase (or such other price as
provided in Section 9.01), (ii) in the case of (x) a Mortgage Loan, accrued
interest on such Stated Principal Balance at the applicable Net Mortgage Rate in
effect from time to time from the Due Date as to which interest was last covered
by a payment by the Mortgagor or an advance by the Master Servicer, which
payment or advance had as of the date of purchase been distributed pursuant to
Section 4.01, through the end of the calendar month in which the purchase is to
be effected, and (y) an REO Property, the sum of (1) accrued interest on such
Stated Principal Balance at the applicable Net Mortgage Rate in effect from time
to time from the Due Date as to which interest was last covered by a payment by
the Mortgagor or an advance by the Master Servicer through the end of the
calendar month immediately preceding the calendar month in which such REO
Property was acquired, plus (2) REO Imputed Interest for such REO Property for
each calendar month commencing with the calendar month in which such REO
Property was acquired and ending with the calendar month in which such purchase
is to be effected, net of the total of all net rental income, Insurance
Proceeds, Liquidation Proceeds and P&I Advances that as of the date of purchase
had been distributed as or to cover REO Imputed Interest pursuant to Section
4.01, (iii) any unreimbursed Servicing Advances and P&I Advances and any unpaid
Servicing Fees allocable to such Mortgage Loan or REO Property, (iv) any amounts
previously withdrawn from the Collection Account in respect of such Mortgage
Loan or REO Property pursuant to Sections 3.11(ix) and 3.16(b), and (v) in the
case of a Mortgage Loan required to be purchased pursuant to Section 2.03,
expenses reasonably incurred or to be incurred by the Master Servicer or the
Trustee in respect of the breach or defect giving rise to the purchase
obligation.

         "Qualified Substitute Mortgage Loan": A mortgage loan substituted for a
Deleted Mortgage Loan pursuant to the terms of this Agreement which must, on the
date of such substitution, (i) have an outstanding principal balance, after
application of all scheduled payments of principal and interest due during or
prior to the month of substitution, not in excess of the Scheduled Principal
Balance of the Deleted Mortgage Loan as of the Due Date in the calendar month
during which the substitution occurs, (ii) have a Mortgage Rate not less than
(and not more than one percentage point in excess of) the Mortgage Rate of the
Deleted Mortgage Loan, (iii) have a Maximum Mortgage Rate not less than the
Maximum Mortgage Rate on the Deleted Mortgage Loan, (iv) have a Minimum Mortgage
Rate not less than the Minimum Mortgage Rate of the Deleted Mortgage Loan, (v)
have a Gross Margin equal to the Gross Margin of the Deleted Mortgage Loan, (vi)
have a next Adjustment Date not more than two months later than the next
Adjustment Date on the Deleted Mortgage Loan, (vii) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Mortgage Loan, (viii) have the same Due Date as the Due Date on the
Deleted Mortgage Loan, (ix) have a Loan-to-Value Ratio as of the date of
substitution equal to or lower than the Loan-to-Value Ratio of the Deleted
Mortgage Loan as of such date, (x) have a risk grading determined by the
Originator at least equal to the risk grading assigned on the Deleted Mortgage
Loan and (xi) conform to each representation and warranty set forth in Section 6
of the Mortgage Loan Purchase Agreement applicable to the Deleted Mortgage Loan.
In the event that one or more mortgage loans are substituted for one or


<PAGE>


                                      -30-

more Deleted Mortgage Loans, the amounts described in clause (i) hereof shall be
determined on the basis of aggregate principal balances, the Mortgage Rates
described in clause (ii) hereof shall be determined on the basis of weighted
average Mortgage Rates, the risk gradings described in clause (x) hereof shall
be satisfied as to each such mortgage loan, the terms described in clause (vii)
hereof shall be determined on the basis of weighted average remaining term to
maturity, the Loan-to-Value Ratios described in clause (ix) hereof shall be
satisfied as to each such mortgage loan and, except to the extent otherwise
provided in this sentence, the representations and warranties described in
clause (xi) hereof must be satisfied as to each Qualified Substitute Mortgage
Loan or in the aggregate, as the case may be.

         "Rating Agency or Rating Agencies": Fitch and S&P or their successors.
If such agencies or their successors are no longer in existence, "Rating
Agencies" shall be such nationally recognized statistical rating agencies, or
other comparable Persons, designated by the Depositor, notice of which
designation shall be given to the Trustee and the Master Servicer.

         "Realized Loss": With respect to each Mortgage Loan as to which a Final
Recovery Determination has been made, an amount (not less than zero) equal to
(i) the unpaid principal balance of such Mortgage Loan as of the commencement of
the calendar month in which the Final Recovery Determination was made, plus (ii)
accrued interest from the Due Date as to which interest was last paid by the
Mortgagor through the end of the calendar month in which such Final Recovery
Determination was made, calculated in the case of each calendar month during
such period (A) at an annual rate equal to the annual rate at which interest was
then accruing on such Mortgage Loan and (B) on a principal amount equal to the
Stated Principal Balance of such Mortgage Loan as of the close of business on
the Distribution Date during such calendar month, plus (iii) any amounts
previously withdrawn from the Collection Account in respect of such Mortgage
Loan pursuant to Section 3.11(ix) and Section 3.16(b), minus (iv) the proceeds,
if any, received in respect of such Mortgage Loan during the calendar month in
which such Final Recovery Determination was made, net of amounts that are
payable therefrom to the Master Servicer with respect to such Mortgage Loan
pursuant to clause (iii) of Section 3.11.

         With respect to any REO Property as to which a Final Recovery
Determination has been made, an amount (not less than zero) equal to (i) the
unpaid principal balance of the related Mortgage Loan as of the date of
acquisition of such REO Property on behalf of REMIC I, plus (ii) accrued
interest from the Due Date as to which interest was last paid by the Mortgagor
in respect of the related Mortgage Loan through the end of the calendar month
immediately preceding the calendar month in which such REO Property was
acquired, calculated in the case of each calendar month during such period (A)
at an annual rate equal to the annual rate at which interest was then accruing
on the related Mortgage Loan and (B) on a principal amount equal to the Stated
Principal Balance of the related Mortgage Loan as of the close of business on
the Distribution Date during such calendar month, plus (iii) REO Imputed
Interest for such REO Property for each calendar month commencing with the
calendar month in which such REO Property was acquired and ending with the
calendar month in which such Final Recovery Determination was made, plus (iv)
any amounts previously withdrawn from the Collection Account in respect of the
related Mortgage Loan pursuant to Section 3.11(ix) and Section 3.16(b),


<PAGE>


                                      -31-

minus (v) the aggregate of all P&I Advances made by the Master Servicer in
respect of such REO Property or the related Mortgage Loan for which the Master
Servicer has been or, in connection with such Final Recovery Determination, will
be reimbursed pursuant to Section 3.23 out of rental income, Insurance Proceeds
and Liquidation Proceeds received in respect of such REO Property, minus (vi)
the total of all net rental income, Insurance Proceeds and Liquidation Proceeds
received in respect of such REO Property that has been, or in connection with
such Final Recovery Determination, will be transferred to the Distribution
Account pursuant to Section 3.23.

         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 subject of a
Debt Service Reduction, the portion, if any, of the reduction in each affected
Monthly Payment attributable to a reduction in the Mortgage Rate imposed by a
court of competent jurisdiction. Each such Realized Loss shall be deemed to have
been incurred on the Due Date for each affected Monthly Payment.

         "Record Date": With respect to each Distribution Date, the last
Business Day of the month immediately preceding the month in which such
Distribution Date occurs.

         "Reference Banks": Bankers Trust Company, Barclay's Bank PLC, The Bank
of Tokyo and National Westminster Bank PLC and their successors in interest;
provided, however, that if any of the foregoing banks are not suitable to serve
as a Reference Bank, "Reference Banks" shall mean any leading banks 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 Depositor 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 Trustee.

         "Refinanced Mortgage Loan": A Mortgage Loan the proceeds of which were
not used to purchase the related Mortgaged Property.

         "Regular Certificate": Any Class A Certificate, Mezzanine Certificate
or Class CE Certificate.

         "Regular Interest": A "regular interest" in a REMIC within the meaning
of Section 860G(a)(1) of the Code.

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


<PAGE>


                                      -32-

         "Relief Act Interest Shortfall": With respect to any Distribution Date
and any Mortgage Loan, any reduction in the amount of interest collectible on
such Mortgage Loan for the most recently ended calendar month as a result of the
application of the Relief Act.

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

         "REMIC I": The segregated pool of assets subject hereto, constituting
the primary trust created hereby and to be administered hereunder, with respect
to which a REMIC election is to be made, consisting of: (i) such Mortgage Loans
as from time to time are subject to this Agreement, together with the Mortgage
Files relating thereto, and together with all collections thereon and proceeds
thereof, (ii) any REO Property, together with all collections thereon and
proceeds thereof, (iii) the Trustee's rights with respect to the Mortgage Loans
under all insurance policies required to be maintained pursuant to this
Agreement and any proceeds thereof, (iv) the Depositor's rights under the
Mortgage Loan Purchase Agreement (including any security interest created
thereby) to the extent conveyed pursuant to Section 2.01, and (v) the Collection
Account, the Distribution Account, any REO Account and such assets that are
deposited therein from time to time and any investments thereof, together with
any and all income, proceeds and payments with respect thereto. Notwithstanding
the foregoing, REMIC I specifically excludes all payments and other collections
of principal and interest due on the Mortgage Loans on or before the Cut-off
Date.

         "REMIC I Interest Loss Allocation Amount": With respect to any
Distribution Date, an amount equal to (a) the product of (i) the aggregate
Stated Principal Balance of the Mortgage Loans and REO Properties then
outstanding and (ii) the REMIC I Remittance Rate for REMIC I Regular Interest
I-LT1 minus two (2) times the weighted average of the REMIC II Remittance Rates
for REMIC I Regular Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC I
Regular Interest I-LT4, REMIC I Regular Interest I-LT5 and REMIC I Regular
Interest I-LT6, with the rate on REMIC I Regular Interest I-LT6 equal to zero
for purposes of this calculation, divided by (b) 12.

         "REMIC I Overcollateralized Amount": With respect to any date of
determination, (i) 1% of the aggregate Uncertificated Balances of the REMIC I
Regular Interests minus (ii) the Uncertificated Balances of REMIC I Regular
Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC I Regular Interest I-LT4
and REMIC I Regular Interest I-LT5, in each case as of such date of
determination.

         "REMIC I Principal Loss Allocation Amount": With respect to any
Distribution Date, an amount equal to the product of (i) the aggregate Stated
Principal Balance of the Mortgage Loans and REO Properties then outstanding and
(ii) 1 minus a fraction, the numerator of which is two times the Uncertificated
Balance of REMIC I Regular Interest I-LT2, REMIC I Regular Interest I-LT3, REMIC
I Regular Interest I-LT4 and REMIC I Regular Interest I-LT5 and the denominator
of which is the sum of the Uncertificated Balances of REMIC I Regular Interest
I-


<PAGE>


                                      -33-

LT2, REMIC I Regular Interest I-LT3, REMIC I Regular Interest I-LT4, REMIC I
Regular Interest I-LT5 and REMIC I Regular Interest I-LT6.

         "REMIC I Regular Interest": Any of the six separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
"regular interest" in REMICI. Each REMIC I Regular Interest shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto. The designations for
the respective REMIC I Regular Interests are set forth in the Preliminary
Statement hereto.

         "REMIC I Regular Interest I-LT1": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT1 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Regular Interest I-LT2": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT2 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Regular Interest I-LT3": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT3 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Regular Interest I-LT4": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT4 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Regular Interest I-LT5": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT5 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms


<PAGE>


                                      -34-

and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Regular Interest I-LT6": One of the separate non-certificated
beneficial ownership interests in REMIC I issued hereunder and designated as a
Regular Interest in REMIC I. REMIC I Regular Interest I-LT6 shall accrue
interest at the related REMIC I Remittance Rate in effect from time to time, and
shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto.

         "REMIC I Remittance Rate": With respect to each REMIC I Regular
Interest, the weighted average of the Expense Adjusted Mortgage Rates on the
then outstanding Mortgage Loans and REO Properties.

         "REMIC I Required Overcollateralized Amount": 1% of the Required
Overcollateralization Amount.

         "REMIC II": The segregated pool of assets consisting of all of the
REMIC I Regular Interests conveyed in trust to the Trustee for the benefit of
REMIC III, as holder of the REMIC II Regular Interests, and the Class R-II
Certificateholders pursuant to Section 2.07, and all amounts deposited therein,
with respect to which a separate REMIC election is to be made.

         "REMIC II Regular Interest": Any of the ten separate non-certificated
beneficial ownership interests in REMIC II issued hereunder and designated as a
"regular interest" in REMIC II. Each REMIC II Regular Interest shall accrue
interest at the related REMIC II Remittance Rate in effect from time to time,
and shall be entitled to distributions of principal, subject to the terms and
conditions hereof, in an aggregate amount equal to its initial Uncertificated
Balance as set forth in the Preliminary Statement hereto. The designations for
the respective REMIC II Regular Interests are set forth in the Preliminary
Statement hereto.

         "REMIC II Regular Interest II-LT1": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT1
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC II Regular Interest II-LT2": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT2
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC II Regular Interest II-LT3": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT3
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.


<PAGE>


                                      -35-

         "REMIC II Regular Interest II-LT4": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT4
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC II Regular Interest II-LT5": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT5
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC II Regular Interest II-LT6": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT6
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to its initial
Uncertificated Balance as set forth in the Preliminary Statement hereto.

         "REMIC II Regular Interest II-LT2S": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT2S
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time on its related Uncertificated Notional Amount.

         "REMIC II Regular Interest II-LT3S": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT3S
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time on its related Uncertificated Notional Amount.

         "REMIC II Regular Interest II-LT4S": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT4S
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time on its related Uncertificated Notional Amount.


<PAGE>


                                      -36-

         "REMIC II Regular Interest II-LT5S": One of the separate
non-certificated beneficial ownership interests in REMIC II issued hereunder and
designated as a Regular Interest in REMIC II. REMIC II Regular Interest II-LT5S
shall accrue interest at the related REMIC II Remittance Rate in effect from
time to time on its related Uncertificated Notional Amount.

         "REMIC II Remittance Rate": With respect to REMIC II Regular Interest
II-LT1 and REMIC II Regular Interest II-LT6, the weighted average of the Expense
Adjusted Mortgage Rates on the then outstanding Mortgage Loans and REO
Properties. With respect to REMIC II Regular Interest II-LT2, REMIC II Regular
Interest II-LT3, REMIC II Regular Interest II-LT4 and REMIC II Regular Interest
II-LT5, the lesser of (i) the related One-Month LIBOR Pass- Through Rate (based
on the actual number of days elapsed in the applicable Interest Accrual Period
and a 360-day year) and (ii) the Net WAC Pass-Through Rate, multiplied by the
actual number of days elapsed in the related Interest Accrual Period divided by
360. With respect to REMIC II Regular Interest II-LT2S, REMIC II Regular
Interest II-LT3S, REMIC II Regular Interest II-LT4S and REMIC II Regular
Interest II-LT5S, a rate per annum equal to excess of the REMIC I Remittance
Rate for the related Uncertificated Corresponding Component over the REMIC II
Remittance Rate for REMIC II Regular Interest II-LT2, REMIC II Regular Interest
II- LT3, REMIC II Regular Interest II-LT4 and REMIC II Regular Interest II-LT5,
respectively.

         "REMIC III": The segregated pool of assets consisting of all of the
REMIC II Regular Interests conveyed in trust to the Trustee for the benefit of
the REMIC III Certificateholders pursuant to Section 2.09, and all amounts
deposited therein, with respect to which a separate REMIC election is to be
made.

         "REMIC III Certificate": Any Regular Certificate or Class R-III
Certificate.

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

         "Remittance Report": A report in form and substance that would be
acceptable to FNMA on a magnetic disk or tape prepared by the Master Servicer
pursuant to Section 4.03 with such additions, deletions and modifications as
agreed to by the Trustee and the Master Servicer.

         "Rents from Real Property": With respect to any REO Property, gross
income of the character described in Section 856(d) of the Code as being
included in the term "rents from real property."

         "REO Account": The account or accounts maintained by the Master
Servicer in respect of an REO Property pursuant to Section 3.23.


<PAGE>


                                      -37-


         "REO Disposition": The sale or other disposition of an REO Property on
behalf of REMIC I.

         "REO Imputed Interest": As to any REO Property, for any calendar month
during which such REO Property was at any time part of REMIC I, one month's
interest at the applicable Net Mortgage Rate on the Stated Principal Balance of
such REO Property (or, in the case of the first such calendar month, of the
related Mortgage Loan, if appropriate) as of the close of business on the
Distribution Date in such calendar month.

         "REO Principal Amortization": With respect to any REO Property, for any
calendar month, the excess, if any, of (a) the aggregate of all amounts received
in respect of such REO Property during such calendar month, whether in the form
of rental income, sale proceeds (including, without limitation, that portion of
the Termination Price paid in connection with a purchase of all of the Mortgage
Loans and REO Properties pursuant to Section 9.01 that is allocable to such REO
Property) or otherwise, net of any portion of such amounts (i) payable pursuant
to Section 3.23(c) in respect of the proper operation, management and
maintenance of such REO Property or (ii) payable or reimbursable to the Master
Servicer pursuant to Section 3.23(d) for unpaid Servicing Fees in respect of the
related Mortgage Loan and unreimbursed Servicing Advances and P&I Advances in
respect of such REO Property or the related Mortgage Loan, over (b) the REO
Imputed Interest in respect of such REO Property for such calendar month.

         "REO Property": A Mortgaged Property acquired by the Master Servicer on
behalf of REMIC I through foreclosure or deed-in-lieu of foreclosure, as
described in Section 3.23.

         "Request for Release": A release signed by a Servicing Officer, in the
form of Exhibit E-1 or Exhibit E-2 attached hereto.

         "Required Overcollateralized Amount": With respect to any Distribution
Date (x) prior to the Stepdown Date, $6,869,579.60 and (y) on or after the
Stepdown Date, the greater of (x) 4.00% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the last day of the related Due Period and
(y) $2,575,957.

         "Reserve Interest Rate": With respect to any Interest Determination
Date, the rate per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
1/16%) of the one-month U.S. dollar lending rates which New York City banks
selected by the Trustee are quoting on the relevant Interest Determination Date
to the principal London offices of leading banks in the London interbank market
or (ii) in the event that the Trustee can determine no such arithmetic mean, the
lowest one-month U.S. dollar lending rate which New York City banks selected by
the Trustee are quoting on such Interest Determination Date to leading European
banks.

         "Residential Dwelling": Any one of the following: (i) an attached or
detached one-family dwelling, (ii) a detached two- to four-family dwelling,
(iii) a one-family dwelling unit in 


<PAGE>


                                      -38-

a FNMA eligible condominium project, or (iv) a detached one-family dwelling in a
planned unit development, none of which is a cooperative, mobile or manufactured
home (as defined in 42 United States Code, Section 5402(6)).

         "Residual Certificate": Any one of the Class R-I Certificates, Class
R-II Certificates or Class R-III Certificates.

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

         "Responsible Officer": When used with respect to the Trustee, the
Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman or
Vice Chairman of the Executive or Standing Committee of the Board of Directors
or Trustees, the President, the Chairman of the Committee on Trust Matters, any
vice president, any assistant vice president, the Secretary, any assistant
secretary, the Treasurer, any assistant treasurer, the Cashier, any assistant
cashier, any trust officer or assistant trust officer, the Controller and any
assistant controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers
and, with respect to a particular matter, to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.

         "Scheduled Principal Balance": With respect to any Mortgage Loan: (a)
as of the Cut-off Date, the outstanding principal balance of such Mortgage Loan
as of such date, net of the principal portion of all unpaid Monthly Payments, if
any, due on or before such date; (b) as of any Due Date subsequent to the
Cut-off Date up to and including the Due Date in the calendar month in which a
Liquidation Event occurs with respect to such Mortgage Loan, the Scheduled
Principal Balance of such Mortgage Loan as of the Cut-off Date, minus the sum of
(i) the principal portion of each Monthly Payment due on or before such Due Date
but subsequent to the Cut-off Date, whether or not received, (ii) all Principal
Prepayments received before such Due Date but after the Cut-off Date, (iii) the
principal portion of all Liquidation Proceeds and Insurance Proceeds received
before such Due Date but after the Cut-off Date, net of any portion thereof that
represents principal due (without regard to any acceleration of payments under
the related Mortgage and Mortgage Note) on a Due Date occurring on or before the
date on which such proceeds were received and (iv) any Realized Loss incurred
with respect thereto as a result of a Deficient Valuation occurring before such
Due Date, but only to the extent such Realized Loss represents a reduction in
the portion of principal of such Mortgage Loan not yet due (without regard to
any acceleration of payments under the related Mortgage and Mortgage Note) as of
the date of such Deficient Valuation; and (c) as of any Due Date subsequent to
the occurrence of a Liquidation Event with respect to such Mortgage Loan, zero.
With respect to any REO Property: (a) as of any Due Date subsequent to the date
of its acquisition on behalf of the Trust Fund up to and including the Due Date
in the calendar month in which a Liquidation Event occurs with respect to such
REO Property, an amount (not less than zero) equal to the Scheduled Principal
Balance of the related Mortgage Loan as of the Due Date in the calendar month in
which such REO Property was acquired, minus the aggregate amount of REO
Principal Amortization, if any, in respect of such REO Property for all
previously ended calendar months; and (b) as of any Due 


<PAGE>

                                      -39-

Date subsequent to the occurrence of a Liquidation Event with respect to such
REO Property, zero.

         "Seller": Salomon Brothers Realty Corp. or its successor in interest,
in its capacity as seller under the Mortgage Loan Purchase Agreement.

         "Senior Interest Distribution Amount": With respect to any Distribution
Date, an amount equal to the sum of (i) the Interest Distribution Amounts for
such Distribution Date for the Class A Certificates and, on the first
Distribution Date, the Residual Certificates and (ii) the Interest Carry Forward
Amount with respect to the Class A Certificates.

         "Servicing Account": The account or accounts created and maintained
pursuant to Section 3.09.

         "Servicing Advances": The reasonable "out-of-pocket" costs and expenses
incurred by the Master Servicer in connection with a default, delinquency or
other unanticipated event by the Master Servicer in the performance of its
servicing obligations, including, 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, in respect of a
particular Mortgage Loan, (iii) the management (including reasonable fees in
connection therewith) and liquidation of any REO Property, and (iv) the
performance of its obligations under Section 3.01, Section 3.09, Section 3.14,
Section 3.16 and Section 3.23. The Master Servicer shall not be required to make
any Servicing Advance in respect of a Mortgage Loan or REO Property that, in the
good faith business judgment of the Master Servicer, would not be ultimately
recoverable from related Insurance Proceeds or Liquidation Proceeds on such
Mortgage Loan or REO Property as provided herein.

         "Servicing Fee": With respect to each Mortgage Loan and for any
calendar month, an amount equal to one month's interest (or in the event of any
payment of interest which accompanies a Principal Prepayment in full made by the
Mortgagor during such calendar month, interest for the number of days covered by
such payment of interest) at the applicable Servicing Fee Rate on the same
principal amount on which interest on such Mortgage Loan accrues for such
calendar month. A portion of such Servicing Fee may be retained by any
Sub-Servicer as its servicing compensation.

         "Servicing Fee Rate": 0.50% per annum.

         "Servicing Officer": Any employee of the Master Servicer involved in,
or responsible for, the administration and servicing of Mortgage Loans, whose
name and specimen signature appear on a list of Servicing Officers furnished by
the Master Servicer to the Trustee and the Depositor on the Closing Date, as
such list may from time to time be amended.

         "Single Certificate": With respect to any Class of Certificates (other
than the Residual Certificates), a hypothetical Certificate of such Class
evidencing a Percentage Interest


<PAGE>


                                      -40-

for such Class corresponding to an initial Certificate Principal Balance or
Notional Amount of $1,000. With respect to the Residual Certificates, a
hypothetical Certificate of such Class evidencing a 100% Percentage Interest in
such Class.

         "Special Hazard Amount": As of any Distribution Date, an amount equal
to $3,434,609 minus the sum of (i) the aggregate amount of Special Hazard Losses
on the Mortgage Loans allocated to the Mezzanine Certificates and the Class CE
Certificates in accordance with Section 4.04 and (ii) the Adjustment Amount (as
defined below) as most recently calculated. For each anniversary of the Cut-off
Date, the Adjustment Amount shall be equal to the amount, if any, by which the
amount calculated in accordance with the preceding sentence (without giving
effect to the deduction of the Adjustment Amount for such anniversary) exceeds
the greatest of (i) twice the outstanding principal balance of the Mortgage Loan
which has the largest outstanding principal balance on the Distribution Date
immediately preceding such anniversary, (ii) the product of 1.00% multiplied by
the outstanding principal balance of all Mortgage Loans on the Distribution Date
immediately preceding such anniversary and (iii) the aggregate outstanding
principal balance (as of the immediately preceding Distribution Date) of the
Mortgage Loans in any five-digit California zip code area with the largest
amount of Mortgage Loans by aggregate principal balance as of such anniversary.

         "Special Hazard Loss": Any Realized Loss or portion thereof not in
excess of the lesser of the cost of repair or replacement of a Mortgaged
Property suffered by such Mortgaged Property by reason of damage caused by
certain hazards (including earthquakes, mudflows and, to a limited extent,
floods) not insured against under the hazard insurance policies or fire or flood
insurance policies required to be maintained in respect of such Mortgaged
Property pursuant to Section 3.14, or by reason of the application of any
co-insurance provision. Special Hazard Losses shall not include any
Extraordinary Loss or any of the following:

         (i)      wear and tear, deterioration, rust or corrosion, mold, wet or
                  dry rot; inherent vice or latent defect; animals, birds,
                  vermin, insects;

         (ii)     smog, smoke, vapor, liquid or dust discharge from agricultural
                  or industrial operations; pollution; contamination;

         (iii)    settling, subsidence, cracking, shrinkage, bulging or
                  expansion of pavements, foundations, walls, floors, roofs or
                  ceilings; and

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

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

         "Startup Day": With respect to each of REMIC I, REMIC II and REMIC III,
the day designated as such pursuant to Section 10.01(b) hereof.



<PAGE>


                                      -41-

         "Stated Principal Balance": With respect to any Mortgage Loan: (a) as
of any date of determination up to but not including the Distribution Date on
which the proceeds, if any, of a Liquidation Event with respect to such Mortgage
Loan would be distributed, the Scheduled Principal Balance of such Mortgage Loan
as of the Cut-off Date, as shown in the Mortgage Loan Schedule, minus the sum of
(i) the principal portion of each Monthly Payment due on a Due Date subsequent
to the Cut-off Date, to the extent received from the Mortgagor or advanced by
the Master Servicer and distributed pursuant to Section 4.01 on or before such
date of determination, (ii) all Principal Prepayments received after the Cut-off
Date, to the extent distributed pursuant to Section 4.01 on or before such date
of determination, (iii) all Liquidation Proceeds and Insurance Proceeds applied
by the Master Servicer as recoveries of principal in accordance with the
provisions of Section 3.16, to the extent distributed pursuant to Section 4.01
on or before such date of determination, and (iv) any Realized Loss incurred
with respect thereto as a result of a Deficient Valuation made during or prior
to the Prepayment Period for the most recent Distribution Date coinciding with
or preceding such date of determination; and (b) as of any date of determination
coinciding with or subsequent to the Distribution Date on which the proceeds, if
any, of a Liquidation Event with respect to such Mortgage Loan would be
distributed, zero. With respect to any REO Property: (a) as of any date of
determination up to but not including the Distribution Date on which the
proceeds, if any, of a Liquidation Event with respect to such REO Property would
be distributed, an amount (not less than zero) equal to the Stated Principal
Balance of the related Mortgage Loan as of the date on which such REO Property
was acquired on behalf of REMIC I, minus the sum (i) if such REO Property was
acquired before the Distribution Date in any calendar month, the principal
portion of the Monthly Payment due on the Due Date in the calendar month of
acquisition, to the extent advanced by the Master Servicer and distributed
pursuant to Section 4.01 on or before such date of determination, and (ii) the
aggregate amount of REO Principal Amortization in respect of such REO Property
for all previously ended calendar months, to the extent distributed pursuant to
Section 4.01 on or before such date of determination; and (b) as of any date of
determination coinciding with or subsequent to the Distribution Date on which
the proceeds, if any, of a Liquidation Event with respect to such REO Property
would be distributed, zero.

         "Stayed Funds": If the Master Servicer is the subject of a proceeding
under the federal Bankruptcy Code and the making of a Remittance (as defined in
Section 7.02(b)) is prohibited by Section 362 of the federal Bankruptcy Code,
funds that are in the custody of the Master Servicer, a trustee in bankruptcy or
a federal bankruptcy court and should have been the subject of such Remittance
absent such prohibition.

         "Stepdown Date": The later to occur of (i) the Distribution Date
occurring in December 2000 and (ii) the first Distribution Date on which the
Credit Enhancement Percentage (calculated for this purpose only after taking
into account distributions of principal on the Mortgage Loans but prior to any
distribution of the Principal Distribution Amount to the Certificates then
entitled to distributions of principal on such Distribution Date) is equal to or
greater than 43.00%.


<PAGE>


                                      -42-

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

         "Sub-Servicing Account": An account established by a Sub-Servicer which
meets the requirements set forth in Section 3.08 and is otherwise acceptable to
the Master Servicer.

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

         "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 REMIC Taxable Income or Net Loss Allocation, or any successor forms,
to be filed on behalf of the Trust Fund due to its classification as a REMIC
under the REMIC Provisions, 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 9.01.

         "Terminator": As defined in Section 9.01.

         "Transfer": Any direct or indirect transfer, sale, pledge,
hypothecation, or other form of assignment of any Ownership Interest in a
Certificate.

         "Transferee": Any Person who is acquiring by Transfer any Ownership
Interest in a Certificate.

         "Transferor": Any Person who is disposing by Transfer of any Ownership
Interest in a Certificate.

         "Trigger Event": A Trigger Event has occurred with respect to a
Distribution Date if the Delinquency Percentage exceeds the lesser of (i)
one-half of the Credit Enhancement Percentage or (ii) 21.50%.

         "Trust Fund": Collectively, all of the assets of REMIC I, REMIC II and
REMIC III.

         "Trustee": Norwest Bank Minnesota, National Association, a national
banking association, or its successor in interest, or any successor trustee
appointed as herein provided.


<PAGE>


                                      -43-

         "Trustee's Fee": The amount payable to the Trustee on each Distribution
Date pursuant to Section 8.05 as compensation for all services rendered by it in
the execution of the trust hereby created and in the exercise and performance of
any of the powers and duties of the Trustee hereunder, which amount shall equal
one twelfth of the product of (i) the Trustee's Fee Rate, multiplied by (ii) the
aggregate Scheduled Principal Balance of the Mortgage Loans and any REO
Properties as of the second preceding Due Date (or, in the case of the initial
Distribution Date, as of the Cut-off Date).

         "Trustee's Fee Rate": 0.007% per annum.

         "Uncertificated Balance": The amount of any REMIC I Regular Interest or
REMIC II Regular Interest outstanding as of any date of determination. As of the
Closing Date, the Uncertificated Balance of each REMIC I Regular Interest and
each REMIC II Regular Interest shall equal the amount set forth in the
Preliminary Statement hereto as its initial uncertificated balance. On each
Distribution Date, the Uncertificated Balance of each REMIC I Regular Interest
and each REMIC II Regular Interest shall be reduced by all distributions of
principal made on such REMIC I Regular Interest or such REMIC II Regular
Interest, as applicable, on such Distribution Date pursuant to Section 4.01 and,
if and to the extent necessary and appropriate, shall be further reduced on such
Distribution Date by Realized Losses as provided in Section 4.04. The
Uncertificated Balance of each REMIC I Regular Interest and each REMIC II
Regular Interest shall never be less than zero.

         "Uncertificated Corresponding Component": With respect to: REMIC II
Regular Interest II-LT1, REMIC I Regular Interest I-LT1; REMIC II Regular
Interest II-LT2 and REMIC II Regular Interest II-LT2S, REMIC I Regular Interest
I-LT2; REMIC II Regular Interest II-LT3 and REMIC II Regular Interest II-LT3S,
REMIC I Regular Interest I-LT3; REMIC II Regular Interest II-LT4 and REMIC II
Regular Interest II-LT4S, REMIC I Regular Interest I-LT4; REMIC II Regular
Interest II-LT5 and REMIC II Regular Interest II-LT5S, REMIC I Regular Interest
I- LT5; and REMIC II Regular Interest II-LT6, REMIC I Regular Interest I-LT6.

         "Uncertificated Interest": With respect to any REMIC I Regular Interest
for any Distribution Date, one month's interest at the REMIC I Remittance Rate
applicable to such REMIC I Regular Interest for such Distribution Date, accrued
on the Uncertificated Balance thereof immediately prior to such Distribution
Date. With respect to any REMIC II Regular Interest for any Distribution Date,
one month's interest at the REMIC II Remittance Rate applicable to such REMIC II
Regular Interest for such Distribution Date, accrued on the Uncertificated
Balance thereof immediately prior to such Distribution Date. Uncertificated
Interest in respect of any REMIC I Regular Interest I-LT1, REMIC I Regular
Interest I-LT6, REMIC II Regular Interest II-LT1 and REMIC II Regular Interest
II-LT6, shall accrue on the basis of a 360- day year consisting of twelve 30-day
months; Uncertificated Interest in respect of REMIC I Regular Interest I-LT2,
REMIC I Regular Interest I-LT3, REMIC I Regular Interest I-LT4, REMIC I Regular
Interest I-LT5 and REMIC II Regular Interest II-LT2, REMIC II Regular Interest
II-LT3, REMIC II Regular Interest II-LT4, REMIC II Regular Interest II-LT5,
REMIC II Regular Interest II-LT2S, REMIC II Regular Interest II-LT3S, REMIC II
Regular Interest II-


<PAGE>


                                      -44-

LT4S and REMIC II Regular Interest II-LT5S shall accrue on the basis of a
360-day year and the actual number of days in the applicable Interest Accrual
Period. Uncertificated Interest with respect to each Distribution Date, as to
any REMIC I Regular Interest or REMIC II Regular Interest, shall be reduced by
an amount equal to a pro rata portion of the sum of (a) the aggregate Prepayment
Interest Shortfall, if any, for such Distribution Date to the extent not covered
by payments pursuant to Section 3.24 and (b) the aggregate amount of any Relief
Act Interest Shortfall, if any, for such Distribution Date. In addition,
Uncertificated Interest with respect to each Distribution Date, as to any REMIC
I Regular Interest or REMIC II Regular Interest, shall be reduced by Realized
Losses, if any, allocated to such REMIC I Regular Interest or REMIC II Regular
Interest pursuant to Section 1.02 and Section 4.04.

         "Uncertificated Notional Amount": With respect to REMIC II Regular
Interest II-LT2S, REMIC II Regular Interest II-LT3S, REMIC II Regular Interest
II-LT4S and REMIC II Regular Interest II-LT5S, the Uncertificated Principal
Balance of REMIC I Regular Interest I- LT2, REMIC I Regular Interest I-LT3,
REMIC I Regular Interest I-LT4 and REMIC I Regular Interest I-LT5, respectively.

         "Uninsured Cause": Any cause of damage to a Mortgaged Property such
that the complete restoration of such property is not fully reimbursable by the
hazard insurance policies required to be maintained pursuant to Section 3.14.

         "United States Person": A citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof (except, in the
case of a partnership, to the extent provided in regulations), or an estate
whose income is subject to United States federal income tax regardless of its
source, 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 the 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.

         "Value": With respect to any Mortgaged Property, the lesser of (i) the
value thereof as determined by an appraisal made for the originator of the
Mortgage Loan at the time of origination of the Mortgage Loan by an appraiser
who met the minimum requirements of FNMA and FHLMC, and (ii) the purchase price
paid for the related Mortgaged Property by the Mortgagor with the proceeds of
the Mortgage Loan, provided, however, in the case of a Refinanced Mortgage Loan,
such value of the Mortgaged Property is based solely upon the value determined
by an appraisal made for the originator of such Refinanced Mortgage Loan at the
time of origination of such Refinanced Mortgage Loan by an appraiser who met the
minimum requirements of FNMA and FHLMC.

         "Voting Rights": The portion of the voting rights of all of the
Certificates which is allocated to any Certificate. With respect to any date of
determination, the percentage of all the Voting Rights allocated among Holders
of each Class of Certificates shall be the fraction, expressed as a percentage,
the numerator of which is the aggregate Certificate Principal Balance


<PAGE>


                                      -45-

of all the Certificates of such Class then outstanding and the denominator of
which is the aggregate Stated Principal Balance of the Mortgage Loans then
outstanding. The Voting Rights allocated to each Class of Certificate shall be
allocated among Holders of each such Class in accordance with their respective
Percentage Interests as of the most recent Distribution Date.

         SECTION 1.02. Allocation of Certain Interest Shortfalls.

         For purposes of calculating the amount of Accrued Certificate Interest
and the amount of the Interest Distribution Amount for the Class A Certificates,
the Mezzanine Certificates and the Class CE Certificates for any Distribution
Date, (1) the aggregate amount of any Prepayment Interest Shortfalls (to the
extent not covered by payments by the Master Servicer pursuant to Section 3.24)
and Relief Act Interest Shortfalls incurred in respect of the Mortgage Loans for
any Distribution Date shall be allocated first, among the Class CE Certificates
on a PRO RATA basis based on, and to the extent of, one month's interest at the
then applicable respective Pass-Through Rate on the respective Notional Amount
of each such Certificate and thereafter, among the Class A Certificates and the
Mezzanine Certificates on a PRO RATA basis based on, and to the extent of, one
month's interest at the then applicable respective Pass-Through Rate on the
respective Certificate Principal Balance of each such Certificate and (2) the
aggregate amount of any Realized Losses incurred for any Distribution Date shall
be allocated among the Class CE Certificates on a PRO RATA basis based on, and
to the extent of, one month's interest at the then applicable respective
Pass-Through Rate on the respective Notional Amount of each such Certificate.

         For purposes of calculating the amount of Uncertificated Interest for
the REMIC I Regular Interests for any Distribution Date, the aggregate amount of
any Prepayment Interest Shortfalls (to the extent not covered by payments by the
Master Servicer pursuant to Section 3.24) and Relief Act Interest Shortfalls
incurred in respect of the Mortgage Loans for any Distribution Date shall be
allocated first, to Uncertificated Interest payable to REMIC I Regular Interest
I-LT1 and REMIC I Regular Interest I-LT6 up to an aggregate amount equal to the
REMIC I Interest Loss Allocation Amount, 98% and 2%, respectively, and
thereafter among REMIC I Regular Interest I-LT1, REMIC I Regular Interest I-LT2,
REMIC I Regular Interest I-LT3, REMIC I Regular Interest I-LT4, REMIC I Regular
Interest I-LT5 and REMIC I Regular Interest I-LT6 PRO RATA based on, and to the
extent of, one month's interest at the then applicable respective Pass- Through
Rate on the respective Uncertificated Balance of each such REMIC I Regular
Interest.

         All Prepayment Interest Shortfalls and Relief Act Interest Shortfalls
on the REMIC II Regular Interests shall be allocated by the Trustee on each
Distribution Date among the REMIC II Regular Interests in the proportion that
Prepayment Interest Shortfalls and Relief Act Interest Shortfalls are allocated
to the related Uncertificated Corresponding Component.


<PAGE>


                                      -46-


                                   ARTICLE II

                          CONVEYANCE OF MORTGAGE LOANS;
                        ORIGINAL ISSUANCE OF CERTIFICATES

         SECTION 2.01. Conveyance of Mortgage Loans.

         The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey to the Trustee,
without recourse, for the benefit of the Certificateholders, all the right,
title and interest of the Depositor, including any security interest therein for
the benefit of the Depositor, in and to the Mortgage Loans identified on the
Mortgage Loan Schedule, the rights of the Depositor under the Mortgage Loan
Purchase Agreement (except Section 17 thereof), and all other assets included or
to be included in REMIC I. Such assignment includes all interest and principal
received by the Depositor or the Master Servicer on or with respect to the
Mortgage Loans (other than payments of principal and interest due on such
Mortgage Loans on or before the Cut-off Date).

         In connection with such transfer and assignment, the Depositor does
hereby deliver to, and deposit with, the Trustee, or to one or more Custodians
as the agent or agents of the Trustee, except as otherwise provided below, the
following documents or instruments with respect to each Mortgage Loan (a
"Mortgage File") so transferred and assigned:

                  (i) the original Mortgage Note, endorsed in the following
         form: "Pay to the order of Norwest Bank Minnesota, National
         Association, as Trustee for the registered holders of Salomon Brothers
         Mortgage Securities VII, Inc., under the applicable pooling and
         servicing agreement, without recourse," with all prior and intervening
         endorsements showing a complete chain of endorsement from the
         originator to the Person so endorsing to the Trustee;

                  (ii) the original Mortgage with evidence of recording thereon,
         and the original recorded power of attorney, if the Mortgage was
         executed pursuant to a power of attorney, with evidence of recording
         thereon;

                  (iii) an original Assignment of the Mortgage executed in the
         following form: "Norwest Bank Minnesota, National Association, as
         Trustee for the registered holders of Salomon Brothers Mortgage
         Securities VII, Inc., under the applicable pooling and servicing
         agreement";

                  (iv) the original recorded Assignment or Assignments of the
         Mortgage showing a complete chain of assignment from the originator to
         the Person assigning the Mortgage to the Trustee as contemplated by the
         immediately preceding clause (iii);


<PAGE>


                                      -47-

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

                  (vi) the original lender's title insurance policy, together
         with all endorsements or riders which were issued with or subsequent to
         the issuance of such policy, insuring the priority of the Mortgage as a
         first lien on the Mortgaged Property represented therein as a fee
         interest vested in the Mortgagor, or in the event such original title
         policy is unavailable, a written commitment or uniform binder or
         preliminary report of title issued by the title insurance or escrow
         company.

         The Master Servicer (in its capacity as Originator) shall promptly (and
in no event later than five Business Days following the later of the Closing
Date and the date of receipt by the Master Servicer of the recording information
for a Mortgage) submit or cause to be submitted for recording, at no expense to
the Trust Fund or the Trustee, in the appropriate public office for real
property records, each Assignment referred to in Sections 2.01(iii) and (iv)
above. In the event that any such Assignment is lost or returned unrecorded
because of a defect therein, the Master Servicer (in its capacity as Originator)
shall promptly prepare or cause to be prepared a substitute Assignment or cure
or cause to be cured such defect, as the case may be, and thereafter cause each
such Assignment to be duly recorded.

         If any of the documents referred to in Sections 2.01(ii), (iii) or (iv)
above has as of the Closing Date been submitted for recording but either (x) has
not been returned from the applicable public recording office or (y) has been
lost or such public recording office has retained the original of such document,
the obligations of the Depositor to deliver such documents shall be deemed to be
satisfied upon (1) delivery to the Trustee, or to the appropriate Custodian on
behalf of the Trustee, of a copy of each such document certified by the
Originator in the case of (x) above or the applicable public recording office in
the case of (y) above to be a true and complete copy of the original that was
submitted for recording and (2) if such copy is certified by the Originator,
delivery to the Trustee, or to the appropriate Custodian on behalf of the
Trustee, promptly upon receipt thereof of either the original or a copy of such
document certified by the applicable public recording office to be a true and
complete copy of the original. If the original lender's title insurance policy
was not delivered pursuant to Section 2.01(vi) above, the Depositor shall
deliver or cause to be delivered to the Trustee, or to the appropriate Custodian
on behalf of the Trustee, promptly after receipt thereof, the original lender's
title insurance policy. The Depositor shall deliver or cause to be delivered to
the Trustee, or to the appropriate Custodian on behalf of the Trustee, promptly
upon receipt thereof any other original documents constituting a part of a
Mortgage File received with respect to any Mortgage Loan, including, but not
limited to, any original documents evidencing an assumption or modification of
any Mortgage Loan.

         All original documents relating to the Mortgage Loans that are not
delivered to the Trustee, or to the appropriate Custodian on behalf of the
Trustee, are and shall be held by or on behalf of the Originator, the Seller,
the Depositor or the Master Servicer, as the case may be, in trust for the
benefit of the Trustee on behalf of the Certificateholders. In the event that
any such


<PAGE>


                                      -48-

original document is required pursuant to the terms of this Section to be a part
of a Mortgage File, such document shall be delivered promptly to the Trustee, or
to the appropriate Custodian on behalf of the Trustee. Any such original
document delivered to or held by the Depositor that is not required pursuant to
the terms of this Section to be a part of a Mortgage File, shall be delivered
promptly to the Master Servicer.

         The Depositor herewith delivers to the Trustee an executed copy of the
Mortgage Loan Purchase Agreement.

         SECTION 2.02. Acceptance of REMIC I by Trustee.

         The Trustee acknowledges receipt (or, with respect to Mortgage Loans
subject to a Custodial Agreement, receipt by the respective Custodian as the
duly appointed agent of the Trustee), subject to the provisions of Section 2.01
and subject to any exceptions noted on the exception report described in the
next paragraph below, the documents referred to in Section 2.01 (other than such
documents described in Section 2.01(v)) above and all other assets included in
the definition of "REMIC I" under clauses (i), (iii), (iv) and (v) (to the
extent of amounts deposited into the Distribution Account) and declares that it,
or such Custodian as its agent, holds and will hold such documents and the other
documents delivered to it constituting a Mortgage File, and that it holds or
will hold all such assets and such other assets included in the definition of
"REMIC I" in trust for the exclusive use and benefit of all present and future
Certificateholders.

         The Trustee agrees, for the benefit of the Certificateholders, to
review (or cause a Custodian on its behalf to review) each Mortgage File on or
before the Closing Date and to certify in substantially the form attached hereto
as Exhibit C-1 (or cause the Custodian to certify in the form of the Initial
Certification attached to the Custodial Agreement) that, as to each Mortgage
Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in
full or any Mortgage Loan specifically identified in the exception report
annexed thereto as not being covered by such certification), (i) all documents
constituting part of such Mortgage File (other than such documents described in
Section 2.01(v)) required to be delivered to it pursuant to this Agreement are
in its possession, (ii) such documents have been reviewed by it or such
Custodian and appear regular on their face and relate to such Mortgage Loan,
(iii) based on its or the Custodian's examination and only as to the foregoing,
the information set forth in the Mortgage Loan Schedule that corresponds to
items (i) through (iii), (vi), (ix), (x), (xiii), (xv) and (xvii) through (xx)
of the definition of "Mortgage Loan Schedule" accurately reflects information
set forth in the Mortgage File. It is herein acknowledged that, in conducting
such review, the Trustee or such Custodian was under no duty or obligation (i)
to inspect, review or examine any such documents, instruments, certificates or
other papers to determine whether they are genuine, enforceable, or appropriate
for the represented purpose or whether they have actually been recorded or that
they are other than what they purport to be on their face, or (ii) to determine
whether any Mortgage File should include any of the documents specified in
clause (v) of Section 2.01.


<PAGE>


                                      -49-

         Prior to the first anniversary date of this Agreement the Trustee shall
deliver to the Depositor and the Master Servicer a final certification in the
form annexed hereto as Exhibit C-2 (or shall cause the Custodian to deliver to
the Trustee, the Depositor and the Master Servicer a final certification in the
form attached to the Custodial Agreement) evidencing the completeness of the
Mortgage Files, with any applicable exceptions noted thereon.

         If in the process of reviewing the Mortgage Files and making or
preparing, as the case may be, the certifications referred to above, the Trustee
or any Custodian finds any document or documents constituting a part of a
Mortgage File to be missing or defective in any material respect, at the
conclusion of its review the Trustee (or a Custodian on behalf of the Trustee)
shall so notify the Depositor and the Master Servicer. In addition, upon the
discovery by the Depositor, the Master Servicer or the Trustee of a breach of
any of the representations and warranties made by the Originator or the Seller
in the Mortgage Loan Purchase Agreement in respect of any Mortgage Loan which
materially adversely affects such Mortgage Loan or the interests of the related
Certificateholders in such Mortgage Loan, the party discovering such breach
shall give prompt written notice to the other parties.

         The Trustee (or a Custodian on behalf of the Trustee) shall, at the
written request and expense of any Certificateholder, provide a written report
to such Certificateholder, of all Mortgage Files released to the Master Servicer
for servicing purposes.

         SECTION 2.03. Repurchase or Substitution of Mortgage Loans by the
                       Originator, the Seller or the Depositor.

         (a) Upon discovery or receipt of notice of any materially defective
document in, or that a document is missing from, a Mortgage File or of the
breach by the Originator or the Seller of any representation, warranty or
covenant under the Mortgage Loan 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 (in the case of any such
representation or warranty made to the knowledge or the best of knowledge of the
Originator or the Seller, as the case may be, as to which the Originator or the
Seller, as the case may be, has no knowledge, without regard to the Originator's
or the Seller's, as the case may be, lack of knowledge with respect to the
substance of such representation or warranty being inaccurate at the time it was
made), the Trustee (or a Custodian on behalf of the Trustee) shall promptly
notify the Originator, the Seller and the Master Servicer of such defect,
missing document or breach and request that the Originator or the Seller, as the
case may be, deliver such missing document or cure such defect or breach within
90 days from the date the Originator or the Seller, as the case may be, was
notified of such missing document, defect or breach, and if the Originator or
the Seller, as the case may be, does not deliver such missing document or cure
such defect or breach in all material respects during such period, the Master
Servicer (or, in accordance with Section 3.02(b), the Trustee) shall enforce the
obligations of the Originator or the Seller, as the case may be, under the
Mortgage Loan Purchase Agreement to repurchase such Mortgage Loan from REMIC I
at the Purchase Price within 90 days after the date on which the Originator or
the Seller, as the case may be, was notified (subject to Section 2.03(e)) of
such missing document, defect or breach, if and


<PAGE>


                                      -50-

to the extent that the Originator or the Seller, as the case may be, is
obligated to do so under the Mortgage Loan Purchase Agreement. The Purchase
Price for the repurchased Mortgage Loan shall be deposited in the Collection
Account, and the Trustee, upon receipt of written certification from the Master
Servicer of such deposit, shall release to the Originator or the Seller, as the
case may be, the related Mortgage File and shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as the
Originator or the Seller, as the case may be, shall furnish to it and as shall
be necessary to vest in the Originator or the Seller, as the case may be, any
Mortgage Loan released pursuant hereto, and the Trustee shall have no further
responsibility with regard to such Mortgage File. In lieu of repurchasing any
such Mortgage Loan as provided above, if so provided in the Mortgage Loan
Purchase Agreement, the Originator or the Seller, as the case may be, may cause
such Mortgage Loan to be removed from REMIC I (in which case it shall become a
Deleted Mortgage Loan) and substitute one or more Qualified 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 Originator or the Seller,
as the case may be, 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 respecting such omission, defect or breach
available to the Trustee on behalf of the Certificateholders.

         (b) Subject to Section 2.03(e), within 90 days of the earlier of
discovery by the Depositor or receipt of notice by the Depositor of the breach
of any representation or warranty of the Depositor set forth in Section 2.04
with respect to any Mortgage Loan, which materially adversely affects the value
of such Mortgage Loan or the interest therein of the Certificateholders, the
Depositor shall (i) cure such breach in all material respects, (ii) repurchase
the Mortgage Loan from REMIC I at the Purchase Price or (iii) remove such
Mortgage Loan from REMIC I (in which case it shall become a Deleted Mortgage
Loan) and substitute one or more Qualified Substitute Mortgage Loans in the
manner and subject to the limitations set forth in Section 2.03(d). If any such
breach is a breach of any of the representations and warranties included in
Section 2.04(a)(iv), and the Depositor is unable to cure such breach, the
Depositor shall repurchase or substitute the smallest number of Mortgage Loans
as shall be required to make such representation or warranty true and correct.
The Purchase Price for any repurchased Mortgage Loan shall be delivered to the
Master Servicer for deposit in the Collection Account, and the Trustee, upon
receipt of written certification from the Master Servicer of such deposit, shall
at the Depositor's direction release to the Depositor the related Mortgage File
and shall execute and deliver such instruments of transfer or assignment
furnished by the Depositor, in each case without recourse, as the Depositor
shall furnish to it and as shall be necessary to vest in the Depositor any
Mortgage Loan released pursuant hereto.

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


<PAGE>


                                      -51-

         (d) Any substitution of Qualified Substitute Mortgage Loans for Deleted
Mortgage Loans made pursuant to Section 2.03(a), in the case of the Originator
or the Seller, or Section 2.03(b), in the case of the Depositor, must be
effected prior to the date which is two years after the Startup Day for REMIC I.

         As to any Deleted Mortgage Loan for which the Originator, the Seller or
the Depositor substitutes a Qualified Substitute Mortgage Loan or Loans, such
substitution shall be effected by the Originator, the Seller or the Depositor,
as the case may be, delivering to the Trustee (or a Custodian on behalf of the
Trustee), for such Qualified 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 Qualified
Substitute Mortgage Loan satisfies the definition thereof and specifying the
Substitution Shortfall Amount (as described below), if any, in connection with
such substitution. The Trustee (or a Custodian on behalf of the Trustee) shall
acknowledge receipt for such Qualified Substitute Mortgage Loan or Loans and,
within ten Business Days thereafter, review such documents as specified in
Section 2.02 and deliver to the Depositor and the Master Servicer, with respect
to such Qualified Substitute Mortgage Loan or Loans, a certification
substantially in the form attached hereto as Exhibit C-1, with any applicable
exceptions noted thereon. Within one year of the date of substitution, the
Trustee shall deliver to the Depositor and the Master Servicer a certification
substantially in the form of Exhibit C-2 hereto with respect to such Qualified
Substitute Mortgage Loan or Loans, with any applicable exceptions noted thereon.
Monthly Payments due with respect to Qualified Substitute Mortgage Loans in the
month of substitution are not part of REMIC I and will be retained by the
Depositor, the Originator or the Seller, as the case may be. For the month of
substitution, distributions to Certificateholders will reflect the Monthly
Payment due on such Deleted Mortgage Loan on or before the Due Date in the month
of substitution, and the Depositor, the Originator or the Seller, as the case
may be, shall thereafter be entitled to retain all amounts subsequently received
in respect of such Deleted Mortgage Loan. The Depositor 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 Qualified Substitute Mortgage Loan or Loans and shall deliver a copy of
such amended Mortgage Loan Schedule to the Trustee. Upon such substitution, such
Qualified 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, in the case of a substitution effected by the Originator or the
Seller, the Mortgage Loan Purchase Agreement, including, in the case of a
substitution effected by the Originator or the Seller, all applicable
representations and warranties thereof included in the Mortgage Loan Purchase
Agreement, and in the case of a substitution effected by the Depositor, all
applicable representations and warranties thereof set forth in Section 2.04, in
each case as of the date of substitution.

         For any month in which the Depositor, the Originator or the Seller
substitutes one or more Qualified Substitute Mortgage Loans for one or more
Deleted Mortgage Loans, the Master Servicer will determine the amount (the
"Substitution Shortfall Amount"), if any, by which the aggregate Purchase Price
of all such Deleted Mortgage Loans exceeds the aggregate of, as to


<PAGE>


                                      -52-

each such Qualified Substitute Mortgage Loan, the Scheduled Principal Balance
thereof as of the date of substitution, together with one month's interest on
such Scheduled Principal Balance at the applicable Net Mortgage Rate. On the
date of such substitution, the Depositor, the Originator or the Seller, as the
case may be, will deliver or cause to be delivered to the Master Servicer for
deposit in the Collection Account an amount equal to the Substitution Shortfall
Amount, if any, and the Trustee, upon receipt of the related Qualified
Substitute Mortgage Loan or Loans and certification by the Master Servicer of
such deposit, shall release to the Depositor, the Originator or the Seller, as
the case may be, the related Mortgage File or Files and shall execute and
deliver such instruments of transfer or assignment, in each case without
recourse, as the Depositor, the Originator or the Seller, as the case may be,
shall deliver to it and as shall be necessary to vest therein any Deleted
Mortgage Loan released pursuant hereto.

         In addition, the Depositor, the Originator or the Seller, as the case
may be, shall obtain at its own expense and deliver to the Trustee an Opinion of
Counsel to the effect that such substitution will not cause (a) any federal tax
to be imposed on any of REMIC I, REMIC II or REMIC III, including without
limitation, any federal tax imposed on "prohibited transactions" under Section
860F(a)(1) of the Code or on "contributions after the startup date" under
Section 860G(d)(1) of the Code, or (b) any of REMIC I, REMIC II or REMIC III to
fail to qualify as a REMIC at any time that any Certificate is outstanding.

         (e) Upon discovery by the Depositor, the Originator, the Seller, the
Master Servicer or the Trustee that any Mortgage Loan does not constitute a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code, the
party discovering such fact shall within two Business Days give written notice
thereof to the other parties. In connection therewith, the Originator, the
Seller or the Depositor shall repurchase or, subject to the limitations set
forth in Section 2.03(d), substitute one or more Qualified 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 (i) the Originator or the Seller, as
the case may be, if the affected Mortgage Loan's status as a non-qualified
mortgage is or results from a breach of any representation, warranty or covenant
made by the Originator or the Seller under the Mortgage Loan Purchase Agreement,
or (ii) the Depositor, if the affected Mortgage Loan's status as a non-qualified
mortgage is a breach of any representation or warranty of the Depositor set
forth in Section 2.04 or if the status as a non-qualified mortgage is a breach
of no representation or warranty. Any such repurchase or substitution shall be
made in the same manner as set forth in Section 2.03(a), if made by the
Originator or the Seller, or Section 2.03(b), if made by the Depositor. The
Trustee shall reconvey to the Depositor, the Originator or the Seller, as the
case may be, 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.


<PAGE>


                                      -53-

         SECTION 2.04. Representations and Warranties of the Depositor.

         (a) The Depositor hereby represents and warrants to the Trustee for the
benefit of the Certificateholders that as of the Closing Date or as of such
other date specifically provided herein:

                  (i) The information set forth in the Mortgage Loan Schedule
         for the Original Mortgage Loans is complete, true and correct in all
         material respects at the date or dates respecting which such
         information is furnished;

                  (ii) Except with respect to approximately 0.95% of the
         Original Mortgage Loans, by aggregate Stated Principal Balance as of
         the Cut-off Date, which, as of the Cut-off Date, were 30 or more but
         less than 60 days delinquent, as of the Cut-off Date, the Monthly
         Payment due under each Original Mortgage Loan is not 30 or more days
         delinquent in payment and has not been 30 or more days delinquent in
         payment more than once in the twelve month period prior to the Cut-off
         Date (assuming that a "rolling" 30 day delinquency is considered to be
         one time delinquent);

                  (iii) Each Original Mortgage Loan had an original term to
         maturity up to 30 years; each Original Mortgage Loan is an
         adjustable-rate mortgage loan with payments due on the first day of
         each month and each such Mortgage Loan is fully amortizing; effective
         with the first payment due after each Adjustment Date, the monthly
         payment amount for each Original Mortgage Loan will be adjusted to an
         amount which would amortize fully the outstanding principal balance of
         such Mortgage Loan over its remaining term and pay interest at the
         Mortgage Rate so adjusted; on the first Adjustment Date and on each
         Adjustment Date thereafter the Mortgage Rate on each Original Mortgage
         Loan will be adjusted to equal the sum of the Index and the related
         Gross Margin, rounded to the nearest multiple of 0.125%, subject to the
         Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage
         Rate applicable to such Mortgage Loan;

                  (iv) (A) No more than approximately 23.62%, approximately
         6.91%, approximately 5.96%, approximately 5.07%, approximately 4.80%,
         approximately 4.72%, approximately 4.37%, approximately 4.31%,
         approximately 4.24%; approximately 4.18%; approximately 3.43% and
         approximately 3.04% of the Original Mortgage Loans, by outstanding
         principal balance of the Original Mortgage Loans as of the Cut-off
         Date, will be secured by Mortgaged Properties located in California,
         Illinois, Florida, Washington, New York, Minnesota, Michigan, Colorado,
         Pennsylvania, Ohio, New Jersey and Massachusetts, respectively, and no
         more than 25.35% of the Original Mortgage Loans, by outstanding
         principal balance of the Original Mortgage Loans as of the Cut-off
         Date, will be secured by Mortgaged Properties located in any other
         state; (B) as of the Cut-off Date, no more than approximately 0.49% of
         the Original Mortgage


<PAGE>


                                      -54-

         Loans, by outstanding principal balance of the Original Mortgage Loans
         as of the Cut-off Date, are secured by Mortgaged Properties located in
         any one California zip code area, and no more than approximately 10.52%
         of the Original Mortgage Loans, by outstanding principal balance of the
         Original Mortgage Loans as of the Cut-off Date are secured by units in
         two- to four-family dwellings, condominiums, town houses, planned unit
         developments or manufactured housing; and (C) at least approximately
         89.48% of the Original Mortgage Loans, by outstanding principal balance
         of the Original Mortgage Loans as of the Cut-off Date, are secured by
         real property with a single family residence erected thereon;

                  (v) If the Mortgaged Property securing an Original Mortgage
         Loan is identified in the Federal Register by the Federal Emergency
         Management Agency ("FEMA") as having special flood hazards, a flood
         insurance policy is in effect at the Closing Date which met the
         requirements of FEMA at the time such policy was issued;

                  (vi) With respect to each Original Mortgage Loan, the
         Loan-to-Value Ratio was less than or equal to 85.00% at the origination
         of such Original Mortgage Loan; and

                  (vii) With respect to at least approximately 93.50% of the
         Original Mortgage Loans by outstanding principal balance as of the
         Cut-off Date, at the time that the Mortgage Loan was made, the
         Mortgagor represented that the Mortgagor would occupy the Mortgaged
         Property as the Mortgagor's primary residence. With respect to
         approximately 6.50% of the Original Mortgage Loans by outstanding
         principal balance as of the Cut-off Date, at the time that the Mortgage
         Loan was made, the Mortgagor represented that the Mortgagor would
         occupy the Mortgaged Property as the Mortgagor's secondary residence or
         that the Mortgaged Property would be an investor property.

         (b) It is understood and agreed that the representations and warranties
set forth in this Section 2.04 shall survive delivery of the Mortgage Files to
the Trustee or to a Custodian, as the case may be, and shall inure to the
benefit of the Certificateholders notwithstanding any restrictive or qualified
endorsement or assignment. Upon discovery by any of the Depositor, the Master
Servicer or the Trustee of a breach of any of the foregoing representations and
warranties which materially and adversely affects the value of any Mortgage Loan
or the interests therein of the Certificateholders, the party discovering such
breach shall give prompt written notice to the other parties, and in no event
later than two Business Days from the date of such discovery. It is understood
and agreed that the obligations of the Depositor set forth in Section 2.03(b) to
cure, substitute for or repurchase a Mortgage Loan constitute the sole remedies
available to the Certificateholders or to the Trustee on their behalf respecting
a breach of the representations and warranties contained in this Section 2.04.


<PAGE>


                                      -55-

         SECTION 2.05. Representations, Warranties and Covenants of the Master
                       Servicer.

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

                  (i) The Master Servicer is a corporation duly organized,
         validly existing and in good standing under the laws of the State of
         Delaware and is duly authorized and qualified to transact any and all
         business contemplated by this Agreement to be conducted by the Master
         Servicer in any state in which a Mortgaged Property is located or is
         otherwise not required under applicable law to effect such
         qualification and, in any event, is in compliance with the doing
         business laws of any such State, to the extent necessary to ensure its
         ability to enforce each Mortgage Loan and to service the Mortgage Loans
         in accordance with the terms of this Agreement;

                  (ii) The Master Servicer has the full corporate power and
         authority to service each Mortgage Loan, and to execute, deliver and
         perform, and to enter into and consummate the transactions contemplated
         by this Agreement and has duly authorized by all necessary corporate
         action on the part of the Master Servicer the execution, delivery and
         performance of this Agreement; and this Agreement, assuming the due
         authorization, execution and delivery thereof by the Depositor and the
         Trustee, constitutes a legal, valid and binding obligation of the
         Master Servicer, enforceable against the Master Servicer in accordance
         with its terms, except to the extent that (a) the enforceability
         thereof may be limited by bankruptcy, insolvency, moratorium,
         receivership and other similar laws relating to creditors' rights
         generally and (b) the remedy of specific performance and injunctive and
         other forms of equitable relief may be subject to the equitable
         defenses and to the discretion of the court before which any proceeding
         therefor may be brought;

                  (iii) The execution and delivery of this Agreement by the
         Master Servicer, the servicing of the Mortgage Loans by the Master
         Servicer hereunder, the consummation of any other of the transactions
         herein contemplated, and the fulfillment of or compliance with the
         terms hereof are in the ordinary course of business of the Master
         Servicer and will not (A) result in a breach of any term or provision
         of the charter or by-laws of the Master Servicer or (B) conflict with,
         result in a breach, violation or acceleration of, or result in a
         default under, the terms of any other material agreement or instrument
         to which the Master Servicer is a party or by which it may be bound, or
         any statute, order or regulation applicable to the Master Servicer of
         any court, regulatory body, administrative agency or governmental body
         having jurisdiction over the Master Servicer; and the Master Servicer
         is not a party to, bound by, or in breach or violation of any


<PAGE>


                                      -56-

         indenture or other agreement or instrument, or subject to or in
         violation of any statute, order or regulation of any court, regulatory
         body, administrative agency or governmental body having jurisdiction
         over it, which materially and adversely affects or, to the Master
         Servicer's knowledge, would in the future materially and adversely
         affect, (x) the ability of the Master Servicer to perform its
         obligations under this Agreement or (y) the business, operations,
         financial condition, properties or assets of the Master Servicer taken
         as a whole;

                  (iv) The Master Servicer is an approved seller/servicer for
         FNMA or FHLMC in good standing and is a HUD approved mortgagee pursuant
         to Section 203 of the National Housing Act;

                  (v) No litigation is pending against the Master Servicer that
         would materially and adversely affect the execution, delivery or
         enforceability of this Agreement or the ability of the Master Servicer
         to service the Mortgage Loans or to perform any of its other
         obligations hereunder in accordance with the terms hereof; and

                  (vi) No consent, approval, authorization or order of any court
         or governmental agency or body is required for the execution, delivery
         and performance by the Master Servicer of, or compliance by the Master
         Servicer with, this Agreement or the consummation of the transactions
         contemplated by this Agreement, except for such consents, approvals,
         authorizations or orders, if any, that have been obtained prior to the
         Closing Date.

         It is understood and agreed that the representations, warranties and
covenants set forth in this Section 2.05 shall survive delivery of the Mortgage
Files to the Trustee or to a Custodian, as the case may be, and shall inure to
the benefit of the Trustee, the Depositor and the Certificateholders. Upon
discovery by any of the Depositor, the Master Servicer or the Trustee of a
breach of any of the foregoing representations, warranties and covenants which
materially and adversely affects the value of any Mortgage Loan or the interests
therein of the Certificateholders, the party discovering such breach shall give
prompt written notice (but in no event later than two Business Days following
such discovery) to the Trustee. The obligation of the Master Servicer set forth
in Section 2.03(c) to cure breaches shall constitute the sole remedies against
the Master Servicer available to the Certificateholders, the Depositor or the
Trustee on behalf of the Certificateholders respecting a breach of the
representations, warranties and covenants contained in this Section 2.05. The
preceding sentence shall not, however, limit any remedies available to the
Certificateholders, the Depositor or the Trustee on behalf of the
Certificateholders, pursuant to the Mortgage Loan Purchase Agreement signed by
the Master Servicer in its capacity as Originator, respecting a breach of the
representations, warranties and covenants of the Master Servicer in its capacity
as Originator contained in such Mortgage Loan Purchase Agreement.


<PAGE>


                                      -57-

         SECTION 2.06. Issuance of Class R-I Certificates.

         The Trustee acknowledges the assignment to it of the Mortgage Loans and
the delivery to it, or any Custodian on its behalf, 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 REMIC I, receipt of which is
hereby acknowledged. Concurrently with such assignment and delivery and in
exchange therefor, the Trustee, pursuant to the written request of the Depositor
executed by an officer of the Depositor, has executed, authenticated and
delivered to or upon the order of the Depositor, the Class R-I Certificates in
authorized denominations. The interests evidenced by the Class R-I Certificates,
together with the REMIC I Regular Interests, constitute the entire beneficial
ownership interest in REMIC I. The rights of the Class R-I Certificateholders
and REMIC II (as holder of the REMIC I Regular Interests) to receive
distributions from the proceeds of REMIC I in respect of the Class R-I
Certificates and the REMIC I Regular Interests, respectively, and all ownership
interests evidenced or constituted by the Class R-I Certificates and the REMIC I
Regular Interests, shall be as set forth in this Agreement.

         SECTION 2.07. Conveyance of REMIC I Regular Interests; Acceptance of
                       REMIC II by the Trustee.

         The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey to the Trustee
without recourse all the right, title and interest of the Depositor in and to
the REMIC I Regular Interests for the benefit of the Class R-II and REMIC III
Certificateholders. The Trustee acknowledges receipt of the REMIC I Regular
Interests and declares that it holds and will hold the same in trust for the
exclusive use and benefit of all present and future Class R-II
Certificateholders and REMIC III Certificateholders. The rights of the Class
R-II Certificateholders and REMIC III (as holder of the REMIC II Regular
Interests) to receive distributions from the proceeds of REMIC II in respect of
the Class R-II Certificates and REMIC II Regular Interests, respectively, and
all ownership interests evidenced or constituted by the Class R-II Certificates
and the REMIC II Regular Interests, shall be as set forth in this Agreement.

         SECTION 2.08. Issuance of Class R-II Certificates.

         The Trustee acknowledges the assignment to it of the REMIC I Regular
Interests and, concurrently therewith and in exchange therefor, pursuant to the
written request of the Depositor executed by an officer of the Depositor, the
Trustee has executed, authenticated and delivered to or upon the order of the
Depositor, the Class R-II Certificates in authorized denominations. The
interests evidenced by the Class R-II Certificates, together with the REMIC II
Regular Interests, constitute the entire beneficial ownership interest in REMIC
II.

         SECTION 2.09. Conveyance of REMIC II Regular Interests; Acceptance of
                       REMIC III by the Trustee.


<PAGE>


                                      -58-

         The Depositor, concurrently with the execution and delivery hereof,
does hereby transfer, assign, set over and otherwise convey to the Trustee
without recourse all the right, title and interest of the Depositor in and to
the REMIC II Regular Interests for the benefit of the REMIC III
Certificateholders. The Trustee acknowledges receipt of the REMIC II Regular
Interests and declares that it holds and will hold the same in trust for the
exclusive use and benefit of all present and future REMIC III
Certificateholders. The rights of the REMIC III Certificateholders to receive
distributions from the proceeds of REMIC III in respect of the REMIC III
Certificates, and all ownership interests evidenced or constituted by the REMIC
III Certificates, shall be as set forth in this Agreement.

         SECTION 2.10. Issuance of REMIC III Certificates.

         The Trustee acknowledges the assignment to it of the REMIC II Regular
Interests and, concurrently therewith and in exchange therefor, pursuant to the
written request of the Depositor executed by an officer of the Depositor, the
Trustee has executed, authenticated and delivered to or upon the order of the
Depositor, the REMIC III Certificates in authorized denominations evidencing the
entire beneficial ownership interest in REMIC III.


<PAGE>


                                      -59-

                                   ARTICLE III

                          ADMINISTRATION AND SERVICING
                              OF THE MORTGAGE LOANS

         SECTION 3.01. Master Servicer to Act as Master Servicer.

         The Master Servicer shall service and administer the Mortgage Loans on
behalf of the Trustee and in the best interests of and for the benefit of the
Certificateholders (as determined by the Master Servicer in its reasonable
judgment) in accordance with the terms of this Agreement and the respective
Mortgage Loans and, to the extent consistent with such terms, in the same manner
in which it services and administers similar mortgage loans for its own
portfolio, giving due consideration to customary and usual standards of practice
of prudent mortgage lenders and loan servicers administering similar mortgage
loans but without regard to:

                  (i) any relationship that the Master Servicer, any
         Sub-Servicer or any Affiliate of the Master Servicer or any
         Sub-Servicer may have with the related Mortgagor;

                  (ii) the ownership of any Certificate by the Master Servicer
         or any Affiliate of the Master Servicer;

                  (iii) the Master Servicer's obligation to make P&I Advances or
         Servicing Advances; or

                  (iv) the Master Servicer's or any Sub-Servicer's right to
         receive compensation for its services hereunder or with respect to any
         particular transaction.

To the extent consistent with the foregoing, the Master Servicer shall also seek
to maximize the timely and complete recovery of principal and interest on the
Mortgage Notes. Subject only to the above-described servicing standards and the
terms of this Agreement and of the respective Mortgage Loans, the Master
Servicer shall have full power and authority, acting alone or through
Sub-Servicers as provided in Section 3.02, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Without limiting the generality of the foregoing, the
Master Servicer in its own name or in the name of a Sub-Servicer is hereby
authorized and empowered by the Trustee when the Master Servicer believes it
appropriate in its best judgment in accordance with the servicing standards set
forth above, to execute and deliver, on behalf of the Certificateholders and the
Trustee, and upon notice to the Trustee, any and all instruments of satisfaction
or cancellation, or of partial or full release or discharge, and all other
comparable instruments, with respect to the Mortgage Loans and the Mortgaged
Properties and to institute foreclosure proceedings or obtain a deed-in-lieu of
foreclosure so as to convert the ownership of such properties, and to hold or
cause to be held title to such properties, on behalf of the Trustee and
Certificateholders. The Master Servicer shall


<PAGE>


                                      -60-

service and administer the Mortgage Loans in accordance with applicable state
and federal law and shall provide to the Mortgagors any reports required to be
provided to them thereby. The Master Servicer shall also comply in the
performance of this Agreement with all reasonable rules and requirements of each
insurer under any standard hazard insurance policy. Subject to Section 3.17, the
Trustee shall execute, at the written request of the Master Servicer, and
furnish to the Master Servicer and any Sub-Servicer such documents as are
necessary or appropriate to enable the Master Servicer or any Sub-Servicer to
carry out their servicing and administrative duties hereunder, and the Trustee
hereby grants to the Master Servicer a power of attorney to carry out such
duties. The Trustee shall not be liable for the actions of the Master Servicer
or any Sub- Servicers under such powers of attorney.

         In accordance with the standards of the preceding paragraph, the Master
Servicer shall advance or cause to be advanced funds as necessary for the
purpose of effecting the timely payment of taxes and assessments on the
Mortgaged Properties, which advances shall be Servicing Advances reimbursable in
the first instance from related collections from the Mortgagors pursuant to
Section 3.09, and further as provided in Section 3.11. Any cost incurred by the
Master Servicer or by Sub-Servicers in effecting the timely payment of taxes and
assessments on a Mortgaged Property shall not, for the purpose of calculating
distributions to Certificateholders, be added to the unpaid principal balance of
the related Mortgage Loan, notwithstanding that the terms of such Mortgage Loan
so permit.

         Notwithstanding anything in this Agreement to the contrary, the Master
Servicer may not make any future advances with respect to a Mortgage Loan
(except as provided in Section 4.03) and the Master Servicer shall not (i)
permit any modification with respect to any Mortgage Loan that would change the
Mortgage Rate, reduce or increase the principal balance (except for reductions
resulting from actual payments of principal) or change the final maturity date
on such Mortgage Loan (unless, as provided in Section 3.07, the Mortgagor is in
default with respect to the Mortgage Loan or such default is, in the judgment of
the Master Servicer, reasonably foreseeable) or (ii) permit any modification,
waiver or amendment of any term of any Mortgage Loan that would both (A) effect
an exchange or reissuance of such Mortgage Loan under Section 1001 of the Code
(or Treasury regulations promulgated thereunder) and (B) cause any of REMIC I,
REMIC II or REMIC III to fail to qualify as a REMIC under the Code or the
imposition of any tax on "prohibited transactions" or "contributions after the
startup date" under the REMIC Provisions.

         The Master Servicer may delegate its responsibilities under this
Agreement; provided, however, that no such delegation shall release the Master
Servicer from the responsibilities or liabilities arising under this Agreement.

         SECTION 3.02. Sub-Servicing Agreements Between Master Servicer and
                       Sub-Servicers.

         (a) The Master Servicer may enter into Sub-Servicing Agreements
(provided that such agreements would not result in a withdrawal or a downgrading
by any Rating Agency


<PAGE>


                                      -61-

of the ratings on the Class A Certificates or the Mezzanine Certificates) with
Sub-Servicers, for the servicing and administration of the Mortgage Loans.

         Each Sub-Servicer shall be (i) authorized to transact business in the
state or states where the related Mortgaged Properties it is to service are
situated, if and to the extent required by applicable law to enable the
Sub-Servicer to perform its obligations hereunder and under the Sub-Servicing
Agreement, (ii) an institution approved as a mortgage loan originator by the
Federal Housing Administration or an institution the deposit accounts in which
are insured by the FDIC and (iii) a FHLMC or FNMA approved mortgage servicer.
Each Sub-Servicing Agreement must impose on the Sub-Servicer requirements
conforming to the provisions set forth in Section 3.08 and provide for servicing
of the Mortgage Loans consistent with the terms of this Agreement. The Master
Servicer will examine each Sub-Servicing Agreement and will be familiar with the
terms thereof. The terms of any Sub-Servicing Agreement will not be inconsistent
with any of the provisions of this Agreement. The Master Servicer and the
Sub-Servicers may enter into and make amendments to the Sub-Servicing Agreements
or enter into different forms of Sub-Servicing Agreements; provided, however,
that any such amendments or different forms shall be consistent with and not
violate the provisions of this Agreement, and that no such amendment or
different form shall be made or entered into which could be reasonably expected
to be materially adverse to the interests of the Certificateholders, without the
consent of the Holders of Certificates entitled to at least 66% of the Voting
Rights. Any variation without the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights from the provisions set forth in
Section 3.08 relating to insurance or priority requirements of Sub-Servicing
Accounts, or credits and charges to the Sub-Servicing Accounts or the timing and
amount of remittances by the Sub- Servicers to the Master Servicer, are
conclusively deemed to be inconsistent with this Agreement and therefore
prohibited. The Master Servicer shall deliver to the Trustee copies of all Sub-
Servicing Agreements, and any amendments or modifications thereof, promptly upon
the Master Servicer's execution and delivery of such instruments.

         (b) As part of its servicing activities hereunder, the Master Servicer
(except as otherwise provided in the last sentence of this paragraph), for the
benefit of the Trustee and the Certificateholders, shall enforce the obligations
of each Sub-Servicer under the related Sub- Servicing Agreement and of the
Originator and the Seller under the Mortgage Loan Purchase Agreement, including,
without limitation, any obligation to make advances in respect of delinquent
payments as required by a Sub-Servicing Agreement, or to purchase a Mortgage
Loan on account of missing or defective documentation or on account of a breach
of a representation, warranty or covenant, as described in Section 2.03(a). Such
enforcement, including, without limitation, the legal prosecution of claims,
termination of Sub-Servicing 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 Master Servicer, in its good faith business judgment, would require
were it the owner of the related Mortgage Loans. The Master Servicer shall pay
the costs of such enforcement at its own expense, and shall be reimbursed
therefor only (i) from a general recovery resulting from such enforcement, to
the extent, if any, that such recovery exceeds all amounts due in respect of the
related Mortgage Loans, or (ii) from a specific recovery of costs, expenses or
attorneys' fees against the party against whom such enforcement is directed.
Enforcement of the

<PAGE>


                                      -62-

Mortgage Loan Purchase Agreement against the Originator shall be effected by the
Master Servicer to the extent it is not the Originator, and otherwise by the
Trustee, in accordance with the foregoing provisions of this paragraph.

         SECTION 3.03. Successor Sub-Servicers.

         The Master Servicer shall be entitled to terminate any Sub-Servicing
Agreement and the rights and obligations of any Sub-Servicer pursuant to any
Sub-Servicing Agreement in accordance with the terms and conditions of such
Sub-Servicing Agreement. In the event of termination of any Sub-Servicer, all
servicing obligations of such Sub-Servicer shall be assumed simultaneously by
the Master Servicer without any act or deed on the part of such Sub-Servicer or
the Master Servicer, and the Master Servicer either shall service directly the
related Mortgage Loans or shall enter into a Sub-Servicing Agreement with a
successor Sub-Servicer which qualifies under Section 3.02.

         Any Sub-Servicing Agreement shall include the provision that such
agreement may be immediately terminated by the Trustee without fee, in
accordance with the terms of this Agreement, in the event that the Master
Servicer shall, for any reason, no longer be the Master Servicer (including
termination due to a Master Servicer Event of Default).

         SECTION 3.04. Liability of the Master Servicer.

         Notwithstanding any Sub-Servicing Agreement, any of the provisions of
this Agreement relating to agreements or arrangements between the Master
Servicer and a Sub- Servicer or reference to actions taken through a
Sub-Servicer or otherwise, the Master Servicer shall remain obligated and
primarily liable to the Trustee and the Certificateholders for the servicing and
administering of the Mortgage Loans in accordance with the provisions of Section
3.01 without diminution of such obligation or liability by virtue of such
Sub-Servicing Agreements or arrangements or by virtue of indemnification from
the Sub-Servicer and to the same extent and under the same terms and conditions
as if the Master Servicer alone were servicing and administering the Mortgage
Loans. The Master Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Master Servicer by such Sub-Servicer and
nothing contained in this Agreement shall be deemed to limit or modify such
indemnification.

         SECTION 3.05. No Contractual Relationship Between Sub-Servicers and
                       Trustee or Certificateholders.

         Any Sub-Servicing Agreement that may be entered into and any
transactions or services relating to the Mortgage Loans involving a Sub-Servicer
in its capacity as such shall be deemed to be between the Sub-Servicer and the
Master Servicer alone, and the Trustee and Certificateholders shall not be
deemed parties thereto and shall have no claims, rights, obligations, duties or
liabilities with respect to the Sub-Servicer except as set forth in Section
3.06. The Master Servicer shall be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of


<PAGE>


                                      -63-

whether the Master Servicer's compensation pursuant to this Agreement is
sufficient to pay such fees.

         SECTION 3.06. Assumption or Termination of Sub-Servicing Agreements by
                       Trustee.

         In the event the Master Servicer shall for any reason no longer be the
master servicer (including by reason of the occurrence of a Master Servicer
Event of Default), the Trustee or its designee shall thereupon assume all of the
rights and obligations of the Master Servicer under each Sub-Servicing Agreement
that the Master Servicer may have entered into, unless the Trustee elects to
terminate any Sub-Servicing Agreement in accordance with its terms as provided
in Section 3.03. Upon such assumption, the Trustee, its designee or the
successor servicer for the Trustee appointed pursuant to Section 7.02 shall be
deemed, subject to Section 3.03, to have assumed all of the Master Servicer's
interest therein and to have replaced the Master Servicer as a party to each
Sub-Servicing Agreement to the same extent as if each Sub-Servicing Agreement
had been assigned to the assuming party, except that (i) the Master Servicer
shall not thereby be relieved of any liability or obligations under any
Sub-Servicing Agreement and (ii) none of the Trustee, its designee or any
successor Master Servicer shall be deemed to have assumed any liability or
obligation of the Master Servicer that arose before it ceased to be the Master
Servicer.

         The Master Servicer at its expense shall, upon request of the Trustee,
deliver to the assuming party all documents and records relating to each
Sub-Servicing Agreement and the Mortgage Loans then being serviced and an
accounting of amounts collected and held by or on behalf of it, and otherwise
use its best efforts to effect the orderly and efficient transfer of the Sub-
Servicing Agreements to the assuming party.

         SECTION 3.07. Collection of Certain Mortgage Loan Payments.

         The Master Servicer shall make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans, and
shall, to the extent such procedures shall be consistent with this Agreement and
the terms and provisions of any applicable insurance policies, follow such
collection procedures as it would follow with respect to mortgage loans
comparable to the Mortgage Loans and held for its own account. Consistent with
the foregoing, the Master Servicer may in its discretion (i) waive any late
payment charge or, if applicable, any penalty interest, or (ii) extend the due
dates for the Monthly Payments due on a Mortgage Note for a period of not
greater than 180 days; provided that any extension pursuant to clause (ii) above
shall not affect the amortization schedule of any Mortgage Loan for purposes of
any computation hereunder, except as provided below. In the event of any such
arrangement pursuant to clause (ii) above, the Master Servicer shall make timely
advances on such Mortgage Loan during such extension pursuant to Section 4.03
and in accordance with the amortization schedule of such Mortgage Loan without
modification thereof by reason of such arrangements. Notwithstanding the
foregoing, in the event that any Mortgage Loan is in default or, in the judgment
of the Master Servicer, such default is reasonably foreseeable, the Master
Servicer, consistent with the standards set forth in Section 3.01, may also
waive, modify or vary any term of such Mortgage Loan


<PAGE>


                                      -64-

(including modifications that would change the Mortgage Rate, forgive the
payment of principal or interest or extend the final maturity date of such
Mortgage Loan), accept payment from the related Mortgagor of an amount less than
the Stated Principal Balance in final satisfaction of such Mortgage Loan (such
payment, a "Short Pay-off") or consent to the postponement of strict compliance
with any such term or otherwise grant indulgence to any Mortgagor if in the
Master Servicer's determination such waiver, modification, postponement or
indulgence is not materially adverse to the interests of the Certificateholders
(taking into account any estimated Realized Loss that might result absent such
action).

         SECTION 3.08. Sub-Servicing Accounts.

         In those cases where a Sub-Servicer is servicing a Mortgage Loan
pursuant to a Sub-Servicing Agreement, the Sub-Servicer will be required to
establish and maintain one or more accounts (collectively, the "Sub-Servicing
Account"). The Sub-Servicing Account shall be an Eligible Account and shall
comply with all requirements of this Agreement relating to the Collection
Account. The Sub-Servicer will be required to deposit into the Sub-Servicing
Account no later than the first Business Day after receipt all proceeds of
Mortgage Loans received by the Sub-Servicer, less its servicing compensation to
the extent permitted by the Sub-Servicing Agreement and to remit such proceeds
to the Master Servicer for deposit in the Collection Account not later than the
first Business Day thereafter. For purposes of this Agreement, the Master
Servicer shall be deemed to have received payments on the Mortgage Loans when
the Sub-Servicer receives such payments.

         SECTION 3.09. Collection of Taxes, Assessments and Similar Items;
                       Servicing Accounts.

         The Master Servicer shall, establish and maintain one or more accounts
(the "Servicing Accounts"), into which all collections from the Mortgagors (or
related advances from Sub-Servicers) for the payment of taxes, assessments,
hazard insurance premiums, and comparable items for the account of the
Mortgagors ("Escrow Payments") shall be deposited and retained. Servicing
Accounts shall be Eligible Accounts. The Master Servicer shall deposit in the
Servicing Accounts on a daily basis, and retain therein, all Escrow Payments
collected on account of the Mortgage Loans, for the purpose of effecting the
timely payment of any such items as required under the terms of this Agreement.
Withdrawals of amounts from a Servicing Account may be made only to (i) effect
timely payment of taxes, assessments, hazard insurance premiums, and comparable
items; (ii) reimburse the Master Servicer (or a Sub-Servicer to the extent
provided in the related Sub-Servicing Agreement) out of related collections for
any advances made pursuant to Section 3.01 (with respect to taxes and
assessments) and Section 3.14 (with respect to hazard insurance); (iii) refund
to Mortgagors any sums as may be determined to be overages; (iv) pay interest,
if required and as described below, to Mortgagors on balances in the Servicing
Account; or (v) clear and terminate the Servicing Account at the termination of
the Master Servicer's obligations and responsibilities in respect of the
Mortgage Loans under this Agreement in accordance with Article IX. As part of
its servicing duties, the Master Servicer or Sub-Servicers shall pay to the
Mortgagors interest on funds in Servicing Accounts, to the extent required by
law


<PAGE>


                                      -65-

and, to the extent that interest earned on funds in the Servicing Accounts is
insufficient, to pay such interest from its or their own funds, without any
reimbursement therefor. To the extent that a Mortgage does not provide for
Escrow Payments, the Master Servicer shall determine that any such payments are
made by the Mortgagor at the time they first become due. The Master Servicer
assumes full responsibility for the timely payment of all such bills and shall
effect timely payments of all such bills irrespective of the Mortgagor's
faithful performance in the payment of same or the making of the Escrow Payments
and shall make advances from its own funds to effect such payments.

         SECTION 3.10. Collection Account and Distribution Account.

         (a) On behalf of the Trust Fund, the Master Servicer shall establish
and maintain one or more accounts (such account or accounts, the "Collection
Account"), held in trust for the benefit of the Trustee and the
Certificateholders. On behalf of the Trust Fund, the Master Servicer shall
deposit or cause to be deposited in the Collection Account on a daily basis, as
and when received or as otherwise required hereunder, the following payments and
collections received or made by it subsequent to the Cut-off Date (other than in
respect of principal or interest on the related Mortgage Loans due on or before
the Cut-off Date), or payments (other than Principal Prepayments) received by it
on or prior to the Cut-off Date but allocable to a Due Period subsequent
thereto:

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

                  (ii) all payments on account of interest (net of the related
         Servicing Fee) on each Mortgage Loan;

                  (iii) all payments on account of Arrearage on the Mortgage
         Loans;

                  (iv) all Insurance Proceeds and Liquidation Proceeds (other
         than proceeds collected in respect of any particular REO Property and
         amounts paid in connection with a purchase of Mortgage Loans and REO
         Properties pursuant to Section 9.01);

                  (v) any amounts required to be deposited pursuant to Section
         3.12 in connection with any losses realized on Permitted Investments
         with respect to funds held in the Collection Account;

                  (vi) any amounts required to be deposited by the Master
         Servicer pursuant to the second paragraph of Section 3.14(a) in respect
         of any blanket policy deductibles;

                  (vii) all proceeds of any Mortgage Loan repurchased or
         purchased in accordance with Section 2.03 or Section 9.01; and


<PAGE>


                                      -66-

                  (viii) all amounts required to be deposited in connection with
         shortfalls in principal amount of Qualified Substitute Mortgage Loans
         pursuant to Section 2.03.

For purposes of the immediately preceding sentence, the Cut-off Date with
respect to any Qualified Substitute Mortgage Loan shall be deemed to be the date
of substitution.

         The foregoing requirements for deposit in the Collection Accounts shall
be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, payments in the nature of prepayment or late
payment charges or assumption fees need not be deposited by the Master Servicer
in the Collection Account. In the event the Master Servicer shall deposit in the
Collection Account any amount not required to be deposited therein, it may at
any time withdraw such amount from the Collection Account, any provision herein
to the contrary notwithstanding.

         (b) On behalf of the Trust Fund, the Trustee shall establish and
maintain one or more accounts (such account or accounts, the "Distribution
Account"), held in trust for the benefit of the Certificateholders. On behalf of
the Trust Fund, the Master Servicer shall deliver to the Trustee in immediately
available funds for deposit in the Distribution Account on or before 3:00 p.m.
New York time (i) on the Master Servicer Remittance Date, that portion of the
Available Distribution Amount (calculated without regard to the references in
clause (2) of the definition thereof to amounts that may be withdrawn from the
Distribution Account) for the related Distribution Date then on deposit in the
Collection Account, and (ii) on each Business Day as of the commencement of
which the balance on deposit in the Collection Account exceeds $75,000 following
any withdrawals pursuant to the next succeeding sentence, the amount of such
excess, but only if the Collection Account constitutes an Eligible Account
solely pursuant to clause (ii) of the definition of "Eligible Account." If the
balance on deposit in the Collection Account exceeds $75,000 as of the
commencement of business on any Business Day and the Collection Account
constitutes an Eligible Account solely pursuant to clause (ii) of the definition
of "Eligible Account," the Master Servicer shall, on or before 3:00 p.m. New
York time on such Business Day, withdraw from the Collection Account any and all
amounts payable or reimbursable to the Depositor, the Master Servicer, the
Trustee, the Originator, the Seller or any Sub-Servicer pursuant to Section 3.11
and shall pay such amounts to the Persons entitled thereto.

         (c) Funds in the Collection Account and the Distribution Account may be
invested in Permitted Investments in accordance with the provisions set forth in
Section 3.12. The Master Servicer shall give notice to the Trustee of the
location of the Collection Account maintained by it when established and prior
to any change thereof. The Trustee shall give notice to the Master Servicer and
the Depositor of the location of the Distribution Account when established and
prior to any change thereof.

         (d) Funds held in the Collection Account at any time may be delivered
by the Master Servicer to the Trustee for deposit in an account (which may be
the Distribution Account and must satisfy the standards for the Distribution
Account as set forth in the definition thereof) and for all purposes of this
Agreement shall be deemed to be a part of the Collection Account;


<PAGE>


                                      -67-

provided, however, that the Trustee shall have the sole authority to withdraw
any funds held pursuant to this subsection (d). In the event the Master Servicer
shall deliver to the Trustee for deposit in the Distribution Account any amount
not required to be deposited therein, it may at any time request that the
Trustee withdraw such amount from the Distribution Account and remit to it any
such amount, any provision herein to the contrary notwithstanding. In addition,
the Master Servicer shall deliver to the Trustee from time to time for deposit,
and the Trustee shall so deposit, in the Distribution Account:

                  (i) any P&I Advances, as required pursuant to Section 4.03;

                  (ii) any amounts required to be deposited pursuant to Section
         3.23(d) or (f) in connection with any REO Property;

                  (iii) any amounts to be paid in connection with a purchase of
         Mortgage Loans and REO Properties pursuant to Section 9.01;

                  (iv) any amounts required to be deposited pursuant to Section
         3.24 in connection with any Prepayment Interest Shortfalls; and

                  (v) any Stayed Funds, as soon as permitted by the federal
         bankruptcy court having jurisdiction in such matters.

         (e) Promptly upon receipt of any Stayed Funds, whether from the Master
Servicer, a trustee in bankruptcy, or federal bankruptcy court or other source,
the Trustee shall deposit such funds in the Distribution Account, subject to
withdrawal thereof pursuant to Section 7.02(b) or as otherwise permitted
hereunder. In addition, the Master Servicer shall deposit in the Distribution
Account any amounts required to be deposited pursuant to Section 3.12 in
connection with losses realized on Permitted Investments with respect to funds
held in the Distribution Account.

         SECTION 3.11. Withdrawals from the Collection Account and Distribution
                       Account.

         (a) The Master Servicer shall, from time to time, make withdrawals from
the Collection Account for any of the following purposes or as described in
Section 4.03:

                  (i) to remit to the Trustee for deposit in the Distribution
         Account the amounts required to be so remitted pursuant to Section
         3.10(b) or permitted to be so remitted pursuant to the first sentence
         of Section 3.10(d);

                  (ii) subject to Section 3.16(d), to reimburse the Master
         Servicer, the Trustee or the Fiscal Agent for Payment Advances, but
         only to the extent of amounts received which represent Late Collections
         (net of the related Servicing


<PAGE>


                                      -68-

         Fees) of Monthly Payments on Mortgage Loans with respect to which such
         P&I Advances were made in accordance with the provisions of Section
         4.03;

                  (iii) subject to Section 3.16(d), to pay the Master Servicer
         or any Sub- Servicer any unpaid Servicing Fees and reimburse any
         unreimbursed Servicing Advances with respect to each Mortgage Loan, but
         only to the extent of any Liquidation Proceeds and Insurance Proceeds
         received with respect to such Mortgage Loan;

                  (iv) to pay to the Master Servicer as servicing compensation
         (in addition to the Servicing Fee) on the Master Servicer Remittance
         Date any interest or investment income earned on funds deposited in the
         Collection Account;

                  (v) to pay to the Master Servicer, the Depositor, the
         Originator or the Seller, as the case may be, with respect to each
         Mortgage Loan that has previously been purchased or replaced pursuant
         to Section 2.03 or Section 3.16(c) all amounts received thereon
         subsequent to the date of purchase or substitution, as the case may be;

                  (vi) to reimburse the Master Servicer for any P&I Advance
         previously made which the Master Servicer has determined to be a
         Nonrecoverable P&I Advance in accordance with the provisions of Section
         4.03;

                  (vii) to reimburse the Master Servicer or the Depositor for
         expenses incurred by or reimbursable to the Master Servicer or the
         Depositor, as the case may be, pursuant to Section 6.03;

                  (viii) to reimburse the Master Servicer or the Trustee, as the
         case may be, for expenses reasonably incurred in respect of the breach
         or defect giving rise to the purchase obligation under Section 2.03 or
         Section 2.04 of this Agreement that were included in the Purchase Price
         of the Mortgage Loan, including any expenses arising out of the
         enforcement of the purchase obligation;

                  (ix) to pay, or to reimburse the Master Servicer for advances
         in respect of, expenses incurred in connection with any Mortgage Loan
         pursuant to Section 3.16(b); and

                  (x) to clear and terminate the Collection Account pursuant to
         Section 9.01.

         The Master Servicer shall keep and maintain separate accounting, on a
Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Collection Account, to the extent held by or on behalf of
it, pursuant to subclauses (ii), (iii), (iv), (v), (vi), (viii) and (ix) above.
The Master Servicer shall provide written notification to the Trustee, on or


<PAGE>


                                      -69-

prior to the next succeeding Master Servicer Remittance Date, upon making any
withdrawals from the Collection Account pursuant to subclause (vii) above.

         (b) The Trustee shall, from time to time, make withdrawals from the
Distribution Account, for any of the following purposes, without priority:

                (i)  to make distributions to Certificateholders in accordance
         with Section 4.01;

                (ii)  to pay to itself the Trustee's Fee pursuant to Section
         8.05;

                (iii)  to pay itself any interest income earned on funds
         deposited in the Distribution Account pursuant to Section 3.12(c);

                (iv)  to reimburse itself pursuant to Section 7.02;

                 (v) to pay any amounts in respect of taxes pursuant to Section
         10.01(h)(iii); and

                 (vi)  to clear and terminate the Distribution Account pursuant
         to Section 9.01.

         SECTION 3.12. Investment of Funds in the Collection Account and the
                       Distribution Account.

         (a) The Master Servicer may direct any depository institution
maintaining the Collection Account (for purposes of this Section 3.12, an
"Investment Account"), and the Trustee, in its individual capacity, may direct
any depository institution maintaining the Distribution Account (for purposes of
this Section 3.12, also an "Investment Account"), to invest the funds in such
Investment Account in one or more Permitted Investments bearing interest or sold
at a discount, and maturing, unless payable on demand, (i) no later than the
Business Day immediately preceding the date on which such funds are required to
be withdrawn from such account pursuant to this Agreement, if a Person other
than the Trustee is the obligor thereon, and (ii) no later than the date on
which such funds are required to be withdrawn from such account pursuant to this
Agreement, if the Trustee is the obligor thereon. All such Permitted Investments
shall be held to maturity, unless payable on demand. Any investment of funds in
an Investment Account shall be made in the name of the Trustee (in its capacity
as such) or in the name of a nominee of the Trustee. The Trustee shall be
entitled to sole possession (except with respect to investment direction of
funds held in the Collection Account) over each such investment and the income
thereon, and any certificate or other instrument evidencing any such investment
shall be delivered directly to the Trustee or its agent, together with any
document of transfer necessary to transfer title to such investment to the
Trustee or its nominee. In the event amounts on deposit in an Investment Account
are at any time invested in a Permitted Investment payable on demand, the
Trustee shall:


<PAGE>


                                      -70-

         (x)      consistent with any notice required to be given thereunder,
                  demand that payment thereon be made on the last day such
                  Permitted Investment may otherwise mature hereunder in an
                  amount equal to the lesser of (1) all amounts then payable
                  thereunder and (2) the amount required to be withdrawn on such
                  date; and

         (y)      demand payment of all amounts due thereunder promptly upon
                  determination by a Responsible Officer of the Trustee that
                  such Permitted Investment would not constitute a Permitted
                  Investment in respect of funds thereafter on deposit in the
                  Investment Account.

         (b) All income and gain realized from the investment of funds deposited
in the Collection Account held by or on behalf of the Master Servicer, shall be
for the benefit of the Master Servicer and shall be subject to its withdrawal in
accordance with Section 3.11. The Master Servicer shall deposit in the
Collection Account the amount of any loss of principal incurred in respect of
any such Permitted Investment made with funds in such accounts immediately upon
realization of such loss.

         (c) All income and gain realized from the investment of funds deposited
in the Distribution Account held by or on behalf of the Trustee, shall be for
the benefit of the Trustee and shall be subject to its withdrawal at any time.
The Trustee shall deposit in the Distribution Account, the amount of any loss of
principal incurred in respect of any such Permitted Investment made with funds
in such accounts immediately upon realization of such loss.

         (d) Except as otherwise expressly provided in this Agreement, if any
default occurs in the making of a payment due under any Permitted Investment, or
if a default occurs in any other performance required under any Permitted
Investment, the Trustee may and, subject to Section 8.01 and Section 8.02(v),
upon the request of the Holders of Certificates representing more than 50% of
the Voting Rights allocated to any Class of Certificates, shall take such action
as may be appropriate to enforce such payment or performance, including the
institution and prosecution of appropriate proceedings.

         SECTION 3.13. [intentionally omitted]

         SECTION 3.14. Maintenance of Hazard Insurance and Errors and Omissions
                       and Fidelity Coverage.

         (a) The Master Servicer shall cause to be maintained for each Mortgage
Loan fire insurance with extended coverage on the related Mortgaged Property in
an amount which is at least equal to the least of (i) the current principal
balance of such Mortgage Loan, (ii) the amount necessary to fully compensate for
any damage or loss to the improvements that are a part of such property on a
replacement cost basis and (iii) the maximum insurable value of the improvements
which are a part of such Mortgaged Property, in each case in an amount not less
than such amount as is necessary to avoid the application of any coinsurance
clause contained in


<PAGE>


                                      -71-

the related hazard insurance policy. The Master Servicer shall also cause to be
maintained fire insurance with extended coverage on each REO Property in an
amount which is at least equal to the lesser of (i) the maximum insurable value
of the improvements which are a part of such property and (ii) the outstanding
principal balance of the related Mortgage Loan at the time it became an REO
Property, plus accrued interest at the Mortgage Rate and related Servicing
Advances. The Master Servicer will comply in the performance of this Agreement
with all reasonable rules and requirements of each insurer under any such hazard
policies. Any amounts to be collected by the Master Servicer under any such
policies (other than amounts to be applied to the restoration or repair of the
property subject to the related Mortgage or amounts to be released to the
Mortgagor in accordance with the procedures that the Master Servicer would
follow in servicing loans held for its own account, subject to the terms and
conditions of the related Mortgage and Mortgage Note) shall be deposited in the
Collection Account, subject to withdrawal pursuant to Section 3.11, if received
in respect of a Mortgage Loan, or in the REO Account, subject to withdrawal
pursuant to Section 3.23, if received in respect of an REO Property. Any cost
incurred by the Master Servicer in maintaining any such insurance shall not, for
the purpose of calculating distributions to Certificateholders, be added to the
unpaid principal balance of the related Mortgage Loan, notwithstanding that the
terms of such Mortgage Loan so permit. It is understood and agreed that no
earthquake or other additional insurance is to be required of any Mortgagor
other than pursuant to such applicable laws and regulations as shall at any time
be in force and as shall require such additional insurance. If the Mortgaged
Property or REO Property is at any time in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards, the Master Servicer will cause to be maintained a flood insurance
policy in respect thereof. Such flood insurance shall be in an amount equal to
the lesser of (i) the unpaid principal balance of the related Mortgage Loan and
(ii) the maximum amount of such insurance available for the related Mortgaged
Property under the national flood insurance program (assuming that the area in
which such Mortgaged Property is located is participating in such program).

         In the event that the Master Servicer shall obtain and maintain a
blanket policy with an insurer having a General Policy Rating of A:X or better
in Best's Key Rating Guide insuring against hazard losses on all of the Mortgage
Loans, it shall conclusively be deemed to have satisfied its obligations as set
forth in the first two sentences of this Section 3.14, it being understood and
agreed that such policy may contain a deductible clause, in which case the
Master Servicer shall, in the event that there shall not have been maintained on
the related Mortgaged Property or REO Property a policy complying with the first
two sentences of this Section 3.14, and there shall have been one or more losses
which would have been covered by such policy, deposit to the Collection Account
from its own funds the amount not otherwise payable under the blanket policy
because of such deductible clause. In connection with its activities as
administrator and servicer of the Mortgage Loans, the Master Servicer agrees to
prepare and present, on behalf of itself, the Trustee and Certificateholders,
claims under any such blanket policy in a timely fashion in accordance with the
terms of such policy.

         (b) The Master Servicer shall keep in force during the term of this
Agreement a policy or policies of insurance covering errors and omissions for
failure in the performance of


<PAGE>


                                      -72-

the Master Servicer's obligations under this Agreement, which policy or policies
shall be in such form and amount that would meet the requirements of FNMA or
FHLMC if it were the purchaser of the Mortgage Loans, unless the Master Servicer
has obtained a waiver of such requirements from FNMA or FHLMC. The Master
Servicer shall also maintain a fidelity bond in the form and amount that would
meet the requirements of FNMA or FHLMC, unless the Master Servicer has obtained
a waiver of such requirements from FNMA or FHLMC. The Master Servicer shall be
deemed to have complied with this provision if an Affiliate of the Master
Servicer has such errors and omissions and fidelity bond coverage and, by the
terms of such insurance policy or fidelity bond, the coverage afforded
thereunder extends to the Master Servicer. Any such errors and omissions policy
and fidelity bond shall by its terms not be cancelable without thirty days'
prior written notice to the Trustee. The Master Servicer shall also cause each
Sub-Servicer to maintain a policy of insurance covering errors and omissions and
a fidelity bond which would meet such requirements.

         SECTION 3.15. Enforcement of Due-On-Sale Clauses; Assumption
                       Agreements.

         The Master Servicer will, to the extent it has knowledge of any
conveyance or prospective conveyance of any Mortgaged Property by any Mortgagor
(whether by absolute conveyance or by contract of sale, and whether or not the
Mortgagor remains or is to remain liable under the Mortgage Note and/or the
Mortgage), exercise its rights to accelerate the maturity of such Mortgage Loan
under the "due-on-sale" clause, if any, applicable thereto; provided, however,
that the Master Servicer shall not exercise any such rights if prohibited by law
from doing so. If the Master Servicer reasonably believes it is unable under
applicable law to enforce such "due-on-sale" clause, or if any of the other
conditions set forth in the proviso to the preceding sentence apply, the Master
Servicer will enter into an assumption and modification agreement from or with
the person to whom such property has been conveyed or is proposed to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, to the extent permitted by applicable state law, the Mortgagor remains
liable thereon. The Master Servicer is also authorized to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted as
the Mortgagor and becomes liable under the Mortgage Note, provided that no such
substitution shall be effective unless such person satisfies the underwriting
criteria of the Master Servicer and has a credit risk rating at least equal to
that of the original Mortgagor. In connection with any assumption or
substitution, the Master Servicer shall apply such underwriting standards and
follow such practices and procedures as shall be normal and usual in its general
mortgage servicing activities and as it applies to other mortgage loans owned
solely by it. The Master Servicer shall not take or enter into any assumption
and modification agreement, however, unless (to the extent practicable in the
circumstances) it shall have received confirmation, in writing, of the continued
effectiveness of any applicable hazard insurance policy, or a new policy meeting
the requirements of this Section is obtained. Any fee collected by the Master
Servicer in respect of an assumption or substitution of liability agreement will
be retained by the Master Servicer as additional servicing compensation. In
connection with any such assumption, no material term of the Mortgage Note
(including but not limited to the related Mortgage Rate and the amount of the
Monthly Payment)


<PAGE>


                                      -73-

may be amended or modified, except as otherwise required pursuant to the terms
thereof. The Master Servicer shall notify the Trustee and any respective
Custodian that any such substitution or assumption agreement has been completed
by forwarding to the Trustee or to such Custodian, as the case may be, the
executed original of such substitution or assumption agreement, which document
shall be added to the related Mortgage File and shall, for all purposes, be
considered a part of such Mortgage File to the same extent as all other
documents and instruments constituting a part thereof.

         Notwithstanding the foregoing paragraph or any other provision of this
Agreement, the Master 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 by the terms of the Mortgage Note or any
assumption which the Master Servicer may be restricted by law from preventing,
for any reason whatever. For purposes of this Section 3.15, the term
"assumption" is deemed to also include a sale (of the Mortgaged Property)
subject to the Mortgage that is not accompanied by an assumption or substitution
of liability agreement.

         SECTION 3.16. Realization Upon Defaulted Mortgage Loans.

         (a) The Master Servicer shall, consistent with the servicing standard
set forth in Section 3.01, foreclose upon or otherwise comparably convert the
ownership of properties securing such of the Mortgage Loans as come into and
continue in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments pursuant to Section 3.07. The Master Servicer
shall be responsible for all costs and expenses incurred by it in any such
proceedings; provided, however, that such costs and expenses will be recoverable
as Servicing Advances by the Master Servicer as contemplated in Section 3.11 and
Section 3.23. The foregoing is subject to the provision that, in any case in
which Mortgaged Property shall have suffered damage from an Uninsured Cause, the
Master Servicer shall not be required to expend its own funds toward the
restoration of such property unless it shall determine in its discretion that
such restoration will increase the proceeds of liquidation of the related
Mortgage Loan after reimbursement to itself for such expenses.

         (b) Notwithstanding the foregoing provisions of this Section 3.16 or
any other provision of this Agreement, with respect to any Mortgage Loan as to
which the Master Servicer has received actual notice of, or has actual knowledge
of, the presence of any toxic or hazardous substance on the related Mortgaged
Property, the Master Servicer shall not, on behalf of the Trustee, either (i)
obtain title to such Mortgaged Property as a result of or in lieu of foreclosure
or otherwise, or (ii) otherwise acquire possession of, or take any other action
with respect to, such Mortgaged Property, if, as a result of any such action,
the Trustee, the Trust Fund or the Certificateholders would be considered to
hold title to, to be a "mortgagee-in-possession" of, or to be an "owner" or
"operator" of such Mortgaged Property within the meaning of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended from
time to time, or any comparable law, unless the Master Servicer has also
previously determined, based on its reasonable judgment and a report prepared by
a Person who regularly conducts environmental audits using customary industry
standards, that:


<PAGE>


                                      -74-

                  (1) such Mortgaged Property is in compliance with applicable
         environmental laws or, if not, that it would be in the best economic
         interest of the Trust Fund to take such actions as are necessary to
         bring the Mortgaged Property into compliance therewith; and

                  (2) there are no circumstances present at such Mortgaged
         Property relating to the use, management or disposal of any hazardous
         substances, hazardous materials, hazardous wastes, or petroleum-based
         materials for which investigation, testing, monitoring, containment,
         clean-up or remediation could be required under any federal, state or
         local law or regulation, or that if any such materials are present for
         which such action could be required, that it would be in the best
         economic interest of the Trust Fund to take such actions with respect
         to the affected Mortgaged Property.

         The cost of the environmental audit report contemplated by this Section
3.23 shall be advanced by the Master Servicer, subject to the Master Servicer's
right to be reimbursed therefor from the Collection Account as provided in
Section 3.11(ix), such right of reimbursement being prior to the rights of
Certificateholders to receive any amount in the Collection Account received in
respect of the affected Mortgage Loan or other Mortgage Loans.

         If the Master Servicer determines, as described above, that it is in
the best economic interest of the Trust Fund to take such actions as are
necessary to bring any such Mortgaged Property into compliance with applicable
environmental laws, or to take such action with respect to the containment,
clean-up or remediation of hazardous substances, hazardous materials, hazardous
wastes or petroleum-based materials affecting any such Mortgaged Property, then
the Master Servicer shall take such action as it deems to be in the best
economic interest of the Trust Fund. The cost of any such compliance,
containment, cleanup or remediation shall be advanced by the Master Servicer,
subject to the Master Servicer's right to be reimbursed therefor from the
Collection Account as provided in Section 3.11(ix), such right of reimbursement
being prior to the rights of Certificateholders to receive any amount in the
Collection Account received in respect of the affected Mortgage Loan or other
Mortgage Loans.

         (c) The Master Servicer may at its option purchase from REMIC I any
Mortgage Loan that is 90 days or more delinquent, which the Master Servicer
determines in good faith will otherwise become subject to foreclosure
proceedings (evidence of such determination to be delivered in writing to the
Trustee prior to purchase), at a price equal to the Purchase Price; provided,
however, that the Master Servicer shall purchase any such Mortgage Loans on the
basis of delinquency, purchasing the most delinquent Mortgage Loans first. The
Purchase Price for any Mortgage Loan purchased hereunder shall be deposited in
the Collection Account, and the Trustee, upon receipt of written certification
from the Master Servicer of such deposit, shall release or cause to be released
to the Master Servicer the related Mortgage File and shall execute and deliver
such instruments of transfer or assignment, in each case without recourse, as
the Master Servicer shall furnish and as shall be necessary to vest in the
Master Servicer title to any Mortgage Loan released pursuant hereto.


<PAGE>


                                      -75-

         (d) Proceeds received in connection with any Final Recovery
Determination, as well as any recovery resulting from a partial collection of
Insurance Proceeds or Liquidation Proceeds, in respect of any Mortgage Loan,
will be applied in the following order of priority: FIRST, to reimburse the
Master Servicer or any Sub-Servicer for any related unreimbursed Servicing
Advances and P&I Advances, pursuant to Section 3.11(ii) or (iii); SECOND, to
accrued and unpaid interest on the Mortgage Loan, to the date of the Final
Recovery Determination, or to the Due Date prior to the Distribution Date on
which such amounts are to be distributed if not in connection with a Final
Recovery Determination; and THIRD, as a recovery of principal of the Mortgage
Loan. If the amount of the recovery so allocated to interest is less than the
full amount of accrued and unpaid interest due on such Mortgage Loan, the amount
of such recovery will be allocated by the Master Servicer as follows: FIRST, to
unpaid Servicing Fees; and SECOND, to the balance of the interest then due and
owing. The portion of the recovery so allocated to unpaid Servicing Fees shall
be reimbursed to the Master Servicer or any Sub-Servicer pursuant to Section
3.11(iii).

         SECTION 3.17. Trustee to Cooperate; Release of Mortgage Files.

         (a) Upon the payment in full of any Mortgage Loan, or the receipt by
the Master Servicer of a notification that payment in full shall be escrowed in
a manner customary for such purposes, the Master Servicer will immediately
notify the Trustee and any related Custodian by a certification in the form of
Exhibit E-2 (which certification shall include a statement to the effect that
all amounts received or to be received in connection with such payment which are
required to be deposited in the Collection Account pursuant to Section 3.10 have
been or will be so deposited) of a Servicing Officer and shall request delivery
to it of the Mortgage File. Upon receipt of such certification and request, the
Trustee or such Custodian, as the case may be, shall promptly release the
related Mortgage File to the Master Servicer. No expenses incurred in connection
with any instrument of satisfaction or deed of reconveyance shall be chargeable
to the Collection Account or the Distribution Account.

         (b) From time to time and as appropriate for the servicing or
foreclosure of any Mortgage Loan, including, for this purpose, collection under
any insurance policy relating to the Mortgage Loans, the Trustee and any related
Custodian shall, upon request of the Master Servicer and delivery to the Trustee
or such Custodian, as the case may be, of a Request for Release in the form of
Exhibit E-l, release the related Mortgage File to the Master Servicer, and the
Trustee shall, at the direction of the Master Servicer, execute such documents
as shall be necessary to the prosecution of any such proceedings. Such Request
for Release shall obligate the Master Servicer to return each and every document
previously requested from the Mortgage File to the Trustee or to such Custodian
when the need therefor by the Master Servicer no longer exists, unless the
Mortgage Loan has been liquidated and the Liquidation Proceeds relating to the
Mortgage Loan have been deposited in the Collection Account or 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, for purposes of initiating or pursuing
legal action or other proceedings for the foreclosure of the Mortgaged Property
either judicially or non-judicially, and the Master Servicer has delivered to
the Trustee a certificate of a Servicing Officer certifying as to the name and
address of the Person


<PAGE>


                                      -76-

to which such Mortgage File or such document was delivered and the purpose or
purposes of such delivery. Upon receipt of a certificate of a Servicing Officer
stating that such Mortgage Loan was liquidated and that all amounts received or
to be received in connection with such liquidation that are required to be
deposited into the Collection Account have been so deposited, or that such
Mortgage Loan has become an REO Property, a copy of the Request for Release
shall be released by the Trustee or such Custodian to the Master Servicer.

         (c) Upon written certification of a Servicing Officer, the Trustee
shall execute and deliver to the Master Servicer any court pleadings, requests
for trustee's sale or other documents reasonably necessary to the foreclosure or
trustee's sale in respect of a Mortgaged Property or to any legal action brought
to obtain judgment against any Mortgagor on the Mortgage Note or Mortgage or to
obtain a deficiency judgment, or to enforce any other remedies or rights
provided by the Mortgage Note or Mortgage or otherwise available at law or in
equity. Each such certification shall include a request that such pleadings or
documents be executed by the Trustee and a statement as to the reason such
documents or pleadings are required and that the execution and delivery thereof
by the Trustee will not 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 3.18. Servicing Compensation.

         As compensation for the activities of the Master Servicer hereunder,
the Master Servicer shall be entitled to the Servicing Fee with respect to each
Mortgage Loan payable solely from payments of interest in respect of such
Mortgage Loan, subject to Section 3.24. In addition, the Master Servicer shall
be entitled to recover unpaid Servicing Fees out of Insurance Proceeds or
Liquidation Proceeds to the extent permitted by Section 3.11(iii) and out of
amounts derived from the operation and sale of an REO Property to the extent
permitted by Section 3.23. The right to receive the Servicing Fee may not be
transferred in whole or in part except in connection with the transfer of all of
the Master Servicer's responsibilities and obligations under this Agreement.

         Additional servicing compensation in the form of assumption fees, late
payment charges and other similar fees and charges (other than prepayment
charges, which shall be distributed to the Depositor or its designee on a
monthly basis, except with respect to loan number 2454056 which prepayment
charges shall be retained by the Master Servicer) shall be retained by the
Master Servicer (subject to Section 3.24) only to the extent such fees or
charges are received by the Master Servicer. The Master Servicer shall also be
entitled pursuant to Section 3.11(iv) to withdraw from the Collection Account
and pursuant to Section 3.23(b) to withdraw from any REO Account, as additional
servicing compensation, interest or other income earned on deposits therein,
subject to Section 3.12 and Section 3.24. The Master Servicer shall be required
to pay all expenses incurred by it in connection with its servicing activities
hereunder (including premiums for the insurance required by Section 3.14, to the
extent such premiums are not paid by the related Mortgagors or by a
Sub-Servicer, servicing compensation of each Sub-Servicer, and to the extent
provided herein in Section 8.05, the fees and expenses of the Trustee) and shall
not be entitled to reimbursement therefor except as specifically provided
herein.


<PAGE>


                                      -77-

         SECTION 3.19. Reports to the Trustee; Collection Account Statements.

         Not later than fifteen days after each Distribution Date, the Master
Servicer shall forward to the Trustee and the Depositor a statement prepared by
the Master Servicer setting forth the status of the Collection Account as of the
close of business on such Distribution Date and showing, for the period covered
by such statement, the aggregate amount of deposits into and withdrawals from
the Collection Account of each category of deposit specified in Section 3.10(a)
and each category of withdrawal specified in Section 3.11. Such statement may be
in the form of the then current FNMA Monthly Accounting Report for its
Guaranteed Mortgage Pass-Through Program with appropriate additions and changes,
and shall also include information as to the aggregate of the outstanding
principal balances of all of the Mortgage Loans as of the last day of the
calendar month immediately preceding such Distribution Date. Copies of such
statement shall be provided by the Trustee to any Certificateholder and to any
Person identified to the Trustee as a prospective transferee of a Certificate,
upon request at the expense of the requesting party, provided such statement is
delivered by the Master Servicer to the Trustee.

         SECTION 3.20. Statement as to Compliance.

         The Master Servicer will deliver to the Trustee, the Depositor and each
Rating Agency on or before April 15 of each calendar year commencing in 1998, an
Officers' Certificate stating, as to each signatory thereof, that (i) a review
of the activities of the Master Servicer during the preceding year and of
performance under this Agreement has been made under such officers' supervision
and (ii) to the best of such officers' knowledge, based on such review, the
Master Servicer has fulfilled all of its obligations under this Agreement
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Copies of any such statement shall be provided by the
Trustee to any Certificateholder and to any Person identified to the Trustee as
a prospective transferee of a Certificate, upon request at the expense of the
requesting party, provided such statement is delivered by the Master Servicer to
the Trustee.

         SECTION 3.21. Independent Public Accountants' Servicing Report.

         Not later than April 15 of each calendar year commencing in 1998, the
Master Servicer, at its expense, shall cause a nationally recognized firm of
independent certified public accountants to furnish to the Master Servicer a
report stating that (i) it has obtained a letter of representation regarding
certain matters from the management of the Master Servicer which includes an
assertion that the Master Servicer has complied with certain minimum residential
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 residential mortgage loans during the
most recently completed fiscal year and (ii) on the basis of an examination
conducted by such firm in accordance with standards established by the American
Institute of Certified Public Accountants, such representation is fairly stated
in all material respects, subject to such exceptions and other qualifications
that may be appropriate. In rendering its report such firm may rely, as to
matters relating to the direct servicing of


<PAGE>


                                      -78-

residential mortgage loans by Sub-Servicers, upon comparable reports of firms of
independent certified public accountants rendered on the basis of examinations
conducted in accordance with the same standards (rendered within one year of
such report) with respect to those
Sub-Servicers.
Immediately upon receipt of such report, the Master Servicer shall furnish a
copy of such report to the Trustee and each Rating Agency. Copies of such
statement shall be provided by the Trustee to any Certificateholder upon request
at the Master Servicer's expense, provided that such statement is delivered by
the Master Servicer to the Trustee. In the event such firm of independent
certified public accountants requires the Trustee to agree to the procedures
performed by such firm, the Master Servicer shall direct the Trustee in writing
to so agree; it being understood and agreed that the Trustee will deliver such
letter of agreement in conclusive reliance upon the direction of the Master
Servicer, and the Trustee has not made any independent inquiry or investigation
as to, and shall have not obligation or liability in respect of, the
sufficiency, validity or correctness of such procedures.

         SECTION 3.22. Access to Certain Documentation.

         The Master Servicer shall provide to the Office of Thrift Supervision,
the FDIC, and any other federal or state banking or insurance regulatory
authority that may exercise authority over any Certificateholder access to the
documentation regarding the Mortgage Loans required by applicable laws and
regulations. Such access shall be afforded without charge, but only upon
reasonable request and during normal business hours at the offices of the Master
Servicer designated by it. In addition, access to the documentation regarding
the Mortgage Loans will be provided to any Certificateholder, the Trustee and to
any Person identified to the Master Servicer as a prospective transferee of a
Certificate, upon reasonable request during normal business hours at the offices
of the Master Servicer designated by it at the expense of the Person requesting
such access.

         SECTION 3.23. Title, Management and Disposition of REO Property.

         (a) The deed or certificate of sale of any REO Property shall be taken
in the name of the Trustee, or its nominee, in trust for the benefit of the
Certificateholders. The Master Servicer, on behalf of REMIC I (and on behalf of
the Trustee for the benefit of the Certificateholders), shall either sell any
REO Property within two years after REMIC I acquires ownership of such REO
Property for purposes of Section 860G(a)(8) of the Code or request from the
Internal Revenue Service, no later than 60 days before the day on which the
two-year grace period would otherwise expire, an extension of the two-year grace
period, unless the Master Servicer shall have delivered to the Trustee and the
Depositor an Opinion of Counsel, addressed to the Trustee and the Depositor, to
the effect that the holding by REMIC I of such REO Property subsequent to two
years after its acquisition will not result in the imposition on REMIC I, REMIC
II or REMIC III of taxes on "prohibited transactions" thereof, as defined in
Section 860F of the Code, or cause any of REMIC I, REMIC II or REMIC III to fail
to qualify as a REMIC under Federal law at any time that any Certificates are
outstanding. The Master Servicer shall manage, conserve, protect and operate
each REO Property for the Certificateholders solely for the purpose of its
prompt disposition and sale in a manner which does not cause such REO Property
to fail to


<PAGE>


                                      -79-

qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of
the Code or result in the receipt by REMIC I, REMIC II or REMIC III of any
"income from non-permitted assets" within the meaning of Section 860F(a)(2)(B)
of the Code, or any "net income from foreclosure property" which is subject to
taxation under the REMIC Provisions.

         (b) The Master Servicer shall segregate and hold all funds collected
and received in connection with the operation of any REO Property separate and
apart from its own funds and general assets and shall establish and maintain
with respect to REO Properties an account held in trust for the Trustee for the
benefit of the Certificateholders (the "REO Account"), which shall be an
Eligible Account. The Master Servicer shall be permitted to allow the Collection
Account to serve as the REO Account, subject to separate ledgers for each REO
Property. The Master Servicer shall be entitled to retain or withdraw any
interest income paid on funds deposited in the REO Account.

         (c) The Master Servicer shall have full power and authority, subject
only to the specific requirements and prohibitions of this Agreement, to do any
and all things in connection with any REO Property as are consistent with the
manner in which the Master Servicer manages and operates similar property owned
by the Master Servicer or any of its Affiliates, all on such terms and for such
period as the Master Servicer deems to be in the best interests of
Certificateholders. In connection therewith, the Master Servicer shall deposit,
or cause to be deposited, on a daily basis in the REO Account all revenues
received by it with respect to an REO Property and shall withdraw therefrom
funds necessary for the proper operation, management and maintenance of such REO
Property including, without limitation:

                  (i) all insurance premiums due and payable in respect of such
         REO Property;

                  (ii) all real estate taxes and assessments in respect of such
         REO Property that may result in the imposition of a lien thereon; and

                  (iii) all costs and expenses necessary to maintain such REO
         Property.

To the extent that amounts on deposit in the REO Account with respect to an REO
Property are insufficient for the purposes set forth in clauses (i) through
(iii) above with respect to such
REO
Property, the Master Servicer shall advance from its own funds such amount as is
necessary for such purposes if, but only if, the Master Servicer would make such
advances if the Master Servicer owned the REO Property and if in the Master
Servicer's judgment, the payment of such amounts will be recoverable from the
rental or sale of the REO Property.

         Notwithstanding the foregoing, neither the Master Servicer nor the
Trustee shall:

                  (i) authorize the Trust Fund to enter into, renew or extend
         any New Lease with respect to any REO Property, if the New Lease by its
         terms will give rise to any income that does not constitute Rents from
         Real Property;


<PAGE>


                                      -80-

                  (ii) authorize any amount to be received or accrued under any
         New Lease other than amounts that will constitute Rents from Real
         Property;

                  (iii) authorize any construction on any REO Property, other
         than the completion of a building or other improvement thereon, and
         then only if more than ten percent of the construction of such building
         or other improvement was completed before default on the related
         Mortgage Loan became imminent, all within the meaning of Section
         856(e)(4)(B) of the Code; or

                  (iv) authorize any Person to Directly Operate any REO Property
         on any date more than 90 days after its date of acquisition by the
         Trust Fund;

unless, in any such case, the Master Servicer has obtained an Opinion of
Counsel, provided to the Trustee, to the effect that such action will not cause
such REO Property to fail to qualify as "foreclosure property" within the
meaning of Section 860G(a)(8) of the Code at any time that it is held by REMIC
I, in which case the Master Servicer may take such actions as are specified in
such Opinion of Counsel.

         The Master Servicer may contract with any Independent Contractor for
the operation and management of any REO Property, provided that:

                  (i) the terms and conditions of any such contract shall not be
         inconsistent herewith;

                  (ii) any such contract shall require, or shall be administered
         to require, that the Independent Contractor pay all costs and expenses
         incurred in connection with the operation and management of such REO
         Property, including those listed above and remit all related revenues
         (net of such costs and expenses) to the Master Servicer as soon as
         practicable, but in no event later than thirty days following the
         receipt thereof by such Independent Contractor;

                  (iii) none of the provisions of this Section 3.23(c) relating
         to any such contract or to actions taken through any such Independent
         Contractor shall be deemed to relieve the Master Servicer of any of its
         duties and obligations to the Trustee on behalf of the
         Certificateholders with respect to the operation and management of any
         such REO Property; and

                  (iv) the Master Servicer shall be obligated with respect
         thereto to the same extent as if it alone were performing all duties
         and obligations in connection with the operation and management of such
         REO Property.

The Master Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Master Servicer by such
Independent Contractor, and nothing in this Agreement shall be deemed


<PAGE>


                                      -81-

to limit or modify such indemnification. The Master Servicer shall be solely
liable for all fees owed by it to any such Independent Contractor, irrespective
of whether the Master Servicer's compensation pursuant to Section 3.18 is
sufficient to pay such fees.

         (d) In addition to the withdrawals permitted under Section 3.23(c), the
Master Servicer may from time to time make withdrawals from the REO Account for
any REO Property: (i) to pay itself or any Sub-Servicer unpaid Servicing Fees in
respect of the related Mortgage Loan; and (ii) to reimburse itself or any
Sub-Servicer for unreimbursed Servicing Advances and P&I Advances made in
respect of such REO Property or the related Mortgage Loan. On the Master
Servicer Remittance Date, the Master Servicer shall withdraw from each REO
Account maintained by it and deposit into the Distribution Account in accordance
with Section 3.10(d)(ii), for distribution on the related Distribution Date in
accordance with Section 4.01, the income from the related REO Property received
during the prior calendar month, net of any withdrawals made pursuant to Section
3.23(c) or this Section 3.23(d).

         (e) Subject to the time constraints set forth in Section 3.23(a), each
REO Disposition shall be carried out by the Master Servicer at such price and
upon such terms and conditions as the Master Servicer shall deem necessary or
advisable, as shall be normal and usual in its general servicing activities for
similar properties.

         (f) The proceeds from the REO Disposition, net of any amount required
by law to be remitted to the Mortgagor under the related Mortgage Loan and net
of any payment or reimbursement to the Master Servicer or any Sub-Servicer as
provided above, shall be deposited in the Distribution Account in accordance
with Section 3.10(d)(ii) on the Master Servicer Remittance Date in the month
following the receipt thereof for distribution on the related Distribution Date
in accordance with Section 4.01. Any REO Disposition shall be for cash only
(unless changes in the REMIC Provisions made subsequent to the Startup Day allow
a sale for other consideration).

         (g) The Master Servicer shall file information returns with respect to
the receipt of mortgage interest received in a trade or business, reports of
foreclosures and abandonments of any Mortgaged Property and cancellation of
indebtedness income with respect to any Mortgaged Property as required by
Sections 6050H, 6050J and 6050P of the Code, respectively. Such reports shall be
in form and substance sufficient to meet the reporting requirements imposed by
such Sections 6050H, 6050J and 6050P of the Code.

         SECTION 3.24. Obligations of the Master Servicer in Respect of
                       Prepayment Interest Shortfalls.

         The Master Servicer shall deliver to the Trustee for deposit into the
Distribution Account on or before 3:00 p.m. New York time on the Master Servicer
Remittance Date from its own funds an amount equal to the lesser of (i) the
aggregate of the Prepayment Interest Shortfalls for the related Distribution
Date resulting solely from Principal Prepayments during the related


<PAGE>


                                      -82-

Prepayment Period and (ii) the amount of its aggregate Servicing Fee for the
most recently ended calendar month.

         SECTION 3.25. Obligations of the Master Servicer in Respect of Mortgage
                       Rates and Monthly Payments.

         In the event that a shortfall in any collection on or liability with
respect to any Mortgage Loan results from or is attributable to adjustments to
Mortgage Rates, Monthly Payments or Stated Principal Balances that were made by
the Master Servicer in a manner not consistent with the terms of the related
Mortgage Note and this Agreement, the Master Servicer, upon discovery or receipt
of notice thereof, immediately shall deliver to the Trustee for deposit in the
Distribution Account from its own funds the amount of any such shortfall and
shall indemnify and hold harmless the Trust Fund, the Trustee, the Depositor and
any successor master servicer in respect of any such liability. Such indemnities
shall survive the termination or discharge of this Agreement.


<PAGE>


                                      -83-

                                   ARTICLE IV

                         PAYMENTS TO CERTIFICATEHOLDERS

         SECTION 4.01. Distributions.

         (a)(1)(A) On each Distribution Date, the following amounts, in the
following order of priority, shall be distributed by REMIC I to REMIC II on
account of the REMIC I Regular Interests or withdrawn from the Distribution
Account and distributed to the holders of the Class R-I Certificates, as the
case may be:

                  (i) to the Holders of REMIC I Regular Interests, in an amount
         equal to (A) the Uncertificated Interest for such Distribution Date,
         plus (B) any amounts in respect thereof remaining unpaid from previous
         Distribution Dates. On the first Distribution Date, the Class R-I
         Certificates shall be entitled to interest accrued on its Certificate
         Principal Balance at the related Pass-Through Rate. Amounts payable as
         Uncertificated Interest in respect of REMIC I Regular Interest I-LT6
         shall be reduced when the REMIC I Overcollateralized Amount is less
         than the REMIC I Required Overcollateralized Amount, by the lesser of
         (x) the amount of such difference and (y) the Maximum I-LT6
         Uncertificated Interest Deferral Amount; and

                  (ii) (x) on the first Distribution Date, to the Holders of the
         Class R-I Certificates, the Certificate Principal Balance thereof and
         (y) on each Distribution Date, to the Holders of REMIC I Regular
         Interests, in an amount equal to the remainder of the Available
         Distribution Amount for such Distribution Date after the distributions
         made pursuant to clauses (i) and (ii)(x) above, allocated as follows
         (except as provided below):

                           (a) to the Holders of the REMIC I Regular Interest
                  I-LT1, 98.00% of such remainder;

                           (b) to the Holders of the REMIC I Regular Interest
                  I-LT2, REMIC I Regular Interest I-LT3, REMIC I Regular
                  Interest I-LT4 and REMIC I Regular Interest I-LT5, 1.00% of
                  such remainder, in the same proportion as principal payments
                  are allocated to the Corresponding Certificates; and

                           (c) to the Holders of the REMIC I Regular Interest
                  I-LT6, 1.00% of such remainder;

provided, however, that 98.00% and 2.00% of any principal payments that are
attributable to a Overcollateralization Reduction Amount shall be allocated to
Holders of the REMIC I Regular Interest I-LT1 and REMIC I Regular Interest
I-LT6, respectively.


<PAGE>


                                      -84-

         (B) On each Distribution Date, the following amounts shall be
distributed by REMIC II to REMIC III on account of the REMIC II Regular
Interests or withdrawn from the Distribution Account and distributed to the
holders of the Class R-II Certificates, as the case may be:

                  (i) on the first Distribution Date, the Class R-II
         Certificates shall be entitled to (x) interest accrued on its
         Certificate Principal Balance at the related Pass-Through Rate and (y)
         principal in an amount equal to the Certificate Principal Balance
         thereof;

                  (ii) any amounts paid as either Uncertificated Interest paid
         or accrued to the REMIC I Regular Interests shall be deemed to have
         been paid to the related Uncertificated Corresponding Component in
         REMIC II in accordance with the REMIC II Remittance Rates; and

                  (iii) any amounts paid as principal on the REMIC I Regular
         Interests shall be deemed to have been paid to the related
         Uncertificated Corresponding Component in REMIC II in accordance with
         the same priorities and conditions.

         (2) On each Distribution Date, the Trustee shall withdraw from the
Distribution Account an amount equal to the Interest Remittance Amount and
distribute to the Certificateholders the following amounts, in the following
order of priority:

                  (i) (x) on the first Distribution Date, to the Holders of the
         Class R-III Certificates and (y) to the Holders of the Class A
         Certificates, an amount equal to the Senior Interest Distribution
         Amount;

                  (ii) to the extent of the Interest Remittance Amount remaining
         after distribution of the Senior Interest Distribution Amount, to the
         Holders of the Class M-1 Certificates, an amount equal to the Interest
         Distribution Amount allocable to the Class M-1 Certificates;

                  (iii) to the extent of the Interest Remittance Amount
         remaining after distribution of the Senior Interest Distribution Amount
         and the Interest Distribution Amount allocable to the Class M-1
         Certificates, to the Holders of the Class M-2 Certificates, an amount
         equal to the Interest Distribution Amount allocable to the Class M-2
         Certificates; and

                  (iv) to the extent of the Interest Remittance Amount remaining
         after distribution of the Senior Interest Distribution Amount and the
         Interest Distribution Amounts allocable to the Class M-1 Certificates
         and the Class M-2 Certificates, to the Holders of the Class M-3
         Certificates, an amount equal to the Interest Distribution Amount
         allocable to the Class M-3 Certificates.


<PAGE>


                                      -85-

         (3) On each Distribution Date, the Trustee shall withdraw from the
Distribution Account an amount equal to the Principal Distribution Amount and
distribute to the Certificateholders the following amounts, in the following
order of priority:

                  (i) On each Distribution Date (a) prior to the Stepdown Date
         or (b) on which a Trigger Event is in effect, the Principal
         Distribution Amount shall be distributed in the following order of
         priority;

                  first, on the first Distribution Date, to the Holders of the
                  Class R-III Certificates, the Certificate Principal Balance
                  thereof;

                  second, to the Holders of the Class A Certificates, until the
                  Certificate Principal Balance of such Class has been reduced
                  to zero;

                  third, to the Holders of the Class M-1 Certificates, until the
                  Certificate Principal Balance of such Class has been reduced
                  to zero;

                  fourth, to the Holders of the Class M-2 Certificates, until
                  the Certificate Principal Balance of such Class has been
                  reduced to zero; and

                  fifth, to the Holders of the Class M-3 Certificates, until the
                  Certificate Principal Balance of such Class has been reduced
                  to zero.

                        (ii) On each Distribution Date (a) on or after the
                  Stepdown Date and (b) on which a Trigger Event is not in
                  effect, the Principal Distribution Amount shall
                  be distributed in the following order of priority;

                  first, the lesser of (x) the Principal Distribution Amount and
                  (y) the Class A Principal Distribution Amount shall be
                  distributed to the Holders of the Class A Certificates, until
                  the Certificate Principal Balance of such Class has been
                  reduced to zero;

                  second, the lesser of (x) the excess of (i) the Principal
                  Distribution Amount over (ii) the amount distributed to the
                  Holders of the Class A Certificates pursuant to clause FIRST
                  above and (y) the Class M-1 Principal Distribution Amount
                  shall be distributed to the Holders of the Class M-1
                  Certificates, until the Certificate Principal Balance of such
                  Class has been reduced to zero;

                  third, the lesser of (x) the excess of (i) the Principal
                  Distribution Amount over (ii) the sum of the amounts
                  distributed to the Holders of the Class A Certificates
                  pursuant to clause FIRST above and to the Holders of the Class
                  M-1 Certificates pursuant to clause SECOND above and (y) the
                  Class M-2 Principal Distribution Amount shall be distributed
                  to the Holders of the


<PAGE>


                                      -86-

                  Class M-2 Certificates, until the Certificate Principal
                  Balance of such Class has been reduced to zero; and

                  fourth, the lesser of (x) the excess of (i) the Principal
                  Distribution Amount over (ii) the sum of the amounts
                  distributed to the Holders of the Class A Certificates
                  pursuant to clause FIRST above, to the Holders of the Class
                  M-1 Certificates pursuant to clause SECOND above and to the
                  Holders of the Class M-2 Certificates pursuant to clause THIRD
                  above and (y) the Class M-3 Principal Distribution Amount
                  shall be distributed to the Holders of the Class M-3
                  Certificates, until the Certificate Principal Balance of such
                  Class has been reduced to zero.

         (4) On each Distribution Date, the Net Monthly Excess Cashflow (or, in
the case of clause (i) below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount) shall be distributed as follows:

                  (i) to the Holders of the Class or Classes of Certificates
         then entitled to receive distributions in respect of principal, in an
         amount equal to the principal portion of any Realized Losses incurred
         or deemed to have been incurred on the Mortgage Loans, applied to
         reduce the Certificate Principal Balance of such Certificates until the
         aggregate Certificate Principal Balance of such Certificates is reduced
         to zero;

                  (ii) to the Holders of the Class or Classes of Certificates
         then entitled to receive distributions in respect of principal, in an
         amount equal to the Overcollateralization Increase Amount, applied to
         reduce the Certificate Principal Balance of such Certificates until the
         aggregate Certificate Principal Balance of such Certificates is reduced
         to zero;

                  (iii) to the Holders of the Class M-1 Certificates, in an
         amount equal to the Interest Carry Forward Amount (plus accrued
         interest) allocable to such Class of Certificates;

                  (iv) to the Holders of the Class M-2 Certificates, in an
         amount equal to the Interest Carry Forward Amount (plus accrued
         interest) allocable to such Class of Certificates;

                  (v) to the Holders of the Class M-3 Certificates, in an amount
         equal to the Interest Carry Forward Amount (plus accrued interest)
         allocable to such Class of Certificates;

                  (vi) to the Holders of the Class A Certificates, in an amount
         equal to the aggregate of any Prepayment Interest Shortfalls (to the
         extent not covered by payments pursuant to Section 3.24) and any Relief
         Act Interest Shortfall;


<PAGE>


                                      -87-

                  (vii) to the Holders of the Class M-1 Certificates, in an
         amount equal to the aggregate of any Prepayment Interest Shortfalls (to
         the extent not covered by payments pursuant to Section 3.24) and any
         Relief Act Interest Shortfall;

                  (viii) to the Holders of the Class M-2 Certificates, in an
         amount equal to the aggregate of any Prepayment Interest Shortfalls (to
         the extent not covered by payments pursuant to Section 3.24) and any
         Relief Act Interest Shortfall;

                  (ix) to the Holders of the Class M-3 Certificates, in an
         amount equal to the aggregate of any Prepayment Interest Shortfalls (to
         the extent not covered by payments pursuant to Section 3.24) and any
         Relief Act Interest Shortfall; and

                  (x) to the Holders of the Class CE Certificates the Interest
         Distribution Amount and any Overcollateralization Reduction Amount for
         such Distribution Date.

         (b) All distributions made with respect to each Class of Certificates
on each Distribution Date shall be allocated PRO RATA among the outstanding
Certificates in such Class based on their respective Percentage Interests.
Payments in respect of each Class of Certificates on each Distribution Date will
be made to the Holders of the respective Class of record on the related Record
Date (except as otherwise provided in Section 4.01(d) or Section 9.01 respecting
the final distribution on such Class), based on the aggregate Percentage
Interest represented by their respective Certificates, and shall be made by wire
transfer of immediately available funds to the account of any such Holder at a
bank or other entity having appropriate facilities therefor, if such Holder
shall have so notified the Trustee in writing at least five Business Days prior
to the Record Date immediately prior to such Distribution Date and is the
registered owner of Certificates having an initial aggregate Certificate
Principal Balance that is in excess of the lesser of (i) $5,000,000 or (ii)
two-thirds of the initial Certificate Principal Balance of such Class of
Certificates, or otherwise by check mailed by first class mail to the address of
such Holder appearing in the Certificate Register. The final distribution on
each Certificate will be made in like manner, but only upon presentment and
surrender of such Certificate at the Corporate Trust Office or such other
location specified in the notice to Certificateholders of such final
distribution.

         Each distribution with respect to a Book-Entry Certificate shall be
paid to the Depository, as Holder thereof, and the Depository shall be
responsible for crediting 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. None of the Trustee, the
Certificate Registrar, the Depositor or the Master Servicer shall have any
responsibility therefor except as otherwise provided by this Agreement or
applicable law.


<PAGE>


                                      -88-

         (c) The rights of the Certificateholders to receive distributions in
respect of the Certificates, and all interests of the Certificateholders in such
distributions, shall be as set forth in this Agreement. Neither the Holders of
any Class of Certificates nor the Trustee nor the Master Servicer shall in any
way be responsible or liable to the Holders of any other Class of Certificates
in respect of amounts properly previously distributed on the Certificates.

         (d) Except as otherwise provided in Section 9.01, whenever the Trustee
expects that the final distribution with respect to any Class of Certificates
will be made on the next Distribution Date, the Trustee shall, no later than
five (5) days after the related Determination Date, mail on such date to each
Holder of such Class of Certificates a notice to the effect that:

                  (i) the Trustee expects that the final distribution with
         respect to such Class of Certificates will be made on such Distribution
         Date, but only upon presentation and surrender of such Certificates at
         the office of the Trustee therein specified, and

               (ii) no interest shall accrue on such Certificates from and after
         the end of the related Interest Accrual Period.

Any funds not distributed to any Holder or Holders of Certificates of such Class
on such Distribution Date because of the failure of such Holder or Holders to
tender their Certificates shall, on such date, be set aside and held in trust by
the Trustee and credited to the account of the appropriate non-tendering Holder
or Holders. If any Certificates as to which notice has been given pursuant to
this Section 4.01(d) shall not have been surrendered for cancellation within six
months after the time specified in such notice, the Trustee shall mail a second
notice to the remaining non-tendering Certificateholders to surrender their
Certificates for cancellation in order to receive the final distribution with
respect thereto. If within one year after the second notice all such
Certificates shall not have been surrendered for cancellation, the Trustee
shall, directly or through an agent, mail a final notice to remaining
non-tendering Certificateholders concerning surrender of their Certificates but
shall continue to hold any remaining funds for the benefit of non-tendering
Certificateholders. The costs and expenses of maintaining the funds in trust and
of contacting such Certificateholders shall be paid out of the assets remaining
in such trust fund. If within one year after the final notice any such
Certificates shall not have been surrendered for cancellation, the Trustee shall
pay to Salomon Brothers Inc all such amounts, and all rights of non- tendering
Certificateholders in or to such amounts shall thereupon cease. No interest
shall accrue or be payable to any Certificateholder on any amount held in trust
by the Trustee as a result of such Certificateholder's failure to surrender its
Certificate(s) for final payment thereof in accordance with this Section
4.01(d).

         (e) Notwithstanding anything to the contrary herein, (i) in no event
shall the Certificate Principal Balance of a Class A Certificate or a Mezzanine
Certificate be reduced more than once in respect of any particular amount both
(a) allocated to such Certificate in respect of Realized Losses pursuant to
Section 4.04 and (b) distributed to the Holder of such Certificate in reduction
of the Certificate Principal Balance thereof pursuant to this Section 4.01 from
Net Monthly Excess Cashflow and (ii) in no event shall the Uncertificated
Balance of a REMIC I


<PAGE>


                                      -89-

Regular Interest be reduced more than once in respect of any particular amount
both (a) allocated to such REMIC I Regular Interest in respect of Realized
Losses pursuant to Section 4.04 and (b) distributed on such REMIC I Regular
Interest in reduction of the Uncertificated Balance thereof pursuant to this
Section 4.01.

         SECTION 4.02. Statements to Certificateholders.

         On each Distribution Date, the Trustee shall prepare and forward by
mail to each Holder of the Regular Certificates, a statement as to the
distributions made on such Distribution Date setting forth:

                  (i) the amount of the distribution made on such Distribution
         Date to the Holders of the Class A Certificates, the Mezzanine
         Certificates and the Class CE Certificates allocable to principal;

                  (ii) the amount of the distribution made on such Distribution
         Date to the Holders of the Class A Certificates, the Mezzanine
         Certificates and the Class CE Certificates allocable to interest;

                  (iii) the aggregate amount of servicing compensation received
         by the Master Servicer during the related Due Period and such other
         customary information as the Trustee deems necessary or desirable, or
         which a Certificateholder reasonably requests, to enable
         Certificateholders to prepare their tax returns;

                  (iv) the aggregate amount of P&I Advances for such
         Distribution Date;

                  (v) the aggregate Stated Principal Balance of the Mortgage
         Loans and any REO Properties at the close of business on such
         Distribution Date;

                  (vi) the number, aggregate principal balance, weighted average
         remaining term to maturity and weighted average Mortgage Rate of the
         Mortgage Loans as of the related Due Date;

                  (vii) the number and aggregate unpaid principal balance of
         Mortgage Loans (a) delinquent 30 to 59 days, (b) delinquent 60 to 89
         days, (c) delinquent 90 or more days, in each case, as of the last day
         of the preceding calendar month, and (d) as to which foreclosure
         proceedings have been commenced;

                  (viii) with respect to any Mortgage Loan that became an REO
         Property during the preceding calendar month, the loan number of such
         Mortgage Loan, the unpaid principal balance and the Stated Principal
         Balance of such Mortgage Loan as of the date it became an REO Property;


<PAGE>


                                      -90-

                  (ix) the book value of any REO Property as of the close of
         business on the last Business Day of the calendar month preceding the
         Distribution Date;

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

                  (xi) the aggregate amount of Realized Losses incurred during
         the related Prepayment Period (or, in the case of Bankruptcy Losses
         allocable to interest, during the related Due Period), separately
         identifying whether such Realized Losses constituted Fraud Losses,
         Special Hazard Losses, Bankruptcy Losses or Extraordinary Losses;

                  (xii) the aggregate amount of Extraordinary Trust Fund
         Expenses withdrawn from the Collection Account or the Distribution
         Account for such Distribution Date;

                  (xiii) the aggregate Certificate Principal Balance of the
         Class A, Mezzanine and Class CE Certificates, after giving effect to
         the distributions, and allocations of Realized Losses, made on such
         Distribution Date, separately identifying any reduction thereof due to
         allocations of Realized Losses;

                  (xiv) the Certificate Factor for each such Class of
         Certificates applicable to such Distribution Date;

                  (xv) the Interest Distribution Amount in respect of the Class
         A Certificates, the Mezzanine Certificates and the Class CE
         Certificates for such Distribution Date and the Interest Carry Forward
         Amount, if any, with respect to the Class A Certificates and the
         Mezzanine Certificates on such Distribution Date, and in the case of
         the Class A Certificates, the Mezzanine Certificates and the Class CE
         Certificates, separately identifying any reduction thereof due to
         allocations of Realized Losses, Prepayment Interest Shortfalls and
         Relief Act Interest Shortfalls;

                  (xvi) the aggregate amount of any Prepayment Interest
         Shortfalls for such Distribution Date, to the extent not covered by
         payments by the Master Servicer pursuant to Section 3.24;

                  (xvii) the aggregate amount of Relief Act Interest Shortfalls
         for such Distribution Date;

                  (xviii) the then-applicable Bankruptcy Amount, Fraud Loss
         Amount and Special Hazard Amount;


<PAGE>


                                      -91-

                  (xix) the Required Overcollateralized Amount and the Credit
         Enhancement Percentage for such Distribution Date;

                  (xx) the Overcollateralization Increase Amount, if any, for
         such Distribution Date;

                  (xxi) the Overcollateralization Reduction Amount, if any, for
         such Distribution Date; and

                  (xxii) the respective Pass-Through Rates applicable to the
         Class A Certificates, the Mezzanine Certificates and the Class CE
         Certificates for such Distribution Date and the Pass-Through Rate
         applicable to the Class A Certificates and the Mezzanine Certificates
         for the immediately succeeding Distribution Date.

         In the case of information furnished pursuant to subclauses (i) through
(iii) above, the amounts shall be expressed as a dollar amount per Single
Certificate of the relevant Class.

         Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each Person who at any time during the calendar
year was a Holder of a Regular Certificate a statement containing the
information set forth in subclauses (i) through (iii) above, aggregated for such
calendar year or applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Trustee pursuant to any requirements of the Code as from time to
time are in force.

         On each Distribution Date, the Trustee shall forward to the Depositor,
to each Holder of a Residual Certificate and to the Master Servicer, a copy of
the reports forwarded to the Regular Certificateholders on such Distribution
Date and a statement setting forth the amounts, if any, actually distributed
with respect to the Residual Certificates, respectively, on such Distribution
Date.

         Within a reasonable period of time after the end of each calendar year,
the Trustee shall furnish to each Person who at any time during the calendar
year was a Holder of a Residual Certificate a statement setting forth the
amount, if any, actually distributed with respect to the Residual Certificates,
as appropriate, aggregated for such calendar year or applicable portion thereof
during which such Person was a Certificateholder. Such obligation of the Trustee
shall be deemed to have been satisfied to the extent that substantially
comparable information shall be prepared by the Trustee and furnished to such
Holders pursuant to the rules and regulations of the Code as are in force from
time to time.

         The Trustee shall, upon request, furnish to each Certificateholder,
during the term of this Agreement, such periodic, special, or other reports or
information, whether or not provided for herein, as shall be reasonable with
respect to the Certificateholder, or otherwise with respect to the purposes of
this Agreement, all such reports or information to be provided at the expense


<PAGE>


                                      -92-

of the Certificateholder in accordance with such reasonable and explicit
instructions and directions as the Certificateholder may provide. For purposes
of this Section 4.02, the Trustee's duties are limited to the extent that the
Trustee receives timely reports as required from the Master Servicer.

         On each Distribution Date the Trustee shall provide Bloomberg Financial
Markets, L.P. ("Bloomberg") cusip level factors for each class of Certificates
as of such Distribution Date, using a format and media mutually acceptable to
the Trustee and Bloomberg.

         SECTION 4.03. Remittance Reports; P&I Advances.

         (a) On the Business Day following each Determination Date, the Master
Servicer shall deliver to the Trustee by telecopy (or by such other means as the
Master Servicer and the Trustee may agree from time to time) a Remittance Report
with respect to the related Distribution Date. Such Remittance Report will
include (i) the amount of P&I Advances to be made by the Master Servicer in
respect of the related Distribution Date, the aggregate amount of P&I Advances
outstanding after giving effect to such P&I Advances, and the aggregate amount
of Nonrecoverable P&I Advances in respect of such Distribution Date and (ii)
such other information with respect to the Mortgage Loans as the Trustee may
reasonably require to perform the calculations necessary to make the
distributions contemplated by Section 4.01 and to prepare the statements to
Certificateholders contemplated by Section 4.02. The Trustee shall not be
responsible to recompute, recalculate or verify any information provided to it
by the Master Servicer.

         (b) The amount of P&I Advances to be made by the Master Servicer for
any Distribution Date shall equal, subject to Section 4.03(d), the sum of (i)
the aggregate amount of Monthly Payments (with each interest portion thereof net
of the related Servicing Fee), due on the related Due Date in respect of the
Mortgage Loans, which Monthly Payments were delinquent as of the close of
business on the related Determination Date and (ii) with respect to each REO
Property, which REO Property was acquired during or prior to the related
Prepayment Period and as to which REO Property an REO Disposition did not occur
during the related Prepayment Period, an amount equal to the excess, if any, of
the Monthly Payments (with each interest portion thereof net of the related
Servicing Fee) that would have been due on the related Due Date in respect of
the related Mortgage Loans, over the net income from such REO Property
transferred to the Distribution Account pursuant to Section 3.23 for
distribution on such Distribution Date.


         On or before 3:00 p.m. New York time on the Master Servicer Remittance
Date, the Master Servicer shall remit in immediately available funds to the
Trustee for deposit in the Distribution Account an amount equal to the aggregate
amount of P&I Advances, if any, to be made in respect of the Mortgage Loans and
REO Properties for the related Distribution Date either (i) from its own funds
or (ii) from the Collection Account, to the extent of funds held therein for
future distribution (in which case it will cause to be made an appropriate entry
in the records of Collection Account that amounts held for future distribution
have been, as permitted by this Section 4.03, used by the Master Servicer in
discharge of any such P&I Advance) or (iii) in the 


<PAGE>


                                      -93-

form of any combination of (i) and (ii) aggregating the total amount of
P&I Advances to be made by the Master Servicer with respect to the Mortgage
Loans and REO Properties. Any amounts held for future distribution and so used
shall be appropriately reflected in the Master Servicer's records and replaced
by the Master Servicer by deposit in the Collection Account on or before any
future Master Servicer Remittance Date to the extent that the Available
Distribution Amount for the related Distribution Date (determined without regard
to P&I Advances to be made on the Master Servicer Remittance Date) shall be less
than the total amount that would be distributed to the Classes of
Certificateholders pursuant to Section 4.01 on such Distribution Date if such
amounts held for future distributions had not been so used to make P&I Advances.
The Trustee will provide notice to the Master Servicer by telecopy by the close
of business on any Master Servicer Remittance Date in the event that the amount
remitted by the Master Servicer to the Trustee on such date is less than the P&I
Advances required to be made by the Master Servicer for the related Distribution
Date.

         (c) The obligation of the Master Servicer to make such P&I Advances is
mandatory, notwithstanding any other provision of this Agreement but subject to
(d) below, and, with respect to any Mortgage Loan or REO Property, shall
continue until a Final Recovery Determination in connection therewith or the
removal thereof from the Trust Fund pursuant to any applicable provision of this
Agreement, except as otherwise provided in this Section.

         (d) Notwithstanding anything herein to the contrary, no P&I Advance
shall be required to be made hereunder by the Master Servicer if such P&I
Advance would, if made, constitute a Nonrecoverable P&I Advance. The
determination by the Master Servicer that it has made a Nonrecoverable P&I
Advance or that any proposed P&I Advance, if made, would constitute a
Nonrecoverable P&I Advance, shall be evidenced by an Officers' Certificate of
the Master Servicer delivered to the Depositor and the Trustee.

         SECTION 4.04. Allocation of Realized Losses.

         (a) Prior to each Determination Date, the Master Servicer shall
determine as to each Mortgage Loan and REO Property: (i) the total amount of
Realized Losses, if any, incurred in connection with any Final Recovery
Determinations made during the related Prepayment Period; (ii) whether and the
extent to which such Realized Losses constituted Fraud Losses, Bankruptcy
Losses, Special Hazard Losses or Extraordinary Losses; and (iii) the respective
portions of such Realized Losses allocable to interest and allocable to
principal. Prior to each Determination Date, the Master Servicer shall also
determine as to each Mortgage Loan: (i) the total amount of Realized Losses, if
any, incurred in connection with any Deficient Valuations made during the
related Prepayment Period; and (ii) the total amount of Realized Losses, if any,
incurred in connection with Debt Service Reductions in respect of Monthly
Payments due during the related Due Period. The information described in the two
preceding sentences that is to be supplied by the Master Servicer shall be
evidenced by an Officers' Certificate delivered to the Trustee by the Master
Servicer prior to the Determination Date immediately following the end of (i) in
the case of Bankruptcy Losses allocable to interest, the 


<PAGE>


                                      -94-

Due Period during which any such Realized Loss was incurred, and (ii) in the
case of all other Realized Losses, the Prepayment Period during which any such
Realized Loss was incurred.

         (b) All Realized Losses on the Mortgage Loans allocated to REMIC II
Regular Interest LT1 pursuant to Section 4.04(c), other than Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary
Losses on the Mortgage Loans shall be allocated by the Trustee on each
Distribution Date as follows: first, to Net Monthly Excess Cashflow; second, to
the Class CE 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 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.

         Notwithstanding anything to the contrary herein, for purposes of
determining the Special Hazard Amount, the Fraud Loss Amount and the Bankruptcy
Amount as of any date of determination, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses paid from Net Monthly Excess Cashflow which would otherwise
have been payable to the holders of the Class CE Certificates shall be deemed to
have been allocated to the Class CE Certificates. Any Excess Special Hazard
Losses, Excess Bankruptcy Losses, Excess Fraud Losses and Extraordinary Losses
allocated to REMIC II Regular Interest LT1 pursuant to Section 4.04(c) will be
allocated among the Class A Certificates, the Class M-1 Certificates, the Class
M-2 Certificates, the Class M-3 Certificates and the Class CE Certificates on a
PRO RATA basis. Any allocation of Realized Losses to a Class A Certificate, a
Class M-1 Certificate, a Class M-2 Certificate or a Class M-3 Certificate on any
Distribution Date shall be made by reducing the Certificate Principal Balance
thereof by the amount so allocated, or in the case of a Class CE Certificate, by
reducing the amount otherwise payable in respect thereof pursuant to Section
4.01(a)(4)(ix).

         As used herein, an allocation of a Realized Loss on a "PRO RATA basis"
among two or more specified Classes of Certificates means an allocation on a PRO
RATA basis, among the various Classes so specified, to each such Class of
Certificates on the basis of their then outstanding Certificate Principal
Balances prior to giving effect to distributions to be made on such Distribution
Date. All Realized Losses and all other losses allocated to a Class of
Certificates hereunder will be allocated among the Certificates of such Class in
proportion to the Percentage Interests evidenced thereby.

         (c) All Realized Losses on the Mortgage Loans (other than Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and
Extraordinary Losses) shall be allocated by the Trustee on each Distribution
Date to the following REMIC I Regular Interests 


<PAGE>


                                      -95-

in the specified percentages, as follows: first, to Uncertificated Interest
payable to the REMIC I Regular Interest I-LT1 and REMIC I Regular Interest I-LT6
up to an aggregate amount equal to the REMIC I Interest Loss Allocation Amount,
98% and 2%, respectively; second, to the Uncertificated Balances of the REMIC I
Regular Interest I-LT1 and REMIC I Regular Interest I- LT6 up to an aggregate
amount equal to the REMIC I Principal Loss Allocation Amount, 98% and2%,
respectively; third, to the Uncertificated Balances of REMIC I Regular Interest
I-LT1, REMIC I Regular Interest I-LT5 and REMIC I Regular Interest I-LT6, 98%,
1% and 1%, respectively, until the Uncertificated Balance of REMIC I Regular
Interest I-LT5 has been reduced to zero; fourth, to the Uncertificated Balances
of REMIC I Regular Interest I-LT1, REMIC I Regular Interest I-LT4 and REMIC I
Regular Interest I-LT6, 98%, 1% and 1%, respectively, until the Uncertificated
Balance of REMIC I Regular Interest I-LT4 has been reduced to zero; fifth, to
the Uncertificated Balances of REMIC I Regular Interest I-LT1, REMIC I Regular
Interest I-LT3 and REMIC I Regular Interest I-LT6, 98%, 1% and 1%, respectively,
until the Uncertificated Balance of REMIC I Regular Interest I-LT3 has been
reduced to zero; and sixth, to the Uncertificated Balances of REMIC I Regular
Interest I-LT1, REMIC I Regular Interest I-LT2 and REMIC I Regular Interest
I-LT6, 98%, 1% and 1%, respectively. Any Excess Special Hazard Losses, Excess
Bankruptcy Losses, Excess Fraud Losses and Extraordinary Losses will be
allocated among the REMIC I Regular Interests on a PRO RATA basis.

         (d) All Realized Losses on the REMIC II Regular Interests shall be
allocated by the Trustee on each Distribution Date among the REMIC II Regular
Interests in the proportion that Realized Losses are allocated to the related
Uncertificated Corresponding Component.

         As used herein, an allocation of a Realized Loss on a "PRO RATA basis"
among the REMIC I Regular Interests means an allocation on a PRO RATA basis
among the REMIC I Regular Interests on the basis of their then outstanding
Uncertificated Balances, in each case prior to giving effect to distributions to
be made on such Distribution Date.

         SECTION 4.05. Compliance with Withholding Requirements.

         Notwithstanding any other provision of this Agreement, the Trustee
shall comply with all federal withholding requirements respecting payments to
Certificateholders of interest or original issue discount that the Trustee
reasonably believes are applicable under the Code. The consent of
Certificateholders shall not be required for such withholding. In the event the
Trustee does withhold any amount from interest or original issue discount
payments or advances thereof to any Certificateholder pursuant to federal
withholding requirements, the Trustee shall indicate the amount withheld to such
Certificateholders.

         SECTION 4.06. Commission Reporting.

         Within 15 days after each Distribution Date, the Trustee shall file
with the Commission via the Electronic Data Gathering 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 30, 1998, the Trustee
shall file a Form 15 Suspension Notification with respect to the 


<PAGE>


                                      -96-

Trust Fund, if applicable. Prior to March 30, 1998, the Trustee shall file a
Form 10-K, in substance conforming to industry standards, with respect to the
Trust Fund. The Depositor hereby grants to the Trustee a limited power of
attorney to execute and file each such document on behalf of the Depositor. Such
power of attorney shall continue until the earlier of (i) receipt by the Trustee
from the Depositor of written termination of such power of attorney and (ii) the
termination of the Trust Fund. At least three Business Days prior to filing any
Form 8-K or Form 10-K pursuant to this Section 4.06, the Trustee shall deliver a
copy of such Form 8-K or Form 10- K, as the case may be, to the Depositor. The
Depositor agrees to promptly furnish to the Trustee, from time to time upon
request, such further information, reports and financial statements within their
control related to this Agreement and the Mortgage Loans as the Trustee
reasonably deems appropriate to prepare and file all necessary reports with the
Commission.


<PAGE>


                                      -97-

                                    ARTICLE V

                                THE CERTIFICATES

         SECTION 5.01. The Certificates.

         (a) The Certificates in the aggregate will represent the entire
beneficial ownership interest in the Mortgage Loans and all other assets
included in REMIC I.

         The Certificates will be substantially in the forms annexed hereto as
Exhibits A-1 through A-8. The Certificates of each Class will be issuable in
registered form only, in denominations of authorized Percentage Interests as
described in the definition thereof. Each Certificate will share ratably in all
rights of the related Class.

         Upon original issue, the Certificates shall be executed and delivered
by the Trustee, and the Trustee shall cause the Certificates to be authenticated
by the Certificate Registrar to or upon the order of the Depositor. The
Certificates shall be executed and attested by manual or facsimile signature on
behalf of the Trustee by an authorized signatory. Certificates bearing the
manual or facsimile signatures of individuals who were at any time the proper
officers of the Trustee shall bind the Trustee, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to the
authentication and delivery of such Certificates or did not hold such offices at
the date of such Certificates. No Certificate shall be entitled to any benefit
under this Agreement or be valid for any purpose, unless there appears on such
Certificate a certificate of authentication substantially in the form provided
herein executed by the Certificate Registrar by manual signature, and such
certificate of authentication 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.

         (b) The Class A Certificates and the Mezzanine Certificates shall
initially be issued as one or more Certificates held by the Book-Entry Custodian
or, if appointed to hold such Certificates as provided below, the Depository and
registered in the name of the Depository or its nominee and, except as provided
below, registration of such Certificates may not be transferred by the Trustee
except to another Depository that agrees to hold such Certificates for the
respective Certificate Owners with Ownership Interests therein. The Certificate
Owners shall hold their respective Ownership Interests in and to such
Certificates through the book-entry facilities of the Depository and, except as
provided below, shall not be entitled to definitive, fully registered
Certificates ("Definitive Certificates") in respect of such Ownership Interests.
All transfers by Certificate Owners of their respective Ownership Interests in
the Book-Entry Certificates shall be made in accordance with the procedures
established by the Depository Participant or brokerage firm representing such
Certificate Owner. Each Depository Participant shall only transfer the Ownership
Interests in the Book-Entry Certificates of Certificate Owners it represents or
of brokerage firms for which it acts as agent in accordance with the
Depository's normal procedures. The Trustee is hereby initially appointed as the
Book-Entry Custodian and hereby agrees to act as such in accordance herewith and
in accordance with the agreement that it has with the


<PAGE>


                                      -98-

Depository authorizing it to act as such. The Book-Entry Custodian may, and, if
it is no longer qualified to act as such, the Book-Entry Custodian shall,
appoint, by a written instrument delivered to the Depositor, the Master Servicer
and, if the Trustee is not the Book-Entry Custodian, the Trustee, any other
transfer agent (including the Depository or any successor Depository) to act as
Book-Entry Custodian under such conditions as the predecessor Book-Entry
Custodian and the Depository or any successor Depository may prescribe, provided
that the predecessor Book-Entry Custodian shall not be relieved of any of its
duties or responsibilities by reason of any such appointment of other than the
Depository. If the Trustee resigns or is removed in accordance with the terms
hereof, the successor trustee or, if it so elects, the Depository shall
immediately succeed to its predecessor's duties as Book-Entry Custodian. The
Depositor shall have the right to inspect, and to obtain copies of, any
Certificates held as Book-Entry Certificates by the Book-Entry Custodian.

         The Trustee, the Master Servicer and the Depositor may for all purposes
(including the making of payments due on the Book-Entry Certificates) deal with
the Depository as the authorized representative of the Certificate Owners with
respect to the Book-Entry Certificates for the purposes of exercising the rights
of Certificateholders hereunder. The rights of Certificate Owners with respect
to the Book-Entry Certificates shall be limited to those established by law and
agreements between such Certificate Owners and the Depository Participants and
brokerage firms representing such Certificate Owners. Multiple requests and
directions from, and votes of, the Depository as Holder of the Book-Entry
Certificates with respect to any particular matter shall not be deemed
inconsistent if they are made with respect to different Certificate Owners. The
Trustee may establish a reasonable record date in connection with solicitations
of consents from or voting by Certificateholders and shall give notice to the
Depository of such record date.

         If (i)(A) the Depositor advises the Trustee in writing that the
Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (B) the Depositor is unable to locate a
qualified successor, (ii) the Depositor at its option advises the Trustee in
writing that it elects to terminate the book-entry system through the Depository
or (iii) after the occurrence of a Master Servicer Event of Default, Certificate
Owners representing in the aggregate not less than 51% of the Ownership
Interests of the Book-Entry Certificates advise the Trustee through the
Depository, in writing, that the continuation of a book-entry system through the
Depository is no longer in the best interests of the Certificate Owners, the
Trustee shall notify all Certificate Owners (through the Depository) of the
occurrence of any such event and of the availability of Definitive Certificates
to Certificate Owners requesting the same. Upon surrender to the Trustee of the
Book-Entry Certificates by the Book-Entry Custodian or the Depository, as
applicable, accompanied by registration instructions from the Depository for
registration of transfer, the Trustee shall issue the Definitive Certificates.
Such Definitive Certificates will be issued in minimum denominations of $10,000,
except that any beneficial ownership that was represented by a Book-Entry
Certificate in an amount less than $10,000 immediately prior to the issuance of
a Definitive Certificate shall be issued in a minimum denomination equal to the
amount represented by such Book-Entry Certificate. None of the Depositor, the
Master Servicer or the Trustee shall be liable for any delay in the delivery of
such instructions and may conclusively rely on, and shall be protected in
relying on, such instructions. Upon the issuance 


<PAGE>


                                      -99-

of DefinitiveCertificates all references herein to obligations imposed upon or
to be performed by the Depository shall be deemed to be imposed upon and
performed by the Trustee, to the extent applicable with respect to such
Definitive Certificates, and the Trustee shall recognize the Holders of the
Definitive Certificates as Certificateholders hereunder.

         SECTION 5.02. Registration of Transfer and Exchange of Certificates.

         (a) The Trustee shall cause to be kept at one of the offices or
agencies to be appointed by the Trustee in accordance with the provisions of
Section 8.12 a Certificate Register for the Certificates in which, subject to
such reasonable regulations as it may prescribe, the Trustee shall provide for
the registration of Certificates and of transfers and exchanges of Certificates
as herein provided. The Trustee will initially serve as Certificate Registrar
for the purpose of registering Certificates and transfers and exchanges of
Certificates as herein provided. The Certificate Registrar may appoint, by a
written instrument delivered to the Master Servicer and the Depositor, any other
bank or trust company to act as Certificate Registrar under such conditions as
the predecessor Certificate Registrar may prescribe, provided that the
predecessor Certificate Registrar shall not be relieved of any of its duties or
responsibilities hereunder by reason of such appointment. If the Trustee shall
at any time not be the Certificate Registrar, the Trustee shall have and
maintain the right to inspect the Certificate Register or to obtain a copy
thereof at all reasonable times, and to rely conclusively upon a certificate of
the Certificate Registrar as to the information set forth in the Certificate
Register.

         (b) No transfer of any Class CE Certificate shall be made unless that
transfer is made pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "1933 Act"), and effective registration
or qualification under applicable state securities laws, or is made in a
transaction that does not require such registration or qualification. In the
event that such a transfer of a Class CE Certificate is to be made without
registration or qualification, the Trustee and the Certificate Registrar shall
each require receipt of: (i) if such transfer is purportedly being made in
reliance upon Rule 144A under the 1933 Act, written certifications from the
Certificateholder desiring to effect the transfer and from such
Certificateholder's prospective transferee, substantially in the forms attached
hereto as Exhibit F- 1; and (ii) in all other cases, an Opinion of Counsel
satisfactory to it that such transfer may be made without such registration or
qualification (which Opinion of Counsel shall not be an expense of the
Depositor, the Trustee, the Master Servicer in its capacity as such, or the
Trust Fund), together with copies of the written certification(s) of the
Certificateholder desiring to effect the transfer and/or such
Certificateholder's prospective transferee upon which such Opinion of Counsel is
based, if any. None of the Depositor, the Certificate Registrar or the Trustee
is obligated to register or qualify the Class CE Certificates under the 1933 Act
or any other securities laws or to take any action not otherwise required under
this Agreement to permit the transfer of such Certificates without registration
or qualification. Any Certificateholder desiring to effect the transfer of a
Class CE Certificate shall, and does hereby agree to, indemnify the Trustee, the
Depositor, the Certificate Registrar and the Master Servicer against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.


<PAGE>


                                      -100-

         (c) No transfer of a Class CE 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 ("Plan Assets") unless the Depositor, the Master Servicer
and the Trustee are provided with an Opinion of Counsel which establishes to the
satisfaction of the Depositor, the Trustee and the Master Servicer that the
purchase of such Certificates is permissible under applicable law, will not
constitute or result in any prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Depositor, the Master Servicer, the Trustee
or the Trust Fund to any obligation or liability (including obligations or
liabilities under ERISA or Section 4975 of the Code) in addition to those
undertaken in this Agreement, which Opinion of Counsel shall not be an expense
of the Depositor, the Master Servicer, the Trustee or the Trust Fund. In lieu of
such Opinion of Counsel, a Plan, any Person acting, directly or indirectly, on
behalf of any such Plan or any Person acquiring such Certificates with Plan
Assets of a Plan may provide a certification in the form of Exhibit G to this
Agreement (or other form acceptable to the Depositor, the Trustee and the Master
Servicer), which the Trustee may rely upon without further inquiry or
investigation. In the absence of its having received the Opinion of Counsel or
certification contemplated by this paragraph, the Trustee shall require the
prospective transferee of any Class CE Certificate or Residual Certificate to
certify that it is not an employee benefit plan subject to ERISA or the Code, a
Person acting, directly or indirectly, on behalf of any such Plan or any Person
acquiring such Certificates with Plan Assets. Any Plan, any Person acting,
directly or indirectly, on behalf of any such Plan or any person using Plan
Assets to acquire Mezzanine Certificates will be deemed to have represented that
such acquisition is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, will not subject the Depositor, the Master Servicer, the Trustee or
the Trust Fund to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (i) the source of funds used to
purchase such Mezzanine Certificates is an "insurance company general account"
(as such term is defined in PTCE 95-60), (ii) the conditions set forth in PTCE
95-60 have been satisfied and (iii) there is no Plan with respect to which the
amount of such general account's reserves and liabilities for contracts held by
or on behalf of such Plan and all other Plans maintained by the same employer
(or any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Mezzanine Certificates. An Opinion of Counsel, any
certification or a deemed representation will not be required in connection with
the initial transfer of any such Certificate by the Depositor to an affiliate of
the Depositor (in which case, the Depositor or any affiliate thereof shall have
deemed to have represented that such affiliate is not a Plan or a Person
investing Plan Assets) and the Trustee shall be entitled to conclusively rely
upon a representation (which, upon the request of the Trustee, shall be a
written representation) from the Depositor of the status of such transferee as
an affiliate of the Depositor.

         (d) (i) 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 authorized the


<PAGE>


                                      -101-

Trustee or its designee under clause (iii)(A) below to deliver payments to a
Person other than such Person and to negotiate the terms of any mandatory sale
under clause (iii)(B) below and to execute all instruments of Transfer and to do
all other things necessary in connection with any such sale. The rights of each
Person acquiring any Ownership Interest in a Residual Certificate are expressly
subject to the following provisions:

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

                           (B) In connection with any proposed Transfer of any
                  Ownership Interest in a Residual Certificate, the Trustee
                  shall require delivery to it and shall not register the
                  Transfer of any Residual Certificate until its receipt of an
                  affidavit and agreement (a "Transfer Affidavit and Agreement"
                  in the form attached hereto as Exhibit F-2) from the proposed
                  Transferee, in form and substance satisfactory to the Trustee,
                  representing and warranting, among other things, that such
                  Transferee is a Permitted Transferee, that it is not acquiring
                  its Ownership Interest in the Residual Certificate that is the
                  subject of the proposed Transfer as a nominee, trustee or
                  agent for any Person that is not a Permitted Transferee, that
                  for so long as it retains its Ownership Interest in a Residual
                  Certificate, it will endeavor to remain a Permitted
                  Transferee, and that it has reviewed the provisions of this
                  Section 5.02(d) and agrees to be bound by them.

                           (C) Notwithstanding the delivery of a Transfer
                  Affidavit and Agreement by a proposed Transferee under clause
                  (B) above, if a Responsible Officer of the Trustee who is
                  assigned to this transaction has actual knowledge that the
                  proposed Transferee is not a Permitted Transferee, no Transfer
                  of an Ownership Interest in a Residual Certificate to such
                  proposed Transferee shall be effected.

                           (D) Each Person holding or acquiring any Ownership
                  Interest in a Residual Certificate shall agree (x) to require
                  a Transfer Affidavit and Agreement (in the form attached
                  hereto as Exhibit F-2) from any other Person to whom such
                  Person attempts to transfer its Ownership Interest in a
                  Residual Certificate and (y) not to transfer its Ownership
                  Interest unless it provides a transferor affidavit (a
                  "Transferor Affidavit" in the form attached hereto as Exhibit
                  F-2) to the Trustee stating that, among other things, it has
                  no actual knowledge that such other Person is not a Permitted
                  Transferee.

                           (E) Each Person holding or acquiring an Ownership
                  Interest in a Residual Certificate, by purchasing an Ownership
                  Interest in such


<PAGE>


                                      -102-

                  Certificate, agrees to give the Trustee written notice that it
                  is a "pass-through interest holder" within the meaning of
                  temporary Treasury regulation Section 1.67-3T(a)(2)(i)(A)
                  immediately upon acquiring an Ownership Interest in a Residual
                  Certificate, if it is, or is holding an Ownership Interest in
                  a Residual Certificate on behalf of, a "pass-through interest
                  holder."

                  (ii) The Trustee will register the Transfer of any Residual
         Certificate only if it shall have received the Transfer Affidavit and
         Agreement and all of such other documents as shall have been reasonably
         required by the Trustee as a condition to such registration. In
         addition, no Transfer of a Residual Certificate shall be made unless
         the Trustee shall have received a representation letter from the
         Transferee of such Certificate to the effect that such Transferee is a
         Permitted Transferee.

                  (iii) (A) If any purported Transferee shall become a Holder of
         a Residual Certificate in violation of the provisions of this Section
         5.02(d), then the last preceding Permitted Transferee shall be
         restored, to the extent permitted by law, to all rights as holder
         thereof retroactive to the date of registration of such Transfer of
         such Residual Certificate. The Trustee shall be under no liability to
         any Person for any registration of Transfer of a Residual Certificate
         that is in fact not permitted by this Section 5.02(d) or for making any
         payments due on such Certificate to the holder thereof or for taking
         any other action with respect to such holder under the provisions of
         this Agreement.

                  (B) If any purported Transferee shall become a holder of a
         Residual Certificate in violation of the restrictions in this Section
         5.02(d) and to the extent that the retroactive restoration of the
         rights of the holder of such Residual Certificate as described in
         clause (iii)(A) above shall be invalid, illegal or unenforceable, then
         the Trustee shall have the right, without notice to the holder or any
         prior holder of such Residual Certificate, to sell such Residual
         Certificate to a purchaser selected by the Trustee on such terms as the
         Trustee may choose. Such purported Transferee shall promptly endorse
         and deliver each Residual Certificate in accordance with the
         instructions of the Trustee. Such purchaser may be the Trustee itself
         or any Affiliate of the Trustee. The proceeds of such sale, net of the
         commissions (which may include commissions payable to the Trustee or
         its Affiliates), expenses and taxes due, if any, will be remitted by
         the Trustee to such purported Transferee. The terms and conditions of
         any sale under this clause (iii)(B) shall be determined in the sole
         discretion of the Trustee, and the Trustee shall not be liable to any
         Person having an Ownership Interest in a Residual Certificate as a
         result of its exercise of such discretion.

                  (iv) The Trustee shall make available to the Internal Revenue
         Service and those Persons specified by the REMIC Provisions all
         information necessary to


<PAGE>


                                      -103-

         compute any tax imposed (A) as a result of the Transfer of an Ownership
         Interest in a Residual Certificate to any Person who is a Disqualified
         Organization, including the information described in Treasury
         regulations sections 1.860D-1(b)(5) and 1.860E-2(a)(5) with respect to
         the "excess inclusions" of such Residual Certificate and (B) as a
         result of any regulated investment company, real estate investment
         trust, common trust fund, partnership, trust, estate or organization
         described in Section 1381 of the Code that holds an Ownership Interest
         in a Residual Certificate having as among its record holders at any
         time any Person which is a Disqualified Organization. Reasonable
         compensation for providing such information may be accepted by the
         Trustee.

                  (v) The provisions of this Section 5.02(d) set forth prior to
         this subsection (v) may be modified, added to or eliminated, provided
         that there shall have been delivered to the Trustee at the expense of
         the party seeking to modify, add to or eliminate any such provision the
         following:

                           (A) written notification from each Rating Agency to
                  the effect that the modification, addition to or elimination
                  of such provisions will not cause such Rating Agency to
                  downgrade its then-current ratings of any Class of
                  Certificates; and

                           (B) an Opinion of Counsel, in form and substance
                  satisfactory to the Trustee, to the effect that such
                  modification of, addition to or elimination of such provisions
                  will not cause any of REMIC I, REMIC II or REMIC III to cease
                  to qualify as a REMIC and will not cause any of REMIC I, REMIC
                  II or REMIC III, as the case may be, to be subject to an
                  entity-level tax caused by the Transfer of any Residual
                  Certificate to a Person that is not a Permitted Transferee or
                  (y) a Person other than the prospective transferee to be
                  subject to a REMIC-tax caused by the Transfer of a Residual
                  Certificate to a Person that is not a Permitted Transferee.

                  (e) Subject to the preceding subsections, upon surrender for
         registration of transfer of any Certificate at any office or agency of
         the Trustee maintained for such purpose pursuant to Section 8.12, the
         Trustee shall execute and the Certificate Registrar shall authenticate
         and deliver, in the name of the designated Transferee or Transferees,
         one or more new Certificates of the same Class of a like aggregate
         Percentage Interest.

                  (f) At the option of the Holder thereof, any Certificate may
         be exchanged for other Certificates of the same Class with authorized
         denominations and a like aggregate Percentage Interest, upon surrender
         of such Certificate to be exchanged at any office or agency of the
         Trustee maintained for such purpose pursuant to Section 8.12. Whenever
         any Certificates are so surrendered for exchange the Trustee shall
         execute and cause the Certificate Registrar to authenticate and deliver
         the Certificates which the Certificateholder making the exchange is
         entitled to receive. Every Certificate presented or surrendered for
         transfer or exchange shall (if


<PAGE>


                                      -104-

so required by the Trustee) be duly endorsed by, or be accompanied by a written
instrument of transfer in the form satisfactory to the Trustee and the
Certificate Registrar duly executed by, the Holder thereof or his attorney duly
authorized in writing.

                  (g) No service charge to the Certificateholders shall be made
         for any transfer or exchange of Certificates, but the Trustee 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.

                  (h) All Certificates surrendered for transfer and exchange
         shall be canceled and destroyed by the Certificate Registrar in
         accordance with its customary procedures.

                  (i) The Trustee will cause the Certificate Registrar (unless
         the Trustee is acting as Certificate Registrar) to provide notice to
         the Trustee of each transfer of a Certificate and to provide the
         Trustee with an updated copy of the Certificate Register on the first
         Business Day in January and June of each year, commencing in January
         1998.

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

         If (i) any mutilated Certificate is surrendered to the Trustee or the
Certificate Registrar, or the Trustee and the Certificate Registrar receive
evidence to their satisfaction of the destruction, loss or theft of any
Certificate, and (ii) there is delivered to the Trustee 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 actual knowledge by the Trustee or the
Certificate Registrar that such Certificate has been acquired by a bona fide
purchaser, the Trustee shall execute and deliver, in exchange for or in lieu of
any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of
the same Class and of like denomination and Percentage Interest. Upon the
issuance of any new Certificate under this Section, the Trustee may require the
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto and any other expenses (including the fees
and expenses of the Certificate Registrar) connected therewith. Any replacement
Certificate issued pursuant to this Section shall constitute complete and
indefeasible evidence of ownership in the applicable REMIC created hereunder, 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 Depositor, the Master Servicer, the Trustee, the Certificate
Registrar and any agent of any of them may treat the Person 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 Depositor, the Master Servicer, the Trustee, the
Certificate Registrar or any agent of any of them shall be affected by notice to
the contrary.

         SECTION 5.05. Certain Available Information.


<PAGE>


                                      -105-

         On or prior to the date of the first sale of any Class CE Certificate
to an Independent third party, the Depositor shall provide to the Trustee ten
copies of any private placement memorandum or other disclosure document used by
the Depositor in connection with the offer and sale of the Class CE
Certificates. In addition, if any such private placement memorandum or
disclosure document is revised, amended or supplemented at any time following
the delivery thereof to the Trustee, the Depositor promptly shall inform the
Trustee of such event and shall deliver to the Trustee ten copies of the private
placement memorandum or disclosure document, as revised, amended or
supplemented. The Trustee shall maintain at its Corporate Trust Office and shall
make available free of charge during normal business hours for review by any
Holder of a Certificate or any Person identified to the Trustee as a prospective
transferee of a Certificate, originals or copies of the following items: (i) in
the case of a Holder or prospective transferee of a Class CE Certificate, the
private placement memorandum or other disclosure document relating to the Class
CE Certificates, in the form most recently provided to the Trustee; and (ii) in
all cases, (A) this Agreement and any amendments hereof entered into pursuant to
Section 11.01, (B) all monthly statements required to be delivered to
Certificateholders of the relevant Class pursuant to Section 4.02 since the
Closing Date, and all other notices, reports, statements and written
communications delivered to the Certificateholders of the relevant Class
pursuant to this Agreement since the Closing Date, (C) all certifications
delivered by a Responsible Officer of the Trustee since the Closing Date
pursuant to Section 10.01(h), (D) any and all Officers' Certificates delivered
to the Trustee by the Master Servicer since the Closing Date to evidence the
Master Servicer's determination that any P&I Advance was, or if made, would be a
Nonrecoverable P&I Advance and (E) any and all Officers' Certificates delivered
to the Trustee by the Master Servicer since the Closing Date pursuant to Section
4.04(a). Copies and mailing of any and all of the foregoing items will be
available from the Trustee upon request at the expense of the person requesting
the same.


<PAGE>


                                      -106-

                                   ARTICLE VI

                      THE DEPOSITOR AND THE MASTER SERVICER

         SECTION 6.01. Liability of the Depositor and the Master Servicer.

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

         SECTION 6.02. Merger or Consolidation of the Depositor or the Master
                       Servicer.

         Subject to the following paragraph, the Depositor will keep in full
effect its existence, rights and franchises as a corporation under the laws of
the jurisdiction of its incorporation. Subject to the following paragraph, the
Master Servicer will keep in full effect its existence, rights and franchises as
a corporation under the laws of the jurisdiction of its incorporation and its
qualification as an approved conventional seller/servicer for FNMA or FHLMC in
good standing. The Depositor and the Master Servicer will obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, the Certificates or any of the Mortgage Loans
and to perform its respective duties under this Agreement.

         The Depositor or the Master Servicer may be merged or consolidated with
or into any Person, or transfer all or substantially all of its assets to any
Person, in which case any Person resulting from any merger or consolidation to
which the Depositor or the Master Servicer shall be a party, or any Person
succeeding to the business of the Depositor or the Master Servicer, shall be the
successor of the Depositor or the Master Servicer, as the case may be,
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that the successor or surviving Person to
the Master Servicer shall be qualified to service mortgage loans on behalf of
FNMA or FHLMC; and provided further that the Rating Agencies' ratings of the
Class A Certificates and the Mezzanine Certificates in effect immediately prior
to such merger or consolidation will not be qualified, reduced or withdrawn as a
result thereof (as evidenced by a letter to such effect from the Rating
Agencies).

         SECTION 6.03. Limitation on Liability of the Depositor, the Master
                       Servicer and Others.

         None of the Depositor, the Master Servicer or any of the directors,
officers, employees or agents of the Depositor or the Master Servicer shall be
under any liability to the Trust Fund or the Certificateholders for any action
taken or for refraining from the taking of any action in good faith pursuant to
this Agreement, or for errors in judgment; provided, however,


<PAGE>


                                      -107-

that this provision shall not protect the Depositor, the Master Servicer or any
such person againstany breach of warranties, representations or covenants made
herein, or against any specific liability imposed on the Master Servicer
pursuant hereto, or against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties hereunder.
The Depositor, the Master Servicer and any director, officer, employee or agent
of the Depositor or the Master Servicer may rely in good faith on any document
of any kind which, PRIMA FACIE, is properly executed and submitted by any Person
respecting any matters arising hereunder. The Depositor, the Master Servicer and
any director, officer, employee or agent of the Depositor or the Master Servicer
shall be indemnified and held harmless by the Trust Fund against any loss,
liability or expense incurred in connection with any legal action relating to
this Agreement or the Certificates, other than any loss, liability or expense
relating to any specific Mortgage Loan or Mortgage Loans (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to this
Agreement) or any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties hereunder or
by reason of reckless disregard of obligations and duties hereunder. Neither the
Depositor nor the Master Servicer shall be under any obligation to appear in,
prosecute or defend any legal action unless such action is related to its
respective duties under this Agreement and, in its opinion, does not involve it
in any expense or liability; provided, however, that each of the Depositor and
the Master Servicer may in its discretion undertake any such action which it may
deem necessary or desirable with respect to this Agreement and the rights and
duties of the parties hereto and the interests of the Certificateholders
hereunder. In such event, unless the Depositor or the Master Servicer acts
without the consent of Holders of Certificates entitled to at least 51% of the
Voting Rights (which consent shall not be necessary for the Depositor or the
Master Servicer in the case of litigation or other legal action by either to
enforce their respective rights or defend themselves hereunder), the legal
expenses and costs of such action and any liability resulting therefrom (except
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or negligence in the performance of duties hereunder or by reason of
reckless disregard of obligations and duties hereunder) shall be expenses, costs
and liabilities of the Trust Fund, and the Depositor (subject to the limitations
set forth above) and the Master Servicer shall be entitled to be reimbursed
therefor from the Collection Account as and to the extent provided in Section
3.11, any such right of reimbursement being prior to the rights of the
Certificateholders to receive any amount in the Collection Account.

         SECTION 6.04. Limitation on Resignation of the Master Servicer.

         The Master Servicer shall not resign from the obligations and duties
hereby imposed on it except (i) upon determination that its duties hereunder are
no longer permissible under applicable law or (ii) with the written consent of
the Trustee and written confirmation from each Rating Agency (which confirmation
shall be furnished to the Depositor and the Trustee) that such resignation will
not cause such Rating Agency to reduce the then current rating of the Class A
Certificates or the Mezzanine Certificates. Any such determination pursuant to
clause (i) of the preceding sentence permitting the resignation of the Master
Servicer shall be evidenced by an Opinion of Counsel to such effect obtained at
the expense of the Master Servicer and delivered to the Trustee. No resignation
of the Master Servicer shall become effective until the Trustee or


<PAGE>


                                      -108-

a successor servicer shall have assumed the Master Servicer's responsibilities,
duties, liabilities(other than those liabilities arising prior to the
appointment of such successor) and obligations under this Agreement.

         Except as expressly provided herein, the Master Servicer shall assign
nor transfer any of its rights, benefits or privileges hereunder to any other
Person, nor delegate to or subcontract with, nor authorize or appoint any other
Person to perform any of the duties, covenants or obligations to be performed by
the Master Servicer hereunder. If, pursuant to any provision hereof, the duties
of the Master Servicer are transferred to a successor master servicer, the
entire amount of the Servicing Fee and other compensation payable to the Master
Servicer pursuant hereto shall thereafter be payable to such successor master
servicer.

         SECTION 6.05. Rights of the Depositor in Respect of the Master
                       Servicer.

         The Master Servicer shall afford (and any Sub-Servicing Agreement shall
provide that each Sub-Servicer shall afford) the Depositor and the Trustee, upon
reasonable notice, during normal business hours, access to all records
maintained by the Master Servicer (and any such Sub- Servicer) in respect of the
Master Servicer's rights and obligations hereunder and access to officers of the
Master Servicer (and those of any such Sub-Servicer) responsible for such
obligations. Upon request, the Master Servicer shall furnish to the Depositor
and the Trustee its (and any such Sub-Servicer's) most recent financial
statements and such other information relating to the Master Servicer's capacity
to perform its obligations under this Agreement as it possesses. To the extent
such information is not otherwise available to the public, the Depositor and the
Trustee shall not disseminate any information obtained pursuant to the preceding
two sentences without the Master Servicer's (or any such Sub-Servicer's) written
consent, except as required pursuant to this Agreement or to the extent that it
is appropriate to do so (i) in working with legal counsel, auditors, taxing
authorities or other governmental agencies, rating agencies or reinsurers, or
(ii) pursuant to any law, rule, regulation, order, judgment, writ, injunction or
decree of any court or governmental authority having jurisdiction over the
Depositor, the Trustee or the Trust Fund, and in either case, the Depositor or
the Trustee, as the case may be, shall use its best efforts to assure the
confidentiality of any such disseminated non-public information. The Depositor
may, but is not obligated to, enforce the obligations of the Master Servicer
under this Agreement and may, but is not obligated to, perform, or cause a
designee to perform, any defaulted obligation of the Master Servicer under this
Agreement or exercise the rights of the Master Servicer under this Agreement;
provided that the Master Servicer shall be relieved of any of its obligations
under this Agreement by virtue of such performance by the Depositor or its
designee. The Depositor shall not have any responsibility or liability for any
action or failure to act by the Master Servicer and is not obligated to
supervise the performance of the Master Servicer under this Agreement or
otherwise.


<PAGE>


                                      -109-

                                   ARTICLE VII

                                     DEFAULT

         SECTION 7.01. Master Servicer Events of Default.

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

                  (i) any failure by the Master Servicer to remit to the Trustee
         for distribution to the Certificateholders any payment (other than a
         P&I Advance required to be made from its own funds on any Master
         Servicer Remittance Date pursuant to Section 4.03) required to be made
         under the terms of the Certificates and this Agreement which continues
         unremedied for a period of one Business Day after the date upon which
         written notice of such failure, requiring the same to be remedied,
         shall have been given to the Master Servicer by the Depositor or the
         Trustee (in which case notice shall be provided by telecopy), or to the
         Master Servicer, the Depositor and the Trustee by the Holders of
         Certificates entitled to at least 25% of the Voting Rights; or

                  (ii) any failure on the part of the Master Servicer duly to
         observe or perform in any material respect any other of the covenants
         or agreements on the part of the Master Servicer contained in the
         Certificates or in this Agreement (or, if the Master Servicer is the
         Originator, the failure of the Originator to repurchase a Mortgage Loan
         as to which a breach has been established that requires a repurchase
         pursuant to the terms of Section 7 of the Mortgage Loan Purchase
         Agreement) which continues unremedied for a period of 45 days after the
         earlier of (i) the date on which written notice of such failure,
         requiring the same to be remedied, shall have been given to the Master
         Servicer by the Depositor or the Trustee, or to the Master Servicer,
         the Depositor and the Trustee by the Holders of Certificates entitled
         to at least 25% of the Voting Rights and (ii) actual knowledge of such
         failure by a Servicing Officer of the Master Servicer; or

                  (iii) a decree or order of a court or agency or supervisory
         authority having jurisdiction in the premises in an involuntary case
         under any present or future federal or state bankruptcy, insolvency or
         similar law or the appointment of a conservator or receiver or
         liquidator in any insolvency, readjustment of debt, marshalling of
         assets and liabilities or similar proceeding, or for the winding-up or
         liquidation of its affairs, shall have been entered against the Master
         Servicer and, if such proceeding is being contested by the Master
         Servicer in good faith, such decree or order shall have remained in
         force undischarged or unstayed for a period of 60 days or results in
         the entry of an order for relief or any such adjudication or
         appointment; or


<PAGE>


                                      -110-

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

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

                  (vi) any failure by the Master Servicer of the Master Servicer
         Termination Test; or

                  (vii) any failure of the Master Servicer to make any P&I
         Advance on any Master Servicer Remittance Date required to be made from
         its own funds pursuant to Section 4.03 which continues unremedied until
         3:00 p.m. New York time on the Business Day immediately following the
         Master Servicer Remittance Date.

If a Master Servicer Event of Default described in clauses (i) through (vi) of
this Section shall occur, then, and in each and every such case, so long as such
Master Servicer Event of Default shall not have been remedied, the Depositor or
the Trustee may, and at the written direction of the Holders of Certificates
entitled to at least 51% of Voting Rights, the Trustee shall, by notice in
writing to the Master Servicer (and to the Depositor if given by the Trustee or
to the Trustee if given by the Depositor), terminate all of the rights and
obligations of the Master Servicer in its capacity as Master Servicer under this
Agreement, to the extent permitted by law, and in and to the Mortgage Loans and
the proceeds thereof. If a Master Servicer Event of Default described in clause
(vii) hereof shall occur, the Trustee shall, by notice in writing to the Master
Servicer and the Depositor, terminate all of the rights and obligations of the
Master Servicer in its capacity as Master Servicer under this Agreement and in
and to the Mortgage Loans and the proceeds thereof. On or after the receipt by
the Master Servicer of such written notice, all authority and power of the
Master Servicer under this Agreement, whether with respect to the Certificates
(other than as a Holder of any Certificate) or the Mortgage Loans or otherwise,
shall pass to and be vested in the Trustee pursuant to and under this Section,
and, without limitation, the Trustee is hereby authorized and empowered, as
attorney-in-fact or otherwise, to execute and deliver, on behalf of and at the
expense of the Master Servicer, any and all documents and other instruments and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the transfer and
endorsement or assignment of the Mortgage Loans and related documents, or
otherwise. The Master Servicer agrees, at its sole cost and expense, promptly
(and in any event no later than ten Business Days subsequent to such notice) to
provide the Trustee with all documents and records requested by it to enable it
to assume the Master Servicer's functions under this Agreement, and to cooperate
with the Trustee in effecting the termination of the Master Servicer's
responsibilities and rights under this Agreement, including, without limitation,
the transfer within one Business Day to the Trustee for administration by it of
all cash amounts which at the time shall be or should have been credited


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                                      -111-

by the Master Servicer to the Collection Account held by or on behalf of the
Master Servicer, the Distribution Account or any REO Account or Servicing
Account held by or on behalf of the Master Servicer or thereafter be received
with respect to the Mortgage Loans or any REO Property serviced by the Master
Servicer (provided, however, that the Master Servicer shall continue to be
entitled to receive all amounts accrued or owing to it under this Agreement on
or prior to the date of such termination, whether in respect of P&I Advances or
otherwise, and shall continue to be entitled to the benefits of Section 6.03,
notwithstanding any such termination, with respect to events occurring prior to
such termination). For purposes of this Section 7.01, the Trustee shall not be
deemed to have knowledge of a Master Servicer Event of Default unless a
Responsible Officer of the Trustee assigned to and working in the Trustee's
Corporate Trust Office has actual knowledge thereof or unless written notice of
any event which is in fact such a Master Servicer Event of Default is received
by the Trustee and such notice references the Certificates, the Trust Fund or
this Agreement.

         SECTION 7.02. Trustee to Act; Appointment of Successor.

         (a) On and after the time the Master Servicer receives a notice of
termination, the Trustee shall be the successor in all respects to the Master
Servicer in its capacity as Master Servicer under this Agreement and the
transactions set forth or provided for herein, and all the responsibilities,
duties and liabilities relating thereto and arising thereafter shall be placed
on the Trustee (except for any representations or warranties of the Master
Servicer under this Agreement, the responsibilities, duties and liabilities
contained in Section 2.03(c) and the obligation to deposit amounts in respect of
losses pursuant to Section 3.12) by the terms and provisions hereof including,
without limitation, the Master Servicer's obligations to make P&I Advances
pursuant to Section 4.03; provided, however, that if the Trustee is prohibited
by law or regulation from obligating itself to make advances regarding
delinquent mortgage loans, then the Trustee shall not be obligated to make P&I
Advances pursuant to Section 4.03; and provided further, that any failure to
perform such duties or responsibilities caused by the Master Servicer's failure
to provide information required by Section 7.01 shall not be considered a
default by the Trustee as successor to the Master Servicer hereunder. As
compensation therefor, the Trustee shall be entitled to the Servicing Fee and
all funds relating to the Mortgage Loans to which the Master Servicer would have
been entitled if it had continued to act hereunder (other than amounts which
were due or would become due to the Master Servicer prior to its termination or
resignation). Notwithstanding the above and subject to the next paragraph, the
Trustee may, if it shall be unwilling to so act, or shall, if it is unable to so
act or if it is prohibited by law from making advances regarding delinquent
mortgage loans, or if the Holders of Certificates entitled to at least 51% of
the Voting Rights so request in writing to the Trustee, promptly appoint or
petition a court of competent jurisdiction to appoint, an established mortgage
loan servicing institution acceptable to each Rating Agency and having a net
worth of not less than $15,000,000, as the successor to the Master Servicer
under this Agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer under this
Agreement. No appointment of a successor to the Master Servicer under this
Agreement shall be effective until the assumption by the successor of all of the
Master Servicer's responsibilities, duties and liabilities hereunder. In
connection with such appointment and assumption described herein, the


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                                      -112-

Trustee may make such arrangements for the compensation of such successor out of
payments on Mortgage Loans as it and such successor shall agree; provided,
however, that no such compensation shall be in excess of that permitted the
Master Servicer as such hereunder. The Depositor, the Trustee and such successor
shall take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession. Pending appointment of a successor to the Master
Servicer under this Agreement, the Trustee shall act in such capacity as herein
above provided.

         Upon removal or resignation of the Master Servicer, the Trustee with
the cooperation of the Seller, (x) shall solicit bids for a successor Master
Servicer as described below and (y) pending the appointment of a successor
Master Servicer as a result of soliciting such bids, shall serve as Master
Servicer of the Mortgage Loans serviced by such predecessor Master Servicer. The
Trustee shall solicit, by public announcement, bids from housing and home
finance institutions, banks and mortgage servicing institutions meeting the
qualifications set forth above (including the Trustee or any affiliate thereof).
Such public announcement shall specify that the successor Master Servicer shall
be entitled to the servicing compensation agreed upon between the Trustee, the
successor Master Servicer and the Seller; provided, however, that no such fee
shall exceed the Servicing Fee. Within thirty days after any such public
announcement, the Trustee, with the cooperation of the Seller, shall negotiate
in good faith and effect the sale, transfer and assignment of the servicing
rights and responsibilities hereunder to the qualified party (meeting the
qualifications of the preceding paragraph) submitting the highest satisfactory
bid as to the price they will pay to obtain such servicing. The Trustee upon
receipt of the purchase price shall pay such purchase price to the Master
Servicer being so removed, after deducting from any sum received by the Trustee
from the successor to the Master Servicer in respect of such sale, transfer and
assignment all costs and expenses of any public announcement and of any sale,
transfer and assignment of the servicing rights and responsibilities reasonably
incurred hereunder. After such deductions, the remainder of such sum shall be
paid by the Trustee to the Master Servicer at the time of such sale.

         (b) If the Master Servicer fails to remit to the Trustee for
distribution to the Certificateholders any payment required to be made under the
terms of the Certificates and this Agreement (for purposes of this Section
7.02(b), a "Remittance") because the Master Servicer is the subject of a
proceeding under the federal Bankruptcy Code and the making of such Remittance
is prohibited by Section 362 of the federal Bankruptcy Code, the Trustee shall
upon notice of such prohibition, regardless of whether it has received a notice
of termination under Section 7.01, advance the amount of such Remittance by
depositing such amount in the Distribution Account on the related Distribution
Date. The Trustee shall be obligated to make such advance only if (i) such
advance, in the good faith judgment of the Trustee, can reasonably be expected
to be ultimately recoverable from Stayed Funds and (ii) the Trustee is not
prohibited by law from making such advance or obligating itself to do so. Upon
remittance of the Stayed Funds to the Trustee or the deposit thereof in the
Distribution Account by the Master Servicer, a trustee in bankruptcy or a
federal bankruptcy court, the Trustee may recover the amount so advanced,
without interest, by withdrawing such amount from the Distribution Account;
however, nothing in this Agreement shall be deemed to affect the Trustee's
rights to recover from the Master


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                                      -113-

Servicer's own fundsinterest on the amount of any such advance. If the Trustee
at any time makes an advance under this Subsection which it later determines in
its good faith judgment will not be ultimately recoverable from the Stayed Funds
with respect to which such advance was made, the Trustee shall be entitled to
reimburse itself for such advance, without interest, by withdrawing from the
Distribution Account, out of amounts on deposit therein, an amount equal to the
portion of such advance attributable to the Stayed Funds.

         SECTION 7.03. Notification to Certificateholders.

         (a) Upon any termination of the Master Servicer pursuant to Section
7.01 above or any appointment of a successor to the Master Servicer pursuant to
Section 7.02 above, the Trustee shall give prompt written notice thereof to
Certificateholders at their respective addresses appearing in the Certificate
Register.

         (b) Not later than the later of 60 days after the occurrence of any
event, which constitutes or which, with notice or lapse of time or both, would
constitute a Master Servicer Event of Default or five days after a Responsible
Officer of the Trustee becomes aware of the occurrence of such an event, the
Trustee shall transmit by mail to all Holders of Certificates notice of each
such occurrence, unless such default or Master Servicer Event of Default shall
have been cured or waived.

         SECTION 7.04. Waiver of Master Servicer Events of Default.

         The Holders representing at least 66% of the Voting Rights evidenced by
all Classes of Certificates affected by any default or Master Servicer Event of
Default hereunder may waive such default or Master Servicer Event of Default;
PROVIDED, HOWEVER, that a default or Master Servicer Event of Default under
clause (i) or (vi) of Section 7.01 may be waived only by all of the Holders of
the Regular Certificates. Upon any such waiver of a default or Master Servicer
Event of Default, such default or Master Servicer Event of Default shall cease
to exist and shall be deemed to have been remedied for every purpose hereunder.
No such waiver shall extend to any subsequent or other default or Master
Servicer Event of Default or impair any right consequent thereon except to the
extent expressly so waived.


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                                      -114-

                                  ARTICLE VIII

                             CONCERNING THE TRUSTEE

         SECTION 8.01. Duties of Trustee.

         The Trustee, prior to the occurrence of a Master Servicer Event of
Default and after the curing of all Master Servicer Events of Default which may
have occurred, undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement. During a Master Servicer Event of
Default, the Trustee shall exercise such of the rights and powers vested in it
by this Agreement, and use the same degree of care and skill in their exercise
as a prudent person would exercise or use under the circumstances in the conduct
of such person's own affairs. Any permissive right of the Trustee enumerated in
this Agreement shall not be construed as a duty.

         The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement. If any such instrument is found
not to conform to the requirements of this Agreement in a material manner, the
Trustee shall take such action as it deems appropriate to have the instrument
corrected, and if the instrument is not corrected to the Trustee's satisfaction,
the Trustee will provide notice thereof to the Certificateholders.

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

               (i) Prior to the occurrence of a Master Servicer Event of
          Default, and after the curing of all such Master Servicer Events of
          Default which may have occurred, the duties and obligations of the
          Trustee shall be determined solely by the express provisions of this
          Agreement, the Trustee shall not be liable except for the performance
          of such duties and obligations as are specifically set forth in this
          Agreement, no implied covenants or obligations shall be read into this
          Agreement against the Trustee and, in the absence of bad faith on the
          part of the Trustee, the Trustee may conclusively rely, as to the
          truth of the statements and the correctness of the opinions expressed
          therein, upon any certificates or opinions furnished to the Trustee
          that conform to the requirements of this Agreement;

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


<PAGE>


                                      -115-

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

         SECTION 8.02. Certain Matters Affecting the Trustee.

         (a) Except as otherwise provided in Section 8.01:

                    (i) The Trustee may request and rely upon, and shall be
          protected in acting or refraining from acting upon, any resolution,
          Officers' Certificate, certificate of auditors or any other
          certificate, statement, instrument, opinion, report, notice, request,
          consent, order, appraisal, bond or other paper or document reasonably
          believed by it to be genuine and to have been signed or presented by
          the proper party or parties;

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

                    (iii) The Trustee shall 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
          reasonable security or indemnity against the costs, expenses and
          liabilities which may be incurred therein or thereby; nothing
          contained herein shall, however, relieve the Trustee of the
          obligation, upon the occurrence of a Master Servicer Event of Default
          (which has not been cured or waived), 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;

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

                    (v) Prior to the occurrence of a Master Servicer Event of
          Default hereunder and after the curing of all Master Servicer Events
          of Default which may have occurred, the Trustee shall not be bound to
          make any investigation into the facts or matters stated in any
          resolution, certificate, statement, instrument, opinion,


<PAGE>


                                      -116-

          report, notice, request, consent, order, approval, bond or other paper
          or document, unless requested in writing to do so by the Holders of
          Certificates entitled to at least 25% of the Voting Rights; provided,
          however, that if the payment within a reasonable time to the Trustee
          of the costs, expenses or liabilities likely to be incurred by it in
          the making of such investigation is, in the opinion of the Trustee,
          not reasonably assured to the Trustee by such Certificateholders, the
          Trustee may require reasonable indemnity against such expense, or
          liability from such Certificateholders as a condition to taking any
          such action;

                    (vi) The Trustee may execute any of the trusts or powers
          hereunder or perform any duties hereunder either directly or by or
          through agents or attorneys; and

                    (vii) The Trustee shall not be personally liable for any
          loss resulting from the investment of funds held in the Collection
          Account at the direction of the Master Servicer pursuant to Section
          3.12.

          (b) All rights of action under this Agreement or under any of the
Certificates, enforceable by the Trustee, may be enforced by it without the
possession of any of the Certificates, or the production thereof at the trial or
other proceeding relating thereto, and any such suit, action or proceeding
instituted by the Trustee shall be brought in its name for the benefit of all
the Holders of such Certificates, subject to the provisions of this Agreement.

          SECTION 8.03. Trustee Not Liable for Certificates or Mortgage Loans.

          The recitals contained herein and in the Certificates (other than the
signature of the Trustee, the authentication of the Certificate Registrar on the
Certificates, the acknowledgments of the Trustee contained in Article II and the
representations and warranties of the Trustee in Section 8.12) shall be taken as
the statements of the Depositor and the Trustee assumes no responsibility for
their correctness. The Trustee makes no representations or warranties as to the
validity or sufficiency of this Agreement (other than as specifically set forth
in Section 8.12) or of the Certificates (other than the signature of the Trustee
and authentication of the Certificate Registrar on the Certificates) or of any
Mortgage Loan or related document. The Trustee shall not be accountable for the
use or application by the Depositor of any of the Certificates or of the
proceeds of such Certificates, or for the use or application of any funds paid
to the Depositor or the Master Servicer in respect of the Mortgage Loans or
deposited in or withdrawn from the Collection Account by the Master Servicer,
other than any funds held by or on behalf of the Trustee in accordance with
Section 3.10.

          SECTION 8.04. Trustee May Own Certificates.

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


<PAGE>


                                      -117-

          SECTION 8.05. Trustee's Fees and Expenses.

          (a) The Trustee shall withdraw from the Distribution Account on each
Distribution Date and pay to itself the Trustee Fee and, to the extent that the
funds therein are at anytime insufficient for such purpose, the Depositor shall
pay such fees. The Trustee, or any director, officer, employee or agent of the
Trustee, shall be indemnified by REMIC I and held harmless against any loss,
liability or expense (not including expenses, disbursements and advances
incurred or made by the Trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the Trustee's
performance in accordance with the provisions of this Agreement) incurred by the
Trustee in connection with any claim or legal action or any pending or
threatened claim or legal action arising out of or in connection with the
acceptance or administration of its obligations and duties under this Agreement,
other than any loss, liability or expense (i) resulting from the Master
Servicer's actions or omissions in connection with this Agreement and the
Mortgage Loans, (ii) that constitutes a specific liability of the Trustee
pursuant to Section 10.01(c) or (iii) any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence in the performance of
duties hereunder or by reason of reckless disregard of obligations and duties
hereunder or as a result of a breach of the Trustee's obligations under Article
X hereof. It is understood by the parties hereto that a "claim" as used in the
preceding sentence includes any claim for indemnification made by the Custodian
under Section 3.2 of the Custodial Agreement. Any amounts payable to the
Trustee, or any director, officer, employee or agent of the Trustee, in respect
of the indemnification provided by this paragraph (a), or pursuant to any other
right of reimbursement from the Trust Fund that the Trustee, or any director,
officer, employee or agent of the Trustee, may have hereunder in its capacity as
such, may be withdrawn by the Trustee from the Distribution Account at any time.

          (b) The Master Servicer agrees to indemnify the Trustee from, and hold
it harmless against, any loss, liability or expense resulting from a breach of
the Master Servicer's obligations and duties under this Agreement. Such
indemnity shall survive the termination or discharge of this Agreement and the
resignation or removal of the Trustee. Any payment hereunder made by the Master
Servicer to the Trustee shall be from the Master Servicer's own funds, without
reimbursement from the Trust Fund therefor.

          (c) The Trustee shall pay any annual rating agency fees of Fitch and
S&P for ongoing surveillance from its own funds without right of reimbursement.

          SECTION 8.06. Eligibility Requirements for Trustee.

          The Trustee hereunder shall at all times be a corporation or an
association (other than the Depositor, the Originator, the Seller, the Master
Servicer or any Affiliate of the foregoing) organized and doing business under
the laws of any state or the United States of America, authorized under such
laws to exercise corporate trust powers, having a combined capital and surplus
of at least $50,000,000 and subject to supervision or examination by federal or
state authority. If such corporation or association publishes reports of
conditions at least


<PAGE>


                                      -118-

annually, pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purposes of this Section the combined capital
and surplus of such corporation or association shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
conditions so published. In case at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Trustee shall
resign immediately in the manner and with the effect specified in Section 8.07.

          SECTION 8.07. Resignation and Removal of the Trustee.

          The Trustee may at any time resign and be discharged from the trust
hereby created by giving written notice thereof to the Depositor, the Master
Servicer and to the Certificateholders. Upon receiving such notice of
resignation, the Depositor shall promptly appoint a successor trustee by written
instrument, in duplicate, which instrument shall be delivered to the resigning
Trustee and to the successor trustee. A copy of such instrument shall be
delivered to the Certificateholders and the Master Servicer by the Depositor. If
no successor trustee shall have been so appointed and have accepted appointment
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment of
a successor trustee.

          If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 8.06 and shall fail to resign after written
request therefor by the Depositor, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee by written instrument, in
duplicate, which instrument shall be delivered to the Trustee so removed and to
the successor trustee. A copy of such instrument shall be delivered to the
Certificateholders and the Master Servicer by the Depositor.

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

          Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section shall not
become effective until acceptance of appointment by the successor trustee as
provided in Section 8.08.

          SECTION 8.08. Successor Trustee.

          Any successor trustee appointed as provided in Section 8.07 shall
execute, acknowledge and deliver to the Depositor and to its predecessor trustee
an instrument accepting


<PAGE>


                                      -119-

such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor hereunder, with the
like effect as if originally named as trustee herein. The predecessor trustee
shall deliver to the successor trustee all Mortgage Files and related documents
and statements, as well as all moneys, held by it hereunder (other than any
Mortgage Files at the time held by a Custodian, which Custodian shall become the
agent of any successor trustee hereunder), and the Depositor and the predecessor
trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for more fully and certainly vesting and confirming
in the successor trustee all such rights, powers, duties and obligations.

          No successor trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor trustee shall be
eligible under the provisions of Section 8.06 and the appointment of such
successor trustee shall not result in a downgrading of any Class of Certificates
by either Rating Agency, as evidenced by a letter from each Rating Agency.

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

          SECTION 8.09. Merger or Consolidation of Trustee.

          Any corporation or association into which the Trustee may be merged or
converted or with which it may be consolidated or any corporation or association
resulting from any merger, conversion or consolidation to which the Trustee
shall be a party, or any corporation or association succeeding to the business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation or association shall be eligible under the provisions of Section
8.06, 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.

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

          Notwithstanding any other provisions hereof, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of REMIC I or property securing the same may at the time be located, the Master
Servicer and the Trustee acting jointly shall have the power and shall execute
and deliver all instruments to appoint one or more Persons approved by the
Trustee to act as co-trustee or co-trustees, jointly with the Trustee, or
separate trustee or separate trustees, of all or any part of REMIC I, and to
vest in such Person or Persons, in such capacity, such title to REMIC I, or any
part thereof, and, subject to the other provisions of this Section 8.10, such
powers, duties, obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable. If the Master Servicer shall not
have joined in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Master


<PAGE>


                                      -120-

Servicer Event of Default shall have occurred and be continuing, the Trustee
alone shall have the power to make such appointment. No co-trustee or separate
trustee hereunder shall be required to meet the terms of eligibility as a
successor trustee under Section 8.06 hereunder and no notice to Holders of
Certificates of the appointment of co-trustee(s) or separate trustee(s) shall be
required under Section 8.08 hereof.

          In the case of any appointment of a co-trustee or separate trustee
pursuant to this Section 8.10 all rights, powers, duties and obligations
conferred or imposed upon the Trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate trustee or co-trustee
jointly, except to the extent that under any law of any jurisdiction in which
any particular act or acts are to be performed by the Trustee (whether as
Trustee hereunder or as successor to the Master Servicer hereunder), the Trustee
shall be incompetent or unqualified to perform such act or acts, in which event
such rights, powers, duties and obligations (including the holding of title to
REMIC I or any portion thereof in any such jurisdiction) shall be exercised and
performed by such separate trustee or co-trustee at the direction of the
Trustee.

          Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trust 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. Appointment of Custodians.

          The Trustee may, with the consent of the Depositor and the Master
Servicer, appoint one or more Custodians to hold all or a portion of the
Mortgage Files as agent for the Trustee, by entering into a Custodial Agreement.
The appointment of any Custodian may at any time be terminated and a substitute
Custodian appointed therefor upon the reasonable request of the Master Servicer
to the Trustee, the consent to which shall not be unreasonably withheld. The
Trustee shall pay any and all fees and expenses of any Custodian in accordance
with each Custodial Agreement. The Trustee initially appoints Texas Commerce
Bank National Association, as Custodian, and the Depositor and Master Servicer
consent to such appointment. Subject to Article VIII hereof, the Trustee agrees
to comply with the terms of each Custodial Agreement and


<PAGE>


                                      -121-

to enforce the terms and provisions thereof against the Custodian for the
benefit of the Certificateholders having an interest in any Mortgage File held
by such Custodian. Each Custodian shall be a depository institution or trust
company subject to supervision by federal or state authority, shall have
combined capital and surplus of at least $10,000,000 and shall be qualified to
do business in the jurisdiction in which it holds any Mortgage File. Each
Custodial Agreement may be amended only as provided in Section 10.01. In no
event shall the appointment of any Custodian pursuant to a Custodial Agreement
diminish the obligations of the Trustee hereunder.

          SECTION 8.12. Appointment of Office or Agency.

          The Trustee will appoint an office or agency in the City of New York
where the Certificates may be surrendered for registration of transfer or
exchange, and presented for final distribution, and where notices and demands to
or upon the Trustee in respect of the Certificates and this Agreement may be
served.

          SECTION 8.13. Representations and Warranties of the Trustee.

          The Trustee hereby represents and warrants to the Master Servicer and
the Depositor, as of the Closing Date, that:

                    (i) The Trustee is a national banking association duly
          organized, validly existing and in good standing under the laws of the
          United States.

                  (ii) The execution and delivery of this Agreement by the
         Trustee, and the performance and compliance with the terms of this
         Agreement by the Trustee, will not violate the Trustee's charter or
         bylaws or constitute a default (or an event which, with notice or lapse
         of time, or both, would constitute a default) under, or result in the
         breach of, any material agreement or other instrument to which it is a
         party or which is applicable to it or any of its assets.

                  (iii) The Trustee has the full power and authority to enter
         into and consummate all transactions contemplated by this Agreement,
         has duly authorized the execution, delivery and performance of this
         Agreement, and has duly executed and delivered this
         Agreement.

                  (iv) This Agreement, assuming due authorization, execution and
         delivery by the Master Servicer and the Depositor, constitutes a valid,
         legal and binding obligation of the Trustee, enforceable against the
         Trustee in accordance with the terms hereof, subject to (A) applicable
         bankruptcy, insolvency, receivership, reorganization, moratorium and
         other laws affecting the enforcement of creditors' rights generally,
         and (B) general principles of equity, regardless of whether such
         enforcement is considered in a proceeding in equity or at law.


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                                      -122-

                  (v) The Trustee is not in violation of, and its execution and
         delivery of this Agreement and its performance and compliance with the
         terms of this Agreement will not constitute a violation of, any law,
         any order or decree of any court or arbiter, or any order, regulation
         or demand of any federal, state or local governmental or regulatory
         authority, which violation, in the Trustee's good faith and reasonable
         judgment, is likely to affect materially and adversely either the
         ability of the Trustee to perform its obligations under this Agreement
         or the financial condition of the Trustee.

                  (vi) No litigation is pending or, to the best of the Trustee's
         knowledge, threatened against the Trustee which would prohibit the
         Trustee from entering into this Agreement or, in the Trustee's good
         faith reasonable judgment, is likely to materially and adversely affect
         either the ability of the Trustee to perform its obligations under this
         Agreement or the financial condition of the Trustee.


<PAGE>


                                      -123-

                                   ARTICLE IX

                                   TERMINATION

          SECTION 9.01 Termination Upon Repurchase or Liquidation of All
Mortgage Loans.

          (a) Subject to Section 9.02, the respective obligations and
responsibilities under this Agreement of the Depositor, the Master Servicer and
the Trustee (other than the obligations of the Master Servicer to the Trustee
pursuant to Section 8.05 and of the Master Servicer to provide for and the
Trustee to make payments in respect of the REMIC I Regular Interests, the REMIC
II Regular Interests or the Classes of Certificates as hereinafter set forth)
shall terminate upon payment to the Certificateholders and the deposit of all
amounts held by or on behalf of the Trustee and required hereunder to be so paid
or deposited on the Distribution Date coinciding with or following the earlier
to occur of (i) the purchase by the Terminator (as defined below) of all
Mortgage Loans and each REO Property remaining in REMIC I and (ii) the final
payment or other liquidation (or any advance with respect thereto) of the last
Mortgage Loan or REO Property remaining in REMIC I; provided, however, that 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 purchase by the Terminator of all Mortgage Loans
and each REO Property remaining in REMIC I shall be at a price equal to the
greater of (A) the aggregate Purchase Price of all the Mortgage Loans included
in REMIC I, plus the appraised value of each REO Property, if any, included in
REMIC I, such appraisal to be conducted by an appraiser mutually agreed upon by
the Terminator and the Trustee in their reasonable discretion and (B) the
aggregate fair market value of all of the assets of REMIC I (as determined by
the Terminator and the Trustee, as of the close of business on the third
Business Day next preceding the date upon which notice of any such termination
is furnished to Certificateholders pursuant to the third paragraph of this
Section 9.01); provided, however, that in the event the Majority Class CE
Certificateholder is the Terminator, the purchase by the Majority Class CE
Certificateholder of all Mortgage Loans and each REO Property remaining in REMIC
I shall be at the price designated in clause (A) above.

          (b) The Majority Class CE Certificateholder shall have the right, and
to the extent the Majority Class CE Certificateholder does not exercise such
right, the Master Servicer, shall have the right (the party exercising such
right, the "Terminator"), to purchase all of the Mortgage Loans and each REO
Property remaining in REMIC I pursuant to clause (i) of the preceding paragraph
no later than the Determination Date in the month immediately preceding the
Distribution Date on which the Certificates will be retired; provided, however,
that the Terminator may elect to purchase all of the Mortgage Loans and each REO
Property remaining in REMIC I pursuant to clause (i) above only if the aggregate
Stated Principal Balance of the Mortgage Loans and each REO Property remaining
in the Trust Fund at the time of such election is less than 10% of the aggregate
Stated Principal Balance of the Mortgage Loans as of the Cut-off Date.


<PAGE>


                                      -124-

          (c) Notice of the liquidation of the REMIC I Regular Interests shall
be given promptly by the Trustee by letter to Certificateholders mailed (a) in
the event such notice is given in connection with the purchase of the Mortgage
Loans and each REO Property by the Terminator, not earlier than the 15th day and
not later than the 25th day of the month next preceding the month of the final
distribution on the Certificates or (b) otherwise during the month of such final
distribution on or before the Determination Date in such month, in each case
specifying (i) the Distribution Date upon which the Trust Fund will terminate
and final payment in respect of the REMIC I Regular Interests, the REMIC II
Regular Interests and the Certificates will be made upon presentation and
surrender of the related Certificates at the office of the Trustee therein
designated, (ii) the amount of any such final payment, (iii) that no interest
shall accrue in respect of the REMIC I Regular Interests, the REMIC II Regular
Interests or the Certificates from and after the Interest Accrual Period
relating to the final Distribution Date therefor and (iv) that the Record Date
otherwise applicable to such Distribution Date is not applicable, payments being
made only upon presentation and surrender of the Certificates at the office of
the Trustee. The Trustee shall give such notice to the Certificate Registrar at
the time such notice is given to Certificateholders. In the event such notice is
given in connection with the purchase of all of the Mortgage Loans and each REO
Property remaining in REMIC I by the Terminator, the Terminator shall deliver to
the Trustee for deposit in the Distribution Account not later than the last
Business Day of the month next preceding the month of the final distribution on
the Certificates an amount in immediately available funds equal to the
above-described purchase price. Upon certification to the Trustee by a Servicing
Officer of the making of such final deposit, the Trustee shall promptly release
or cause to be released to the Terminator the Mortgage Files for the remaining
Mortgage Loans, and the Trustee shall execute all assignments, endorsements and
other instruments necessary to effectuate such transfer.

          (d) Upon presentation of the Certificates by the Certificateholders on
the final Distribution Date, the Trustee shall distribute to each
Certificateholder so presenting and surrendering its Certificates the amount
otherwise distributable on such Distribution Date in accordance with Section
4.01 in respect of the Certificates so presented and surrendered. Any funds not
distributed to any Holder or Holders of Certificates being retired on such
Distribution Date because of the failure of such Holder or Holders to tender
their Certificates shall, on such date, be set aside and held in trust by the
Trustee and credited to the account of the appropriate non-tendering Holder or
Holders. If any Certificates as to which notice has been given pursuant to this
Section 9.01 shall not have been surrendered for cancellation within six months
after the time specified in such notice, the Trustee shall mail a second notice
to the remaining non-tendering Certificateholders to surrender their
Certificates for cancellation in order to receive the final distribution with
respect thereto. If within one year after the second notice all such
Certificates shall not have been surrendered for cancellation, the Trustee
shall, directly or through an agent, mail a final notice to remaining related
non-tendering Certificateholders concerning surrender of their Certificates. The
costs and expenses of maintaining the funds in trust and of contacting such
Certificateholders shall be paid out of the assets remaining in the trust funds.
If within one year after the final notice any such Certificates shall not have
been surrendered for cancellation, the Trustee shall pay to Salomon Brothers Inc
all such amounts, and all rights of non-tendering Certificateholders in or to
such amounts shall thereupon cease. No interest shall accrue or be


<PAGE>


                                      -125-

payable to any Certificateholder on any amount held in trust by the Trustee as a
result of such Certificateholder's failure to surrender its Certificate(s) for
final payment thereof in accordance
with this Section 9.01.

          Immediately following the deposit of funds in trust hereunder in
respect of the Certificates, the Trust Fund shall terminate.

          SECTION 9.02 Additional Termination Requirements.

          (a) In the event that the Terminator purchases all the Mortgage Loans
and each REO Property or the final payment on or other liquidation of the last
Mortgage Loan or REO Property remaining in REMIC I pursuant to Section 9.01, the
Trust Fund shall be terminated in accordance with the following additional
requirements:

                    (i) The Trustee shall specify the first day in the 90-day
          liquidation period in a statement attached to REMIC I's, REMIC II's
          and REMIC III's final Tax Return pursuant to Treasury regulation
          Section 1.860F-1 and shall satisfy all requirements of a qualified
          liquidation under Section 860F of the Code and any regulations
          thereunder, as evidenced by an Opinion of Counsel obtained at the
          expense of the Terminator;

                    (ii) During such 90-day liquidation period, and at or prior
          to the time of making of the final payment on the Certificates, the
          Trustee shall sell all of the assets of REMIC I to the Terminator for
          cash; and

                    (iii) At the time of the making of the final payment on the
          Certificates, the Trustee shall distribute or credit, or cause to be
          distributed or credited, to the Holders of the Residual Certificates
          all cash on hand in the Trust Fund (other than cash retained to meet
          claims), and the Trust Fund shall terminate at that time.

          (b) At the expense of the applicable Terminator (or in the event of
termination under Section 9.01(a)(ii), at the expense of the Trustee), the
Trustee shall prepare or cause to be prepared the documentation required in
connection with the adoption of a plan of liquidation of each of REMIC I, REMIC
II and REMIC III pursuant to this Section 9.02.

          (c) By their acceptance of Certificates, the Holders thereof hereby
agree to authorize the Trustee to specify the 90-day liquidation period for each
of REMIC I, REMIC II and REMIC III, which authorization shall be binding upon
all successor Certificateholders.


<PAGE>


                                      -126-

                                    ARTICLE X

                                REMIC PROVISIONS

          SECTION 10.01. REMIC Administration.

          (a) The Trustee shall elect to treat each of REMIC I, REMIC II and
REMIC III as a REMIC under the Code and, if necessary, under applicable state
law. Each such election will be made on Form 1066 or other appropriate federal
tax or information return or any appropriate state return for the taxable year
ending on the last day of the calendar year in which the Certificates are
issued. For the purposes of the REMIC election in respect of REMIC I, the REMIC
I Regular Interests shall be designated as the Regular Interests in REMIC I and
the Class R-I Certificates shall be designated as the Residual Interests in
REMIC I. The REMIC II Regular Interests shall be designated as the Regular
Interests in REMIC II and the Class R-II Certificates shall be designated as the
Residual Interests in REMIC II. The Class A Certificates, the Mezzanine
Certificates and the Class CE Certificates shall be designated as the Regular
Interests in REMIC III and the Class R-III Certificates shall be designated as
the Residual Interests in REMIC III. The Trustee shall not permit the creation
of any "interests" in REMIC I, REMIC II or REMIC III (within the meaning of
Section 860G of the Code) other than the REMIC I Regular Interests, the REMIC II
Regular Interests and the interests represented by the Certificates.

          (b) The Closing Date is hereby designated as the "Startup Day" of
REMIC I, REMIC II and REMIC III within the meaning of Section 860G(a)(9) of the
Code.

          (c) The Trustee shall pay out of its own funds, without any right of
reimbursement, any and all expenses relating to any tax audit of the Trust Fund
(including, but not limited to, any professional fees or any administrative or
judicial proceedings with respect to any of REMIC I, REMIC II or REMIC III that
involve the Internal Revenue Service or state tax authorities), other than the
expense of obtaining any tax related Opinion of Counsel except as specified
herein. The Trustee, as agent for all of REMIC I's, REMIC II's and REMIC III's
tax matters person, shall (i) act on behalf of the Trust Fund in relation to any
tax matter or controversy involving any of REMIC I, REMIC II or REMIC III and
(ii) represent the Trust Fund in any administrative or judicial proceeding
relating to an examination or audit by any governmental taxing authority with
respect thereto. The holder of the largest Percentage Interest of the Residual
Certificates shall be designated, in the manner provided under Treasury
regulations section 1.860F-4(d) and temporary Treasury regulations section
301.6231(a)(7)-IT, as the tax matters person of the related REMIC created
hereunder. By their acceptance thereof, the holder of the largest Percentage
Interest of the Residual Certificates hereby agrees to irrevocably appoint the
Trustee or an Affiliate as its agent to perform all of the duties of the tax
matters person for the Trust Fund.

          (d) The Trustee shall prepare, sign and file all of the Tax Returns in
respect of each REMIC created hereunder. The expenses of preparing and filing
such returns shall be borne by the Trustee without any right of reimbursement
therefor. The Master Servicer shall provide


<PAGE>


                                      -127-

on a timely basis to the Trustee or its designee such information with respect
to the assets of the Trust Fund as is in its possession and reasonably required
by the Trustee to enable it to perform
its obligations under this Article.

          (e) The Trustee shall perform on behalf of each of REMIC I, REMIC II
and REMIC III 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, as required by the Code, the REMIC
Provisions or other such compliance guidance, the Trustee shall provide (i) to
any Transferor of a Residual Certificate such information as is necessary for
the application of any tax relating to the transfer of a Residual Certificate to
any Person who is not a Permitted Transferee, (ii) to the Certificateholders
such information or reports as are required by the Code or the REMIC Provisions
including reports relating to interest, original issue discount and market
discount or premium (using the Prepayment Assumption as required) and (iii) to
the Internal Revenue Service the name, title, address and telephone number of
the person who will serve as the representative of REMIC I, REMIC II and REMIC
III. The Master Servicer shall provide on a timely basis to the Trustee such
information with respect to the assets of the Trust Fund, including, without
limitation, the Mortgage Loans, as is in its possession and reasonably required
by the Trustee to enable it to perform its obligations under this subsection. In
addition, the Depositor shall provide or cause to be provided to the Trustee,
within ten (10) days after the Closing Date, all information or data that the
Trustee reasonably determines to be relevant for tax purposes as to the
valuations and issue prices of the Certificates, including, without limitation,
the price, yield, prepayment assumption and projected cash flow of the
Certificates.

          (f) The Trustee shall take such action and shall cause each REMIC
created hereunder to take such action as shall be necessary to create or
maintain the status thereof as a REMIC under the REMIC Provisions (and the
Master Servicer shall assist it, to the extent reasonably requested by it). The
Trustee shall not take any action, cause the Trust Fund 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 REMIC I, REMIC II or REMIC III as a REMIC or (ii) result in the
imposition of a tax upon the Trust Fund (including but not limited to the tax on
prohibited transactions as defined in Section 860F(a)(2) of the Code and the tax
on contributions to a REMIC set forth in Section 860G(d) of the Code) (either
such event, an "Adverse REMIC Event") unless the Trustee has received an Opinion
of Counsel, addressed to the Trustee (at the expense of the party seeking to
take such action but in no event at the expense of the Trustee) to the effect
that the contemplated action will not, with respect to any of REMIC I, REMIC II
or REMIC III, endanger such status or result in the imposition of such a tax,
nor shall the Master Servicer take or fail to take any action (whether or not
authorized hereunder) as to which the Trustee has advised it in writing that it
has received an Opinion of Counsel to the effect that an Adverse REMIC Event
could occur with respect to such action. In addition, prior to taking any action
with respect to REMIC I, REMIC II or REMIC III or the respective assets of each,
or causing REMIC I, REMIC II or REMIC III to take any action, which is not
contemplated under the terms of this Agreement, the Master Servicer will consult
with the Trustee or its designee, in writing, with respect to whether such
action could


<PAGE>


                                      -128-

cause an Adverse REMIC Event to occur with respect to REMIC I, REMIC II or REMIC
III, and the Master Servicer shall not take any such action or cause either
REMIC I, REMIC II or REMIC III to take any such action as to which the Trustee
has advised it in writing that an Adverse REMIC Event could occur. The Trustee
may consult with counsel to make such written advice, and the cost of same shall
be borne by the party seeking to take the action not permitted by this
Agreement, but in no event shall such cost be an expense of the Trustee. At all
times as may be required by the Code, the Trustee will ensure that substantially
all of the assets of both REMIC I and REMIC II will consist of "qualified
mortgages" as defined in Section 860G(a)(3) of the Code and "permitted
investments" as defined in Section 860G(a)(5) of the Code.

          (g) In the event that any tax is imposed on "prohibited transactions"
of any REMIC created hereunder as defined in Section 860F(a)(2) of the Code, on
the "net income from foreclosure property" of such REMIC as defined in Section
860G(c) of the Code, on any contributions to any such REMIC after the Startup
Day therefor pursuant to Section 860G(d) of the Code, or any other tax is
imposed by the Code or any applicable provisions of state or local tax laws,
such tax shall be charged (i) to the Trustee pursuant to Section 10.03 hereof,
if such tax arises out of or results from a breach by the Trustee of any of its
obligations under this Article X, (ii) to the Master Servicer pursuant to
Section 10.03 hereof, if such tax arises out of or results from a breach by the
Master Servicer of any of its obligations under Article III or this Article X,
or otherwise (iii) against amounts on deposit in the Distribution Account and
shall be paid by withdrawal therefrom.

          (h) On or before April 15 of each calendar year, commencing April 15,
1998, the Trustee shall deliver to the Master Servicer and each Rating Agency a
Certificate from a Responsible Officer of the Trustee stating the Trustee's
compliance with this Article X.

          (i) The Trustee shall, for federal income tax purposes, maintain books
and records with respect to each of REMIC I, REMIC II and REMIC III on a
calendar year and on an accrual basis.

          (j) Following the Startup Day, the Trustee shall not accept any
contributions of assets to any of REMIC I, REMIC II or REMIC III other than in
connection with any Qualified Substitute Mortgage Loan delivered in accordance
with Section 2.03 unless it shall have received an Opinion of Counsel to the
effect that the inclusion of such assets in the Trust Fund will not cause the
related REMIC to fail to qualify as a REMIC at any time that any Certificates
are outstanding or subject such REMIC to any tax under the REMIC Provisions or
other applicable provisions of federal, state and local law or ordinances.

          (k) Neither the Trustee nor the Master Servicer shall enter into any
arrangement by which REMIC I, REMIC II or REMIC III will receive a fee or other
compensation for services nor permit any such REMIC to receive any income from
assets other than "qualified mortgages" as defined in Section 860G(a)(3) of the
Code or "permitted investments" as defined in Section 860G(a)(5) of the Code.


<PAGE>


                                      -129-

          SECTION 10.02. Prohibited Transactions and Activities.

          None of the Depositor, the Master Servicer or the Trustee shall sell,
dispose of or substitute for any of the Mortgage Loans (except in connection
with (i) the foreclosure of a Mortgage Loan, including but not limited to, the
acquisition or sale of a Mortgaged Property acquired by deed in lieu of
foreclosure, (ii) the bankruptcy of REMIC I, (iii) the termination of REMIC I
pursuant to Article IX of this Agreement, (iv) a substitution pursuant to
Article II of this Agreement or (v) a purchase of Mortgage Loans pursuant to
Article II or III of this Agreement), nor acquire any assets for any of REMIC I,
REMIC II or REMIC III (other than REO Property acquired in respect of a
defaulted Mortgage Loan), nor sell or dispose of any investments in the
Collection Account or the Distribution Account for gain, nor accept any
contributions to any of REMIC I, REMIC II or REMIC III after the Closing Date
(other than a Qualified Substitute Mortgage Loan delivered in accordance with
Section 2.03), unless it has received an Opinion of Counsel, addressed to the
Trustee (at the expense of the party seeking to cause such sale, disposition,
substitution, acquisition or contribution but in no event at the expense of the
Trustee) that such sale, disposition, substitution, acquisition or contribution
will not (a) affect adversely the status of any of REMIC I, REMIC II or REMIC
III as a REMIC or (b) cause any of REMIC I, REMIC II or REMIC III to be subject
to a tax on "prohibited transactions" or "contributions" pursuant to the REMIC
Provisions.

          SECTION 10.03. Master Servicer and Trustee Indemnification.

          (a) The Trustee agrees to indemnify the Trust Fund, the Depositor and
the Master Servicer for any taxes and costs including, without limitation, any
reasonable attorneys fees imposed on or incurred by the Trust Fund, the
Depositor or the Master Servicer, as a result of a breach of the Trustee's
covenants set forth in this Article X.

          (b) The Master Servicer agrees to indemnify the Trust Fund, the
Depositor and the Trustee for any taxes and costs including, without limitation,
any reasonable attorneys' fees imposed on or incurred by the Trust Fund, the
Depositor or the Trustee, as a result of a breach of the Master Servicer's
covenants set forth in Article III or this Article X.


<PAGE>


                                      -130-

                                   ARTICLE XI

                            MISCELLANEOUS PROVISIONS

          SECTION 11.01. Amendment.

          This Agreement or any Custodial Agreement may be amended from time to
time by the Depositor, the Master Servicer, the Trustee and, if applicable, the
Custodian without the consent of any of the Certificateholders, (i) to cure any
ambiguity or defect, (ii) to correct, modify or supplement any provisions herein
(including to give effect to the expectations of Certifcateholders), or in any
Custodial Agreement, or (iii) to make any other provisions with respect to
matters or questions arising under this Agreement or in any Custodial Agreement
which shall not be inconsistent with the provisions of this Agreement or such
Custodial Agreement, provided that such action shall not, as evidenced by an
Opinion of Counsel delivered to the Trustee, adversely affect in any material
respect the interests of any Certificateholder. No amendment shall be deemed to
adversely affect in any material respect the interests of any Certificateholder
who shall have consented thereto, and no Opinion of Counsel shall be required to
address the effect of any such amendment on any such consenting
Certificateholder.

          This Agreement or any Custodial Agreement may also be amended from
time to time by the Depositor, the Master Servicer and the Trustee with the
consent of the Holders of Certificates entitled to at least 66% of the Voting
Rights for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement or any Custodial Agreement
or of modifying in any manner the rights of the Holders of Certificates;
provided, however, that no such amendment shall (i) reduce in any manner the
amount of, or delay the timing of, payments received on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the Holder
of such Certificate, (ii) adversely affect in any material respect the interests
of the Holders of any Class of Certificates in a manner, other than as described
in (i), without the consent of the Holders of Certificates of such Class
evidencing at least 66% of the Voting Rights allocated to such Class, or (iii)
modify the consents required by the immediately preceding clauses (i) and (ii)
without the consent of the Holders of all Certificates then outstanding.
Notwithstanding any other provision of this Agreement, for purposes of the
giving or withholding of consents pursuant to this Section 11.01, Certificates
registered in the name of the Depositor or the Master Servicer or any Affiliate
thereof shall be entitled to Voting Rights with respect to matters affecting
such Certificates.

          Notwithstanding any contrary provision of this Agreement, the Trustee
shall not consent to any amendment to this Agreement unless it shall have first
received an Opinion of Counsel to the effect that such amendment will not result
in the imposition of any tax on any of REMIC I, REMIC II or REMIC III pursuant
to the REMIC Provisions or cause any of REMIC I, REMIC II or REMIC III to fail
to qualify as a REMIC at any time that any Certificates are outstanding.


<PAGE>


                                      -131-

          Promptly after the execution of any such amendment the Trustee shall
furnish a copy of such amendment to each Certificateholder.

          It shall not be necessary for the consent of Certificateholders under
this Section 11.01 to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such reasonable
regulations as the Trustee may prescribe.

          The cost of any Opinion of Counsel to be delivered pursuant to this
Section 11.01 shall be borne by the Person seeking the related amendment, but in
no event shall such Opinion of Counsel be an expense of the Trustee.

          The Trustee may, but shall not be obligated to enter into any
amendment pursuant to this Section that affects its rights, duties and
immunities under this Agreement or otherwise.

          SECTION 11.02. 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
Master Servicer at the expense of the Certificateholders, but only upon
direction of the Trustee 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 constitute but one and
the same instrument.

          SECTION 11.03. Limitation on Rights of Certificateholders.

          The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the Trust Fund, nor 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 Fund, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

          No Certificateholder shall have any right to vote (except as expressly
provided for herein) or in any manner otherwise control the operation and
management of the Trust Fund, or the obligations of the parties hereto, nor
shall anything herein set forth, or contained in the terms of any 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


<PAGE>


                                      -132-

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 (i) such Holder
previously shall have given to the Trustee a written notice of default and of
the continuance thereof, as hereinbefore provided, and (ii) 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 whatsoever 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, 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, each and every Certificateholder
and the Trustee shall be entitled to such relief as can be given either at law
or in equity.

          SECTION 11.04. Governing Law.

          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.

          SECTION 11.05. Notices.

          All directions, demands and notices hereunder shall be in writing and
shall be deemed to have been duly given when received if personally delivered at
or mailed by first class mail, postage prepaid, or by express delivery service
or delivered in any other manner specified herein, to (a) in the case of the
Depositor, Seven World Trade Center, New York, New York 10048, Attention:
Mortgage Finance Group (telecopy number (212) 783-3895), or such other address
or telecopy number as may hereafter be furnished to the Master Servicer and the
Trustee in writing by the Depositor, (b) in the case of Ameriquest Mortgage
Company, 1100 Town & Country Road, 11th Floor, Orange, California 92868,
Attention: Del Dillingham, Esq. (telecopy number: (714) 973-4535), or such other
address or telecopy number as may hereafter be furnished to the Trustee and the
Depositor in writing by Ameriquest Mortgage Company and (c) in the case of the
Trustee, Sixth Street & Marquette Avenue, Minneapolis, Minnesota 55479-0070,
Attention: Corporate Trust Services (telecopy number (612) 832-3539), with a
copy to the Trustee at 11000 Broken Land Parkway, Columbia, Maryland 21044,
Attention: Securities Administration Services (telecopy number (410) 884-2360),
or such other address or telecopy number as may hereafter be


<PAGE>


                                      -133-

furnished to the Master Servicer and the Depositor in writing by the Trustee.
Any notice required or permitted to be given to a Certificateholder shall be
given by first class mail, postage prepaid, at the address of such Holder 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 when mailed, whether or not the Certificateholder receives such notice. A
copy of any notice required to be telecopied hereunder also shall be mailed to
the appropriate party in the manner set forth above.

          SECTION 11.06. Severability of Provisions.

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

          SECTION 11.07. Notice to Rating Agencies.

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

          1.    Any material change or amendment to this Agreement;

          2.    The occurrence of any Master Servicer Event of Default that
                has not been cured or waived;

          3.    The resignation or termination of the Master Servicer or the
                Trustee;

          4.    The repurchase or substitution of Mortgage Loans pursuant to
                or as contemplated by Section 2.03;

          5.    The final payment to the Holders of any Class of
                Certificates;

          6.    Any change in the location of the Collection Account or the
                Distribution Account;

          7.    Any event that would result in the inability of the Trustee,
                were it to succeed as Master Servicer, to make advances
                regarding delinquent Mortgage Loans; and

          8.    The filing of any claim under the Master Servicer's blanket
                bond and errors and omissions insurance policy required by
                Section 3.14 or the cancellation or material modification of
                coverage under any such instrument.


<PAGE>


                                      -134-

         In addition, the Trustee shall promptly furnish to each Rating Agency
copies of each report to Certificateholders described in Section 4.02 and the
Master Servicer, as required pursuant to Section 3.20 and Section 3.21, shall
promptly furnish to each Rating Agency copies of the following:

         1.       Each annual statement as to compliance described in Section
                  3.20; and

         2.       Each annual independent public accountants' servicing report
                  described in Section 3.21.

         Any such notice pursuant to this Section 11.07 shall be in writing and
shall be deemed to have been duly given if personally delivered at or mailed by
first class mail, postage prepaid, or by express delivery service to Fitch
Investors Service, Inc., One State Street Plaza, 33rd Floor, New York, New York
10004 and to Standard & Poor's Ratings Services, 25 Broadway, New York, New York
10004, or such other addresses as the Rating Agencies may designate in writing
to the parties hereto.

         SECTION 11.08. 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 11.09. Grant of Security Interest.

         It is the express intent of the parties hereto that the conveyance of
the Mortgage Loans by the Depositor to the Trustee be, and be construed as, a
sale of the Mortgage Loans by the Depositor and not a pledge of the Mortgage
Loans by the Depositor to secure a debt or other obligation of the Depositor.
However, in the event that, notwithstanding the aforementioned intent of the
parties, the Mortgage Loans are held to be property of the Depositor, then, (a)
it is the express intent of the parties that such conveyance be deemed a pledge
of the Mortgage Loans by the Depositor to the Trustee to secure a debt or other
obligation of the Depositor and (b)(1) this Agreement shall also be deemed to be
a security agreement within the meaning of Articles 8 and 9 of the Uniform
Commercial Code as in effect from time to time in the State of New York; (2) the
conveyance provided for in Section 2.01 hereof shall be deemed to be a grant by
the Depositor to the Trustee of a security interest in all of the Depositor's
right, title and interest in and to the Mortgage Loans and all amounts payable
to the holders of the Mortgage Loans in accordance with the terms thereof and
all proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, instruments, securities or other property, including without limitation
all amounts, other than investment earnings, from time to time held or invested
in the Collection Account and the Distribution Account, whether in the form of
cash, instruments, securities or other property; (3) the obligations secured by
such security agreement shall be deemed to be all of the Depositor's obligations
under this Agreement, including the obligation to provide to the
Certificateholders the benefits of this Agreement relating to the Mortgage Loans
and the Trust Fund; and (4) notifications to persons holding such property, and
acknowledgments, receipts or confirmations


<PAGE>


                                      -135-

from persons holding such property, shall be deemed notifications to, or
acknowledgments, receipts or confirmations from, financial intermediaries,
bailees or agents (as applicable) of the Trustee for the purpose of perfecting
such security interest under applicable law. Accordingly, the Depositor hereby
grants to the Trustee a security interest in the Mortgage Loans and all other
property described in clause (2) of the preceding sentence, for the purpose of
securing to the Trustee the performance by the Depositor of the obligations
described in clause (3) of the preceding sentence. Notwithstanding the
foregoing, the parties hereto intend the conveyance pursuant to Section 2.01 to
be a true, absolute and unconditional sale of the Mortgage Loans and assets
constituting the Trust Fund by the Depositor to the Trustee.


<PAGE>


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


                                           SALOMON BROTHERS MORTGAGE
                                           SECURITIES VII, INC.,
                                           as Depositor


                                           By: /s/ Susan Mills
                                               ---------------------
                                           Name:   Susan Mills
                                           Title:  Assistant Vice President



                                           AMERIQUEST MORTGAGE COMPANY,
                                           as Master Servicer

                                           By: /s/ Judith L. Hopkinson
                                               -------------------------
                                           Name:   Judith L. Hopkinson
                                           Title:  Executive Vice President



                                          NORWEST BANK MINNESOTA,
                                          NATIONAL ASSOCIATION,
                                          as Trustee


                                          By: /s/ Randall S. Reider
                                              -------------------------
                                          Name:   Randall S. Reider
                                          Title:  Officer


<PAGE>


STATE OF NEW YORK   )
                    ) ss.:
COUNTY OF NEW YORK  )


         On the __th day of November 1997, before me, a notary public in and for
said State, personally appeared Susan Mills, known to me to be an Assistant Vice
President of Salomon Brothers Mortgage Securities VII, Inc., one of the
corporations that executed the within instrument, and also known to me to be the
person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.

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

                                            -----------------------------------
                                                    Notary Public

[Notarial Seal]

<PAGE>



STATE OF CALIFORNIA  )
                     ) ss.:
COUNTY OF ORANGE     )


         On the __th day of November 1997, before me, a notary public in and for
said State, personally appeared __________________, known to me to be a
_________________ of Ameriquest Mortgage Company, one of the corporations that
executed the within instrument, and also known to me to be the person who
executed it on behalf of said corporation, and acknowledged to me that such
corporation executed the within instrument.

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


                                            -----------------------------------
                                                        Notary Public

[Notarial Seal]


<PAGE>


STATE OF MARYLAND )
                  ) ss.:
COUNTY OF HAIFORD )


         On the __th day of November 1997, before me, a notary public in and for
said State, personally appeared ____________________, known to me to be a
________________ of Norwest Bank Minnesota, National Association, one of the
entities that executed the within instrument, and also known to me to be the
person who executed it on behalf of said corporation, and acknowledged to me
that such entity executed the within instrument.

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

                                            -----------------------------------
                                                       Notary Public

[Notarial Seal]


<PAGE>

                                   EXHIBIT A-1
                                   -----------

                           FORM OF CLASS A CERTIFICATE

      SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
      "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS
      THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
      INTERNAL REVENUE CODE OF 1986 (THE "CODE").


Series 1997-AQ2, Class A

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class A Certificates as of the Issue Date:
$269,616,000

Denomination:  $_____________

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date: November 25, 1997

CUSIP: 79548K XB 9


   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
   LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
   CERTIFICATE.


<PAGE>


                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

    THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
    SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
    THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
    CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
    AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class A Certificates as of
the Issue Date) in that certain beneficial ownership interest evidenced by all
the Class A Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class A Certificates on such
Distribution Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by or on behalf of the Trustee by wire
transfer in immediately available funds to the account of the Person entitled
thereto if such Person shall have so notified the Trustee in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class A Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class A Certificates, or otherwise by check mailed by
first class mail to the address of the Person entitled thereto, as such name and
address shall appear on the Certificate Register. Notwithstanding the above, the
final distribution on this Certificate will be made after due notice by the
Trustee of the pendency of such


<PAGE>

                                       -2-

distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

         The Pass-Through Rate applicable to the calculation of interest payable
with respect to this Certificate on any Distribution Date shall equal a rate per
annum equal to the lesser of (i) the One-Month LIBOR plus 0.24%, in the case of
each Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans is reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 0.48% per annum, in the case of any Distribution Date
thereafter, and (ii) the Net WAC Pass-Through Rate for such Distribution Date.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Floating Rate Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing a Percentage
Interest in the Class of Certificates specified on the face hereof equal to the
denomination specified on the face hereof divided by the aggregate Certificate
Principal Balance of the Class of Certificates specified on the face hereof.

         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Master Servicer, the Trustee and the rights of the
Certificateholders under the Agreement at any time by the Depositor, the Master
Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trustee as provided in the Agreement, duly
endorsed by, or accompanied by an assignment in the form below or other written
instrument of transfer in form satisfactory to the Trustee and the Certificate
Registrar duly executed by, the Holder hereof or such Holder's attorney duly
authorized in writing, and thereupon one or more new Certificates of the same
Class in


<PAGE>


                                       -3-

authorized denominations evidencing the same aggregate Percentage Interest will
be issued to the designated transferee or transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.

         No service charge will be made for any such registration of transfer or
exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Master Servicer, the Trustee, and the Certificate
Registrar and any agent of the Depositor, any Master Servicer, the Trustee or
the Certificate Registrar may treat the Person in whose name this Certificate is
registered as the owner hereof for all purposes, and none of the Depositor, the
Master Servicer, the Trustee, the Certificate Registrar nor any such agent shall
be affected by notice to the contrary.

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by or on behalf of the Trustee and required to be paid to them pursuant to
the Agreement following the earlier of (i) the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Certificate Registrar, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.


<PAGE>


         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class A Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory


<PAGE>


                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed


<PAGE>


                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.


<PAGE>

                                   EXHIBIT A-2
                                   -----------

                          FORM OF CLASS M-1 CERTIFICATE

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS
         THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
         INTERNAL REVENUE CODE OF 1986 (THE "CODE").

         THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A
         CERTIFICATES AND THE RESIDUAL CERTIFICATES TO THE
         EXTENT DESCRIBED IN THE POOLING AND SERVICING
         AGREEMENT REFERRED TO HEREIN.

         ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT (EACH A
         "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974,
         AS AMENDED ("ERISA"), OR THE CODE ACQUIRING THIS CERTIFICATE WILL BE
         DEEMED TO HAVE MADE THE REPRESENTATIONS AS DESCRIBED HEREIN.


<PAGE>


Series 1997-AQ2, Class M-1

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class M-1 Certificates as of the Issue
Date:  $31,770,000

Denomination:  $_____________

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XC 7


  DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
  CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
  OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
  LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
  CERTIFICATE.


<PAGE>


                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

     THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
     SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
     THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
     CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
     AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class M-1 Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class M-1 Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class M-1 Certificates on
such Distribution Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by or on behalf of the Trustee by wire
transfer in immediately available funds to the account of the Person entitled
thereto if such Person shall have so notified the Trustee in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class M-1 Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class M-1 Certificates, or otherwise by check mailed by
first class mail to the address of the Person


<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

         The Pass-Through Rate applicable to the calculation of interest payable
with respect to this Certificate on any Distribution Date shall equal a rate per
annum equal to the lesser of (i) the One-Month LIBOR plus 0.42%, in the case of
each Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans is reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 0.63% per annum, in the case of any Distribution Date
thereafter, and (ii) the Net WAC Pass-Through Rate for such Distribution Date.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Floating Rate Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing a Percentage
Interest in the Class of Certificates specified on the face hereof equal to the
denomination specified on the face hereof divided by the aggregate Certificate
Principal Balance of the Class of Certificates specified on the face hereof.


         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Master Servicer, the Trustee and the rights of the
Certificateholders under the Agreement at any time by the Depositor, the Master
Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trustee as provided in the Agreement, duly
endorsed by, or accompanied by an assignment in the form


<PAGE>


                                       -3-

below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.

         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 using
Plan Assets to acquire this Certificate will be deemed to have represented that
such acquisition is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, will not subject the Depositor, the Master Servicer, the Trustee or
the Trust Fund to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (i) the source of funds used to
purchase this Certificate is an "insurance company general account" (as such
term is defined in PTCE 95-60), (ii) the conditions set forth in PTCE 95-60 have
been satisfied and (iii) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of this Certificate. This deemed representation will not be required
in connection with the initial transfer of this Certificate by the Depositor to
an affiliate of the Depositor (in which case, the Depositor or any affiliate
thereof shall have deemed to have represented that such affiliate is not a Plan
or a Person investing Plan Assets) and the Trustee shall be entitled to
conclusively rely upon a representation (which, upon the request of the Trustee,
shall be a written representation) from the Depositor of the status of such
transferee as an affiliate of the Depositor.

         No service charge will be made for any such registration of transfer or
exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Master Servicer, the Trustee, and the Certificate
Registrar and any agent of the Depositor, the Master Servicer, the Trustee or
the Certificate Registrar may treat the Person in whose name this Certificate is
registered as the owner hereof for all purposes, and none of the Depositor, the
Master Servicer, the Trustee, the Certificate Registrar nor any such agent shall
be affected by notice to the contrary.


<PAGE>


                                       -4-

         The obligations created by the Agreement and the Trust Fund created
thereby shall terminate upon payment to the Certificateholders of all amounts
held by or on behalf of the Trustee and required to be paid to them pursuant to
the Agreement following the earlier of (i) the final payment or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

         The recitals contained herein shall be taken as statements of the
Depositor and the Trustee assumes no responsibility for their correctness.

         Unless the certificate of authentication hereon has been executed by
the Certificate Registrar, by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid for any purpose.


<PAGE>


         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                           NORWEST BANK MINNESOTA,
                                           NATIONAL ASSOCIATION
                                           as Trustee


                                           By:
                                              ------------------------------
                                                     Authorized Officer


                          CERTIFICATE OF AUTHENTICATION
                          -----------------------------

         This is one of the Class M-1 Certificates referred to in the
within-mentioned Agreement.

                                           NORWEST BANK MINNESOTA,
                                           NATIONAL ASSOCIATION
                                           as Certificate Registrar


                                           By:
                                              ------------------------------
                                                  Authorized Signatory


<PAGE>



                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed


<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.


<PAGE>


                                   EXHIBIT A-3
                                   -----------

                          FORM OF CLASS M-2 CERTIFICATE

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS
         THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
         INTERNAL REVENUE CODE OF 1986 (THE "CODE").

         THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A CERTIFICATES, THE CLASS
         M-1 CERTIFICATES AND THE RESIDUAL CERTIFICATES TO THE EXTENT DESCRIBED
         IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.

         ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT (EACH A
         "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974,
         AS AMENDED ("ERISA"), OR THE CODE ACQUIRING THIS CERTIFICATE WILL BE
         DEEMED TO HAVE MADE THE REPRESENTATIONS AS DESCRIBED HEREIN.


<PAGE>


Series 1997-AQ2, Class M-2

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class M-2 Certificates as of the Issue
Date:  $23,184,000

Denomination:  $_____________

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XD 5


   DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
   CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
   OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
   LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
   CERTIFICATE.


<PAGE>


                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

    THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
    SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
    THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
    CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
    AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

         This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class M-2 Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class M-2 Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

         Pursuant to the terms of the Agreement, distributions will be made on
the 25th day of each month or, if such 25th day is not a Business Day, the
Business Day immediately following (a "Distribution Date"), commencing on the
First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class M-2 Certificates on
such Distribution Date pursuant to the Agreement.

         All distributions to the Holder of this Certificate under the Agreement
will be made or caused to be made by or on behalf of the Trustee by wire
transfer in immediately available funds to the account of the Person entitled
thereto if such Person shall have so notified the Trustee in writing at least
five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class M-2 Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class M-2 Certificates, or otherwise by check mailed by
first class mail to the address of the Person


<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

         The Pass-Through Rate applicable to the calculation of interest payable
with respect to this Certificate on any Distribution Date shall equal a rate per
annum equal to the lesser of (i) the One-Month LIBOR plus 0.64%, in the case of
each Distribution Date through and including the Distribution Date on which the
aggregate principal balance of the Mortgage Loans is reduced to less than 10% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date, or
One-Month LIBOR plus 0.96% per annum, in the case of any Distribution Date
thereafter, and (ii) the Net WAC Pass-Through Rate for such Distribution Date.

         This Certificate is one of a duly authorized issue of Certificates
designated as Asset-Backed Floating Rate Certificates of the Series specified on
the face hereof (herein called the "Certificates") and representing a Percentage
Interest in the Class of Certificates specified on the face hereof equal to the
denomination specified on the face hereof divided by the aggregate Certificate
Principal Balance of the Class of Certificates specified on the face hereof.


         The Certificates are limited in right of payment to certain collections
and recoveries respecting the Mortgage Loans, all as more specifically set forth
herein and in the Agreement. As provided in the Agreement, withdrawals from the
Collection Account and the Distribution Account may be made from time to time
for purposes other than distributions to Certificateholders, such purposes
including reimbursement of advances made, or certain expenses incurred, with
respect to the Mortgage Loans.

         The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Depositor, the Master Servicer, the Trustee and the rights of the
Certificateholders under the Agreement at any time by the Depositor, the Master
Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

         As provided in the Agreement and subject to certain limitations therein
set forth, the transfer of this Certificate is registrable in the Certificate
Register upon surrender of this Certificate for registration of transfer at the
offices or agencies appointed by the Trustee as provided in the Agreement, duly
endorsed by, or accompanied by an assignment in the form


<PAGE>


                                       -3-

below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

         The Certificates are issuable in fully registered form only without
coupons in Classes and denominations representing Percentage Interests specified
in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.

         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 using
Plan Assets to acquire this Certificate will be deemed to have represented that
such acquisition is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, will not subject the Depositor, the Master Servicer, the Trustee or
the Trust Fund to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (i) the source of funds used to
purchase this Certificate is an "insurance company general account" (as such
term is defined in PTCE 95-60), (ii) the conditions set forth in PTCE 95-60 have
been satisfied and (iii) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of this Certificate. This deemed representation will not be required
in connection with the initial transfer of this Certificate by the Depositor to
an affiliate of the Depositor (in which case, the Depositor or any affiliate
thereof shall have deemed to have represented that such affiliate is not a Plan
or a Person investing Plan Assets) and the Trustee shall be entitled to
conclusively rely upon a representation (which, upon the request of the Trustee,
shall be a written representation) from the Depositor of the status of such
transferee as an affiliate of the Depositor.

         No service charge will be made for any such registration of transfer or
exchange of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.

         The Depositor, the Master Servicer, the Trustee, and the Certificate
Registrar and any agent of the Depositor, the Master Servicer, the Trustee or
the Certificate Registrar may treat the Person in whose name this Certificate is
registered as the owner hereof for all purposes, and none of the Depositor, the
Master Servicer, the Trustee, the Certificate Registrar nor any such agent shall
be affected by notice to the contrary.


<PAGE>


                                       -4-

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.




<PAGE>




                  IN WITNESS WHEREOF, the Trustee has caused this Certificate to
be duly executed under its official seal.

Dated:  November 25, 1997


                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class M-2 Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory



<PAGE>




                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed



<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.




<PAGE>



                                   EXHIBIT A-4

                          FORM OF CLASS M-3 CERTIFICATE

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS
         THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
         INTERNAL REVENUE CODE OF 1986 (THE "CODE").

         THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A CERTIFICATES, THE CLASS
         M-1 CERTIFICATES, THE CLASS M-2 CERTIFICATES AND THE RESIDUAL
         CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING AND SERVICING
         AGREEMENT REFERRED TO HEREIN.

         ANY EMPLOYEE BENEFIT PLAN OR OTHER RETIREMENT ARRANGEMENT (EACH A
         "PLAN") SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974,
         AS AMENDED ("ERISA"), OR THE CODE ACQUIRING THIS CERTIFICATE WILL BE
         DEEMED TO HAVE MADE THE REPRESENTATIONS AS DESCRIBED HEREIN.



<PAGE>




Series 1997-AQ2, Class M-3

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class M-3 Certificates as of the Issue
Date:  $12,021,000

Denomination:  $_____________

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XE 3


         DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
         CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
         OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
         LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
         CERTIFICATE.





<PAGE>



                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
         THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
         CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
         AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

                  This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class M-3 Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class M-3 Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

                  Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class M-3 Certificates on
such Distribution Date pursuant to the Agreement.

                  All distributions to the Holder of this Certificate under the
Agreement will be made or caused to be made by or on behalf of the Trustee by
wire transfer in immediately available funds to the account of the Person
entitled thereto if such Person shall have so notified the Trustee in writing at
least five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class M-3 Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class M-3 Certificates, or otherwise by check mailed by
first class mail to the address of the Person



<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

                  The Pass-Through Rate applicable to the calculation of
interest payable with respect to this Certificate on any Distribution Date shall
equal a rate per annum equal to the lesser of (i) the One-Month LIBOR plus
0.97%, in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
is reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, or One-Month LIBOR plus 1.455% per annum, in the
case of any Distribution Date thereafter, and (ii) the Net WAC Pass-Through Rate
for such Distribution Date.

                  This Certificate is one of a duly authorized issue of
Certificates designated as Asset-Backed Floating Rate Certificates of the Series
specified on the face hereof (herein called the "Certificates") and representing
a Percentage Interest in the Class of Certificates specified on the face hereof
equal to the denomination specified on the face hereof divided by the aggregate
Certificate Principal Balance of the Class of Certificates specified on the face
hereof.


                  The Certificates are limited in right of payment to certain
collections and recoveries respecting the Mortgage Loans, all as more
specifically set forth herein and in the Agreement. As provided in the
Agreement, withdrawals from the Collection Account and the Distribution Account
may be made from time to time for purposes other than distributions to
Certificateholders, such purposes including reimbursement of advances made, or
certain expenses incurred, with respect to the Mortgage Loans.

                  The Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor, the Master Servicer, the Trustee and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

                  As provided in the Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate is registrable
in the Certificate Register upon surrender of this Certificate for registration
of transfer at the offices or agencies appointed by the Trustee as provided in
the Agreement, duly endorsed by, or accompanied by an assignment in the form



<PAGE>


                                       -3-

below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

                  The Certificates are issuable in fully registered form only
without coupons in Classes and denominations representing Percentage Interests
specified in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are exchangeable for new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest, as requested by the Holder surrendering the same.

                  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
using Plan Assets to acquire this Certificate will be deemed to have represented
that such acquisition is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code, will not subject the Depositor, the Master Servicer, the Trustee or
the Trust Fund to any obligation in addition to those undertaken in the
Agreement and the following conditions are met: (i) the source of funds used to
purchase this Certificate is an "insurance company general account" (as such
term is defined in PTCE 95-60), (ii) the conditions set forth in PTCE 95-60 have
been satisfied and (iii) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of this Certificate. This deemed representation will not be required
in connection with the initial transfer of this Certificate by the Depositor to
an affiliate of the Depositor (in which case, the Depositor or any affiliate
thereof shall have deemed to have represented that such affiliate is not a Plan
or a Person investing Plan Assets) and the Trustee shall be entitled to
conclusively rely upon a representation (which, upon the request of the Trustee,
shall be a written representation) from the Depositor of the status of such
transferee as an affiliate of the Depositor.

                  No service charge will be made for any such registration of
transfer or exchange of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

                  The Depositor, the Master Servicer, the Trustee, and the
Certificate Registrar and any agent of the Depositor, the Master Servicer, the
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Depositor, the Master Servicer, the Trustee, the Certificate Registrar nor any
such agent shall be affected by notice to the contrary.




<PAGE>


                                       -4-

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.




<PAGE>




         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class M-3 Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory




<PAGE>



                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed




<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.



<PAGE>



                                   EXHIBIT A-5

                          FORM OF CLASS CE CERTIFICATE

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "REGULAR INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT", AS
         THOSE TERMS ARE DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE
         INTERNAL REVENUE CODE OF 1986 (THE "CODE").

         THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSES OF
         APPLYING THE U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID")
         RULES TO THIS CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS
         NOVEMBER 25, 1997. BASED ON THE OID REGULATIONS AND ASSUMING THAT THE
         MORTGAGE LOANS PREPAY AT 28% CONSTANT PREPAYMENT RATE, USED SOLELY FOR
         THE PURPOSES OF APPLYING THE OID RULES TO THE CERTIFICATES (THE
         "PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH NO MORE
         THAN $8,317.47 OF OID PER $100,000 OF INITIAL NOTIONAL AMOUNT, THE 
         YIELD TO MATURITY IS 21.78% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE
         INITIAL ACCRUAL PERIOD IS NO MORE THAN $172.43 PER $100,000 OF INITIAL
         NOTIONAL AMOUNT, COMPUTED UNDER THE EXACT METHOD. NO REPRESENTATION IS
         MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE
         PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE.

         THIS CERTIFICATE IS SUBORDINATE TO THE CLASS A CERTIFICATES, THE
         MEZZANINE CERTIFICATES AND THE RESIDUAL CERTIFICATES TO THE EXTENT
         DESCRIBED IN THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.

         THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE
         AND MAY NOT BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT
         TO SUCH ACT AND LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE
         EXEMPT FROM REGISTRATION UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW
         AND IS TRANSFERRED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF
         THE AGREEMENT.

         NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
         RETIREMENT ARRANGEMENT (EACH A "PLAN") SUBJECT TO THE EMPLOYEE
         RETIREMENT INCOME SECURITY



<PAGE>



         ACT OF 1974, AS AMENDED ("ERISA"), OR THE CODE WILL BE REGISTERED
         EXCEPT IN COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.



<PAGE>




Series 1997-AQ2, Class CE

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Notional Amount of the Class
CE Certificates as of the Issue Date:
$------------------

Notional Amount: $343,460,679.60

Aggregate Certificate Principal Balance of
the Class CE Certificates as of the Issue
Date:  $6,869,579.60

Denomination:  $_____________

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997




         DISTRIBUTIONS IN REDUCTION OF THE CERTIFICATE PRINCIPAL BALANCE OF THIS
         CERTIFICATE MAY BE MADE MONTHLY AS SET FORTH HEREIN. ACCORDINGLY, THE
         OUTSTANDING CERTIFICATE PRINCIPAL BALANCE HEREOF AT ANY TIME MAY BE
         LESS THAN THE AMOUNT SHOWN ABOVE AS THE DENOMINATION OF THIS
         CERTIFICATE.



<PAGE>




                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
         THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
         CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
         AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

                  This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class CE Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class CE Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

                  Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class CE Certificates on
such Distribution Date pursuant to the Agreement.

                  All distributions to the Holder of this Certificate under the
Agreement will be made or caused to be made by or on behalf of the Trustee by
wire transfer in immediately available funds to the account of the Person
entitled thereto if such Person shall have so notified the Trustee in writing at
least five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class CE Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class CE Certificates, or otherwise by check mailed by
first class mail to the address of the Person



<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

                  This Certificate is one of a duly authorized issue of
Certificates designated as Asset-Backed Floating Rate Certificates of the Series
specified on the face hereof (herein called the "Certificates") and representing
a Percentage Interest in the Class of Certificates specified on the face hereof
equal to the denomination specified on the face hereof divided by the aggregate
Certificate Principal Balance of the Class of Certificates specified on the face
hereof.


                  The Certificates are limited in right of payment to certain
collections and recoveries respecting the Mortgage Loans, all as more
specifically set forth herein and in the Agreement. As provided in the
Agreement, withdrawals from the Collection Account and the Distribution Account
may be made from time to time for purposes other than distributions to
Certificateholders, such purposes including reimbursement of advances made, or
certain expenses incurred, with respect to the Mortgage Loans.

                  The Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor, the Master Servicer, the Trustee and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

                  As provided in the Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate is registrable
in the Certificate Register upon surrender of this Certificate for registration
of transfer at the offices or agencies appointed by the Trustee as provided in
the Agreement, duly endorsed by, or accompanied by an assignment in the form
below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

                  The Certificates are issuable in fully registered form only
without coupons in Classes and denominations representing Percentage Interests
specified in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are



<PAGE>


                                       -3-

exchangeable for new Certificates of the same Class in authorized denominations
evidencing the same aggregate Percentage Interest, as requested by the Holder
surrendering the same.

                  No transfer of this Certificate shall be made unless the
transfer is made pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "1933 Act"), and an effective
registration or qualification under applicable state securities laws, or is made
in a transaction that does not require such registration or qualification. In
the event that such a transfer of this Certificate is to be made without
registration or qualification, the Trustee and the Certificate Registrar shall
require receipt of (i) if such transfer is purportedly being made in reliance
upon Rule 144A under the 1933 Act, written certifications from the Holder of the
Certificate desiring to effect the transfer, and from such Holder's prospective
transferee, substantially in the forms attached to the Agreement as Exhibit F-1,
and (ii) in all other cases, an Opinion of Counsel satisfactory to it that such
transfer may be made without such registration or qualification (which Opinion
of Counsel shall not be an expense of the Trust Fund or of the Depositor, the
Trustee or the Master Servicer in their respective capacities as such), together
with copies of the written certification(s) of the Holder of the Certificate
desiring to effect the transfer and/or such Holder's prospective transferee upon
which such Opinion of Counsel is based. None of the Depositor, the Certificate
Registrar or the Trustee is obligated to register or qualify the Class of
Certificates specified on the face hereof under the 1933 Act or any other
securities law or to take any action not otherwise required under the Agreement
to permit the transfer of such Certificates without registration or
qualification. Any Holder desiring to effect a transfer of this Certificate
shall be required to indemnify the Trustee, the Depositor, the Certificate
Registrar and the Master Servicer against any liability that may result if the
transfer is not so exempt or is not made in accordance with such federal and
state laws.

                  No transfer of this Certificate or any interest herein 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
("Plan Assets") unless the Depositor, the Trustee and the Master Servicer are
provided with an Opinion of Counsel which establishes to the satisfaction of the
Depositor, the Trustee and the Master Servicer that the purchase of this
Certificate is permissible under applicable law, will not constitute or result
in any prohibited transaction under ERISA or Section 4975 of the Code and will
not subject the Depositor, the Master Servicer, the Trustee or the Trust Fund to
any obligation or liability (including obligations or liabilities under ERISA or
Section 4975 of the Code) in addition to those undertaken in the Agreement,
which Opinion of Counsel shall not be an expense of the Depositor, the Master
Servicer, the Trustee or the Trust Fund. In lieu of such Opinion of Counsel, a
Plan, any Person acting, directly or indirectly, on behalf of any such Plan or
any Person acquiring this Certificate with Plan Assets of a Plan may provide a
certification in the form of Exhibit G to the Agreement, which the Trustee may
rely upon without further inquiry or investigation. Neither an Opinion of
Counsel nor a certification will be required in connection with the initial
transfer of this Certificate by the Depositor to an affiliate of the Depositor
(in which case, the Depositor or any affiliate thereof



<PAGE>


                                       -4-

shall have deemed to have represented that such affiliate is not a Plan or a
Person investing Plan Assets of any Plan) and the Trustee shall be entitled to
conclusively rely upon a representation (which, upon the request of the Trustee,
shall be a written representation) from the Depositor of the status of such
transferee as an affiliate of the Depositor.

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

                  The Depositor, the Master Servicer, the Trustee and the
Certificate Registrar and any agent of the Depositor, the Master Servicer, the
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Depositor, the Master Servicer, the Trustee, the Certificate Registrar nor any
such agent shall be affected by notice to the contrary.

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.



<PAGE>


                                       -5-



         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class CE Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory




<PAGE>




                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed




<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.




<PAGE>



                                   EXHIBIT A-6

                          FORM OF CLASS R-I CERTIFICATE

         THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON-
         UNITED STATES PERSON.

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "RESIDUAL INTEREST" 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 (THE "CODE").

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS
         CERTIFICATE MAY BE MADE ONLY IN ACCORDANCE WITH THE
         PROVISIONS OF SECTION 5.02 OF THE POOLING AND SERVICING
         AGREEMENT REFERRED TO HEREIN.

         NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT
         PLAN OR OTHER RETIREMENT ARRANGEMENT SUBJECT TO THE
         EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
         AMENDED, OR THE CODE WILL BE REGISTERED EXCEPT IN
         COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE
         MADE ONLY IF THE PROPOSED TRANSFEREE PROVIDES (I) AN AFFIDAVIT TO THE
         TRUSTEE THAT (A) SUCH TRANSFEREE IS NOT (1) THE UNITED STATES OR ANY
         POSSESSION THEREOF, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
         FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR
         INSTRUMENTALITY OF ANY OF THE FOREGOING, (2) ANY ORGANIZATION (OTHER
         THAN A COOPERATIVE DESCRIBED IN SECTION 521 OF THE CODE) THAT IS EXEMPT
         FROM THE TAX IMPOSED BY CHAPTER 1 OF THE CODE UNLESS SUCH ORGANIZATION
         IS SUBJECT TO THE TAX IMPOSED BY SECTION 511 OF THE CODE, (3) ANY
         ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF THE CODE (ANY SUCH
         PERSON DESCRIBED IN THE FOREGOING CLAUSES (1), (2) OR (3) SHALL
         HEREINAFTER BE REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (4) AN
         AGENT OF A DISQUALIFIED ORGANIZATION AND (B) NO PURPOSE OF SUCH
         TRANSFER IS TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX, AND (II)
         SUCH TRANSFEREE SATISFIES CERTAIN ADDITIONAL CONDITIONS RELATING TO THE
         FINANCIAL CONDITION OF THE PROPOSED TRANSFEREE. NOTWITHSTANDING THE
         REGISTRATION IN THE CERTIFICATE REGISTER OF ANY



<PAGE>



         TRANSFER, SALE OR OTHER DISPOSITION OF THIS CERTIFICATE TO A
         DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED ORGANIZATION,
         SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR EFFECT
         WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A
         CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED
         TO, THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF
         THIS CERTIFICATE BY ACCEPTANCE HEREOF SHALL BE DEEMED TO HAVE CONSENTED
         TO THE PROVISIONS OF THIS PARAGRAPH AND THE PROVISIONS OF SECTION
         5.02(D) OF THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. ANY
         PERSON THAT IS A DISQUALIFIED ORGANIZATION IS PROHIBITED FROM ACQUIRING
         BENEFICIAL OWNERSHIP OF THIS CERTIFICATE.


Series 1997-AQ2, Class R-I

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class R-I Certificates as of the Issue
Date:  $100.00

Denomination:  $100.00

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XF 0







<PAGE>



                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
         THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
         CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
         AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

                  This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class R-I Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class R-I Certificates in REMIC I created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

                  Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class R-I Certificates on
such Distribution Date pursuant to the Agreement.

                  All distributions to the Holder of this Certificate under the
Agreement will be made or caused to be made by or on behalf of the Trustee by
wire transfer in immediately available funds to the account of the Person
entitled thereto if such Person shall have so notified the Trustee in writing at
least five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class R-I Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class R-I Certificates, or otherwise by check mailed by
first class mail to the address of the Person



<PAGE>


                                                      -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

                  This Certificate is one of a duly authorized issue of
Certificates designated as Asset-Backed Floating Rate Certificates of the Series
specified on the face hereof (herein called the "Certificates") and representing
a Percentage Interest in the Class of Certificates specified on the face hereof
equal to the denomination specified on the face hereof divided by the aggregate
Certificate Principal Balance of the Class of Certificates specified on the face
hereof.


                  The Certificates are limited in right of payment to certain
collections and recoveries respecting the Mortgage Loans, all as more
specifically set forth herein and in the Agreement. As provided in the
Agreement, withdrawals from the Collection Account and the Distribution Account
may be made from time to time for purposes other than distributions to
Certificateholders, such purposes including reimbursement of advances made, or
certain expenses incurred, with respect to the Mortgage Loans.

                  The Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor, the Master Servicer, the Trustee and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

                  As provided in the Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate is registrable
in the Certificate Register upon surrender of this Certificate for registration
of transfer at the offices or agencies appointed by the Trustee as provided in
the Agreement, duly endorsed by, or accompanied by an assignment in the form
below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

                  The Certificates are issuable in fully registered form only
without coupons in Classes and denominations representing Percentage Interests
specified in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are



<PAGE>


                                       -3-

exchangeable for new Certificates of the same Class in authorized denominations
evidencing the same aggregate Percentage Interest, as requested by the Holder
surrendering the same.

                  No transfer of this Certificate or any interest herein 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
("Plan Assets") unless the Depositor, the Trustee and the Master Servicer are
provided with an Opinion of Counsel which establishes to the satisfaction of the
Depositor, the Trustee and the Master Servicer that the purchase of this
Certificate is permissible under applicable law, will not constitute or result
in any prohibited transaction under ERISA or Section 4975 of the Code and will
not subject the Depositor, the Master Servicer, the Trustee or the Trust Fund to
any obligation or liability (including obligations or liabilities under ERISA or
Section 4975 of the Code) in addition to those undertaken in the Agreement,
which Opinion of Counsel shall not be an expense of the Depositor, the Master
Servicer, the Trustee or the Trust Fund. In lieu of such Opinion of Counsel, a
Plan, any Person acting, directly or indirectly, on behalf of any such Plan or
any Person acquiring this Certificate with Plan Assets of a Plan may provide a
certification in the form of Exhibit G to the Agreement, which the Trustee may
rely upon without further inquiry or investigation. Neither an Opinion of
Counsel nor a certification will be required in connection with the initial
transfer of this Certificate by the Depositor to an affiliate of the Depositor
(in which case, the Depositor or any affiliate thereof shall have deemed to have
represented that such affiliate is not a Plan or a Person investing Plan Assets
of any Plan) and the Trustee shall be entitled to conclusively rely upon a
representation (which, upon the request of the Trustee, shall be a written
representation) from the Depositor of the status of such transferee as an
affiliate of the Depositor.

                  Prior to registration of any transfer, sale or other
disposition of this Certificate, the proposed transferee shall provide to the
Trustee (i) an affidavit to the effect that such transferee is any Person other
than a Disqualified Organization or the agent (including a broker, nominee or
middleman) of a Disqualified Organization, and (ii) a certificate that
acknowledges that (A) the Class R-I Certificates have been designated as a
residual interest in a REMIC, (B) it will include in its income a PRO RATA share
of the net income of the Trust Fund and that such income may be an "excess
inclusion," as defined in the Code, that, with certain exceptions, cannot be
offset by other losses or benefits from any tax exemption, and (C) it expects to
have the financial means to satisfy all of its tax obligations including those
relating to holding the Class R-I Certificates. Notwithstanding the registration
in the Certificate Register of any transfer, sale or other disposition of this
Certificate to a Disqualified Organization or an agent (including a broker,
nominee or middleman) of a Disqualified Organization, such registration shall be
deemed to be of no legal force or effect whatsoever and such Person shall not be
deemed to be a Certificateholder for any purpose, including, but not limited to,
the receipt of distributions in respect of this Certificate.

         The Holder of this Certificate, by its acceptance hereof, shall be
deemed to have consented to the provisions of Section 5.02 of the Agreement and
to any amendment of the



<PAGE>


                                       -4-

Agreement deemed necessary by counsel of the Depositor to ensure that the
transfer of this Certificate to any Person other than a Permitted Transferee or
any other Person will not cause the Trust Fund to cease to qualify as a REMIC or
cause the imposition of a tax upon the REMIC.

                  No service charge will be made for any such registration of
transfer or exchange of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

                  The Depositor, the Master Servicer, the Trustee and the
Certificate Registrar and any agent of the Depositor, the Master Servicer, the
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Depositor, the Master Servicer, the Trustee, the Certificate Registrar nor any
such agent shall be affected by notice to the contrary.

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.




<PAGE>




         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class R-I Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory



<PAGE>


                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed



<PAGE>





                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.



<PAGE>



                                   EXHIBIT A-7

                         FORM OF CLASS R-II CERTIFICATE

         THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON-
         UNITED STATES PERSON.

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "RESIDUAL INTEREST" 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 (THE "CODE").

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS
         CERTIFICATE MAY BE MADE ONLY IN ACCORDANCE WITH THE
         PROVISIONS OF SECTION 5.02 OF THE POOLING AND SERVICING
         AGREEMENT REFERRED TO HEREIN.

         NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT
         PLAN OR OTHER RETIREMENT ARRANGEMENT SUBJECT TO THE
         EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
         AMENDED, OR THE CODE WILL BE REGISTERED EXCEPT IN
         COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE
         MADE ONLY IF THE PROPOSED TRANSFEREE PROVIDES (I) AN AFFIDAVIT TO THE
         TRUSTEE THAT (A) SUCH TRANSFEREE IS NOT (1) THE UNITED STATES OR ANY
         POSSESSION THEREOF, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
         FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR
         INSTRUMENTALITY OF ANY OF THE FOREGOING, (2) ANY ORGANIZATION (OTHER
         THAN A COOPERATIVE DESCRIBED IN SECTION 521 OF THE CODE) THAT IS EXEMPT
         FROM THE TAX IMPOSED BY CHAPTER 1 OF THE CODE UNLESS SUCH ORGANIZATION
         IS SUBJECT TO THE TAX IMPOSED BY SECTION 511 OF THE CODE, (3) ANY
         ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF THE CODE (ANY SUCH
         PERSON DESCRIBED IN THE FOREGOING CLAUSES (1), (2) OR (3) SHALL
         HEREINAFTER BE REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (4) AN
         AGENT OF A DISQUALIFIED ORGANIZATION AND (B) NO PURPOSE OF SUCH
         TRANSFER IS TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX, AND (II)
         SUCH TRANSFEREE SATISFIES CERTAIN ADDITIONAL CONDITIONS RELATING TO THE
         FINANCIAL CONDITION OF THE PROPOSED TRANSFEREE. NOTWITHSTANDING THE
         REGISTRATION IN THE CERTIFICATE REGISTER OF ANY



<PAGE>



         TRANSFER, SALE OR OTHER DISPOSITION OF THIS CERTIFICATE TO A
         DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED ORGANIZATION,
         SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR EFFECT
         WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A
         CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED
         TO, THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF
         THIS CERTIFICATE BY ACCEPTANCE HEREOF SHALL BE DEEMED TO HAVE CONSENTED
         TO THE PROVISIONS OF THIS PARAGRAPH AND THE PROVISIONS OF SECTION
         5.02(D) OF THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. ANY
         PERSON THAT IS A DISQUALIFIED ORGANIZATION IS PROHIBITED FROM ACQUIRING
         BENEFICIAL OWNERSHIP OF THIS CERTIFICATE.


Series 1997-AQ2, Class R-II

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class R-II Certificates as of the Issue
Date:  $100.00

Denomination:  $100.00

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XG 8







<PAGE>



                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
         THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
         CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
         AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

                  This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class R-II Certificates as
of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class R-II Certificates in REMIC II created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

                  Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class R-II Certificates on
such Distribution Date pursuant to the Agreement.

                  All distributions to the Holder of this Certificate under the
Agreement will be made or caused to be made by or on behalf of the Trustee by
wire transfer in immediately available funds to the account of the Person
entitled thereto if such Person shall have so notified the Trustee in writing at
least five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class R-II Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class R-II Certificates, or otherwise by check mailed
by first class mail to the address of the Person



<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

                  This Certificate is one of a duly authorized issue of
Certificates designated as Asset-Backed Floating Rate Certificates of the Series
specified on the face hereof (herein called the "Certificates") and representing
a Percentage Interest in the Class of Certificates specified on the face hereof
equal to the denomination specified on the face hereof divided by the aggregate
Certificate Principal Balance of the Class of Certificates specified on the face
hereof.


                  The Certificates are limited in right of payment to certain
collections and recoveries respecting the Mortgage Loans, all as more
specifically set forth herein and in the Agreement. As provided in the
Agreement, withdrawals from the Collection Account and the Distribution Account
may be made from time to time for purposes other than distributions to
Certificateholders, such purposes including reimbursement of advances made, or
certain expenses incurred, with respect to the Mortgage Loans.

                  The Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor, the Master Servicer, the Trustee and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

                  As provided in the Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate is registrable
in the Certificate Register upon surrender of this Certificate for registration
of transfer at the offices or agencies appointed by the Trustee as provided in
the Agreement, duly endorsed by, or accompanied by an assignment in the form
below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

                  The Certificates are issuable in fully registered form only
without coupons in Classes and denominations representing Percentage Interests
specified in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are



<PAGE>


                                       -3-

exchangeable for new Certificates of the same Class in authorized denominations
evidencing the same aggregate Percentage Interest, as requested by the Holder
surrendering the same.

                  No transfer of this Certificate or any interest herein 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
("Plan Assets") unless the Depositor, the Trustee and the Master Servicer are
provided with an Opinion of Counsel which establishes to the satisfaction of the
Depositor, the Trustee and the Master Servicer that the purchase of this
Certificate is permissible under applicable law, will not constitute or result
in any prohibited transaction under ERISA or Section 4975 of the Code and will
not subject the Depositor, the Master Servicer, the Trustee or the Trust Fund to
any obligation or liability (including obligations or liabilities under ERISA or
Section 4975 of the Code) in addition to those undertaken in the Agreement,
which Opinion of Counsel shall not be an expense of the Depositor, the Master
Servicer, the Trustee or the Trust Fund. In lieu of such Opinion of Counsel, a
Plan, any Person acting, directly or indirectly, on behalf of any such Plan or
any Person acquiring this Certificate with Plan Assets of a Plan may provide a
certification in the form of Exhibit G to the Agreement, which the Trustee may
rely upon without further inquiry or investigation. Neither an Opinion of
Counsel nor a certification will be required in connection with the initial
transfer of this Certificate by the Depositor to an affiliate of the Depositor
(in which case, the Depositor or any affiliate thereof shall have deemed to have
represented that such affiliate is not a Plan or a Person investing Plan Assets
of any Plan) and the Trustee shall be entitled to conclusively rely upon a
representation (which, upon the request of the Trustee, shall be a written
representation) from the Depositor of the status of such transferee as an
affiliate of the Depositor.

                  Prior to registration of any transfer, sale or other
disposition of this Certificate, the proposed transferee shall provide to the
Trustee (i) an affidavit to the effect that such transferee is any Person other
than a Disqualified Organization or the agent (including a broker, nominee or
middleman) of a Disqualified Organization, and (ii) a certificate that
acknowledges that (A) the Class R-II Certificates have been designated as a
residual interest in a REMIC, (B) it will include in its income a PRO RATA share
of the net income of the Trust Fund and that such income may be an "excess
inclusion," as defined in the Code, that, with certain exceptions, cannot be
offset by other losses or benefits from any tax exemption, and (C) it expects to
have the financial means to satisfy all of its tax obligations including those
relating to holding the Class R-II Certificates. Notwithstanding the
registration in the Certificate Register of any transfer, sale or other
disposition of this Certificate to a Disqualified Organization or an agent
(including a broker, nominee or middleman) of a Disqualified Organization, such
registration shall be deemed to be of no legal force or effect whatsoever and
such Person shall not be deemed to be a Certificateholder for any purpose,
including, but not limited to, the receipt of distributions in respect of this
Certificate.

         The Holder of this Certificate, by its acceptance hereof, shall be
deemed to have consented to the provisions of Section 5.02 of the Agreement and
to any amendment of the



<PAGE>


                                       -4-

Agreement deemed necessary by counsel of the Depositor to ensure that the
transfer of this Certificate to any Person other than a Permitted Transferee or
any other Person will not cause the Trust Fund to cease to qualify as a REMIC or
cause the imposition of a tax upon the REMIC.

                  No service charge will be made for any such registration of
transfer or exchange of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

                  The Depositor, the Master Servicer, the Trustee and the
Certificate Registrar and any agent of the Depositor, any Master Servicer, the
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Depositor, the Master Servicer, the Trustee, the Certificate Registrar nor any
such agent shall be affected by notice to the contrary.

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.




<PAGE>




         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class R-II Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory




<PAGE>


                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed




<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.


<PAGE>


&&
                                   EXHIBIT A-8

                         FORM OF CLASS R-III CERTIFICATE

         THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON- UNITED STATES
         PERSON.

         SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A
         "RESIDUAL INTEREST" 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 (THE "CODE").

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE
         MADE ONLY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 5.02 OF THE
         POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN.

         NO TRANSFER OF THIS CERTIFICATE TO AN EMPLOYEE BENEFIT PLAN OR OTHER
         RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME
         SECURITY ACT OF 1974, AS AMENDED, OR THE CODE WILL BE REGISTERED
         EXCEPT IN COMPLIANCE WITH THE PROCEDURES DESCRIBED HEREIN.

         ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE
         MADE ONLY IF THE PROPOSED TRANSFEREE PROVIDES (I) AN AFFIDAVIT TO THE
         TRUSTEE THAT (A) SUCH TRANSFEREE IS NOT (1) THE UNITED STATES OR ANY
         POSSESSION THEREOF, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY
         FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR
         INSTRUMENTALITY OF ANY OF THE FOREGOING, (2) ANY ORGANIZATION (OTHER
         THAN A COOPERATIVE DESCRIBED IN SECTION 521 OF THE CODE) THAT IS EXEMPT
         FROM THE TAX IMPOSED BY CHAPTER 1 OF THE CODE UNLESS SUCH ORGANIZATION
         IS SUBJECT TO THE TAX IMPOSED BY SECTION 511 OF THE CODE, (3) ANY
         ORGANIZATION DESCRIBED IN SECTION 1381(A)(2)(C) OF THE CODE (ANY SUCH
         PERSON DESCRIBED IN THE FOREGOING CLAUSES (1), (2) OR (3) SHALL
         HEREINAFTER BE REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (4) AN
         AGENT OF A DISQUALIFIED ORGANIZATION AND (B) NO PURPOSE OF SUCH
         TRANSFER IS TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX, AND (II)
         SUCH TRANSFEREE SATISFIES CERTAIN ADDITIONAL CONDITIONS RELATING TO THE
         FINANCIAL CONDITION OF THE PROPOSED TRANSFEREE. NOTWITHSTANDING THE
         REGISTRATION IN THE CERTIFICATE REGISTER OF ANY



<PAGE>



         TRANSFER, SALE OR OTHER DISPOSITION OF THIS CERTIFICATE TO A
         DISQUALIFIED ORGANIZATION OR AN AGENT OF A DISQUALIFIED ORGANIZATION,
         SUCH REGISTRATION SHALL BE DEEMED TO BE OF NO LEGAL FORCE OR EFFECT
         WHATSOEVER AND SUCH PERSON SHALL NOT BE DEEMED TO BE A
         CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING, BUT NOT LIMITED
         TO, THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE. EACH HOLDER OF
         THIS CERTIFICATE BY ACCEPTANCE HEREOF SHALL BE DEEMED TO HAVE CONSENTED
         TO THE PROVISIONS OF THIS PARAGRAPH AND THE PROVISIONS OF SECTION
         5.02(D) OF THE POOLING AND SERVICING AGREEMENT REFERRED TO HEREIN. ANY
         PERSON THAT IS A DISQUALIFIED ORGANIZATION IS PROHIBITED FROM ACQUIRING
         BENEFICIAL OWNERSHIP OF THIS CERTIFICATE.


Series 1997-AQ2, Class R-III

Variable Pass-Through Rate

Date of Pooling and Servicing Agreement
and Cut-off Date:  November 1, 1997

First Distribution Date:
December 26, 1997

No. ___

Aggregate Certificate Principal Balance of
the Class R-III Certificates as of the Issue
Date:  $100.00

Denomination:  $100.00

Master Servicer:
Ameriquest Mortgage Company

Trustee:  Norwest Bank Minnesota,
National Association

Issue Date:  November 25, 1997

CUSIP: 79548K XH 6




<PAGE>



                     ASSET-BACKED FLOATING RATE CERTIFICATE

evidencing a beneficial ownership interest in a Trust Fund (the "Trust Fund")
consisting primarily of a pool of conventional one- to four-family first
mortgage loans (the "Mortgage Loans") formed and sold by

                 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC.

         THIS CERTIFICATE DOES NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
         SALOMON BROTHERS MORTGAGE SECURITIES VII, INC., THE MASTER SERVICER,
         THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THIS
         CERTIFICATE NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY
         AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.

                  This certifies that _____________ is the registered owner of a
Percentage Interest (obtained by dividing the denomination of this Certificate
by the aggregate Certificate Principal Balance of the Class R-III Certificates
as of the Issue Date) in that certain beneficial ownership interest evidenced by
all the Class R-III Certificates in REMIC III created pursuant to a Pooling and
Servicing Agreement, dated as specified above (the "Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. (hereinafter called the "Depositor,"
which term includes any successor entity under the Agreement), the Master
Servicer and the Trustee, a summary of certain of the pertinent provisions of
which is set forth hereafter. To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.

                  Pursuant to the terms of the Agreement, distributions will be
made on the 25th day of each month or, if such 25th day is not a Business Day,
the Business Day immediately following (a "Distribution Date"), commencing on
the First Distribution Date specified above, to the Person in whose name this
Certificate is registered on the last Business Day of the month immediately
preceding the month of such distribution (the "Record Date"), in an amount equal
to the product of the Percentage Interest evidenced by this Certificate and the
amount required to be distributed to the Holders of Class R-III Certificates on
such Distribution Date pursuant to the Agreement.

                  All distributions to the Holder of this Certificate under the
Agreement will be made or caused to be made by or on behalf of the Trustee by
wire transfer in immediately available funds to the account of the Person
entitled thereto if such Person shall have so notified the Trustee in writing at
least five Business Days prior to the Record Date immediately prior to such
Distribution Date and is the registered owner of Class R-III Certificates the
aggregate initial Certificate Principal Balance of which is in excess of the
lesser of (i) $5,000,000 or (ii) two-thirds of the aggregate initial Certificate
Principal Balance of the Class R-III Certificates, or otherwise by check mailed
by first class mail to the address of the Person



<PAGE>


                                       -2-

entitled thereto, as such name and address shall appear on the Certificate
Register. Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency appointed by the Trustee for that purpose as provided in the
Agreement.

                  This Certificate is one of a duly authorized issue of
Certificates designated as Asset-Backed Floating Rate Certificates of the Series
specified on the face hereof (herein called the "Certificates") and representing
a Percentage Interest in the Class of Certificates specified on the face hereof
equal to the denomination specified on the face hereof divided by the aggregate
Certificate Principal Balance of the Class of Certificates specified on the face
hereof.


                  The Certificates are limited in right of payment to certain
collections and recoveries respecting the Mortgage Loans, all as more
specifically set forth herein and in the Agreement. As provided in the
Agreement, withdrawals from the Collection Account and the Distribution Account
may be made from time to time for purposes other than distributions to
Certificateholders, such purposes including reimbursement of advances made, or
certain expenses incurred, with respect to the Mortgage Loans.

                  The Agreement permits, with certain exceptions therein
provided, the amendment thereof and the modification of the rights and
obligations of the Depositor, the Master Servicer, the Trustee and the rights of
the Certificateholders under the Agreement at any time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of Certificates
entitled to at least 66% of the Voting Rights. Any such consent by the Holder of
this Certificate shall be conclusive and binding on such Holder and upon all
future Holders of this Certificate and of any Certificate issued upon the
transfer hereof or in exchange herefor or in lieu hereof whether or not notation
of such consent is made upon this Certificate. The Agreement also permits the
amendment thereof, in certain limited circumstances, without the consent of the
Holders of any of the Certificates.

                  As provided in the Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate is registrable
in the Certificate Register upon surrender of this Certificate for registration
of transfer at the offices or agencies appointed by the Trustee as provided in
the Agreement, duly endorsed by, or accompanied by an assignment in the form
below or other written instrument of transfer in form satisfactory to the
Trustee and the Certificate Registrar duly executed by, the Holder hereof or
such Holder's attorney duly authorized in writing, and thereupon one or more new
Certificates of the same Class in authorized denominations evidencing the same
aggregate Percentage Interest will be issued to the designated transferee or
transferees.

                  The Certificates are issuable in fully registered form only
without coupons in Classes and denominations representing Percentage Interests
specified in the Agreement. As provided in the Agreement and subject to certain
limitations therein set forth, Certificates are



<PAGE>


                                       -3-

exchangeable for new Certificates of the same Class in authorized denominations
evidencing the same aggregate Percentage Interest, as requested by the Holder
surrendering the same.

                  No transfer of this Certificate or any interest herein 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
("Plan Assets") unless the Depositor, the Trustee and the Master Servicer are
provided with an Opinion of Counsel which establishes to the satisfaction of the
Depositor, the Trustee and the Master Servicer that the purchase of this
Certificate is permissible under applicable law, will not constitute or result
in any prohibited transaction under ERISA or Section 4975 of the Code and will
not subject the Depositor, the Master Servicer, the Trustee or the Trust Fund to
any obligation or liability (including obligations or liabilities under ERISA or
Section 4975 of the Code) in addition to those undertaken in the Agreement,
which Opinion of Counsel shall not be an expense of the Depositor, the Master
Servicer, the Trustee or the Trust Fund. In lieu of such Opinion of Counsel, a
Plan, any Person acting, directly or indirectly, on behalf of any such Plan or
any Person acquiring this Certificate with Plan Assets of a Plan may provide a
certification in the form of Exhibit G to the Agreement, which the Trustee may
rely upon without further inquiry or investigation. Neither an Opinion of
Counsel nor a certification will be required in connection with the initial
transfer of this Certificate by the Depositor to an affiliate of the Depositor
(in which case, the Depositor or any affiliate thereof shall have deemed to have
represented that such affiliate is not a Plan or a Person investing Plan Assets
of any Plan) and the Trustee shall be entitled to conclusively rely upon a
representation (which, upon the request of the Trustee, shall be a written
representation) from the Depositor of the status of such transferee as an
affiliate of the Depositor.

                  Prior to registration of any transfer, sale or other
disposition of this Certificate, the proposed transferee shall provide to the
Trustee (i) an affidavit to the effect that such transferee is any Person other
than a Disqualified Organization or the agent (including a broker, nominee or
middleman) of a Disqualified Organization, and (ii) a certificate that
acknowledges that (A) the Class R-III Certificates have been designated as a
residual interest in a REMIC, (B) it will include in its income a PRO RATA share
of the net income of the Trust Fund and that such income may be an "excess
inclusion," as defined in the Code, that, with certain exceptions, cannot be
offset by other losses or benefits from any tax exemption, and (C) it expects to
have the financial means to satisfy all of its tax obligations including those
relating to holding the Class R-III Certificates. Notwithstanding the
registration in the Certificate Register of any transfer, sale or other
disposition of this Certificate to a Disqualified Organization or an agent
(including a broker, nominee or middleman) of a Disqualified Organization, such
registration shall be deemed to be of no legal force or effect whatsoever and
such Person shall not be deemed to be a Certificateholder for any purpose,
including, but not limited to, the receipt of distributions in respect of this
Certificate.

         The Holder of this Certificate, by its acceptance hereof, shall be
deemed to have consented to the provisions of Section 5.02 of the Agreement and
to any amendment of the



<PAGE>


                                       -4-

Agreement deemed necessary by counsel of the Depositor to ensure that the
transfer of this Certificate to any Person other than a Permitted Transferee or
any other Person will not cause the Trust Fund to cease to qualify as a REMIC or
cause the imposition of a tax upon the REMIC.

                  No service charge will be made for any such registration of
transfer or exchange of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any transfer or exchange of Certificates.

                  The Depositor, the Master Servicer, the Trustee and the
Certificate Registrar and any agent of the Depositor, any Master Servicer, the
Trustee or the Certificate Registrar may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
Depositor, the Master Servicer, the Trustee, the Certificate Registrar nor any
such agent shall be affected by notice to the contrary.

                  The obligations created by the Agreement and the Trust Fund
created thereby shall terminate upon payment to the Certificateholders of all
amounts held by or on behalf of the Trustee and required to be paid to them
pursuant to the Agreement following the earlier of (i) the final payment or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in REMIC I, and (ii) the purchase by the party designated in the
Agreement at a price determined as provided in the Agreement from REMIC I of all
the Mortgage Loans and all property acquired in respect of such Mortgage Loans.
The Agreement permits, but does not require, the party designated in the
Agreement to purchase from REMIC I all the Mortgage Loans and all property
acquired in respect of any Mortgage Loan at a price determined as provided in
the Agreement. The exercise of such right will effect early retirement of the
Certificates; however, such right to purchase is subject to the aggregate Stated
Principal Balance of the Mortgage Loans at the time of purchase being less than
10% of the aggregate Stated Principal Balance of the Mortgage Loans at the
Cut-off Date.

                  The recitals contained herein shall be taken as statements of
the Depositor and the Trustee assumes no responsibility for their correctness.

                  Unless the certificate of authentication hereon has been
executed by the Certificate Registrar, by manual signature, this Certificate
shall not be entitled to any benefit under the Agreement or be valid for any
purpose.




<PAGE>




         IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its official seal.

Dated:  November 25, 1997

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Trustee


                                             By:
                                                -------------------------
                                                   Authorized Officer


                          CERTIFICATE OF AUTHENTICATION

         This is one of the Class R-III Certificates referred to in the
within-mentioned Agreement.

                                             NORWEST BANK MINNESOTA,
                                             NATIONAL ASSOCIATION
                                             as Certificate Registrar


                                             By:
                                                ---------------------------
                                                   Authorized Signatory



<PAGE>


                                  ABBREVIATIONS
                                  -------------

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

    TEN COM - as tenants in common             UNIF GIFT MIN ACT - Custodian
                                                            __________________
                                                              (Cust)  (Minor)
    TEN ENT  - as tenants by the entireties                 under Uniform Gifts
                                                                to Minors Act
    JT TEN   - as joint tenants with right                  __________________
               if survivorship and not as                         (State)
               tenants in common

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


                                   ASSIGNMENT
                                   ----------


         FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Please print or typewrite name, address including postal zip code, and Taxpayer
Identification Number of assignee)

a Percentage Interest equal to ____% evidenced by the within Asset-Backed
Floating Rate Certificate and hereby authorize(s) the registration of transfer
of such interest to assignee on the Certificate Register of the Trust Fund.

         I (we) further direct the Certificate Registrar to issue a new
Certificate of a like Percentage Interest and Class to the above named assignee
and deliver such Certificate to the following address: .

Dated:


                                           -------------------------------------
                                           Signature by or on behalf of assignor



                                           -------------------------------------
                                           Signature Guaranteed

<PAGE>



                            DISTRIBUTION INSTRUCTIONS

         The assignee should include the following for purposes of distribution:

         Distributions shall be made, by wire transfer or otherwise, in
immediately available funds to__________________________________________________
________________________________________________________________________________
for the account of _______________________________, account number_____________,
or, if mailed by check, to______________________________________________________
_______________________________________________________________________________.
Applicable statements should be mailed to_______________________________________
________________________________________________________________________________
This information is provided by , the assignee named above, or_________________
________________________________________, as its agent.



<PAGE>



                                    EXHIBIT B


                                   [RESERVED]





<PAGE>



                                   EXHIBIT C-1


                     FORM OF TRUSTEE'S INITIAL CERTIFICATION


                                                              [Date]

Salomon Brothers Mortgage
  Securities VII, Inc.
Seven World Trade Center
New York, New York  10048

Ameriquest Mortgage Company
1100 Town & Country Road
Orange, California  92868

   Re:      Pooling and Servicing Agreement, dated as of November 1, 1997,
            among Salomon Brothers Mortgage Securities VII, Inc.,
            Ameriquest Mortgage Company and Norwest Bank Minnesota, N.A.
            Asset-Backed Floating Rate Certificates, Series 1997-Aq2
            ------------------------------------------------------------

Ladies and Gentlemen:

         Pursuant to Section 2.02 of the Pooling and Servicing Agreement,
attached hereto is the Custodial Initial Certification delivered by Texas
Commerce Bank National Association, as Custodian, pursuant to the Custodial
Agreement dated as of November 25, 1997, by and among Norwest Bank Minnesota,
N.A., Salomon Brothers Mortgage Securities VII, Inc., Ameriquest Mortgage
Company and Texas Commerce Bank National Association.

         The Trustee (nor the Custodian on its behalf) has made no independent
examination of any documents contained in each Mortgage File beyond the review
specifically required in the above-referenced Pooling and Servicing Agreement.
The Trustee makes no representations as to: (i) the validity, legality,
sufficiency, enforceability due authorization, recordability or genuineness of
any of the documents contained in the Mortgage File of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, or (ii) the collectability,
insurability, effectiveness or suitability of any such Mortgage Loan.

                                       NORWEST BANK MINNESOTA, N.A.



                                       By:__________________________________
                                       Name:________________________________
                                       Title:_______________________________



<PAGE>





                                   EXHIBIT C-2


                       FORM OF TRUSTEE FINAL CERTIFICATION


                                                              [Date]

Salomon Brothers Mortgage
  Securities VII, Inc.
Seven World Trade Center
New York, New York  10048

Ameriquest Mortgage Company
1100 Town & Country Road
Orange, California  92868

   Re:      Pooling and Servicing Agreement, dated as of November 1, 1997,
            among Salomon Brothers Mortgage Securities VII, Inc.,
            Ameriquest Mortgage Company and Norwest Bank Minnesota, N.A.
            Asset-Backed Floating Rate Certificates, Series 1997-Aq2
            ------------------------------------------------------------

Ladies and Gentlemen:

         In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement, the undersigned, as 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 or a Custodian on its
behalf has received:

                (i) the original recorded Mortgage, and the original recorded
         power of attorney, if the Mortgage was executed pursuant to a power of
         attorney, or a certified copy thereof in those instances where the
         public recording office retains the original or where the original has
         been lost; and

               (ii) an original recorded Assignment of the Mortgage to the
         Trustee together with the original recorded Assignment or Assignments
         of the Mortgage showing a complete chain of assignment from the
         originator, or a certified copy of such Assignments in those instances
         where the public recording retains the original or where original has
         been lost; and

              (iii) the original lender's title insurance policy.

         The Trustee has made no independent examination of any documents
contained in each Mortgage File beyond the review specifically required in the
above-referenced Pooling and



<PAGE>



Servicing Agreement. The Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any of the
documents contained in the Mortgage File of any of the Mortgage Loans identified
on the Mortgage Loan Schedule, or (ii) the collectability, insurability,
effectiveness or suitability of any such Mortgage Loan.

         Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the above-captioned Pooling and Servicing
Agreement.

                                      NORWEST BANK MINNESOTA, N.A.



                                      By:______________________________________
                                      Name:____________________________________
                                      Title:___________________________________





<PAGE>



                                    EXHIBIT D


                    FORM OF MORTGAGE LOAN PURCHASE AGREEMENT





<PAGE>


                        MORTGAGE LOAN PURCHASE AGREEMENT

                  This is a Mortgage Loan Purchase  Agreement (the "Agreement"),
dated November 20, 1997, among Salomon Brothers Mortgage Securities VII, Inc., a
Delaware corporation (the "Purchaser"),  Ameriquest Mortgage Company, a Delaware
corporation  (the  "Originator")  and Salomon  Brothers Realty Corp., a New York
corporation (the "Seller").

                              Preliminary Statement

                  The Seller intends to sell the Mortgage Loans (as  hereinafter
defined) to the Purchaser on the terms and subject to the  conditions  set forth
in this  Agreement.  The  Mortgage  Loans were  purchased by the Seller from the
Originator  pursuant to a certain  Master  Mortgage  Loan Purchase and Servicing
Agreement,  dated as of May 1, 1996 (the  "Purchase and  Servicing  Agreement"),
between the  Seller,  as initial  purchaser  and the  Originator,  as seller and
servicer.  The Purchaser  intends to deposit the Mortgage  Loans into a mortgage
pool  comprising  the trust fund.  The trust fund will be  evidenced by a single
series of asset-backed floating rate certificates designated as Series 1997-AQ2,
(the  "Certificates").  The  Certificates  will  consist  of  eight  classes  of
certificates.  The  Certificates  will  be  issued  pursuant  to a  Pooling  and
Servicing  Agreement,  dated as of November 1, 1997 (the  "Pooling and Servicing
Agreement"), among the Purchaser, as depositor, Norwest Bank Minnesota, National
Association,  as  trustee,  and the  Originator,  as  master  servicer  (in such
capacity, the "Master Servicer").  Capitalized terms used but not defined herein
shall have the meanings set forth in the Pooling and Servicing Agreement.

                  The parties hereto agree as follows:

                  SECTION 1.  AGREEMENT TO PURCHASE.  The Seller agrees to sell,
and the  Purchaser  agrees to  purchase,  on or before  November  25,  1997 (the
"Closing Date"), certain adjustable-rate conventional residential mortgage loans
(the "Mortgage Loans"), having an aggregate principal balance as of the close of
business on November 1, 1997 (the "Cut-off Date") of approximately  $345,499,819
(the "Closing Balance"), after giving effect to all payments due on the Mortgage
Loans on or before the Cut-off Date, whether or not received.

                  SECTION 2.  MORTGAGE  LOAN  SCHEDULE.  The  Purchaser  and the
Seller have agreed upon which of the  mortgage  loans owned by the Seller are to
be purchased by the  Purchaser  pursuant to this  Agreement  and the Seller will
prepare or cause to be prepared on or prior to the Closing Date a final schedule
(the "Closing  Schedule")  that together  shall describe such Mortgage Loans and
set forth all of the Mortgage Loans to be purchased  under this  Agreement.  The
Closing  Schedule will conform to the  requirements  set forth in this Agreement
and to the  definition  of  "Mortgage  Loan  Schedule"  under  the  Pooling  and
Servicing  Agreement.  The Closing  Schedule  shall be used as the Mortgage Loan
Schedule under the Pooling and Servicing Agreement.

                  SECTION 3. CONSIDERATION.

                           (a) In consideration for the Mortgage Loans to be 
purchased hereunder, the Purchaser shall, as described in Section 8, pay to or
upon the order of the Seller in immediately available funds an amount (the
"Purchase Price") equal to approximately 107.119% times the Closing 



<PAGE>


                                       -2-


Balance,  plus accrued interest thereon from the Cut-off Date up to but
not including the Closing Date.

                           (b)      The Purchaser or any assignee, transferee or
designee of the Purchaser shall be entitled to all scheduled payments of
principal 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 Mortgage
Loans allocable to the period after the Cut-off Date. All scheduled payments of
principal and interest due on or before the Cut-off Date and collected after the
Cut-off Date shall belong to the Seller.

                           (c)      Pursuant to the Pooling and Servicing 
Agreement, the Purchaser will assign all of its right, title and interest in and
to the Mortgage Loans, together with its rights under this Agreement, to the
Trustee for the benefit of the related Certificateholders.

                  SECTION 4.        TRANSFER OF THE MORTGAGE LOANS.

                           (a)      Possession of Mortgage Files.  The Seller
does hereby sell, transfer, assign, set over and convey to the Purchaser,
without recourse but subject to the terms of this Agreement, all of its right,
title and interest in, to and under the Mortgage Loans. The contents of each
Mortgage File not delivered to the Purchaser or to any assignee, transferee or
designee of the Purchaser on or prior to the Closing Date are and shall be held
in trust by the Seller for the benefit of the Purchaser or any assignee,
transferee or designee of the Purchaser. Upon the sale of the Mortgage Loans the
ownership of each Mortgage Note, the related Mortgage and the other contents of
the related Mortgage File is vested in the Purchaser and the ownership of all
records and documents with respect to the related Mortgage Loan prepared by or
that come into the possession of the Seller on or after the Closing Date shall
immediately vest in the Purchaser and shall be delivered immediately to the
Purchaser or as otherwise directed by the Purchaser.

                           (b) Delivery of Mortgage Loan Documents.  The Seller
will, on or prior to the Closing Date, deliver or cause to be delivered to the
Purchaser or any assignee, transferee or designee of the Purchaser each of the
following documents for each Mortgage Loan:

                  (i) the  original  Mortgage  Note,  endorsed in the  following
         form:   "Pay  to  the  order  of  Norwest  Bank   Minnesota,   National
         Association,  as Trustee for the registered holders of Salomon Brothers
         Mortgage  Securities  VII,  Inc.,  under  the  applicable  pooling  and
         servicing agreement,  without recourse," with all prior and intervening
         endorsements  showing  a  com  plete  chain  of  endorsement  from  the
         originator to the Person so endorsing to the Trustee;

                  (ii) the original Mortgage with evidence of recording 
         thereon;

                  (iii) an  original  Assignment  of  Mortgage  executed  in the
         following  form:  "Norwest Bank  Minnesota,  National  Association,  as
         Trustee  for  the  registered  holders  of  Salomon  Brothers  Mortgage
         Securities  VII,  Inc.,  under the  applicable  pooling  and  servicing
         agreement";



<PAGE>


                                       -3-


                  (iv) the original  recorded  Assignment or  Assignments of the
         Mortgage  showing a complete chain of assignment from the originator to
         the Person assigning the Mortgage to the Trustee as contemplated by the
         immediately preceding clause (iii);

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

                  (vi) the original  lender's title insurance  policy,  together
         with all endorsements or riders which were issued with or subsequent to
         the issuance of such policy, insuring the priority of the Mortgage as a
         first lien on the Mortgaged Property represented therein as a fee
         interest vested in the Mortgagor.

                  Notwithstanding  anything to the  contrary  contained  in this
Section 4, if any document referred to in Section 4(b)(ii) or 4(b)(iv) above has
been  submitted  for  recording  but either (x) has not been  returned  from the
applicable public recording office or (y) has been lost or such public recording
office has retained the original of such document, the obligations of the Seller
hereunder  shall be deemed to have been  satisfied  upon (1)  delivery  by or on
behalf  of the  Seller  promptly  upon  receipt  thereof  to or on behalf of the
Purchaser or any assignee, transferee or designee of the Purchaser of either the
original or a copy of such document  certified by the  Originator in the case of
(x) above or the public  recording  office in the case of (y) above to be a true
and  complete  copy of the  recorded  original  thereof  and (2) if such copy is
certified by the Originator delivery promptly upon receipt thereof of either the
original or a copy of such document  certified by the public recording office to
be a true and complete copy of the original.

                  In the event that the original lender's title insurance policy
has not yet been  issued,  the  Seller  shall  deliver to the  Purchaser  or any
assignee,  transferee  or designee  of the  Purchaser  a written  commitment  or
interim binder or preliminary  report of title issued by the title  insurance or
escrow  company.  The Seller shall  deliver to the  Purchaser  or any  assignee,
transferee or designee of the  Purchaser  promptly upon receipt by the Seller of
any such original title insurance policy or original Primary Mortgage  Insurance
Policy.

                  Each  original  document  relating to a Mortgage Loan which is
not delivered to the Purchaser or its assignee,  transferee or designee, if held
by the  Seller  or the  Originator,  shall  be so held  for the  benefit  of the
Purchaser or its assignee, transferee or designee.

                           (c) Acceptance of Mortgage Loans.  The documents 
delivered pursuant to Section 4(b) hereof shall be reviewed by the Purchaser or
any assignee, transferee or designee of the Purchaser at any time before or
after the Closing Date (and with respect to each document permitted to be
delivered after the Closing Date within seven days of its delivery) to ascertain
that all required documents have been executed and received and that such
documents relate to the Mortgage Loans identified on the Mortgage Loan Schedule.




<PAGE>


                                       -4-


                           (d) Transfer of Interest in Agreements.  The
Purchaser has the right to assign its interest under this Agreement, in whole or
in part, to the Trustee, as may be required to effect the purposes of the
Pooling and Servicing Agreement, without the consent of the Seller or the
Originator, and the assignee shall succeed to the rights and obligations
hereunder of the Purchaser. Any expense reasonably incurred by or on behalf of
the Purchaser or the Trustee in connection with enforcing any obligations of the
Seller or the Originator under this Agreement will be promptly reimbursed by the
Seller or the Originator, as applicable.

                           (e) Examination of Mortgage Files.  Prior to the
Closing Date, the Seller shall either (i) deliver in escrow to the Purchaser or
to any assignee, transferee or designee of the Purchaser, for examination, the
Mortgage File pertaining to each Mortgage Loan, or (ii) make such Mortgage Files
available to the Purchaser or to any assignee, transferee or designee of the
Purchaser for examination. Such examination may be made by the Purchaser or the
Trustee, and their respective designees, upon reasonable notice to the Seller
during normal business hours before the Closing Date and within 60 days after
the Closing Date. If any such person makes such examination prior to the Closing
Date and identifies any Mortgage Loans that do not conform to the requirements
of the Purchaser as described in this Agreement, such Mortgage Loans shall be
deleted from the Closing Schedule. The Purchaser may, at its option and without
notice to the Seller, purchase all or part of the Mortgage Loans without
conducting any partial or complete examination. The fact that the Purchaser or
any person has conducted or has failed to conduct any partial or complete
examination of the Mortgage Files shall not affect the rights of the Purchaser
or any assignee, transferee or designee of the Purchaser to demand repurchase or
other relief as provided herein or under the Pooling and Servicing Agreement.

                  SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE 
                             SELLER AND THE ORIGINATOR.

                  (a) The  Originator  hereby  represents  and  warrants  to the
Seller and the Purchaser,  as of the date hereof and as of the Closing Date, and
covenants, that:

                           (i) The Originator is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is duly authorized and qualified to transact any and all business
contemplated by this Agreement to be conducted by the Originator in any state in
which a Mortgaged Property is located or is otherwise not required under
applicable law to effect such qualification and, in any event, is in compliance
with the doing business laws of any such State, to the extent necessary to
ensure its ability to enforce each Mortgage Loan and to service the Mortgage
Loans in accordance with the terms of the Pooling and Servicing Agreement;

                           (ii) The Originator had the full corporate power and 
authority to originate, hold and sell each Mortgage Loan and has the full
corporate power and authority to service each Mortgage Loan, and to execute,
deliver and perform, and to enter into and consummate the transactions
contemplated by this Agreement and has duly authorized by all necessary
corporate action on the part of the Originator the execution, delivery and
performance of this Agreement; and



<PAGE>


                                       -5-


this Agreement,  assuming the due authorization,  execution and delivery thereof
by the  Purchaser,  constitutes  a legal,  valid and binding  obligation  of the
Originator,  enforceable  against the  Originator in accordance  with its terms,
except to the  extent  that (a) the  enforceability  thereof  may be  limited by
bankruptcy, insolvency, moratorium, receivership and other similar laws relating
to creditors'  rights  generally and (b) the remedy of specific  performance and
injunctive  and other forms of equitable  relief may be subject to the equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought;

                           (iii) The execution and delivery of this Agreement by
the Originator, the servicing of the Mortgage Loans by the Originator under the
Pooling and Servicing Agreement, the consummation of any other of the
transactions herein contemplated, and the fulfillment of or compliance with the
terms hereof are in the ordinary course of business of the Originator and will
not (A) result in a breach of any term or provision of the charter or by-laws of
the Originator or (B) conflict with, result in a breach, violation or
acceleration of, or result in a default under, the terms of any other material
agreement or instrument to which the Originator is a party or by which it may be
bound, or any statute, order or regulation applicable to the Originator of any
court, regulatory body, administrative agency or governmental body having
jurisdiction over the Originator; and the Originator is not a party to, bound
by, or in breach or violation of any indenture or other agreement or instrument,
or subject to or in violation of any statute, order or regulation of any court,
regulatory body, administrative agency or governmental body having jurisdiction
over it, which materially and adversely affects or, to the Originator's
knowledge, would in the future materially and adversely affect, (x) the ability
of the Originator to perform its obligations under this Agreement or (y) the
business, operations, financial condition, properties or assets of the
Originator taken as a whole;

                           (iv)     No consent, approval, authorization or order
of any court or governmental agency or body is required for the execution,
delivery and performance by the Originator of, or compliance by the Originator
with, this Agreement or the consummation of the transactions contemplated
hereby, or if any such consent, approval, authorization or order is required,
the Originator has obtained the same;

                           (v)      The Originator is an approved 
seller/servicer for FNMA or FHLMC in good standing and is a HUD approved
mortgagee pursuant to Section 203 of the National Housing Act; and

                           (vi)     No litigation is pending against the
Originator that would materially and adversely affect the execution, delivery or
enforceability of this Agreement or the ability of the Originator to service the
Mortgage Loans or to perform any of its other obligations hereunder in
accordance with the terms hereof;

                  (b)      The Seller hereby represents and warrants, as of the
date hereof and as of the Closing Date, and covenants, that:




<PAGE>


                                       -6-


                           (i)      The Seller is a corporation, duly organized
and validly existing and in good standing under the laws of the State of New
York with full corporate power and authority to conduct its business as
presently conducted by it to the extent material to the consummation of the
transactions contemplated herein. The Seller had the full corporate power and
authority to acquire the Mortgage Loans. The Seller has the full corporate power
and authority to own the Mortgage Loans and to transfer and convey the Mortgage
Loans to the Purchaser and has the full corporate power and authority to execute
and deliver, engage in the transactions contemplated by, and perform and observe
the terms and conditions of this Agreement;

                           (ii)     This Agreement has been duly and validly
authorized, executed and delivered by the Seller, all requisite corporate action
having been taken, and (assuming the due authorization, execution and delivery
hereof by the Purchaser and the Originator) constitutes the valid, legal and
binding obligation of the Seller, enforceable in accordance with its terms,
except as such enforcement may be limited by (A) bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws relating to or
affecting the rights of creditors generally, (B) general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law) or (C) public policy considerations underlying the securities laws,
to the extent that such public policy considerations limit the enforceability of
the provisions of this Agreement which purport to provide indemnification from
securities laws liabilities;

                           (iii) No consent,  approval,  authorization  or order
of, registration or filing with, or notice to any governmental authority or
court is required, under federal laws or the laws of the State of New York, for
the execution, delivery and performance by the Seller of, or compliance by the
Seller with, this Agreement or the consummation by the Seller of any other
transaction con templated hereby and by the Pooling and Servicing Agreement;
provided, however, that the Seller makes no representation or warranty regarding
federal or state securities laws in connection with the sale or distribution of
the Certificates;

                           (iv)     No certificate of an officer, statement or 
other information furnished in writing or report delivered by the Seller to the
Purchaser, any affiliate of the Purchaser or the Trustee for use in connection
with the purchase of the Mortgage Loans and the transactions contemplated
hereunder and under the Pooling and Servicing Agreement will contain any untrue
statement of a material fact, or omit a material fact necessary to make the
information, certificate, statement or report not misleading in any material
respect.

                           (v)      Neither the sale of the Mortgage Loans to
the Purchaser, nor the execution, delivery or performance of this Agreement by
the Seller, conflicts or will conflict with or results or will result in a
breach of or constitutes or will constitute a default (or an event, which with
notice or lapse of time or both, would constitute a default) under (A) any terms
or provisions of the certificate of incorporation or by-laws of the Seller, (B)
any term or provision of any material agreement, contract, instrument or
indenture, to which the Seller is a party or by which the Seller or any of its
property is bound, or (C) any law, rule, regulation, order, judgment, writ,
injunction or decree of any court or governmental authority having jurisdiction
over the Seller or any of its



<PAGE>


                                       -7-


property,  or results or will result in the creation or  imposition of any lien,
charge or  encumbrance  which  would have a  material  adverse  effect  upon the
Mortgage  Loans or any  documents  or  instruments  evidencing  or securing  the
Mortgage Loans;

                           (vi)  The  Seller  has not  dealt  with  any  broker,
investment banker, agent or other person, except for the Purchaser or any of its
affiliates, that may be entitled to any commission or compensation in connection
with the sale of the Mortgage Loans;

                           (vii) There is no litigation currently pending or, to
the best of the Seller's knowledge, threatened against the Seller that would
reasonably be expected to adversely affect the transfer of the Mortgage Loans,
the issuance of the Certificates, the execution, delivery, performance or
enforceability of this Agreement or that would result in a material adverse
change in the financial condition of the Seller;

                           (viii)  Each  Mortgage  Note,  each  Mortgage,   each
Assignment and any other document required to be delivered by or on behalf of
the Seller under this Agreement or the Pooling and Servicing Agreement to the
Purchaser or any assignee, transferee or designee of the Purchaser for each
Mortgage Loan has been or will be, in accordance with Section 4(b) hereof,
delivered to the Purchaser or any such assignee, transferee or designee. With
respect to each Mortgage Loan, the Seller is in possession of a complete
Mortgage File in compliance with the Pooling and Servicing Agreement, except for
such documents that (A) have been delivered (1) to the Purchaser or any
assignee, transferee or designee of the Purchaser or (2) for recording to the
appropriate public recording office and have not yet been returned or (B) are
not required to be delivered to the Purchaser or any assignee, transferee or
designee of the Purchaser until 90 days following the Closing Date or such later
date as provided in Section 4;

                           (ix)     The transfer, assignment and conveyance of
the Mortgage Notes and the Mortgages by the Seller pursuant to this Agreement
are not subject to the bulk transfer or any similar statutory provisions in
effect in any relevant jurisdiction, except any as may have been complied with;

                           (x)      The Seller (A) is a solvent entity and is
paying its debts as they become due and (B) after giving effect to the transfer
of the Mortgage Loans, will be a solvent entity and will have sufficient
resources to pay its debts as they become due;

                           (xi)     The form of endorsement of each Mortgage
Note satisfied the requirement, if any, of endorsement in order to transfer all
right, title and interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note; and each Assignment to be delivered
hereunder is in recordable form and is sufficient to effect the assignment of
and to transfer to the assignee thereunder the benefits of the assignor, as
mortgagee or assignee thereof, under each Mortgage to which that Assignment
relates;




<PAGE>


                                       -8-


                           (xii)  The  transfer  of the  Mortgage  Loans  to the
Purchaser at the Closing Date will be treated by the Seller for financial
accounting and reporting purposes as a sale of assets; and

                           (xiii)  Immediately prior to the sale of the Mortgage
Loans to the Purchaser as herein contemplated, the Seller had good title to, and
was the sole owner of, the Mortgage Loans, and such sale validly transfers the
Mortgage Loans to the Purchaser free and clear of any pledge, lien, encumbrance
or security interest.

                           (xiv) With respect to the Mortgage Loans,  the Seller
hereby represents and warrants, as of the date hereof and as of the Closing
Date, that each Mortgage Loan constitutes a "qualified mortgage" within the
meaning of Section 860(G)(a)(3) of the Code.

                  SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR 
                             RELATING TO THE MORTGAGE LOANS.

         (a) Representations and Warranties as to Individual Mortgage Loans. The
Originator hereby represents and warrants to the Seller and the Purchaser,  that
as of the Closing Date:

                           (i)      The information set forth on the related 
Mortgage Loan Schedule with respect to each Mortgage Loan is true and correct in
all material respects;

                           (ii)     Except as set forth on Exhibit 1, all
payments due prior to the Cut-off Date have been made and none of the Mortgage
Loans will have been contractually delinquent for more than one calendar month
more than once since the origination thereof;

                           (iii) Each Mortgage is a valid and enforceable  first
lien on the Mortgaged Property, including all improvements thereon, subject only
to (a) the lien of nondelinquent current real property taxes and assessments,
(b) covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage, such
exceptions appearing of record being acceptable to mortgage lending institutions
generally or specifically reflected in the appraisal made in connection with the
origination of the related Mortgage Loan, and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage;

                           (iv)     Immediately prior to the assignment of the
Mortgage Loans to the Purchaser pursuant to the Purchase and Servicing
Agreement, the Originator had good title to, and was the sole legal and
beneficial owner of, each Mortgage Loan free and clear of any pledge, lien,
encumbrance or security interest and has full right and authority, subject to no
interest or participation of, or agreement with, any other party to sell and
assign the same;

                           (v)      To the best of the Originator's knowledge,
there is no delinquent tax or assessment lien against any Mortgaged Property;



<PAGE>


                                       -9-


                           (vi)     There is no valid offset, defense or
counterclaim to any Mortgage Note or Mortgage, including the obligation of the
Mortgagor to pay the unpaid principal of or interest on such Mortgage Note, nor
will the operation of any of the terms of the Mortgage Note and the Mortgage, or
the exercise of any right thereunder, render the Mortgage unenforceable, in
whole or in part, or subject to any right of rescission, set-off, counterclaim
or defense, including the defense of usury and no such right of rescission,
set-off, counterclaim or defense has been asserted with respect thereto;

                           (vii)  To the  best  of the  Originator's  knowledge,
there are no mechanics' liens or claims for work, labor or material affecting
any Mortgaged Property which are or may be a lien prior to, or equal with, the
lien of the related Mortgage, except those which are insured against by the
title insurance policy referred to in (xi) below;

                           (viii)  To the  best of the  Originator's  knowledge,
each Mortgaged Property is free of material damage and is in average repair;

                           (ix)     Each Mortgage Loan at origination complied
in all material respects with applicable local, state and federal laws,
including, without limitation, usury, equal credit opportunity, real estate
settlement procedures, truth-in-lending and disclosure laws, and consummation of
the transactions contemplated hereby will not involve the violation of any such
laws;

                           (x)      Neither the Originator nor any prior holder
of any Mortgage has modified the Mortgage in any material respect (except that a
Mortgage Loan may have been modified by a written instrument which has been
recorded, if necessary, to protect the interests of the Seller and the Purchaser
and which has been delivered to the Custodian); satisfied, cancelled or
subordinated such Mortgage in whole or in part; released the related Mortgaged
Property in whole or in part from the lien of such Mortgage; or executed any
instrument of release, cancellation, modification or satisfaction with respect
thereto;

                           (xi) A lender's  policy of title  insurance  together
with a condominium endorsement and extended coverage endorsement, if applicable,
and an adjustable rate mortgage endorsement in an amount at least equal to the
Cut-off Date Principal Balance of each Mortgage Loan or a commitment (binder) to
issue the same was effective on the date of the origination of each Mortgage
Loan, each such policy is valid and remains in full force and effect, the
transfer of the related Mortgage Loan to the Seller and Purchaser will not
affect the validity or enforceability of such policy and each such policy was
issued by a title insurer qualified to do business in the jurisdiction where the
Mortgaged Property is located and acceptable to FNMA or FHLMC and in a form
acceptable to FNMA or FHLMC, which policy insures the Originator and successor
owners of indebtedness secured by the insured Mortgage, as to the first priority
lien of the Mortgage; to the best of the Originator's knowledge, no claims have
been made under such mortgage title insurance policy and no prior holder of the
related Mortgage, including the Originator, has done, by act or omission,
anything which would impair the coverage of such mortgage title insurance
policy;



<PAGE>


                                      -10-


                           (xii)  Each  Mortgage  Loan  was  originated  by  the
Originator or by a savings and loan association, savings bank, commercial bank,
credit union, insurance company or similar institution which is supervised and
examined by a federal or state authority, or by a mortgagee approved by the
Secretary of Housing and Urban Development pursuant to sections 203 and 211 of
the National Housing Act and, if originated on behalf of the Originator by a
Person other than the Originator, is subject to the same standards and
procedures used by the Originator in originating mortgage loans directly;

                           (xiii)  With  respect to each  Mortgage  Loan on each
Adjustment Date, the Mortgage Interest Rate will be adjusted to equal the Index
plus the Margin, rounded to the nearest 0.125%, subject to the Periodic Rate
Cap, the Maximum Rate and the Minimum Rate. Except for Balloon Loans, the
related Mortgage Note is payable on the first day of each month in self-
amortizing monthly installments of principal and interest, with interest payable
in arrears, and requires a Monthly Payment which is sufficient to fully amortize
the outstanding principal balance of the Mortgage Loan over its remaining term
and to pay interest at the applicable Mortgage Interest Rate. No Mortgage Loan
is subject to negative amortization. All rate adjustments have been performed in
accordance with the terms of the related Mortgage Note or subsequent
modifications, if any.

                           (xiv) To the best of the Originator's knowledge,  all
of the improvements which were included for the purpose of determining the
Appraised Value of the Mortgaged Property lie wholly within the boundaries and
building restriction lines of such property, and no improvements on adjoining
properties encroach upon the Mortgaged Property;

                           (xv) All inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy, have been made or
obtained from the appropriate authorities and the Mortgaged Property is lawfully
occupied under applicable law;

                           (xvi) All parties  which have had any interest in the
Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are (or, during
the period in which they held and disposed of such interest, were) in compliance
with any and all applicable licensing requirements of the laws of the state
wherein the Mortgaged Property is located;

                           (xvii) The Mortgage Note and the related Mortgage are
genuine, and each is the legal, valid and binding obligation of the maker
thereof, enforceable in accordance with its terms and with applicable laws. All
parties to the Mortgage Note and the Mortgage had legal capacity to execute the
Mortgage Note and the Mortgage and each Mortgage Note and Mortgage have been
duly and properly executed by such parties;

                           (xviii) The proceeds of each  Mortgage Loan have been
fully disbursed, there is no requirement for future advances thereunder and any
and all requirements as to completion of



<PAGE>


                                      -11-


any on-site or off-site improvements and as to disbursements of any escrow funds
therefor have been complied with. All costs, fees and expenses incurred in
making, closing or recording the Mortgage Loans were paid;

                           (xix) The related  Mortgage  contains  customary  and
enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of the
benefits of the security, including, (i) in the case of a Mortgage designated as
a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure.
There is no homestead or other exemption available to the Mortgagor which would
interfere with the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage;

                           (xx) With respect to each Mortgage constituting a
deed of trust, a trustee, duly qualified under applicable law to serve as such,
has been properly designated and currently so serves and is named in such
Mortgage, and no fees or expenses are or will become payable by the Purchaser to
the trustee under the deed of trust, except in connection with a trustee's sale
after default by the Mortgagor;

                           (xxi)  Each  Mortgage  Note and each  Mortgage  is in
substantially one of the forms attached hereto as Exhibit 2;

                           (xxii)  There exist no  deficiencies  with respect to
escrow deposits and payments, if such are required, for which customary
arrangements for repayment thereof have not been made, and no escrow deposits or
payments of other charges or payments due the Originator have been capitalized
under the Mortgage or the related Mortgage Note;

                           (xxiii) The origination,  underwriting and collection
practices used by the Originator with respect to each Mortgage Loan have been in
all respects legal, proper, prudent and customary in the mortgage servicing
business;

                           (xxiv) There is no pledged  account or other security
other than real estate securing the Mortgagor's obligations;

                           (xxv) No  Mortgage  Loan  has a  shared  appreciation
feature, or other contingent interest feature;

                           (xxvi) No Mortgage Loan provides for primary mortgage
insurance;

                           (xxvii) The improvements upon each Mortgaged Property
are covered by a valid and existing hazard insurance policy with a generally
acceptable carrier that provides for fire extended coverage and such other
hazards as are customary in the area where the Mortgaged Property is located
representing coverage not less than the lesser of the outstanding principal
balance of the related Mortgage Loan or the minimum amount required to
compensate for damage or loss on a replacement cost basis. All individual
insurance policies and flood policies referred to in clause (xxviii) below
contain a standard mortgagee clause naming the Originator or the original
mortgagee,




<PAGE>


                                      -12-

and its successors in interest, as mortgagee, and the Originator has received no
notice that any premiums due and payable thereon have not been paid; the
Mortgage obligates the Mortgagor thereunder to maintain all such insurance,
including flood insurance, at the Mortgagor's cost and expense, and upon the
Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at the Mortgagor's cost and expense and to seek
reimbursement therefor from the Mortgagor;

                           (xxviii) If the Mortgaged Property is in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards, a flood insurance policy in a form meeting the
requirements of the current guidelines of the Flood Insurance Administration is
in effect with respect to such Mortgaged Property with a generally acceptable
carrier in an amount representing coverage not less than the least of (A) the
original outstanding principal balance of the Mortgage Loan, (B) the minimum
amount required to compensate for damage or loss on a replacement cost basis or
(C) the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973;

                           (xxix)  There is no  default,  breach,  violation  or
event of acceleration existing under the Mortgage or the related Mortgage Note;
and the related Originator has not waived any default, breach, violation or
event of acceleration;

                           (xxx) Each  Mortgaged  Property is improved by a one-
to four-family residential dwelling, including condominium units and dwelling
units in planned unit developments, which, to the best of the Originator's
knowledge, does not include cooperatives or mobile homes and does not constitute
other than real property under state law;

                           (xxxi)  There  is no  obligation  on the  part of the
Originator or any other party under the terms of the Mortgage or related
Mortgage Note to make payments in addition to those made by the Mortgagor;

                           (xxxii) Any future advances made prior to the Cut-off
Date have been consolidated with the outstanding principal amount secured by the
Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term reflected on the related Mortgage Loan
Schedule. The consolidated principal amount does not exceed the original
principal amount of the Mortgage Loan;

                           (xxxiii) Each Mortgage Loan was underwritten in 
accordance with the Originator's underwriting guidelines as described in the
Prospectus Supplement;

                           (xxxiv) The Mortgage File contains an appraisal which
was performed by an appraiser who satisfied, and which was conducted in
accordance with, all of the applicable requirements of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, as amended;



<PAGE>


                                      -13-


                           (xxxv)  None of the  Mortgage  Loans  is a  graduated
payment mortgage loan, nor is any Mortgage Loan subject to a temporary buydown
or similar arrangement;

                           (xxxvi) With respect to each  Mortgage  Loan, no loan
junior in lien priority to such Mortgage Loan and secured by the related
Mortgaged Property was originated by the Originator at the time of origination
of such Mortgage Loan;

                           (xxxvii) The characteristics of the Mortgage Loans as
set forth on Exhibit 1 hereto are true and correct in all material respects;

                           (xxxviii) The Mortgage contains an enforceable
provision for the acceleration of the payment of the unpaid principal balance of
the Mortgage Loan in the event that the Mortgaged Property is sold or
transferred without the prior written consent of the mortgagee thereunder;

                           (xxxix) The Originator has not advanced funds, or
induced, solicited or knowingly received any advance of funds by a party other
than the mortgagor, directly or indirectly, for the payment of any amount
required under the mortgage loan;

                           (xl) There is no proceeding pending, or to best of
the Originator's knowledge threatened, for the total or partial condemnation of
the Mortgaged Property or the taking by eminent domain of any Mortgaged
Property; and

                           (xli) With respect to each Mortgage Loan identified
on the schedule attached hereto as Exhibit 8, the related mortgagor shall not
fail to make the first Monthly Payment due under such Mortgage Loan within 30
days after the Due Date on which such Monthly Payment was due.

                  SECTION 7. REPURCHASE OBLIGATION FOR DEFECTIVE DOCUMENTATION
                             AND FOR BREACH OF REPRESENTATION AND WARRANTY.

                  (a) The representations and warranties  contained in Section 6
shall not be  impaired  by any  review  and  examination  of loan files or other
documents  evidencing  or relating to the  Mortgage  Loans or any failure on the
part of the Seller or the  Purchaser  to review or examine  such  documents  and
shall  inure to the  benefit of any  assignee,  transferee  or  designee  of the
Purchaser,  including  the Trustee  for the  benefit of holders of  asset-backed
floating  rate  certificates  evidencing  an interest in all or a portion of the
Mortgage Loans.  With respect to the  representations  and warranties  contained
herein  which  are  made  to the  knowledge  or the  best  of  knowledge  of the
Originator or the Seller,  as the case may be, or as to which the  Originator or
the Seller,  as the case may be, has no knowledge,  if it is discovered that the
substance of any such  representation and warranty was inaccurate as of the date
such  representation  and  warranty  was made or  deemed  to be  made,  and such
inaccuracy  materially and adversely  affects the value of the related  Mortgage
Loan or the  interest  therein of the  Purchaser  or the  Purchaser's  assignee,
transferee or designee, then



<PAGE>


                                      -14-


notwithstanding  the lack of knowledge by the  Originator or the Seller,  as the
case may be, with respect to the substance of such  representation  and warranty
being  inaccurate  at the time the  representation  and warranty  was made,  the
Originator or the Seller,  as the case may be, shall take such action  described
in the following paragraph in respect of such Mortgage Loan.

                  Upon discovery by the Originator, the Seller, the Purchaser or
any  assignee,  transferee  or  designee  of the  Purchaser  of  any  materially
defective  document in, or that any material document was not transferred by the
Seller,  and not  transferred  by the Originator to the Seller (as listed on the
Trustee's  Preliminary  Exception Report), as part of, any Mortgage File or of a
breach of any of the representations and warranties contained in Section 5(a) or
Section 6 that materially and adversely  affects the value of any Mortgage Loan,
the Purchaser or the  Purchaser's  assignee,  transferee or designee,  the party
discovering  the breach shall give prompt written  notice to the others.  Within
ninety (90) days of its  discovery  or its receipt of notice of any such missing
documentation  which was not  transferred  to the Seller as  described  above or
materially  defective  documentation or any such breach of a representation  and
warranty the  Originator  promptly  shall deliver such missing  document or cure
such defect or breach in all material  respects,  or in the event the Originator
cannot  deliver such missing  document or such defect or breach cannot be cured,
the  Originator  shall,  within 90 days of its  discovery  or receipt of notice,
either (i) repurchase the affected Mortgage Loan at a price equal to the greater
of (A) the Purchase  Price (as such term is defined in the Pooling and Servicing
Agreement) or (B) with respect to any Mortgage Loan repurchased as a result of a
breach of the representation  and warranty  contained in Section  6(a)(xli),  an
amount equal to the product of the related  purchase  price  percentage for such
Mortgage Loan as specified on Exhibit 8 and the Stated Principal Balance of such
Mortgage Loan as of the date of  repurchase,  or (ii) pursuant to the provisions
of the Pooling and Servicing Agreement,  cause the removal of such Mortgage Loan
from the Trust Fund and  substitute one or more  Qualified  Substitute  Mortgage
Loans.  With  respect to  Mortgage  Loans where the  Mortgage  File is missing a
material document that was transferred from the Originator to the Seller or upon
discovery  by the  Originator,  the  Seller,  the  Purchaser  or  any  assignee,
transferee   or  designee  of  the   Purchaser   of  a  breach  of  any  of  the
representations and warranties  contained in Section 5(b)(xi),  (xiii) and (xiv)
that  materially  and  adversely  affects the value of any  Mortgage  Loan,  the
Purchaser  or the  Purchaser's  assignee,  transferee  or  designee,  the  party
discovering  such breach shall give prompt written notice to the others.  Within
ninety (90) days of its  discovery  or its receipt of notice of any such missing
document or any such breach of a representation and warranty the Seller promptly
shall  deliver  such  missing  document  or cure  such  defect  or breach in all
material  respects,  or in the event the  Seller  cannot  deliver  such  missing
document or such defect or breach cannot be cured,  the Seller shall,  within 90
days of its discovery or receipt of notice,  either (i)  repurchase the affected
Mortgage Loan at the Purchase  Price (as such term is defined in the Pooling and
Servicing  Agreement)  or (ii)  pursuant  to the  provisions  of the Pooling and
Servicing Agreement, cause the removal of such Mortgage Loan from the Trust Fund
and substitute one or more Qualified  Substitute  Mortgage Loans. The Originator
or the Seller,  as the case may be, shall amend the Closing  Schedule to reflect
the  withdrawal of such  Mortgage Loan from the terms of this  Agreement and the
Pooling  and  Servicing  Agreement  and the  addition,  if any,  of a  Qualified
Substitute  Mortgage  Loan.  The  Originator or the Seller,  as the case may be,
shall deliver to the Purchaser such amended  Closing  Schedule and shall deliver
such other documents as



<PAGE>


                                      -15-


are required by this  Agreement or the Pooling and  Servicing  Agreement  within
five (5) days of any such  amendment.  Any  repurchase  pursuant to this Section
7(a) shall be accomplished by deposit in the Collection Account of the amount of
the Purchase Price in accordance  with Section 2.03 of the Pooling and Servicing
Agreement.  In  connection  with  the  repurchase  of any  Mortgage  Loan by the
Originator at the price indicated in clause (i)(B) above,  any amounts in excess
of the  Purchase  Price shall not be deposited in the  Collection  Account,  but
instead  shall be paid to the  Purchaser  or its  designee.  Any  repurchase  or
substitution  required by this Section shall be made in a manner consistent with
Section 2.03 of the Pooling and Servicing Agreement.

                           In addition, upon discovery by the Seller, the
Purchaser, or any assignee, transferee or designee of the Purchaser that any
Mortgage Loan does not constitute a "qualified mortgage" within the meaning of
Section 860G(a)(3) of the Code, the party discovering the breach shall give
prompt written notice within two Business Days to the others. Within ninety (90)
days of its dis covery or its receipt of notice, the Seller promptly shall
either (i) repurchase the affected Mortgage Loan at the Purchase Price (as such
term is defined in the Pooling and Servicing Agreement) or (ii) pursuant to the
provisions of the Pooling and Servicing Agreement, cause the removal of such
Mortgage Loan from the Trust Fund and substitute one or more Qualified
Substitute Mortgage Loans.

                  (b) It is understood  and agreed that the  obligations  of the
Originator  or the  Seller,  as the case may be, set forth in this  Section 7 to
cure, repurchase or substitute for a defective Mortgage Loan constitute the sole
remedies of the Seller and the  Purchaser  against the  Originator  respecting a
missing or defective document or a breach of the  representations and warranties
contained  in Section  5(a) or Section 6. It is  understood  and agreed that the
obligations  of the  Seller  set  forth  in  this  Section  7 to  repurchase  or
substitute  for a  Mortgage  Loan as to which a  material  document  is  missing
constitute  the sole remedies of the Purchaser  against the Seller  respecting a
missing document.

                  SECTION  8.  CLOSING;  PAYMENT  FOR THE  MORTGAGE  LOANS.  The
closing of the purchase and sale of the Mortgage  Loans shall be held at the New
York City  office of  Thacher  Proffitt & Wood at 10:00 AM New York City time on
the Closing Date.

                  The  closing  shall  be  subject  to  each  of  the  following
conditions:

                  (a)      All  of the  representations  and  warranties  of the
                           Seller under this Agreement shall be true and correct
                           in all  material  respects as of the date as of which
                           they are made and no event shall have occurred which,
                           with notice or the passage of time,  would constitute
                           a default under this Agreement;

                  (b)      All  of the  representations  and  warranties  of the
                           Originator  under  this  Agreement  shall be true and
                           correct in all material respects as of the date as of
                           which they are made and no event shall have  occurred
                           which,  with  notice or the  passage  of time,  would
                           constitute a default under this Agreement;



<PAGE>


                                      -16-


                  (c)      The Purchaser shall have received, or the attorneys
                           of the Purchaser shall have received in escrow (to be
                           released from escrow at the time of closing), all
                           Closing Documents as specified in Section 9 of this
                           Agreement, in such forms as are agreed upon and
                           acceptable to the Purchaser, duly executed by all
                           signatories other than the Purchaser as required
                           pursuant to the respective terms thereof;

                  (d)      The  Seller  shall  have  delivered  or  caused to be
                           delivered  and  released to the  Purchaser  or to its
                           designee,    all   documents    (including    without
                           limitation,  the  Mortgage  Loans)  required to be so
                           delivered by the  Purchaser  pursuant to Section 2.01
                           of the Pooling and Servicing Agreement; and

                  (e)      All other  terms  and  conditions  of this  Agreement
                           shall have been complied with.

                  Subject  to the  foregoing  conditions,  the  Purchaser  shall
deliver or cause to be  delivered  to the Seller on the  Closing  Date,  against
delivery  and  release by the Seller to the  Trustee of all  documents  required
pursuant to the Pooling  and  Servicing  Agreement,  the  consideration  for the
Mortgage Loans as specified in Section 3 of this  Agreement,  by delivery to the
Seller of the Purchase Price in immediately available funds.

                  SECTION 9. CLOSING DOCUMENTS.  Without limiting the generality
of Section 8 hereof, the closing shall be subject to delivery of each of the
following documents:

                           (a)      An  Officers'  Certificate  of  the  Seller,
                                    dated  the  Closing  Date,  upon  which  the
                                    Originator,   the   Purchaser   and  Salomon
                                    Brothers Inc (the  "Underwriter")  may rely,
                                    in  the  form  of  Exhibit  3  hereto,   and
                                    attached  thereto copies of the  certificate
                                    of incorporation, by-laws and certificate of
                                    good  standing of the Seller  under the laws
                                    of New York;

                           (b)      An  Officers'  Certificate  of  the  Seller,
                                    dated  the  Closing  Date,  upon  which  the
                                    Purchaser and the  Underwriter  may rely, in
                                    the form of Exhibit 4 hereto,  with  respect
                                    to certain  facts  regarding the sale of the
                                    Mortgage   Loans  by  the   Seller   to  the
                                    Purchaser;

                           (c)      An Opinion of Counsel of the  Seller,  dated
                                    the  Closing  Date  and   addressed  to  the
                                    Originator,    the    Purchaser    and   the
                                    Underwriter,   substantially   in  the  form
                                    attached hereto as Exhibit 5;

                           (d)      An Officer's  Certificate of the Originator,
                                    dated  the  Closing  Date,  upon  which  the
                                    Seller,  the Purchaser  and the  Underwriter
                                    may rely,  in the form of  Exhibit 6 hereto,
                                    and attached thereto copies of the



<PAGE>


                                      -17-


                                    certificate of incorporation, by-laws and
                                    certificate of good standing of the
                                    Originator under the laws of its state of
                                    incorporation;

                           (e)      An opinion  of  Counsel  of the  Originator,
                                    dated the Closing Date and  addressed to the
                                    Seller,  the Purchaser  and the  Underwriter
                                    substantially in the form attached hereto as
                                    Exhibit 7;

                           (f)      Such  opinions  of  counsel  as  the  Rating
                                    Agencies  or  the  Trustee  may  request  in
                                    connection  with  the  sale of the  Mortgage
                                    Loans by the Seller to the  Purchaser or the
                                    Seller's   execution  and  delivery  of,  or
                                    performance under, this Agreement;

                            (g)     A letter from Deloitte & Touche L.L.P., 
                                    certified public accountants, dated the date
                                    hereof and to the effect that they have
                                    performed certain specified procedures as a
                                    result of which they determined that certain
                                    information of an accounting, financial or
                                    statistical nature set forth in the
                                    Purchaser's Prospectus Supplement, dated
                                    November 20, 1997 in the Summary under the
                                    subheading "The Mortgage Pool" and under the
                                    captions "The Mortgage Pool" and "Pooling
                                    and Servicing Agreement-- The Originator and
                                    Master Servicer", agrees with the records of
                                    the Originator;

                            (h)     The Originator shall deliver to the Seller
                                    for inclusion in the Prospectus Supplement
                                    for Salomon Brothers Mortgage Securities
                                    VII, Inc., Asset-Backed Floating Rate
                                    Certificates, Series 1997-AQ2, under the
                                    captions "The Mortgage Pool -- Underwriting
                                    Standards; Representations" and "Pooling and
                                    Servicing Agreement -- The Originator and
                                    Master Servicer", or for inclusion in other
                                    offering material such publicly available
                                    information regarding the Originator, its
                                    financial condition and its mortgage loan
                                    delinquency, foreclosure and loss
                                    experience, underwriting standards, lending
                                    activities and loan sales, production, and
                                    servicing and collection practices, and any
                                    similar nonpublic, unaudited financial
                                    information;

                            (i)     A letter from Deloitte & Touche L.L.P., 
                                    certified public accountants, dated the date
                                    hereof and to the effect that they have
                                    performed certain specified procedures as a
                                    result of which they determined that certain
                                    information of an accounting, financial or
                                    statistical nature set forth in the
                                    Purchaser's Prospectus Supplement, dated
                                    November 20, 1997 under the captions
                                    "Summary of Prospectus Supplement", "Yield
                                    on the Certificates" and "Description of the
                                    Certificates" agrees with the records of the
                                    Seller; and


<PAGE>


                                      -18-


                           (j)      Such  further   information,   certificates,
                                    opinions and  documents as the  Purchaser or
                                    the Underwriter may reasonably request.

                  SECTION  10.  COSTS.   The  Originator  shall  pay  (or  shall
reimburse  the Purchaser or any other Person to the extent that the Purchaser or
such other Person shall pay) all costs and expenses  incurred in connection with
the transfer and delivery of the Mortgage Loans,  including without  limitation,
recording fees, fees for title policy  endorsements  and  continuations  and the
fees for  recording  Assignments  of  Mortgage,  the fees  and  expenses  of the
Originator's in-house accountants and in-house attorneys, the costs and expenses
incurred in connection with producing the  Originator's  loan loss,  foreclosure
and delinquency  experience,  and the costs and expenses  incurred in connection
with  obtaining the documents  referred to in Sections 9(d) and 9(e). The Seller
shall pay (or shall  reimburse  the  Purchaser or any other Person to the extent
that the  Purchaser  or such other  Person  shall pay) the costs and expenses of
printing (or otherwise  reproducing) and delivering this Agreement,  the Pooling
and  Servicing   Agreement,   the  Certificates,   the  prospectus,   prospectus
supplement,  and private placement  memorandum  relating to the Certificates and
other related  documents,  the initial fees,  costs and expenses of the Trustee,
the fees and expenses of the Seller's counsel in connection with the preparation
of all  documents  relating to the  securitization  of the Mortgage  Loans,  the
filing fee charged by the Securities and Exchange Commission for registration of
the  Certificates,  the cost of outside special counsel that may be required for
the Originator,  the cost of obtaining the documents referred to in Section 9(g)
and the fees charged by any rating  agency to rate the  Certificates.  All other
costs and expenses in connection with the  transactions  contemplated  hereunder
shall be borne by the party incurring such expense.

                  SECTION  11.  SERVICING.  The  Seller has  represented  to the
Purchaser  that the  Mortgage  Loans are being  serviced  under the Purchase and
Servicing Agreement with the Originator,  and it is understood and agreed by and
among the Seller,  the Originator  and the Purchaser that the interim  servicing
arrangements under the Purchase and Servicing Agreement with the Originator will
be  superseded  by the  servicing  arrangements  set  forth in the  Pooling  and
Servicing Agreement.

                  SECTION 12. MANDATORY  DELIVERY;  GRANT OF SECURITY  INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans described on the
Mortgage  Loan  Schedule in  accordance  with the terms and  conditions  of this
Agreement  is  mandatory.  It is  specifically  understood  and agreed that each
Mortgage Loan is unique and identifiable on the date hereof and that an award of
money damages would be  insufficient  to compensate the Purchaser for the losses
and damages  incurred by the  Purchaser in the event of the Seller's  failure to
deliver the  Mortgage  Loans on or before the Closing  Date.  The Seller  hereby
grants to the  Purchaser  a lien on and a  continuing  security  interest in the
Seller's  interest  in each  Mortgage  Loan and  each  document  and  instrument
evidencing  each such Mortgage Loan to secure the  performance  by the Seller of
its  obligation  hereunder,  and the Seller  agrees that it holds such  Mortgage
Loans in custody for the Purchaser,  subject to the Purchaser's (i) right, prior
to the Closing Date, to reject any Mortgage Loan to the extent permitted by this
Agreement,  and  (ii)  obligation  to  deliver  or  cause  to be  delivered  the
consideration for the Mortgage Loans pursuant to Section 8 hereof.  Any Mortgage
Loans rejected by the Purchaser  shall  concurrently  therewith be released from
the security interest created hereby.



<PAGE>


                                      -19-


The Seller agrees that, upon acceptance of the Mortgage Loans by the Purchaser
or its designee and delivery of payment to the Seller, that its security
interest in the Mortgage Loans shall be released. All rights and remedies of the
Purchaser under this Agreement are distinct from, and cumulative with, any other
rights or remedies under this Agreement or afforded by law or equity and all
such rights and remedies may be exercised concurrently, independently or
successively.

                  Notwithstanding the foregoing, if on the Closing Date, each of
the  conditions  set forth in Section 8 hereof shall have been satisfied and the
Purchaser  shall not have paid or caused to be paid the Purchase  Price,  or any
such  condition  shall  not have  been  waived or  satisfied  and the  Purchaser
determines  not to pay or cause to be paid the  Purchase  Price,  the  Purchaser
shall  immediately  effect the redelivery of the Mortgage  Loans, if delivery to
the Purchaser has occurred and the security  interest created by this Section 12
shall be deemed to have been released.

                  SECTION 13. NOTICES.  All demands,  notices and communications
hereunder  shall be in  writing  and shall be deemed to have been duly  given if
personally  delivered  to or mailed by  registered  mail,  postage  prepaid,  or
transmitted by telex or telegraph and confirmed by a similar mailed writing,  if
to the  Purchaser,  addressed to the Purchaser at Seven World Trade Center,  New
York, New York 10048,  Attention:  Mortgage Finance Group, or such other address
as may hereafter be furnished to the Seller and the Originator in writing by the
Purchaser;  if to the  Seller,  addressed  to the  Seller at Seven  World  Trade
Center, New York, New York 10048, Attention:  Mortgage Finance Group, or to such
other  address as the Seller may  designate in writing to the  Purchaser and the
Originator;  if to the  Originator,  addressed to the  Originator at 1100 Town &
Country Road, Suite 900, Orange,  California 92868, Attention:  General Counsel,
or to such  other  address as the  Originator  may  designate  in writing to the
Purchaser and the Seller.

                  SECTION 14. SEVERABILITY OF PROVISIONS.  Any part,  provision,
representation  or warranty of this  Agreement  which is  prohibited or which is
held to be void or  unenforceable  shall be  ineffective  to the  extent of such
prohibition or unenforceability  without  invalidating the remaining  provisions
hereof. Any part, provision,  representation or warranty of this Agreement which
is prohibited or  unenforceable  or is held to be void or  unenforceable  in any
jurisdiction  shall,  as to such  jurisdiction,  be ineffective to the extent of
such  prohibition  or  unenforceability   without   invalidating  the  remaining
provisions  hereof,  and  any  such  prohibition  or   unenforceability  in  any
jurisdiction   as  to  any  Mortgage   Loan  shall  not   invalidate  or  render
unenforceable such provision in any other jurisdiction.  To the extent permitted
by applicable law, the parties hereto waive any provision of law which prohibits
or renders void or unenforceable any provision hereof.

                  SECTION 15. AGREEMENT OF PARTIES.  The Originator,  the Seller
and the Purchaser  each agree to execute and deliver such  instruments  and take
such actions as either of the others may, from time to time,  reasonably request
in order to effectuate  the purpose and to carry out the terms of this Agreement
and the Pooling and Servicing Agreement.

                  SECTION 16. SURVIVAL.  (a) The Seller agrees that the
representations, warranties and agreements made by it herein and in any
certificate or other instrument delivered



<PAGE>


                                      -20-

pursuant hereto shall be deemed to be relied upon by the Purchaser,
notwithstanding any investigation heretofore or hereafter made by the Purchaser
or on its behalf, and that the representations, warranties and agreements made
by the Seller herein or in any such certificate or other instrument shall
survive the delivery of and payment for the Mortgage Loans and shall continue in
full force and effect, notwithstanding any restrictive or qualified endorsement
on the Mortgage Notes and notwithstanding subsequent termination of this
Agreement, the Pooling and Servicing Agreement or the Trust Fund.


                  (b) The Originator agrees that the representations, warranties
and  agreements  made by it herein and in any  certificate  or other  instrument
delivered  pursuant  hereto  shall be deemed to be relied upon by the Seller and
the Purchaser  notwithstanding any investigation heretofore or hereafter made by
the Seller or the  Purchaser  or on the  behalf of either of them,  and that the
representations,  warranties and agreements made by the Originator  herein or in
any such  certificate  shall continue in full force and effect,  notwithstanding
subsequent termination of this Agreement, the Pooling and Servicing Agreement or
the Trust Fund.

                  SECTION 17. INDEMNIFICATION. (a) The Originator will indemnify
and hold  harmless  the  Purchaser  and each  person,  if any,  who controls the
Purchaser within the meaning of the Securities Act of 1933, as amended (the
"1933 Act"), against any losses, claims, damages or liabilities to which such
Purchaser or such controlling person may become subject, under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Prospectus Supplement
dated November 20, 1997 (the "Prospectus Supplement"), as amended or
supplemented, relating to the public offering of the Certificates, representing
interests in the Mortgage Loans, or in any other offering document (the "Private
Placement Memorandum") relating to the offering by the Purchaser or an affiliate
thereof, of the Class CE Certificates, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission
relates to information set forth in the Prospectus Supplement on the front cover
in the fourth paragraph (except the last sentence thereof), in the Summary under
the subheadings "Originator," "Master Servicer" and "The Mortgage Pool" and
under the captions "The Mortgage Pool -- General", "-- Underwriting Standards;
Representations" and "Pooling and Servicing Agreement -- The Originator and
Master Servicer" (and substantially identical information approved by the
Originator set forth in the Private Placement Memorandum relating to the Class
CE Certificates) (collectively, the "Originator Information") and will reimburse
the Purchaser and each such controlling person for any legal or other expenses
reasonably incurred by such Purchaser and each such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. The Originator's liability under this Section 17 shall be
in addition to any other liability the Originator may otherwise have.

                  (b) The  Purchaser  agrees to indemnify  and hold harmless the
Originator,  its  officers and its  directors,  and each person who controls the
Seller within the meaning of either the



<PAGE>


                                      -21-


1933  Act or the  1934  Act  against  any and all  losses,  claims,  damages  or
liabilities,  joint or several,  to which they may become subject under the 1933
Act, the 1934 Act, or other  federal or state  statutory law or  regulation,  at
common law or otherwise,  insofar as such losses, claims, damages or liabilities
(or  actions in respect  thereof)  arise out of or are based in whole or in part
upon any  untrue  statement  or alleged  untrue  statement  of a  material  fact
contained in the  Prospectus  Supplement,  the  Prospectus or Private  Placement
Memorandum,  or in any revision or amendment thereof or supplement  thereto,  or
arise out of or are based upon the omission or alleged omission to state therein
a  material  fact  required  to be  stated  therein  or  necessary  to make  the
statements  therein,  in the light of the circumstances in which they were made,
not  misleading,  as of the date  thereof  and as of the  Closing  Date,  except
insofar as such losses,  claims, damages or liabilities are caused by any untrue
statement or omission or alleged  untrue  statement or omission  made therein in
reliance  upon and in  conformity  with the  Originator's  Information  and will
reimburse the Originator and each such controlling person for any legal or other
expenses reasonably incurred by such Originator and each such controlling person
in connection  with  investigating  or defending any such loss,  claim,  damage,
liability or action. The Purchaser's liability under this Section 17 shall be in
addition to any other liability the Purchaser may otherwise have.

                  (c)  In  case  any  proceeding   (including  any  governmental
investigation)  shall be  instituted  involving  any  person in respect of which
indemnity may be sought  pursuant to either  Section 17(a) or 17(b) above,  such
person (the  "indemnified  party") shall promptly notify the person against whom
such  indemnity  may be sought  (the  "indemnifying  party") in writing  and the
indemnifying  party, upon request of the indemnified party, shall retain counsel
reasonably  satisfactory to the  indemnified  party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the reasonable fees and  disbursements of such counsel related to such
proceeding.  In any such proceeding,  any indemnified party shall have the right
to retain its own counsel,  but the reasonable fees and expenses of such counsel
shall be at the expense of such  indemnified  party unless (i) the  indemnifying
party and the  indemnified  party shall have mutually agreed to the retention of
such counsel or (ii) the named  parties to any such  proceeding  (including  any
impleaded parties) include both the indemnifying party and the indemnified party
and  representation  of both parties by the same counsel would be  inappropriate
due to actual or potential  differing  interests  between them. It is understood
that the  indemnifying  party shall not, in  connection  with any  proceeding or
related proceedings in the same jurisdiction,  be liable for the reasonable fees
and expenses of more than one separate  firm for all such  indemnified  parties.
Such firm  shall be  designated  in  writing  by the  Purchaser,  in the case of
parties indemnified pursuant to clause 17(a) and by the Originator,  in the case
of parties indemnified  pursuant to clause 17(b). The indemnifying party may, at
its option, at any time upon written notice to the indemnified party, assume the
defense  of  any  proceeding  and  may  designate  counsel  satisfactory  to the
indemnified  party  in  connection   therewith  provided  that  the  counsel  so
designated would have no actual or potential  conflict of interest in connection
with such representation.  Unless it shall assume the defense of any proceeding,
the indemnifying  party shall not be liable for any settlement of any proceeding
effected  without its written  consent,  but if settled  with such consent or if
there be a final judgment for the plaintiff,  the  indemnifying  party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. If the indemnifying party assumes the defense of
any



<PAGE>


                                      -22-

proceeding, it shall be entitled to settle such proceeding with the consent of
the indemnified party or, if such settlement provides for release of the
indemnified party in connection with all matters relating to the proceeding
which have been asserted against the indemnified party in such proceeding by the
other parties to such settlement, without the consent of the indemnified party.

                  (d) If the indemnification  provided for in this Section 17 is
unavailable  to an  indemnified  party under  Section  17(a) or 17(b)  hereof or
insufficient in respect of any losses,  claims,  damages or liabilities referred
to  therein,   then  the  indemnifying  party,  in  lieu  of  indemnifying  such
indemnified  party,  shall  contribute  to the  amount  paid or  payable by such
indemnified party as a result of such losses, claims, damages or liabilities, in
such  proportion  as is  appropriate  to  reflect  the  relative  fault  of  the
indemnified  and  indemnifying  parties in  connection  with the  statements  or
omissions which resulted in such losses, claims, damages or liabilities, as well
as any  other  relevant  equitable  considerations.  The  relative  fault of the
indemnified and indemnifying  parties shall be determined by reference to, among
other things,  whether the untrue or alleged untrue statement of a material fact
or the  omission  or  alleged  omission  to state a  material  fact  relates  to
information   supplied  by  such  parties  and  the  parties'  relative  intent,
knowledge,  access to  information  and  opportunity  to correct or prevent such
statement or omission.

                  (e) The Purchaser and the  Originator  agree that it would not
be just and equitable if contribution  pursuant to Section 17 were determined by
pro rata allocation or by any other method of allocation which does not take
account of the considerations referred to in Section 17(d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in this Section 17 shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim, except where the indemnified party is
required to bear such expenses pursuant to this Section 17, which expenses the
indemnifying party shall pay as and when incurred, at the request of the
indemnified party, to the extent that the indemnifying party will be ultimately
obligated to pay such expenses. In the event that any expenses so paid by the
indemnifying party are subsequently determined to not be required to be borne by
the indemnifying party hereunder, the party which received such payment shall
promptly refund the amount so paid to the party which made such payment. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.

                  (f) The indemnity  and  contribution  agreements  contained in
this Section 17 shall remain  operative and in full force and effect  regardless
of (i) any termination of this  Agreement,  (ii) any  investigation  made by the
Purchaser  or any person  controlling  the  Purchaser  or by or on behalf of the
Originator and their respective  directors or officers or any person controlling
the Originator, and (iii) acceptance of and payment for any of the Certificates.




<PAGE>


                                      -23-


                  SECTION 18. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS, 
DUTIES, OBLIGATIONS AND RESPONSIBILITIES OF THE PARTIES HERETO SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS (INCLUDING THE CHOICE OF LAW
PROVISIONS) AND DECISIONS OF THE STATE OF NEW YORK. THE PARTIES HERETO INTEND
THAT THE PROVISIONS OF SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW
SHALL APPLY TO THIS AGREEMENT.

                  SECTION 19.  Miscellaneous.  This Agreement may be executed in
two or more counterparts,  each of which when so executed and delivered shall be
an  original,  but all of  which  together  shall  constitute  one and the  same
instrument. This Agreement shall inure to the benefit of and be binding upon the
parties  hereto and their  respective  successors  and assigns.  This  Agreement
supersedes  all prior  agreements  and  understandings  relating  to the subject
matter  hereof.  Neither  this  Agreement  nor any term  hereof may be  changed,
waived,  discharged or terminated  orally,  but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination  is sought.  The  headings  in this  Agreement  are for  purposes of
reference only and shall not limit or otherwise affect the meaning hereof.

                  It is the  express  intent  of the  parties  hereto  that  the
conveyance  of the Mortgage  Loans by the Seller to the Purchaser as provided in
Section 4 hereof be, and be construed  as, a sale of the  Mortgage  Loans by the
Seller to the Purchaser and not as a pledge of the Mortgage  Loans by the Seller
to the Purchaser to secure a debt or other obligation of the Seller. However, in
the event that,  notwithstanding the aforementioned  intent of the parties,  the
Mortgage  Loans  are held to be  property  of the  Seller,  then,  (a) it is the
express  intent of the parties  that such  conveyance  be deemed a pledge of the
Mortgage  Loans  by the  Seller  to the  Purchaser  to  secure  a debt or  other
obligation of the Seller and (b) (1) this Agreement shall also be deemed to be a
security  agreement  within  the  meaning  of  Articles  8 and 9 of the New York
Uniform  Commercial  Code; (2) the  conveyance  provided for in Section 4 hereof
shall be  deemed  to be a grant by the  Seller to the  Purchaser  of a  security
interest in all of the Seller's right, title and interest in and to the Mortgage
Loans and all amounts payable to the holders of the Mortgage Loans in accordance
with the  terms  thereof  and all  proceeds  of the con  version,  voluntary  or
involuntary,  of the  foregoing  into  cash,  instruments,  securities  or other
property,  including  without  limitation  all  amounts,  other than  investment
earnings,  from time to time held or invested in the Collection  Account whether
in the  form  of  cash,  instruments,  securities  or  other  property;  (3) the
possession  by the  Purchaser  or its  agent  of  Mortgage  Notes,  the  related
Mortgages and such other items of property that constitute  instruments,  money,
negotiable  documents or chattel paper shall be deemed to be  "possession by the
secured  party" for purposes of  perfecting  the security  interest  pursuant to
Section 9-305 of the New York Uniform  Commercial Code; and (4) notifications to
persons holding such property,  and  acknowledgments,  receipts or confirmations
from  persons  holding  such  property,  shall be  deemed  notifications  to, or
acknowledgments,  receipts  or  confirmations  from,  financial  intermediaries,
bailees or agents (as applicable) of the Purchaser for the purpose of perfecting
such security  interest under  applicable law. Any assignment of the interest of
the  Purchaser  pursuant to Section  4(d)  hereof  shall also be deemed to be an
assignment of any security interest created hereby. The Seller and the Purchaser
shall, to the extent consistent with this



<PAGE>


                                      -24-


Agreement, take such actions as may be necessary to ensure that, if this
Agreement were deemed to create a security interest in the Mortgage Loans, such
security interest would be deemed to be a perfected security interest of first
priority under applicable law and will be maintained as such throughout the term
of this Agreement and the Pooling and Servicing Agreement.



<PAGE>





                  IN  WITNESS  WHEREOF,  the  Purchaser,   the  Seller  and  the
Originator  have caused  their names to be signed by their  respective  officers
thereunto duly authorized as of the date first
above written.

                                       SALOMON BROTHERS MORTGAGE
                                       SECURITIES VII, INC.


                                       By:
                                          ----------------------------------
                                       Name:     Susan Mills
                                       Title:    Assistant Vice President



                                       SALOMON BROTHERS REALTY CORP.


                                       By:
                                          ----------------------------------
                                       Name:     Susan Mills
                                       Title:    Authorized Agent



                                       AMERIQUEST MORTGAGE COMPANY


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



<PAGE>






                                                                       EXHIBIT 1

                  Pool Characteristics of the Mortgage Loans as delivered on the
Closing Date:

                  All  percentages set forth herein are based upon the aggregate
unpaid principal balances of the Mortgage Loans as of the Cut-off Date.

         (1)      No Mortgage Loan had a Loan-to-Value Ratio at origination in
                  excess of 85%;

         (2)      No more than  0.49% of the  Mortgage  Loans  (measured  by the
                  Cut-off  Date  Principal  Balance),  are related to  Mortgaged
                  Properties located in any one zip code area;

         (3)      Each  Mortgaged  Property  is  located in one of the states of
                  Alabama,  Alaska,  Arizona,  Arkansas,  California,  Colorado,
                  Connecticut, Delaware, District of Columbia, Florida, Georgia,
                  Hawaii,  Idaho,  Illinois,  Indiana,  Iowa, Kansas,  Kentucky,
                  Louisiana,   Maine,   Maryland,    Massachusetts,    Michigan,
                  Minnesota,  Mississippi,  Missouri, Montana, Nebraska, Nevada,
                  New  Hampshire,  New  Jersey,  New  Mexico,  New  York,  North
                  Carolina, North Dakota, Ohio, Oklahoma, Oregon,  Pennsylvania,
                  Rhode Island, South Carolina, South Dakota, Tennessee,  Texas,
                  Utah,  Vermont,   Washington,  West  Virginia,  Wisconsin  and
                  Wyoming;

         (4)      None of the  Mortgage  Loans  (measured  by the  Cut-off  Date
                  Principal Balance) are secured by a leasehold estate (the term
                  of each  such  leasehold  estate,  if any,  is not less than 5
                  years longer than the related Mortgage Note);

         (5)      No  more  than  approximately  1.75%  of  the  Mortgage  Loans
                  (measured by the Cut-off Date  Principal  Balance) are secured
                  by condominium units; no more than 0.27% of the Mortgage Loans
                  are secured by investor condominium units; and all condominium
                  Mortgage  Loans have been  originated on a form  acceptable to
                  FNMA or FHLMC with such riders as have been acceptable to FNMA
                  or FHLMC, as the case may be;

         (6)      No more than 5.85% of the Mortgage Loans (measured by the 
                  Cut-off Date Principal Balance) are secured by two- to
                  four-family dwellings. No more than 0.25% of the Mortgage
                  Loans (measured by the Cut-off Date Principal Balance) are
                  secured by Town Houses. No more than 0.99% of the Mortgage
                  Loans (measured by the Cut-off Date Principal Balance) are
                  secured by Manufactured Housing. No more than 1.68% of the
                  Mortgage Loans (measured by the Cut-off Date Principal
                  Balance) are secured by dwelling units in PUDs.
                  Approximately 89.48% of the Mortgage Loans (measured by the
                  Cut-off Date Principal Balance) are secured by detached
                  one-family dwellings;

         (7)      No Mortgage Loan had a principal balance in excess of 
                  approximately $515,000 at origination;

         (8)      Each Mortgage Loan was originated on or after July 1996 and
                  each Mortgage Loan has a next Adjustment Date no later than
                  May 1998;



<PAGE>


                                       -2-



         (9)      On the basis of representations made by the Mortgagors in
                  their loan applications, no more than 6.50% of the Mortgage
                  Loans are secured by investor properties and at least 93.50%
                  of the owner-occupied Mortgage Loans are secured by
                  owner-occupied Mortgaged Properties (in each case measured
                  by the Cut-off Date Principal Balance);

         (10)     The Mortgage  Interest Rates borne by the Mortgage Loans as of
                  the  Cut-off  Date  ranged  from 5.99% per annum to 15.00% per
                  annum and the weighted  average  Mortgage  Interest Rate as of
                  the Cut-off Date was 9.571% per annum;

         (11)     As of the Cut-off Date,  approximately  60.27% of the Mortgage
                  Loans were rate/term refinancings, approximately 37.88% of the
                  Mortgage Loans were cash out  refinancings  and  approximately
                  1.86% of the Mortgage  Loans were made to purchase the related
                  Mortgaged  Properties,  in each case  measured  by the Cut-off
                  Date Principal Balance;

         (12)     The  Margins on the  Mortgage  Loans range from 3.50% to 7.25%
                  and the  weighted  average  Margin as of the Cut-off  Date was
                  approximately 6.169%;

         (13)     No more than 74.75% of the  Mortgage  Loans  (measured  by the
                  Cut-off Date Principal Balance) were originated by the related
                  Originator  under  such  Originator's   "Full   Documentation"
                  mortgage  loan  program,  no more than 13.42% of the  Mortgage
                  Loans  (measured by the Cut-off Date  Principal  Balance) were
                  originated by the related  Originator under such  Originator's
                  "Fast  Trac",   "QuickCredit",   or  "QuickCredit  Fast  Trac"
                  mortgage  loan  programs,  no more than 11.83% of the Mortgage
                  Loans  (measured by the Cut-off Date  Principal  Balance) were
                  originated by the related  Originator under such  Originator's
                  "Stated Income Documentation"  mortgage loan program, and none
                  of the Mortgage Loans  (measured by the Cut-off Date Principal
                  Balance) were originated by the related  Originator under such
                  Originator's  "INSTA  Credit"  or  "INSTA  Credit  Fast  Trac"
                  mortgage loan program;

         (14)     With  respect to the related  Originator's  underwriting  risk
                  categories,  37.08%, 16.20%, 11.66%, 11.50%, 19.61%, 1.82% and
                  2.13% of the Mortgage Loans constitute A- Risk Mortgage Loans,
                  B+  Risk  Mortgage  Loans,  B Risk  Mortgage  Loans,  B-  Risk
                  Mortgage  Loans, C Risk Mortgage Loans, C- Risk Mortgage Loans
                  and D Risk Mortgage Loans, respectively, in each case measured
                  by the Cut-off Date Principal Balance; and

         (15)     Mortgage Loan exceptions referred to in Section 6(a)(ii) are
                  set forth below:



<PAGE>








                                                                       EXHIBIT 2

                FORM OF MORTGAGE NOTE AND MORTGAGE/DEED OF TRUST




<PAGE>







                                                                       EXHIBIT 3

                  [FORM OF OFFICER'S CERTIFICATE OF THE SELLER]

                          Salomon Brothers Realty Corp.

                              Officer's Certificate


                  I,  ________________,  hereby  certify  that  I  am  the  duly
appointed  Authorized  Agent  of  Salomon  Brothers  Realty  Corp.,  a New  York
corporation (the "Seller"), and further certify as
follows:

                  1.  Attached  hereto  is  a  true  and  correct  copy  of  the
         Certificate of  Incorporation  and By-laws of the Seller,  all of which
         are in full  force  and  effect on the date  hereof.  There has been no
         amendment  or  other  document  filed   affecting  the  Certificate  of
         Incorporation  of the Seller since  [December  20,  1982],  and no such
         amendment  has been  authorized.  There has been no  amendment or other
         document  filed  affecting the By-laws of the Seller since  [October 7,
         1986], and no such amendment has been authorized.  Attached hereto is a
         good standing certificate issued by the Secretary of State of the State
         of New York with respect to the Seller. No event has occurred since the
         date  thereof  that,  to the best  knowledge  of the  undersigned,  has
         affected the good standing of the Seller under the laws of New York.

                  2. There are no actions,  suits or proceedings  pending or, to
         the best of my  knowledge,  threatened  against or affecting the Seller
         which, if adversely determined, individually or in the aggregate, would
         materially  and  adversely  affect the Seller's  ability to perform its
         obligations  under the Mortgage Loan Purchase  Agreement (the "Mortgage
         Loan Purchase  Agreement"),  dated November 20, 1997, among the Seller,
         Ameriquest  Mortgage Company and Salomon Brothers  Mortgage  Securities
         VII, Inc (the  "Depositor").  No  proceedings  looking  toward  merger,
         consolidation  or liquidation,  dissolution or bankruptcy of the Seller
         are pending or contemplated.

                  3. Each  person who,  as an officer or  representative  of the
         Seller,  signed the  Mortgage  Loan  Purchase  Agreement  and any other
         document  delivered  prior  hereto or on the date hereof in  connection
         with the purchase  described in the Mortgage  Loan  Purchase  Agreement
         was, at the respective times of such signing and delivery,  and is now,
         duly  elected or  appointed,  qualified  and acting as such  officer or
         representative,  and the  signatures of such persons  appearing on such
         documents are their genuine signatures.

                  4. All of the  representations  and  warranties  of the Seller
         under the Mortgage Loan Purchase  Agreement are true and correct in all
         material  respects as of the Closing Date  subject,  in the case of the
         Closing  Schedule  delivered  pursuant to the  Mortgage  Loan  Purchase
         Agreement,  to such  amendments  thereto as were duly made on or before
         the date hereof and no event has  occurred  with  respect to the Seller
         which,  with notice or the passage of time or both,  would constitute a
         default under the Mortgage Loan Purchase Agreement.




<PAGE>


                                       -2-


                  5. The  information  set forth in the Mortgage  Loan  Schedule
         attached as an exhibit to the Pooling and  Servicing  Agreement is true
         and correct in all material respects.

                  6. The transactions contemplated in the Mortgage Loan Purchase
         Agreement will be reported as a sale in the Seller's financial reports.

                  7. The  information  contained in the  Depositor's  Prospectus
         Supplement, Asset- Backed Floating Rate Certificates,  Series 1997-AQ2,
         dated  November  20,  1997,  and  the  Depositor's   Private  Placement
         Memorandum,  dated November 20, 1997,  relating to the Mortgage  Loans,
         the Seller and its loan portfolio,  specifically the information in the
         summary under the caption "The Mortgage  Pool," is true and accurate in
         all material  respects  and does not contain any untrue  statement of a
         material  fact or omit to state a material  fact  required to be stated
         therein or necessary to make the  statements  therein,  in light of the
         circumstances under which they were made, not misleading.

                  8.  With  respect  to its sale of the  Mortgage  Loans and the
         transactions  and  undertakings   contemplated  by  the  Mortgage  Loan
         Purchase  Agreement,  the Seller has complied in all material  respects
         with all the  obligations by which it is bound and has satisfied in all
         material  respects  all the  conditions  on its part to be performed or
         satisfied prior to the Closing Date.

                  9. Capitalized terms used but not defined herein shall have
         the meanings assigned in the Mortgage Loan Purchase Agreement.



<PAGE>


                                       -3-


                  IN WITNESS WHEREOF, I have hereunto signed my name.


Dated:
                                       By: __________________________________
                                       Name:
                                       Title:     Authorized Agent



                  I, , an  ________________  of Salomon  Brothers  Realty Corp.,
hereby certify that  ________________ is a duly appointed,  qualified and acting
Authorized  Agent of the Seller and that the  signature  appearing  above is his
genuine signature.

                  IN WITNESS WHEREOF, I have hereunto signed my name.

Dated:
                                       By: __________________________________
                                       Name:
                                       Title:





<PAGE>








                                                                       EXHIBIT 4
                  [FORM OF OFFICER'S CERTIFICATE OF THE SELLER]

                 Salomon Brothers Mortgage Securities VII, Inc.
                     Asset-Backed Floating Rate Certificates
                                 Series 1997-AQ2

                                 CERTIFICATE OF
                          SALOMON BROTHERS REALTY CORP.


                  Reference is made to the sale of mortgage loans (the "Mortgage
Loans") by Salomon Brothers Realty Corp.  ("SBRC") to Salomon Brothers  Mortgage
Securities  VII,  Inc.  (the  "Depositor")  pursuant to a Mortgage Loan Purchase
Agreement,  dated November 20, 1997, among SBRC, Ameriquest Mortgage Company and
the Depositor  (the  "Purchase  Agreement"),  and the  simultaneous  issuance of
Asset-Backed  Floating Rate Certificates,  Series 1997-AQ2,  Class A, Class M-1,
Class M-2,  Class M-3,  Class CE,  Class  R-I,  Class R-II and Class  R-III (the
"Certificates"),  pursuant to a Pooling  and  Servicing  Agreement,  dated as of
November 1, 1997 (the "Pooling and Servicing Agreement") among the Depositor, as
depositor,   Ameriquest  Mortgage  Company,  as  master  servicer  (the  "Master
Servicer") and Norwest Bank  Minnesota,  National  Association,  as trustee (the
"Trustee").  In  consideration  for its  purchase  of the  Mortgage  Loans,  the
Depositor will deliver to SBRC  immediately  available funds. The Depositor will
sell the Certificates to Salomon Brothers Inc (the  "Underwriter") for offer and
sale pursuant to the terms of an Underwriting Agreement, dated November 20, 1997
(the "Underwriting Agreement"),  between the Depositor and the Underwriter.  The
Purchase  Agreement,  the Pooling and Servicing  Agreement and the  Underwriting
Agreement   together,   are   hereinafter   collectively   referred  to  as  the
"Agreements".  Capitalized  terms not  otherwise  defined  herein shall have the
meanings set forth in the Agreements.

                  The undersigned is a duly appointed Authorized Agent of
Salomon Brothers Realty Corp. and hereby certifies after reasonable
investigation that:


                  1. The price to be paid to SBRC for the  Mortgage  Loans  will
have been  paid in full at the  closing  of the sale  pursuant  to the  Purchase
Agreement, and no agreement or arrangement exists or will exist that permits the
modification  of the  consideration  for the Mortgage  Loans  subsequent to that
sale.  SBRC will not have any right or  obligation  to  repurchase  any Mortgage
Loan, except as provided in the Purchase Agreement.

                  2.  Each  Mortgage  Note and each  related  Mortgage  has been
appropriately prepared and duly executed and delivered by the related Mortgagor,
and each Mortgage has been appropriately recorded in the applicable jurisdiction
and any  intervening  endorsement  of any  Mortgage  Note,  and any  intervening
assignment  of any  Mortgage,  which was  required  in order to transfer to SBRC
ownership of the Mortgage Loans, was obtained and completed.

                  3. Each  Mortgage  Note has been  endorsed  or  assigned  in a
manner that satisfies any  requirement  necessary to transfer to the Trustee all
right, title and interest of the party so



<PAGE>


                                       -2-


endorsing or assigning,  as noteholder  or  transferee  thereof,  in and to that
Mortgage  Note,  as  provided  in the  Purchase  Agreement  and the  Pooling and
Servicing Agreement. Each Assignment to the Trustee is in recordable form and is
sufficient  to effect  the  assignment  and  transfer  to the  Depositor  of the
benefits of the assignor, as original mortgagee or assignee thereof,  under each
Mortgage to which that Assignment relates, as provided in the Purchase Agreement
and the Pooling and Servicing Agreement. Each Assignment to the Trustee has been
or will be  appropriately  recorded to the extent required under applicable law,
as provided in the Pooling and Servicing Agreement.

                  4.  Each  original   Mortgage  Note,  each  original  recorded
Mortgage,  each original recorded intervening  Assignment and each Assignment to
the Trustee has been delivered to the Trustee at the direction of the Depositor,
and the  Trustee  will  maintain  continuous  actual  possession  of each of the
foregoing  in the State of New York.  Neither  the  Trustee nor any agent of the
Trustee  that has or will have  possession  of any  Mortgage  Note,  Mortgage or
Assignment  is,  or will be,  at any time  during  the term of the  Pooling  and
Servicing  Agreement,  an  affiliate  of SBRC or  otherwise  under the direct or
indirect control of SBRC.

                  5. Immediately  prior to the transfer of the Mortgage Loans by
SBRC to the Depositor,  SBRC was the sole owner of each Mortgage Loan,  free and
clear  of any and all  prior  liens,  mortgages,  security  interests,  pledges,
participation   interests,   adverse  claims,   charges  or  other  equities  or
encumbrances of any nature, and had full right and authority to sell, assign and
transfer the Mortgage Loans.

                  6. No Mortgage Note,  Mortgage or other document  constituting
part of the Mortgage File reflects or will reflect on its face any interest that
is inconsistent with the ownership interest of SBRC in and to the Mortgage Loans
or the transfer of the Mortgage Loans by SBRC to
the Depositor.

                  7. The transfer of the Mortgage Loans by SBRC to the Depositor
as provided in the Purchase Agreement is intended by SBRC to be, and is in fact,
a contemporaneous exchange in which SBRC receives new value.

                  8. SBRC was solvent at all  relevant  times prior to, and will
not be  rendered  insolvent  by,  the  transfer  of the  Mortgage  Loans  to the
Depositor.

                  9. SBRC did not transfer the Mortgage Loans to the Depositor
with any intent to hinder, delay or defraud any of SBRC's creditors.

                  10. None of SBRC, the Depositor,  the Master  Servicers or the
Trustee, or any agent acting on behalf of any of them, has been or will become a
party to any fraud or illegality affecting any Mortgage Loan or Certificate.

                  11.   No   breach   of   the    Agreements   by   any   party,
misrepresentation  or failure by any party to perform  all acts  required  to be
performed prior to the Closing Date, or fraud or mistake on



<PAGE>


                                       -3-


the part of any party to the  Agreements  in  connection  with the  transactions
contemplated by the Agreements, has occurred or will occur.

                  12.  No party to the  Agreements  has  taken or will  take any
action that is  unreasonable,  arbitrary or capricious,  or that is not taken in
good faith or in a commercially reasonable manner,  affecting the Mortgage Loans
in connection with the transactions contemplated
by the Agreements.

                  13. There is not and will not be any other agreement among the
parties to the Agreements that modifies or otherwise supplements the agreement
of the parties as expressed in the Agreements.

                  14.  SBRC  does not have and will not have any right to modify
or  alter  the  terms  of the  transfer  of the  Mortgage  Loans  by SBRC to the
Depositor, or to substitute or add any mortgage loan thereafter, except as
provided in the Agreements.

                  15.  SBRC will not take any action that is  inconsistent  with
the ownership interest in the Mortgage Loans evidenced by the Certificates. SBRC
will  promptly  indicate  to other  persons  or  entities,  when a  response  is
appropriate,  that the Mortgage Loans were transferred by SBRC to the Depositor.
SBRC will not claim any ownership  interest directly in the Mortgage Loans other
than that represented by Certificates in which it may have an ownership interest
from time to time.

                  16. Under generally accepted  accounting  principles  ("GAAP")
and for  federal  income tax  purposes,  SBRC will  report the  transfer  of the
Mortgage  Loans  to  the  Depositor,  as  provided  in the  respective  Purchase
Agreements as a sale of all of its interest in the Mortgage Loans. SBRC has been
advised by or has confirmed with its independent  public accountants for similar
transactions  that the sale will be so classified  under GAAP in accordance with
Statement No. 125 of the Financial Accounting Standards Board.



<PAGE>


                                       -4-


                  IN  WITNESS   WHEREOF,   the  undersigned  has  executed  this
Certificate as of November __, 1997.


                                          SALOMON BROTHERS REALTY CORP.


                                          By:
                                          Name:
                                          Title: Authorized Agent




<PAGE>


Salomon Brothers Mortgage Securities VII, Inc.
Salomon Brothers Inc.
Ameriquest Mortgage Company
November __, 1997                                                       Page 1.



                                    EXHIBIT 5

                   [FORM OF OPINION OF COUNSEL TO THE SELLER]

                                November __, 1997


Salomon Brothers Mortgage
  Securities VII, Inc.
Seven World Trade Center
New York, New York 10048

Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048

Ameriquest Mortgage Company
1100 Town & Country Road
Orange, California 92868

            Re: Salomon Brothers Mortgage Securities VII, Inc.
                Asset-Backed Floating Rate Certificates Series 1997-AQ2
                -------------------------------------------------------

Ladies and Gentlemen:

                  We have acted as counsel to Salomon Brothers Realty Corp. (the
"Seller") in connection  with the sale of mortgage loans (the "Mortgage  Loans")
by  the  Seller  to  Salomon  Brothers   Mortgage   Securities  VII,  Inc.  (the
"Depositor") pursuant to a Mortgage Loan Purchase Agreement,  dated November 20,
1997,  among the Seller,  Ameriquest  Mortgage  Company and the  Depositor  (the
"Agreement"). This opinion is being delivered to you pursuant to Section 9(c) of
the Agreement.  Capitalized  terms used but not defined herein have the meanings
set forth in the Agreement or in agreements referred to therein.

                  In  rendering  this  opinion  letter,  we do not  express  any
opinion  concerning  any law other than the law of the State of New York and the
federal law of the United States,  and we do not express any opinion  concerning
the  application  of the "doing  business"  laws or the  securities  laws of any
jurisdiction  other than the federal  securities  laws of the United States.  In
addition,  we do not express any  opinion on any issue not  expressly  addressed
below.

                  In  rendering  this  opinion  letter,  we  have  examined  the
Agreement,  the certificate of incorporation  and by-laws of the Seller and such
records and other documents as we have deemed necessary.  As to matters of fact,
we have examined and relied upon  representations of the Seller contained in the
Agreement,   and  where  we  have   deemed   appropriate,   representations   or
certifications of officers of the Seller, the Depositor or public officials.  We
have assumed the authenticity of all documents submitted to us as originals, the
genuineness of all  signatures,  the legal  capacity of natural  persons and the
conformity to the originals of all documents submitted to us as copies. We have



<PAGE>


Salomon Brothers Mortgage Securities VII, Inc.
Salomon Brothers Inc.
Ameriquest Mortgage Company
November __, 1997                                                     Page 2.



assumed,  except as to the Seller,  that all parties had the corporate power and
authority to enter into and perform all  obligations  thereunder and, as to such
parties,  we also have assumed the due authorization by all requisite  corporate
action,  the due execution and delivery and the validity and binding  effect and
enforceability of such documents.  We have further assumed that there is not and
will  not be any  other  agreement  that  materially  supplements  or  otherwise
modifies the agreements expressed in the Agreements. We have further assumed the
conformity of the Mortgage Loans and related  documents to the  requirements  of
the Agreement.

                  Based upon the foregoing, we are of the opinion that:

         1.       The  Seller  is  a  corporation  duly  organized  and  validly
                  existing and in good  standing  under the laws of the State of
                  New  York  and has the  requisite  corporate  power to own its
                  properties,  to conduct its business as presently conducted by
                  it, to own the  Mortgage  Loans,  to  transfer  and convey the
                  Mortgage  Loans to the Depositor and to enter into and perform
                  its obligations under the Agreement.

         2.       The Agreement has been duly authorized, executed and delivered
                  by the  Seller  and,  upon due  authorization,  execution  and
                  delivery by the other parties  thereto,  it will  constitute a
                  valid, legal and binding agreement of the Seller,  enforceable
                  against  the Seller in  accordance  with its terms,  except as
                  enforceability  may be limited by (a) bankruptcy,  insolvency,
                  liquidation, receivership, moratorium, reorganization or other
                  similar laws affecting the rights of creditors and (b) general
                  principles  of  equity,  whether  enforcement  is  sought in a
                  proceeding in equity or at law.

         3.       No consent,  approval,  authorization or order of any State of
                  New York or federal  court or  governmental  agency or body is
                  required   for  the   consummation   by  the   Seller  of  the
                  transactions  contemplated  by the Agreement  except for those
                  consents, approvals,  authorizations or orders that previously
                  have been obtained.

         4.       Neither the transfer of the Mortgage Loans as provided in
                  the Agreement, nor the fulfillment of the terms of or the
                  consummation of any other of the transactions contemplated
                  by the Agreement, will result in a breach of any term or
                  provision of the certificate of incorporation or by-laws of
                  the Seller or, to the best of our knowledge, will conflict
                  with, result in a breach, violation or acceleration of or
                  constitute a default under, the terms of any indenture or
                  other agreement or instrument to which the Seller is a party
                  or by which it is bound, or any State of New York or federal
                  statute applicable to the Seller, or any order or regulation
                  of any State of New York or federal court, regulatory body,
                  administrative agency or governmental body having
                  jurisdiction over the Seller.


<PAGE>


Salomon Brothers Mortgage Securities VII, Inc.
Salomon Brothers Inc.
Ameriquest Mortgage Company
November __, 1997                                                     Page 3.



         5.       To  the  best  of  our   knowledge,   there  are  no  actions,
                  proceedings or  investigations  pending or threatened  against
                  the Seller  before any court,  administrative  agency or other
                  tribunal (a) asserting the  invalidity of the  Agreement,  (b)
                  seeking to prevent the consummation of any of the transactions
                  contemplated in the Agreement or (c) that might materially and
                  adversely   affect  the  performance  by  the  Seller  of  its
                  obligations  under, or the validity or enforceability  of, the
                  Agreement.

                  This  opinion  letter is rendered for the sole benefit of each
addressee hereof, and no other person is entitled to rely hereon. Copies of this
letter may not be  furnished  to any other  person,  nor may any portion of this
letter be quoted,  circulated or referred to in any other document,  without our
prior written consent.

                                                Very truly yours,

                                                Thacher Proffitt & Wood


                                                By




<PAGE>




                                                                       EXHIBIT 6

                  [FORM OF OFFICER'S CERTIFICATE OF ORIGINATOR]

                           Ameriquest Mortgage Company

                              Officer's Certificate


                  I, ____________________________,  hereby certify that I am the
duly  elected  _____________________________________,   of  Ameriquest  Mortgage
Company, a Delaware corporation (the "Company"),  and further certify, on behalf
of the Company as follows:

                  1. Attached  hereto as Attachment I is a true and correct copy
of the Certificate of Incorporation  and By-laws of the Company as in full force
and effect on the date  hereof.  No event has  occurred  since  ________________
which has affected the good  standing of the Company under the laws of the State
of Delaware

                  2.  No  proceedings   looking   toward  merger,   liquidation,
dissolution or bankruptcy of the Company are pending or contemplated.

                  3. Each person who, as an officer or  attorney-in-fact  of the
Company,  signed  (a)  the  Mortgage  Loan  Purchase  Agreement  (the  "Purchase
Agreement")  dated November 20, 1997 among the Company,  Salomon Brothers Realty
Corp. and Salomon  Brothers  Mortgage  Securities VII, Inc. ("SBMS VII"), or (b)
any other  document  delivered  prior hereto or on the date hereof in connection
with the transactions contemplated by the Purchase Agreement and the Pooling and
Servicing  Agreement  dated as of November  20, 1997 among SBMS VII, the Company
and Norwest Bank Minnesota,  National Association (the "Pooling Agreement") was,
at the  respective  times of such  signing and  delivery,  and is as of the date
hereof,  duly  elected or  appointed,  qualified  and acting as such  officer or
attorney-in-fact, and the signatures of such persons appearing on such documents
are their genuine signatures.

                  4. Attached hereto as Attachment II is a true and correct copy
of the  resolutions  duly  adopted by the board of directors of the Company on ,
199_ (the  "Resolutions")  with respect to the transactions  contemplated by the
Purchase  Agreement and the Pooling  Agreement;  said  Resolutions have not been
amended or modified, annulled or revoked and are in full force and effect on the
date hereof.

                  5. All of the  representations  and  warranties of the Company
contained  in the  Purchase  Agreement  are true  and  correct  in all  material
respects as of the Closing Date, and no event has occurred which, with notice or
the  passage of time or both,  would  constitute  a default  under the  Purchase
Agreement.

                  6.  The  Company  has  performed  all of its  duties  and  has
satisfied  all  of the  material  conditions  on its  part  to be  performed  or
satisfied prior to the Closing Date.




<PAGE>


                                                                     Page 2.


                  All  capitalized  terms used herein and not otherwise  defined
shall have the meanings assigned to them in the Pooling Agreement.

                  IN WITNESS WHEREOF, I have hereunto signed my name and affixed
the seal of the Company.

                                        Dated:  November __, 1997

         (Seal)                         AMERIQUEST MORTGAGE COMPANY


                                        By:
                                        Name:
                                        Title:


                  I, ________________________________,  [Assistant] Secretary of
______________________________, hereby certify that ____________________________
is the duly elected, qualified and acting ______________________________________
of ____________________________  and that the signature  appearing  above is his
genuine signature.

                  IN WITNESS WHEREOF, I have hereunto signed my name.

Dated:  November __, 1997

                                     AMERIQUEST MORTGAGE COMPANY


                                     By:
                                     Name:
                                     Title:



<PAGE>




                                                                       EXHIBIT 7

                [FORM OF OPINION OF COUNSEL FOR EACH ORIGINATOR]

TO:  Addressees on Schedule A


                                          November__, 1997


        Re:    Salomon Brothers Mortgage Securities VII, Inc.
               Asset-Backed Floating Rate Certificates' Series 1997-AQ2
               --------------------------------------------------------

Ladies and Gentlemen:

         I am General Counsel of Ameriquest Mortgage Company (the "Company") and
have acted as counsel to the Company in  connection  with the  servicing  by the
Company of certain  residential  first  mortgage  loans (the  "Mortgage  Loans")
pursuant to the Pooling and  Servicing  Agreement,  dated as of November 1, 1997
(the  "Pooling  and  Servicing  Agreement"),  among  Salomon  Brothers  Mortgage
Securities VII, Inc., as depositor (the "Depositor"),  the Company,  and Norwest
Bank Minnesota,  N.A., as trustee (the "Trustee"),  relating to the issuance and
sale  by the  Depositor  of  Asset-Backed  Floating  Rate  Certificates,  Series
1997-AQ2,  designated as the Class A, Class M-1, Class M-2, Class M-3, Class CE,
Class  R-I,  Class  R-II  and  Class  R-III  Certificates   (collectively,   the
"Certificates").  In  connection  with the sale and  servicing  of the  Mortgage
Loans,  the  Company  has  entered  into the  Custodial  Agreement,  dated as of
November 25, 1997,  among the Trustee,  the  Company,  the  Depositor  and Texas
Commerce Bank National Association, as custodian (the "Custodial Agreement") and
the  Mortgage  Loan  Purchase  Agreement,  dated  November20,  1997,  among  the
Depositor,  the  Company  and  Salomon  Brothers  Realty  Corp.  (the  "Purchase
Agreement");  the Purchase Agreement,  the Custodial Agreement,  and the Pooling
and Servicing Agreement, the "Agreements"). Capitalized terms not defined herein
have the meanings set forth in the Agreements.

         As such counsel,  I have  examined  original or reproduced or certified
copies of the certificate of incorporation and bylaws of the Company, as amended
to date,  records of actions  taken by the Board of Directors of the Company and
copies of the  Agreements,  the Prospectus  Supplement,  dated November 20, 1997
(the  "Prospectus  Supplement"),  to the  Prospectus,  dated  November 20, 1997,
relating to the Class A, M-1, M-2, M-3, R-I, R-II and R-III Certificates. I have
also examined such other documents,  papers,  statutes and authorities as I deem
necessary  as a basis  for the  opinions  hereinafter  set  forth.  In all  such
examinations  made by me in  connection  with this  opinion,  I have assumed the
genuineness of all  signatures  and the  completeness  and  authenticity  of all
records  and all  documents  submitted  to me as copies  thereof.  As to various
matters of fact relevant to the opinions  hereinafter  expressed,  I have relied
upon  the  representations  and  warranties  contained  in  the  Agreements  and
statements and certificates of officers and  representatives of the Company.  As
to  matters in  Paragraph  5 below  with  respect  to which I opine  based on my
knowledge,  I have relied solely upon inquiries  made to and responses  received
from officers and  representatives of the Company and the documents furnished to
me by representatives of the Company,  which documents such representatives have
informed me include the only material indentures, agreements and



<PAGE>


                                      - 2 -

instruments to which the Company is a party or by which it or any of its
properties or assets are bound.

         In addition to the foregoing,  I have assumed that, if the Trustee, the
Company or any Certificateholder seeks to enforce any of their respective rights
under  the  Agreements,  they  will  do so  only  in  good  faith  and  only  in
circumstances and in a manner in which it is commercially reasonable to do so.

         In addition to rendering  legal advice and assistance to the Company in
the course of the  negotiation  and  preparation of the  Agreements,  involving,
among other things,  discussions and inquiries  concerning various legal matters
and the review of certain corporate records,  documents and proceedings,  I also
participated  in  conferences  with  representatives  of the  Depositor  and the
Company's independent certified public accountants, at which the contents of the
Prospectus  Supplement and related  matters were  discussed and revised.  I have
not, however,  except with respect to matters expressly covered by this opinion,
independently verified the accuracy,  completeness or fairness of the statements
contained in the Prospectus Supplement,  and, due to the limitations inherent in
the information available to me and the nature and extent of my participation in
such conferences, I am unable to assume, and I do not assume, any responsibility
for the accuracy, completeness or fairness of such statements.

         I express no opinion  except as to (i) United  States  federal  law and
(ii) the laws of the State of California.

         Based upon and subject to the foregoing, I am of the opinion that:

         1. The Company is duly authorized and qualified to transact any and all
business  contemplated  by the  Agreements  in any  state in  which a  Mortgaged
Property  securing a Mortgage Loan is located or is otherwise not required under
applicable law to effect such  qualification and, in any event, is in compliance
with the doing  business  laws of any such  State,  to the extent  necessary  to
ensure  the  enforceability  of each  Mortgage  Loan  and the  servicing  of the
Mortgage  Loans in  accordance  with  the  terms of the  Pooling  and  Servicing
Agreement.

         2. The Company has the power to engage in the transactions contemplated
by each and all of the  Agreements  and has all requisite  power,  authority and
legal  right to execute  and  deliver  the  Agreements  and any other  documents
delivered  in  connection  therewith  and to perform  and  observe the terms and
conditions of such instruments.

         3.  Each of the  Agreements  has been  duly  authorized,  executed  and
delivered by the Company and is a legal, valid and binding agreement enforceable
in accordance  with its  respective  terms  against the Company,  except as such
enforcement   may  be  limited  by   bankruptcy,   insolvency,   reorganization,
receivership,  moratorium  or other laws  relating to or affecting the rights of
creditors generally and by general equity principles  regardless of whether such
enforcement is considered in a proceeding in equity or at law.




<PAGE>


                                      - 3 -

         4. No consent, approval, authorization, license, permit or order of any
court or governmental agency or body is required for the execution, delivery and
performance  by the Company of, or compliance by the Company with, any or all of
the  Agreements or the  consummation  of the  transactions  contemplated  by the
Agreements.

         5. The  execution and delivery of the  Agreements  by the Company,  the
servicing of the Mortgage Loans by the Company, the consummation of any other of
the  transactions  contemplated  by the  Agreements  and the  fulfillment  of or
compliance  with the  terms of the  Agreements  are in the  ordinary  course  of
business of the Company and will not (A) result in a material breach of any term
or provision of the charter or by-laws of the Company or (B) materially conflict
with,  result in a material breach,  violation or acceleration of or result in a
material  default under the terms of any other material  agreement or instrument
of which I have  knowledge to which the Company is a party or by which it may be
bound,  or any statute,  order or  regulation  applicable  to the Company of any
court,  regulatory  body,  administrative  agency or  governmental  body  having
jurisdiction over the Company; and the Company is not a party to, bound by or in
material  breach  or  violation  of any  material  indenture  or other  material
agreement or instrument of which I have knowledge, or subject to or in violation
of  any  statute,   order  or   regulation  of  any  court,   regulatory   body,
administrative  agency or governmental  body having  jurisdiction over it, which
materially  and adversely  affects or, to the best of my knowledge,  will in the
future  materially  and  adversely  affect,  (x) the  ability of the  Company to
perform its  obligations  under the Agreements or (y) the business,  operations,
financial condition, properties or assets of the Company taken as a whole.

         6. To the best of my knowledge, there is no action, suit, proceeding or
investigation  pending or threatened  against the Company which, in my judgment,
either in any one  instance  or in the  aggregate,  may  result in any  material
adverse change in the business, operations,  financial condition,  properties or
assets of the Company or in any material  impairment  of the right or ability of
the Company to carry on its business  substantially  as now  conducted or in any
material  liability on the part of the Company or which would draw into question
the validity of the Agreements, the Certificates or the Mortgage Loans or of any
action taken or to be taken in  connection  with the  transactions  contemplated
thereby,  or which  would be likely  to impair  materially  the  ability  of the
Company to perform its obligations under the terms of the Agreements.

         7. Based upon my  participation,  nothing has come to my attention that
has  caused me to  believe  that the  information  contained  in the  Prospectus
Supplement on the front cover in the fourth paragraph  (except the last sentence
thereof), in the Summary under the subheadings  "Originator",  "Master Servicer"
and "The Mortgage  Pool" and under the captions  "The  Mortgage  Pool--General",
"--Underwriting   Standards;   Representations"   and  "Pooling  and   Servicing
Agreement--The  Originator and Master Servicer" in particular (but excluding the
financial  statements,  the schedules and other financial and  statistical  data
included  therein as to which I express no opinion)  insofar as such information
relates to the Company or the Mortgage  Loans sold by the Company to the Seller,
includes an untrue  statement of a material  fact,  or omits to state a material
fact as of the date hereof,  necessary in order to make the statements  therein,
in light of the circumstances under which they were made not misleading.




<PAGE>


                                      - 4 -

         This opinion is solely for the benefit of the  addressees  hereof,  and
may not be relied upon in any manner by any other person or entity.

                                       Respectfully submitted,



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





<PAGE>


                                      - 5 -

                                   SCHEDULE A



Salomon Brothers Mortgage               Fitch Investors Service, L.P.
  Securities VII, Inc.                     One State Street Plaza
Seven World Trade Center, 29th Floor    New York, New York 10004
New York, New York 10048


Standard and Poor's Rating Services     Norwest Bank Minnesota, N.A.
26 Broadway                             Norwest Center
New York, New York 10004                Sixth & Marquette
                                        Minneapolis, Minnesota 55479

Salomon Brothers Inc                    Texas Commerce Bank National Association
Seven World Trade Center                712 Main Street
New York, New York 10048                Houston, Texas 77002



<PAGE>





                                                                       EXHIBIT 8

      Mortgage Loan Number                        Purchase Price Percentage
      --------------------                        -------------------------



<PAGE>




                                   EXHIBIT E-1


                               REQUEST FOR RELEASE
                             (for Trustee/Custodian)



LOAN INFORMATION

         Name of Mortgagor:   ______________________________________

         Master Servicer
         Loan No.:            ______________________________________

TRUSTEE/CUSTODIAN

         Name:                ______________________________________

         Address:             ______________________________________


         Trustee/Custodian
         Mortgage File No.:   ______________________________________

DEPOSITOR

         Name:             SALOMON BROTHERS MORTGAGE
                           SECURITIES VII, INC.

         Address:          ______________________________________
                           ______________________________________

         Certificates:     Asset-Backed Floating Rate
                           Certificates, Series 1997-AQ2.


<PAGE>



                  The undersigned Master Servicer hereby acknowledges that it
has received from _______________________, as Trustee for the Holders of
Asset-Backed Floating Rate Certifi cates, Series 1997-AQ2, the documents
referred to below (the "Documents"). All capitalized terms not otherwise defined
in this Request for Release shall have the meanings given them in the Pooling
and Servicing Agreement, dated as of November 1, 1997, among the Trustee, the
Depositor and the Master Servicer (the "Pooling and Servicing Agreement").

( )      Promissory Note dated _______________, 19__, in the original principal
         sum of $__________, made by _____________________, payable to, or
         endorsed to the order of, the Trustee.

( )      Mortgage recorded on _________________________ as instrument no.
         ____________________ in the County Recorder's Office of the County of
         _________________, State of __________________ in book/reel/docket
         _________________ of official records at page/image _____________.

( )      Deed of Trust recorded on ___________________ as instrument no.
         ________________ in the County Recorder's Office of the County of
         _________________, State of ____________________ in book/reel/docket
         _________________ of official records at page/image ______________.

( )      Assignment of Mortgage or Deed of Trust to the Trustee, recorded on
          ___________________ as instrument no. _________ in the County
          Recorder's Office of the County of _______________, State of
          _______________________ in book/reel/docket ____________ of official
          records at page/image ____________.

( )      Other documents, including any amendments, assignments or other
         assumptions of the Mortgage Note or Mortgage.

( )      ---------------------------------------------

( )      ---------------------------------------------

( )      ---------------------------------------------

( )      ---------------------------------------------

                  The undersigned Master Servicer hereby acknowledges and agrees
as follows:

                  (1) The Master Servicer shall hold and retain possession of
         the Documents in trust for the benefit of the Trustee, solely for the
         purposes provided in the Agreement.

                  (2) The Master Servicer shall not cause or permit the
         Documents to become subject to, or encumbered by, any claim, liens,
         security interest, charges, writs of



<PAGE>



         attachment or other impositions nor shall the Master Servicer assert or
         seek to assert any claims or rights of setoff to or against the
         Documents or any proceeds thereof.

                  (3) The Master Servicer shall return each and every Document
         previously requested from the Mortgage File to the Trustee when the
         need therefor no longer exists, unless the Mortgage Loan relating to
         the Documents has been liquidated and the proceeds thereof have been
         remitted to the Collection Account and except as expressly provided in
         the Agreement.

                  (4) The Documents and any proceeds thereof, including any
         proceeds of proceeds, coming into the possession or control of the
         Master Servicer shall at all times be earmarked for the account of the
         Trustee, and the Master Servicer shall keep the Documents and any
         proceeds separate and distinct from all other property in the Master
         Servicer's possession, custody or control.

Dated:

                                     [MASTER SERVICER]

                                     By:_____________________________________
                                     Name:___________________________________
                                     Title:__________________________________






<PAGE>



                                   EXHIBIT E-2


                               REQUEST FOR RELEASE
                          [Mortgage Loans Paid in Full]

                     OFFICERS' CERTIFICATE AND TRUST RECEIPT
                     ASSET-BACKED FLOATING RATE CERTIFICATES
                                 SERIES 1997-AQ2


____________________________________________________ HEREBY CERTIFIES THAT
HE/SHE IS AN OFFICER OF THE MASTER SERVICER, HOLDING THE OFFICE SET
FORTH BENEATH HIS/HER SIGNATURE, AND HEREBY FURTHER CERTIFIES AS
FOLLOWS:

WITH RESPECT TO THE MORTGAGE LOANS, AS THE TERM IS DEFINED IN THE
POOLING AND SERVICING AGREEMENT DESCRIBED IN THE ATTACHED
SCHEDULE:

ALL PAYMENTS OF PRINCIPAL, PREMIUM (IF ANY), AND INTEREST HAVE BEEN
MADE.

LOAN NUMBER: _____________________         BORROWER'S NAME:_____________________

COUNTY:___________________________

WE HEREBY CERTIFY THAT ALL AMOUNTS RECEIVED IN CONNECTION WITH SUCH PAYMENTS,
WHICH ARE REQUIRED TO BE DEPOSITED IN THE COLLEC TION ACCOUNT PURSUANT TO
SECTION 3.10 OF THE POOLING AND SERVICING AGREEMENT, HAVE BEEN OR WILL BE
CREDITED.


____________________________            DATED:_________________________

/  /   VICE PRESIDENT

/  /   ASSISTANT VICE PRESIDENT



<PAGE>



                                   EXHIBIT F-1


                    FORM OF TRANSFEROR REPRESENTATION LETTER


                                               [Date]


[Trustee]
_____________________________________
_____________________________________



[Certificate Registrar]
_____________________________________
_____________________________________


       Re:      Salomon Brothers Mortgage Securities VII, Inc.,
                Asset-Backed Floating Rate Certificates, Series 1997-AQ2,
                Class ___, Representing A ___% Class ___ Percentage Interest
                ------------------------------------------------------------

Ladies and Gentlemen:

                  In connection with the transfer by ________________ (the
"Transferor") to ________________ (the "Transferee") of the captioned
asset-backed certificates (the "Certificates"), the Transferor hereby certifies
as follows:

                  Neither the Transferor nor anyone acting on its behalf has (a)
offered, pledged, sold, disposed of or otherwise transferred any Certificate,
any interest in any Certificate or any other similar security to any person in
any manner, (b) has solicited any offer to buy or to accept a pledge,
disposition or other transfer of any Certificate, any interest in any
Certificate or any other similar security from any person in any manner, (c) has
otherwise approached or negotiated with respect to any Certificate, any interest
in any Certificate or any other similar security with any person in any manner,
(d) has made any general solicitation by means of general advertising or in any
other manner, (e) has taken any other action, that (in the case of each of
subclauses (a) through (e) above) would constitute a distribution of the
Certificates under the Securities Act of 1933, as amended (the "1933 Act"), or
would render the disposition of any Certificate a violation of Section 5 of the
1933 Act or any state securities law or would require registration or
qualification pursuant thereto. The Transferor will not act, nor has it
authorized or will it authorize any person to act, in any manner set forth in
the foregoing sentence with respect to any Certificate. The Transferor will not
sell or otherwise transfer any of the Certificates, except in compliance with
the provisions of that certain Pooling and Servicing Agreement, dated as of
November 1, 1997, among Salomon Brothers Mortgage Securities VII, Inc. as
Depositor, Ameriquest Mortgage Company as Master



<PAGE>



Servicer and Norwest Bank Minnesota, N.A. as Trustee (the "Pooling and Servicing
Agreement"), pursuant to which Pooling and Servicing Agreement the Certificates
were issued.

                  Capitalized terms used but not defined herein shall have the
meanings assigned thereto in the Pooling and Servicing Agreement.

                                      Very truly yours,

                                      [Transferor]

                                      By:_____________________________________
                                      Name:_____________________________________
                                      Title:____________________________________





<PAGE>



                    FORM OF TRANSFEREE REPRESENTATION LETTER


                                                                  [Date]


[Trustee]
_____________________________________
_____________________________________


[Certificate Registrar]
_____________________________________
_____________________________________


       Re:  Salomon Brothers Mortgage Securities VII, Inc.,
            Asset-Backed Floating Rate Certificates, Series 1997-AQ2,
            Class ___, Representing A ___% Class ___ Percentage Interest
            ------------------------------------------------------------

Ladies and Gentlemen:

                  In connection with the purchase from ______________________
(the "Transferor") on the date hereof of the captioned trust certificates (the
"Certificates"), _______________ (the "Transferee") hereby certifies as follows:

                  1. The Transferee is a "qualified institutional buyer" as that
         term is defined in Rule 144A ("Rule 144A") under the Securities Act of
         1933 (the "1933 Act") and has completed either of the forms of
         certification to that effect attached hereto as Annex 1 or Annex 2. The
         Transferee is aware that the sale to it is being made in reliance on
         Rule 144A. The Transferee is acquiring the Certificates for its own
         account or for the account of a qualified institutional buyer, and
         understands that such Certificate may be resold, pledged or transferred
         only (i) to a person reasonably believed to be a qualified
         institutional buyer that purchases for its own account or for the
         account of a qualified institutional buyer to whom notice is given that
         the resale, pledge or transfer is being made in reliance on Rule 144A,
         or (ii) pursuant to another exemption from registration under the 1933
         Act.

                  2. The Transferee has been furnished with all information
         regarding (a) the Certificates and distributions thereon, (b) the
         nature, performance and servicing of the Mortgage Loans, (c) the
         Pooling and Servicing Agreement referred to below, and (d) any credit
         enhancement mechanism associated with the Certificates, that it has
         requested.




<PAGE>




                  All capitalized terms used but not otherwise defined herein
have the respective meanings assigned thereto in the Pooling and Servicing
Agreement, dated as of November 1, 1997, among Salomon Brothers Mortgage
Securities VII, Inc. as Depositor, Ameriquest Mortgage Company as Master
Servicer and Norwest Bank Minnesota, N.A. as Trustee, pursuant to which the
Certificates were issued.


                                     [TRANSFEREE]

                                     By:_____________________________________
                                     Name:___________________________________
                                     Title:__________________________________





<PAGE>



                                                          ANNEX 1 TO EXHIBIT F-1

            QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A

          [For Transferees Other Than Registered Investment Companies]

                  The undersigned hereby certifies as follows to [name of
Transferor] (the "Transferor") and Norwest Bank Minnesota, N.A., as Trustee and
Certificate Registrar, with respect to the asset-backed certificates (the
"Certificates") described in the Transferee Certificate to which this
certification relates and to which this certification is an Annex:

                  1. As indicated below, the undersigned is the President, Chief
Financial Officer, Senior Vice President or other executive officer of the
entity purchasing the Certificates (the "Transferee").

                  2. In connection with purchases by the Transferee, the
Transferee is a "qualified institutional buyer" as that term is defined in Rule
144A under the Securities Act of 1933 ("Rule 144A") because (i) the Transferee
owned and/or invested on a discretionary basis $______________________1 in
securities (except for the excluded securities referred to below) as of the end
of the Transferee's most recent fiscal year (such amount being calculated in
accordance with Rule 144A) and (ii) the Transferee satisfies the criteria in the
category marked below.

         ___      CORPORATION, ETC. The Transferee is a corporation (other than
                  a bank, savings and loan association or similar institution),
                  Massachusetts or similar business trust, partnership, or any
                  organization described in Section 501(c)(3) of the Internal
                  Revenue Code of 1986.

         ___      BANK. The Transferee (a) is a national bank or banking
                  institution organized under the laws of any State, territory
                  or the District of Columbia, the business of which is
                  substantially confined to banking and is supervised by the
                  State or territorial banking commission or similar official or
                  is a foreign bank or equivalent institution, and (b) has an
                  audited net worth of at least $25,000,000 as demonstrated in
                  its latest annual financial statements, A COPY OF WHICH IS
                  ATTACHED HERETO.

         ___      SAVINGS AND LOAN. The Transferee (a) is a savings and loan
                  association, building and loan association, cooperative bank,
                  homestead association or similar institution, which is
                  supervised and examined by a State or Federal authority having
                  supervision over any such institutions or is a foreign savings
                  and loan association or equivalent institution and (b) has an
                  audited net worth of
- --------
1 Transferee must own and/or invest on a discretionary basis at least
$100,000,000 in securities unless Transferee is a dealer, and, in that case,
Transferee must own and/or invest on a discretionary basis at least $10,000,000
in securities.




<PAGE>



                  at least $25,000,000 as demonstrated in its latest annual
                  financial statements, A COPY OF WHICH IS ATTACHED HERETO.

         ___      BROKER-DEALER.  The Transferee is a dealer registered pursuant
                  to Section 15 of the Securities Exchange Act of 1934.

         ___      INSURANCE COMPANY. The Transferee is an insurance company
                  whose primary and predominant business activity is the writing
                  of insurance or the reinsuring of risks underwritten by
                  insurance companies and which is subject to supervision by the
                  insurance commissioner or a similar official or agency of a
                  State, territory or the District of Columbia.

         ___      STATE OR LOCAL PLAN.  The Transferee is a plan established and
                  maintained by a State, its political subdivisions, or any
                  agency or instrumentality of the State or its political
                  subdivisions, for the benefit of its employees.

         ___      ERISA PLAN. The Transferee is an employee benefit plan within
                  the meaning of Title I of the Employee Retirement Income
                  Security Act of 1974.

         ___      INVESTMENT ADVISOR.   The Transferee is an investment advisor
                  registered under the Investment Advisers Act of 1940.

                  3. The term "SECURITIES" as used herein DOES NOT INCLUDE (i)
securities of issuers that are affiliated with the Transferee, (ii) securities
that are part of an unsold allotment to or subscription by the Transferee, if
the Transferee is a dealer, (iii) securities issued or guaranteed by the U.S. or
any instrumentality thereof, (iv) bank deposit notes and certificates of
deposit, (v) loan participations, (vi) repurchase agreements, (vii) securities
owned but subject to a repurchase agreement and (viii) currency, interest rate
and commodity swaps.

                  4. For purposes of determining the aggregate amount of
securities owned and/or invested on a discretionary basis by the Transferee, the
Transferee used the cost of such securities to the Transferee and did not
include any of the securities referred to in the preceding paragraph. Further,
in determining such aggregate amount, the Transferee may have included
securities owned by subsidiaries of the Transferee, but only if such
subsidiaries are consolidated with the Transferee in its financial statements
prepared in accordance with generally accepted accounting principles and if the
investments of such subsidiaries are managed under the Transferee's direction.
However, such securities were not included if the Transferee is a
majority-owned, consolidated subsidiary of another enterprise and the Transferee
is not itself a reporting company under the Securities Exchange Act of 1934.

                  5. The Transferee acknowledges that it is familiar with Rule
144A and understands that the Transferor and other parties related to the
Certificates are relying and will continue to rely on the statements made herein
because one or more sales to the Transferee may be in reliance on Rule 144A.

         ___      ___    Will the Transferee be purchasing the Certificates



<PAGE>



         Yes      No                only for the Transferee's own account?

                  6. If the answer to the foregoing question is "no", the
Transferee agrees that, in connection with any purchase of securities sold to
the Transferee for the account of a third party (including any separate account)
in reliance on Rule 144A, the Transferee will only purchase for the account of a
third party that at the time is a "qualified institutional buyer" within the
meaning of Rule 144A. In addition, the Transferee agrees that the Transferee
will not purchase securities for a third party unless the Transferee has
obtained a current representation letter from such third party or taken other
appropriate steps contemplated by Rule 144A to conclude that such third party
independently meets the definition of "qualified institutional buyer" set forth
in Rule 144A.

                  7. The Transferee will notify each of the parties to which
this certification is made of any changes in the information and conclusions
herein. Until such notice is given, the Transferee's purchase of the
Certificates will constitute a reaffirmation of this certification as of the
date of such purchase. In addition, if the Transferee is a bank or savings and
loan as provided above, the Transferee agrees that it will furnish to such
parties updated annual financial statements promptly after they become
available.

Dated:

                                     ___________________________________________
                                     Print Name of Transferee


                                     By:________________________________________
                                     Name:______________________________________
                                     Title:_____________________________________





<PAGE>



                                                          ANNEX 2 TO EXHIBIT F-1


            QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A

           [For Transferees That Are Registered Investment Companies]


                  The undersigned hereby certifies as follows to [name of
Transferor] (the "Transferor") and Norwest Bank Minnesota, N.A., as Trustee and
Certificate Registrar, with respect to the asset-backed certificates (the
"Certificates") described in the Transferee Certificate to which this
certification relates and to which this certification is an Annex:

                  1. As indicated below, the undersigned is the President, Chief
Financial Officer or Senior Vice President of the entity purchasing the
Certificates (the "Transferee") or, if the Transferee is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933 ("Rule 144A") because the Transferee is part of a Family of
Investment Companies (as defined below), is such an officer of the investment
adviser (the "Adviser").

                  2. In connection with purchases by the Transferee, the
Transferee is a "qualified institutional buyer" as defined in Rule 144A because
(i) the Transferee is an investment company registered under the Investment
Company Act of 1940, and (ii) as marked below, the Transferee alone, or the
Transferee's Family of Investment Companies, owned at least $100,000,000 in
securities (other than the excluded securities referred to below) as of the end
of the Transferee's most recent fiscal year. For purposes of determining the
amount of securities owned by the Transferee or the Transferee's Family of
Investment Companies, the cost of such securities was used.

____              The Transferee owned $___________________ in securities
                  (other than the excluded securities referred to below) as of
                  the end of the Transferee's most recent fiscal year (such
                  amount being calculated in accordance with Rule 144A).

____              The Transferee is part of a Family of Investment Companies
                  which owned in the aggregate $______________ in securities
                  (other than the excluded securities referred to below) as of
                  the end of the Transferee's most recent fiscal year (such
                  amount being calculated in accordance with Rule 144A).

                  3. The term "FAMILY OF INVESTMENT COMPANIES" as used herein
means two or more registered investment companies (or series thereof) that have
the same investment adviser or investment advisers that are affiliated (by
virtue of being majority owned subsidiaries of the same parent or because one
investment adviser is a majority owned subsidiary of the other).

                  4. The term "SECURITIES" as used herein does not include (i)
securities of issuers that are affiliated with the Transferee or are part of the
Transferee's Family of



<PAGE>



Investment Companies, (ii) securities issued or guaranteed by the U.S. or any
instrumentality thereof, (iii) bank deposit notes and certificates of deposit,
(iv) loan participations, (v) repurchase agreements, (vi) securities owned but
subject to a repurchase agreement and (vii) currency, interest rate and
commodity swaps.

                  5. The Transferee is familiar with Rule 144A and understands
that the parties to which this certification is being made are relying and will
continue to rely on the statements made herein because one or more sales to the
Transferee will be in reliance on Rule 144A. In addition, the Transferee will
only purchase for the Transferee's own account.

                  6. The undersigned will notify the parties to which this
certification is made of any changes in the information and conclusions herein.
Until such notice, the Transferee's purchase of the Certificates will constitute
a reaffirmation of this certification by the undersigned as of the date of such
purchase.

Dated:

                                        ________________________________________
                                          Print Name of Transferee or Advisor


                                        By:_____________________________________
                                        Name:___________________________________
                                        Title:__________________________________


                                        IF AN ADVISER:

                                        ________________________________________
                                        Print Name of Transferee






<PAGE>





                    FORM OF TRANSFEREE REPRESENTATION LETTER


                  The undersigned hereby certifies on behalf of the purchaser
named below (the "Purchaser") as follows:

                  1. I am an executive officer of the Purchaser.

                  2. The Purchaser is a "qualified institutional buyer", as
         defined in Rule 144A, ("Rule 144A") under the Securities Act of 1933,
         as amended.

                  3. As of the date specified below (which is not earlier than
         the last day of the Purchaser's most recent fiscal year), the amount of
         "securities", computed for purposes of Rule 144A, owned and invested on
         a discretionary basis by the Purchaser was in excess of $100,000,000.


Name of Purchaser______________________________________________________________

By:      (Signature)___________________________________________________________

Name of Signatory______________________________________________________________

Title__________________________________________________________________________

Date of this certificate_______________________________________________________

Date of information provided in paragraph 3____________________________________





<PAGE>



                                   EXHIBIT F-2


                    FORM OF TRANSFER AFFIDAVIT AND AGREEMENT

STATE OF NEW YORK    )
                     : ss.:
COUNTY OF NEW YORK   )


                     ________________, being duly sworn, deposes, represents and
warrants as follows:

                  1. I am a ______________________ of ________________________ 
(the "Owner") a corporation duly organized and existing under the laws of
______________, the record owner of Salomon Brothers Mortgage Securities VII,
Inc., Asset-Backed Floating Rate Certificates, Series 1997-AQ2, [Class R-I] [and
Class R-II][Class R-III] (the "Class R Certificates"), on behalf of whom I make
this affidavit and agreement. Capitalized terms used but not defined herein have
the respective meanings assigned thereto in the Pooling and Servicing Agreement
pursuant to which the Class R Certificates were issued.

                  2. The Owner (i) is and will be a "Permitted Transferee" as of
____________________, 199___ and (ii) is acquiring the Class R Certificates for
its own account or for the account of another Owner from which it has received
an affidavit in substantially the same form as this affidavit. A "Permitted
Transferee" is any person other than a "disqualified organization" or a
possession of the United States. For this purpose, a "disqualified organization"
means the United States, any state or political subdivision thereof, any agency
or instrumentality of any of the foregoing (other than an instrumentality all of
the activities of which are subject to tax and, except for the Federal Home Loan
Mortgage Corporation, a majority of whose board of directors is not selected by
any such governmental entity) or any foreign government, international
organization or any agency or instrumentality of such foreign government or
organization, any rural electric or telephone cooperative, or any organization
(other than certain farmers' cooperatives) that is generally exempt from federal
income tax unless such organization is subject to the tax on unrelated business
taxable income.

                  3. The Owner is aware (i) of the tax that would be imposed on
transfers of the Class R Certificates to disqualified organizations under the
Internal Revenue Code of 1986 that applies to all transfers of the Class R
Certificates after March 31, 1988; (ii) that such tax would be on the transferor
or, if such transfer is through an agent (which person includes a broker,
nominee or middleman) for a non-Permitted Transferee, on the agent; (iii) that
the person otherwise liable for the tax shall be relieved of liability for the
tax if the transferee furnishes to such person an affidavit that the transferee
is a Permitted Transferee and, at the time of transfer, such person does not
have actual knowledge that the affidavit is false; and (iv) that each of the
Class R Certificates may be a "noneconomic residual interest" within the meaning
of proposed Treasury regulations promulgated under the Code and that the
transferor of a "noneconomic residual interest" will remain liable for any taxes
due with respect to the



<PAGE>



income on such residual interest, unless no significant purpose of the transfer
is to impede the assessment or collection of tax.

                  4. The Owner is aware of the tax imposed on a "pass-through
entity" holding the Class R Certificates if, at any time during the taxable year
of the pass-through entity, a non-Permitted Transferee is the record holder of
an interest in such entity. (For this purpose, a "pass-through entity" includes
a regulated investment company, a real estate investment trust or common trust
fund, a partnership, trust or estate, and certain cooperatives.)

                  5. The Owner is aware that the Trustee will not register the
transfer of any Class R Certificate unless the transferee, or the transferee's
agent, delivers to the Trustee, among other things, an affidavit in
substantially the same form as this affidavit. The Owner expressly agrees that
it will not consummate any such transfer if it knows or believes that any of the
representations contained in such affidavit and agreement are false.

                  6. The Owner consents to any additional restrictions or
arrangements that shall be deemed necessary upon advice of counsel to constitute
a reasonable arrangement to ensure that the Class R Certificates will only be
owned, directly or indirectly, by an Owner that is a Permitted Transferee.

                  7. The Owner's taxpayer identification number is
___________________.

                  8. The Owner has reviewed the restrictions set forth on the
face of the Class R Certificates and the provisions of Section 5.02(d) of the
Pooling and Servicing Agreement under which the Class R Certificates were issued
(in particular, clauses (iii)(A) and (iii)(B) of Section 5.02(d) which authorize
the Trustee to deliver payments to a person other than the Owner and negotiate a
mandatory sale by the Trustee in the event that the Owner holds such Certificate
in violation of Section 5.02(d)); and that the Owner expressly agrees to be
bound by and to comply with such restrictions and provisions.

                  9. The Owner is not acquiring and will not transfer the Class
R Certificates in order to impede the assessment or collection of any tax.

                  10. The Owner anticipates that it will, so long as it holds
the Class R Certificates, have sufficient assets to pay any taxes owed by the
holder of such Class R Certificates, and hereby represents to and for the
benefit of the person from whom it acquired the Class R Certificates that the
Owner intends to pay taxes associated with holding such Class R Certificates as
they become due, fully understanding that it may incur tax liabilities in excess
of any cash flows generated by the Class R Certificates.

                  11. The Owner has no present knowledge that it may become
insolvent or subject to a bankruptcy proceeding for so long as it holds the
Class R Certificates.

                  12. The Owner has no present knowledge or expectation that it
will be unable to pay any United States taxes owed by it so long as any of the
Certificates remain outstanding.



<PAGE>



                  13. The Owner is not acquiring the Class R Certificates with
the intent to transfer the Class R Certificates to any person or entity that
will not have sufficient assets to pay any taxes owed by the holder of such
Class R Certificates, or that may become insolvent or subject to a bankruptcy
proceeding, for so long as the Class R Certificates remain outstanding.

                  14. The Owner will, in connection with any transfer that it
makes of the Class R Certificates, obtain from its transferee the
representations required by Section 5.02(d) of the Pooling and Servicing
Agreement under which the Class R Certificate were issued and will not
consummate any such transfer if it knows, or knows facts that should lead it to
believe, that any such representations are false.

                  15. The Owner will, in connection with any transfer that it
makes of the Class R Certificates, deliver to the Trustee an affidavit, which
represents and warrants that it is not transferring the Class R Certificates to
impede the assessment or collection of any tax and that it has no actual
knowledge that the proposed transferee: (i) has insufficient assets to pay any
taxes owed by such transferee as holder of the Class R Certificates; (ii) may
become insolvent or subject to a bankruptcy proceeding for so long as the Class
R Certificates remains outstanding; and (iii) is not a "Permitted Transferee".

                  16. The Owner is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in, or under the
laws of, the United States or any political subdivision thereof, or an estate or
trust whose income from sources without the United States may be included 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.

                  [17. The Owner of the Class R-III Certificate, hereby agrees
that in the event that the Trust Fund created by the Pooling and Servicing
Agreement is terminated pursuant to Section 9.01 thereof, the undersigned shall
assign and transfer to the Holders of the Class CE Certificates any amounts in
excess of par received in connection with such termination. Accordingly, in the
event of such termination, the Trustee is hereby authorized to withhold any such
amounts in excess of par and to pay such amounts directly to the Holders of the
Class CE Certificates. This agreement shall bind and be enforceable against any
successor, transferee or assigned of the undersigned in the Class R-III
Certificate. In connection with any transfer of the Class R-III Certificate, the
Owner shall obtain an agreement substantially similar to this clause from any
subsequent owner.]



<PAGE>




                  IN WITNESS WHEREOF, the Owner has caused this instrument to be
executed on its behalf, pursuant to the authority of its Board of Directors, by
its [Vice] President, attested by its [Assistant] Secretary, this ____ day of
__________, 199___.

                                     [OWNER]


                                     By:____________________________________
                                     Name:_________________________________
                                     Title:   [Vice] President


ATTEST:


By:_________________________________
Name:_______________________________
Title:  [Assistant] Secretary




                  Personally appeared before me the above-named , known or
proved to me to be the same person who executed the foregoing instrument and to
be a [Vice] President of the Owner, and acknowledged to me that [he/she]
executed the same as [his/her] free act and deed and the free act and deed of
the Owner.

                  Subscribed and sworn before me this ____ day of __________,
199___.



                                       -------------------------------------
                                                    Notary Public


                                       County of ______________________________
                                       State of _______________________________

                                       My Commission expires:




<PAGE>





                          FORM OF TRANSFEROR AFFIDAVIT

STATE OF NEW YORK     )
                      : ss. :
COUNTY OF NEW YORK    )


                      _______________, being duly sworn, deposes, represents and
warrants as follows:


1. I am a ____________________ of _____________________________ (the "Owner"), a
corporation duly organized and existing under the laws of ______________, on
behalf of whom I make this affidavit.

                  2. The Owner is not transferring the [Class R-I][, Class
R-II][and Class R- III] (the "Residual Certificates") to impede the assessment
or collection of any tax.

                  3. The Owner has no actual knowledge that the Person that is
the proposed transferee (the "Purchaser") of the Residual Certificates: (i) has
insufficient assets to pay any taxes owed by such proposed transferee as holder
of the Residual Certificates; (ii) may become insolvent or subject to a
bankruptcy proceeding for so long as the Residual Certificates remain
outstanding and (iii) is not a Permitted Transferee.

                  4. The Owner understands that the Purchaser has delivered to
the Trustee a transfer affidavit and agreement in the form attached to the
Pooling and Servicing Agreement as Exhibit F-2. The Owner does not know or
believe that any representation contained therein is false.

                  5. At the time of transfer, the Owner has conducted a
reasonable investigation of the financial condition of the Purchaser as
contemplated by Treasury Regulations Section 1.860E-1(c)(4)(i) and, as a result
of that investigation, the Owner has determined that the Purchaser has
historically paid its debts as they became due and has found no significant
evidence to indicate that the Purchaser will not continue to pay its debts as
they become due in the future. The Owner understands that the transfer of a
Residual Certificate may not be respected for United States income tax purposes
(and the Owner may continue to be liable for United States income taxes
associated therewith) unless the Owner has conducted such an investigation.

                  6. Capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Pooling and Servicing Agreement



<PAGE>



                  IN WITNESS WHEREOF, the Owner has caused this instrument to be
executed on its behalf, pursuant to the authority of its Board of Directors, by
its [Vice] President, attested by its [Assistant] Secretary, this ____ day of
__________, 199___.

                                     [OWNER]


                                     By:____________________________________
                                     Name:_________________________________
                                     Title:   [Vice] President


ATTEST:


By:_________________________________
Name:_______________________________
Title:  [Assistant] Secretary




                  Personally appeared before me the above-named , known or
proved to me to be the same person who executed the foregoing instrument and to
be a [Vice] President of the Owner, and acknowledged to me that [he/she]
executed the same as [his/her] free act and deed and the free act and deed of
the Owner.

                  Subscribed and sworn before me this ____ day of __________,
199___.



                                       ________________________________________
                                                    Notary Public


                                       County of ______________________________
                                       State of _______________________________

                                       My Commission expires:



<PAGE>



                                    EXHIBIT G


            FORM OF CERTIFICATION WITH RESPECT TO ERISA AND THE CODE

                                                     _____________, 199__

Salomon Brothers Mortgage Securities VII, Inc.
Seven World Trade Center
New York, New York 10048

Norwest Bank Minnesota,
 National Association
11000 Broken Land Parkway
Columbia, Maryland 21044-3562
Attention:  Corporate Trust Administration

Ameriquest Mortgage Company
1100 Town & Country Road
Orange, California 92868


           Re:      Salomon Brothers Mortgage Securities VII, Inc.
                    Asset-Backed Floating Rate Certificates,
                    Series 1997-Aq2, Class ___
                    -----------------------------------------------

Dear Sirs:

                  __________________________________ (the "Transferee") intends
to acquire from _____________________ (the "Transferor") $____________ Initial
Certificate Principal Balance of Salomon Brothers Mortgage Securities VII, Inc.
Asset-Backed Floating Rate Certificates, Series 1997-AQ2, Class ___ (the
"Certificates"), issued pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") dated as of November 1, 1997 among Salomon
Brothers Mortgage Securities VII, Inc. as depositor (the "Depositor"),
Ameriquest Mortgage Company as master servicer (the "Master Servicer") and
Norwest Bank Minnesota, National Association as trustee (the "Trustee").
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Pooling and Servicing Agreement. The Transferee hereby
certifies, represents and warrants to, and covenants with the Depositor, the
Trustee and the Master Servicer that the following statements in either (1) or
(2) are accurate:

         _____ (1) The Certificates (i) are not being acquired by, and will not
         be transferred to, any employee benefit plan within the meaning of
         section 3(3) of the Employee Retirement Income Security Act of 1974, as
         amended ("ERISA"), or other retirement arrangement, including
         individual retirement accounts and annuities, Keogh plans and bank
         collective investment funds and insurance company general or separate
         accounts



<PAGE>



         in which such plans, accounts or arrangements are invested, that is
         subject to Section 406 of ERISA or Section 4975 of the Internal Revenue
         Code of 1986 (the "Code") (any of the foregoing, a "Plan"), (ii) are
         not being acquired with "plan assets" of a Plan within the meaning of
         the Department of Labor ("DOL") regulation, 29 C.F.R. ss. 2510.3-101,
         and (iii) will not be transferred to any entity that is deemed to be
         investing in plan assets within the meaning of the DOL regulation at 29
         C.F.R. ss. 2510.3-101; or

         _____ (2) The purchase of Certificates is permissible under applicable
         law, will not constitute or result in any prohibited transaction under
         ERISA or Section 4975 of the Code, will not subject the Depositor, the
         Trustee or the Master Servicer to any obligation in addition to those
         undertaken in the Pooling and Servicing Agreement and each of the
         following statements are accurate: (a) the Transferee is an insurance
         company; (b) the source of funds used to purchase such Certificates is
         an "insurance company general account" (as such term is defined in
         Prohibited Transaction Class Exemption ("PTCE") 95-60 issued by the
         DOL); (c) the conditions set forth in PTCE 95-60 have been satisfied
         and the purchase, holding and transfer of Certificates by or on behalf
         of the Transferee are exempt under PTCE 95-60; and (d) there is no Plan
         with respect to which the amount of such general account's reserves and
         liabilities for contracts held by or on behalf of such Plan and all
         other Plans maintained by he same employer (or any "affiliate" thereof,
         as defined in PTCE 95-60) or by the same employee organization exceed
         10% of the total of all reserves and liabilities of such general
         account (as determined under PTCE 95-60) as of the date of the
         acquisition of the Certificates.

                                        Very truly yours,

                                        _____________________________________

                                        By:__________________________________
                                        Name:
                                        Title:




<PAGE>



                                    EXHIBIT H


                           FORM OF CUSTODIAL AGREEMENT






<PAGE>


                               CUSTODIAL AGREEMENT


                  THIS  CUSTODIAL  AGREEMENT (as amended and  supplemented  from
time to time,  the  "Agreement"),  dated as of November 25,  1997,  by and among
NORWEST BANK MINNESOTA,  NATIONAL ASSOCIATION,  not individually,  but solely as
Trustee  (including  its  successors  under the Pooling and Servicing  Agreement
defined below, the "Trustee"),  AMERIQUEST  MORTGAGE COMPANY  (together with any
successor in interest or  successor  under the Pooling and  Servicing  Agreement
referred to below, a "Master  Servicer"),  SALOMON BROTHERS MORTGAGE  SECURITIES
VII,  INC. (the  "Depositor")  and TEXAS  COMMERCE  BANK  NATIONAL  ASSOCIATION,
(together with any successor in interest or any successor  appointed  hereunder,
the "Custodian").


                        W I T N E S S E T H  T H A T :

                  WHEREAS,  the Master Servicers,  the Trustee and the Depositor
have entered  into a Pooling and  Servicing  Agreement,  dated as of November 1,
1997,  relating to the issuance of Salomon  Brothers  Mortgage  Securities  VII,
Inc., Asset-Backed Floating Rate Certificates,  Series 1997-AQ2 (as in effect on
the date of this Agreement, the "Original Pooling and Servicing Agreement",  and
as amended  and  supplemented  from time to time,  the  "Pooling  and  Servicing
Agreement"); and

                  WHEREAS,  the  Custodian  has  agreed  to act as agent for the
Trustee for the purposes of receiving  and holding  certain  documents and other
instruments   delivered  by  the  Depositor  under  the  Pooling  and  Servicing
Agreement,  all upon the terms and  conditions  and sub ject to the  limitations
hereinafter set forth;

                  NOW,  THEREFORE,  in  consideration  of the  premises  and the
mutual  covenants  and  agreements  hereinafter  set  forth,  the  Trustee,  the
Depositor, the Master Servicers and the Custodian hereby agree as follows:

                                    ARTICLE I

                                   Definitions

                  Capitalized  terms  used in  this  Agreement  and not  defined
herein shall have the meanings  assigned in the Original  Pooling and  Servicing
Agreement, unless otherwise required by the context herein.




<PAGE>


                                        2

                                   ARTICLE II

                          Custody of Mortgage Documents

                  Section 2.1. Custodian to Act as Agent; Acceptance of Mortgage
Files. The Custodian,  as the duly appointed agent and bailee of the Trustee for
these   purposes,   hereby  accepts  the  agency   contemplated   hereunder  and
acknowledges  receipt as of the Closing Date of the documents  listed in Section
2.1(a) and (b) and, as agent for the  Trustee,  agrees to verify  receipt of the
following  documents  pertaining to each of the Mortgage Loans identified on the
Mortgage Loan Schedule attached to the Pooling and Servicing Agreement listed in
Section 2.1(c), (d), (e) and (f) in accordance with Section 2.2 hereof:

                (a) the original Mortgage Note,  endorsed in the following form:
         "Pay to the order of Norwest Bank Minnesota,  National Association,  as
         Trustee  for  the  registered  holders  of  Salomon  Brothers  Mortgage
         Securities  VII,  Inc.,  under the  applicable  pooling  and  servicing
         agreement,   without   recourse",   with  all  prior  and   intervening
         endorsements   showing  a  complete  chain  of  endorsement   from  the
         originator to the Person so endorsing to the Trustee;

                (b) the original  Mortgage with  evidence of recording  thereon,
         and the  original  recorded  power of  attorney,  if the  Mortgage  was
         executed  pursuant to a power of attorney,  with  evidence of recording
         thereon;

                (c) an  original  Assignment  of the  Mortgage  executed  in the
         following  form:  "Norwest Bank  Minnesota,  National  Association,  as
         Trustee  for  the  registered  holders  of  Salomon  Brothers  Mortgage
         Securities  VII,  Inc.,  under the  applicable  pooling  and  servicing
         agreement";

                (d) the  original  recorded  Assignment  or  Assignments  of the
         Mortgage  showing a complete chain of assignment from the originator to
         the Person assigning the Mortgage to the Trustee as contemplated by the
         immediately preceding clause (c);

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

                (f) the original lender's title insurance policy,  together with
         all  endorsements or riders which were issued with or subsequent to the
         issuance of such  policy,  insuring  the  priority of the Mortgage as a
         first  lien on the  Mortgaged  Property  represented  therein  as a fee
         interest  vested in the Mortgagor,  or in the event such original title
         policy  is  unavailable,  a written  commitment  or  uniform  binder or
         preliminary  report of title  issued by the title  insurance  or escrow
         company.

                  In furtherance of  facilitating  the  acknowledgement  of such
receipt by the Custodian,  the Trustee  hereby  instructs the Custodian to cause
the endorsement or execution, as the case may



<PAGE>


                                        3

be, of the  documents  listed in Section  2.1(a) and (c) to be  completed by the
Custodian in the forms prescribed by Section 2.1(a) and (c).

                  The related  Master  Servicer (in its capacity as  Originator)
promptly  shall (and in no event later than five  Business  Days  following  the
later of the Closing Date and the date of receipt by such Master Servicer of the
recording  information  for a  Mortgage)  submit  or cause to be  submitted  for
recording,  at no expense to the Trust Fund, the Depositor,  the Custodian,  the
Trustee,  in the  appropriate  public  office for real  property  records,  each
Assignment  referred to in clauses (c) and (d) of this Section 2.1. In the event
that any such  Assignment  is lost or  returned  unrecorded  because of a defect
therein,  the related Master  Servicer (in its capacity as Originator)  promptly
shall prepare a substitute  Assignment or cure such defect,  as the case may be,
and thereafter cause each such Assignment to be duly recorded.

                  Notwithstanding  anything to the  contrary  contained  in this
Section 2.1, in those instances where either (x) the public recording office has
not returned the original  Mortgage,  power of attorney or Assignment or (y) the
public  recording  office  retains the original  Mortgage,  power of attorney or
Assignment  after it has been  recorded  or such  document  has been  lost,  the
obligations  of the Depositor  hereunder  shall be deemed to have been satisfied
upon (1) delivery by the Depositor, the related Originator or the Trustee to the
Custodian of a copy of such Mortgage,  power of attorney or Assignment certified
by such  Originator in the case of (x) above or the public  recording  office in
the case of (y) above to be a true and complete  copy of the  recorded  original
thereof and (2) if such copy is certified by the related Originator  delivery to
the Custodian, promptly upon receipt thereof of either the original or a copy of
such document certified by the public recording office to be a true and complete
copy of the original. Upon delivery to the Depositor,  the related Originator or
the  Trustee  (x) by the  public  recording  office  of  any  recorded  original
Mortgage,  power of attorney or Assignment or (y) by a title insurance or escrow
company of any lender's title insurance policy,  the Depositor,  such Originator
or the Trustee,  as the case may be,  promptly shall (and in no event later than
five  Business  Days  following  such  receipt)  deliver  such  document  to the
Custodian. The Depositor shall deliver or cause to be delivered to the Custodian
promptly upon receipt thereof any other original  documents  constituting a part
of a Mortgage File received with respect to any Mortgage  Loan,  including,  but
not limited to, any original documents  evidencing an assumption or modification
of any Mortgage  Loan.  All Mortgage Loan  documents held by the Custodian as to
each Mortgage Loan shall hereinafter be referred to as the "Mortgage File".

                  In the event that any original  document is required  pursuant
to the terms of this  Section to be a part of a  Mortgage  File,  such  document
shall be delivered promptly to the Custodian.

                  In the  event  of any  failure  of any  party to  deliver  any
document as provided  above,  the Custodian  shall give prompt written notice of
such failure to the other  parties to this  Agreement.  Once the  Custodian  has
given  notice of such  failure it is to continue to hold the  Mortgage  Loan and
Mortgage File unless otherwise directed.



<PAGE>


                                        4


                  The parties  hereto  agree and  acknowledge  that prior to the
transfer and sale of the Mortgage  Loans  pursuant to the Mortgage Loan Purchase
Agreement,  all  Mortgage  Loan  documents  delivered to the  Custodian  for the
benefit of the  Depositor  and the  possession by the Custodian of such Mortgage
Loan Documents  shall be at the will of the Depositor and such possession by the
Custodian shall be in a custodial capacity only.

                  Section 2.2. Review of Mortgage Files.  The Custodian  agrees,
for the  benefit of the  Trustee,  and the  Certificateholders,  to review  each
Mortgage File within 5 days after receipt of such Mortgage File (but in no event
later  than two  Business  Days  prior to the  Closing  Date) and to  certify in
substantially  the form attached hereto as Exhibit One that, as to each Mortgage
Loan listed in the Mortgage Loan Schedule  (other than any Mortgage Loan paid in
full or any  Mortgage  Loan  specifically  identified  in the  exception  report
annexed thereto as not being covered by such  certification),  (i) all documents
constituting part of such Mortgage File (other than such documents  described in
Section 2.1(e)) required to be delivered to it pursuant to this Agreement 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 its
examination  and only as to the  foregoing,  the  information  set  forth in the
Mortgage Loan Schedule that corresponds to items (i) through (iii),  (vi), (ix),
(x),  (xiii),  (xv) and (xvii)  through (xx) of the definition of "Mortgage Loan
Schedule"  accurately reflects information set forth in the Mortgage File. It is
herein  acknowledged  that, in conducting such review, the Custodian is under no
duty or  obligation  (i) to  inspect,  review  or  examine  any such  documents,
instruments,  certificates  or other papers to determine  that they are genuine,
enforceable,  or  appropriate  for the  represented  purpose  or that  they have
actually  been  recorded or that they are other than what they  purport to be on
their face, or (ii) to determine whether any Mortgage File should include any of
the documents specified in clause (e) of Section 2.1.

                  The Mortgage Files will be delivered to the Custodian not less
than 2 days prior to the Closing Date.

                  Prior to the  first  anniversary  date of this  Agreement  the
Custodian shall deliver to the Trustee, the Depositor and the Master Servicers a
final  certification  in the form annexed  hereto as Exhibit Two  evidencing the
completeness  of the  Mortgage  Files,  with  any  applicable  exceptions  noted
thereon.

                  If in the process of reviewing  the Mortgage  Files and making
or  preparing,  as the case may be,  the  certifications  referred  to above the
Custodian finds any document or documents constituting a part of a Mortgage File
to be missing or defective in any material  respect,  at the  conclusion  of its
review the Custodian  shall so notify the Trustee,  the Depositor and the Master
Servicers.

                  Section 2.3. Notification of Defects.  Upon discovery by the
Custodian of a defect with respect to a Mortgage File (including without
limitation a missing or defective



<PAGE>


                                        5

document  contained  therein),  the Custodian  shall give prompt  written notice
specifying such defect to the Trustee.

                  Section 2.4.  Release of Mortgage Files.  Upon (i) the payment
in full of any Mortgage Loan, or (ii) the purchase or repurchase of any Mortgage
Loan pursuant to Section 2.03 of the Pooling and Servicing  Agreement,  or (iii)
substitution  of a Qualified  Substitute  Mortgage  Loan for a Deleted  Mortgage
Loan,  and upon receipt by the Custodian of a certificate  signed by a Servicing
Officer stating that all amounts required by the Pooling and Servicing Agreement
in connection with such payment,  repurchase or substitution have been deposited
in the Collection  Account pursuant to Section 3.10 of the Pooling and Servicing
Agreement, the Custodian shall promptly release the related Mortgage File to the
Depositor or the related Master Servicer, as the case may be.

                  From  time  to  time  as  appropriate  for  the  servicing  or
foreclosure  of any Mortgage Loan,  the  Custodian,  shall,  upon request of the
related Master  Servicer and delivery to the Custodian of a Request for Release,
release the related  Mortgage  File to such Master  Servicer.  Such  Request for
Release  shall  obligate  the related  Master  Servicer to return each and every
document  previously  requested from the Mortgage File to the Custodian when the
need therefor by such Master Servicer no longer exists, unless: (i) the Mortgage
Loan has been liquidated and the Liquidation  Proceeds  relating to the Mortgage
Loan have been deposited in the Certificate  Account;  or (ii) 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, for purposes of initiating or pursuing
legal action or other proceedings for the foreclosure of the Mortgaged  Property
either judicially or  non-judicially,  and such Master Servicer has delivered to
the Custodian 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. Upon receipt of a certificate of a
Servicing  Officer  stating that such Mortgage Loan was  liquidated and that all
amounts received or to be received in connection with such liquidation which are
required to be deposited into the Certificate Account have been so deposited, or
that such Mortgage Loan has become an REO  Property,  the related  Mortgage File
shall be released by the Custodian to the related Master Servicer.

                  The Custodian  shall, at the expense of any  Certificateholder
and upon such  Certificateholder's  request,  provide  a written  report to such
Certificateholder  of all Mortgage Files released to either Master  Servicer for
servicing purposes.

                  Section 2.5.  Audit and  Examination of Mortgage  Files.  Upon
reasonable  notice to the  Custodian,  the Trustee,  the Master  Servicers,  the
Depositor or any agent of any of them will be permitted,  during normal business
hours,  to examine the Mortgage  Files,  documents,  records and other papers in
possession  of or under the control of  Custodian  relating to any or all of the
Mortgage Loans.

                  Section 2.6. Copies of Mortgage Files.  Upon the reasonable
request of the Trustee, the related Master Servicer or the Depositor, the
Custodian shall provide to the Trustee,



<PAGE>


                                        6

such  Master  Servicer  or the  Depositor,  as the  case may be,  copies  of the
documents  which  constitute  the  Mortgage  Files.  The  Trustee  shall pay all
reasonable  costs and  expenses  incurred by the  Custodian  in  preparing  such
copies,  which shall be in  accordance  with the  Custodian's  then-current  fee
schedule.

                  Section 2.7.  Safekeeping.  The Custodian  shall segregate the
Mortgage Files from all other  mortgages and mortgage notes and similar  records
in its  possession,  and  agrees  to hold the  Mortgage  Files on  behalf of the
Trustee for the use and benefit of all present and future Certificateholders and
to maintain  accurate  records  pertaining to each Mortgage Note and Mortgage in
the  Mortgage  Files as will  enable the  Trustee  to comply  with the terms and
conditions of the Pooling and Servicing Agreement,  and at all times to maintain
a current inventory thereof and to conduct periodic physical  inspections of the
Mortgage  Files held by it under this Agreement in such a manner as shall enable
the Trustee to verify the accuracy of such  inventory  and record  keeping.  The
Custodian  will  promptly  report to the Trustee any failure on its part to hold
the Mortgage Files as herein  provided and promptly take  appropriate  action to
remedy any such failure.

                  Section  2.8.   Administration;   Reports.  In  general,   the
Custodian  shall  attend to all  nondiscretionary  details  in  connection  with
maintaining  custody  of the  Mortgage  Files on behalf of the  Trustee,  and to
provide the Trustee  with  notification  of any change in status of any Mortgage
File. In addition,  the Custodian shall assist the other parties hereto, who are
preparing  routine  reports to  Certificateholders,  at the  request of any such
party, or to regulatory  bodies,  to the extent  necessitated by the Custodian's
custody of the Mortgage Files.


                                   ARTICLE III

                            Concerning the Custodian

                  Section 3.1. Custodian a Bailee and Agent of the Trustee. With
respect to each Mortgage Note,  Mortgage and other documents  constituting  each
Mortgage File which are delivered to the Custodian,  the Custodian hereby agrees
to act as the agent and bailee of the Trustee,  and to hold such  documents,  in
trust,   for  the   exclusive   use  and  benefit  of  all  present  and  future
Certificateholders and undertakes to perform such duties and only such duties as
are specifically set forth in this Agreement. The Custodian may not delegate any
of its duties  hereunder  without the prior written consent of the Trustee.  The
Custodian   shall  segregate  and  maintain  all  documents   constituting   the
Custodian's   Mortgage   File   received   by  it  for   the   benefit   of  the
Certificateholders  in secure facilities in accordance with customary  standards
for  such  custody.  The  Mortgage  Note and  Assignment  of  Mortgage  shall be
maintained  in secure  fireproof  facilities.  Except upon  compliance  with the
provisions of Section 2.4 of this Agreement, no Mortgage Note, Mortgage or other
document  constituting  a part of a  Mortgage  File  shall be deliv  ered by the
Custodian to the Depositor, or either Master Servicer or otherwise released from
the possession of the Custodian.




<PAGE>


                                        7

                  Section 3.2.  Indemnification.  The parties hereto acknowledge
that the Trustee, the Depositor and the Master Servicers shall not be liable for
the acts of the  Custodian  hereunder.  The  Custodian  agrees to indemnify  the
Trustee,  the  Depositor and the Master  Servicers  and any  director,  officer,
employee or agent of the Trustee,  the Depositor and the Master  Servicers  for,
and to  hold  them  harmless  against,  any  liabilities,  obligations,  losses,
damages, penalties,  actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever, including reasonable attorney's fees, incurred
by them arising out of, or in connection  with, any suit,  claim or other action
relating to the Custodian's performance of this Agreement.  Such indemnification
shall  survive  the  termination  or  discharge  of  this  Agreement,   and  the
resignation or removal of the Custodian hereunder.

                  The Trustee agrees to indemnify and hold the Custodian and its
directors,   officers,  agents  and  employees  harmless  against  any  and  all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses or  disbursements of any kind or nature  whatsoever,  including
reasonable  attorney's  fees,  that may be imposed on,  incurred by, or asserted
against  it or them in any way  relating  to or  arising  out of this  Custodial
Agreement or any action taken or not taken by it or them  hereunder  unless such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses  or  disbursements  were  imposed  on,  incurred by or asserted
against the Custodian  because of the breach by the Custodian of its obligations
hereunder,  or  because  of the  Custodian's  negligence,  lack of good faith or
willful  misconduct  on the  part  of  the  Custodian  or any of its  directors,
officers,  agents or employees. The foregoing  indemnification shall survive any
termination or assignment of this Custodial Agreement.

                  Section 3.3. Custodian May Own Certificates.  The Custodian in
its individual or any other capacity may become the owner or pledgee of
Certificates with the same rights it would have if it were not Custodian.

                  Section 3.4. Trustee to Pay Custodian's Fees and Expenses. The
Trustee   covenants  and  agrees  to  pay  to  the  Custodian  monthly  on  each
Distribution  Date,  and the  Custodian  shall be entitled  to, a fee of 1/12 of
0.0035% per annum multiplied by the aggregate Scheduled Principal Balance of the
Mortgage Loans and any REO  Properties as of the second  preceding Due Date (or,
in  the  case  of the  first  Distribution  Date,  as of the  Cut-off  Date)  as
compensation for all services  rendered by it in the exercise and performance of
any of the powers and duties  hereunder of the  Custodian,  and the Trustee will
pay or reimburse the  Custodian  upon its request for all  reasonable  expenses,
disbursements  and advances incurred or made by the Custodian in accordance with
any of the provisions of this Agreement  (including the reasonable  compensation
and the  expenses  and  disbursements  of its  counsel  and of all  persons  not
regularly in its employ),  except any such expense,  disbursement  or advance as
may arise from its negligence or bad faith.

                  Section  3.5.   Custodian  May  Resign;   Trustee  May  Remove
Custodian.  The  Custodian  may resign from the  obligations  and duties  hereby
imposed upon it as such obligations and duties relate to its acting as Custodian
of the Mortgage Loans by giving  written  notice  thereof to the Depositor,  the
Master Servicers, and the Trustee. Upon receiving such notice of



<PAGE>


                                        8

resignation,  the Trustee shall either:  (1) take custody of the Mortgage  Files
itself and give prompt notice  thereof to the Depositor,  the Master  Servicers,
and the  Custodian  or (2)  promptly  appoint a successor  Custodian  by written
instrument,  in duplicate,  which instrument shall be delivered to the resigning
Custodian  and to the successor  Custodian.  If the Trustee shall not have taken
custody of the  Mortgage  Files and no  successor  Custodian  shall have been so
appointed and have accepted  appointment within 30 days after the giving of such
notice  of  resignation,  the  resigning  Custodian  may  petition  any court of
competent jurisdiction for the appointment of a successor Custodian.

                  The  Trustee  may remove the  Custodian  at any time.  In such
event, the Trustee shall appoint, or petition a court of competent  jurisdiction
to appoint, a successor Custodian hereunder.  Any successor Custodian shall be a
depository  institution or a trust company  subject to supervision by federal or
state authority and shall be able to satisfy the other requirements contained in
Section 3.7.

                  Any resignation or removal of the Custodian and appointment of
a successor  Custodian  pursuant to any of the  provisions  of this  Section 3.5
shall  become   effective  upon  acceptance  of  appointment  by  the  successor
Custodian.  The Trustee shall give prompt notice to the Depositor and the Master
Servicers of the appointment of any successor Custodian.  No successor Custodian
shall be appointed by the Trustee without the prior approval of the Depositor.

                  In the event of the removal or  resignation  of the Custodian,
the Custodian shall transfer all files to the successor Custodian within 60 days
after receipt of tender of notice of removal or resignation.

                  Section 3.6. Merger or Consolidation of Custodian.  Any Person
into  which the  Custodian  may be merged or  converted  or with which it may be
consolidated,   or  any  Person   resulting  from  any  merger,   conversion  or
consolidation to which the Custodian shall be a party, or any Person  succeeding
to the  business  of the  Custodian,  shall be the  successor  of the  Custodian
hereunder,  provided  such Person shall be able to satisfy the  requirements  in
Section 3.7,  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.

                  Section 3.7.  Representations of the Custodian.  The Custodian
hereby represents that it is a depository institution or a trust company subject
to  supervision  by a federal or state  authority,  has a combined  capital  and
surplus  of at  least  $10,000,000  and  is  qualified  to do  business  in  the
jurisdiction in which it will hold any Mortgage File.

                  Section 3.8. Liability of the Custodian. In the absence of bad
faith on the part of the Custodian,  the Custodian may conclusively  rely, as to
the  truth of the  statements  and the  correctness  of the  opinions  expressed
therein, upon any request, instructions,  certificate, opinion or other document
furnished to the Custodian,  reasonably  believed by the Custodian to be genuine
and to have  been  signed  or  presented  by the  proper  party or  parties  and
conforming to the requirements of this Custodial  Agreement;  but in the case of
any loan document or other request,



<PAGE>


                                        9

instruction,   document  or  certificate   which  by  any  provision  hereof  is
specifically  required to be furnished to the Custodian,  the Custodian shall be
under a duty to examine the same in  accordance  with the  requirements  of this
Custodial Agreement.

                  Neither  the  Custodian  nor any of its  directors,  officers,
agents or employees, shall be liable for any action taken or omitted to be taken
by it or them hereunder or in connection  herewith in good faith and believed by
it or them to be within the purview of this Custodial Agreement,  except for its
or their breach of its or their  obligations  hereunder,  or by its or their own
negligence,  lack of good faith or  willful  misconduct.  In no event  shall the
Custodian or its  directors,  officers,  agents and employees be held liable for
any special,  indirect or consequential  damages resulting from any action taken
or omitted to be taken by it or them hereunder or in connection herewith in good
faith and  reasonably  believed  by it or them to be within the  purview of this
Custodial Agreement, even if advised of the possibility of such damages.

                  Section 3.9. Insurance.  The Custodian shall, at its own
expense, maintain in full force and effect at all times during the existence of
this Agreement the following:

                           (a)      fidelity insurance;
                           (b)      theft of documents insurance; and
                           (c)      forgery insurance.

All such  insurance  shall be in amounts with  standard  coverage and subject to
deductibles  as is customary  for insurance  typically  maintained by depository
institutions or trust companies which act as custodians,  which insurance may be
self-insurance.  The minimum coverage under any such insurance shall be at least
equal to the corresponding  amounts required by FNMA in the FNMA Mortgage-Backed
Securities  Selling  and  Servicing  Guide or by FHLMC in the FHLMC  Sellers'  &
Servicers'  Guide.  The Custodian shall,  upon written  request,  provide to the
Depositor  or the  Trustee a copy of any  policy  or  certificate  of  insurance
required to be maintained by the Custodian pursuant to this Agreement.


                                   ARTICLE IV

                            Miscellaneous Provisions

                  Section  4.1.  Notices.  All notices,  requests,  consents and
demands and other  communications  required  under this Agreement or pursuant to
any other  instrument or document  delivered  hereunder shall be in writing and,
unless otherwise specifically provided, may be delivered personally, by telegram
or telex,  or by first  class  mail,  postage  prepaid,  or by express  delivery
service,  at the addresses shown on the first page hereof, or such other address
as may  hereafter  be furnished  to the other  parties by like notice.  Any such
demand, notice or communication  hereunder shall be deemed to have been received
on the date delivered to or received at the premises of the addressee.




<PAGE>


                                       10

                  Section 4.2.  Amendments.  No  modification or amendment of or
supplement to this Agreement  shall be valid or effective  unless the same is in
writing and signed by all parties hereto, and none of the Depositor,  the Master
Servicers  nor the  Trustee  shall  enter into any  amendment  hereof  except as
permitted by the Pooling and Servicing Agreement.  The Trustee shall give prompt
notice to the  Custodian  of any  amendment  or  supplement  to the  Pooling and
Servicing Agreement and furnish the Custodian with written copies thereof.

                  Section 4.3.  Governing Law. This Agreement  shall be deemed a
contract made under the laws of the State of New York and shall be construed and
enforced in accordance with and governed by the laws of the State of New York.

                  Section 4.4.  Counterparts.  For 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 constitute but one and the same instrument.

                  Section 4.5. Severability of Provisions. If any one or more of
the covenants,  agreements,  provisions or terms of this Agreement  shall be for
any reason whatsoever held invalid, then such covenants, agreements,  provisions
or terms shall be deemed  severable  from the remaining  covenants,  agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability  of the other provisions of this Agreement or of the Certificates
or the rights of the Holders thereof.




<PAGE>



                  IN WITNESS WHEREOF, this Agreement is executed as of the date
first above written.


                                                NORWEST BANK MINNESOTA,
                                                NATIONAL ASSOCIATION,
                                                as Trustee
Address:
                                                By:_____________________________
Norwest Center                                  Name:
Sixth & Marquette                               Title:
Minneapolis, Minnesota 55479



                                                TEXAS COMMERCE BANK NATIONAL
                                                ASSOCIATION,
                                                as Custodian
Address:

801 West Greens Road                            By:_____________________________
Houston, Texas 77067                            Name:
                                                Title:


                                                AMERIQUEST MORTGAGE COMPANY
                                                as Master Servicer

Address:
                                                By:_____________________________
1100 Town & Country Road                        Name:
Orange, California 92868                        Title:


                                                SALOMON BROTHERS MORTGAGE
                                                SECURITIES VII, INC.,
                                                as Depositor
Address:
                                                By:_____________________________
Seven World Trade Center                        Name:  Susan Mills
New York, New York 10048                        Title:  Assistant Vice President



<PAGE>




STATE OF NEW YORK    )
                     ) ss.:
COUNTY OF NEW YORK   )


                  On the ___ day of November, 1997 before me, a notary public in
and for  said  State,  personally  appeared  Susan  Mills,  known to me to be an
Assistant Vice President of Salomon Brothers Mortgage  Securities VII, Inc., one
of the corporations that executed the within instrument, and also known to me to
be the person who executed it on behalf of said corporation, and acknowledged to
me that such corporation executed the within instrument.

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


                                             ------------------------------
                                                   Notary Public


[Notarial Seal]



<PAGE>




STATE OF ________________)
                         ) ss.:
COUNTY OF _______________)


                  On the ___ day of November, 1997 before me, a notary public in
and for said State, personally appeared __________________,  known to me to be a
____________________  of Ameriquest  Mortgage  Company,  one of the corporations
that executed the within  instrument,  and also known to me to be the person who
executed  it on behalf of said  corporation,  and  acknowledged  to me that such
corporation executed the within instrument.

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


                                             ------------------------------
                                                   Notary Public



[Notarial Seal]





<PAGE>



STATE OF NEW YORK    )
                     ) ss.:
COUNTY OF NEW YORK   )


                  On the 25th day of November,  1997 before me, a notary  public
in and for said State,  personally appeared Randall S. Reider, known to me to be
an  Officer  of Norwest  Bank  Minnesota,  N.A.,  one of the  corporations  that
executed  the  within  instrument,  and also  known to me to be the  person  who
executed  it on behalf of said  corporation,  and  acknowledged  to me that such
corporation executed the within instrument.

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



                                             ------------------------------
                                                   Notary Public

[Notarial Seal]





<PAGE>


STATE OF ________________)
                         ) ss.:
COUNTY OF _______________)


                  On the ___ day of November, 1997 before me, a notary public in
and for said State, personally appeared  ______________________,  known to me to
be a ___________________ of Texas Commerce Bank National Association, one of the
corporations that executed the within instrument, and also known to me to be the
person who executed it on behalf of said  corporation,  and  acknowledged  to me
that such corporation executed the within instrument.

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



                                             ------------------------------
                                                   Notary Public


[Notarial Seal]





<PAGE>



                     EXHIBIT ONE TO THE CUSTODIAL AGREEMENT


                     FORM OF CUSTODIAN INITIAL CERTIFICATION


                                                   November __, 1997



Salomon Brothers Mortgage
Securities VII, Inc.
Seven World Trade Center
New York, New York  10048


[Master Servicer]

[Trustee]


        Re: Custodial Agreement, dated November __, 1997, among Salomon Brothers
            Mortgage Securities VII, Inc., Ameriquest Mortgage Company, Norwest
            Bank Minnesota, N.A., and Texas Commerce Bank National Association
            Asset-Backed Floating Rate Certificates, Series 1997-AQ2
            --------------------------------------------------------------------


Ladies and Gentlemen:

                  In  accordance  with  Section  2.2  of  the   above-referenced
Custodial Agreement, the undersigned, as Custodian, hereby certifies, subject to
the  exceptions  noted on the attached  report,  that as to each  Mortgage  Loan
listed in the Mortgage Loan Schedule  (other than any Mortgage Loan paid in full
or any Mortgage Loan  specifically  identified  in the  exception  report as not
being  covered by this  certification),  it has reviewed  the Mortgage  File and
determined that (i) all documents constituting part of such Mortgage File (other
than such documents  described in Section 2.1(e)) required to be delivered to it
pursuant to the Custodial  Agreement are in its possession,  (ii) such documents
have been  reviewed  by it and  appear  regular on their face and relate to such
Mortgage Loan, (iii) based on its examination and only as to the foregoing,  the
information  set forth in the Mortgage Loan Schedule that  corresponds  to items
(i) through (iii), (vi), (ix), (x), (xiii), (xv), and (xvii) through (xx) of the
definition of "Mortgage  Loan  Schedule" in the Pooling and Servicing  Agreement
accurately reflects information set forth in the Mortgage File.

                  The  Custodian  has  made no  independent  examination  of any
documents  contained  in each  Mortgage  File  beyond  the  review  specifically
required in the  above-referenced  Custodial  Agreement.  The Custodian makes no
representations as to: (i) the validity, legality, sufficiency,



<PAGE>


                                        2

enforceability or genuineness of any of the documents  contained in the 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) whether any Mortgage File included any of the documents
specified in clause (e) of Section 2.1 of the Custodial Agreement.

                  Capitalized  words and  phrases  used  herein  shall  have the
meanings assigned to them in the above-captioned Custodial Agreement.

                                           TEXAS COMMERCE BANK
                                           NATIONAL ASSOCIATION


                                           By:_________________________________
                                           Name:
                                           Title:




<PAGE>



                     EXHIBIT TWO TO THE CUSTODIAL AGREEMENT


                      FORM OF CUSTODIAN FINAL CERTIFICATION


                                                      [Date]



Salomon Brothers Mortgage
Securities VII, Inc.
Seven World Trade Center
New York, New York  10048

Attention: ___________________


[Master Servicer]

[Trustee]


      Re:  Custodial Agreement, dated November ___, 1997, among Salomon
           Brothers Mortgage Securities VII, Inc., Ameriquest Mortgage Company,
           Norwest Bank Minnesota, N.A., and Texas Commerce Bank National
           Association Asset-Backed Floating Rate Certificates, Series 1997-AQ2
           --------------------------------------------------------------------

Ladies and Gentlemen:

                  In  accordance   with  Section  2.2  of  the   above-captioned
Custodial Agreement, the undersigned,  as Custodian, 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:

                         (i)  the  original  Mortgage  Note,   endorsed  in  the
         following form:  "Pay to the order of Norwest Bank Minnesota,  N.A., as
         Trustee  for  the  registered  holders  of  Salomon  Brothers  Mortgage
         Securities  VII,  Inc.,  under the  applicable  pooling  and  servicing
         agreement,   without   recourse",   with  all  prior  and   intervening
         endorsements   showing  a  complete  chain  of  endorsement   from  the
         originator to the Person so endorsing to the Trustee;

                        (ii) the original  recorded  Mortgage,  and the original
         recorded power of attorney,  if the Mortgage was executed pursuant to a
         power of attorney, or a certified copy thereof in those instances where
         the public  recording office retains the original or where the original
         has been lost; and



<PAGE>


                                        2

                       (iii) an original recorded  Assignment of the Mortgage to
         the  Trustee  together  with  the  original   recorded   Assignment  or
         Assignments of the Mortgage showing a complete chain of assignment from
         the  originator,  or a  certified  copy of such  Assignments  in  those
         instances  where the public  recording  retains  the  original or where
         original has been lost; and

                        (iv) the original lender's title insurance policy.

                  The  Custodian  has  made no  independent  examination  of any
documents  contained  in each  Mortgage  File  beyond  the  review  specifically
required in the above-referenced  Pooling and Servicing Agreement. The Custodian
makes  no  representations  as to:  (i)  the  validity,  legality,  sufficiency,
enforceability or genuineness of any of the documents  contained in the Mortgage
File of any of the Mortgage Loans  identified on the Mortgage Loan Schedule,  or
(ii) the collectability,  insurability, effectiveness or suitability of any such
Mortgage Loan.

                  Capitalized  words and  phrases  used  herein  shall  have the
meanings assigned to them in the above-captioned Custodial Agreement.


                                       TEXAS COMMERCE BANK NATIONAL
                                       ASSOCIATION


                                       By:__________________________________
                                       Name:
                                       Title:



<PAGE>


                                   SCHEDULE 1


                             MORTGAGE LOAN SCHEDULE

                           TO BE PROVIDED UPON REQUEST



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