________________________________________________________________
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: August 19, 1998
(Date of earliest event reported)
NOVASTAR MORTGAGE FUNDING CORPORATION (as depositor under the Trust
Agreement, dated as of August 1, 1998, and pursuant to which an
Indenture was entered into, providing for, inter alia, the issuance
of NovaStar Mortgage Funding Trust, Series 1998-2 Home-Equity Loan
Asset-Backed Bonds)
NovaStar Mortgage Funding Corporation
(Exact name of registrant as specified in its charter)
Delaware 333-44099 48-1195807
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
1901 West 47th Street
Suite 105
Westwood, Kansas 66205
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (913) 514-3500
__________________________________________________________________
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Not applicable
(b) Not applicable
(c) Exhibits:
4.3 Servicing Agreement, dated as of August 1,
1998, among NovaStar Mortgage, Inc., as master servicer, the
NovaStar Mortgage Funding Trust, Series 1998-2, as issuer and
First Union National Bank, as indenture trustee.
4.4 Amended and Restated Trust Agreement, dated as
of August 1, 1998, between NovaStar Mortgage Funding
Corporation, as depositor and Wilmington Trust Company, as
owner trustee.
4.5 Indenture, dated as of August 1, 1998, between
NovaStar Mortgage Funding Trust, Series 1998-2, as issuer and
First Union National Bank, as indenture trustee.
4.6 Financial Guaranty Insurance Policy, dated as
of August 19, 1998, issued by MBIA Insurance Corporation with
respect to $315,000,000 aggregate principal amount NovaStar
Home Equity Loan Asset-Backed Bonds, Series 1998-2.
4.7 Schedule to International Swap Dealers
Association, Inc. (ISDA) Standard Form Master Agreement, dated
as of August 19, 1998, between Merrill Lynch Capital Services,
Inc. and NovaStar Mortgage Funding Trust, Series 1998-2,
together with the Guarantee of Merrill Lynch & Co., Inc.,
Letter of Confirmation re CAP Transaction 98DL2708 and Letter
of Confirmation re CAP Transaction 98DL2709.
4.8 Letter of Confirmation re USD 80,000,000
Interest Rate Cap NY 11432, dated August 5, 1998, from
Greenwich Capital Markets, Inc., as agent for NatWest Capital
Markets Limited, which itself acts as agent for National
Westminster Bank PLC to NovaStar Mortgage Funding Trust,
Series 1998-2.
<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.
NOVASTAR MORTGAGE FUNDING
CORPORATION
By: /s/ Scott F. Hartman
Name: Scott F. Hartman
Title: President
Dated: August 27, 1998
EXECUTION COPY
_________________________________________________________________
NOVASTAR MORTGAGE, INC.
as Servicer,
FIRST UNION NATIONAL BANK
as Indenture Trustee,
and
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
as Issuer
______________________
SERVICING AGREEMENT
Dated as of August 1, 1998
______________________
Fixed and Adjustable-Rate Mortgage Loans
NovaStar Mortgage Funding Trust, Series 1998-2
NovaStar Home Equity Loan Asset-Backed Bonds, Series 1998-2
_________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I Definitions. . . . . . . . . . . . . . . . . . . . . .1
Section 1.01. Definitions. . . . . . . . . . . . . . . . .1
Section 1.02. Other Definitional Provisions. . . . . . . .2
Section 1.03. Interest Calculations. . . . . . . . . . . .2
ARTICLE II Representations and Warranties. . . . . . . . . .3
Section 2.01. Representations and Warranties Regarding the
Servicer . . . . . . . . . . . . . . . . . .3
Section 2.02. Existence. . . . . . . . . . . . . . . . . .4
Section 2.03. Enforcement of Representations and
Warranties . . . . . . . . . . . . . . . . .4
ARTICLE III Administration and Servicing of Mortgage Loans. .5
Section 3.01. Servicer to Assure Servicing . . . . . . . .5
Section 3.02. Subservicing Agreements Between Servicer and
Subservicers . . . . . . . . . . . . . . . .7
Section 3.03. Successor Subservicers . . . . . . . . . . .8
Section 3.04. Liability of the Servicer. . . . . . . . . .8
Section 3.05. Assumption or Termination of Subservicing
Agreements by Indenture Trustee. . . . . . .8
Section 3.06. Collection of Mortgage Loan Payments . . . .9
Section 3.07. Withdrawals from the Collection Account. . 11
Section 3.08. Collection of Taxes, Assessments and Similar
Items; Servicing Accounts. . . . . . . . . 13
Section 3.09. Access to Certain Documentation and
Information Regarding the Mortgage Loans . 14
Section 3.10. Servicing and Administration of the CAP
Agreements and the ML&Co Guaranty. . . . . 14
Section 3.11. Maintenance of Hazard Insurance and Fidelity
Coverage . . . . . . . . . . . . . . . . . 15
Section 3.12. Due-on-Sale Clauses; Assumption Agreements 17
Section 3.13. Realization Upon Defaulted Mortgage Loans. 18
Section 3.14. Indenture Trustee to Cooperate; Release of
Mortgage Files . . . . . . . . . . . . . . 19
Section 3.15. Servicing Compensation . . . . . . . . . . 21
Section 3.16. Annual Statements of Compliance. . . . . . 21
Section 3.17. Annual Independent Public Accountants'
Servicing Report . . . . . . . . . . . . . 22
Section 3.18. Optional Purchase of Defaulted Mortgage
Loans. . . . . . . . . . . . . . . . . . . 22
Section 3.19. Information Required by the Internal Revenue
Service Generally and Reports of Foreclosures
and Abandonments of Mortgaged Property . . 22
Section 3.20. Purchase of Converted Mortgage Loans . . . 23
Section 3.21. Superior Liens . . . . . . . . . . . . . . 23
Section 3.22. Servicing and Administrating of the PMI
Policies . . . . . . . . . . . . . . . . . 24
ARTICLE IV Remittance Reports. . . . . . . . . . . . . . . 26
Section 4.01. Remittance Reports . . . . . . . . . . . . 26
Section 4.02. Advances . . . . . . . . . . . . . . . . . 26
Section 4.03. Compensating Interest Payments . . . . . . 27
ARTICLE V The Servicer . . . . . . . . . . . . . . . . . . . . 27
Section 5.01. Liability of the Servicer. . . . . . . . . 27
Section 5.02. Merger or Consolidation of, or Assumption of
the Obligations of, the Servicer. . . . . 27
Section 5.03. Limitation on Liability of the Servicer and
Others . . . . . . . . . . . . . . . . . . 27
Section 5.04. Servicer Not to Resign . . . . . . . . . . 28
Section 5.05. Delegation of Duties . . . . . . . . . . . 29
Section 5.06. Servicer to Pay Indenture Trustee's and Owner
Trustee's Fees and Expenses;
Indemnification. . . . . . . . . . . . . . 29
ARTICLE VI Default . . . . . . . . . . . . . . . . . . . . 30
Section 6.01. Servicing Default. . . . . . . . . . . . . 30
Section 6.02. Indenture Trustee to Act; Appointment of
Successor. . . . . . . . . . . . . . . . . 34
Section 6.03. Notification to Bondholders. . . . . . . . 35
Section 6.04. Waiver of Defaults . . . . . . . . . . . . 35
ARTICLE VII Miscellaneous Provisions. . . . . . . . . . . . 35
Section 7.01. Amendment. . . . . . . . . . . . . . . . . 35
Section 7.02. Governing Law. . . . . . . . . . . . . . . 36
Section 7.03. Notices. . . . . . . . . . . . . . . . . . 36
Section 7.04. Severability of Provisions . . . . . . . . 37
Section 7.05. Third-Party Beneficiaries. . . . . . . . . 37
Section 7.06. Counterparts . . . . . . . . . . . . . . . 37
Section 7.07. Effect of Headings and Table of Contents . 37
Section 7.08. Termination. . . . . . . . . . . . . . . . 38
Section 7.09. No Petition. . . . . . . . . . . . . . . . 38
Section 7.10. No Recourse. . . . . . . . . . . . . . . . 38
ARTICLE VIII Administrative Duties of the Servicer . . . . . 38
Section 8.01. Administrative Duties. . . . . . . . . . . 38
Section 8.02. Records. . . . . . . . . . . . . . . . . . 40
Section 8.03. Additional Information to be Furnished . . 40
EXHIBIT A - MORTGAGE LOAN SCHEDULE . . . . . . . . . . . . . .A-1
EXHIBIT B - FORM OF REQUEST FOR RELEASE. . . . . . . . . . . .B-1
EXHIBIT C - FORM OF LIQUIDATION REPORT . . . . . . . . . . . .C-1
<PAGE>
THIS SERVICING AGREEMENT, dated as of August 1, 1998,
among NovaStar Mortgage, Inc., as Servicer (the "Servicer"),
First Union National Bank, as Indenture Trustee (the "Indenture
Trustee"), and NovaStar Mortgage Funding Trust, Series 1998-2, as
Issuer (the "Issuer").
W I T N E S E T H T H A T:
WHEREAS, pursuant to the terms of the Mortgage Loan
Purchase Agreement, the Seller will sell (i) the Initial Mortgage
Loans to the Company on the Closing Date and (ii) the Subsequent
Mortgage Loans to the Company on each Subsequent Transfer Date,
who will then sell the Subsequent Mortgage Loans to the Issuer on
each Subsequent Transfer Date;
WHEREAS, pursuant to the terms of the Trust Agreement,
the Company will sell the Initial Mortgage Loans and transfer all
of its rights under the Mortgage Loan Purchase Agreement to the
Issuer on the Closing Date;
WHEREAS, pursuant to the terms of the Trust Agreement,
the Issuer will issue and transfer to the Company the
Certificates on the Closing Date;
WHEREAS, pursuant to the terms of the Indenture, the
Issuer will issue the Bonds on the Closing Date;
WHEREAS, pursuant to the terms of the Certificates Sale
Agreement, the Company will sell and transfer to NCFC the
Certificates on the Closing Date;
WHEREAS, pursuant to the terms of the Master Assignment
Agreement, NCFC will pledge and transfer the Certificates to
MLMCI on the Closing Date; and
WHEREAS, pursuant to the terms of this Servicing
Agreement, the Servicer will service the Mortgage Loans directly
or through one or more Subservicers.
NOW, THEREFORE, in consideration of the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. For all purposes of this
Servicing Agreement, except as otherwise expressly provided
herein or unless the context otherwise requires, capitalized
terms not otherwise defined herein shall have the meanings
assigned to such terms in the Definitions contained in Appendix A
to the Indenture dated as of August 1, 1998 (the "Indenture")
between <PAGE> the Issuer and the Indenture Trustee, which Definitions
are incorporated by reference herein. All other capitalized
terms used herein shall have the meanings specified herein.
Section 1.02. Other Definitional Provisions. (a) All terms
defined in this Servicing Agreement shall have the defined
meanings when used in any certificate or other document made or
delivered pursuant hereto unless otherwise defined therein.
(b) As used in this Servicing Agreement and in any certifi-
cate or other document made or delivered pursuant hereto or
thereto, accounting terms not defined in this Servicing Agreement
or in any such certificate or other document, and accounting
terms partly defined in this Servicing Agreement or in any such
certificate or other document, to the extent not defined, shall
have the respective meanings given to them under generally
accepted accounting principles. To the extent that the
definitions of accounting terms in this Servicing Agreement or in
any such certificate or other document are inconsistent with the
meanings of such terms under generally accepted accounting
principles, the definitions contained in this Servicing Agreement
or in any such certificate or other document shall control.
(c) The words "hereof," "herein," "hereunder" and words of
similar import when used in this Servicing Agreement shall refer
to this Servicing Agreement as a whole and not to any particular
provision of this Servicing Agreement; Section and Exhibit
references contained in this Servicing Agreement are references
to Sections and Exhibits in or to this Servicing Agreement unless
otherwise specified; and the term "including" shall mean
"including without limitation".
(d) The definitions contained in this Servicing Agreement
are applicable to the singular as well as the plural forms of
such terms and to the masculine as well as the feminine and
neuter genders of such terms.
(e) Any agreement, instrument or statute defined or
referred to herein or in any instrument or certificate delivered
in connection herewith means such agreement, instrument or
statute as from time to time amended, modified or supplemented
and includes (in the case of agreements or instruments)
references to all attachments thereto and instruments
incorporated therein; references to a Person are also to its
permitted successors and assigns.
Section 1.03. Interest Calculations. All calculations of
interest hereunder that are made in respect of the Principal
Balance of a Mortgage Loan shall be made in accordance with the
terms of the related Mortgage Note and Mortgage. The calculation
of the Servicing Fee shall be made on the basis of a 360-day year
consisting of twelve 30-day months. All dollar amounts
calculated hereunder shall be rounded to the nearest penny with
one-half of one penny being rounded up.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.01. Representations and Warranties Regarding the
Servicer. The Servicer represents and warrants to the Issuer and
for the benefit of the Indenture Trustee, as pledgee of the
Mortgage Loans, the Bond Insurer and the Bondholders, as of the
Closing Date, that:
(i) The Servicer is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Virginia and has the corporate power to own its
assets and to transact the business in which it is currently
engaged. The Servicer is duly qualified to do business as a
foreign corporation and is in good standing in each juris-
diction in which the character of the business transacted by
it or properties owned or leased by it requires such quali-
fication and in which the failure to so qualify would have a
material adverse effect on the business, properties, assets,
or condition (financial or other) of the Servicer or the
validity or enforceability of the Mortgage Loans;
(ii) The Servicer has the corporate power and authority
to make, execute, deliver and perform this Servicing
Agreement and all of the transactions contemplated under
this Servicing Agreement, and has taken all necessary
corporate action to authorize the execution, delivery and
performance of this Servicing Agreement. When executed and
delivered, this Servicing Agreement will constitute the
legal, valid and binding obligation of the Servicer
enforceable in accordance with its terms, except as enforce-
ment of such terms may be limited by bankruptcy, insolvency
or similar laws affecting the enforcement of creditors'
rights generally and by the availability of equitable
remedies;
(iii) The Servicer is not required to obtain the
consent of any other Person or any consent, license,
approval or authorization from, or registration or
declaration with, any governmental authority, bureau or
agency in connection with the execution, delivery,
performance, validity or enforceability of this Servicing
Agreement, except for such consent, license, approval or
authorization, or registration or declaration, as shall have
been obtained or filed, as the case may be;
(iv) The execution and delivery of this Servicing
Agreement and the performance of the transactions
contemplated hereby by the Servicer will not violate any
provision of any existing law or regulation or any order or
decree of any court applicable to the Servicer or any
provision of the certificate of incorporation or bylaws of
the Servicer, or constitute a material breach of any
mortgage, indenture, contract or other agreement to which
the Servicer is a party or by which the Servicer may be
bound; and
(v) No litigation or administrative proceeding of or
before any court, tribunal or governmental body is currently
pending, or to the knowledge of the Servicer threatened,
against the Servicer or any of its properties or with
respect to this Servicing <PAGE> Agreement or the Bonds or the
Certificates which, to the knowledge of the Servicer, has a
reasonable likelihood of resulting in a material adverse
effect on the transactions contemplated by this Servicing
Agreement.
The foregoing representations and warranties shall survive
any termination of the Servicer hereunder.
Section 2.02. Existence. The Issuer will keep in full
effect its existence, rights and franchises as a business trust
under the laws of the State of Delaware and will obtain and
preserve its qualification to do business in each jurisdiction in
which such qualification is or shall be necessary to protect the
validity and enforceability of this Servicing Agreement.
Section 2.03. Enforcement of Representations and
Warranties. The Servicer, on behalf of and subject to the
direction of the Indenture Trustee, as pledgee of the Mortgage
Loans, or the Bond Insurer, shall enforce the representations and
warranties and related obligations for breaches thereof of the
Seller pursuant to the Mortgage Loan Purchase Agreement. Upon
the discovery by the Seller, the Servicer, the Indenture Trustee,
the Issuer, the Owner Trustee or the Bond Insurer of a breach of
any of the representations and warranties made in the Mortgage
Loan Purchase Agreement, in respect of any Mortgage Loan which
materially and adversely affects the value of the related
Mortgage Loan or the interests of the Bondholders or the
Certificateholders or the Bond Insurer, the party discovering
such breach shall give prompt written notice to the other
parties. The Servicer shall promptly notify the Seller of such
breach and request that, pursuant to the terms of the Mortgage
Loan Purchase Agreement, the Seller either (i) cure such breach
in all material respects or (ii) purchase such Mortgage Loan, in
each instance in accordance with the Mortgage Loan Purchase
Agreement; provided that the Seller shall, subject to the
conditions set forth in the Mortgage Loan Purchase Agreement,
have the option to substitute an Eligible Substitute Mortgage
Loan or Eligible Substitute Mortgage Loans for such Mortgage
Loan. Monthly Payments due with respect to Eligible Substitute
Mortgage Loans in the month of substitution shall not be part of
the Trust Estate and will be retained by the Servicer and
remitted by the Servicer to the Seller on the next succeeding
Payment Date. For the month of substitution, distributions to
the Payment Account pursuant to the Servicing Agreement will
include the Monthly Payment due on a Deleted Mortgage Loan for
such month and thereafter the Seller shall be entitled to retain
all amounts received in respect of such Deleted Mortgage Loan.
The Servicer shall amend or cause to be amended the Mortgage Loan
Schedule to reflect the removal of such Mortgage Loan and the
substitution of the Eligible Substitute Mortgage Loans and the
Servicer shall promptly deliver the amended Mortgage Loan
Schedule to the related Subservicer, if any, the Bond Insurer,
the Owner Trustee and the Indenture Trustee.
In connection with the substitution of one or more Eligible
Substitute Mortgage Loans for one or more Deleted Mortgage Loans,
the Servicer will determine the amount (such amount, a
"Substitution Adjustment Amount"), if any, by which the aggregate
principal balance of all such Eligible Substitute Mortgage Loans
as of the date of substitution is less than the aggregate
principal balance of all such Deleted Mortgage Loans (after
application of the principal portion of <PAGE> the Monthly Payments due
in the month of substitution that are to be distributed to the
Payment Account in the month of substitution). The Seller shall
pay the Substitution Adjustment Amount to the Servicer and the
Servicer shall deposit such Substitution Adjustment Amount into
the Collection Account upon receipt.
It is understood and agreed that the obligation of the
Seller to cure such breach or purchase or substitute for such
Mortgage Loan as to which such a breach has occurred and is
continuing shall constitute the sole remedy respecting such
breach available to the Issuer and the Indenture Trustee, as
pledgee of the Mortgage Loans, against the Seller, except as set
forth in Section 6.1 of the Mortgage Loan Purchase Agreement. In
connection with the purchase of or substitution for any such
Mortgage Loan by the Seller, the Issuer shall assign to the
Seller all of its right, title and interest in respect of the
Mortgage Loan Purchase Agreement applicable to such Mortgage
Loan. Upon receipt of the Repurchase Price, or upon completion
of such substitution, the Servicer shall notify the Indenture
Trustee by certification signed by a Servicing Officer (which
certification shall include a statement to the effect that the
Repurchase Price has been deposited in the Collection Account)
and then the Indenture Trustee shall deliver the Mortgage Files
relating to such Mortgage Loan to the Servicer, together with all
relevant endorsements and assignments prepared by the Servicer
which the Indenture Trustee shall execute.
ARTICLE III
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
Section 3.01. Servicer to Assure Servicing. (a) The
Servicer shall supervise, or take such actions as are necessary
to ensure, the servicing and administration of the Mortgage Loans
and any REO Property in accordance with this Servicing Agreement
and its normal servicing practices, which generally shall conform
to the standards of an institution prudently servicing mortgage
loans for its own account and shall have full authority to do
anything it reasonably deems appropriate or desirable in
connection with such servicing and administration. The Servicer
may perform its responsibilities relating to servicing through
other agents or independent contractors, but shall not thereby be
released from any of its responsibilities as hereinafter set
forth. The authority of the Servicer, in its capacity as
Servicer, and any Subservicer acting on its behalf, shall
include, without limitation, the power to (i) consult with and
advise any Subservicer regarding administration of a related
Mortgage Loan, (ii) approve any recommendation by a Subservicer
to foreclose on a related Mortgage Loan, (iii) supervise the
filing and collection of insurance claims and take or cause to be
taken such actions on behalf of the insured Person thereunder as
shall be reasonably necessary to prevent the denial of coverage
thereunder, and (iv) effectuate foreclosure or other conversion
of the ownership of the Mortgaged Property securing a related
Mortgage Loan, including the employment of attorneys, the
institution of legal proceedings, the collection of deficiency
judgments, the acceptance of compromise proposals and any other
matter pertaining to a delinquent Mortgage Loan. The authority
of the Servicer shall include, in addition, the power on behalf
of the Bondholders, the Indenture Trustee, the Bond <PAGE> Insurer or
any of them to (i) execute and deliver customary consents or
waivers and other instruments and documents, (ii) consent to
transfer of any related Mortgaged Property and assumptions of the
related Mortgage Notes and Security Instruments (in the manner
provided in this Servicing Agreement) and (iii) collect any
Insurance Proceeds and Liquidation Proceeds. Without limiting
the generality of the foregoing, the Servicer and any Subservicer
acting on its behalf may, and is hereby authorized, and empowered
by the Indenture Trustee when the Servicer believes it is
reasonably necessary in its best judgment in order to comply with
its servicing duties hereunder, to execute and deliver, on behalf
of itself, the Bondholders, the Indenture Trustee, the Bond
Insurer or any of them, any instruments of satisfaction,
cancellation, partial or full release, discharge and all other
comparable instruments, with respect to the related Mortgage
Loans, the Insurance Policies and the accounts related thereto,
and the Mortgaged Properties. The Servicer may exercise this
power in its own name or in the name of a Subservicer. The
Servicer will not waive any prepayment penalties without the
consent of the Bond Insurer.
The Servicer, in such capacity, may not consent to the
placing of a lien senior to that of the Mortgage on the related
Mortgaged Property other than any first lien which is prior to
the Mortgage Loan on the related Mortgaged Property as of the
Cut-off Date or Subsequent Cut-off Date, as applicable. If the
Mortgage relating to a Mortgage Loan had a lien senior to the
Mortgage Loan on the related Mortgaged Property as of the Cut-off
Date, or the Subsequent Cut-off Date in the case of a Subsequent
Mortgage Loan, then the Servicer, in such capacity, may consent
to the refinancing of the prior senior lien; provided that (i)
the resulting Combined Loan-to-Value Ratio of such Mortgage Loan
is no higher than the combined Loan-to-Value Ratio prior to such
refinancing, (ii) the interest rate for the loan evidencing the
refinanced senior lien is no higher than the interest rate on the
loan evidencing the existing senior lien immediately prior to the
date of such refinancing; provided however if the loan evidencing
the existing senior lien prior to the date of refinancing has an
adjustable rate and the loan evidencing the refinanced senior
lien has a fixed rate, then the loan evidencing the refinanced
senior lien may be up to 2.0% higher than the then current
mortgage rate of the loan evidencing the existing senior lien and
(iii) the loan evidencing the refinanced senior lien is not
subject to negative amortization.
The relationship of the Servicer (and of any successor to
the Servicer as servicer under this Servicing Agreement) to the
Issuer and the Indenture Trustee under this Servicing Agreement
is intended by the parties to be that of an independent
contractor and not that of a joint venturer, partner or agent.
(b) Notwithstanding the provisions of Subsection 3.01(a),
the Servicer shall not take any action inconsistent with the
interests of the Indenture Trustee, the Bond Insurer or the
Bondholders or with the rights and interests of the Indenture
Trustee, the Bond Insurer or the Bondholders under this Servicing
Agreement.
(c) The Indenture Trustee shall furnish the Servicer with
any powers of attorney and other documents in form as provided to
it necessary or appropriate to enable the Servicer to service and
administer the related Mortgage Loans and REO Property and the
Indenture Trustee <PAGE> shall not be liable for the actions of the
Servicer or any Subservicers under such powers of attorney.
Section 3.02. Subservicing Agreements Between Servicer and
Subservicers. (a) The Servicer may enter into Subservicing
Agreements with Subservicers for the servicing and administration
of the Mortgage Loans and for the performance of any and all
other activities of the Servicer hereunder. Each Subservicer
shall be either (i) an institution the accounts of which are
insured by the FDIC or (ii) another entity that engages in the
business of originating or servicing mortgage loans comparable to
the Mortgage Loans, and in either case shall be authorized to
transact business in the state or states in which the related
Mortgaged Properties it is to service are situated, if and to the
extent required by applicable law to enable the Subservicer to
perform its obligations hereunder and under the Subservicing
Agreement. Any Subservicing Agreement entered into by the
Servicer shall include the provision that such Agreement may be
immediately terminated (i) (x) with cause and without any
termination fee by the Servicer hereunder and/or (y) without
cause, in which case the Servicer shall be solely responsible for
any termination fee or penalty resulting therefrom and (ii) at
the option of the Bond Insurer upon the termination or
resignation of the Servicer hereunder, in which case the Servicer
shall be solely responsible for any termination fee or penalty
resulting therefrom. In addition, each Subservicing Agreement
shall provide for servicing of the Mortgage Loans consistent with
the terms of this Servicing Agreement. The Servicer and the
Subservicers may enter into Subservicing Agreements and make
amendments to the Subservicing Agreements or enter into different
forms of Subservicing Agreements providing for, among other
things, the delegation by the Servicer to a Subservicer of
additional duties regarding the administration of the Mortgage
Loans; provided, however, that any such amendments or different
forms shall be consistent with and not violate the provisions of
this Servicing 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 Bond
Insurer or the Bondholders, without the consent of the Bond
Insurer or, if a Bond Insurer Default exists, the holders of at
least 51% of the aggregate Bond Principal Balance of the
Outstanding Bonds.
(b) As part of its servicing activities hereunder, the
Servicer, for the benefit of the Indenture Trustee, the Bond
Insurer and the Bondholders, shall enforce the obligations of
each Subservicer under the related Subservicing Agreement. Such
enforcement, including, without limitation, the legal prosecution
of claims, termination of Subservicing Agreements and the pursuit
of other appropriate remedies, shall be in such form and carried
out to such an extent and at such time as the Servicer, in its
good faith business judgment, would require were it the owner of
the related Mortgage Loans. The Servicer shall pay the costs of
such enforcement at its own expense, but shall be reimbursed
therefor only (i) from a general recovery resulting from such
enforcement only to the extent, if any, that such recovery
exceeds all amounts due in respect of the related Mortgage Loan
or (ii) from a specific recovery of costs, expenses or attorneys'
fees against the party against whom such enforcement is directed.
<PAGE>
Section 3.03. Successor Subservicers. The Servicer shall
be entitled to terminate any Subservicing Agreement that may
exist in accordance with the terms and conditions of such
Subservicing Agreement and without any limitation by virtue of
this Servicing Agreement; provided, however, that upon
termination, the Servicer shall either act as servicer of the
related Mortgage Loans or enter into an appropriate contract with
a successor Subservicer reasonably acceptable to the Indenture
Trustee and the Bond Insurer pursuant to which such successor
Subservicer will be bound by all relevant terms of the related
Subservicing Agreement pertaining to the servicing of such
Mortgage Loans.
Section 3.04. Liability of the Servicer. (a)
Notwithstanding any Subservicing Agreement, any of the provisions
of this Servicing Agreement relating to agreements or
arrangements between the Servicer and a Subservicer or reference
to actions taken through a Subservicer or otherwise, the Servicer
shall under all circumstances remain obligated and primarily
liable to the Indenture Trustee, the Bondholders and the Bond
Insurer for the servicing and administering of the Mortgage Loans
and any REO Property in accordance with this Servicing Agreement.
The obligations and liability of the Servicer shall not be
diminished by virtue of Subservicing Agreements or by virtue of
indemnification of the Servicer by any Subservicer, or any other
Person. The obligations and liability of the Servicer shall
remain of the same nature and under the same terms and conditions
as if the Servicer alone were servicing and administering the
related Mortgage Loans. The Servicer shall, however, be entitled
to enter into indemnification agreements with any Subservicer or
other Person and nothing in this Servicing Agreement shall be
deemed to limit or modify such indemnification. For the purposes
of this Servicing Agreement, the Servicer shall be deemed to have
received any payment on a Mortgage Loan on the date the
Subservicer received such payment; provided, however, that this
sentence shall not apply to the Indenture Trustee acting as the
Servicer; provided, further, however, that the foregoing
provision shall not affect the obligation of the Servicer if it
is also the Indenture Trustee to advance amounts which are not
Nonrecoverable Advances.
(b) Any Subservicing Agreement that may be entered into and
any transactions or services relating to the Mortgage Loans
involving a Subservicer in its capacity as such and not as an
originator shall be deemed to be between the Subservicer and the
Servicer alone, and the Indenture Trustee, the Bond Insurer and
the Bondholders shall not be deemed parties thereto and shall
have no claims, rights, obligations, duties or liabilities with
respect to the Subservicer except as set forth in Section 3.15.
Section 3.05. Assumption or Termination of Subservicing
Agreements by Indenture Trustee. (a) If the Indenture Trustee
or its designee shall assume the servicing obligations of the
Servicer in accordance with Section 6.02 below, the Indenture
Trustee, to the extent necessary to permit the Indenture Trustee
to carry out the provisions of Section 6.02 with respect to the
Mortgage Loans, shall succeed to all of the rights and
obligations of the Servicer under each of the Subservicing
Agreements. In such event, the Indenture Trustee or its designee
as the successor Servicer shall be deemed to have assumed all of
the Servicer's rights and obligations therein and to have
replaced the Servicer as a party to such Subservicing Agreements
to the same <PAGE> extent as if such Subservicing Agreements had been
assigned to the Indenture Trustee or its designee as a successor
Servicer, except that the Indenture Trustee or its designee as a
successor Servicer shall not be deemed to have assumed any
obligations or liabilities of the Servicer arising prior to such
assumption and the Servicer shall not thereby be relieved of any
liability or obligations under such Subservicing Agreements
arising prior to such assumption. Nothing in the foregoing shall
be deemed to entitle the Indenture Trustee or its designee as a
successor Servicer at any time to receive any portion of the
servicing compensation provided under Section 3.15 except for
such portion as the Servicer would be entitled to receive.
(b) In the event that the Indenture Trustee or its designee
as successor Servicer for the Indenture Trustee assumes the
servicing obligations of the Servicer under Section 6.02, upon
the request of the Indenture Trustee or such designee as
successor Servicer, the Servicer shall at its own expense deliver
to the Indenture Trustee, or at its written request to such
designee, originals or, if originals are not available,
photocopies of all documents, files and records, electronic or
otherwise, relating to the Subservicing Agreements and the
related Mortgage Loans or REO Property then being serviced and an
accounting of amounts collected and held by it, if any, and will
otherwise cooperate and use its reasonable efforts to effect the
orderly and efficient transfer of the Subservicing Agreements, or
responsibilities hereunder to the Indenture Trustee, or at its
written request to such designee as successor Servicer.
Section 3.06. Collection of Mortgage Loan Payments. (a)
The Servicer will coordinate and monitor remittances by
Subservicers to it with respect to the Mortgage Loans in
accordance with this Servicing Agreement.
(b) The Servicer shall make its best reasonable efforts to
collect or cause to be collected all payments required under the
terms and provisions of the Mortgage Loans and shall follow, and
use its best reasonable efforts to cause Subservicers to follow,
collection procedures comparable to the collection procedures of
prudent mortgage lenders servicing mortgage loans for their own
account to the extent such procedures shall be consistent with
this Servicing Agreement. Consistent with the foregoing, the
Servicer or the related Subservicer may in its discretion (i)
waive or permit to be waived any late payment charge, prepayment
charge, assumption fee, or any penalty interest in connection
with the prepayment of a Mortgage Loan and (ii) suspend or reduce
or permit to be suspended or reduced regular monthly payments for
a period of up to six months, or arrange or permit an arrangement
with a Mortgagor for a scheduled liquidation of delinquencies;
provided, however, that the Servicer or the related Subservicer
may permit the foregoing only if it believes, in good faith, that
recoveries of Monthly Payments will be maximized; provided
further, however, that the Servicer may not without the prior
written consent of the PMI Insurer and the Bond Insurer permit
any waiver, modification or variance which would (a) change the
loan rate, (b) forgive any payment of principal or interest, (c)
lessen the lien priority or (d) extend the final maturity date of
a Mortgage Loan past 12 months prior to the final maturity date
on the Bonds. In the event the Servicer or related Subservicer
shall consent to the deferment of the due dates for payments due
on a Mortgage Note, the Servicer shall nonetheless make an
Advance or shall cause the related Subservicer to make an <PAGE> advance
to the same extent as if such installment were due, owing and
delinquent and had not been deferred through liquidation of the
Mortgaged Property; provided, however, that the obligation of the
Servicer or the related Subservicer to make an Advance shall
apply only to the extent that the Servicer believes, in good
faith, that such advances are not Nonrecoverable Advances.
(c) Within five Business Days after the Servicer has
determined that all amounts which it expects to recover from or
on account of a Liquidated Mortgage Loan have been recovered and
that no further Liquidation Proceeds will be received in
connection therewith, the Servicer shall provide to (i) the
Indenture Trustee a certificate of a Servicing Officer that such
Mortgage Loan became a Liquidated Mortgage Loan as of the date of
such determination and (ii) the Bond Insurer and the Indenture
Trustee a Liquidation Report in the form attached hereto as
Exhibit C.
(d) The Servicer shall establish a segregated account in
the name of the Indenture Trustee (the "Collection Account"),
which shall be an Eligible Account, in which the Servicer shall
deposit or cause to be deposited any amounts representing
payments on and any collections in respect of the Mortgage Loans
received by it after the Cut-Off Date or, with respect to the
Subsequent Mortgage Loans, the Subsequent Cut-off Date (other
than in respect of the payments referred to in the following
paragraph) within two Business Days following receipt thereof,
including the following payments and collections received or made
by it (without duplication):
(i) all payments of principal or interest on the
Mortgage Loans received by the Servicer directly from
Mortgagors or from the respective Subservicer;
(ii) the aggregate Repurchase Price of the Mortgage
Loans purchased by the Servicer pursuant to Sections 3.18 or
3.20;
(iii) Net Liquidation Proceeds;
(iv) all proceeds of any Mortgage Loans repurchased by
the Seller pursuant to the Mortgage Loan Purchase Agreement,
and all Substitution Adjustment Amounts required to be
deposited in connection with the substitution of an Eligible
Substitute Mortgage Loan pursuant to the Mortgage Loan
Purchase Agreement;
(v) Insurance Proceeds, other than Net Liquidation
Proceeds, and PMI Insurance Proceeds resulting from any
insurance policy maintained on a Mortgaged Property;
(vi) any Advance and any Compensating Interest
payments;
(vii) all payments received from the CAP Providers
under the CAP Agreements or from ML&Co pursuant to the ML&Co
Guaranty pursuant to the terms thereof; and
<PAGE>
(viii) any other amounts received by the Servicer,
including all Foreclosure Profits, assumption fees,
prepayment penalties and any other fees that are required to
be deposited in the Collection Account pursuant to this
Servicing Agreement.
provided, however, that with respect to each Due Period, the
Servicer shall be permitted to retain from payments in respect of
interest on the Mortgage Loans, the Servicing Fee for such Due
Period. The foregoing requirements respecting deposits to the
Collection Account are exclusive, it being understood that,
without limiting the generality of the foregoing, the Servicer
need not deposit in the Collection Account late payment charges
payable by Mortgagors, as further described in Section 3.15, or
amounts received by the Subservicer for the accounts of Mort-
gagors for application towards the payment of taxes, insurance
premiums, assessments and similar items. In the event any amount
not required to be deposited in the Collection Account is so
deposited, the Servicer may at any time (prior to being
terminated under this Servicing Agreement) withdraw such amount
from the Collection Account, any provision herein to the contrary
notwithstanding. The Servicer shall keep records that accurately
reflect the funds on deposit in the Collection Account that have
been identified by it as being attributable to the Mortgage Loans
and shall hold all collections in the Collection Account for the
benefit of the Owner Trustee, the Indenture Trustee, the
Bondholders and the Bond Insurer, as their interests may appear.
Funds in the Collection Account may be invested in Eligible
Investments, but shall not be commingled with the Servicer's own
funds or general assets or with funds respecting payments on
mortgage loans or with any other funds not related to the Bonds.
Income earned on such Eligible Investments shall be for the
account of the Servicer.
(e) The Servicer will require each Subservicer to hold all
funds constituting collections on the Mortgage Loans, pending
remittance thereof to the Servicer, in one or more accounts in
the name of the Indenture Trustee meeting the requirements of an
Eligible Account, and such funds shall not be invested. The
Subservicer shall segregate and hold all funds collected and
received pursuant to each Mortgage Loan separate and apart from
any of its own funds and general assets and any other funds. Each
Subservicer shall make remittances to the Servicer no later than
one Business Day following receipt thereof and the Servicer shall
deposit any such remittances received from any Subservicer within
one Business Day following receipt by the Servicer.
Section 3.07. Withdrawals from the Collection Account. (a)
The Servicer shall, from time to time as provided herein, make
withdrawals from the Collection Account of amounts on deposit
therein pursuant to Section 3.06 that are attributable to the
Mortgage Loans for the following purposes (without duplication):
(i) to deposit in the Payment Account, by the fourth
Business Day prior to each Payment Date, all collections on
the Mortgage Loans required to be distributed from the
Payment Account on a Payment Date;
<PAGE>
(ii) to the extent deposited to the Collection Account,
to reimburse itself or the related Subservicer for
previously unreimbursed expenses incurred in maintaining
individual insurance policies pursuant to Section 3.11, or
Liquidation Expenses, paid pursuant to Section 3.13, such
withdrawal right being limited to amounts received on
particular Mortgage Loans (other than any Repurchase Price
in respect thereof) which represent late recoveries of the
payments for which such advances were made, or from related
Liquidation Proceeds;
(iii) to pay to itself out of each payment received
on account of interest on a Mortgage Loan as contemplated by
Section 3.15, an amount equal to the related Servicing Fee
(to the extent not retained pursuant to Section 3.06);
(iv) to pay to itself or the Seller, with respect to
any Mortgage Loan or property acquired in respect thereof
that has been purchased by the Seller, the Servicer or other
entity, all amounts received thereon and not required to be
distributed to Bondholders as of the date on which the
related Repurchase Price is determined;
(v) to reimburse the Servicer or any Subservicer for
any unreimbursed Advance of its own funds or any
unreimbursed advance of such Subservicer's own funds, the
right of the Servicer or a Subservicer to reimbursement
pursuant to this subclause (v) being limited to amounts
received on a particular Mortgage Loan (including, for this
purpose, the Repurchase Price therefor, Insurance Proceeds
and Liquidation Proceeds) which represent late payments or
recoveries of the principal of or interest on such Mortgage
Loan respecting which such Advance or advance was made;
(vi) to reimburse the Servicer or any Subservicer from
Insurance Proceeds or Liquidation Proceeds relating to a
particular Mortgage Loan for amounts expended by the
Servicer or such Subservicer pursuant to Section 3.13 in
good faith in connection with the restoration of the related
Mortgage Property which was damaged by the uninsured cause
or in connection with the liquidation of such Mortgage Loan;
(vii) to reimburse the Servicer or any Subservicer
for any unreimbursed Nonrecoverable Advance previously made,
and otherwise not reimbursed pursuant to this Subsection
3.07(a);
(viii) to pay the Owner Trustee the Owner Trustee
Fee;
(ix) to withdraw any other amount deposited in the
Collection Account that was not required to be deposited
therein pursuant to Section 3.06;
(x) to reimburse the Servicer for costs associated
with the environmental report specified in Section 3.13(c);
<PAGE>
(xi) to clear and terminate the Collection Account upon
a termination pursuant to Section 7.08;
(xii) to pay to the Servicer income earned on
Eligible Investments in the Collection Account;
(xiii) to make regular scheduled payments (but not
termination payments) due to the First and Second CAP
Provider under the First and Second CAP Agreements in
accordance with the terms thereof;
(xiv) to deposit in the Payment Account, by the
fourth Business Day prior to each Payment Date, all payments
received from the CAP Providers under the CAP Agreements or
from ML&Co pursuant to the ML&Co Guaranty; and
(xv) to pay to the PMI Insurer the monthly PMI Premium
due under each PMI Policy from payments received (or
Advances made) on account of interest due on the related
Mortgage Loan;
Withdrawals made pursuant to clause (xv) shall be made on a first
priority basis. In connection with withdrawals pursuant to
clauses (ii), (iii), (iv), (v) and (vi), the Servicer's
entitlement thereto is limited to collections or other recoveries
on the related Mortgage Loan, and the Servicer shall keep and
maintain separate accounting, on a Mortgage Loan by Mortgage Loan
basis, for the purpose of justifying any withdrawal from the
Collection Account pursuant to such clauses. The Servicer shall
not use any payments received under the CAP Agreements or the
ML&Co Guaranty and deposited in the Collection Account to make
any of the foregoing payments, other than pursuant to clause
(xiv) above.
(b) Notwithstanding the provisions of this Section 3.07,
the Servicer may, but is not required to, allow the Subservicers
to deduct from amounts received by them or from the related
account maintained by a Subservicer, prior to deposit in the
Collection Account, any portion to which such Subservicers are
entitled as reimbursement of any reimbursable Advances made by
such Subservicers.
Section 3.08. Collection of Taxes, Assessments and Similar
Items; Servicing Accounts. (a) The Servicer shall establish and
maintain or cause the related Subservicer to establish and
maintain, one or more Servicing Accounts. The Servicer or a
Subservicer will deposit and retain therein all collections from
the Mortgagors for the payment of taxes, assessments, insurance
premiums, or comparable items as agent of the Mortgagors.
(b) The deposits in the Servicing Accounts shall be held in
trust by the Servicer or a Subservicer (and its successors and
assigns) in the name of the Indenture Trustee. Such Servicing
Accounts shall be Eligible Accounts and, if permitted by
applicable law, invested in Eligible Investments held in trust by
the Servicer or a Subservicer as described above and maturing, or
be <PAGE> subject to redemption or withdrawal, no later than the date on
which such funds are required to be withdrawn, and in no event
later than 45 days after the date of investment; withdrawals of
amounts from the Servicing Accounts may be made only to effect
timely payment of taxes, assessments, insurance premiums, or
comparable items, to reimburse the Servicer or a Subservicer for
any advances made with respect to such items, to refund to any
Mortgagors any sums as may be determined to be overages, to pay
interest, if required, to Mortgagors on balances in the Servicing
Accounts or to clear and terminate the Servicing Accounts at or
any time after the termination of this Servicing Agreement.
Amounts received from Mortgagors for deposit into the Servicing
Accounts shall be deposited in the Servicing Accounts by the
Servicer within two days of receipt. The Servicer shall advance
from its own funds amounts needed to pay items payable from the
Servicing Accounts if the Servicer reasonably believes that such
amounts are recoverable from the related Mortgagor. The Servicer
shall comply with all laws relating to the Servicing Accounts,
including laws relating to payment of interest on the Servicing
Accounts. If interest earned by the Servicer on the Servicing
Accounts is not sufficient to pay required interest on the
Servicing Accounts, the Servicer shall pay the difference from
its own funds. The Servicing Accounts shall not be the property
of the Issuer.
Section 3.09. Access to Certain Documentation and
Information Regarding the Mortgage Loans. The Servicer shall
provide, and shall cause any Subservicer to provide, to the
Indenture Trustee, the Owner Trustee and the Bond Insurer access
to the documentation regarding the related Mortgage Loans and REO
Property and to the Bondholders, the FDIC, and the supervisory
agents and examiners of the FDIC (to which the Indenture Trustee
shall also provide) access to the documentation regarding the
related Mortgage Loans required by applicable regulations, such
access being afforded without charge but only upon reasonable
request and during normal business hours at the offices of the
Servicer or the Subservicers that are designated by these
entities; provided, however, that, unless otherwise required by
law, the Indenture Trustee, the Servicer or the Subservicer shall
not be required to provide access to such documentation if the
provision thereof would violate the legal right to privacy of any
Mortgagor; provided, further, however, that the Indenture
Trustee, the Bond Insurer and the Owner Trustee shall coordinate
their requests for such access so as not to impose an
unreasonable burden on, or cause an unreasonable interruption of,
the business of the Servicer or any Subservicer. The Servicer,
the Subservicers and the Indenture Trustee shall allow
representatives of the above entities to photocopy any of the
documentation and shall provide equipment for that purpose at a
charge that covers their own actual out-of-pocket costs.
Section 3.10. Servicing and Administration of the CAP
Agreements and the ML&Co Guaranty. (a) The Servicer shall take
all such actions on behalf of the Issuer as are necessary to
service and administer the CAP Agreements and the ML&Co Guaranty
and to perform the Issuer's obligations and enforce the Issuer's
rights under the CAP Agreements and the ML&Co Guaranty which
actions shall conform to the standards of an institution
prudently administering the CAP Agreements and the ML&Co Guaranty
for its own account. Except as expressly set forth herein, the
Servicer shall have full authority on behalf of the Issuer to do
anything it reasonably deems appropriate or desirable in
connection with the servicing and administration of <PAGE> the CAP
Agreements and the ML&Co Guaranty. The Servicer shall make its
best reasonable efforts to collect or cause to be collected from
the CAP Providers or ML&Co all payments due to the Issuer under
the CAP Agreements and the ML&Co Guaranty.
(b) The Servicer shall deposit into the Collection Account
pursuant to Section 3.06(d)(vii) hereof all payments received
from the CAP Providers and ML&Co under the terms of the CAP
Agreements and the ML&Co Guaranty. The Servicer shall (i)
withdraw from the Collection Account and pay to the First and
Second CAP Provider, pursuant to Section 3.07(a)(xiii) hereof,
regular scheduled payments due to the First and Second CAP
Provider under the First and Second CAP Agreements in accordance
with the terms thereof and (ii) withdraw from the Collection
Account and deposit in the Payment Account, pursuant to Section
3.07(a)(xiv), all regular scheduled payments received under the
CAP Agreements or the ML&Co Guaranty required to be deposited in
the Payment Account.
(c) Notwithstanding the provisions of Subsection 3.10(a)
and (b), the Servicer shall not take any action in regard to the
CAP Agreements inconsistent with the interests of the Indenture
Trustee, the Bond Insurer or the Bondholders or with the rights
and interests of the Indenture Trustee, the Bond Insurer or the
Bondholders under this Servicing Agreement; provided, however,
that payments to the First and Second CAP Provider pursuant to
Subsection 3.10(b) above and Section 3.07(a)(xiii) hereof shall
be deemed not to be inconsistent with such interests.
(d) The Issuer and Indenture Trustee shall furnish the
Servicer with any powers of attorney and other documents in form
as provided to it necessary or appropriate to enable the Servicer
to service and administer the CAP Agreements; provided, however,
that the Indenture Trustee shall not be liable for the actions of
the Servicer under such powers of attorney.
Section 3.11. Maintenance of Hazard Insurance and Fidelity
Coverage. (a) The Servicer shall maintain and keep, or cause
each Subservicer to maintain and keep, with respect to each
Mortgage Loan and each REO Property, in full force and effect
hazard insurance (fire insurance with extended coverage) equal to
at least the lesser of the Principal Balance of the Mortgage Loan
(or the combined Principal Balance owing on such Mortgage Loan
and any mortgage loan senior to such Mortgage Loan) or the
current replacement cost of the Mortgaged Property, and
containing a standard mortgagee clause, provided, however, that
the amount of hazard insurance may not be less than the amount
necessary to prevent loss due to the application of any co-
insurance provision of the related policy. Unless applicable
state law requires a higher deductible, the deductible on such
hazard insurance policy may be no more than $1,500 or 1% of the
applicable amount of coverage, whichever is less. In the case of
a condominium unit or a unit in a planned unit development, the
required hazard insurance shall take the form of a multi-peril
policy covering the entire condominium project or planned unit
development, in an amount equal to at least 100% of the insurable
value based on replacement cost. If the Servicer shall obtain
and maintain a blanket policy consistent with its general
mortgage servicing activities from an insurer acceptable to the
Bond Insurer insuring against hazard losses on all of the
Mortgage Loans, it <PAGE> shall conclusively be deemed to have satisfied
its obligations as set forth in this Section 3.11(a), it being
understood and agreed that such policy may contain a deductible
clause, in which case the Servicer shall, in the event that there
shall not have been maintained on the related Mortgaged Property
a policy complying with this Section 3.11(a) and there shall
have been a loss which would have been covered by such policy,
deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of such deductible
clause without any right of reimbursement. Any such deposit by
the Servicer shall be made on the last Business Day of the Due
Period in the month in which payments under any such policy would
have been deposited in the Collection Account. In connection
with its activities as servicer of the Mortgage Loans, the
Servicer agrees to present, on behalf of itself, the Issuer and
the Indenture Trustee, claims under any such blanket policy.
(b) Any amounts collected by the Servicer or a Subservicer
under any such hazard insurance policy (other than amounts to be
applied to the restoration or repair of the Mortgaged Property or
amounts released to the Mortgagor in accordance with the
Servicer's or a Subservicer's normal servicing procedures, the
Mortgage Note, the Security Instrument or applicable law) shall
be deposited in the Collection Account.
(c) Any cost incurred by a Servicer or a Subservicer in
maintaining any such individual hazard insurance policies shall
not be added to the amount owing under the Mortgage Loan for the
purpose of calculating monthly distributions to Bondholders,
notwithstanding that the terms of the Mortgage Loan so permit.
Such costs of maintaining individual hazard insurance policies
shall be recoverable by the Servicer or a Subservicer out of
related late payments by the Mortgagor or out of Insurance
Proceeds or Liquidation Proceeds or by the Servicer from the
Repurchase Price, to the extent permitted by Section 3.07.
(d) No earthquake or other additional insurance is to be
required of any Mortgagor or maintained on property acquired with
respect to a Security Instrument other than pursuant to such
applicable laws and regulations as shall at any time be in force
and shall require such additional insurance. When, at the time of
origination of the Mortgage Loan or at any subsequent time, the
Mortgaged Property is located in a federally designated special
flood hazard area, the Servicer shall use its best reasonable
efforts to cause with respect to the Mortgage Loans and each REO
Property flood insurance (to the extent available and in
accordance with mortgage servicing industry practice) to be
maintained. Such flood insurance shall cover the Mortgaged
Property, including all items taken into account in arriving at
the Appraised Value on which the Mortgage Loan was based, and
shall be in an amount equal to the lesser of (i) the Principal
Balance of the related Mortgage Loan and (ii) the minimum amount
required under the terms of coverage to compensate for any damage
or loss on a replacement cost basis, but not more than the
maximum amount of such insurance available for the related
Mortgaged Property under either the regular or emergency programs
of the National Flood Insurance Program (assuming that the area
in which such Mortgaged Property is located is participating in
such program). Unless applicable state law requires a higher
deductible, the deductible on such flood insurance may not exceed
$1,500 or 1% of the applicable amount of coverage, whichever is
less.
<PAGE>
(e) If insurance has not been maintained complying with
Subsections 3.11 (a) and (d) and there shall have been a loss
which would have been covered by such insurance had it been
maintained, the Servicer shall pay, or cause the related
Subservicer to pay, for any necessary repairs without any right
of reimbursement.
(f) The Servicer shall present, or cause the related
Subservicer to present, claims under any related hazard insurance
or flood insurance policy.
(g) The Servicer shall obtain and maintain at its own
expense, and shall cause each Subservicer to obtain and maintain
at its own expense, and for the duration of this Servicing
Agreement, a blanket fidelity bond and an errors and omissions
insurance policy covering the Servicer's and such Subservicer's
officers, employees and other persons acting on its behalf in
connection with its activities under this Servicing Agreement.
The amount of coverage shall be consistent with industry
standards but in an amount not less than presently maintained by
the Servicer. The Servicer shall promptly notify the Indenture
Trustee and the Bond Insurer of any material change in the terms
of such bond or policy. The Servicer shall provide annually to
the Indenture Trustee and the Bond Insurer a certificate of
insurance that such bond and policy are in effect. If any such
bond or policy ceases to be in effect, the Servicer shall, to the
extent possible, give the Indenture Trustee and the Bond Insurer
ten days' notice prior to any such cessation and shall use its
reasonable best efforts to obtain a comparable replacement bond
or policy, as the case may be. Any amounts relating to the
Mortgage Loans collected under such bond or policy shall be
deposited in the Collection Account.
Section 3.12. Due-on-Sale Clauses; Assumption Agreements.
(a) In any case in which the Servicer is notified by any
Mortgagor or Subservicer that a Mortgaged Property relating to a
Mortgage Loan has been or is about to be conveyed by the
Mortgagor, the Servicer shall enforce, or shall instruct such
Subservicer to enforce, any due-on-sale clause contained in the
related Security Instrument to the extent permitted under the
terms of the related Mortgage Note and by applicable law. The
Servicer or the related Subservicer may repurchase a Mortgage
Loan at the Repurchase Price when the Servicer requires
acceleration of the Mortgage Loan, but only if the Servicer is
satisfied, as evidenced by an Officer's Certificate delivered to
the Indenture Trustee and the Bond Insurer, that such Mortgage
Loan is in default or default is reasonably foreseeable. If the
Servicer reasonably believes that such due-on-sale clause cannot
be enforced under applicable law or if the Mortgage Loan does not
contain a due-on-sale clause, the Servicer is authorized, and may
authorize any Subservicer, to consent to a conveyance subject to
the lien of the Mortgage, and, with the consent of the PMI
Insurer, if applicable, to take or enter into an assumption
agreement from or with the Person to whom such property has been
or is about to be conveyed, pursuant to which such Person becomes
liable under the related Mortgage Note and unless prohibited by
applicable state law, such Mortgagor remains liable thereon, on
condition, however, that the related Mortgage Loan shall continue
to be covered by a hazard policy. In connection with any such
assumption, no material term of the related Mortgage Note may be
changed. The Servicer shall notify the Indenture Trustee and the
Bond Insurer, whenever possible, before the completion of such
assumption agreement, and shall forward to the Indenture <PAGE> Trustee
the original copy of such assumption agreement, which copy shall
be added by the Indenture Trustee to the related Mortgage File
and which shall, for all purposes, be considered a part of such
Mortgage File to the same extent as all other documents and
instruments constituting a part thereof.
(b) Notwithstanding the foregoing paragraph or any other
provision of this Servicing Agreement, the Servicer shall not be
deemed to be in default, breach or any other violation of its
obligations hereunder by reason of any assumption of a Mortgage
Loan by operation of law or any conveyance by the Mortgagor of
the related Mortgaged Property or assumption of a Mortgage Loan
which the Servicer reasonably believes it may be restricted by
law from preventing, for any reason whatsoever or if the exercise
of such right would impair or threaten to impair any recovery
under any applicable insurance policy.
Section 3.13. Realization Upon Defaulted Mortgage Loans.
(a) The Servicer shall, or shall direct the related Subservicer
to, foreclose upon or otherwise comparably convert the ownership
of properties securing any Mortgage Loans that come into and
continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments pursuant to
Section 3.06, except that the Servicer shall not, and shall not
direct the related Subservicer to, foreclose upon or otherwise
comparably convert a Mortgaged Property if there is evidence of
toxic waste or other environmental hazards thereon unless the
Servicer follows the procedures in Subsection (c) below. In
connection with such foreclosure or other conversion, the
Servicer in conjunction with the related Subservicer, if any,
shall use its best reasonable efforts to preserve REO Property
and to realize upon defaulted Mortgage Loans in such manner as to
maximize the receipt of principal and interest by the
Bondholders, taking into account, among other things, the timing
of foreclosure and the considerations set forth in Subsection
3.13(b). The foregoing is subject to the proviso that the
Servicer shall not be required to expend its own funds in
connection with any foreclosure or towards the restoration of any
property unless it determines in good faith (i) that such
restoration or foreclosure will increase the proceeds of
liquidation of the Mortgage Loan to Bondholders after
reimbursement to itself for such expenses and (ii) that such
expenses will be recoverable to it either through Liquidation
Proceeds (respecting which it shall have priority for purposes of
reimbursements from the Collection Account pursuant to Section
3.07) or through Insurance Proceeds (respecting which it shall
have similar priority). The Servicer shall be responsible for all
costs and expenses constituting Liquidation Expenses incurred by
it in any such proceedings; provided, however, that it shall be
entitled to reimbursement thereof (as well as its normal
servicing compensation) as set forth in Section 3.07. Any income
from or other funds (net of any income taxes) generated by REO
Property shall be deemed for purposes of this Servicing Agreement
to be Liquidation Proceeds.
Any subsequent collections with respect to any Liquidated
Mortgage Loan shall be deposited to the Collection Account. For
purposes of determining the amount of any Liquidation Proceeds or
Insurance Proceeds, or other unscheduled collections, the
Servicer may take into account any estimated additional
Liquidation Expenses expected to be incurred in connection with
the related defaulted Mortgage Loan.
<PAGE>
In the event that title to any Mortgaged Property is
acquired in foreclosure or by deed in lieu of foreclosure, the
deed or certificate of sale shall be issued to the Indenture
Trustee, who shall hold the same on behalf of the Issuer in
accordance with the Indenture. Notwithstanding any such
acquisition of title and cancellation of the related Mortgage
Loan, such Mortgaged Property shall (except as otherwise
expressly provided herein) be considered to be an outstanding
Mortgage Loan held as an asset of the Issuer until such time as
such property shall be sold.
(b) The Servicer shall not acquire any real property (or
any personal property incident to such real property) on behalf
of the Trust Estate except in connection with a default or
reasonably foreseeable default of a Mortgage Loan. In the event
that the Servicer acquires any real property (or personal
property incident to such real property) on behalf of the Trust
Estate in connection with a default or imminent default of a
Mortgage Loan, such property shall be disposed of by the Servicer
on behalf of the Trust Estate within two years after its
acquisition on behalf of the Trust Estate.
(c) With respect to any Mortgage Loan as to which the
Servicer or a Subservicer has received notice of, or has actual
knowledge of, the presence of any toxic or hazardous substance on
the Mortgaged Property, the Servicer shall promptly notify the
Indenture Trustee, the Owner Trustee and the Bond Insurer and
shall act in accordance with any such directions and instructions
provided by the Bond Insurer, or if a Bond Insurer Default
exists, by the Indenture Trustee, as pledgee of the Issuer.
Notwithstanding the preceding sentence of this Section 3.13(c),
with respect to any Mortgage Loan described by such sentence, the
Servicer shall, if requested by the Bond Insurer, obtain and
deliver to the Issuer, the Indenture Trustee and the Bond Insurer
an environmental audit report prepared by a Person who regularly
conducts environmental audits using customary industry standards.
The Servicer shall be entitled to reimbursement for such report
pursuant to Section 3.07. If the Bond Insurer or Indenture
Trustee, as applicable, has not provided directions and
instructions to the Servicer in connection with any such Mortgage
Loan within 30 days of a request by the Servicer for such
directions and instructions, then the Servicer shall take such
action as it deems to be in the best economic interest of the
Trust Estate (other than proceeding against the Mortgaged
Property) and is hereby authorized at such time as it deems
appropriate to release such Mortgaged Property from the lien of
the related Mortgage. The parties hereto acknowledge that the
Servicer shall not obtain on behalf of the Issuer a deed as a
result or in lieu of foreclosure, and shall not otherwise acquire
possession of or title to, or commence any proceedings to acquire
possession of or title to, or take any other action with respect
to, any Mortgaged Property, if the Owner Trustee could reasonably
be considered to be a responsible party for any liability arising
from the presence of any toxic or hazardous substance on the
Mortgaged Property, unless the Owner Trustee has been indemnified
to its reasonable satisfaction against such liability.
Section 3.14. Indenture Trustee to Cooperate; Release of
Mortgage Files. (a) Upon payment in full of any Mortgage Loan,
the Servicer will immediately notify the Indenture Trustee by a
certification signed by a Servicing Officer (which certification
shall include a statement to the effect that all amounts received
in connection with such payment which are required to be
<PAGE>
deposited in the Collection Account have been so deposited) and
shall request delivery to the Servicer or Subservicer, as the
case may be, of the Mortgage File. Upon receipt of such
certification and request, the Indenture Trustee shall promptly
release the related Mortgage File to the Servicer or Subservicer
and execute and deliver to the Servicer, without recourse, the
request for reconveyance, deed of reconveyance or release or
satisfaction of mortgage or such instrument releasing the lien of
the Security Instrument (furnished by the Servicer), together
with the Mortgage Note with written evidence of cancellation
thereon.
(b) From time to time as is appropriate, for the servicing
or foreclosure of any Mortgage Loan or collection under an
insurance policy, the Servicer may deliver to the Indenture
Trustee a Request for Release signed by a Servicing Officer on
behalf of the Servicer in substantially the form attached as
Exhibit B hereto. Upon receipt of the Request for Release, the
Indenture Trustee shall deliver the Mortgage File or any document
therein to the Servicer or Subservicer, as the case may be, as
bailee for the Indenture Trustee.
(c) The Servicer shall cause each Mortgage File or any
document therein released pursuant to Subsection 3.14(b) to be
returned to the Indenture Trustee when the need therefor no
longer exists, and in any event within 21 days of the Servicer's
receipt thereof, unless the Mortgage Loan has become a Liquidated
Mortgage Loan and the Liquidation Proceeds relating to the
Mortgage Loan have been deposited in the Collection Account or
such Mortgage File is being used to pursue foreclosure or other
legal proceedings. Prior to return of a Mortgage File or any
document to the Indenture Trustee, the Servicer, the related
insurer or Subservicer to whom such file or document was
delivered shall retain such file or document in its respective
control as bailee for the Indenture Trustee unless the Mortgage
File or such document has been delivered to an attorney, or to a
public trustee or other public official as required by law, to
initiate or pursue legal action or other proceedings for the
foreclosure of the Mortgaged Property either judicially or non-
judicially, and the Servicer has delivered to the Indenture
Trustee a certificate of a Servicing Officer certifying as to the
name and address of the Person to which such Mortgage File or
such document was delivered and the purpose or purposes of such
delivery. If a Mortgage Loan becomes a Liquidated Mortgage Loan,
the Indenture Trustee shall deliver the Request for Release with
respect thereto to the Servicer upon deposit of the related
Liquidation Proceeds in the Collection Account.
(d) The Indenture Trustee shall execute and deliver to the
Servicer any court pleadings, requests for trustee's sale or
other documents necessary to (i) the foreclosure or trustee's
sale with respect to a Mortgaged Property; (ii) any legal action
brought to obtain judgment against any Mortgagor on the Mortgage
Note or Security Instrument; (iii) obtain a deficiency judgment
against the Mortgagor; or (iv) enforce any other rights or
remedies provided by the Mortgage Note or Security Instrument or
otherwise available at law or equity. Together with such
documents or pleadings the Servicer shall deliver to the
Indenture Trustee a certificate of a Servicing Officer in which
it requests the Indenture Trustee to execute the pleadings or
documents. The certificate shall certify and explain the reasons
for which the pleadings or documents are required. It shall
further certify that the Indenture Trustee's execution and
delivery <PAGE> of the pleadings or documents will not invalidate any
insurance coverage under the insurance policies or invalidate or
otherwise affect the lien of the Security Instrument, except for
the termination of such a lien upon completion of the foreclosure
or trustee's sale.
Section 3.15. Servicing Compensation. (a) As
compensation for its activities hereunder, the Servicer shall be
entitled to receive the Servicing Fee from full payments of
accrued interest on each Mortgage Loan. The Servicer shall be
solely responsible for paying any and all fees with respect to a
Subservicer and the Trust Estate shall not bear any fees,
expenses or other costs directly associated with any Subservicer.
(b) The Servicer may retain additional servicing
compensation in the form of late payment charges, to the extent
such charges are collected from the related Mortgagors and
investment earnings on the Collection Account. The Servicer
shall be required to pay all expenses it incurs in connection
with servicing activities under this Servicing Agreement and
shall not be entitled in connection with servicing activities
under this Servicing Agreement to reimbursement except as
provided in this Servicing Agreement. Expenses to be paid by the
Servicer without reimbursement under this Subsection 3.15(b)
shall include payment of the expenses of the accountants retained
pursuant to Section 3.17.
(c) To further compensate the Servicer for its activities
hereunder, the Servicer shall have the right and the obligation
to purchase each Converted Mortgage Loan pursuant to Section 3.20
hereof.
(d) The parties acknowledge that the Servicer's rights and
obligations under Section 3.20 hereof to purchase Converted
Mortgage Loans were taken into consideration when the Servicing
Fee was established.
Section 3.16. Annual Statements of Compliance. Within 90
days after December 31 of each year, the Servicer at its own
expense shall deliver to the Indenture Trustee, with a copy to
the Bond Insurer and the Rating Agencies, an Officer's
Certificate stating, as to the signer thereof, that (i) a review
of the activities of the Servicer during the preceding calendar
year and of performance under this Servicing Agreement has been
made under such officer's supervision, (ii) to the best of such
officer's knowledge, based on such review, the Servicer has
fulfilled its obligations under this Servicing Agreement in all
material respects for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such
default known to such officer and the nature and status thereof
including the steps being taken by the Servicer to remedy such
default; (iii) a review of the activities of each Subservicer
during the Subservicer's most recently ended calendar year and
its performance under its Subservicing Agreement has been made
under such officer's supervision; and (iv) to the best of the
Servicing Officer's knowledge, based on his review and the
certification of an officer of the Subservicer (unless the
Servicing Officer has reason to believe that reliance on such
certification is not justified), either each Subservicer has
performed and fulfilled its duties, responsibilities and
obligations under this Servicing Agreement and its Subservicing
Agreement in all material respects throughout the year, <PAGE> or, if
there has been a default in performance or fulfillment of any
such duties, responsibilities or obligations, specifying the
nature and status of each such default known to the Servicing
Officer. Copies of such statements shall be provided by the
Servicer to the Bondholders upon request or by the Indenture
Trustee at the expense of the Servicer should the Servicer fail
to provide such copies.
Section 3.17. Annual Independent Public Accountants'
Servicing Report. (a) Within 90 days after December 31 of each
year, the Servicer, at its expense, shall cause a firm of
independent public accountants who are members of the American
Institute of Certified Public Accountants and are otherwise
acceptable to the Bond Insurer to furnish a statement to the
Servicer, which will be provided to the Indenture Trustee, the
Bond Insurer and the Rating Agencies, to the effect that, in
connection with the firm's examination of the Servicer's
financial statements as of the end of such calendar year, nothing
came to their attention that indicated that the Servicer was not
in compliance with Sections 3.06, 3.07 and 3.08 except for (i)
such exceptions as such firm believes to be immaterial and (ii)
such other exceptions as are set forth in such statement.
(b) Within 90 days after December 31 of each year, the
Servicer, at its expense, shall, and shall cause each Subservicer
to cause, a nationally recognized firm of independent certified
public accountants to furnish to the Servicer or such
Subservicer, as the case may be, a report stating that (i) it has
obtained a letter of representation regarding certain matters
from the management of the Servicer or such Subservicer, as the
case may be, which includes an assertion that the Servicer or
such Subservicer, as the case may be, has complied with certain
minimum mortgage loan servicing standards identified in the
Uniform Single Attestation Program for Mortgage Bankers
established by the Mortgage Bankers Association of America with
respect to the servicing of first lien conventional single family
mortgage loans during the most recently completed calendar year
and (ii) on the basis of an examination conducted by such firm in
accordance with standards established by the American Institute
of Certified Public Accountants, such representation is fairly
stated in all material respects, subject to such exceptions and
other qualifications that may be appropriate. Immediately upon
receipt of such report, the Servicer shall or shall cause each
Subservicer to furnish a copy of such report to the Indenture
Trustee, the Rating Agencies and the Bond Insurer.
Section 3.18. Optional Purchase of Defaulted Mortgage
Loans. The Servicer may repurchase any Mortgage Loan delinquent
in payment for a period of 90 days or longer for a price equal to
the Repurchase Price. The procedure for such repurchase shall be
the same as for repurchase by the Seller under the Mortgage Loan
Purchase Agreement. Notwithstanding the foregoing, the Indenture
Trustee, whether acting as Indenture Trustee or in the capacity
of successor Servicer, shall have no obligation to repurchase any
Mortgage Loan.
Section 3.19. Information Required by the Internal Revenue
Service Generally and Reports of Foreclosures and Abandonments of
Mortgaged Property. The Servicer shall prepare and deliver all
federal and state information reports when and as required by all
applicable state <PAGE> and federal income tax laws. In particular,
with respect to the requirement under Section 6050J of the Code
to the effect that the Servicer or Subservicer shall make reports
of foreclosures and abandonments of any mortgaged property for
each year beginning in 1997, the Servicer or Subservicer shall
file reports relating to each instance occurring during the
previous calendar year in which the Servicer (i) acquires an
interest in any Mortgaged Property through foreclosure or other
comparable conversion in full or partial satisfaction of a
Mortgage Loan, or (ii) knows or has reason to know that any
Mortgaged Property has been abandoned. The reports from the
Servicer or Subservicer shall be in form and substance sufficient
to meet the reporting requirements imposed by Section 6050J,
Section 6050H (reports relating to mortgage interest received)
and Section 6050P of the Code (reports relating to cancellation
of indebtedness).
Section 3.20. Purchase of Converted Mortgage Loans. (a)
Within 30 days after the applicable Conversion Date, the Servicer
shall purchase and the Issuer shall sell each Converted Mortgage
Loan for a purchase price equal to the Repurchase Price. The
procedure for such purchase shall be the same as for repurchase
by the Seller under the Mortgage Loan Purchase Agreement (but
such purchase shall be made by the Servicer or its assignee). If
the Servicer resells any such Converted Mortgage Loan, the
Servicer shall do so for a good faith purchase price.
Notwithstanding the foregoing, the Indenture Trustee, whether
acting as Indenture Trustee or in the capacity as successor
Servicer, shall have no obligation to purchase any Converted
Mortgage Loan.
(b) The Servicer shall retain all conversion fees paid by
the Mortgagor upon conversion of a Convertible Mortgage Loan.
(c) The Servicer's right and obligation to purchase each
Converted Mortgage Loan may be assigned and delegated by the
Servicer, on an aggregate or a loan by loan basis; provided,
however, that (i) notwithstanding any such assignment or
delegation, the Servicer shall remain liable for the performance
of its purchase obligation under this Section 3.20; (ii) the
Servicer shall not assign or delegate its right and obligation to
purchase Converted Mortgage Loans to the Seller; and (iii) if the
Servicer assigns and delegates such rights and obligations, it
shall do so on the condition that the assignee agrees that if the
assignee resells any such Converted Mortgage Loans, it will do so
for a good faith purchase price.
Section 3.21. Superior Liens. If the Servicer is
notified that any lienholder under a Superior Lien has
accelerated or intends to accelerate the obligations secured by
such Superior Lien, or has declared or intends to declare a
default under the related mortgage or the promissory note secured
thereby, or has filed or intends to file an election to have any
Mortgaged Property sold or foreclosed, the Servicer shall take,
on behalf of the Issuer, the Bond Insurer and the Indenture
Trustee, reasonable actions to protect the interests of the
Securityholders and the Bond Insurer and/or to preserve the
security of the related Mortgage Loan consistent with the
requirements of this Servicing Agreement, provided that the
Servicer shall not be required to make any Servicing Advances to
cure the default or reinstate the Superior Lien. The Servicer
<PAGE>
shall promptly notify the Issuer, and the Bond Insurer and the
Indenture Trustee if it takes any such action.
Section 3.22. Servicing and Administrating of the PMI
Policies. (a) The Servicer shall take all such actions on
behalf of the Issuer as are necessary to service, maintain and
administer the PMI Policies and to perform the Issuer's
obligations and enforce the Issuer's rights under the PMI
Policies, which actions shall conform to the standards of an
institution prudently administering PMI Policies for its own
account. Except as expressly set forth herein, the Servicer
shall have full authority on behalf of the Issuer to do anything
it reasonably deems appropriate or desirable in connection with
the servicing, maintenance and administration of the PMI
Policies. The Servicer shall make its best reasonable efforts to
file all insured claims under the PMI Policies and collect from
the PMI Insurer all Insurance Proceeds due to the Issuer under
the PMI Policies. The Servicer shall not take, or permit any
subservicer to take, any action which would result in non-
coverage under any applicable PMI Policy of any loss which, but
for the actions of the Servicer or Subservicer, would have been
covered thereunder. To the extent coverage is available, the
Servicer shall keep or cause to be kept in full force and effect
each such PMI Policy for the life of the Mortgage Loan; provided,
however, that if a PMI Insurer Insolvency Event has occurred and
is continuing, the Servicer shall, at the direction of the Bond
Insurer, or, if a Bond Insurer Default has occurred and is
continuing, may, terminate the PMI Policy on any Mortgage Loan
that is not then past due. Unless a Bond Insurer Default has
occurred and is continuing, neither the Servicer nor the
Indenture Trustee shall terminate the PMI Policy with respect to
any Mortgage Loan without the prior written consent of the Bond
Insurer. The Servicer shall cooperate with the PMI Insurer and
shall use its best efforts to furnish all reasonable aid,
evidence and information in the possession of the Servicer or to
which the Servicer has access with respect to any Mortgage Loan.
(b) The Servicer shall deposit into the Collection Account
pursuant to Section 3.06(d)(v) hereof all PMI Insurance Proceeds
received from the PMI Insurer under the terms of the PMI
Policies. The Servicer shall withdraw from the Collection
Account and pay to the PMI Insurer pursuant to Section
3.07(a)(xv) hereof, the monthly PMI Premiums due to the PMI
Insurer in accordance with the terms of the PMI Insurance
Agreement.
(c) Notwithstanding the provisions of Subsection 3.22(a)
and (b), the Servicer shall not take any action in regard to the
PMI Policies inconsistent with the interests of the Indenture
Trustee, the Bond Insurer or the Bondholders or with the rights
and interests of the Indenture Trustee, the Bond Insurer or the
Bondholders under this Servicing Agreement; provided, however,
that payments of the monthly PMI Premiums to the PMI Insurer
pursuant to Subsection 3.22(b) above and Section 3.07(a)(xv)
hereof shall be deemed not to be inconsistent with such
interests.
(d) The Issuer and Indenture Trustee shall furnish the
Servicer with any powers of attorney and other documents in form
as provided to it necessary or appropriate to enable the <PAGE> Servicer
to service and administer the PMI Policies; provided, however,
that the Indenture Trustee shall not be liable for the actions of
the Servicer under such powers of attorney.
(e) If at any time during the term of this Agreement, a PMI
Insurer Insolvency Event has occurred and is continuing, the
Servicer agrees to review, not less often than monthly, the
financial condition of the PMI Insurer with a view towards
determining whether recoveries under the PMI Policy are
jeopardized for reasons related to the financial condition of the
PMI Insurer. In such event, the Bond Insurer may (i) obtain, at
its own expense, for the benefit of the Indenture Trustee, the
Bondholders and the Bond Insurer, an additional PMI Policy or a
replacement PMI Policy or (ii) with the consent of the Servicer,
obtain for the benefit of the Indenture Trustee, the Bondholders
and the Bond Insurer an additional PMI Policy or a replacement
PMI Policy, the PMI Premiums on which would be paid by the
Servicer from the Collection Account pursuant to Section
3.07(a)(xv) hereof. The Servicer shall cooperate with and assist
the Bond Insurer in obtaining any replacement or additional
policy.
(f) The Servicer shall give written notice to the PMI
Insurer of all "Defaults" and "Early Defaults" (as such terms are
defined in the PMI Policy) with respect to the Mortgage Loans
within the time frames and in the manner provided in the PMI
Policy.
(g) The Servicer shall not authorize any assumption
agreement with respect to any Mortgage Loan covered by a PMI
Policy without the prior written approval of the PMI Insurer.
(h) With respect to each Mortgage Loan covered by a PMI
Policy, the Servicer shall initiate foreclosure proceedings or
other appropriate proceedings not later than 6 months after it is
permitted to do so hereunder and under the Mortgage Loan and by
applicable law, and shall provide copies of all notices and
pleadings with respect thereto.
(i) With respect to any Mortgage Loan covered by a PMI
Policy, the Servicer shall use its best efforts to obtain the PMI
Insurer's Consent with respect to any "Approved Sale" (as such
term is defined in the PMI Policy) of the related Mortgaged
Property.
(j) The Servicer shall comply with any bidding instructions
provided to it by the PMI Insurer pursuant to the PMI Policy.
(k) The Servicer shall furnish to the Bond Insurer copies
of all notices, certificates, statements, reports, information
and correspondence from PMI Insurer to the Servicer and from the
Servicer to the PMI Insurer.
(l) Following any PMI Insurer Insolvency Event, the Bond
Insurer shall consult with the Servicer regarding whether or not
to terminate the PMI Policy with respect to any Mortgage Loan
that is not then past due. The Bond Insurer shall give the
Servicer thirty (30) days prior written notice of its intention
to terminate the PMI Policy with respect to any Mortgage Loan.
<PAGE>
ARTICLE IV
REMITTANCE REPORTS
Section 4.01. Remittance Reports. On the second Business
Day following each Determination Date, the Servicer shall deliver
to the Indenture Trustee a report, prepared as of the close of
business on the Determination Date (the "Determination Date
Report"), and shall forward to the Indenture Trustee in the form
of computer readable electromagnetic tape or disk a copy of such
report. The Determination Date Report and any written
information supplemental thereto shall include such information
with respect to the Mortgage Loans that is reasonably available
to the Servicer and that is required by the Indenture Trustee for
purposes of making the calculations and providing the reports
referred to in the Indenture, as set forth in written
specifications or guidelines issued by the Indenture Trustee from
time to time. Such information shall include the aggregate
amounts required to be withdrawn from the Collection Account and
deposited into the Payment Account pursuant to Section 3.07.
Such information shall also include (a) the number of Mortgage
Loans that prepaid in the previous month; (b) the loan balance of
each such Mortgage Loan; (c) whether a prepayment penalty was
applied to such Mortgage Loan; and (d) the amount of prepayment
penalty with respect to each such Mortgage Loan. The Servicer
agrees to cooperate with the Indenture Trustee in providing all
information as is reasonably requested by the Indenture Trustee
to prepare the reports required under the Indenture. Upon
written request by the Bond Insurer, the Servicer shall deliver
the Determination Date Report to the Bond Insurer.
The determination by the Servicer of such amounts shall, in
the absence of obvious error, be presumptively deemed to be
correct for all purposes hereunder and the Owner Trustee and
Indenture Trustee shall be protected in relying upon the same
without any independent check or verification.
Section 4.02. Advances. If any Monthly Payment (together
with any advances from the Subservicers) on a Mortgage Loan that
was due on the immediately preceding Due Date and delinquent on
the Determination Date is delinquent other than as a result of
application of the Relief Act, the Servicer will deposit in the
Collection Account not later than the fourth Business Day
immediately preceding the related Payment Date an amount equal to
such deficiency net of the related Servicing Fee for such
Mortgage Loan, except to the extent the Servicer determines any
such advance to be nonrecoverable from Liquidation Proceeds,
Insurance Proceeds or future payments on such Mortgage Loan.
Subject to the foregoing and in the absence of such a
determination, the Servicer shall continue to make such advances
through the date that the related Mortgaged Property has, in the
judgment of the Servicer, been completely liquidated. If
applicable, on the fourth Business Day preceding each Payment
Date, the Servicer shall present an Officer's Certificate to the
Indenture Trustee and the Bond Insurer (i) stating that the
Servicer elects not to make an Advance in a stated amount and
(ii) detailing the reason it deems the <PAGE> advance to be
nonrecoverable. The Indenture Trustee shall forward a copy of
such Officer's Certificate to the Bond Insurer.
Section 4.03. Compensating Interest Payments. The Servicer
shall deposit in the Collection Account not later than the fourth
Business Day preceding the Payment Date an amount equal to the
Compensating Interest related to the related Determination Date.
The Servicer shall not be entitled to any reimbursement of any
Compensating Interest payment.
ARTICLE V
THE SERVICER
Section 5.01. Liability of the Servicer. The Servicer
shall be liable in accordance herewith only to the extent of the
obligations specifically imposed upon and undertaken by the
Servicer herein.
Section 5.02. Merger or Consolidation of, or Assumption of
the Obligations of, the Servicer. Any corporation into which the
Servicer may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Servicer shall be a
party, or any corporation succeeding to the business of the
Servicer, shall be, with the consent of the Bond Insurer, the
successor of the Servicer, 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.
The Servicer may fully assign all of its rights and delegate
its duties and obligations under this Servicing Agreement;
provided, that the Person accepting such assignment or delegation
shall be a Person which is reasonably satisfactory to the
Indenture Trustee (as pledgee of the Mortgage Loans) and the Bond
Insurer (in its sole discretion), is willing to service the
Mortgage Loans and executes and delivers to the Indenture Trustee
and the Issuer an agreement, in form and substance reasonably
satisfactory to the Bond Insurer, the Indenture Trustee and the
Issuer, which contains an assumption by such Person of the due
and punctual performance and observance of each covenant and
condition to be performed or observed by the Servicer under this
Servicing Agreement; provided, further, that each Rating Agency's
rating of the Bonds in effect immediately prior to such assign-
ment and delegation will not be qualified, reduced, or withdrawn
as a result of such assignment and delegation (as evidenced by a
letter to such effect from each Rating Agency) without taking
into account the Bond Insurance Policy.
Section 5.03. Limitation on Liability of the Servicer and
Others. Neither the Servicer nor any of the directors or
officers or employees or agents of the Servicer shall be under
any liability to the Issuer, the Owner Trustee, the Indenture
Trustee, the Bond Insurer or the Bondholders for any action taken
or for refraining from the taking of any action in good faith
pursuant to this Servicing Agreement, provided, however, that
this provision shall not protect the Servicer or any <PAGE> such Person
against any liability which would otherwise be imposed by reason
of its willful misfeasance, bad faith or negligence in the
performance of its duties hereunder or by reason of its reckless
disregard of its obligations and duties hereunder. The Servicer
and any director or officer or employee or agent of the Servicer
may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any
matters arising hereunder. The Servicer and any director or
officer or employee or agent of the Servicer shall be indemnified
by the Issuer and held harmless against any loss, liability or
expense incurred in connection with any legal action relating to
this Servicing Agreement or the Bonds, including any amount paid
to the Owner Trustee or the Indenture Trustee pursuant to Section
5.06(b), other than any loss, liability or expense related to any
specific Mortgage Loan or Mortgage Loans (except as any such
loss, liability or expense shall be otherwise reimbursable
pursuant to this Servicing Agreement) and any loss, liability or
expense incurred by reason of its willful misfeasance, bad faith
or negligence in the performance of its duties hereunder or by
reason of its reckless disregard of its obligations and duties
hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action which is not
incidental to its duties to service the Mortgage Loans in accor-
dance with this Servicing Agreement, and which in its opinion may
involve it in any expense or liability; provided, however, that
the Servicer may in its sole discretion undertake any such action
which it may deem necessary or desirable in respect of this
Servicing Agreement, and the rights and duties of the parties
hereto and the interests of the Bondholders hereunder. In such
event, the reasonable legal expenses and costs of such action and
any liability resulting therefrom shall be expenses, costs and
liabilities of the Issuer, and the Servicer shall be entitled to
be reimbursed therefor. The Servicer's right to indemnity or
reimbursement pursuant to this Section 5.03 shall survive any
resignation or termination of the Servicer pursuant to Section
5.04 or 6.01 with respect to any losses, expenses, costs or
liabilities arising prior to such resignation or termination (or
arising from events that occurred prior to such resignation or
termination). Any reimbursements or indemnification to the
Servicer from the Issuer pursuant to this Section 5.03 shall be
payable in the priority set forth in Section 3.05(a)(xi) of the
Indenture.
Section 5.04. Servicer Not to Resign. Subject to the
provisions of Section 5.02, the Servicer shall not resign from
the obligations and duties hereby imposed on it except (i) upon
determination that the performance of its obligations or duties
hereunder are no longer permissible under applicable law or (ii)
upon satisfaction of the following conditions: (a) the Servicer
has proposed a successor servicer to the Issuer, the Bond Insurer
and the Indenture Trustee in writing and such proposed successor
servicer is reasonably acceptable to the Issuer and the Indenture
Trustee; (b) each Rating Agency shall have delivered a letter to
the Issuer, the Bond Insurer and the Indenture Trustee prior to
the appointment of the successor servicer stating that the
proposed appointment of such successor servicer as Servicer
hereunder will not result in the reduction or withdrawal of the
then current rating of the Bonds or the then current rating of
the Bonds without taking into account the Bond Insurance Policy;
and (c) such proposed successor servicer is acceptable to the
Bond Insurer, as evidenced by a letter to the Issuer, the
Servicer and the Indenture Trustee; provided, however, that no
such resignation by the Servicer shall become effective until
such successor servicer or, in the case of (i) above, the
Indenture Trustee, as pledgee of the Mortgage Loans, shall have
assumed the Servicer's responsibilities and obligations <PAGE> hereunder
or the Indenture Trustee, as pledgee of the Mortgage Loans, shall
have designated a successor servicer in accordance with Section
6.02. Any such resignation shall not relieve the Servicer of
responsibility for any of the obligations specified in Sections
6.01 and 6.02 as obligations that survive the resignation or
termination of the Servicer. The Servicer shall have no claim
(whether by subrogation or otherwise) or other action against any
Bondholder or the Bond Insurer for any amounts paid by the
Servicer pursuant to any provision of this Servicing Agreement.
Any such determination permitting the resignation of the Servicer
shall be evidenced by an Opinion of Counsel to such effect
delivered to the Indenture Trustee and the Bond Insurer.
Section 5.05. Delegation of Duties. In the ordinary course
of business, the Servicer at any time may delegate any of its
duties hereunder to any Person, including any of its Affiliates,
who agrees to conduct such duties in accordance with the same
standards with which the Servicer complies pursuant to Section
3.01. Such delegation shall not relieve the Servicer of its
liabilities and responsibilities with respect to such duties and
shall not constitute a resignation within the meaning of Section
5.04.
Section 5.06. Servicer to Pay Indenture Trustee's and Owner
Trustee's Fees and Expenses; Indemnification. (a) The Servicer
covenants and agrees to pay to the Owner Trustee, the Indenture
Trustee and any co-trustee of the Indenture Trustee from time to
time, and the Owner Trustee, the Indenture Trustee and any such
co-trustee shall be entitled to, reasonable compensation,
including all indemnification payments (which shall not be
limited by any provision of law in regard to the compensation of
a trustee of an express trust) for all services rendered by each
of them in the execution of the trusts created under the Trust
Agreement and the Indenture and in the exercise and performance
of any of the powers and duties under the Trust Agreement or the
Indenture, as the case may be, of the Owner Trustee, the
Indenture Trustee and any co-trustee of the Indenture Trustee,
and the Servicer will pay or reimburse the Indenture Trustee and
any co-trustee upon request for all reasonable expenses,
disbursements and advances incurred or made by the Indenture
Trustee or any co-trustee of the Indenture Trustee in accordance
with any of the provisions of this Servicing Agreement except any
such expense, disbursement or advance as may arise from its
negligence or bad faith.
(b) The Servicer agrees to indemnify the Indenture Trustee
and the Owner Trustee for, and to hold the Indenture Trustee and
the Owner Trustee, as the case may be, harmless against, any
claim, tax, penalty, loss, liability or expense of any kind
whatsoever, incurred without gross negligence or willful mis-
conduct on its part, arising out of, or in connection with, the
failure by the Servicer to perform its duties in compliance with
this Servicing Agreement, including the reasonable costs and
expenses (including reasonable legal fees and expenses) of
defending itself against any claim in connection with the
exercise or performance of any of its powers or duties under any
Basic Document, provided that:
(i) with respect to any such claim, the Indenture
Trustee or Owner Trustee, as the case may be, shall have
given the Servicer written notice thereof promptly after the
<PAGE>
Indenture Trustee or Owner Trustee, as the case may be,
shall have actual knowledge thereof;
(ii) while maintaining control over its own defense,
the Indenture Trustee or Owner Trustee, as the case may be,
shall cooperate and consult fully with the Servicer in pre-
paring such defense; and
(iii) notwithstanding anything in this Servicing
Agreement to the contrary, the Servicer shall not be liable
for settlement of any claim by the Indenture Trustee or the
Owner Trustee, as the case may be, entered into without the
prior consent of the Servicer, which consent shall not be
unreasonably withheld.
No termination of this Servicing Agreement shall affect the
obligations created by this Section 5.06 of the Servicer to
indemnify the Indenture Trustee and the Owner Trustee under the
conditions and to the extent set forth herein. This section
shall survive the termination of this Servicing Agreement. Any
amounts to be paid by the Servicer pursuant to this Subsection
may not be paid from the Trust Estate.
Notwithstanding the foregoing, the indemnification provided
by the Servicer in this Section 5.06 shall not pertain to any
loss, liability or expense of the Indenture Trustee or the Owner
Trustee, including the costs and expenses of defending itself
against any claim, incurred in connection with any actions taken
by the Indenture Trustee or the Owner Trustee at the direction of
the Securityholders, as the case may be, pursuant to the terms of
this Servicing Agreement.
(c) The Servicer agrees to indemnify the Issuer in an
amount equal to the amount of any claim made under a PMI Policy
for which coverage is denied by the PMI Insurer because (and if
the PMI Insurer's denial of coverage is contested by the
Servicer, a court or arbitrator finally determines that coverage
is not available under the PMI Policy because) of the Servicer's
failure to abide by the terms of the PMI Policy or the PMI
Insurance Agreement or the Servicer's failure to abide by the NFI
Underwriting Guidelines or the NFI Servicing Guidelines, as
attached to the PMI Insurance Agreement.
ARTICLE VI
DEFAULT
Section 6.01. Servicing Default. If any one of the follow-
ing events (a "Servicing Default") shall occur and be continuing:
(i) Any failure by the Servicer to deposit in the
Collection Account or Payment Account any deposit required
to be made under the terms of this Servicing Agreement,
including any Advances and Compensating Interest, which
continues <PAGE> unremedied for a period of three Business Days
after the date upon which written notice of such failure
shall have been given to the Servicer by the Issuer or the
Indenture Trustee or to the Servicer, the Issuer and the
Indenture Trustee by the Bond Insurer; or
(ii) Failure on the part of the Servicer duly to
observe or perform in any material respect any other cove-
nants or agreements of the Servicer set forth in this
Servicing Agreement, which failure, in each case, materially
and adversely affects the interests of Bondholders or the
Bond Insurer or the breach of any representation or warranty
of the Servicer in this Servicing Agreement or in the
Insurance Agreement which materially and adversely affects
the interests of the Bondholders or the Bond Insurer, and
which in either case continues unremedied for a period of 30
days after the date on which written notice of such failure
or breach, requiring the same to be remedied, and stating
that such notice is a "Notice of Default" hereunder, shall
have been given to the Servicer by the Issuer or the
Indenture Trustee or to the Servicer, the Issuer and the
Indenture Trustee by the Bond Insurer; or
(iii) The entry against the Servicer of a decree or
order by a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a trus-
tee, conservator, receiver or liquidator in any insolvency,
conservatorship, receivership, readjustment of debt,
marshaling of assets and liabilities or similar proceedings,
or for the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in
effect for a period of 60 consecutive days; or
(iv) The Servicer shall voluntarily go into liquida-
tion, consent to the appointment of a conservator, receiver,
liquidator or similar person in any insolvency, readjustment
of debt, marshaling of assets and liabilities or similar
proceedings of or relating to the Servicer or of or relating
to all or substantially all of its property, or a decree or
order of a court, agency or supervisory authority having
jurisdiction in the premises for the appointment of a
conservator, receiver, liquidator or similar person in any
insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against
the Servicer and such decree or order shall have remained in
force undischarged, unbonded or unstayed for a period of 60
days; or the Servicer shall admit in writing its inability
to pay its debts generally as they become due, file a
petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit
of its creditors or voluntarily suspend payment of its
obligations; or
(v) Any failure by the Servicer to pay when due any
amount payable by it under the terms of the Insurance
Agreement which continues unremedied for a period of three
(3) Business Days after the date upon which written notice
of such failure shall have been given to the Servicer by the
Bond Insurer;
<PAGE>
(vi) Failure on the part of the Seller or the Servicer
to duly perform in any material respect any covenant or
agreement set forth in the Insurance Agreement, which
failure continues unremedied for a period of 30 days after
the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the
Indenture Trustee, the Seller or the Servicer, as the case
may be, by the Bond Insurer; or
(vii) So long as the Seller is an affiliate, the
parent of or under the common control with the Servicer, any
failure of the Seller to repurchase any Mortgage Loan
required to be repurchased, or pay any amount due, pursuant
to the Mortgage Loan Purchase Agreement which continues
unremedied for a period of 30 days after the date upon which
written notice of such failure shall have been given to the
Servicer.
(viii) Failure on the part of the Servicer (or its
assignee) to purchase any Converted Mortgage Loan pursuant
to Section 3.20 hereof.
(ix) (A) the Cumulative Loss Percentage (without
giving any effect to coverage provided by any PMI Policy)
for any period set forth below exceeds the percentage set
forth below,
Period Cumulative Loss %
July 2, 1998 July 1, 1999 1%
July 2, 1999 July 1, 2000 2%
July 2, 2000 July 1, 2001 3%
July 2, 2001 July 1, 2002 4%
July 2, 2002 July 1, 2003 5%
For any period thereafter 6%
(B) Realized Losses on the Mortgage Loans
(without giving any effect to coverage provided by any
PMI Policy) over any one twelve-month period exceed
1.25% of the aggregate Principal Balances of the
Mortgage Loans as of the Cut-Off Date, and
(C) the Rolling Delinquency Percentage exceeds
15%;
then, (a) and in every such case, other than that set forth
in (v) or (vi) hereof, so long as a Servicing Default shall
not have been remedied by the Servicer, either the Issuer,
subject to the direction of the Indenture Trustee as pledgee
of the Mortgage Loans, with the consent of the Bond Insurer,
or the Bond Insurer, or if a Bond Insurer Default exists,
the holders of at least 51% of the aggregate Bond Principal
Balance of the Bonds, by notice then given in writing to the
Servicer (and to the Indenture Trustee and the Issuer if
given <PAGE> by the Bond Insurer) or (b) in the case of the events
set forth in (v) or (vi) hereof, the Bond Insurer or, if a
Bond Insurer Default exists, the holders of at least 51% of
the aggregate Bond Principal Balance of the Bonds, may, by
notice to the Servicer, terminate all of the rights and
obligations of the Servicer as servicer under this Servicing
Agreement other than its right to receive servicing compen-
sation and expenses for servicing the Mortgage Loans here-
under during any period prior to the date of such termina-
tion and the Issuer, subject to the direction of the
Indenture Trustee as pledgee of the Mortgage Loans, with the
consent of the Bond Insurer, or the Bond Insurer may
exercise any and all other remedies available at law or
equity. Any such notice to the Servicer shall also be given
to each Rating Agency, the Bond Insurer and the Issuer. On
or after the receipt by the Servicer of such written notice,
all authority and power of the Servicer under this Servicing
Agreement, whether with respect to the Bonds or the Mortgage
Loans or otherwise, shall pass to and be vested in the
Indenture Trustee, pursuant to and under this Section 6.01;
and, without limitation, the Indenture Trustee is hereby
authorized and empowered to execute and deliver, on behalf
of the Servicer, as attorney-in-fact or otherwise, any and
all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to com-
plete the transfer and endorsement of each Mortgage Loan and
related documents, or otherwise. The Servicer agrees to
cooperate with the Indenture Trustee in effecting the
termination of the responsibilities and rights of the
Servicer hereunder, including, without limitation, the
transfer within one Business Day to the Indenture Trustee
for the administration by it of all cash amounts relating to
the Mortgage Loans that shall at the time be held by the
Servicer and to be deposited by it in the Collection
Account, or that have been deposited by the Servicer in the
Collection Account or thereafter received by the Servicer
with respect to the Mortgage Loans. In addition, the
Servicer agrees promptly (and in any event no later than
five Business Days subsequent to such notice) to provide the
Indenture Trustee with all documents and records requested
by it to enable it to assume the Servicer's functions under
this Servicing Agreement. All reasonable costs and expenses
(including, but not limited to, attorneys' fees) incurred in
connection with amending this Servicing Agreement to reflect
such succession as Servicer pursuant to this Section 6.01
shall be paid by the predecessor Servicer (or if the
predecessor Servicer is the Indenture Trustee, the Servicer
succeeded by the Indenture Trustee) upon presentation of
reasonable documentation of such costs and expenses. For
purposes of this Section 6.01, the Indenture Trustee shall
not be deemed to have knowledge of a Servicer Default unless
a Responsible Officer of the Indenture Trustee assigned to
and working in the Indenture Trustee's Corporate Trust
Office has actual knowledge thereof or unless written notice
of any event which is in fact such a Servicer Default is
received by the Indenture Trustee and such notice references
the Bonds or this Servicing Agreement.
Notwithstanding any termination of the activities of the
Servicer hereunder, the Servicer shall be entitled to receive,
out of any late collection of a payment on a Mortgage Loan which
was due prior to the notice terminating the Servicer's rights and
obligations hereunder and received after such notice, that
portion to which the Servicer would have been entitled pursuant
to <PAGE> Sections 3.07 and 3.15 as well as its Servicing Fee in respect
thereof, and any other amounts payable to the Servicer hereunder
the entitlement to which arose prior to the termination of its
activities hereunder.
The Servicer shall immediately notify the Indenture Trustee,
the Bond Insurer and the Owner Trustee in writing of any
Servicing Default.
Section 6.02. Indenture Trustee to Act; Appointment of
Successor. (a) On and after the time the Servicer receives a
notice of termination pursuant to Section 6.01 or sends a notice
pursuant to Section 5.04, the Indenture Trustee on behalf of the
Bondholders and the Bond Insurer shall be the successor in all
respects to the Servicer in its capacity as servicer under this
Servicing Agreement and the transactions set forth or provided
for herein and shall be subject to all the responsibilities,
duties and liabilities relating thereto placed on the Servicer by
the terms and provisions hereof, including but not limited to the
provisions of Article VIII. Nothing in this Servicing Agreement
shall be construed to permit or require the Indenture Trustee to
(i) be responsible or accountable for any act or omission of the
Servicer prior to the issuance of a notice of termination
hereunder, (ii) require or obligate the Indenture Trustee, in its
capacity as successor Servicer, to purchase, repurchase or
substitute any Mortgage Loan, (iii) fund any losses on any
Eligible Investment directed by any other Servicer, or (iv) be
responsible for the representations and warranties of the
Servicer; provided, however, that the Indenture Trustee, as
successor Servicer, shall be required to make any required
Advances to the extent that the Servicer failed to make such
Advances. As compensation therefor, the Indenture Trustee shall
be entitled to such compensation as the Servicer would have been
entitled to hereunder if no such notice of termination had been
given. Notwithstanding the above, (i) if the Indenture Trustee
is unwilling to act as successor Servicer, or (ii) if the
Indenture Trustee is legally unable to so act, the Indenture
Trustee may (in the situation described in clause (i)) or shall
(in the situation described in clause (ii)) appoint or petition a
court of competent jurisdiction to appoint any established hous-
ing and home finance institution, bank or other mortgage loan
servicer having a net worth of not less than $10,000,000 as the
successor to the Servicer hereunder in the assumption of all or
any part of the responsibilities, duties or liabilities of the
Servicer hereunder; provided, that any such successor Servicer
shall be acceptable to the Bond Insurer, as evidenced by the Bond
Insurer's prior written consent and provided further that the
appointment of any such successor Servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to
the Bonds by the Rating Agencies or the ratings assigned to the
Bonds without taking into account the Bond Insurance Policy.
Pending appointment of a successor to the Servicer hereunder,
unless the Indenture Trustee is prohibited by law from so acting,
the Indenture Trustee shall act in such capacity as hereinabove
provided. In connection with such appointment and assumption,
the successor shall be entitled to receive compensation out of
payments on Mortgage Loans in an amount equal to the compensation
which the Servicer would otherwise have received pursuant to
Section 3.15 (or such lesser or greater compensation as the
Indenture Trustee and such successor shall agree; provided,
however, that any greater compensation shall only be payable from
amounts that otherwise would be distributed to the
Certificateholders). The appointment of a successor Servicer
shall not affect any liability of the predecessor Servicer which
<PAGE>
may have arisen under this Servicing Agreement prior to its
termination as Servicer (including, without limitation, the
obligation to purchase Mortgage Loans pursuant to Section 3.01,
to pay any deductible under an insurance policy pursuant to
Section 3.11 or to indemnify the Indenture Trustee pursuant to
Section 5.06), nor shall any successor Servicer be liable for any
acts or omissions of the predecessor Servicer or for any breach
by such Servicer of any of its representations or warranties
contained herein or in any related document or agreement. The
Indenture Trustee and such successor shall take such action,
consistent with this Servicing Agreement, as shall be necessary
to effectuate any such succession.
(b) Any successor, including the Indenture Trustee on
behalf of the Bondholders, to the Servicer as servicer shall
during the term of its service as servicer continue to service
and administer the Mortgage Loans for the benefit of the
Bondholders and the Bond Insurer, (ii) maintain in force a policy
or policies of insurance covering errors and omissions in the
performance of its obligations as Servicer hereunder and a
fidelity bond in respect of its officers, employees and agents to
the same extent as the Servicer is so required pursuant to
Section 3.11.
(c) Any successor Servicer, including the Indenture Trustee
on behalf of the Bondholders and the Bond Insurer, shall not be
deemed to be in default or to have breached its duties hereunder
if the predecessor Servicer shall fail to deliver any required
deposit to the Collection Account or otherwise cooperate with any
required servicing transfer or succession hereunder.
Section 6.03. Notification to Bondholders. Upon any
termination or appointment of a successor to the Servicer pursu-
ant to this Article VI or Section 5.04, the Indenture Trustee
shall give prompt written notice thereof to the Bondholders, the
Bond Insurer, the Owner Trustee, the Issuer and each Rating
Agency.
Section 6.04. Waiver of Defaults. The Indenture Trustee
shall transmit by mail to all Bondholders and the Bond Insurer,
within 5 days after the occurrence of any Servicing Default known
to the Indenture Trustee, unless such Servicing Default shall
have been cured, notice of each such Servicing Default hereunder
known to the Indenture Trustee. The Bond Insurer or, if a Bond
Insurer Default exists, the holders of at least 51% of the
aggregate Bond Principal Balance of the Bonds may waive any
default by the Servicer in the performance of its obligations
hereunder and the consequences thereof, except a default in the
making of or the causing to be made any required distribution on
the Bonds. No such waiver shall extend to any subsequent or
other default or impair any right consequent thereon except to
the extent expressly so waived. The Servicer shall give notice
of any such waiver to the Rating Agencies.
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01. Amendment. This Servicing Agreement may be
amended from time to time by the parties hereto with the prior
written consent of the Bond Insurer, provided that any amendment
be accompanied by a letter from the Rating Agencies to the effect
that the amendment will not result in the downgrading or
withdrawal of the rating then assigned to the Bonds or the rating
then assigned to the Bonds without taking into account the Bond
Insurance Policy.
Section 7.02. Governing Law. THIS SERVICING 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 7.03. Notices. All demands, notices and communica-
tions hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered at or mailed by certified
mail, return receipt requested, to:
(a) in the case of the Servicer: NovaStar Mortgage, Inc.
1900 W. 47th Place
Suite 205
Westwood, Kansas 66205
Attention: Chris Miller,
Senior Vice President
(b) in the case of the
Bond Insurer: MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
Attention: Asset-Backed IPM
(NovaStar Mortgage Funding Trust,
Series 1998-2, NovaStar Home
Equity Loan Asset-Backed Bonds,
Series 1998-2)
(c) in the case of
Rating Agencies: Moody's Investors Service Inc.
99 Church Street
New York, New York 10007
Attention: Rod Dubitsky
Standard & Poor's
26 Broadway
New York, New York 10004-1064
Attention: Leslie Albergo
<PAGE>
(d) in the case of the
Owner Trustee: Wilmington Trust Company
Wilmington, Delaware 19890
Attention: Emmett Harmon
(e) in the case of the
Issuer, to NovaStar c/o NovaStar Financial, Inc.
Mortgage Funding Trust, 1901 W. 47th Place
Series 1998-2: Suite 105
Westwood, Kansas 66502
Attention: David J. Lee,
Vice President
(f) in the case of the
Indenture Trustee: First Union National Bank
230 South Tryon Street, NC1179
9th Floor
Charlotte, NC 28288-1179
Attention: Robert Ashbaugh
or, as to each party, at such other address as shall be
designated by such party in a written notice to each other party.
Any notice required or permitted to be mailed to a Bondholder
shall be given by first class mail, postage prepaid, at the
address of such Bondholder as shown in the Certificate Register.
Any notice so mailed within the time prescribed in this Servicing
Agreement shall be conclusively presumed to have been duly given,
whether or not the Bondholder receives such notice. Any notice
or other document required to be delivered or mailed by the
Indenture Trustee to any Rating Agency shall be given on a
reasonable efforts basis and only as a matter of courtesy and
accommodation and the Indenture Trustee shall have no liability
for failure to deliver such notice or document to any Rating
Agency.
Section 7.04. Severability of Provisions. If any one or
more of the covenants, agreements, provisions or terms of this
Servicing 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 Servicing Agreement and
shall in no way affect the validity or enforceability of the
other provisions of this Servicing Agreement or of the Bonds or
the rights of the Bondholders thereof.
Section 7.05. Third-Party Beneficiaries. This Servicing
Agreement will inure to the benefit of and be binding upon the
parties hereto, the Bondholders, the Bond Insurer, the Owner
Trustee, the Indenture Trustee and their respective successors
and permitted assigns. Except as otherwise provided in this
Servicing Agreement, no other Person will have any right or
obligation hereunder. The Indenture Trustee shall have the right
to exercise all rights of the Issuer under this Agreement.
<PAGE>
Section 7.06. Counterparts. This instrument may be
executed in any number of counterparts, each of which so executed
shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
Section 7.07. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction
hereof.
Section 7.08. Termination. Except with respect to
obligations of the Servicer relating to any representations and
warranties or indemnities made by it in this Agreement, the
respective obligations and responsibilities of the Servicer and
the Issuer created hereby shall terminate upon the satisfaction
and discharge of the Indenture pursuant to Section 4.10 thereof.
Section 7.09. No Petition. The Servicer, by entering into
this Servicing Agreement, hereby covenants and agrees that it
will not at any time institute against the Issuer or the Company,
or join any institution against the Issuer or the Company, any
bankruptcy proceedings under any United States federal or state
bankruptcy or similar law in connection with any obligations of
the Issuer or the Company. This section shall survive the
termination of this Servicing Agreement by one year.
Section 7.10. No Recourse. The Servicer acknowledges that
no recourse may be had against the Issuer, except as may be
expressly set forth in this Servicing Agreement.
ARTICLE VIII
ADMINISTRATIVE DUTIES OF THE SERVICER
Section 8.01. Administrative Duties.
(a) Duties with Respect to the Indenture. The Servicer
shall perform all its duties and the duties of the Issuer under
the Indenture. In addition, the Servicer shall consult with the
Owner Trustee as the Servicer deems appropriate regarding the
duties of the Issuer under the Indenture. The Servicer shall
monitor the performance of the Issuer and shall advise the Owner
Trustee when action is necessary to comply with the Issuer's
duties under the Indenture. The Servicer shall prepare for
execution by the Issuer or shall cause the preparation by other
appropriate Persons of all such documents, reports, filings,
instruments, certificates and opinions as it shall be the duty of
the Issuer to prepare, file or deliver pursuant to the Indenture.
In furtherance of the foregoing, the Servicer shall take all
necessary action that is the duty of the Issuer to take pursuant
to the Indenture.
(b) Duties with Respect to the Issuer.
<PAGE>
(i) In addition to the duties of the Servicer set
forth in this Servicing Agreement or any of the Basic
Documents, the Servicer shall perform such calculations and
shall prepare for execution by the Issuer or the Owner
Trustee or shall cause the preparation by other appropriate
Persons of all such documents, reports, filings,
instruments, certificates and opinions as it shall be the
duty of the Issuer or the Owner Trustee to prepare, file or
deliver pursuant to this Servicing Agreement or any of the
Basic Documents or under state and federal tax and
securities laws, and at the request of the Owner Trustee or
the Bond Insurer shall take all appropriate action that it
is the duty of the Issuer to take pursuant to this Servicing
Agreement or any of the Basic Documents. In accordance with
the directions of the Issuer, the Bond Insurer or the Owner
Trustee, the Servicer shall administer, perform or supervise
the performance of such other activities in connection with
the Bonds (including the Basic Documents) as are not covered
by any of the foregoing provisions and as are expressly
requested by the Issuer, the Bond Insurer or the Owner
Trustee and are reasonably within the capability of the
Servicer.
(ii) Notwithstanding anything in this Servicing
Agreement or any of the Basic Documents to the contrary, the
Servicer shall be responsible for promptly notifying the
Owner Trustee and the Bond Insurer in the event that any
withholding tax is imposed on the Issuer's payments (or
allocations of income) to an Owner (as defined in the Trust
Agreement) as contemplated in Section 5.03 of the Trust
Agreement. Any such notice shall be in writing and specify
the amount of any withholding tax required to be withheld by
the Owner Trustee pursuant to such provision.
(iii) In carrying out the foregoing duties or any
of its other obligations under this Servicing Agreement, the
Servicer may enter into transactions with or otherwise deal
with any of its Affiliates; provided, however, that the
terms of any such transactions or dealings shall be in
accordance with any directions received from the Issuer and
shall be, in the Servicer's opinion, no less favorable to
the Issuer in any material respect than with terms made
available to unrelated third-parties.
(c) Tax Matters. The Servicer shall provide such services
as are reasonably necessary to assist the Issuer, the Indenture
Trustee or the Owner Trustee, as applicable, in the preparation
of tax returns and information reports as provided in Section
5.03 of the Trust Agreement.
(d) Non-Ministerial Matters. With respect to matters that
in the reasonable judgment of the Servicer are non-ministerial,
the Servicer shall not take any action pursuant to this Article
VIII unless within a reasonable time before the taking of such
action, the Servicer shall have notified the Owner Trustee, the
Bond Insurer and the Indenture Trustee of the proposed action and
the Owner Trustee, the Bond Insurer and, with respect to items
(A), (B), (C) and (D) below, the Indenture Trustee shall not have
withheld consent or provided an alternative direction. For the
purpose of the preceding sentence, "non-ministerial matters"
shall include:
<PAGE>
(A) the amendment of or any supplement to the
Indenture;
(B) the initiation of any claim or lawsuit by the
Issuer and the compromise of any action, claim or lawsuit
brought by or against the Issuer (other than in connection
with the collection of the Mortgage Loans);
(C) the amendment, change or modification of this
Servicing Agreement or any of the Basic Documents;
(D) the appointment of successor Certificate Paying
Agents and successor Indenture Trustees pursuant to the
Indenture or the appointment of successor Servicers or the
consent to the assignment by the Certificate Registrar,
Paying Agent or Indenture Trustee of its obligations under
the Indenture; and
(E) the removal of the Indenture Trustee.
Section 8.02. Records. The Servicer shall maintain
appropriate books of account and records relating to services
performed under this Servicing Agreement, which books of account
and records shall be accessible for inspection by the Issuer,
Indenture Trustee and the Bond Insurer upon reasonable request
and at any time during normal business hours.
Section 8.03. Additional Information to be Furnished. The
Servicer shall furnish to the Issuer, Indenture Trustee and the
Bond Insurer from time to time such additional information
regarding the Bonds as the Issuer, Indenture Trustee or the Bond
Insurer shall reasonably request.
<PAGE>
IN WITNESS WHEREOF, the Servicer, the Indenture Trustee and
the Issuer have caused this Servicing Agreement to be duly
executed by their respective officers or representatives all as
of the day and year first above written.
NOVASTAR MORTGAGE, INC.
as Servicer
By:________________________________
Name:
Title:
NOVASTAR MORTGAGE FUNDING TRUST,
SERIES 1998-2
as Issuer
By: WILMINGTON TRUST COMPANY, not
in its individual capacity but
solely as Owner Trustee
By:________________________________
Name:
Title:
FIRST UNION NATIONAL BANK
not in its individual capacity
but solely as
Indenture Trustee
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT B
FORM OF REQUEST FOR RELEASE
DATE:
TO:
RE: REQUEST FOR RELEASE OF DOCUMENTS
In connection with your administration of the Mortgage Loans, we
request the release of the Mortgage File described below.
Servicing Agreement Dated:
Series #:
Account #:
Pool #:
Loan #:
Borrower Name(S):
Reason for Document Request: (circle one) Mortgage Loan
Prepaid in Full
Mortgage Loan Repurchased
"We hereby certify that all amounts received or to be received in
connection with such payments which are required to be deposited
have been or will be so deposited as provided in the Servicing
Agreement."
_____________________________________
[Name of Servicer]
Authorized Signature
*****************************************************************
TO CUSTODIAN/Indenture Trustee: Please acknowledge this request,
and check off documents being enclosed with a copy of this form.
You should retain this form for your files in accordance with the
terms of the Servicing Agreement.
Enclosed Documents: [ ] Promissory Note
[ ] Mortgage or Deed of Trust
[ ] Assignment(s) of Mortgage or Deed
of Trust
[ ] Title Insurance Policy
[ ] Other: ___________________________
______________________
Name
______________________
Title
_____________________
Date
<PAGE>
EXHIBIT C
FORM OF LIQUIDATION REPORT
Customer Name:
Account Number:
Original Principal Balance:
1. Type of Liquidation (REO disposition/charge-off/short pay-off)
Date last paid
Date of foreclosure
Date of REO
Date of REO Disposition
Property Sale Price/Estimated Market Value at disposition
2. Liquidation Proceeds
Principal Prepayment $____________
Property Sale Proceeds ____________
Insurance Proceeds ____________
Other (itemize) ____________
Total Proceeds $____________
3. Liquidation Expenses
Servicing Advances ____________
Delinquency Advances ____________
Monthly Advances ____________
Servicing Fees ____________
Other Servicing Compensation ____________
Total Advances $____________
4. Net Liquidation Proceeds $____________
(Item 2 minus Item 3)
5. Principal Balance of Mortgage Loan $____________
6. Loss, if any (Item 5 minus Item 4) $____________
EXECUTION COPY
_________________________________________________________________
NOVASTAR MORTGAGE FUNDING CORPORATION
as Company
and
WILMINGTON TRUST COMPANY
as Owner Trustee
_________________________________________
AMENDED AND RESTATED
TRUST AGREEMENT
Dated as of August 19, 1998
__________________________________________
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
HOME EQUITY LOAN ASSET-BACKED BONDS
_________________________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . .1
1.01. Definitions . . . . . . . . . . . . . . . . . . . .1
1.02. Other Definitional Provisions . . . . . . . . . . .1
ARTICLE II Organization. . . . . . . . . . . . . . . . . . . .2
2.01. Name. . . . . . . . . . . . . . . . . . . . . . . .2
2.02. Office. . . . . . . . . . . . . . . . . . . . . . .2
2.03. Purposes and Powers . . . . . . . . . . . . . . . .2
2.04. Appointment of Owner Trustee. . . . . . . . . . . .3
2.05. Initial Capital Contribution of Owner Trust Estate.3
2.06. Declaration of Trust. . . . . . . . . . . . . . . .3
2.07. Liability of the Holders of the Certificates. . . .4
2.08. Title to Trust Property . . . . . . . . . . . . . .4
2.09. Situs of Trust. . . . . . . . . . . . . . . . . . .4
2.10. Representations and Warranties of the Company . . .4
2.11. Payment of Trust Fees . . . . . . . . . . . . . . .5
2.12. Investment Company. . . . . . . . . . . . . . . . .5
ARTICLE III Conveyance of the Mortgage Loans; Certificates. . .5
3.01. Conveyance of the Initial Mortgage Loans. . . . . .5
3.02. Initial Ownership . . . . . . . . . . . . . . . . .6
3.03. The Certificates. . . . . . . . . . . . . . . . . .6
3.04. Authentication of Certificates. . . . . . . . . . .7
3.05. Registration of and Limitations on Transfer and
Exchange of Certificates. . . . . . . . . . . . . .7
3.06. Mutilated, Destroyed, Lost or Stolen Certificates 10
3.07. Persons Deemed Certificateholders . . . . . . . . 10
3.08. Access to List of Certificateholders' Names and
Addresses . . . . . . . . . . . . . . . . . . . . 10
3.09. Maintenance of Office or Agency . . . . . . . . . 10
3.10. Certificate Paying Agent. . . . . . . . . . . . . 11
3.11. Pre-Funding Amount and Interest Coverage Amount . 12
3.12. Purchase of Subsequent Mortgage Loans . . . . . . 12
ARTICLE IV Authority and Duties of Owner Trustee . . . . . . 12
4.01. General Authority . . . . . . . . . . . . . . . . 12
4.02. General Duties. . . . . . . . . . . . . . . . . . 13
4.03. Action upon Instruction . . . . . . . . . . . . . 13
4.04. No Duties Except as Specified under Specified
Documents or in Instructions. . . . . . . . . . . 13
4.05. Restrictions. . . . . . . . . . . . . . . . . . . 14
4.06. Prior Notice to Certificateholders with Respect to
Certain Matters . . . . . . . . . . . . . . . . . 14
4.07. Action by Certificateholders with Respect to Certain
Matters . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
4.08. Action by Certificateholders with Respect to
Bankruptcy. . . . . . . . . . . . . . . . . . . . 16
4.09. Restrictions on Certificateholders' Power . . . . 16
4.10. Majority Control. . . . . . . . . . . . . . . . . 17
4.11. Optional Redemption . . . . . . . . . . . . . . . 17
ARTICLE V Application of Trust Funds. . . . . . . . . . . . 17
5.01. Distributions . . . . . . . . . . . . . . . . . . 17
5.02. Method of Payment . . . . . . . . . . . . . . . . 18
5.03. Tax Returns . . . . . . . . . . . . . . . . . . . 18
5.04. Statements to Certificateholders. . . . . . . . . 18
ARTICLE VI Concerning the Owner Trustee. . . . . . . . . . . 18
6.01. Acceptance of Trusts and Duties . . . . . . . . . 18
6.02. Furnishing of Documents . . . . . . . . . . . . . 19
6.03. Representations and Warranties. . . . . . . . . . 19
6.04. Reliance; Advice of Counsel . . . . . . . . . . . 20
6.05. Not Acting in Individual Capacity . . . . . . . . 21
6.06. Owner Trustee Not Liable for Certificates or Related
Documents . . . . . . . . . . . . . . . . . . . . 21
6.07. Owner Trustee May Own Certificates and Bonds. . . 21
6.08. Payments from Owner Trust Estate. . . . . . . . . 21
6.09. Doing Business in Other Jurisdictions . . . . . . 22
6.10. Liability of Certificate Registrar and Certificate
Paying Agent. . . . . . . . . . . . . . . . . . . 22
ARTICLE VII Compensation of Owner Trustee . . . . . . . . . . 22
7.01. Owner Trustee's Fees and Expenses . . . . . . . . 22
7.02. Indemnification . . . . . . . . . . . . . . . . . 22
ARTICLE VIII Termination of Trust Agreement. . . . . . . . . . 23
8.01. Termination of Trust Agreement. . . . . . . . . . 23
ARTICLE IX Successor Owner Trustees and Additional Owner
Trustees. . . . . . . . . . . . . . . . . . . . . 24
9.01. Eligibility Requirements for Owner Trustee. . . . 24
9.02. Replacement of Owner Trustee. . . . . . . . . . . 25
9.03. Successor Owner Trustee . . . . . . . . . . . . . 25
9.04. Merger or Consolidation of Owner Trustee. . . . . 26
9.05. Appointment of Co-Trustee or Separate Trustee . . 26
ARTICLE X Miscellaneous . . . . . . . . . . . . . . . . . . 27
10.01. Amendments. . . . . . . . . . . . . . . . . . . . 27
10.02. No Legal Title to Owner Trust Estate. . . . . . . 29
10.03. Limitations on Rights of Others . . . . . . . . . 29
10.04. Notices . . . . . . . . . . . . . . . . . . . . . 29
10.05. Severability. . . . . . . . . . . . . . . . . . . 30
10.06. Separate Counterparts . . . . . . . . . . . . . . 30
<PAGE>
10.07. Successors and Assigns. . . . . . . . . . . . . . 30
10.08. No Petition . . . . . . . . . . . . . . . . . . . 30
10.09. No Recourse . . . . . . . . . . . . . . . . . . . 30
10.10. Headings. . . . . . . . . . . . . . . . . . . . . 30
10.11. Governing Law . . . . . . . . . . . . . . . . . . 30
10.12. Integration . . . . . . . . . . . . . . . . . . . 30
10.13. Third Party Beneficiary . . . . . . . . . . . . . 31
EXHIBITS
Exhibit A - Form of Certificate. . . . . . . . . . . . . . . .A-1
Exhibit B - Certificate of Trust of NovaStar Mortgage Funding
Trust . . . . . . . . . . . . . . . . . . . . .B-1
Exhibit C - Form of Rule 144A Investment Representation. . . .C-1
Exhibit D - Form of Investor Representation Letter . . . . . .D-1
Exhibit E - Form of Transferor Representation Letter . . . . .E-1
Exhibit F - Form of Certificate of Non-Foreign Status. . . . .F-1
Exhibit G - Form of ERISA Representation Letter. . . . . . . .G-1
Exhibit H - Form of Representation Letter. . . . . . . . . . .H-1
Exhibit I - Initial Trust Agreement. . . . . . . . . . . . . .I-1
<PAGE>
This Amended and Restated Trust Agreement (which amends and
restates the Trust Agreement, dated August 1, 1998, between
NovaStar Mortgage Funding Corporation, as company (the
"Company"), and Wilmington Trust Company, a Delaware banking
corporation, as owner trustee (the "Owner Trustee"), which is
attached hereto as Exhibit I), dated as of August 19, 1998 (as
amended from time to time, this "Trust Agreement"), between the
Company and the Owner Trustee,
WITNESSETH THAT:
In consideration of the mutual agreements herein contained,
the Company and the Owner Trustee agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. For all purposes of this Trust
Agreement, except as otherwise expressly provided herein or
unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the meanings assigned to such
terms in Appendix A to the Indenture, dated as of August 1,
1998, between NovaStar Mortgage Funding Trust, Series 1998-2, as
Issuer, and First Union National Bank, as Indenture Trustee,
which is incorporated by referenced herein. All other
capitalized terms used herein shall have the meanings specified
herein.
Section 1.02. Other Definitional Provisions.
(a) All terms defined in this Trust Agreement shall have
the defined meanings when used in any certificate or other docu-
ment made or delivered pursuant hereto unless otherwise defined
therein.
(b) As used in this Trust Agreement and in any certificate
or other document made or delivered pursuant hereto or thereto,
accounting terms not defined in this Trust Agreement or in any
such certificate or other document, and accounting terms partly
defined in this Trust Agreement or in any such certificate or
other document to the extent not defined, shall have the respec-
tive meanings given to them under generally accepted accounting
principles. To the extent that the definitions of accounting
terms in this Trust Agreement or in any such certificate or other
document are inconsistent with the meanings of such terms under
generally accepted accounting principles, the definitions con-
tained in this Trust Agreement or in any such certificate or
other document shall control.
(c) The words "hereof," "herein," "hereunder" and words of
similar import when used in this Trust Agreement shall refer to
this Trust Agreement as a whole and not to any particular pro-
vision of this Trust Agreement; Article, Section and Exhibit
references contained in this Trust Agreement are references to
Articles, Sections and Exhibits in or to this Trust Agreement
unless otherwise specified; and the term "including" shall mean
"including without limitation".
<PAGE>
(d) The definitions contained in this Trust Agreement are
applicable to the singular as well as the plural forms of such
terms and to the masculine as well as to the feminine and neuter
genders of such terms.
(e) Any agreement, instrument or statute defined or
referred to herein or in any instrument or certificate delivered
in connection herewith means such agreement, instrument or
statute as from time to time amended, modified or supplemented
and includes (in the case of agreements or instruments)
references to all attachments thereto and instruments incorpo-
rated therein; references to a Person are also to its permitted
successors and assigns.
ARTICLE II
Organization
Section 2.01. Name. The trust created hereby (the "Trust")
shall be known as "NovaStar Mortgage Funding Trust, Series 1998-2",
in which name the Owner Trustee may conduct the business of
the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.
s
Section 2.02. Office. The office of the Trust shall be in
care of the Owner Trustee at the Corporate Trust Office or at
such other address in Delaware as the Owner Trustee may designate
by written notice to the Certificateholders and the Company.
Section 2.03. Purposes and Powers. The purpose of the
Trust is to engage in the following activities:
(i) to issue the Bonds pursuant to the Indenture and
the Certificates pursuant to this Trust Agreement and to
sell the Bonds and the Certificates;
(ii) to pay the organizational, start-up and
transactional expenses of the Trust;
(iii) to hold, assign, grant, transfer, pledge and
convey the Mortgage Loans pursuant to the Indenture and to
hold, manage and distribute to the Certificateholders pur-
suant to Section 5.01 any portion of the Mortgage Loans
released from the Lien of, and remitted to the Trust
pursuant to the Indenture;
(iv) to purchase and hold the Initial Mortgage Loans
pursuant to this Trust Agreement and to purchase and hold
the Subsequent Mortgage Loans pursuant to the Mortgage Loan
Purchase Agreement;
(v) to enter into and perform its obligations under
the Basic Documents to which it is to be a party;
(vi) to enter into and perform its obligations under
the CAP Agreements;
<PAGE>
(vii) to acquire and perform its obligations under the
PMI Policies;
(viii) to purchase and hold the NCFC Demand Note;
(ix) if directed by holders of Certificates
representing more than 50% of the beneficial interests in
the Trust, sell the Trust Estate subsequent to the discharge
of the Indenture, all for the benefit of the holders of the
Certificates;
(x) to engage in those activities, including entering
into agreements, that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or
connected therewith; and
(xi) subject to compliance with the Basic Documents,
to engage in such other activities as may be required in
connection with conservation of the Owner Trust Estate and
the making of distributions to the Certificateholders and
the Bondholders.
The Trust is hereby authorized to engage in the foregoing activi-
ties. The Trust shall not engage in any activity other than in
connection with the foregoing or other than as required or autho-
rized by the terms of this Trust Agreement or the Basic Docu-
ments.
Section 2.04. Appointment of Owner Trustee. The Company
hereby appoints the Owner Trustee as trustee of the Trust
effective as of the date hereof, to have all the rights, powers
and duties set forth herein.
Section 2.05. Initial Capital Contribution of Owner Trust
Estate. The Company hereby sells, assigns, transfers, conveys
and sets over to the Trust, as of the date hereof, the sum of $1.
The Owner Trustee hereby acknowledges receipt in trust from the
Company, as of the date hereof, of the foregoing contribution,
which shall constitute the initial corpus of the Trust and shall
be deposited in the Certificate Distribution Account. The Owner
Trustee also acknowledges on behalf of the Trust the receipt in
trust of the Mortgage Loans, the rights with respect to the
representations and warranties made by the Seller under the
Mortgage Loan Purchase Agreement, the CAP Agreements, the PMI
Policies, the NCFC Demand Note and all other amounts constituting
part of the Trust Estate (such items plus all other amounts or
items included in the Trust Estate from time to time, the "Owner
Trust Estate").
Section 2.06. Declaration of Trust. The Owner Trustee
hereby declares that it shall hold the Owner Trust Estate in
trust upon and subject to the conditions set forth herein for the
use and benefit of the Certificateholders, subject to the
obligations of the Trust under the Basic Documents. It is the
intention of the parties hereto that the Trust constitute a
"business trust" under the Business Trust Statute and that this
Trust Agreement constitute the governing instrument of such
business trust. It is the intention of the parties hereto that,
for federal and state income and state and local franchise tax
purposes, the Trust shall not be treated as (i) an association
subject separately to taxation as a corporation, (ii) a "publicly
traded partnership" as defined in Treasury Regulation Section
1.7704-1 or (iii) a "taxable mortgage pool" as defined in Section
7701(i) of the Code, and that the Bonds shall be debt, and the
provisions of this Trust Agreement shall be interpreted to
further this intention. Except as otherwise provided in this
Trust Agreement, the rights of the Certificateholders will be
<PAGE>
those of equity owners of the Trust. Effective as of the date
hereof, the Owner Trustee shall have all rights, powers and
duties set forth herein and in the Business Trust Statute with
respect to accomplishing the purposes of the Trust.
Section 2.07. Liability of the Holders of the Certificates.
The holders of the Certificates shall be jointly and severally
liable directly to and shall indemnify the Trust and the Owner
Trustee for all losses, claims, damages, liabilities and expenses
of the Trust and the Owner Trustee (including Expenses, to the
extent not paid by the Servicer pursuant to Section 2.11 or out
of the Owner Trust Estate); provided, however, that the holders
of the Certificates shall not be liable for payments required to
be made on the Bonds or the Certificates, or for any losses
incurred by a Certificateholder in the capacity of an investor in
the Certificates or a Bondholder in the capacity of an investor
in the Bonds. The holders of the Certificates shall be liable
for and shall promptly pay any entity level taxes imposed on the
Trust. In addition, any third party creditors of the Trust,
including the Bond Insurer (other than in connection with the
obligations described in the second preceding sentence for which
the holders of the Certificates shall not be liable) shall be
deemed third party beneficiaries of this paragraph. The
obligations of the holders of the Certificates under this
paragraph shall be evidenced by the Certificates.
Section 2.08. Title to Trust Property. Except with respect
to the Mortgage Loans, which will be assigned of record to the
Indenture Trustee pursuant to the Indenture, legal title to the
Owner Trust Estate shall be vested at all times in the Trust as a
separate legal entity except where applicable law in any juris-
diction requires title to any part of the Owner Trust Estate to
be vested in a trustee or trustees, in which case title shall be
deemed to be vested in the Owner Trustee, a co-trustee and/or a
separate trustee, as the case may be.
Section 2.09. Situs of Trust. The Trust will be located
and administered in the State of Delaware. All bank accounts
maintained by the Owner Trustee on behalf of the Trust shall be
located in the State of Delaware. The Trust shall not have any
employees in any state other than Delaware; provided, however,
that nothing herein shall restrict or prohibit the Owner Trustee
from having employees within or without the State of Delaware or
taking actions outside the State of Delaware in order to comply
with Section 2.03. Payments will be received by the Trust only
in Delaware or New York, and payments will be made by the Trust
only from Delaware or New York. The only office of the Trust
will be at the Corporate Trust Office in Delaware.
Section 2.10. Representations and Warranties of the
Company. The Company hereby represents and warrants to the Owner
Trustee and the Bond Insurer that:
(i) The Company is duly organized and validly existing
as a corporation in good standing under the laws of the
State of Delaware, with power and authority to own its
properties and to conduct its business as such properties
are currently owned and such business is presently
conducted.
(ii) The Company is duly qualified to do business as a
foreign corporation in good standing and has obtained all
necessary licenses and approvals in all jurisdictions in
which the ownership or lease of its property or the conduct
of its business shall require such <PAGE> qualifications and in
which the failure to so qualify would have a material
adverse effect on the business, properties, assets or
condition (financial or other) of the Company.
(iii) The Company has the power and authority to execute
and deliver this Trust Agreement and to carry out its terms;
the Company has full power and authority to convey and
assign the property to be conveyed and assigned to and
deposited with the Trust as part of the Owner Trust Estate
and the Company has duly authorized such conveyance and
assignment and deposit to the Trust by all necessary
corporate action; and the execution, delivery and
performance of this Trust Agreement have been duly
authorized by the Company by all necessary corporate action.
(iv) The consummation of the transactions contemplated
by this Trust Agreement and the fulfillment of the terms
hereof do not conflict with, result in any breach of any of
the terms and provisions of, or constitute (with or without
notice or lapse of time) a default under, the articles of
incorporation or bylaws of the Company, or any indenture,
agreement or other instrument to which the Company is a
party or by which it is bound; nor result in the creation or
imposition of any Lien upon any of its properties pursuant
to the terms of any such indenture, agreement or other
instrument (other than pursuant to the Basic Documents); nor
violate any law or, to the best of the Company's knowledge,
any order, rule or regulation applicable to the Company of
any court or of any federal or state regulatory body,
administrative agency or other governmental instrumentality
having jurisdiction over the Company or its properties.
(v) The Trust is not required to register as an
investment company under the Investment Company Act and is
not under the control of a Person required to so register.
Section 2.11. Payment of Trust Fees. The Servicer shall
pay the Owner Trustee Fee pursuant to Section 3.07 of the
Servicing Agreement and shall pay the Trust's expenses (including
expenses of the Owner Trustee and the Indenture Trustee) incurred
with respect to the performance of the Trust's duties under the
Indenture pursuant to Section 5.06 of the Servicing Agreement,
or, if such amounts are insufficient, the Owner Trustee shall be
paid pursuant to Section 5.01 hereof.
Section 2.12. Investment Company. Neither the Company nor
any holder of a Certificate shall take any action which would
cause the Trust to become an "investment company" which would be
required to register under the Investment Company Act.
ARTICLE III
Conveyance of the Mortgage Loans;
Certificates
Section 3.01. Conveyance of the Initial Mortgage Loans.
The Company, concurrently with the execution and delivery hereof,
does hereby Grant to the Trust, without recourse, all its right,
title and interest in and to the Initial Mortgage Loans (and the
related PMI Policies), including all interest and principal
received on or with respect to the Initial Mortgage Loans after
the Cut-off Date (other <PAGE> than payments of principal and interest
due on the Mortgage Loans on or before the Cut-off Date) the
proceeds thereof and all rights under the Related Documents
(including the related Mortgage Files). In addition, the Company
hereby Grants to the Trust all of its right, title, and interest
in, to, and under the Mortgage Loan Purchase Agreement. Further,
the Company hereby assigns to the Trust all of its right, title
and interest in, to and under the PMI Policies and NCFC Demand
Note.
The conveyance of the Initial Mortgage Loans by the Company
to the Trust hereunder is intended to facilitate the simultaneous
issuance of the Bonds under the Indenture and issuance of the
Certificates hereunder. The parties hereto intend that the
conveyance of the Initial Mortgage Loans by the Company to the
Trust hereunder constitute a sale by the Company to the Trust of
all of the Company's right, title and interest in and to the
Initial Mortgage Loans. However, if the transactions
contemplated by this Trust Agreement are determined to constitute
a financing, the Company hereby Grants to the Trust a security
interest in the Owner Trust Estate and all distributions thereon
and proceeds thereof, and this Trust Agreement shall constitute a
security agreement under applicable law, and in such event, the
parties hereto acknowledge that the Indenture Trustee, in
addition to holding the Initial Mortgage Loans for the benefit of
the Bondholders and the Bond Insurer, holds the Mortgage Loans as
designee of the Trust.
Section 3.02. Initial Ownership. Upon the formation of the
Trust by the contribution by the Company pursuant to Section 2.05
and until the conveyance of the Initial Mortgage Loans pursuant
to Section 3.01 and the issuance of the Certificates, the Company
shall be the sole Certificateholder.
On the Closing Date, (i) the Owner Trustee, acting on behalf
of the Trust, will issue the Certificates to the Company in
exchange for the Initial Mortgage Loans; (ii) the Company will
sell, transfer and convey, without recourse, the Certificates to
NCFC pursuant to the Certificates Sale Agreement, and (iii) NCFC
will pledge and assign the Certificates to MLMCI as collateral
for loans from MLMCI to NCFC pursuant to the Master Assignment
Agreement. In recognition of such transfers of the Certificates
on the Closing Date, and at the request and instruction of the
Company, NCFC and MLMCI, on the Closing Date the Owner Trustee
shall register the Certificates in the name of MLMCI or its
nominee and shall deliver the actual Certificates to MLMCI or its
nominee. All parties acknowledge and agree that the registration
of the Certificates in the name of MLMCI or its nominee is solely
to more fully secure the pledge of such Certificates by NCFC to
MLMCI and to perfect the security interest of MLMCI in such
pledged Certificates, and while MLMCI or its nominee may hold
legal title to such pledged Certificates, equitable title to and
beneficial ownership of such pledged Certificates shall remain in
NCFC, pursuant to the Master Assignment Agreement.
Section 3.03. The Certificates. The Certificates shall be
issued in the form of one or more Certificates each representing
not less than a 10% Certificate Percentage Interest. The
Certificates shall be executed on behalf of the Trust by manual
or facsimile signature of an authorized officer of the Owner
Trustee and authenticated in the manner provided in Section 3.04.
Certificates bearing the manual or facsimile signatures of
individuals who were, at the time when such signatures shall have
been affixed, authorized to sign on behalf of the Trust, shall be
validly issued and entitled to the benefit of this Trust Agree-
ment, notwithstanding that such individuals or any of them shall
have ceased to be so authorized prior to the authentication and
delivery of such Certificates or did not hold such offices at the
date of authentication and delivery of such Certificates. A
Person shall become a Certificateholder and shall be entitled to
the rights and subject to the obligations of a <PAGE> Certificateholder
hereunder upon such Person's acceptance of a Certificate duly
registered in such Person's name, pursuant to Section 3.05.
A transferee of a Certificate shall become a Certificate-
holder and shall be entitled to the rights and subject to the
obligations of a Certificateholder hereunder upon such trans-
feree's acceptance of a Certificate duly registered in such
transferee's name pursuant to and upon satisfaction of the
conditions set forth in Section 3.05.
Section 3.04. Authentication of Certificates. The Owner
Trustee shall cause all Certificates issued hereunder to be
executed and authenticated on behalf of the Trust, authenticated
and delivered to or upon the written order of the Company, signed
by its chairman of the board, its president or any vice
president, without further corporate action by the Company, in
authorized denominations. No Certificate shall entitle its
holder to any benefit under this Trust Agreement or be valid for
any purpose unless there shall appear on such Certificate a
certificate of authentication substantially in the form set forth
in Exhibit A, executed by the Owner Trustee or the Certificate
Registrar by manual signature; such authentication shall
constitute conclusive evidence that such Certificate shall have
been duly authenticated and delivered hereunder. All
Certificates shall be dated the date of their authentication.
Section 3.05. Registration of and Limitations on Transfer
and Exchange of Certificates. The Certificate Registrar shall
keep or cause to be kept, a Certificate Register in which, sub-
ject to such reasonable regulations as it may prescribe, the
Certificate Registrar shall provide for the registration of
Certificates and of transfers and exchanges of Certificates as
herein provided. First Union National Bank shall be the initial
Certificate Registrar. If the Certificate Registrar resigns or
is removed, the Owner Trustee shall appoint a successor
Certificate Registrar.
Subject to satisfaction of the conditions set forth below
with respect to the Certificate, upon surrender for registration
of transfer of any Certificate at the office or agency maintained
pursuant to Section 3.09, the Owner Trustee or the Certificate
Registrar shall execute, authenticate and deliver in the name of
the designated transferee or transferees, one or more new
Certificates in authorized denominations of a like aggregate
amount dated the date of authentication by the Owner Trustee or
the Certificate Registrar. At the option of a Certificateholder,
Certificates may be exchanged for other Certificates of
authorized denominations of a like aggregate amount upon
surrender of the Certificates to be exchanged at the office or
agency maintained pursuant to Section 3.09.
Every Certificate presented or surrendered for registration
of transfer or exchange shall be accompanied by a written instru-
ment of transfer in form satisfactory to the Certificate Regis-
trar duly executed by the Certificateholder or such
Certificateholder's attorney duly authorized in writing. Each
Certificate surrendered for registration of transfer or exchange
shall be canceled and subsequently disposed of by the Certificate
Registrar in accordance with its customary practice.
No service charge shall be made for any registration of
transfer or exchange of Certificates, but the Owner Trustee or
the Certificate Registrar may require payment of a sum sufficient
to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates.
<PAGE>
No Person shall become a Certificateholder until it shall
establish its non-foreign status by submitting to the Certificate
Paying Agent an IRS Form W-9 and the Certificate of Non-Foreign
Status set forth in Exhibit F hereto.
No transfer, sale, pledge or other disposition of a
Certificate shall be made unless such transfer, sale, pledge or
other disposition is exempt from the registration requirements of
the Securities Act and any applicable state securities laws or is
made in accordance with said Act and laws. In the event of any
such transfer, the Certificate Registrar or the Company shall
prior to such transfer require the transferee to execute (a)
either (i) an investment letter in substantially the form
attached hereto as Exhibit C (or in such form and substance
reasonably satisfactory to the Certificate Registrar and the
Company) which investment letter shall not be an expense of the
Trust, the Owner Trustee, the Certificate Registrar, the
Servicer, the Bond Insurer or the Company and which investment
letter states that, among other things, such transferee (A) is a
"qualified institutional buyer" as defined under Rule 144A,
acting for its own account or the accounts of other "qualified
institutional buyers" as defined under Rule 144A and (B) is aware
that the proposed transferor intends to rely on the exemption
from registration requirements under the Securities Act of 1933,
as amended, provided by Rule 144A or (ii) (A) a written Opinion
of Counsel acceptable to and in form and substance satisfactory
to the Certificate Registrar, the Company and the Bond Insurer
that such transfer may be made pursuant to an exemption,
describing the applicable exemption and the basis therefor, from
said Act and laws or is being made pursuant to said Act and laws,
which Opinion of Counsel shall not be an expense of the Trust,
the Owner Trustee, the Certificate Registrar, the Servicer, the
Bond Insurer or the Company and (B) the transferee executes a
representation letter, substantially in the form of Exhibit D
hereto, and the transferor executes a representation letter,
substantially in the form of Exhibit E hereto, each acceptable to
and in form and substance satisfactory to the Certificate
Registrar and the Company certifying the facts surrounding such
transfer, which representation letters shall not be an expense of
the Trust, the Owner Trustee, the Certificate Registrar, the
Servicer, the Bond Insurer or the Company and (b) the Certificate
of Non-Foreign Status (in substantially the form attached hereto
as Exhibit F) acceptable to and in form and substance reasonably
satisfactory to the Certificate Registrar and the Company, which
certificate shall not be an expense of the Trust, the Owner
Trustee, the Certificate Registrar, the Servicer, the Bond
Insurer or the Company. If the Certificateholder is unable to
provide a Certificate of Non-Foreign Status, the
Certificateholder must provide an Opinion of Counsel as described
above in this paragraph. The Certificateholder desiring to
effect such transfer shall, and does hereby agree to, indemnify
the Trust, the Owner Trustee, the Certificate Registrar, the
Servicer, the Bond Insurer and the Company against any liability
that may result if the transfer is not so exempt or is not made
in accordance with such federal and state laws. Neither an
Opinion of Counsel nor a certification set forth in clause (a) of
this paragraph will be required in connection with the initial
transfer of any such Certificate by the Company to NCFC pursuant
to the Certificates Sale Agreement or the pledge of any such
Certificate by NCFC to MLMCI pursuant to the Master Assignment
Agreement, and the certification set forth in clause (b) of this
paragraph will not be required in connection with the pledge of
any such Certificate by NCFC to MLMCI.
No transfer of a Certificate or any interest therein shall
be made to 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
<PAGE>
ERISA, or Section 4975 of the Code (collectively, "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 within the meaning of the Department of Labor regulation
promulgated at 29 C.F.R. Section 2510.3-101 ("Plan Assets") unless the
Company, the Owner Trustee, the Certificate Registrar and the
Servicer are provided with an Opinion of Counsel which
establishes to the satisfaction of the Company, the Owner
Trustee, the Certificate Registrar and the Servicer that 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 and will not subject the
Company, the Owner Trustee, the Certificate Registrar or the
Servicer to any obligation or liability (including obligations or
liabilities under ERISA or Section 4975 of the Code) in addition
to those undertaken in this Trust Agreement, which Opinion of
Counsel shall not be an expense of the Trust, the Company, the
Owner Trustee, the Certificate Registrar, the Bond Insurer or the
Servicer. 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 Trust
Agreement, which the Company, the Owner Trustee, the Certificate
Registrar and the Servicer 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 any such Certificate by the Company to NCFC pursuant
to the Certificates Sale Agreement, or the pledge of any such
Certificate by NCFC to MLMCI pursuant to the Master Assignment
Agreement (in which case, the Company shall be deemed to have
represented that neither NCFC nor MLMCI is a Plan or a Person
investing Plan Assets of any Plan), and the Owner Trustee shall
be entitled to conclusively rely upon a representation (which,
upon the request of the Owner Trustee, shall be a written
representation) from the Company regarding the status of such
transferees.
In addition, no transfer, sale, assignment, pledge or other
disposition of a Certificate shall be made unless the proposed
transferee executes a representation letter substantially in the
form of Exhibit D, or substantially in the form of Exhibit H
hereto, that (1) the transferee is acquiring the Certificate for
its own behalf and is not acting as agent or custodian for any
other person or entity in connection with such acquisition and
(2) if the transferee is a partnership, grantor trust or S
corporation for federal income tax purposes, the Certificates are
not more than 50% of the assets of the partnership, grantor trust
or S corporation.
No offer, sale, transfer, pledge, hypothecation or other
disposition (including any pledge, sale or transfer under a
repurchase transaction or securities loan) of any Certificate
shall be made to any transferee unless, prior to such
disposition, the proposed transferor delivers to the Owner
Trustee an Opinion of Counsel, rendered by a law firm generally
recognized to be qualified to opine concerning the tax aspects of
asset securitization, to the effect that such transfer (including
any disposition permitted following any default under any pledge
or repurchase transaction) will not cause the Trust to be (i)
treated as an association taxable as a corporation for federal
income tax purposes, (ii) taxable as a taxable mortgage pool as
defined in Section 7701(i) of the Code or (iii) taxable as a
"publicly traded partnership" as defined in Treasury Regulation
section 1.7704-1. Notwithstanding the foregoing, the provisions
of this paragraph shall not apply to the initial transfer of the
Certificates by the Company to NCFC pursuant to the Certificates
Sale Agreement.
Notwithstanding any other provisions of this Section 3.05 to
the contrary, on the Closing Date, (i) the Company may transfer
the Certificates to NCFC pursuant to the Certificates Sale
<PAGE>
Agreement and (ii) NCFC may pledge the Certificates to MLMCI
pursuant to the Master Assignment Agreement, in each case without
complying with the foregoing provisions of this Section 3.05, as
applicable.
Section 3.06. Mutilated, Destroyed, Lost or Stolen Certif-
icates. If (a) any mutilated Certificate shall be surrendered to
the Certificate Registrar, or if the Certificate Registrar shall
receive evidence to its satisfaction of the destruction, loss or
theft of any Certificate and (b) there shall be delivered to the
Certificate Registrar and the Owner Trustee such security or
indemnity as may be required by them to save each of them harm-
less, then in the absence of notice to the Certificate Registrar
or the Owner Trustee that such Certificate has been acquired by a
bona fide purchaser, the Owner Trustee shall execute on behalf of
the Trust and the Owner Trustee or the Certificate Registrar,
shall authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new
Certificate of like tenor and denomination. In connection with
the issuance of any new Certificate under this Section 3.06, the
Owner Trustee or the Certificate Registrar may require the
payment of a sum sufficient to cover any expenses of the Owner
Trustee or the Certificate Registrar (including fees and expenses
of counsel) and any tax or other governmental charge that may be
imposed in connection therewith. Any duplicate Certificate
issued pursuant to this Section 3.06 shall constitute conclusive
evidence of ownership in the Trust, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be
found at any time.
Section 3.07. Persons Deemed Certificateholders. Prior to
due presentation of a Certificate for registration of transfer,
the Owner Trustee, the Certificate Registrar or any Certificate
Paying Agent may treat the Person in whose name any Certificate
is registered in the Certificate Register as the owner of such
Certificate for the purpose of receiving distributions pursuant
to Section 5.02 and for all other purposes whatsoever, and none
of the Trust, the Owner Trustee, the Certificate Registrar or any
Paying Agent shall be bound by any notice to the contrary.
Section 3.08. Access to List of Certificateholders' Names
and Addresses. The Certificate Registrar shall furnish or cause
to be furnished to the Company or the Owner Trustee, within
15 days after receipt by the Certificate Registrar of a written
request therefor from the Company or the Owner Trustee, a list,
in such form as the Company or the Owner Trustee, as the case may
be, may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. Each
Certificateholder, by receiving and holding a Certificate, shall
be deemed to have agreed not to hold any of the Trust, the
Company, the Certificate Registrar or the Owner Trustee
accountable by reason of the disclosure of its name and address,
regardless of the source from which such information was derived.
Section 3.09. Maintenance of Office or Agency. The Owner
Trustee on behalf of the Trust, shall maintain in Wilmington,
Delaware, an office or offices or agency or agencies where
Certificates may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Owner
Trustee in respect of the Certificates and the Basic Documents
may be served. The Owner Trustee initially designates the
Corporate Trust Office as its office for such purposes. The
Owner Trustee shall give prompt written notice to the Company and
the Certificateholders of any change in the location of the
Certificate Register or any such office or agency.
<PAGE>
Section 3.10. Certificate Paying Agent. (a) The
Certificate Paying Agent shall make distributions to
Certificateholders from the Certificate Distribution Account on
behalf of the Trust in accordance with the provisions of the
Certificates and Section 5.01 hereof from payments remitted to
the Certificate Paying Agent by the Indenture Trustee pursuant to
Section 3.05 of the Indenture. The Trust hereby appoints First
Union National Bank as Certificate Paying Agent and First Union
National Bank hereby accepts such appointment and further agrees
that it will be bound by the provisions of this Trust Agreement
relating to the Certificate Paying Agent and shall:
(i hold all sums held by it for the payment of
amounts due with respect to the Certificates in trust for
the benefit of the Persons entitled thereto until such sums
shall be paid to such Persons or otherwise disposed of as
herein provided;
(ii give the Owner Trustee notice of any default by
the Trust of which it has actual knowledge in the making of
any payment required to be made with respect to the
Certificates;
(iii at any time during the continuance of any such
default, upon the written request of the Owner Trustee
forthwith pay to the Owner Trustee on behalf of the Trust
all sums so held in Trust by such Certificate Paying Agent;
(iv immediately resign as Certificate Paying Agent
and forthwith pay to the Owner Trustee on behalf of the
Trust all sums held by it in trust for the payment of
Certificates if at any time it ceases to meet the standards
under this Section 3.10 required to be met by the
Certificate Paying Agent at the time of its appointment;
(v comply with all requirements of the Code with
respect to the withholding from any payments made by it on
any Certificates of any applicable withholding taxes imposed
thereon and with respect to any applicable reporting
requirements in connection therewith;
(vi deliver to the Owner Trustee a copy of the
report to Certificateholders prepared with respect to each
Payment Date by the Servicer pursuant to Section 4.01 of the
Servicing Agreement; and
(vii not institute bankruptcy proceedings against the
Issuer in connection with this Trust Agreement.
(b) The Trust may revoke such power and remove the
Certificate Paying Agent if it determines in its sole discretion
that the Certificate Paying Agent shall have failed to perform
its obligations under this Trust Agreement in any material
respect. First Union National Bank shall be permitted to resign
as Certificate Paying Agent upon 30 days written notice to the
Owner Trustee and the Bond Insurer; provided First Union National
Bank is also resigning as Paying Agent under the Indenture at
such time. In the event that First Union National Bank shall no
longer be the Certificate Paying Agent under this Trust Agreement
and Paying Agent under the Indenture, the Owner Trustee shall
appoint a successor to act as Certificate Paying Agent (which
shall be a bank or trust company) and which shall also be the
successor Paying Agent under the Indenture. The Owner Trustee
shall cause such successor Certificate Paying Agent or any
additional Certificate Paying Agent appointed <PAGE> by the Owner
Trustee to execute and deliver to the Owner Trustee an instrument
accepting the terms of this Section 3.10 as it relates to the
Certificate Paying Agent. The Certificate Paying Agent shall
return all unclaimed funds to the Trust and upon removal of a
Certificate Paying Agent such Certificate Paying Agent shall also
return all funds in its possession to the Trust. The provisions
of Sections 6.01, 6.03, 6.04 and 7.01 shall apply to the
Certificate Paying Agent to the extent applicable. Any reference
in this Trust Agreement to the Certificate Paying Agent shall
include any co-paying agent unless the context requires
otherwise.
(c) The Certificate Paying Agent shall establish and main-
tain with itself a trust account (the "Certificate Distribution
Account") in which the Certificate Paying Agent shall deposit, on
the same day as it is received from the Indenture Trustee, each
remittance received by the Certificate Paying Agent with respect
to payments made pursuant to the Indenture. The Certificate
Paying Agent shall make all distributions to Certificateholders,
from moneys on deposit in the Certificate Distribution Account.
(d) The Certificate Paying Agent shall be paid by the
Indenture Trustee from sources other than the Trust Estate.
Section 3.11. Pre-Funding Amount and Interest Coverage
Amount. On the Closing Date, (i) proceeds of the offering of the
Bonds in an amount equal to the Original Pre-Funded Amount shall
be deposited into the Pre-Funding Account as contemplated by
Section 8.08 of the Indenture; (ii) proceeds of the offering of
the Bonds in an amount equal to the Interest Coverage Amount
shall be deposited into the Interest Coverage Account as
contemplated by Section 8.09 of the Indenture; (iii) the Original
Pre-Funded Amount and the Interest Coverage Amount shall become
part of the Owner Trust Estate under this Trust Agreement; and
(iv) the Original Pre-Funded Amount and the Interest Coverage
Amount shall become part of the Trust Estate and the Collateral
under the Indenture.
Section 3.12. Purchase of Subsequent Mortgage Loans. On
each Subsequent Transfer Date, (i) the Seller shall sell, and the
Company shall purchase, the Subsequent Mortgage Loans, and the
Company shall resell, and the Trust shall purchase, the
Subsequent Mortgage Loans, as contemplated by and subject to the
conditions set forth in Section 2.2 of the Mortgage Loan Purchase
Agreement; (ii) in consideration for the Purchase of the
Subsequent Mortgage Loans, the Trust shall instruct the Indenture
Trustee to transfer funds in the Pre-Funding Account to the
Company, who shall in turn transfer such funds to the Seller as
contemplated by and subject to the conditions set forth in
Section 8.08 of the Indenture, (iii) the Subsequent Mortgage Loan
shall become part of the Owner Trust Estate under this Trust
Agreement and (iv) the Subsequent Mortgage Loans shall become
part of the Trust Estate and the Collateral under the Indenture.
ARTICLE IV
Authority and Duties of Owner Trustee
Section 4.01. General Authority. The Owner Trustee is
authorized and directed to execute and deliver the Basic Docu-
ments to which the Trust is to be a party and each certificate or
other document attached as an exhibit to or contemplated by the
Basic Documents to which the Trust is to be a party and any
amendment or other agreement or instrument described herein, as
evidenced <PAGE> conclusively by the Owner Trustee's execution thereof.
In addition to the foregoing, the Owner Trustee is authorized,
but shall not be obligated, except as otherwise provided in this
Trust Agreement, to take all actions required of the Trust
pursuant to the Basic Documents.
Section 4.02. General Duties. It shall be the duty of the
Owner Trustee to discharge (or cause to be discharged) all of its
responsibilities pursuant to the terms of this Trust Agreement
and the Basic Documents to which the Trust is a party and to
administer the Trust in the interest of the Certificateholders,
subject to the Basic Documents and in accordance with the pro-
visions of this Trust Agreement.
Section 4.03. Action upon Instruction. (a) Subject to
this Article IV and in accordance with the terms of the Basic
Documents, the Certificateholders may by written instruction
direct the Owner Trustee in the management of the Trust. Such
direction may be exercised at any time by written instruction of
the Certificateholders pursuant to this Article IV.
(b) Notwithstanding the foregoing, the Owner Trustee shall
not be required to take any action hereunder or under any Basic
Document if the Owner Trustee shall have reasonably determined,
or shall have been advised by counsel, that such action is likely
to result in liability on the part of the Owner Trustee or is
contrary to the terms hereof or of any Basic Document or is
otherwise contrary to law.
(c) Whenever the Owner Trustee is required to decide
between alternative courses of action permitted or required by
the terms of this Trust Agreement or under any Basic Document, or
in the event that the Owner Trustee is unsure as to the
application of any provision of this Trust Agreement or any Basic
Document or any such provision is ambiguous as to its applica-
tion, or is, or appears to be, in conflict with any other appli-
cable provision, or in the event that this Trust Agreement
permits any determination by the Owner Trustee or is silent or is
incomplete as to the course of action that the Owner Trustee is
required to take with respect to a particular set of facts, the
Owner Trustee shall promptly give notice (in such form as shall
be appropriate under the circumstances) to the Certificateholders
(with a copy to the Bond Insurer) requesting instruction as to
the course of action to be adopted, and to the extent the Owner
Trustee acts in good faith in accordance with any written
instruction of the Certificateholders (with the consent of the
Bond Insurer), the Owner Trustee shall not be liable on account
of such action to any Person. If the Owner Trustee shall not
have received appropriate instruction within 10 days of such
notice (or within such shorter period of time as reasonably may
be specified in such notice or may be necessary under the
circumstances) it may, but shall be under no duty to, take or
refrain from taking such action not inconsistent with this Trust
Agreement or the Basic Documents, as it shall deem to be in the
best interests of the Certificateholders, the Bondholders and the
Bond Insurer, and the Owner Trustee shall have no liability to
any Person for such action or inaction.
Section 4.04. No Duties Except as Specified under Specified
Documents or in Instructions. The Owner Trustee shall not have
any duty or obligation to manage, make any payment with respect
to, register, record, sell, dispose of, or otherwise deal with
the Owner Trust Estate, or to otherwise take or refrain from
taking any action under, or in connection with, any document
contemplated hereby to which the Owner Trustee is a party, except
as expressly provided (a) in accordance with the powers granted
to and the authority conferred upon the Owner Trustee pursuant to
this Trust <PAGE> Agreement, (b) in accordance with the Basic Documents
and (c) in accordance with any document or instruction delivered
to the Owner Trustee pursuant to Section 4.03; and no implied
duties or obligations shall be read into this Trust Agreement or
any Basic Document against the Owner Trustee. The Owner Trustee
shall have no responsibility (i) to file any financing or
continuation statement in any public office at any time, (ii) to
otherwise perfect or maintain the perfection of any security
interest or lien granted to it hereunder, (iii) to record this
Trust Agreement or any Basic Document or (iv) to prepare or file
any Securities and Exchange Commission filing for the Trust. The
Owner Trustee nevertheless agrees that it will, at its own cost
and expense, promptly take all action as may be necessary to
discharge any liens on any part of the Owner Trust Estate that
result from actions by, or claims against, the Owner Trustee that
are not related to the ownership or the administration of the
Owner Trust Estate.
Section 4.05. Restrictions. (a) The Owner Trustee or the
Company (or an Affiliate thereof) shall not take any action
(i) that is inconsistent with the purposes of the Trust set forth
in Section 2.03 or (ii) that, to the actual knowledge of the
Owner Trustee based on an Opinion of Counsel rendered by a law
firm generally recognized to be qualified to opine concerning the
tax aspects of asset securitization, would result in the Trust
becoming taxable as a corporation for federal income tax purposes
or (iii) would result in the amendment or modification of the
Basic Documents or this Trust Agreement without the prior written
consent of the Bond Insurer. The Certificateholders shall not
direct the Owner Trustee to take action that would violate the
provisions of this Section 4.05.
(b) The Owner Trustee shall not convey or transfer any of
the Trust's properties or assets, including those included in the
Trust Estate, to any person unless (i) it shall have received an
Opinion of Counsel rendered by a law firm generally recognized to
be qualified to opine concerning the tax aspects of asset
securitization to the effect that such transaction will not have
any material adverse tax consequence to the Trust or any
Certificateholder and (ii) such conveyance or transfer shall not
violate the provisions of Section 3.16(b) of the Indenture.
(c) The Trust shall not commingle its assets with those of
any other entity. The Trust shall maintain its financial and
accounting books and records separate from those of any other
entity. Except as expressly set forth herein, the Trust shall
pay its indebtedness, operating expenses and liabilities from its
own funds, and the Trust shall not pay the indebtedness,
operating expenses and liabilities of any other entity. The
Trust shall maintain appropriate minutes or other records of all
appropriate actions and shall maintain its office separate from
the offices of the Company.
Section 4.06. Prior Notice to Certificateholders with
Respect to Certain Matters. With respect to the following
matters, the Owner Trustee shall not take action unless at least
30 days before the taking of such action, the Owner Trustee shall
have notified the Certificateholders and the Bond Insurer in
writing of the proposed action and the Certificateholders and the
Bond Insurer shall <PAGE> not have notified the Owner Trustee in writing
prior to the 30th day after such notice is given that such
certificateholders and the Bond Insurer have withheld consent or
provided alternative direction (provided, however, that any
direction by the Certificateholders shall require the prior
consent of the Bond Insurer):
(a) the initiation of any claim or lawsuit by the Trust
(except claims or lawsuits brought in connection with the collec-
tion of cash distributions due and owing under the Mortgage
Loans) and the compromise of any action, claim or lawsuit brought
by or against the Trust (except with respect to the
aforementioned claims or lawsuits for collection of cash
distributions due and owing under the Mortgage Loans);
(b) the election by the Trust to file an amendment to the
Certificate of Trust (unless such amendment is required to be
filed under the Business Trust Statute);
(c) the amendment or other change to this Trust Agreement
or any Basic Document in circumstances where the consent of any
Bondholder or the Bond Insurer is required;
(d) the amendment or other change to this Trust Agreement
or any Basic Document in circumstances where the consent of any
Bondholder or the Bond Insurer is not required and such amendment
materially adversely affects the interest of the
Certificateholders;
(e) the appointment pursuant to the Indenture of a succes-
sor Bond Registrar, Paying Agent or Indenture Trustee or,
pursuant to this Trust Agreement, of a successor Certificate
Registrar or Certificate Paying Agent or the consent to the
assignment by the Bond Registrar, Paying Agent, Indenture
Trustee, Certificate Registrar or Certificate Paying Agent of its
obligations under the Indenture or this Trust Agreement, as
applicable;
(f) the consent to the calling or waiver of any default
under any Basic Document;
(g) the consent to the assignment by the Indenture Trustee
or Servicer of their respective obligations under any Basic
Document;
(h) except as provided in Article VIII hereof, dissolve,
terminate or liquidate the Trust in whole or in part;
(i) merge or consolidate the Trust with or into any other
entity, or convey or transfer all or substantially all of the
Trust's assets to any other entity;
(j) cause the Trust to incur, assume or guaranty any
indebtedness other than as set forth in this Trust Agreement;
(k) perform any act that conflicts with any other Basic
Document;
(l) perform any act which would make it impossible to carry
on the ordinary business of the Trust as described in Section
2.03 hereof;
<PAGE>
(m) confess a judgment against the Trust;
(n) possess Trust assets or assign the Trust's right to
property for other than a Trust purpose;
(o) cause the Trust to lend any funds to any entity; or
(p) change the Trust's purpose and powers from those
enumerated in this Trust Agreement.
Section 4.07. Action by Certificateholders with Respect to
Certain Matters. The Owner Trustee shall not have the power,
except upon the direction of the Certificateholders, and with the
consent of the Bond Insurer, to (a) remove or replace the
Servicer under the Servicing Agreement pursuant to Sections 6.01
and 6.02 thereof or to remove or replace the Indenture Trustee
under the Indenture pursuant to Section 6.08 thereof, (b) except
as expressly provided in the Basic Documents, sell the Mortgage
Loans after the termination of the Indenture, (c) institute
proceedings to have the Trust declared or adjudicated to be
bankrupt or insolvent, (d) consent to the institution of
bankruptcy or insolvency proceedings against the Trust, (e) file
a petition or consent to a petition seeking reorganization or
relief on behalf of the Trust under any applicable federal or
state law relating to bankruptcy, (f) consent to the appointment
of a receiver, liquidator, assignee, trustee, sequestrator (or
any similar official) of the Trust or a substantial portion of
the property of the Trust, (g) make any assignment for the
benefit of the Trust's creditors, (h) cause the Trust to admit in
writing its inability to pay its debts generally as they become
due, (i) take any action or cause the Trust to take any action,
in furtherance of any of the foregoing clauses (c) through (i)
(any of such clauses, a "Bankruptcy Action"). So long as the
Indenture and the Insurance Agreement remain in effect and no
Bond Insurer Default exists, no Certificateholder shall have the
power to take, and shall not take, any Bankruptcy Action with
respect to the Trust or the Company or direct the Owner Trustee
to take any Bankruptcy Action with respect to the Trust or the
Company. The Owner Trustee shall take the actions referred to in
the preceding sentence only upon written instructions signed by
the Certificateholders and with the consent of the Bond Insurer.
Section 4.08. Action by Certificateholders with Respect to
Bankruptcy. The Owner Trustee shall not have the power to
commence a voluntary proceeding in bankruptcy relating to the
Trust without the unanimous prior approval of all Certificate-
holders and the consent of the Bond Insurer, the Bondholders and
the Owner Trustee and the delivery to the Owner Trustee by each
such Certificateholder of a certificate certifying that such
Certificateholder reasonably believes that the Trust is
insolvent. This paragraph shall survive for one year and one day
following termination of this Trust Agreement.
Section 4.09. Restrictions on Certificateholders' Power.
The Certificateholders shall not direct the Owner Trustee to take
or to refrain from taking any action if such action or inaction
would be contrary to any obligation of the Trust or the Owner
Trustee under this Trust Agreement or any of the Basic Documents
or would be contrary to Section 2.03, nor shall the Owner Trustee
be obligated to follow any such direction, if given.
<PAGE>
Section 4.10. Majority Control. Except as expressly pro-
vided herein, any action that may be taken by the Certificate-
holders under this Trust Agreement may be taken by the holders of
Certificates evidencing not less than a majority of the outstand-
ing Certificate Percentage Interests of the Certificates. Except
as expressly provided herein, any written notice of the
Certificateholders delivered pursuant to this Trust Agreement
shall be effective if signed by holders of Certificates
evidencing not less than a majority of the outstanding
Certificate Principal Balance of the Certificates at the time of
the delivery of such notice.
Section 4.11. Optional Redemption. Upon receipt of written
instructions provided to the Owner Trustee by the holder or
holders of 100% of the Certificates, the Owner Trustee shall
cause the Issuer to redeem the Bonds in accordance with Section
8.07 of the Indenture and shall provide all necessary notices on
behalf of the Issuer to effect the foregoing, provided that such
holder or holders shall deposit with the Indenture Trustee an
amount equal to the aggregate redemption price specified under
Section 8.07 of the Indenture, which shall be applied by the
Indenture Trustee solely to make such redemption payments. The
Owner Trustee shall not have the power to exercise the right of
the Issuer to redeem the Bonds pursuant to Section 8.07 of the
Indenture, except as provided above.
ARTICLE V
Application of Trust Funds
Section 5.01. Distributions. (a) On each Payment Date,
the Certificate Paying Agent shall distribute to the
Certificateholders, on a pro rata basis based on the Certificate
Percentage Interests thereof, all funds on deposit in the
Certificate Distribution Account and available therefor (as
provided in Section 3.05 of the Indenture) for such Payment Date
as reduced by any amount owing to the Owner Trustee hereunder and
any Expenses of the Trust remaining unpaid.
(b) In the event that any withholding tax is imposed on the
distributions (or allocations of income) to a Certificateholder,
such tax shall reduce the amount otherwise distributable to such
Certificateholder in accordance with this Section 5.01. The
Certificate Paying Agent is hereby authorized and directed to
retain or cause to be retained from amounts otherwise
distributable to the Certificateholders sufficient funds for the
payment of any tax that is legally owed by the Trust (but such
authorization shall not prevent the Owner Trustee from contesting
any such tax in appropriate proceedings, and withholding payment
of such tax, if permitted by law, pending the outcome of such
proceedings). The amount of any withholding tax imposed with
respect to a Certificateholder shall be treated as cash distrib-
uted to such Certificateholder at the time it is withheld by the
Certificate Paying Agent and remitted to the appropriate taxing
authority. If there is a possibility that withholding tax is
payable with respect to a distribution (such as a distribution to
a non-U.S. Certificateholder), the Certificate Paying Agent may
in its sole discretion withhold such amounts in accordance with
this paragraph (b).
(c) Distributions to Certificateholders shall be
subordinated to the creditors of the Trust, including the
Bondholders and the Bond Insurer.
<PAGE>
Section 5.02. Method of Payment. Subject to Section
8.01(c), distributions required to be made to Certificateholders
on any Payment Date as provided in Section 5.01 shall be made to
each Certificateholder of record on the preceding Record Date
either by, in the case of any Certificateholder owning
Certificates having a Certificate Percentage Interest of 100%,
wire transfer, in immediately available funds, to the account of
such holder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder shall have
provided to the Certificate Registrar appropriate written
instructions at least five Business Days prior to such Record
Date or, if not, by check mailed to such Certificateholder at the
address of such holder appearing in the Certificate Register.
Section 5.03. Tax Returns. The Indenture Trustee shall (a)
maintain (or cause to be maintained) the books of the Trust on a
calendar year basis using the accrual method of accounting, (b)
deliver (or cause to be delivered) to each Certificateholder as
may be required by the Code and applicable Treasury Regulations,
such information as may be required to enable each
Certificateholder to prepare its federal and state income tax
returns, (c) prepare and file or cause to be prepared and filed
such tax returns relating to the Trust as may be required by the
Code and applicable Treasury Regulations (making such elections
as may from time to time be required or appropriate under any
applicable state or federal statutes, rules or regulations) and
(d) collect or cause to be collected any withholding tax as
described in and in accordance with Section 5.01 of this Trust
Agreement with respect to income or distributions to
Certificateholders and prepare or cause to be prepared the
appropriate forms relating thereto.
Section 5.04. Statements to Certificateholders. On each
Payment Date, the Certificate Paying Agent shall send to each
Certificateholder the statement or statements provided to the
Owner Trustee and the Certificate Paying Agent by the Indenture
Trustee pursuant to Section 7.05 of the Indenture with respect to
such Payment Date.
ARTICLE VI
Concerning the Owner Trustee
Section 6.01. Acceptance of Trusts and Duties. The Owner
Trustee accepts the trusts hereby created and agrees to perform
its duties hereunder with respect to such trusts but only upon
the terms of this Trust Agreement. Each of the Owner Trustee and
the Certificate Paying Agent also agrees to disburse all moneys
actually received by it constituting part of the Owner Trust
Estate upon the terms of the Basic Documents and this Trust
Agreement. The Owner Trustee shall not be answerable or
accountable hereunder or under any Basic Document under any
circumstances, except (i) for its own willful misconduct, gross
negligence or bad faith or grossly negligent failure to act or
(ii) in the case of the inaccuracy of any representation or
warranty contained in Section 6.03 expressly made by the Owner
Trustee. In particular, but not by way of limitation (and
subject to the exceptions set forth in the preceding sentence):
(a) The Owner Trustee shall not be liable with respect to
any action taken or omitted to be taken by it in accordance with
the instructions of the Certificateholders permitted under this
Trust Agreement;
<PAGE>
(b) No provision of this Trust Agreement or any Basic Docu-
ment shall require the Owner Trustee to expend or risk funds or
otherwise incur any financial liability in the performance of any
of its rights, duties or powers hereunder or under any Basic
Document if the Owner Trustee shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured or
provided to it;
(c) Under no circumstances shall the Owner Trustee be
liable for indebtedness evidenced by or arising under any of the
Basic Documents, including the principal of and interest on the
Bonds;
(d) The Owner Trustee shall not be responsible for or in
respect of the validity or sufficiency of this Trust Agreement or
for the due execution hereof by the Company or for the form,
character, genuineness, sufficiency, value or validity of any of
the Owner Trust Estate, or for or in respect of the validity or
sufficiency of the Basic Documents, the Bonds, the Certificates,
other than the certificate of authentication on the Certificates,
if executed by the Owner Trustee and the Owner Trustee shall in
no event assume or incur any liability, duty, or obligation to
any Bondholder or to any Certificateholder, other than as
expressly provided for herein or expressly agreed to in the Basic
Documents;
(e) The Owner Trustee shall not be liable for the default
or misconduct of the Company, Indenture Trustee, Certificate
Registrar or the Servicer under any of the Basic Documents or
otherwise and the Owner Trustee shall have no obligation or
liability to perform the obligations of the Trust under this
Trust Agreement or the Basic Documents that are required to be
performed by the Indenture Trustee under the Indenture or the
Seller under the Mortgage Loan Purchase Agreement; and
(f) The Owner Trustee shall be under no obligation to exer-
cise any of the rights or powers vested in it or duties imposed
by this Trust Agreement, or to institute, conduct or defend any
litigation under this Trust Agreement or otherwise or in relation
to this Trust Agreement or any Basic Document, at the request,
order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Owner Trustee security or
indemnity satisfactory to it against the costs, expenses and
liabilities that may be incurred by the Owner Trustee therein or
thereby. The right of the Owner Trustee to perform any discre-
tionary act enumerated in this Trust Agreement or in any Basic
Document shall not be construed as a duty.
Section 6.02. Furnishing of Documents. The Owner Trustee
shall furnish to the Securityholders promptly upon receipt of a
written reasonable request therefor, duplicates or copies of all
reports, notices, requests, demands, certificates, financial
statements and any other instruments furnished to the Trust under
the Basic Documents.
Section 6.03. Representations and Warranties. The Owner
Trustee, in its individual capacity, hereby represents and
warrants to the Company, for the benefit of the
Certificateholders and the Bond Insurer that:
(a) It is a banking corporation duly organized and validly
existing in good standing under the laws of the State of
Delaware. It has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Trust
Agreement;
<PAGE>
(b) It has taken all corporate action necessary to autho-
rize the execution and delivery by it of this Trust Agreement,
and this Trust Agreement will be executed and delivered by one of
its officers who is duly authorized to execute and deliver this
Trust Agreement on its behalf;
(c) The execution, delivery, authentication and performance
by it of this Trust Agreement will not require the authorization,
consent or approval of, the giving of notice to, the filing or
registration with, or the taking of any other action with respect
to, any governmental authority or agency;
(d) Neither the execution nor the delivery by it of this
Trust Agreement, nor the consummation by it of the transactions
contemplated hereby nor compliance by it with any of the terms or
provisions hereof will contravene any federal or Delaware law,
governmental rule or regulation governing the banking or trust
powers of the Owner Trustee or any judgment or order binding on
it, or constitute any default under its charter documents or
bylaws or any indenture, mortgage, contract, agreement or instru-
ment to which it is a party or by which any of its properties may
be bound;
(e) This Trust Agreement, assuming due authorization,
execution and delivery by the Company, constitutes a valid,
legal and binding obligation of the Owner Trustee, enforceable
against it in accordance with the terms hereof subject to
applicable bankruptcy, insolvency, reorganization, moratorium and
other laws affecting the enforcement of creditors' rights
generally and to general principles of equity, regardless of
whether such enforcement is considered in a proceeding in equity
or at law;
(f) The Owner Trustee is not in default with respect to any
order or decree of any court or any order, regulation or demand
of any Federal, state, municipal or governmental agency, which
default might have consequences that would materially and
adversely affect the condition (financial or other) or operations
of the Owner Trustee or its properties or might have consequences
that would materially adversely affect its performance hereunder;
and
(g) No litigation is pending or, to the best of the Owner
Trustee's knowledge, threatened against the Owner Trustee which
would prohibit its entering into this Trust Agreement or
performing its obligations under this Trust Agreement.
Section 6.04. Reliance; Advice of Counsel. (a) The Owner
Trustee shall incur no liability to anyone in acting upon any
signature, instrument, notice, resolution, request, consent,
order, certificate, report, opinion, Bond, or other document or
paper believed by it to be genuine and believed by it to be
signed by the proper party or parties. The Owner Trustee may
accept a certified copy of a resolution of the board of directors
or other governing body of any corporate party as conclusive
evidence that such resolution has been duly adopted by such body
and that the same is in full force and effect. As to any fact or
matter the method of determination of which is not specifically
prescribed herein, the Owner Trustee may for all purposes hereof
rely on a certificate, signed by the president or any vice
president or by the treasurer or other authorized officers of the
relevant party, as to such fact or matter and such certificate
shall constitute full protection to the Owner Trustee for any
action taken or omitted to be taken by it in good faith in reli-
ance thereon.
<PAGE>
(b) In the exercise or administration of the Trust here-
under and in the performance of its duties and obligations under
this Trust Agreement or the Basic Documents, the Owner Trustee
(i) may act directly or through its agents, attorneys, custodians
or nominees (including persons acting under a power of attorney)
pursuant to agreements entered into with any of them, and the
Owner Trustee shall not be liable for the conduct or misconduct
of such agents, attorneys, custodians or nominees (including
persons acting under a power of attorney) if such persons have
been selected by the Owner Trustee with reasonable care and
(ii) may consult with counsel, accountants and other skilled
persons to be selected with reasonable care and employed by it.
The Owner Trustee shall not be liable for anything done, suffered
or omitted in good faith by it in accordance with the written
opinion or advice of any such counsel, accountants or other such
Persons and not contrary to this Trust Agreement or any Basic
Document.
Section 6.05. Not Acting in Individual Capacity. Except as
provided in this Article VI, in accepting the trusts hereby
created Wilmington Trust Company acts solely as Owner Trustee
hereunder and not in its individual capacity, and all Persons
having any claim against the Owner Trustee by reason of the
transactions contemplated by this Trust Agreement or any Basic
Document shall look only to the Owner Trust Estate for payment or
satisfaction thereof.
Section 6.06. Owner Trustee Not Liable for Certificates or
Related Documents. The recitals contained herein and in the
Certificates (other than the signatures of the Owner Trustee on
the Certificates) shall be taken as the statements of the
Company, and the Owner Trustee assumes no responsibility for the
correctness thereof. The Owner Trustee makes no representations
as to the validity or sufficiency of this Trust Agreement, of any
Basic Document or of the Certificates (other than the signatures
of the Owner Trustee on the Certificates) or the Bonds, or of any
Related Documents. The Owner Trustee shall at no time have any
responsibility or liability with respect to the sufficiency of
the Owner Trust Estate or its ability to generate the payments to
be distributed to Certificateholders under this Trust Agreement
or the Bondholders under the Indenture, including compliance by
the Company or the Seller with any warranty or representation
made under any Basic Document or in any related document or the
accuracy of any such warranty or representation, or any action of
the Certificate Paying Agent, the Certificate Registrar or the
Indenture Trustee taken in the name of the Owner Trustee.
Section 6.07. Owner Trustee May Own Certificates and Bonds.
The Owner Trustee in its individual or any other capacity may,
subject to Section 3.05, become the owner or pledgee of
Certificates or Bonds and may deal with the Company, the Seller,
the Certificate Paying Agent, the Certificate Registrar and the
Indenture Trustee in transactions with the same rights as it
would have if it were not Owner Trustee.
Section 6.08. Payments from Owner Trust Estate. All
payments to be made by the Owner Trustee under this Trust
Agreement or any of the Basic Documents to which the Owner
Trustee is a party shall be made only from the income and
proceeds of the Owner Trust Estate or from other amounts required
to be provided by the Certificateholders and only to the extent
that the Owner Trustee shall have received income or proceeds
from the Owner Trust Estate or the Certificateholders to make
such payments in accordance with the terms hereof. Wilmington
Trust Company, in its individual capacity, shall not be liable
for any amounts payable under this Trust Agreement or any of the
Basic Documents to which the Owner Trustee is a party.
<PAGE>
Section 6.09. Doing Business in Other Jurisdictions.
Notwithstanding anything contained herein to the contrary,
neither Wilmington Trust Company nor the Owner Trustee shall be
required to take any action in any jurisdiction other than in the
State of Delaware if the taking of such action will, even after
the appointment of a co-trustee or separate trustee in accordance
with Section 9.05 hereof, (i) require the consent or approval or
authorization or order of or the giving of notice to, or the
registration with or the taking of any other action in respect
of, any state or other governmental authority or agency of any
jurisdiction other than the State of Delaware; (ii) result in any
fee, tax or other governmental charge under the laws of the State
of Delaware becoming payable by Wilmington Trust Company; or
(iii) subject Wilmington Trust Company to personal jurisdiction
in any jurisdiction other than the State of Delaware for causes
of action arising from acts unrelated to the consummation of the
transactions by Wilmington Trust Company or the Owner Trustee, as
the case may be, contemplated hereby.
Section 6.10. Liability of Certificate Registrar and
Certificate Paying Agent. All provisions affording protection to
or limiting the liability of the Owner Trustee shall inure as
well to the Certificate Registrar and Certificate Paying Agent.
ARTICLE VII
Compensation of Owner Trustee
Section 7.01. Owner Trustee's Fees and Expenses. The Owner
Trustee shall receive as compensation for its services hereunder
such fees as have been separately agreed upon before the date
hereof and as set forth in Appendix A to the Indenture, and the
Owner Trustee shall be reimbursed by the Company or the Servicer
for its reasonable expenses hereunder and under the Basic
Documents, including the reasonable compensation, expenses and
disbursements of such agents, representatives, experts and
counsel as the Owner Trustee may reasonably employ in connection
with the exercise and performance of its rights and its duties
hereunder and under the Basic Documents. The amount of the Owner
Trustee Fee shall be paid by the Servicer to the Owner Trustee
pursuant to Section 3.07(a)(viii) of the Servicing Agreement.
Section 7.02. Indemnification. The Company shall
indemnify, defend and hold harmless the Owner Trustee and its
successors, assigns, agents and servants (collectively, the
"Indemnified Parties") from and against, any and all liabilities,
obligations, losses, damages, taxes, claims, actions and suits,
and any and all reasonable costs, expenses and disbursements
(including reasonable legal fees and expenses) of any kind and
nature whatsoever (collectively, "Expenses") which may at any
time be imposed on, incurred by, or asserted against the Owner
Trustee or any Indemnified Party in any way relating to or
arising out of this Trust Agreement, the Basic Documents, the
Owner Trust Estate, the administration of the Owner Trust Estate
or the action or inaction of the Owner Trustee hereunder,
provided, that:
(i the Company shall not be liable for or required
to indemnify an Indemnified Party from and against Expenses
arising or resulting from the Owner Trustee's willful
misconduct, gross negligence or bad faith or as a result of
any inaccuracy of a representation or warranty contained in
Section 6.03 expressly made by the Owner Trustee;
<PAGE>
(ii with respect to any such claim, the Indemnified
Party shall have given the Company written notice thereof
promptly after the Indemnified Party shall have actual
knowledge thereof;
(iii while maintaining control over its own defense,
the Company shall consult with the Indemnified Party in
preparing such defense; and
(iv notwithstanding anything in this Trust Agreement
to the contrary, the Company shall not be liable for
settlement of any claim by an Indemnified Party entered into
without the prior consent of the Company which consent shall
not be unreasonably withheld.
The indemnities contained in this Section shall survive the
resignation or termination of the Owner Trustee or the termina-
tion of this Trust Agreement. In the event of any claim, action
or proceeding for which indemnity will be sought pursuant to this
Section 7.02, the Owner Trustee's choice of legal counsel, if
other than the legal counsel retained by the Owner Trustee in
connection with the execution and delivery of this Trust
Agreement, shall be subject to the approval of the Company, which
approval shall not be unreasonably withheld. In addition, upon
written notice to the Owner Trustee and with the consent of the
Owner Trustee which consent shall not be unreasonably withheld,
the Company has the right to assume the defense of any claim,
action or proceeding against the Owner Trustee.
ARTICLE VIII
Termination of Trust Agreement
Section 8.01. Termination of Trust Agreement. (a) This
Trust Agreement (other than Article VII) and the Trust shall
terminate and be of no further force or effect upon the earliest
of (i) the final distribution of all moneys or other property or
proceeds of the Owner Trust Estate in accordance with the terms
of the Indenture and this Trust Agreement, (ii) the Payment Date
in August 2028, or (iii) the distribution of all of the assets of
the Owner Trust Estate, in accordance with written instructions
provided to the Owner Trustee by holders of a majority of the
Certificates, following the optional redemption of the Bonds by
the Issuer pursuant to Section 8.07 of the Indenture; provided in
each case that all amounts owing to the Bondholders and the Bond
Insurer to the extent payable from the Owner Trust Estate or
proceeds thereof have been paid in full and that all obligations
under the Indenture have been discharged. The bankruptcy,
liquidation, dissolution, death or incapacity of any Certifi-
cateholder shall not (x) operate to terminate this Trust
Agreement or the Trust or (y) 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 all or any part of the Trust or the Owner Trust Estate or
(z) otherwise affect the rights, obligations and liabilities of
the parties hereto.
(b) Except as provided in Section 8.01(a), neither the
Company nor any Certificateholder shall be entitled to revoke or
terminate the Trust.
<PAGE>
(c) Notice of any termination of the Trust, specifying the
Payment Date upon which Certificateholders shall surrender their
Certificates to the Certificate Paying Agent for payment of the
final distribution and cancellation, shall be given by the
Certificate Paying Agent by letter to Certificateholders and the
Bond Insurer mailed within five Business Days of receipt of
notice of the final payment on the Bonds from the Indenture
Trustee, stating (i) the Payment Date upon or with respect to
which final payment of the Certificates shall be made upon
presentation and surrender of the Certificates at the office of
the Certificate Paying Agent therein designated, (ii) the amount
of any such final payment and (iii) that the Record Date
otherwise applicable to such Payment Date is not applicable,
payments being made only upon presentation and surrender of the
Certificates at the office of the Certificate Payment Agent
therein specified. The Certificate Paying Agent shall give such
notice to the Owner Trustee and the Certificate Registrar at the
time such notice is given to Certificateholders. Upon
presentation and surrender of the Certificates, the Certificate
Paying Agent shall cause to be distributed to Certificateholders
amounts distributable on such Payment Date pursuant to
Section 5.01.
In the event that all of the Certificateholders shall not
surrender their Certificates for cancellation within six months
after the date specified in the above mentioned written notice,
the Certificate Paying Agent shall give a second written notice
to the remaining Certificateholders to surrender their Certifi-
cates for cancellation and receive the final distribution with
respect thereto. Subject to applicable laws with respect to
escheat of funds, if within one year following the Payment Date
on which final payment of the Certificates was to have been made
pursuant to Section 3.05 of the Indenture, all the Certificates
shall not have been surrendered for cancellation, the Certificate
Paying Agent may take appropriate steps, or may appoint an agent
to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates,
and the cost thereof shall be paid out of the funds and other
assets that shall remain subject to this Trust Agreement. Any
funds remaining in the Certificate Distribution Account after
exhaustion of such remedies shall be distributed by the
Certificate Paying Agent to the holder of the Certificate.
(d) Upon the winding up of the Trust and its termination,
the Owner Trustee shall cause the Certificate of Trust to be
canceled by filing a certificate of cancellation with the
Secretary of State in accordance with the provisions of Section
3810(d) of the Business Trust Statute.
ARTICLE IX
Successor Owner Trustees and Additional Owner Trustees
Section 9.01. Eligibility Requirements for Owner Trustee.
The Owner Trustee shall at all times be a corporation reasonably
acceptable to the Bond Insurer and satisfying the provisions of
Section 3807(a) of the Business Trust Statute; authorized 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 authorities; and having (or
having a parent that has) a rating of at least Baa3 or is
otherwise acceptable to the Bond Insurer, Moody's and Standard &
Poor's. If such corporation shall publish reports of condition
at least annually pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the
purpose of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and
surplus as set forth in its <PAGE> most recent report of condition so
published. In case at any time the Owner Trustee shall cease to
be eligible in accordance with the provisions of this Section
9.01, the Owner Trustee shall resign immediately in the manner
and with the effect specified in Section 9.02.
Section 9.02. Replacement of Owner Trustee. The Owner
Trustee may at any time resign and be discharged from the trusts
hereby created by giving 30 days prior written notice thereof to
the Bond Insurer and the Company. Upon receiving such notice of
resignation, the Company shall promptly appoint a successor Owner
Trustee with the consent of the Bond Insurer which will not be
unreasonably withheld, by written instrument, in duplicate, one
copy of which instrument shall be delivered to the resigning
Owner Trustee and to the successor Owner Trustee. If no
successor Owner Trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Owner Trustee may petition
any court of competent jurisdiction for the appointment of a
successor Owner Trustee reasonably acceptable to the
Certificateholders and the Bond Insurer.
If at any time the Owner Trustee shall cease to be eligible
in accordance with the provisions of Section 9.01 and shall fail
to resign after written request therefor by the Company or the
Bond Insurer, or if at any time the Owner Trustee shall be
legally unable to act, or shall be adjudged bankrupt or
insolvent, or a receiver of the Owner Trustee or of its property
shall be appointed, or any public officer shall take charge or
control of the Owner Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then
the Company may remove the Owner Trustee with the consent of the
Bond Insurer and shall remove the Owner Trustee at the direction
of the Bond Insurer.
Any resignation or removal of the Owner Trustee and appoint-
ment of a successor Owner Trustee pursuant to any of the pro-
visions of this Section shall not become effective until accep-
tance of appointment by the successor Owner Trustee pursuant to
Section 9.03 and payment of all fees and expenses owed to the
outgoing Owner Trustee. The Servicer shall provide notice of
such resignation or removal of the Owner Trustee to each of the
Rating Agencies and the Bond Insurer.
Section 9.03. Successor Owner Trustee. Any successor Owner
Trustee appointed pursuant to Section 9.02 shall execute,
acknowledge and deliver to the Indenture Trustee and to its
predecessor Owner Trustee an instrument accepting such
appointment under this Trust Agreement, and thereupon the
resignation or removal of the predecessor Owner Trustee shall
become effective, and such successor Owner Trustee, without any
further act, deed or conveyance, shall become fully vested with
all the rights, powers, duties and obligations of its predecessor
under this Trust Agreement, with like effect as if originally
named as Owner Trustee. The predecessor Owner Trustee shall upon
payment of its fees and expenses deliver to the successor Owner
Trustee all documents and statements and monies held by it under
this Trust Agreement; and the predecessor Owner Trustee shall
execute and deliver such instruments and do such other things as
may reasonably be required for fully and certainly vesting and
confirming in the successor Owner Trustee all such rights,
powers, duties and obligations.
No successor Owner Trustee shall accept appointment as
provided in this Section 9.03 unless at the time of such accep-
tance such successor Owner Trustee shall be eligible pursuant to
Section 9.01.
<PAGE>
Upon acceptance of appointment by a successor Owner Trustee
pursuant to this Section 9.03, the Owner Trustee shall mail
notice thereof to all Certificateholders, the Indenture Trustee,
the Bondholders, the Bond Insurer and the Rating Agencies.
Section 9.04. Merger or Consolidation of Owner Trustee.
Any Person into which the Owner Trustee may be merged or convert-
ed or with which it may be consolidated, or any Person resulting
from any merger, conversion or consolidation to which the Owner
Trustee shall be a party, or any Person succeeding to all or
substantially all of the corporate trust business of the Owner
Trustee, shall be the successor of the Owner Trustee hereunder,
without the execution or filing of any instrument or any further
act on the part of any of the parties hereto, anything herein to
the contrary notwithstanding; provided, that such Person shall be
eligible pursuant to Section 9.01 and, provided, further, that
the Owner Trustee shall mail notice of such merger or consolida-
tion to the Rating Agencies and the Bond Insurer.
Section 9.05. Appointment of Co-Trustee or Separate
Trustee. Notwithstanding any other provisions of this Trust
Agreement, at any time, for the purpose of meeting any legal
requirements of any jurisdiction in which any part of the Owner
Trust Estate may at the time be located, the Owner Trustee shall
have the power and shall execute and deliver all instruments to
appoint one or more Persons to act as co-trustee, jointly with
the Owner Trustee, or as separate trustee or trustees, of all or
any part of the Owner Trust Estate, and to vest in such Person,
in such capacity, such title to the Trust or any part thereof
and, subject to the other provisions of this Section, such
powers, duties, obligations, rights and trusts as the Owner
Trustee or the Bond Insurer may consider necessary or desirable.
No co-trustee or separate trustee under this Trust Agreement
shall be required to meet the terms of eligibility as a successor
Owner Trustee pursuant to Section 9.01 and no notice of the
appointment of any co-trustee or separate trustee shall be
required pursuant to Section 9.03, except that notice to, and the
consent of, the Bond Insurer shall be required for appointment of
a co-trustee.
Each separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following
provisions and conditions:
(a) All rights, powers, duties and obligations conferred or
imposed upon the Owner Trustee shall be conferred upon and exer-
cised or performed by the Owner Trustee and such separate trustee
or co-trustee jointly (it being understood that such separate
trustee or co-trustee is not authorized to act separately without
the Owner Trustee joining in such act), except to the extent that
under any law of any jurisdiction in which any particular act or
acts are to be performed, the Owner Trustee shall be incompetent
or unqualified to perform such act or acts, in which event such
rights, powers, duties and obligations (including the holding of
title to the Owner Trust Estate or any portion thereof in any
such jurisdiction) shall be exercised and performed singly by
such separate trustee or co-trustee, but solely at the direction
of the Owner Trustee;
(b) No trustee under this Trust Agreement shall be
personally liable by reason of any act or omission of any other
trustee under this Trust Agreement; and
(c) The Owner Trustee may at any time accept the
resignation of or remove any separate trustee or co-trustee.
<PAGE>
Any notice, request or other writing given to the Owner
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 Trust Agreement and the condi-
tions of this Article IX. Each separate trustee and co-trustee,
upon its acceptance of the trusts conferred, shall be vested with
the estates or property specified in its instrument of appoint-
ment, either jointly with the Owner Trustee or separately, as may
be provided therein, subject to all the provisions of this Trust
Agreement, specifically including every provision of this Trust
Agreement relating to the conduct of, affecting the liability of,
or affording protection to, the Owner Trustee. Each such instru-
ment shall be filed with the Owner Trustee.
Any separate trustee or co-trustee may at any time appoint
the Owner Trustee as 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 Trust 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 Owner Trustee, to the extent
permitted by law, without the appointment of a new or successor
co-trustee or separate trustee.
ARTICLE X
Miscellaneous
Section 10.01. Amendments. (a) This Trust Agreement
may be amended from time to time by the parties hereto (with the
prior written consent of the Bond Insurer and with prior notice
to the Rating Agencies) as specified in this Section, provided
that any amendment, except as provided in subparagraph (e) below,
shall be accompanied by an Opinion of Counsel addressed to the
Owner Trustee and obtained by the Servicer to the effect that
such amendment (i) complies with the provisions of this Section
and (ii) would not cause the Trust (if NCFC was not the holder of
100% of the Certificates or if the Bond Insurance Policy is
outstanding) to be subject to an entity level tax for federal
income tax purposes.
(b) If the purpose of the amendment (as detailed therein)
is to correct any mistake, eliminate any inconsistency, cure any
ambiguity or deal with any matter not covered (i.e. to give
effect to the intent of the parties and, if applicable, to the
expectations of the Certificateholders), it shall not be
necessary to obtain the consent of any Certificateholders, but
the Owner Trustee shall be furnished with (i) a letter from each
of the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to any Bond
or the rating then assigned to any Bond without taking into
account the Bond Insurance Policy or (ii) an Opinion of Counsel
obtained by the Servicer to the effect that such action will not
adversely affect in any material respect the interests of any
Certificateholders or the Bond Insurer, and the consent of the
Bond Insurer shall be obtained.
(c) If the purpose of the amendment is to prevent the
imposition of any federal or state taxes at any time that any
Security is outstanding, it shall not be necessary to obtain the
consent of any Certificateholder, but the Owner Trustee and the
Bond Insurer shall be furnished with an Opinion of Counsel
obtained by the Servicer that such amendment is necessary or
helpful to prevent the <PAGE> imposition of such taxes and is not
materially adverse to any Certificateholder or the Bond Insurer
and the consent of the Bond Insurer shall be obtained.
(d) If the purpose of the amendment is to add or eliminate
or change any provision of the Trust Agreement other than as
contemplated in (b) and (c) above, the amendment shall require
(i) an Opinion of Counsel obtained by the Servicer to the effect
that such action will not adversely affect in any material
respect the interests of any Certificateholders or the Bond
Insurer, (ii) the consent of the Bond Insurer and (iii) either
(A) a letter from each of the Rating Agencies that the amendment
will not result in the downgrading or withdrawal of the rating
then assigned to any Bond or the rating then assigned to any Bond
without taking into account the Bond Insurance Policy or (B) the
consent of the Indenture Trustee and the holders of Certificates
evidencing a majority of the Certificate Principal Balance of the
Certificates; provided, however, that no such amendment shall (1)
reduce in any manner the amount of, or delay the timing of,
payments received that are required to be distributed on any
Certificate without the consent of the related Certificateholder
and the Bond Insurer, or (2) reduce the aforesaid percentage of
Certificates the holders of which are required to consent to any
such amendment, without the consent of the holders of all such
Certificates then outstanding.
(e) If the purpose of the amendment is to provide for the
holding of any of the Certificates in book-entry form, it shall
require the consent of holders of all such Certificates then
outstanding; provided, that the Opinion of Counsel specified in
subparagraph (a) above shall not be required.
(f) If the purpose of the amendment is to provide for the
issuance of additional certificates representing an interest in
the Trust, it shall not be necessary to obtain the consent of any
Certificateholder, but the Owner Trustee shall be furnished with
(i) an Opinion of Counsel obtained by the Servicer to the effect
that such action will not adversely affect in any material
respect the interests of any Certificateholders or the Bond
Insurer or (ii) a letter from each of the Rating Agencies that
the amendment will not result in the downgrading or withdrawal of
the rating then assigned to any Bonds or the rating then assigned
to the Bonds without taking into account the Bond Insurance
Policy and the consent of the Bond Insurer shall be obtained.
(g) Promptly after the execution of any such amendment or
consent, the Servicer shall furnish written notification of the
substance of such amendment or consent to each Certificateholder,
the Indenture Trustee, the Bond Insurer and each of the Rating
Agencies. It shall not be necessary for the consent of
Certificateholders or the Indenture Trustee pursuant to this
Section 10.01 to approve the particular form of any proposed
amendment or consent, but it shall be sufficient if such consent
shall approve the substance thereof. The manner of obtaining
such consents (and any other consents of Certificateholders pro-
vided for in this Trust Agreement or in any other Basic Document)
and of evidencing the authorization of the execution thereof by
Certificateholders shall be subject to such reasonable require-
ments as the Owner Trustee may prescribe.
(h) In connection with the execution of any amendment to
any agreement to which the Trust is a party, other than this
Trust Agreement, the Owner Trustee shall be entitled to receive
and conclusively rely upon an Opinion of Counsel to the effect
that such amendment is authorized or permitted by the documents
subject to such amendment and that all conditions precedent in
the Basic <PAGE> Documents for the execution and delivery thereof by the
Trust or the Owner Trustee, as the case may be, have been
satisfied.
Promptly after the execution of any amendment to the Certif-
icate of Trust, the Owner Trustee shall cause the filing of such
amendment with the Secretary of State of the State of Delaware.
Section 10.02. No Legal Title to Owner Trust Estate.
The Certificateholders shall not have legal title to any part of
the Owner Trust Estate solely by virtue of their status as
Certificateholders. The Certificateholders shall be entitled to
receive distributions with respect to their undivided beneficial
interests therein only in accordance with Articles V and VIII.
No transfer, by operation of law or otherwise, of any right,
title or interest of the Certificateholders to and in their
ownership interest in the Owner Trust Estate shall operate to
terminate this Trust Agreement or the trusts hereunder or entitle
any transferee to an accounting or to the transfer to it of legal
title to any part of the Owner Trust Estate
Section 10.03. Limitations on Rights of Others. Except
for Section 2.07, the provisions of this Trust Agreement are
solely for the benefit of the Owner Trustee, the Company, the
Certificateholders, the Bond Insurer and, to the extent expressly
provided herein, the Indenture Trustee and the Bondholders, and
nothing in this Trust Agreement (other than Section 2.07),
whether express or implied, shall be construed to give to any
other Person any legal or equitable right, remedy or claim in the
Owner Trust Estate or under or in respect of this Trust Agreement
or any covenants, conditions or provisions contained herein.
Section 10.04. Notices. (a) Unless otherwise
expressly specified or permitted by the terms hereof, all notices
shall be in writing and shall be deemed given upon receipt, to
the Owner Trustee at: Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19890'
Attention: Corporate Trust Administration; to the Company at:
NovaStar Mortgage Funding Corporation, 1901 West 47th Place,
Suite 105, Westwood, Kansas 66205, Attention: David Lee; to the
Indenture Trustee at: First Union National Bank, 230 S. Tryon
Street, 9th Floor, Charlotte, North Carolina 28288-1179,
Attention: Corporate Trust Department - NovaStar Mortgage Funding
Trust, Series 1998-2; to the Bond Insurer at: MBIA Insurance
Corporation, 113 King Street, Armonk, New York 10504, Attention:
Insured Portfolio Mgmt - SF (NovaStar Mortgage Funding Trust,
Series 1998-2) (telecopy number (914) 765-3810); to Moody's at:
99 Church Street, New York, New York 10007, Attention:
Residential Mortgage Monitoring Unit; to Standard & Poor's at 26
Broadway, 15th Floor, New York, New York 10004, Attention: Asset
Backed Surveillance Group or, as to each party, at such other
address as shall be designated by such party in a written notice
to each other party.
(b) 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 Certificateholder as shown in the
Certificate Register. Any notice so mailed within the time
prescribed in this Trust Agreement shall be conclusively presumed
to have been duly given, whether or not the Certificateholder
receives such notice.
(c) A copy of any notice delivered to the Owner Trustee or
the Trust shall also be delivered to the Company.
<PAGE>
Section 10.05. Severability. Any provision of this
Trust Agreement that is prohibited 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 shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
Section 10.06. Separate Counterparts. This Trust
Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall
be an original, but all such counterparts shall together
constitute but one and the same instrument.
Section 10.07. Successors and Assigns. All representa-
tions, warranties, covenants and agreements contained herein
shall be binding upon, and inure to the benefit of, each of the
Company, the Bond Insurer, the Owner Trustee and its successors
and each Certificateholder and its successors and permitted
assigns, all as herein provided. Any request, notice, direction,
consent, waiver or other instrument or action by a
Certificateholder shall bind the successors and assigns of such
Certificateholder.
Section 10.08. No Petition. The Owner Trustee, by
entering into this Trust Agreement and each Certificateholder, by
accepting a Certificate, hereby covenant and agree that they will
not at any time institute against the Company or the Trust, or
join in any institution against the Company or the Trust of, any
bankruptcy proceedings under any United States federal or state
bankruptcy or similar law in connection with any obligations to
the Certificates, the Bonds, this Trust Agreement or any of the
Basic Documents. This Section shall survive for one year
following the termination of this Trust Agreement.
Section 10.09. No Recourse. Each Certificateholder by
accepting a Certificate acknowledges that such Certificate-
holder's Certificates represent beneficial interests in the Trust
only and do not represent interests in or obligations of the
Company, the Seller, the Owner Trustee, the Indenture Trustee or
any Affiliate thereof and no recourse may be had against such
parties or their assets, except as may be expressly set forth or
contemplated in this Trust Agreement, the Certificates or the
Basic Documents.
Section 10.10. Headings. The headings of the various
Articles and Sections herein are for convenience of reference
only and shall not define or limit any of the terms or provisions
hereof.
Section 10.11. Governing Law. THIS TRUST AGREEMENT SHALL
BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS,
AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.12. Integration. This Trust Agreement consti-
tutes the entire agreement among the parties hereto pertaining to
the subject matter hereof and supersedes all prior agreements and
understanding pertaining thereto.
<PAGE>
Section 10.13. Third Party Beneficiary. The Bond Insurer
shall be a third party beneficiary hereof and shall be entitled
to enforce the provisions hereof as if a party hereto. This
provision shall not be construed to limit or modify in any way
the fiduciary obligation of the Owner Trustee to the beneficial
owners of the Trust.
IN WITNESS WHEREOF, the Company and the Owner Trustee have
caused their names to be signed hereto by their respective
officers thereunto duly authorized, all as of the day and year
first above written.
NOVASTAR MORTGAGE FUNDING CORPORATION, as Company,
By:
Name:
Title:
WILMINGTON TRUST COMPANY, as Owner Trustee,
By:
Name:
Title:
Acknowledged and Agreed:
FIRST UNION NATIONAL BANK,
as Certificate Registrar
and Certificate Paying Agent
By:
Name:
Title:
<PAGE>
EXHIBIT A
[Form of Certificate]
[Face]
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 TRANS-
FERRED IN TRANSACTIONS WHICH ARE EXEMPT FROM REGISTRATION UNDER
SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN
ACCORDANCE WITH THE PROVISIONS OF SECTION 3.05 OF THE TRUST
AGREEMENT REFERRED TO HEREIN.
NO TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS THE CERTIFI-
CATE REGISTRAR SHALL HAVE RECEIVED EITHER (i) A REPRESENTATION
LETTER FROM THE TRANSFEREE OF THIS CERTIFICATE TO THE EFFECT THAT
SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO THE
FIDUCIARY RESPONSIBILITY PROVISIONS OF THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION
4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), OR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR USING
THE ASSETS OF ANY SUCH PLAN, OR (ii) IF THIS CERTIFICATE IS
PRESENTED FOR REGISTRATION IN THE NAME OF A PLAN SUBJECT TO THE
FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA, OR SECTION 4975 OF
THE CODE (OR COMPARABLE PROVISIONS OF ANY SUBSEQUENT ENACTMENTS),
OR A TRUSTEE OF ANY SUCH PLAN, OR ANY OTHER PERSON WHO IS USING
THE ASSETS OF ANY SUCH PLAN TO EFFECT SUCH ACQUISITION, AN
OPINION OF COUNSEL TO THE EFFECT THAT THE PURCHASE OR HOLDING OF
THIS CERTIFICATE WILL NOT RESULT IN THE ASSETS OF THE OWNER TRUST
ESTATE BEING DEEMED TO BE "PLAN ASSETS" AND SUBJECT TO THE
FIDUCIARY RESPONSIBILITY PROVISIONS OF ERISA OR THE PROHIBITED
TRANSACTION PROVISIONS OF THE CODE, WILL NOT CONSTITUTE OR RESULT
IN A PROHIBITED TRANSACTION WITHIN THE MEANING OF SECTION 406 OR
SECTION 407 OF ERISA OR SECTION 4975 OF THE CODE, AND WILL NOT
SUBJECT THE OWNER TRUSTEE OR THE COMPANY TO ANY OBLIGATION OR
LIABILITY.
NO TRANSFER OF THIS CERTIFICATE SHALL BE MADE UNLESS THE CERTIFI-
CATE REGISTRAR SHALL HAVE RECEIVED A CERTIFICATE OF NON-FOREIGN
STATUS CERTIFYING AS TO THE TRANSFEREE'S STATUS AS A U.S. PERSON
OR CORPORATION UNDER U.S. LAW.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE SELLER, THE COMPANY, THE SERVICER, THE INDENTURE TRUSTEE,
OR THE <PAGE> OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES,
EXCEPT AS EXPRESSLY PROVIDED IN THE TRUST AGREEMENT OR THE BASIC
DOCUMENTS.
<PAGE>
Certificate No. ______________________
Certificate Percentage Interest of this Certificate: _______%
Cut-off Date: __________________
First Payment Date
________________
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES
Evidencing a fractional undivided equity interest in the
Owner Trust Estate, the property of which consists primarily of
the Mortgage Loans in NovaStar Mortgage Funding Trust, Series
1998-2 (the "Trust"), a Delaware business trust formed by
NOVASTAR MORTGAGE FUNDING CORPORATION, as Company, pursuant to
the Trust Agreement referred to below.
This certifies that [name of holder] is the registered owner
of the Certificate Percentage Interest represented hereby.
The Trust was created pursuant to a Trust Agreement, dated
as of August 1, 1998, as amended and restated by the Amended and
Restated Trust Agreement, dated as of August 19, 1998 (as amended
and supplemented from time to time, the "Trust Agreement"),
between the Company and Wilmington Trust Company, as owner
trustee (as amended and supplemented from time to time, the
"Owner Trustee", which term includes any successor entity under
the Trust Agreement), a summary of certain of the pertinent
provisions of which is set forth hereinafter. This Certificate
is issued under and is subject to the terms, provisions and con-
ditions of the Trust Agreement, to which Trust Agreement the
holder of this Certificate by virtue of the acceptance hereof
assents and by which such holder is bound.
This Certificate is one of a duly authorized issue of
NovaStar Mortgage Funding Trust, Series 1998-2 Home Equity Loan
Asset-Backed Certificates (herein called the "Certificates")
issued under the Trust Agreement to which reference is hereby
made for a statement of the respective rights thereunder of the
Company, the Owner Trustee and the holders of the Certificates
and the terms upon which the Certificates are executed and
delivered. All terms used in this Certificate which are defined
in the Trust Agreement shall have the meanings assigned to them
in the Trust Agreement. The Owner Trust Estate consists of the
Mortgage Loans in the NovaStar Mortgage Funding Trust, Series
1998-2, the CAP Agreements and the other assets referred to in
Section 2.05 of the Trust Agreement. The rights of the holders
of the Certificates are subordinated to the rights of the holders
of the Bonds, as set forth in the Indenture.
<PAGE>
There will be distributed on the 25th day of each month or,
if such 25th day is not a Business Day, the next Business Day
(each, a "Payment Date"), commencing in September 1998, to the
Person in whose name this Certificate is registered (i) with
respect to the first Payment Date, on the Closing Date and (ii)
with respect to every other Payment Date, at the close of
business on the last Business Day of the month preceding the
month of such Payment Date (the "Record Date"), such Certif-
icateholder's Certificate Percentage Interest in the amount to be
distributed to Certificateholders on such Payment Date.
The Certificateholder, by its acceptance of this Certifi-
cate, agrees that it will look solely to the funds on deposit in
the Payment Account that have been released from the Lien of the
Indenture for payment hereunder and that neither the Owner
Trustee in its individual capacity nor the Company is personally
liable to the Certificateholders for any amount payable under
this Certificate or the Trust Agreement or, except as expressly
provided in the Trust Agreement, subject to any liability under
the Trust Agreement.
The Holder of this Certificate acknowledges and agrees that
its rights to receive distributions in respect of this Certifi-
cate are subordinated to the rights of the Bondholders as
described in the Indenture, dated as of August 1, 1998, between
the Trust and First Union National Bank, as Indenture Trustee
(the "Indenture").
The Company and each Certificateholder, by acceptance of a
Certificate, agree to treat, and to take no action inconsistent
with the treatment of, the Certificates for federal, state and
local income tax purposes as an equity interest in the Trust.
Each Certificateholder, by its acceptance of a Certificate,
covenants and agrees that such Certificateholder will not at any
time institute against the Company, or join in any institution
against the Company or the Trust of, any bankruptcy, reorgani-
zation, arrangement, insolvency or liquidation proceedings, or
other proceedings under any United States federal or state
bankruptcy or similar law in connection with any obligations
relating to the Certificates, the Bonds, the Trust Agreement or
any of the Basic Documents.
Distributions on this Certificate will be made as provided
in the Trust Agreement by the Certificate Paying Agent by wire
transfer or check mailed to the Certificateholder of record in
the Certificate Register without the presentation or surrender of
this Certificate or the making of any notation hereon. Except as
otherwise provided in the Trust Agreement and notwithstanding the
above, the final distribution on this Certificate will be made
after due notice by the Certificate Paying Agent of the pendency
of such distribution and only upon presentation and surrender of
this Certificate at the office or agency maintained by the
Certificate Registrar for that purpose by the Trust in the
Borough of Manhattan, The City of New York.
Reference is hereby made to the further provisions of this
Certificate set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set
forth at this place.
Unless the certificate of authentication hereon shall have
been executed by an authorized officer of the Owner Trustee, or
an authenticating agent by manual signature, this Certificate
shall not entitle the holder hereof to any benefit under the
Trust Agreement or be valid for any purpose.
<PAGE>
THIS CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS CONFLICT
OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF
THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH
LAWS.
<PAGE>
IN WITNESS WHEREOF, the Owner Trustee, on behalf of the
Trust and not in its individual capacity, has caused this
Certificate to be duly executed.
WILMINGTON TRUST COMPANY, not in its individual
capacity but solely as Owner Trustee
Dated: By:
Authorized Signatory
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the
within-mentioned Trust Agreement.
WILMINGTON TRUST COMPANY, not in its individual
capacity but solely as Owner Trustee
By:
Authorized Signatory
or
As Authenticating Agent of the Trustee
By:
Authorized Signatory
<PAGE>
[REVERSE OF CERTIFICATE]
The Certificates do not represent an obligation of, or an
interest in, the Company, the Seller, the Servicer, the Indenture
Trustee, the Owner Trustee, the Bond Insurer or any Affiliates of
any of them and no recourse may be had against such parties or
their assets, except as expressly set forth or contemplated
herein or in the Trust Agreement or the Basic Documents. In
addition, this Certificate is not guaranteed by any governmental
agency or instrumentality and is limited in right of payment to
certain collections and recoveries with respect to the Mortgage
Loans, all as more specifically set forth herein and in the Trust
Agreement. A copy of the Trust Agreement may be examined by any
Certificateholder upon written request during normal business
hours at the principal office of the Company and at such other
places, if any, designated by the Company.
The Trust Agreement permits the amendment thereof as speci-
fied below, provided that any amendment be accompanied by the
consent of the Bond Insurer and an Opinion of Counsel to the
Owner Trustee to the effect that such amendment complies with the
provisions of the Trust Agreement and, if NovaStar Certificates
Financing Corporation was not the holder of 100% of the
Certificates, would not cause the Trust to be subject to an
entity level tax. If the purpose of the amendment is to correct
any mistake, eliminate any inconsistency, cure any ambiguity or
deal with any matter not covered, it shall not be necessary to
obtain the consent of any Certificateholder, but the Owner
Trustee shall be furnished with (A) a letter from each of the
Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to any Bond
or the rating then assigned to any Bond without taking into
account the Bond Insurance Policy or (B) an Opinion of Counsel to
the effect that such action will not adversely affect in any
material respect the interests of any Certificateholders, and the
consent of the Bond Insurer shall be obtained. If the purpose of
the amendment is to prevent the imposition of any federal or
state taxes at any time that any Security is outstanding, it
shall not be necessary to obtain the consent of the any
Certificateholder, but the Owner Trustee shall be furnished with
an Opinion of Counsel that such amendment is necessary or helpful
to prevent the imposition of such taxes and is not materially
adverse to any Certificateholder and the consent of the Bond
Insurer shall be obtained. If the purpose of the amendment is to
add or eliminate or change any provision of the Trust Agreement,
other than as specified in the preceding two sentences, the
amendment shall require (A) an Opinion of Counsel to the effect
that such action will not adversely affect in any material
respect the interests of any Certificateholders, (B) the consent
of the Bond Insurer and (C) either (a) a letter from each of the
Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to any Bond
or the rating then assigned to any Bond without taking into
account the Bond Insurance Policy or (b) the consent of the
Indenture Trustee and the holders of the Certificates evidencing
a majority of the Certificate Principal Balance of the
Certificates; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing of, pay-
ments received that are required to be distributed on any Certif-
icate without the consent of the related Certificateholder and
the Bond Insurer, or (ii) reduce the aforesaid percentage of
Certificates the holders of which are required to consent to any
such amendment without the consent of the holders of all such
Certificates then outstanding.
As provided in the Trust Agreement and subject to certain
limitations therein set forth, the transfer of this Certificate
is registerable in the Certificate Register upon surrender of
this Certificate <PAGE> for registration of transfer at the offices or
agencies of the Certificate Registrar maintained by the Trust,
accompanied by a written instrument of transfer in form
satisfactory to 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 authorized
denominations evidencing the same aggregate interest in the Trust
will be issued to the designated transferee. The initial
Certificate Registrar appointed under the Trust Agreement is
First Union National Bank.
Except as provided in the Trust Agreement, the Certificates
are issuable only in a minimum Certificate Percentage Interest of
10%. As provided in the Trust Agreement and subject to certain
limitations therein set forth, Certificates are exchangeable for
new Certificates of authorized denominations evidencing the same
aggregate denomination, as requested by the Certificateholder
surrendering the same. No service charge will be made for any
such registration of transfer or exchange, but the Owner Trustee
or the Certificate Registrar may require payment of a sum
sufficient to cover any tax or governmental charge payable in
connection therewith.
The Owner Trustee, the Certificate Paying Agent, the Certif-
icate Registrar and any agent of the Owner Trustee, the Certifi-
cate Paying Agent, 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 Owner Trustee, the
Certificate Paying Agent, the Certificate Registrar or any such
agent shall be affected by any notice to the contrary.
The obligations and responsibilities created by the Trust
Agreement and the Trust created thereby shall terminate as and
when provided in accordance with the terms of the Trust
Agreement.
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
_________________________________________________________________
(Please print or type name and address, including postal zip
code, of assignee)
_________________________________________________________________
the within Certificate, and all rights thereunder, hereby
irrevocably constituting and appointing
_________________________________________________________________
to transfer said Certificate on the books of the Certificate
Registrar, with full power of substitution in the premises.
Dated:
___________________________________________*/
Signature Guaranteed:
____________________________*/
_________________
*/ NOTICE: The signature to this assignment must correspond
with the name as it appears upon the face of the within
Certificate in every particular, without alteration, enlargement
or any change whatever. Such signature must be guaranteed by a
member firm of the New York Stock Exchange or a commercial bank
or trust company.
<PAGE>
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the infor-
mation of the Certificate Paying Agent:
Distribution shall be made by wire transfer in immediately
available funds to ______________________________________________
_________________________________________________________________
for the account of ________________________________________,
account number ______________, or, if mailed by check, to
______________.
Applicable statements should be mailed to__________________.
______________________________
Signature of assignee or agent
(for authorization of wire
transfer only)
<PAGE>
EXHIBIT B
TO THE TRUST AGREEMENT
CERTIFICATE OF TRUST OF
NovaStar Mortgage Funding Trust, Series 1998-2
THIS Certificate of Trust of NovaStar Mortgage Funding
Trust, Series 1998-2 (the "Trust"), dated August __, 1998, is
being duly executed and filed by ______________________, a
Delaware banking corporation, as trustee, to form a business
trust under the Delaware Business Trust Act (12 Del. Code, Section 3801
et seq.).
1. Name. The name of the business trust formed
hereby is NovaStar Mortgage Funding Trust, Series 1998-2.
2. Delaware Trustee. The name and business address
of the trustee of the Trust in the State of Delaware is
______________________, __________________, __________,
______________, Attention: ______________________________.
IN WITNESS WHEREOF, the undersigned, being the sole
trustee of the Trust, has executed this Certificate of Trust as
of the date first above written.
______________________,
not in its individual capacity but solely
as owner trustee under a Trust Agreement
dated as of August 1, 1998
By:
_______________________________
Name:
Title:
<PAGE>
EXHIBIT C
[FORM OF RULE 144A INVESTMENT REPRESENTATION]
Description of Rule 144A Securities, including numbers:
_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
The undersigned seller, as registered holder (the
"Seller"), intends to transfer the Rule 144A Securities described
above to the undersigned buyer (the "Buyer").
1. In connection with such transfer and in accordance
with the agreements pursuant to which the Rule 144A Securities
were issued, the Seller hereby certifies the following facts:
Neither the Seller nor anyone acting on its behalf has offered,
transferred, pledged, sold or otherwise disposed of the Rule 144A
Securities, any interest in the Rule 144A Securities or any other
similar security to, or solicited any offer to buy or accept a
transfer, pledge or other disposition of the Rule 144A Securi-
ties, any interest in the Rule 144A Securities or any other
similar security from, or otherwise approached or negotiated with
respect to the Rule 144A Securities, any interest in the Rule
144A Securities or any other similar security with, any person in
any manner, or made any general solicitation by means of general
advertising or in any other manner, or taken any other action,
that would constitute a distribution of the Rule 144A Securities
under the Securities Act of 1933, as amended (the "1933 Act"), or
that would render the disposition of the Rule 144A Securities a
violation of Section 5 of the 1933 Act or require registration
pursuant thereto, and that the Seller has not offered the Rule
144A Securities to any person other than the Buyer or another
"qualified institutional buyer" as defined in Rule 144A under the
1933 Act.
2. The Buyer warrants and represents to, and covenants
with, the Owner Trustee and the Company (each as defined in the
Amended and Restated Trust Agreement (the "Agreement"), dated as
of August 19, 1998, between NovaStar Mortgage Funding
Corporation, as Company, and Wilmington Trust Company, as Owner
Trustee) pursuant to Section 3.05 of the Agreement and
__________________________________ as indenture trustee, as
follows:
a. The Buyer understands that the Rule 144A
Securities have not been registered under the 1933 Act or
the securities laws of any state.
b. The Buyer considers itself a substantial,
sophisticated institutional investor having such knowledge
and experience in financial and business matters that it is
capable of evaluating the merits and risks of investment in
the Rule 144A Securities.
<PAGE>
c. The Buyer has been furnished with all informa-
tion regarding the Rule 144A Securities that it has request-
ed from the Seller, the Indenture Trustee, the Owner Trustee
or the Servicer.
d. Neither the Buyer nor anyone acting on its
behalf has offered, transferred, pledged, sold or otherwise
disposed of the Rule 144A Securities, any interest in the
Rule 144A Securities or any other similar security to, or
solicited any offer to buy or accept a transfer, pledge or
other disposition of the Rule 144A Securities, any interest
in the Rule 144A Securities or any other similar security
from, or otherwise approached or negotiated with respect to
the Rule 144A Securities, any interest in the Rule 144A
Securities or any other similar security with, any person in
any manner, or made any general solicitation by means of
general advertising or in any other manner, or taken any
other action, that would constitute a distribution of the
Rule 144A Securities under the 1933 Act or that would render
the disposition of the Rule 144A Securities a violation of
Section 5 of the 1933 Act or require registration pursuant
thereto, nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with respect to
the Rule 144A Securities.
e. The Buyer is a "qualified institutional buyer"
as that term is defined in Rule 144A under the 1933 Act and
has completed either of the forms of certification to that
effect attached hereto as Annex 1 or Annex 2. The Buyer is
aware that the sale to it is being made in reliance on Rule
144A. The Buyer is acquiring the Rule 144A Securities for
its own account or the accounts of other qualified institu-
tional buyers, understands that such Rule 144A Securities
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 regis-
tration under the 1933 Act.
[3. The Buyer warrants and represents to, and
covenants with, the Seller, the Indenture Trustee, Owner Trustee,
Servicer and the Company that either (1) the Buyer is (A) not an
employee benefit plan (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA")), or a plan (within the meaning of Section 4975(e)(1)
of the Internal Revenue Code of 1986 ("Code")), which (in either
case) is subject to ERISA or Section 4975 of the Code (both a
"Plan"), and (B) is not directly or indirectly purchasing the
Rule 144A Securities on behalf of, as investment manager of, as
named fiduciary of, as trustee of, or with "plan assets" of a
Plan, or (2) the Buyer understands that registration of transfer
of any Rule 144A Securities to any Plan, or to any Person acting
on behalf of any Plan, will not be made unless such Plan delivers
an opinion of its counsel, addressed and satisfactory to the
Certificate Registrar and the Company, to the effect that the
purchase and holding of the Rule 144A Securities by, on behalf of
or with "plan assets" of any Plan would not constitute or result
in a prohibited transaction under Section 406 of ERISA or Section
4975 of the Code, and would not subject the Company, the
Servicer, the Indenture Trustee or the Trust to any obligation or
liability (including liabilities under ERISA or Section 4975 of
the Code) in addition to those undertaken in the Agreement or any
other liability.]
<PAGE>
4. This document may be executed in one or more
counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to
be an original; such counterparts, together, shall constitute one
and the same document.
Capitalized terms used herein and not otherwise defined
herein have the meanings assigned to them in the Agreement.
IN WITNESS WHEREOF, each of the parties has executed
this document as of the date set forth below.
___________________________ _____________________________
Print Name of Seller Print Name of Buyer
By: _______________________ By:__________________________
Name: Name:
Title: Title:
Taxpayer Identification: Taxpayer Identification:
No. ________________________ No. __________________________
Date: _____________________ Date: ________________________
<PAGE>
ANNEX 1 TO EXHIBIT C
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Buyers Other Than Registered Investment Companies]
The undersigned hereby certifies as follows in connection with
the Rule 144A Investment Representation to which this
Certification is attached:
1. As indicated below, the undersigned is the President,
Chief Financial Officer, Senior Vice President or other executive
officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer
is a "qualified institutional buyer" as that term is defined in
Rule 144A under the Securities Act of 1933 ("Rule 144A") because
(i) the Buyer 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 Buyer's most
recent fiscal year (such amount being calculated in accordance
with Rule 144A) and (ii) the Buyer satisfies the criteria in the
category marked below.
___ Corporation, etc. The Buyer is a corporation (other than
a bank, savings and loan association or similar
institution), Massachusetts or similar business trust,
partnership, or charitable organization described in
Section 501(c)(3) of the Internal Revenue Code.
___ Bank. The Buyer (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.
1/ Buyer must own and/or invest on a discretionary basis at least
$100,000,000 in securities unless Buyer is a dealer, and, in that
case, Buyer must own and/or invest on a discretionary basis at least
$10,000,000 in securities.
<PAGE>
___ Savings and Loan. The Buyer (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 at least $25,000,000 as demonstrated in its latest
annual financial statements.
___ Broker-Dealer. The Buyer is a dealer registered pursuant
to Section 15 of the Securities Exchange Act of 1934.
___ Insurance Company. The Buyer 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 or territory or the
District of Columbia.
___ State or Local Plan. The Buyer 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 Buyer is an employee benefit plan within
the meaning of Title I of the Employee Retirement Income
Security Act of 1974.
___ Investment Adviser. The Buyer is an investment adviser
registered under the Investment Advisers Act of 1940.
___ SBIC. The Buyer is a Small Business Investment Company
licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment
Act of 1958.
___ Business Development Company. The Buyer is a business
development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940.
___ Trust Fund. The Buyer is a trust fund whose trustee is a
bank or trust company and whose participants are
exclusively (a) plans 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, or
(b) employee benefit plans within the meaning of Title I
of the Employee Retirement Income Security Act of 1974,
but is not a trust fund that includes as participants
individual retirement accounts or H.R. 10 plans.
3. The term "securities" as used herein does not
include (i) securities of issuers that are affiliated with the
Buyer, (ii) securities that are part of an unsold allotment to or
subscription by the Buyer, if the Buyer is a dealer, (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.
<PAGE>
4. For purposes of determining the aggregate amount
of securities owned and/or invested on a discretionary basis by
the Buyer, the Buyer used the cost of such securities to the
Buyer and did not include any of the securities referred to in
the preceding paragraph. Further, in determining such aggregate
amount, the Buyer may have included securities owned by
subsidiaries of the Buyer, but only if such subsidiaries are
consolidated with the Buyer in its financial statements prepared
in accordance with generally accepted accounting principles and
if the investments of such subsidiaries are managed under the
Buyer's direction. However, such securities were not included if
the Buyer is a majority-owned, consolidated subsidiary of another
enterprise and the Buyer is not itself a reporting company under
the Securities Exchange Act of 1934.
5. The Buyer acknowledges that it is familiar with
Rule 144A and understands that the seller to it 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
Buyer may be in reliance on Rule 144A.
___ ___ Will the Buyer be purchasing the Rule 144A
Yes No Securities only for the Buyer's own account?
6. If the answer to the foregoing question is "no",
the Buyer agrees that, in connection with any purchase of
securities sold to the Buyer for the account of a third party
(including any separate account) in reliance on Rule 144A, the
Buyer 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 Buyer agrees that the Buyer will
not purchase securities for a third party unless the Buyer 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 Buyer 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 Buyer's
purchase of Rule 144A Securities will constitute a reaffirmation
of this certification as of the date of such purchase.
________________________________________
Print Name of Buyer
By: ____________________________________
Name:
Title:
Date: _____________________
<PAGE>
ANNEX 2 TO EXHIBIT C
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Buyers That Are Registered Investment Companies]
The undersigned hereby certifies as follows in
connection with the Rule 144A Investment Representation to which
this Certification is attached:
1. As indicated below, the undersigned is the
President, Chief Financial Officer or Senior Vice President of
the Buyer or, if the Buyer is a "qualified institutional buyer"
as that term is defined in Rule 144A under the Securities Act of
1933 ("Rule 144A") because Buyer is part of a Family of
Investment Companies (as defined below), is such an officer of
the Adviser.
2. In connection with purchases by Buyer, the Buyer is
a "qualified institutional buyer" as defined in SEC Rule 144A
because (i) the Buyer is an investment company registered under
the Investment Company Act of 1940, and (ii) as marked below, the
Buyer alone, or the Buyer'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 Buyer's most
recent fiscal year. For purposes of determining the amount of
securities owned by the Buyer or the Buyer's Family of
Investment Companies, the cost of such securities was used.
____ The Buyer owned $___________________ in securities
(other than the excluded securities referred to below)
as of the end of the Buyer's most recent fiscal year
(such amount being calculated in accordance with
Rule 144A).
____ The Buyer 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 Buyer'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
Buyer or are part of the Buyer's Family of Investment Companies,
(ii) bank deposit notes and certificates of deposit, (iii) loan
participations, (iv) repurchase agreements, (v) securities owned
but subject to a repurchase agreement and (vi) currency, interest
rate and commodity swaps.
5. The Buyer is familiar with Rule 144A and
understands that each of the parties to which this certification
is made are relying and will continue to rely on the statements
made herein <PAGE> because one or more sales to the Buyer will be in
reliance on Rule 144A. In addition, the Buyer will only purchase
for the Buyer's own account.
6. The undersigned will notify each of the parties to
which this certification is made of any changes in the
information and conclusions herein. Until such notice, the
Buyer's purchase of Rule 144A Securities will constitute a
reaffirmation of this certification by the undersigned as of the
date of such purchase.
_________________________________
Print Name of Buyer
By: ____________________________
Name:
Title:
IF AN ADVISER:
_________________________________
Print Name of Buyer
Date: ____________________
<PAGE>
EXHIBIT D
FORM OF INVESTOR REPRESENTATION LETTER
, 19
NovaStar Mortgage Funding Corporation
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
First Union National Bank
230 S. Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Attention: Corporate Trust Administration
Re: NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Certificates (the
"Certificates")
Ladies and Gentlemen:
___________________ (the "Purchaser") intends to
purchase from _____________________ (the "Seller") $___________
of the above -captioned Certificates, issued pursuant to the
Amended and Restated Trust Agreement (the "Trust Agreement"),
dated as of August 19, 1998, between NovaStar Mortgage Funding
Corporation, as company (the "Company"), and Wilmington Trust
Company, as owner trustee (the "Owner Trustee"), as acknowledged
and agreed by First Union National Bank as Certificate Registrar.
All terms used herein and not otherwise defined shall have the
meanings set forth in the Trust Agreement. The Purchaser hereby
certifies, represents and warrants to, and covenants with, the
Company and the Certificate Registrar that:
1. The Purchaser understands that (a) the
Certificates have not been and will not be registered
or qualified under the Securities Act of 1933, as
amended (the "Act") or any state securities law, (b)
the Company is not required to so register or qualify
the Certificates, (c) the Certificates may be resold
only if registered and qualified pursuant to the
provisions of the Act or any state securities law, or
if an exemption from such registration and
qualification is available, (d) the Trust Agreement
contains restrictions regarding the transfer of the
Certificates and (e) the Certificates will bear a
legend to the foregoing effect.
<PAGE>
2. The Purchaser is acquiring the Certificates
for its own account for investment only and not with a
view to or for sale in connection with any distribution
thereof in any manner that would violate the Act or any
applicable state securities laws.
3. The Purchaser is (a) a substantial,
sophisticated institutional investor having such
knowledge and experience in financial and business
matters, and, in particular, in such matters related to
securities similar to the Certificates, such that it is
capable of evaluating the merits and risks of
investment in the Certificates, (b) able to bear the
economic risks of such an investment and (c) an
"accredited investor" within the meaning of Rule 501(a)
promulgated pursuant to the Act.
4. The Purchaser has been furnished with, and
has had an opportunity to review (a) a copy of the
Trust Agreement and (b) such other information
concerning the Certificates, the Mortgage Loans and the
Company as has been requested by the Purchaser from the
Company or the Seller and is relevant to the
Purchaser's decision to purchase the Certificates. The
Purchaser has had any questions arising from such
review answered by the Company or the Seller to the
satisfaction of the Purchaser.
5. The Purchaser has not and will not nor has it
authorized or will it authorize any person to (a)
offer, pledge, sell, dispose of or otherwise transfer
any Certificate, any interest in any Certificate or any
other similar security to any person in any manner, (b)
solicit any offer to buy or to accept a pledge,
disposition of other transfer of any Certificate, any
interest in any Certificate or any other similar
security from any person in any manner, (c) otherwise
approach or negotiate with respect to any Certificate,
any interest in any Certificate or any other similar
security with any person in any manner, (d) make any
general solicitation by means of general advertising or
in any other manner or (e) take any other action, that
(as to any of (a) through (e) above) would constitute a
distribution of any Certificate under the Act, that
would render the disposition of any Certificate a
violation of Section 5 of the Act or any state
securities law, or that would require registration or
qualification pursuant thereto. The Purchaser will not
sell or otherwise transfer any of the Certificates,
except in compliance with the provisions of the Trust
Agreement.
6. The Purchaser represents:
(i) that either (a) or (b) is satisfied, as marked below:
____ a. The Purchaser is not any employee
benefit plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986 (the "Code"), a 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. Section 2510.3-101; or
____ b. The Purchaser will provide the Company,
the Owner Trustee, the Certificate Registrar and the
Servicer with either: (x) an opinion of counsel,
satisfactory <PAGE> to the Company, the Owner Trustee, the
Certificate Registrar and the Servicer, to the effect that
the purchase and holding of a Certificate by or on behalf of
the Purchaser is permissible under applicable law, will not
constitute or result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code (or
comparable provisions of any subsequent enactments) and will
not subject the Company, the Owner Trustee, the Trust, the
Certificate Registrar or the Servicer to any obligation or
liability (including liabilities under ERISA or Section 4975
of the Code) in addition to those undertaken in the Trust
Agreement, which opinion of counsel shall not be an expense
of the Company, the Owner Trustee, the Trust, the
Certificate Registrar or the Servicer; or (y) in lieu of
such opinion of counsel, a certification in the form of
Exhibit G to the Trust Agreement; and
(ii) the Purchaser is familiar with the prohibited
transaction restrictions and fiduciary responsibility
requirements of Sections 406 and 407 of ERISA and Section
4975 of the Code and understands that each of the parties to
which this certification is made is relying and will
continue to rely on the statements made in this paragraph 6.
7. The Purchaser is not a non-United States
person.
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT E
FORM OF TRANSFEROR REPRESENTATION LETTER
______________, 19___
NovaStar Mortgage Funding Corporation
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
First Union National Bank
230 S. Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Attention: Corporate Trust Administration
Re: NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Certificates (the
"Certificates")
Ladies and Gentlemen:
________________________________ (the "Purchaser")
intends to purchase from ______________________(the "Seller") a
___% Certificate Percentage Interest of NovaStar Mortgage Funding
Trust, Series 1998-2 Home Equity Loan Asset-Backed Certificates
(the "Certificates"), issued pursuant to the Amended and Restated
Trust Agreement (the "Trust Agreement"), dated as of August 19,
1998 between NovaStar Mortgage Funding Corporation, as company
(the "Company"), and Wilmington Trust Company, as owner trustee
(the "Owner Trustee"), as acknowledged and agreed by First Union
National Bank, as Certificate Registrar. All terms used herein
and not otherwise defined shall have the meanings set forth in
the Trust Agreement. The Seller hereby certifies, represents and
warrants to, and covenants with, the Company and the Certificate
Registrar that:
Neither the Seller 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, or (e) has taken any other action, that (as to any of (a)
through (e) above) would constitute a <PAGE> distribution of the
Certificates under the Securities Act of 1933 (the "Act"), that
would render the disposition of any Certificate a violation of
Section 5 of the Act or any state securities law, or that would
require registration or qualification pursuant thereto. The
Seller will not act, in any manner set forth in the foregoing
sentence with respect to any Certificate. The Seller has not and
will not sell or otherwise transfer any of the Certificates,
except in compliance with the provisions of the Trust Agreement.
Very truly yours,
(Seller)
By:
Name:
Title:
<PAGE>
EXHIBIT F
CERTIFICATE OF NON-FOREIGN STATUS
This Certificate of Non-Foreign Status ("certificate") is
delivered pursuant to Section 3.05 of the Amended and Restated
Trust Agreement, dated as of August 19, 1998 (the "Trust
Agreement"), between NovaStar Mortgage Funding Corporation, as
Company, and Wilmington Trust Company, as Owner Trustee, in
connection with the acquisition of, transfer to or possession by
the undersigned, whether as beneficial owner (the "Beneficial
Owner"), or nominee on behalf of the Beneficial Owner of the
NovaStar Mortgage Funding Trust, Series 1998-2 Home Equity Loan
Asset-Backed Certificates (the "Certificate"). Capitalized terms
used but not defined in this certificate have the respective
meanings given them in the Trust Agreement.
Each holder must complete Part I, Part II (if the holder is a
nominee), and in all cases sign and otherwise complete Part III.
In addition, each holder shall submit with the Certificate an IRS
Form W-9 relating to such holder.
To confirm to the Trust that the provisions of Sections 871, 881
or 1446 of the Internal Revenue Code (relating to withholding tax
on foreign partners) do not apply in respect of the Certificate
held by the undersigned, the undersigned hereby certifies:
Part I - Complete Either A or B
A. Individual as Beneficial Owner
1. I am (The Beneficial Owner is ) not a non-
resident alien for purposes of U.S. income
taxation;
2. My (The Beneficial Owner's) name and home
address are:
; and
3. My (The Beneficial Owner's) U.S. taxpayer
identification number (Social Security
Number) is .
B. Corporate, Partnership or Other Entity as
Beneficial Owner
1. (Name of the
Beneficial Owner) is not a foreign
corporation, foreign partnership, foreign
trust or foreign estate (as those terms are
defined in the Code and Treasury Regulations;
<PAGE>
2. The Beneficial Owner's office address and
place of incorporation (if applicable) is
; and
3. The Beneficial Owner's U.S. employer
identification number is .
Part II - Nominees
If the undersigned is the nominee for the Beneficial Owner,
the undersigned certifies that this certificate has been made in
reliance upon information contained in:
an IRS Form W-9
a form such as this or substantially similar
provided to the undersigned by an appropriate person and (i) the
undersigned agrees to notify the Trust at least thirty (30) days
prior to the date that the form relied upon becomes obsolete, and
(ii) in connection with change in Beneficial Owners, the
undersigned agrees to submit a new Certificate of Non-Foreign
Status to the Trust promptly after such change.
Part III - Declaration
The undersigned, as the Beneficial Owner or a nominee
thereof, agrees to notify the Trust within sixty (60) days of the
date that the Beneficial Owner becomes a foreign person. The
undersigned understands that this certificate may be disclosed to
the Internal Revenue Service by the Trust and any false statement
contained therein could be punishable by fines, imprisonment or
both.
<PAGE>
Under penalties of perjury, I declare that I have examined
this certificate and to the best of my knowledge and belief it is
true, correct and complete and will further declare that I will
inform the Trust of any change in the information provided above,
and, if applicable, I further declare that I have the authority*
to sign this document.
Name
Title (if applicable)
Signature and Date
*NOTE: If signed pursuant to a power of attorney, the power of
attorney must accompany this certificate.
<PAGE>
EXHIBIT G
FORM OF ERISA REPRESENTATION LETTER
_____________, 199__
NovaStar Mortgage Funding Corporation
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
Wilmington Trust Company, as Owner Trustee
1100 North Market Street
Rodney Square North
Wilmington, Delaware 19890
First Union National Bank, as Certificate Registrar
230 S. Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Re: NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Certificates
Dear Sirs:
__________________________________ (the "Transferee")
intends to acquire from _____________________ (the "Transferor")
a ____% Certificate Percentage Interest of NovaStar Mortgage
Funding Trust, Series 1998-2 Home Equity Loan Asset-Backed
Certificates (the "Certificates"), issued pursuant to an Amended
and Restated Trust Agreement (the "Trust Agreement"), dated as of
August 19, 1998, between NovaStar Mortgage Funding Corporation,
as company (the "Company"), and Wilmington Trust Company, as
owner trustee (the "Owner Trustee"). Capitalized terms used
herein and not otherwise defined shall have the meanings assigned
thereto in the Trust Agreement.
The Transferee hereby certifies, represents and warrants to,
and covenants with, the Company, the Owner Trustee, the
Certificate Registrar and the Servicer that either:
(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 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 <PAGE> Labor ("DOL") regulation, 29
C.F.R. Section 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, 29 C.F.R. Section
2510.3-101; or
(2) The purchase of the 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 Company, the Owner Trustee, the
Certificate Registrar or the Servicer to any obligation in
addition to those undertaken in the Trust Agreement and,
with respect to each source of funds being used by the
Transferee to acquire the Certificates (each being referred
to as a "Source") and the following statements in either (a)
or (b):
(a) the Transferee is an insurance company and
(i) the Source is assets of its "general account," (ii)
the conditions set forth in PTCE 95-60 issued by the
DOL have been satisfied and the purchase and holding of
Certificates by or on behalf of the Transferee are
exempt under PTCE 95-60 and (iii) the amount of
reserves and liabilities for such general account
contracts held by or on behalf of any Plan do not
exceed 10% of the total reserves and liabilities of
such general account plus surplus as of the date hereof
(for purposes of this clause, all Plans maintained by
the same employer (or affiliate thereof) or employee
organization are deemed to be a single Plan) in
connection with its purchase and holding of such
Certificates; or
(b) the Transferee is an insurance company and
(i) the Source is assets of its "general account," (ii)
the requirements of Section 401(c) of ERISA and the DOL
regulations to be promulgated thereunder ("401(c)
Regulations") have been satisfied and will continue to
be satisfied and (iii) the Transferee represents that
it understands that the operation of the general
account after December 31, 1998 may affect its ability
to continue to hold the Certificates after the date
which is 18 months after the 401(c) Regulations become
final and unless a class exemption issued by the DOL or
an exception under Section 401(c) of ERISA is then
available for the continued holding of Certificates, if
the assets of the general account constitute Plan
Assets, it will dispose of the Certificates prior to
the date which is 18 months after the 401(c)
Regulations become final.
(3) The Transferee is familiar with the prohibited
transaction restrictions and fiduciary responsibility
requirements of Sections 406 and 407 of ERISA and Section
4975 of the Code and understands that each of the parties to
which this certification is made is relying and will
continue to rely on the statements made herein.
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT H
FORM OF REPRESENTATION LETTER
_____________, 199__
NovaStar Mortgage Funding Corporation
1901 West 47th Place, Suite 105
Westwood, Kansas 66205
Wilmington Trust Company, as Owner Trustee
1100 North Market Street
Rodney Square North
Wilmington, Delaware 19890
First Union National Bank, as Certificate Registrar
230 S. Tryon Street, 9th Floor
Charlotte, North Carolina 28288-1179
Re: NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Certificates
Dear Sirs:
__________________________________ (the "Transferee")
intends to acquire from _____________________ (the "Transferor")
a ___% Certificate Percentage Interest of NovaStar Mortgage
Funding Trust, Series 1998-2 Home Equity Loan Asset-Backed
Certificates (the "Certificates"), issued pursuant to an Amended
and Restated Trust Agreement (the "Trust Agreement"), dated as of
August 19, 1998 among NovaStar Mortgage Funding Corporation, as
company (the "Company"), and Wilmington Trust Company, as owner
trustee (the "Owner Trustee"). Capitalized terms used herein and
not otherwise defined shall have the meanings assigned thereto in
the Trust Agreement.
The Transferee hereby certifies, represents and
warrants to, and covenants with, the Company, the Owner Trustee,
the Certificate Registrar and the Servicer that:
(1) the Transferee is acquiring the Certificate for
its own behalf and is not acting as agent or custodian for
any other person or entity in connection with such
acquisition; and
(2) the Transferee is not a partnership, grantor
trust or S corporation for federal income tax purposes, or,
if the Transferee is a partnership, grantor trust or S
corporation for federal income tax purposes, the
Certificates are not more than 50% of the assets of the
partnership, grantor trust or S corporation.
<PAGE>
Very truly yours,
By:
Name:
Title:
<PAGE>
EXHIBIT I
INITIAL TRUST AGREEMENT
EXECUTION COPY
_________________________________________________________________
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
Issuer
and
FIRST UNION NATIONAL BANK
Indenture Trustee
_________________________________________
INDENTURE
Dated as of August 1, 1998
__________________________________________
Relating to
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
NOVASTAR HOME EQUITY LOAN ASSET-BACKED BONDS, SERIES 1998-2
_________________________________________________________________
<PAGE>
This Indenture, dated as of August 1, 1998, between NovaStar
Mortgage Funding Trust, Series 1998-2, a Delaware business trust,
as Issuer (the "Issuer"), and First Union National Bank, a
national banking association, as Indenture Trustee (the
"Indenture Trustee"),
WITNESSETH THAT:
Each party hereto agrees as follows for the benefit of
the other party and for the equal and ratable benefit of the
Holders of the NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Bonds (the "Bonds") and the Bond
Insurer.
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at
the Closing Date, as trustee for the benefit of the Holders of
the Bonds and the Bond Insurer, all of the Issuer's right, title
and interest in and to whether now existing or hereafter created
by (a) the Initial Mortgage Loans, the Subsequent Mortgage Loans,
the Eligible Substitute Mortgage Loans (and, in each case, the
related PMI Policies) and the proceeds thereof and all rights
under the Related Documents (including the related Mortgage
Files) and any title and hazard insurance policies with respect
to the Mortgaged Properties; (b) all funds on deposit from time
to time in the Collection Account allocable to the Mortgage Loans
excluding any investment income from such funds; (c) all funds on
deposit from time to time in the Payment Account and in all
proceeds thereof, including any income on funds deposited in, or
investments made with funds deposited in, the Payment Account,
which income shall belong to, and be for the account of, the
Indenture Trustee; (d) all funds on deposit from time to time in
the Interest Coverage Account and the Pre-Funding Account in each
case including any income on funds deposited in, or investments
made with funds deposited in such accounts; (e) all rights under
the (i) Mortgage Loan Purchase Agreement as assigned to the
Issuer and the Company's Subsequent Transfer Instrument, (ii) the
Servicing Agreement and any Subservicing Agreements, (iii) the
PMI Policies and (iv) the CAP Agreements and the ML&Co Guaranty;
(f) the NCFC Demand Note and the Surety Bond and (g) all present
and future claims, demands, causes and choses in action in
respect of any or all of the foregoing and all payments on or
under, and all proceeds of every kind and nature whatsoever in
respect of, any or all of the foregoing and all payments on or
under, and all proceeds of every kind and nature whatsoever in
the conversion thereof, voluntary or involuntary, into cash or
other liquid property, all cash proceeds, accounts, accounts
receivable, notes, drafts, acceptances, checks, deposit accounts,
rights to payment of any and every kind, and other forms of obli-
gations and receivables, instruments and other property which at
any time constitute all or part of or are included in the pro-
ceeds of any of the foregoing (collectively, the "Trust Estate"
or the "Collateral").
The foregoing Grant is made in trust to secure (i) the
payment of principal of and interest on, and any other amounts
owing in respect of, the Bonds, equally and ratably without
prejudice, priority or distinction, (ii) the payment of all other
amounts payable under this Indenture and (iii) compliance with
the provisions of this Indenture, all as provided in this Inden-
ture.
The Indenture Trustee, as trustee on behalf of the
Holders of the Bonds and the Bond Insurer, acknowledges such
Grant, accepts the trust under this Indenture in accordance with
the <PAGE> provisions hereof and agrees to perform its duties as
Indenture Trustee as required herein. The Indenture Trustee
agrees that it will hold the Bond Insurance Policy in trust and
that it will hold any proceeds of any claim made upon the Bond
Insurance Policy solely for the use and benefit of the Holders of
the Bonds in accordance with the terms hereof and the terms of
the Bond Insurance Policy.
The Indenture Trustee further acknowledges that in the
event (i) the transfer of the Mortgage Loans from the Seller to
the Company pursuant to the Mortgage Loan Purchase Agreement is
determined to be a financing; (ii) the transfer of the Initial
Mortgage Loans from the Company to the Issuer pursuant to the
Trust Agreement is determined to be a financing; and/or (iii) the
transfer of the Subsequent Mortgage Loans by the Seller to the
Company and then by the Company to the Issuer pursuant to the
Mortgage Loan Purchase Agreement is determined to constitute a
financing, then in each case the Indenture Trustee holds the
Mortgage Loans as the designee and bailee of the Company and the
Issuer, respectively, subject however, in each case, to a prior
lien in favor of the Bondholders and the Bond Insurer pursuant to
the terms of this Indenture.
ARTICLE I
Definitions
Section 1.01. Definitions. For all purposes of this Inden-
ture, except as otherwise expressly provided herein or unless the
context otherwise requires, capitalized terms not otherwise
defined herein shall have the meanings assigned to such terms in
the Definitions attached hereto as Appendix A, which is incorpo-
rated by reference herein. All other capitalized terms used
herein shall have the meanings specified herein.
Section 1.02. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the Trust
Indenture Act (the "TIA"), the provision is incorporated by
reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"Commission" means the Securities and Exchange
Commission.
"indenture securities" means the Bonds.
"indenture security holder" means a Bondholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means
the Indenture Trustee.
<PAGE>
"obligor" on the indenture securities means the Issuer
and any other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined
by the TIA, defined by TIA by reference to another statute or
defined by Commission rules, have the meanings assigned to them
by such definitions.
Section 1.03. Rules of Construction. Unless the context
otherwise requires:
(i a term has the meaning assigned to it;
(ii an accounting term not otherwise defined has the
meaning assigned to it in accordance with generally accepted
accounting principles as in effect from time to time;
(iii "or" is not exclusive;
(iv "including" means including without limitation;
(v words in the singular include the plural and
words in the plural include the singular; and
(vi any agreement, instrument or statute defined or
referred to herein or in any instrument or certificate
delivered in connection herewith means such agreement,
instrument or statute as from time to time amended, modified
or supplemented and includes (in the case of agreements or
instruments) references to all attachments thereto and
instruments incorporated therein; references to a Person are
also to its permitted successors and assigns.
ARTICLE II
Original Issuance of Bonds
Section 2.01. Form. The Class A-1 Bonds, together with the
Indenture Trustee's certificate of authentication, shall be in
substantially the form set forth in Exhibit A hereto, with such
appropriate insertions, omissions, substitutions and other varia-
tions as are required or permitted by this Indenture. The Class
A-2 Bonds, together with the Indenture Trustee's certificate of
authentication, shall be in substantially the form set forth in
Exhibit B hereto, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted
by this Indenture.
The Bonds shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods (with or
without steel engraved borders).
<PAGE>
The terms of the Bonds set forth in Exhibit A and Exhibit B,
respectively, are part of the terms of this Indenture.
Section 2.02. Execution, Authentication and Delivery. The
Bonds shall be executed on behalf of the Issuer by any of its
Authorized Officers. The signature of any such Authorized
Officer on the Bonds may be manual or facsimile.
Bonds bearing the manual or facsimile signature of individ-
uals who were at any time Authorized Officers of the Issuer shall
bind the Issuer, notwithstanding that such individuals or any of
them have ceased to hold such offices prior to the authentication
and delivery of such Bonds or did not hold such offices at the
date of such Bonds.
The Indenture Trustee shall upon Issuer Request authenticate
and deliver two classes of Bonds for original issue, Class A-1
Bonds in an aggregate principal amount of $115,000,000 and Class
A-2 Bonds in an aggregate principal amount of $200,000,000.
Each Bond shall be dated the date of its authentication.
The Bonds shall be issuable as registered Class A-1 Bonds or
Class A-2 Bonds and shall be issuable in a minimum initial Class
A-1 Bond Principal Balance or Class A-2 Bond Principal Balance,
as the case may be, of $25,000 and in integral multiples of $1 in
excess thereof.
No Bond shall be entitled to any benefit under this Inden-
ture or be valid or obligatory for any purpose, unless there
appears on such Bond a certificate of authentication substan-
tially in the form provided for herein executed by the Indenture
Trustee by the manual signature of one of its authorized signa-
tories, and such certificate upon any Bond shall be conclusive
evidence, and the only evidence, that such Bond has been duly
authenticated and delivered hereunder.
Section 2.03. Acceptance of Mortgage Loans by Indenture
Trustee. (a) The Indenture Trustee acknowledges receipt of,
subject to the review described below and any exceptions it notes
pursuant to the procedures described below, the documents (or
certified copies thereof) referred to in Section 2.1(b) of the
Mortgage Loan Purchase Agreement and declares that it holds and
will continue to hold those documents and any amendments,
replacements or supplements thereto and all other assets of the
Trust Estate as Indenture Trustee in trust for the use and
benefit of all present and future Holders of the Bonds and the
Bond Insurer. No later than 45 days after the Closing Date and
each Subsequent Transfer Date (or, with respect to any Eligible
Substitute Mortgage Loan, within 5 Business Days after the
receipt by the Indenture Trustee thereof and, with respect to any
documents received beyond 45 days after the Closing Date,
promptly thereafter), the Indenture Trustee agrees, for the
benefit of the Bondholders and the Bond Insurer, to review each
Mortgage File delivered to it and to execute and deliver, or
cause to be executed and delivered, to the Seller and the Bond
Insurer an initial certification in the form annexed hereto as
Exhibit C. In conducting such review, the Trustee will ascertain
whether all required documents described in Section 2.1(b) of the
Mortgage Loan Purchase Agreement have been executed and received
and whether those documents relate, determined on the basis of
the Mortgagor name, original principal balance and loan number,
to <PAGE> the Mortgage Loans it has received, as identified in Exhibit E
to this Indenture, as supplemented (provided, however, that with
respect to those documents described in subclause (b)(vi) of such
section, the Indenture Trustee's obligations shall extend only to
documents actually delivered pursuant to such subclause). In
performing any such review, the Indenture Trustee may
conclusively rely on the purported due execution and genuineness
of any such document and on the purported genuineness of any
signature thereon. If the Indenture Trustee finds that any
document constituting part of the Mortgage File not to have been
executed or received, or to be unrelated to the Mortgage Loans
identified in Exhibit E or Attachment B to Exhibit 2 of the
Mortgage Loan Purchase Agreement or to appear to be defective on
its face, the Indenture Trustee shall promptly notify the Seller
and the Bond Insurer of such finding and the Seller's obligation
to cure such defect or repurchase or substitute for the related
Mortgage Loan.
Pursuant to Section 5.11 of this Indenture, the Bond
Insurer, so long as no Bond Insurer Default exists, has the right
to exercise any trust or power conferred on the Indenture
Trustee. In connection with the acceptance of the Subsequent
Mortgage Loans by the Indenture Trustee, the Bond Insurer shall
provide a Certificate (the "MBIA Certificate") stating that the
Subsequent Mortgage Loans are acceptable to the Bond Insurer.
Since the Bond Insurer is acting on behalf of the Bondholders,
the MBIA Certificate will be binding upon those Bondholders. The
Indenture Trustee shall not agree to any transfer of Subsequent
Mortgage Loans to it without (i) receipt of the MBIA Certificate
and (ii) confirmation from the Rating Agencies that the purchase
of such Subsequent Mortgage Loans will not result in a downgrade,
withdrawal or qualification of the ratings then in effect for the
Outstanding Bonds (without regard to the Bond Insurance Policy).
(b) No later than 180 days after the Closing Date, the
Indenture Trustee will review, for the benefit of the Bondholders
and the Bond Insurer, the Mortgage Files and will execute and
deliver or cause to be executed and delivered to the Seller and
the Bond Insurer, a final certification in the form annexed
hereto as Exhibit D. In conducting such review, the Indenture
Trustee will ascertain whether an original of each document
described in subclauses (b)(ii)-(iv) of Section 2.1 of the
Mortgage Loan Purchase Agreement required to be recorded has been
returned from the recording office with evidence of recording
thereon or a certified copy has been obtained from the recording
office. If the Indenture Trustee finds any document constituting
part of the Mortgage File has not been received, or to be
unrelated, determined on the basis of the Mortgagor name,
original principal balance and loan number, to the Mortgage Loans
identified in Exhibit E or Attachment B to Exhibit 2 of the
Mortgage Loan Purchase Agreement or to appear defective on its
face, the Indenture Trustee shall promptly notify the Seller and
the Bond Insurer of such finding and the Seller's obligation to
cure such defect or repurchase or substitute for the related
Mortgage Loan.
(c) Upon deposit of the Repurchase Price in the
Collection Account and notification of the Indenture Trustee by a
certification signed by a Servicing Officer (which certification
shall include a statement to the effect that the Repurchase Price
has been deposited in the Collection Account), the Indenture
Trustee shall release to the Seller the related Mortgage File and
shall execute and deliver all instruments of transfer or
assignment, without recourse, furnished to it by the Seller as
are necessary to vest in the Seller title to and rights under the
related Mortgage Loan. Such purchase <PAGE> shall be deemed to have
occurred on the date on which certification of the deposit of the
Repurchase Price in the Payment Account was received by the
Indenture Trustee. The Indenture Trustee shall amend the
applicable Mortgage Loan Schedule to reflect such repurchase and
shall promptly notify the Servicer, the Bond Insurer and the
Rating Agencies of such amendment.
ARTICLE III
Covenants
Section 3.01. Collection of Payments with respect to the
Mortgage Loans. The Indenture Trustee shall establish and main-
tain an Eligible Account (the "Payment Account"), held in trust
for the benefit of the Bondholders and the Bond Insurer. The
Indenture Trustee shall, subject to the terms of this paragraph,
deposit in the Payment Account, (i) on the date of receipt (if
received prior to 3:00 p.m. Eastern Standard Time, and if not,
then on the Business Day following receipt) from the Servicer,
each remittance received by the Indenture Trustee with respect to
the Mortgage Loans, all payments received from the CAP Providers
under the CAP Agreements and from ML&Co. under the ML&Co.
Guaranty, and all other amounts required to be deposited in the
Payment Account, and (ii) amounts transferred from the Pre-
Funding Account and the Interest Coverage Account pursuant to
Section 8.08 and 8.09 hereof. The Indenture Trustee shall make
all payments of principal of and interest on the Bonds, subject
to Section 3.03, as provided in Section 3.05 from monies on
deposit in the Payment Account.
Section 3.02. Maintenance of Office or Agency. The Issuer
will maintain within the United States of America, an office or
agency where, subject to satisfaction of conditions set forth
herein, Bonds may be surrendered for registration of transfer or
exchange, and where notices and demands to or upon the Issuer in
respect of the Bonds and this Indenture may be served. The
Issuer hereby initially appoints the Indenture Trustee to serve
as its agent for the foregoing purposes. If at any time the
Issuer shall fail to maintain any such office or agency or shall
fail to furnish the Indenture Trustee with the address thereof,
such surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Indenture Trustee, and the Issuer
hereby appoints the Indenture Trustee as its agent to receive all
such surrenders, notices and demands.
Section 3.03. Money for Payments To Be Held in Trust;
Paying Agent. (a) As provided in Section 3.01, all payments of
amounts due and payable with respect to any Bonds that are to be
made from amounts withdrawn from the Payment Account pursuant to
Section 3.01 shall be made on behalf of the Issuer by the
Indenture Trustee or by the Paying Agent, and no amounts so
withdrawn from the Payment Account for payments of Bonds shall be
paid over to the Issuer except as provided in this Section 3.03.
The Issuer will cause each Paying Agent other than the
Indenture Trustee to execute and deliver to the Indenture Trustee
an instrument in which such Paying Agent shall agree with the
<PAGE>
Indenture Trustee (and if the Indenture Trustee acts as Paying
Agent it hereby so agrees), subject to the provisions of this
Section 3.03, that such Paying Agent will:
(i) hold all sums held by it for the payment of
amounts due with respect to the Bonds in trust for the
benefit of the Persons entitled thereto until such sums
shall be paid to such Persons or otherwise disposed of as
herein provided and pay such sums to such Persons as herein
provided;
(ii) give the Indenture Trustee and the Bond Insurer
notice of any default by the Issuer of which it has actual
knowledge in the making of any payment required to be made
with respect to the Bonds;
(iii) at any time during the continuance of any
such default, upon the written request of the Indenture
Trustee, forthwith pay to the Indenture Trustee all sums so
held in trust by such Paying Agent;
(iv) immediately resign as Paying Agent and forthwith
pay to the Indenture Trustee all sums held by it in trust
for the payment of Bonds if at any time it ceases to meet
the standards required to be met by a Paying Agent at the
time of its appointment;
(v) comply with all requirements of the Code with
respect to the withholding from any payments made by it on
any Bonds of any applicable withholding taxes imposed there-
on and with respect to any applicable reporting requirements
in connection therewith; and
(vi) not commence a bankruptcy proceeding against
the Issuer in connection with this Indenture.
The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other
purpose, by Issuer Request direct any Paying Agent to pay to the
Indenture Trustee all sums held in trust by such Paying Agent,
such sums to be held by the Indenture Trustee upon the same
trusts as those upon which the sums were held by such Paying
Agent; and upon such payment by any Paying Agent to the Indenture
Trustee, such Paying Agent shall be released from all further
liability with respect to such money.
Subject to applicable laws with respect to escheat of funds,
any money held by the Indenture Trustee or any Paying Agent in
trust for the payment of any amount due with respect to any Bond
(other than amounts paid under the Bond Insurance Policy) and
remaining unclaimed for one year after such amount has become due
and payable shall be discharged from such trust and be paid to
the Issuer upon receipt of an Issuer Request; and the Holder of
such Bond shall thereafter, as an unsecured general creditor,
look only to the Issuer for payment thereof (but only to the
extent of the amounts so paid to the Issuer), and all liability
of the Indenture Trustee or such Paying Agent with respect to
such trust money shall thereupon cease; provided, however, that
the Indenture Trustee or such Paying Agent, before being required
to make any such repayment, shall at the expense and <PAGE> direction of
the Issuer cause to be published once, in an Authorized
Newspaper, notice that such money remains unclaimed and that,
after a date specified therein, which shall not be less than
30 days from the date of such publication, any unclaimed balance
of such money then remaining will be repaid to the Issuer. The
Indenture Trustee with the consent of the Bond Insurer, so long
as no Bond Insurer Default exists, may also adopt and employ, at
the expense and direction of the Issuer, any other reasonable
means of notification of such repayment (including, but not
limited to, mailing notice of such repayment to Holders whose
Bonds have been called but have not been surrendered for redemp-
tion or whose right to or interest in monies due and payable but
not claimed is determinable from the records of the Indenture
Trustee or of any Paying Agent, at the last address of record for
each such Holder).
Section 3.04. Existence. The Issuer will keep in full
effect its existence, rights and franchises as a business trust
under the laws of the State of Delaware (unless it becomes, or
any successor Issuer hereunder is or becomes, organized under the
laws of any other state or of the United States of America, in
which case the Issuer will keep in full effect its existence,
rights and franchises under the laws of such other jurisdiction)
and will obtain and preserve its qualification to do business in
each jurisdiction in which such qualification is or shall be
necessary to protect the validity and enforceability of this
Indenture, the Bonds, the Mortgage Loans and each other instru-
ment or agreement included in the Trust Estate.
Section 3.05. Payment of Principal and Interest. (a) On
each Payment Date from amounts on deposit in the Payment Account
in accordance with Section 8.02 hereof, the Indenture Trustee
shall pay to the Bondholders and to other Persons the amounts to
which they are entitled in the priority set forth below;
provided, however, that any amounts representing payments from
the Bond Insurer shall only be used to pay interest and principal
to the Bondholders pursuant to clauses (iv) and (v):
(i) to the Indenture Trustee, the Indenture
Trustee Fee;
(ii) to the Bond Insurer, the Bond Insurance Premium;
(iii) to the First and Second CAP Provider, amounts
(including termination payments) due under the First and
Second CAP Agreements, but only to the extent that (A) such
amounts have not been paid by the Servicer pursuant to the
Servicing Agreement, and (B) such amounts represent insured
amounts under the CAP Agreement Insurance Policy;
(iv) to the Bondholders, the Interest Payment
Amount with respect to such Payment Date by paying on a pro
rata basis to the Bondholders holding the Class A-1 Bonds
the Class A-1 Interest Payment Amount with respect to such
Payment Date and to the Bondholders holding the Class A-2
Bonds the Class A-2 Interest Payment Amount with respect to
such Payment Date;
<PAGE>
(v) to the Bondholders, the Principal Payment
Amount with respect to such Payment Date, by concurrently
paying such amount to the Bondholders holding the Class A-1
Bonds and to the Bondholders holding the Class A-2 Bonds on
a pro rata basis, in accordance with the Class A-1 Bond
Principal Balance and the Class A-2 Bond Principal Balance;
(vi) to the Bond Insurer, the sum of (a) all
payments previously paid by the Bond Insurer under the Bond
Insurance Policy, the CAP Agreement Insurance Policy and the
Surety Bond which have not previously been reimbursed, (b)
any other amounts due to the Bond Insurer pursuant to the
Insurance Agreement, to the extent not previously paid or
reimbursed and (c) interest on the foregoing as set forth in
the Insurance Agreement from the date such amounts become
due until paid in full;
(vii) to the Bondholders, as principal on the
Bonds, the Subordination Increase Amount for such Payment
Date;
(viii) to the Bondholders, any Carry-Forward Amount
for such Payment Date, on a pro rata basis, in accordance
with the Class A-1 Carry-Forward Amount and the Class A-2
Carry-Forward Amount;
(ix) to the Indenture Trustee, any amounts owing
to the Indenture Trustee under any Basic Documents remaining
unpaid;
(x) to the First and Second CAP Provider, any amounts
due under the First and Second CAP Agreements, but only to
the extent that such payments have not been paid by the
Servicer pursuant to the Servicing Agreement or pursuant to
clause (iii) above;
(xi) to the Servicer, any amounts owing to the
Servicer pursuant to the Servicing Agreement in connection
with the indemnity by the Issuer thereunder, and in the
event there is a successor servicer, additional
compensation, if necessary, pursuant to Section 6.02(a) of
the Servicing Agreement; and
(xii) any remaining amount, to the Issuer or the
Certificate Paying Agent as its designee, on behalf of the
Certificateholders.
On each Payment Date, the Certificate Paying Agent shall
deposit in the Certificate Distribution Account all amounts it
received pursuant to this Section 3.05 for the purpose of
distributing such funds to the Certificateholders after payment
of trust expenses to the Owner Trustee or the Indenture Trustee
pursuant to the Trust Agreement.
Interest will accrue on the Bonds during an Interest Period
on the basis of the actual number of days in such Interest Period
and a year assumed to consist of 360 days.
<PAGE>
Any installment of interest or principal, if any, payable on
any Class A-1 Bond or Class A-2 Bond that is punctually paid or
duly provided for by the Issuer on the applicable Payment Date
shall, so long as such Class A-1 Bonds or Class A-2 Bonds are
Book-Entry Bonds registered in the name of the Depository or its
nominee, be paid by wire transfer to the Depository or its
nominee; otherwise if such Holder shall have so requested at
least five Business Days prior to the related Record Date and
such Holder holds such Class A-1 Bonds or Class A-2 Bonds of an
aggregate initial Bond Principal Balance of at least $5,000,000,
such installment shall be paid on such Payment Date to each
Holder of record on such Record Date, by wire transfer to an
account specified in writing by such Holder reasonably satisfac-
tory to the Indenture Trustee, and in all other cases or if no
such instructions have been delivered to the Indenture Trustee,
by check to such Bondholder mailed to such Holder's address as it
appears in the Bond Register in the amount required to be
distributed to such Holder on such Payment Date; provided, how-
ever, that the Indenture Trustee shall not pay to such Holders
any amount required to be withheld from a payment to such Holder
by the Code. The Indenture Trustee may deduct a reasonable wire
transfer fee from any payment made by wire transfer.
(b) The principal of each Bond shall be due and
payable in full on the Final Scheduled Payment Date for such Bond
as provided in the applicable form of Bond as set forth in
Exhibits A and B, respectively. All principal payments on the
Bonds shall be made to the Bondholders entitled thereto in accor-
dance with the Percentage Interests represented by such Bonds.
Upon notice to the Indenture Trustee by the Issuer, the Indenture
Trustee shall notify the Person in whose name a Bond is register-
ed at the close of business on the Record Date preceding the
Final Scheduled Payment Date or other final Payment Date
(including any final Payment Date resulting from any redemption
pursuant to Section 8.07 hereof). Such notice shall to the
extent practicable be mailed no later than five Business Days
prior to such Final Scheduled Payment Date or other final Payment
Date and shall specify that payment of the principal amount and
any interest due with respect to such Bond at the Final Scheduled
Payment Date or other final Payment Date will be payable only
upon presentation and surrender of such Bond and shall specify
the place where such Bond may be presented and surrendered for
such final payment. No interest shall accrue on the Bonds on or
after the Final Scheduled Payment Date or any such other final
Payment Date.
Section 3.06. Protection of Trust Estate. (a) The Issuer
will from time to time prepare, execute and deliver all such
supplements and amendments hereto and all such financing
statements, continuation statements, instruments of further
assurance and other instruments, and will take such other action
necessary or advisable to:
(i) maintain or preserve the lien and security
interest (and the priority thereof) of this Indenture or
carry out more effectively the purposes hereof;
(ii) perfect, publish notice of or protect the
validity of any Grant made or to be made by this Indenture;
(iii) cause the Issuer or the Servicer to enforce
any of their rights with respect to the Mortgage Loans; and
<PAGE>
(iv) preserve and defend title to the Trust Estate
and the rights of the Indenture Trustee, the Bond Insurer
and the Bondholders in such Trust Estate against the claims
of all persons and parties.
(b) Except as otherwise provided in this Indenture, the
Indenture Trustee shall not remove any portion of the Trust
Estate that consists of money or is evidenced by an instrument,
certificate or other writing from the jurisdiction in which it
was held at the date of the most recent Opinion of Counsel
delivered pursuant to Section 3.07 hereof, unless the Indenture
Trustee shall have first received an Opinion of Counsel to the
effect that the lien and security interest created by this
Indenture with respect to such property will continue to be
maintained after giving effect to such action or actions.
The Issuer hereby designates the Indenture Trustee its agent
and attorney-in-fact to sign any financing statement, continu-
ation statement or other instrument required to be signed pur-
suant to this Section 3.06 upon the Issuer's preparation thereof
and delivery to the Indenture Trustee.
Section 3.07. Opinions as to Trust Estate. (a) On the
Closing Date, the Issuer shall furnish to the Indenture Trustee,
the Bond Insurer and the Owner Trustee an Opinion of Counsel
either stating that, in the opinion of such counsel, such action
has been taken with respect to the recording and filing of this
Indenture, any indentures supplemental hereto, and any other
requisite documents, and with respect to the execution and filing
of any financing statements and continuation statements, as are
necessary to perfect and make effective the lien and first
priority security interest in the Collateral and reciting the
details of such action, or stating that, in the opinion of such
counsel, no such action is necessary to make such lien and first
priority security interest effective.
(b) On or before September 1 in each calendar year,
beginning in 1998, the Issuer shall furnish to the Indenture
Trustee and the Bond Insurer an Opinion of Counsel at the expense
of the Issuer either stating that, in the opinion of such
counsel, such action has been taken with respect to the
recording, filing, re-recording and refiling of this Indenture,
any indentures supplemental hereto and any other requisite
documents and with respect to the execution and filing of any
financing statements and continuation statements as is necessary
to maintain the lien and first priority security interest in the
Collateral and reciting the details of such action or stating
that in the opinion of such counsel no such action is necessary
to maintain such lien and security interest. Such Opinion of
Counsel shall also describe the recording, filing, re-recording
and refiling of this Indenture, any indentures supplemental
hereto and any other requisite documents and the execution and
filing of any financing statements and continuation statements
that will, in the opinion of such counsel, be required to
maintain the lien and security interest in the Collateral until
December 31 in the following calendar year.
Section 3.08. Performance of Obligations. (a) The Issuer
will punctually perform and observe all of its obligations and
agreements contained in this Indenture, the Basic Documents and
in the instruments and agreements included in the Trust Estate.
<PAGE>
(b) The Issuer, with the consent of the Bond Insurer
so long as no Bond Insurer Default exists, may contract with
other Persons to assist it in performing its duties under this
Indenture, and any performance of such duties by a Person
identified to the Indenture Trustee in an Officer's Certificate
of the Issuer shall be deemed to be action taken by the Issuer.
(c) The Issuer will not take any action or permit any
action to be taken by others which would release any Person from
any of such Person's covenants or obligations under any of the
documents relating to the Mortgage Loans or under any instrument
included in the Trust Estate, or which would result in the amend-
ment, hypothecation, subordination, termination or discharge of,
or impair the validity or effectiveness of, any of the documents
relating to the Mortgage Loans or any such instrument, except
such actions as the Servicer is expressly permitted to take in
the Servicing Agreement. The Indenture Trustee, as pledgee of
the Mortgage Loans, shall with the consent of, or direction of,
the Bond Insurer, so long as no Bond Insurer Default exists, be
able to exercise the rights of the Issuer to direct the actions
of the Servicer pursuant to the Servicing Agreement.
Section 3.09. Negative Covenants. So long as any Bonds are
Outstanding, the Issuer shall not:
(i) except as expressly permitted by this
Indenture, sell, transfer, exchange or otherwise dispose of
the Trust Estate, unless directed to do so by the Bond
Insurer or the Indenture Trustee with the consent of the
Bond Insurer, so long as no Bond Insurer Default exists;
(ii) claim any credit on, or make any deduction
from the principal or interest payable in respect of, the
Bonds (other than amounts properly withheld from such
payments under the Code) or assert any claim against any
present or former Bondholder by reason of the payment of the
taxes levied or assessed upon any part of the Trust Estate;
(iii) (A) permit the validity or effectiveness of
this Indenture to be impaired, or permit the lien of this
Indenture to be amended, hypothecated, subordinated,
terminated or discharged, or permit any Person to be
released from any covenants or obligations with respect to
the Bonds under this Indenture except as may be expressly
permitted hereby, (B) permit any lien, charge, excise,
claim, security interest, mortgage or other encumbrance
(other than the lien of this Indenture) to be created on or
extend to or otherwise arise upon or burden the Trust Estate
or any part thereof or any interest therein or the proceeds
thereof or (C) permit the lien of this Indenture not to
constitute a valid first priority security interest in the
Trust Estate; or
(iv) waive or impair, or fail to assert rights
under, the Mortgage Loans, or impair or cause to be impaired
the Issuer's interest in the Mortgage Loans, the Mortgage
Loan Purchase Agreement or any other Basic Document, if any
such action would materially and adversely affect the
interests of the Bondholders or the Bond Insurer.
<PAGE>
Section 3.10. Annual Statement as to Compliance. The
Issuer will deliver to the Indenture Trustee and the Bond
Insurer, within 90 days after the end of each fiscal year of the
Issuer (commencing with the fiscal year 1998), an Officer's
Certificate stating, as to the Authorized Officer signing such
Officer's Certificate, that:
(i) a review of the activities of the Issuer during
such year and of its performance under this Indenture has
been made under such Authorized Officer's supervision; and
(ii) to the best of such Authorized Officer's
knowledge, based on such review, the Issuer has complied
with all conditions and covenants under this Indenture
throughout such year, or, if there has been a default in its
compliance with any such condition or covenant, specifying
each such default known to such Authorized Officer and the
nature and status thereof.
Section 3.11. Servicing and Administration of the CAP
Agreements. The Indenture Trustee agrees that it will hold the
CAP Agreements and the ML&Co Guaranty, and the Issuer's rights
thereunder, and any payments received under the CAP Agreements
(net of any payments due to the CAP Providers under the CAP
Agreements) in trust solely for the use and benefit of the
Bondholders and the Bond Insurer in accordance with the terms
hereof and the terms of the Servicing Agreement. Subject to the
provisions of Section 3.05 hereof, the Indenture Trustee shall
take all such actions on behalf of the Issuer as are necessary to
service and administer the CAP Agreements and to perform the
Issuer's obligations and enforce the Issuer's rights under the
CAP Agreements, which actions shall conform to the standards of
an institution prudently administering the CAP Agreements for its
own account; provided, however, that so long as no Servicing
Default has occurred and is continuing, the Servicer shall act as
agent for the Indenture Trustee with respect to the servicing and
administering of the CAP Agreements and the performance of the
Issuer's obligations and the enforcement of the Issuer's rights
under the CAP Agreements pursuant to Section 3.10 of the
Servicing Agreement.
Section 3.12. Representations and Warranties Concerning the
Mortgage Loans. The Indenture Trustee, as pledgee of the
Mortgage Loans, has the benefit of the representations and
warranties made by the Seller in the Mortgage Loan Purchase
Agreement concerning the Seller and the Mortgage Loans and the
right to enforce the remedies against the Seller provided in such
Mortgage Loan Purchase Agreement to the same extent as though
such representations and warranties were made directly to the
Indenture Trustee. If the Indenture Trustee has actual knowledge
of any breach of any representation or warranty made by the
Seller in the Mortgage Loan Purchase Agreement, the Indenture
Trustee shall promptly notify the Seller and the Bond Insurer of
such finding and the Seller's obligation to cure such breach or
repurchase or substitute for the related Mortgage Loan.
Section 3.13. Amendments to Servicing Agreement. The
Issuer covenants with the Indenture Trustee and the Bond Insurer
that it will not enter into any amendment or supplement to the
Servicing Agreement without the prior written consent of the
Indenture Trustee and the Bond Insurer. The Indenture Trustee,
as pledgee of the Mortgage Loans, may, with the consent of the
<PAGE>
Bond Insurer so long as no Bond Insurer Default exists, decline
to enter into or consent to any such supplement or amendment if
the Bond Insurer's or Bondholders' rights, duties or immunities
would be materially and adversely affected thereby. The
Indenture Trustee may, but shall not be obligated to, enter into
any amendment or supplement to the Servicing Agreement that
affects the Indenture Trustee's own rights, duties, liabilities
or immunities under this Indenture or otherwise.
Section 3.14. Servicer as Agent and Bailee of the Indenture
Trustee. Solely for purposes of perfection under Section 9-305
of the Uniform Commercial Code or other similar applicable law,
rule or regulation of the state in which such property is held by
the Servicer, the Issuer and the Indenture Trustee hereby
acknowledge that the Servicer is acting as agent and bailee of
the Indenture Trustee in holding amounts on deposit in the
Collection Account, as well as its agent and bailee in holding
any Related Documents released to the Servicer, and any other
items constituting a part of the Trust Estate which from time to
time come into the possession of the Servicer. It is intended
that, by the Servicer's acceptance of such agency, the Indenture
Trustee, as a secured party of the Mortgage Loans, will be deemed
to have possession of such Related Documents, such monies and
such other items for purposes of Section 9-305 of the Uniform
Commercial Code of the state in which such property is held by
the Servicer.
Section 3.15. Investment Company Act. The Issuer shall not
become an "investment company" or under the "control" of an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (or any successor or amendatory
statute), and the rules and regulations thereunder (taking into
account not only the general definition of the term "investment
company" but also any available exceptions to such general
definition); provided, however, that the Issuer shall be in
compliance with this Section 3.15 if it shall have obtained an
order exempting it from regulation as an "investment company" so
long as it is in compliance with the conditions imposed in such
order.
Section 3.16. Issuer May Consolidate, etc. (a) The Issuer
shall not consolidate or merge with or into any other Person,
unless:
(i) the Person (if other than the Issuer) formed by or
surviving such consolidation or merger shall be a Person
organized and existing under the laws of the United States
of America or any state or the District of Columbia and
shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form
reasonably satisfactory to the Indenture Trustee and the
Bond Insurer, the due and punctual payment of the principal
of and interest on all Bonds and to the Certificate Paying
Agent, on behalf of the Certificateholders, and the payment
of the Bond Insurance Premium and all other amounts payable
to the Bond Insurer and the performance or observance of
every agreement and covenant of this Indenture on the part
of the Issuer to be performed or observed, all as provided
herein;
(ii) immediately after giving effect to such
transaction, no Event of Default shall have occurred and be
continuing;
<PAGE>
(iii) the Rating Agencies shall have notified the
Issuer that such transaction shall not cause the rating of
the Bonds to be reduced, suspended or withdrawn or to be
considered by either Rating Agency to be below investment
grade without taking into account the Bond Insurance Policy;
(iv) the Issuer and the Bond Insurer shall have
received an Opinion of Counsel (and shall have delivered a
copy thereof to the Indenture Trustee) to the effect that
such transaction will not (A) adversely affect the status of
the Bonds as indebtedness for federal income tax purposes,
or (B) cause the Trust to be subject to an entity level tax
for federal income tax purposes;
(v) any action that is necessary to maintain the lien
and security interest created by this Indenture shall have
been taken;
(vi) the Issuer shall have delivered to the
Indenture Trustee and the Bond Insurer an Officer's
Certificate and an Opinion of Counsel each stating that such
consolidation or merger and such supplemental indenture
comply with this Article III and that all conditions
precedent herein provided for relating to such transaction
have been complied with (including any filing required by
the Exchange Act); and
(vii) the Bond Insurer, so long as no Bond Insurer
Default exists, shall have given its prior written consent.
(b) The Issuer shall not convey or transfer any of its
properties or assets, including those included in the Trust
Estate, to any Person, unless:
(i) the Person that acquires by conveyance or transfer
the properties and assets of the Issuer the conveyance or
transfer of which is hereby restricted shall (A) be a United
States citizen or a Person organized and existing under the
laws of the United States of America or any state,
(B) expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form
satisfactory to the Indenture Trustee, the due and punctual
payment of the principal of and interest on all Bonds and to
the Certificate Paying Agent, on behalf of the
Certificateholders, and the payment of the Bond Insurance
Premium and all other amounts payable to the Bond Insurer
and the performance or observance of every agreement and
covenant of this Indenture on the part of the Issuer to be
performed or observed, all as provided herein, (C) expressly
agree by means of such supplemental indenture that all
right, title and interest so conveyed or transferred shall
be subject and subordinate to the rights of the Holders of
the Bonds and the Bond Insurer, (D) unless otherwise
provided in such supplemental indenture, expressly agree to
indemnify, defend and hold harmless the Issuer, the
Indenture Trustee and the Bond Insurer against and from any
loss, liability or expense arising under or related to this
Indenture and the Bonds and (E) expressly agree by means of
such supplemental indenture that such Person (or if a group
<PAGE>
of Persons, then one specified Person) shall make all fil-
ings with the Commission (and any other appropriate Person)
required by the Exchange Act in connection with the Bonds;
(ii) immediately after giving effect to such
transaction, no Default or Event of Default shall have
occurred and be continuing;
(iii) the Rating Agencies shall have notified the
Issuer that such transaction shall not cause the rating of
the Bonds or the rating of the Bonds without taking into
account the Bond Insurance Policy to be reduced, suspended
or withdrawn;
(iv) the Issuer and the Bond Insurer shall have
received an Opinion of Counsel (and shall have delivered a
copy thereof to the Indenture Trustee) to the effect that
such transaction will not (A) adversely affect the status of
the Bonds as indebtedness for federal income tax purposes,
or (B) cause the Trust to be subject to an entity level tax
for federal income tax purposes;
(v) any action that is necessary to maintain the lien
and security interest created by this Indenture shall have
been taken;
(vi) the Issuer shall have delivered to the
Indenture Trustee and the Bond Insurer an Officer's
Certificate and an Opinion of Counsel each stating that such
conveyance or transfer and such supplemental indenture
comply with this Article III and that all conditions
precedent herein provided for relating to such transaction
have been complied with (including any filing required by
the Exchange Act); and
(vii) the Bond Insurer, so long as no Bond Insurer
Default exists, shall have given its prior written consent.
Section 3.17. Successor or Transferee. (a) Upon any
consolidation or merger of the Issuer in accordance with Section
3.16(a), the Person formed by or surviving such consolidation or
merger (if other than the Issuer) shall succeed to, and be sub-
stituted for, and may exercise every right and power of, the
Issuer under this Indenture with the same effect as if such
Person had been named as the Issuer herein.
(b) Upon a conveyance or transfer of all the assets and
properties of the Issuer pursuant to Section 3.16(b), the Issuer
will be released from every covenant and agreement of this
Indenture to be observed or performed on the part of the Issuer
with respect to the Bonds immediately upon the delivery of
written notice to the Indenture Trustee and the Bond Insurer of
such conveyance or transfer and approval of such transaction
given by the Bond Insurer to the Indenture Trustee.
Section 3.18. No Other Business. The Issuer shall not
engage in any business other than financing, purchasing, owning,
selling and managing the Mortgage Loans and the issuance of the
<PAGE>
Bonds and Certificates in the manner contemplated by this
Indenture and the Basic Documents and all activities incidental
thereto.
Section 3.19. No Borrowing. The Issuer shall not issue,
incur, assume, guarantee or otherwise become liable, directly or
indirectly, for any indebtedness except for the Bonds and amounts
due to the Bond Insurer under this Indenture and the Insurance
Agreement.
Section 3.20. Guarantees, Loans, Advances and Other Liabil-
ities. Except as contemplated by this Indenture or the Basic
Documents, the Issuer shall not make any loan or advance or
credit to, or guarantee (directly or indirectly or by an
instrument having the effect of assuring another's payment or
performance on any obligation or capability of so doing or
otherwise), endorse or otherwise become contingently liable,
directly or indirectly, in connection with the obligations,
stocks or dividends of, or own, purchase, repurchase or acquire
(or agree contingently to do so) any stock, obligations, assets
or securities of, or any other interest in, or make any capital
contribution to, any other Person.
Section 3.21. Capital Expenditures. The Issuer shall not
make any expenditure (by long-term or operating lease or other-
wise) for capital assets (either realty or personalty).
Section 3.22. Purchase of Mortgage Loans Pursuant to the
Servicing Agreement. (a) Upon deposit of the Repurchase Price for
a defaulted Mortgage Loan in the Collection Account pursuant to
Section 3.18 of the Servicing Agreement and notification of the
Indenture Trustee by a certification signed by a Servicing
Officer (which certification shall include a statement to the
effect that the Repurchase Price has been deposited in the
Collection Account), the Indenture Trustee shall release to the
Servicer the related Mortgage File and shall execute and deliver
all instruments of transfer or assignment, without recourse,
furnished to it by the Servicer as are necessary to vest in the
Servicer title to and rights under the related Mortgage Loan.
Such purchase shall be deemed to have occurred on the date on
which certification of the deposit of the Repurchase Price in the
Collection Account was received by the Indenture Trustee. The
Indenture Trustee shall amend the applicable Mortgage Loan
Schedule to reflect such repurchase and shall promptly notify the
Servicer and the Bond Insurer of such amendment.
(b) Upon deposit of the Repurchase Price for such Converted
Mortgage Loan in the Collection Account pursuant to Section 3.20
of the Servicing Agreement and notification of the Indenture
Trustee by a certification signed by a Servicing Officer (which
certification shall include a statement to the effect that the
Repurchase Price has been deposited in the Collection Account),
the Indenture Trustee shall release to the Servicer or its
assignee the related Mortgage File and shall execute and deliver
all instruments of transfer or assignment, without recourse,
furnished to it by the Servicer or its assignee as are necessary
to vest in the Servicer or its assignee title to and rights under
the related Mortgage Loan. Such purchase shall be deemed to have
occurred on the date on which certification of the deposit of the
Repurchase Price in the Collection Account was received by the
Indenture Trustee. The Indenture Trustee shall amend the
applicable Mortgage Loan Schedule to reflect such purchase and
shall promptly notify the Servicer and the Bond Insurer of such
amendment.
<PAGE>
Section 3.23. Restricted Payments. The Issuer shall not,
directly or indirectly, (i) pay any dividend or make any distri-
bution (by reduction of capital or otherwise), whether in cash,
property, securities or a combination thereof, to the Owner
Trustee or any owner of a beneficial interest in the Issuer or
otherwise with respect to any ownership or equity interest or
security in or of the Issuer, (ii) redeem, purchase, retire or
otherwise acquire for value any such ownership or equity interest
or security or (iii) set aside or otherwise segregate any amounts
for any such purpose; provided, however, that the Issuer may
make, or cause to be made, (x) distributions to the Owner Trustee
and the Certificateholders as contemplated by, and to the extent
funds are available for such purpose under this Indenture and the
Trust Agreement and (y) payments to the Servicer pursuant to the
terms of the Servicing Agreement. The Issuer will not, directly
or indirectly, make payments to or distributions from the
Collection Account except in accordance with this Indenture and
the Basic Documents.
Section 3.24. Notice of Events of Default. The Issuer
shall give the Indenture Trustee, the Bond Insurer and the Rating
Agencies prompt written notice of each Event of Default hereunder
and under the Trust Agreement.
Section 3.25. Further Instruments and Acts. Upon request
of the Indenture Trustee or the Bond Insurer, the Issuer will
execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
Section 3.26. Statements to Bondholders and Merrill Lynch.
On each Payment Date, the Indenture Trustee and the Certificate
Registrar shall forward by mail to each Bondholder and
Certificateholder, respectively, the statement prepared pursuant
to Section 7.05 of this Indenture. On the Business Day
immediately preceding each Payment Date, the Indenture Trustee
shall forward the statement prepared pursuant to section 7.05 of
this Indenture by telecopy to Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Attention: Barry Finkelstein, telecopy number
(212) 449-9015. The Indenture Trustee shall have no
responsibility to (i) verify information provided by the Servicer
to be included in such statement or (ii) include any information
required to be included in such statement if the Servicer has
failed to timely produce such information to the Indenture
Trustee as required pursuant to the Servicing Agreement.
Section 3.27. Determination of Bond Interest Rate. On the
Interest Determination Date, the Indenture Trustee shall
determine One-Month LIBOR and as soon as practical thereafter
shall (i) determine the Applicable Spread (taking into account
the Remarketing Spread as certified by the Remarketing Spread
Calculation Agent), and (ii) determine the Class A-1 Bond
Interest Rate and the Class A-2 Bond Interest Rate for the
Interest Period following such Interest Determination Date and
shall inform the Issuer, the Servicer and the Company at their
respective facsimile numbers given to the Indenture Trustee in
writing thereof.
Section 3.28. Payments under the Bond Insurance Policy. If
the Indenture Trustee determines that a Deficiency Amount will
exist for the following Payment Date, then the Indenture Trustee
shall submit a Notice (as defined in the Bond Insurance Policy)
for payment in the amount of the Deficiency Amount to the Bond
Insurer no later than 12:00 Noon, New York City time, on <PAGE> the
second Business Day prior to the applicable Payment Date. Upon
receipt of such Deficiency Amount in accordance with the terms of
the Bond Insurance Policy, the Indenture Trustee shall deposit
such Deficiency Amount in the Payment Account for distribution to
Bondholders pursuant to Section 3.05 hereof, or with respect to
an acceleration of the Bonds, pursuant to Section 6.02 hereof.
All amounts received by the Indenture Trustee under the Bond
Insurance Policy shall remain uninvested.
In addition, a claim may be made under the Bond Insurance
Policy in respect of any Preference Amount (as defined in and
pursuant to the terms and conditions of the Bond Insurance
Policy) and the Indenture Trustee shall submit a Notice (as
defined in the Bond Insurance Policy) for payment with respect
thereto together with the other documents required to be
delivered to the Bond Insurer pursuant to the Bond Insurance
Policy in connection with a claim in respect of any Preference
Amount.
Section 3.29. Servicing and Administration of the PMI
Policies. The Indenture Trustee agrees that it will hold the PMI
Policies and the Issuer's rights thereunder, and all payments
received under the PMI Policies, in trust solely for the use and
benefit of the Bondholders and the Bond Insurer in accordance
with the terms hereof and the terms of the Servicing Agreement.
Subject to the provisions of Section 3.05 hereof, the Indenture
Trustee shall take all such actions on behalf of the Issuer as
are necessary to service and administer the PMI Policies and to
perform the Issuer's obligations and enforce the Issuer's rights
under the PMI Policies, which actions shall conform to the
standards of an institution prudently administering the PMI
Policies for its own account; provided, however, that so long as
no Servicing Default has occurred and is continuing, the Servicer
shall act as agent for the Indenture Trustee with respect to the
servicing and administering of the PMI Policies pursuant to
Section 3.22 of the Servicing Agreement.
Section 3.30. NCFC Demand Note and Surety Bond.
(a) The Indenture Trustee agrees that it will hold the
NCFC Demand Note and the Surety Bond, and the Issuer's rights
thereunder, and any payments received thereon, in trust solely
for the use and benefit of the Bondholders, in accordance with
the terms hereof.
(b) Notwithstanding any other provision of this
Indenture, the Indenture Trustee shall not make any demand for
payment under the NCFC Demand Note or any demand for payment
under the Surety Bond, or sell or otherwise transfer (except
pursuant to Section 3.30(c) hereof) the NCFC Demand Note or the
Surety Bond, unless proceeds of the Mortgage Loans, payments
received under the CAP Agreements, and payments received under
the Bond Insurance Policy are otherwise insufficient to pay
principal and interest due on the Bonds, in accordance with their
terms. The Indenture Trustee shall make a demand for payment
under the NCFC Demand Note or demand for payment under the Surety
Bond only on the Maturity Date of the Bonds or following a Bond
Insurer Default or an Event of Default under the Indenture.
Proceeds of the NCFC Demand Note and payments under the Surety
Bond shall be held and applied by the Indenture Trustee pursuant
to Section 3.05 or Section 5.04 hereof, as applicable.
<PAGE>
(c) If the Indenture Trustee has not received a
payment due under the NCFC Demand Note within one (1) business
day after making a demand for payment, then the Indenture Trustee
shall submit a claim for payment under the Surety Bond by filing
with the Bond Insurer a Demand for Payment in the form attached
to the Surety Bond.
(d) The Issuer and the Indenture Trustee acknowledge
(and each Bondholder by acceptance of its Bond hereby agrees)
that (i) to the extent the Bond Insurer makes payments under the
Surety Bond on account of principal due and owing from NCFC under
the NCFC Demand Note, the Bond Insurer shall be fully subrogated
to the rights of the Issuer, as Holder of the NCFC Demand Note,
to receive such principal from NCFC, and (ii) the Bond Insurer
shall be paid such principal but only from the sources in the
manner provided herein and in the Insurance Agreement for the
payment of such principal.
(e) Payments disbursed by the Indenture Trustee from
the proceeds of the Surety Bond shall not be considered payments
by NCFC with respect to the NCFC Demand Note, nor shall such
disbursement of such payments discharge the obligations of NCFC
with respect to the amounts thereof, and the Bond Insurer shall
become the owner of such amounts as the deemed subrogee of the
Issuer.
ARTICLE IV
The Bonds; Satisfaction and Discharge of Indenture
Section 4.01. The Bonds. The Bonds shall be registered in
the name of a nominee designated by the Depository. Beneficial
Owners will hold interests in the Bonds through the book-entry
facilities of the Depository in minimum initial Class A-1 Bond
Principal Balances or Class A-2 Bond Principal Balances of
$25,000 and integral multiples of $1 in excess thereof.
Subject to the last sentence of Section 4.12 , the Indenture
Trustee may for all purposes (including the making of payments
due on the Bonds) deal with the Depository as the authorized
representative of the Beneficial Owners with respect to the Bonds
for the purposes of exercising the rights of Holders of Bonds
hereunder. In addition, subject to the last sentence of Section
4.12, except as provided in the next succeeding paragraph of this
Section 4.01, the rights of Beneficial Owners with respect to the
Bonds shall be limited to those established by law and agreements
between such Beneficial Owners and the Depository and Depository
Participants. Except as provided in Section 4.08 hereof,
Beneficial Owners shall not be entitled to definitive certif-
icates for the Bonds as to which they are the Beneficial Owners.
Requests and directions from, and votes of, the Depository as
Holder of the Bonds shall not be deemed inconsistent if they are
made with respect to different Beneficial Owners. The Indenture
Trustee may establish a reasonable record date in connection with
solicitations of consents from or voting by Bondholders and give
notice to the Depository of such record date. Without the con-
sent of the Issuer and the Indenture Trustee, no Bond may be
transferred by the Depository except to a successor Depository
that agrees to hold such Bond for the account of the Beneficial
Owners.
<PAGE>
In the event The Depository Trust Company resigns or is
removed as Depository, the Indenture Trustee with the approval of
the Issuer may appoint a successor Depository. If no successor
Depository has been appointed within 30 days of the effective
date of the Depository's resignation or removal, each Beneficial
Owner shall be entitled to certificates representing the Bonds it
beneficially owns in the manner prescribed in Section 4.08.
The Bonds shall, on original issue, be executed on behalf of
the Issuer by the Owner Trustee, not in its individual capacity
but solely as Owner Trustee, authenticated by the Indenture
Trustee and delivered by the Indenture Trustee to or upon the
order of the Issuer.
Section 4.02. Registration of and Limitations on Transfer
and Exchange of Bonds; Appointment of Certificate Registrar. The
Issuer shall cause the Indenture Trustee, as Bond Registrar, to
keep at the Corporate Trust Office a Bond Register in which,
subject to such reasonable regulations as it may prescribe, the
Bond Registrar shall provide for the registration of Bonds and of
transfers and exchanges of Bonds as herein provided.
Subject to the restrictions and limitations set forth below,
upon surrender for registration of transfer of any Bond at the
Corporate Trust Office, the Issuer shall execute and the
Indenture Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Bonds
in authorized initial Bond Principal Balances evidencing the same
aggregate Percentage Interests.
Subject to the foregoing, at the option of the Bondholders,
Bonds may be exchanged for other Bonds of the same class and in
authorized initial Bond Principal Balances evidencing the same
aggregate Percentage Interests upon surrender of the Bonds to be
exchanged at the Corporate Trust Office of the Bond Registrar.
Whenever any Bonds are so surrendered for exchange, the Issuer
shall execute and the Indenture Trustee shall authenticate and
deliver the Bonds which the Bondholder making the exchange is
entitled to receive. Each Bond presented or surrendered for
registration of transfer or exchange shall (if so required by the
Bond Registrar) be duly endorsed by, or be accompanied by a
written instrument of transfer in form reasonably satisfactory to
the Bond Registrar duly executed by the Holder thereof or his
attorney duly authorized in writing with such signature
guaranteed by a commercial bank or trust company located or
having a correspondent located in the City of New York or the
city in which any Corporate Trust Office is located. Bonds
delivered upon any such transfer or exchange will evidence the
same obligations, and will be entitled to the same rights and
privileges, as the Bonds surrendered.
No service charge shall be made for any registration of
transfer or exchange of Bonds, but the Bond Registrar shall re-
quire payment of a sum sufficient to cover any tax or governmen-
tal charge that may be imposed in connection with any registra-
tion of transfer or exchange of Bonds.
The Issuer hereby appoints the Indenture Trustee as
Certificate Registrar to keep at its Corporate Trust Office a
Certificate Register pursuant to Section 3.09 of the Trust
Agreement in which, subject to such reasonable regulations as it
may prescribe, the Certificate Registrar shall <PAGE> provide for the
registration of Certificates and of transfers and exchanges
thereof pursuant to Section 3.05 of the Trust Agreement. The
Indenture Trustee hereby accepts such appointment.
Section 4.03. Mutilated, Destroyed, Lost or Stolen Bonds.
If (i) any mutilated Bond is surrendered to the Indenture
Trustee, or the Indenture Trustee receives evidence to its satis-
faction of the destruction, loss or theft of any Bond, and (ii)
there is delivered to the Indenture Trustee such security or
indemnity as may be required by it to hold the Issuer, the Bond
Insurer and the Indenture Trustee harmless, then, in the absence
of notice to the Issuer, the Bond Registrar or the Indenture
Trustee that such Bond has been acquired by a bona fide
purchaser, and provided that the requirements of Section 8-405 of
the UCC are met, the Issuer shall execute, and upon its request
the Indenture Trustee shall authenticate and deliver, in exchange
for or in lieu of any such mutilated, destroyed, lost or stolen
Bond, a replacement Bond; provided, however, that if any such
destroyed, lost or stolen Bond, but not a mutilated Bond, shall
have become or within seven days shall be due and payable,
instead of issuing a replacement Bond, the Issuer may pay such
destroyed, lost or stolen Bond when so due or payable without
surrender thereof. If, after the delivery of such replacement
Bond or payment of a destroyed, lost or stolen Bond pursuant to
the proviso to the preceding sentence, a bona fide purchaser of
the original Bond in lieu of which such replacement Bond was
issued presents for payment such original Bond, the Issuer, the
Bond Insurer and the Indenture Trustee shall be entitled to
recover such replacement Bond (or such payment) from the Person
to whom it was delivered or any Person taking such replacement
Bond from such Person to whom such replacement Bond was delivered
or any assignee of such Person, except a bona fide purchaser, and
shall be entitled to recover upon the security or indemnity
provided therefor to the extent of any loss, damage, cost or
expense incurred by the Issuer, the Bond Insurer or the Indenture
Trustee in connection therewith.
Upon the issuance of any replacement Bond under this Section
4.03, the Issuer may require the payment by the Holder of such
Bond of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other
reasonable expenses (including the fees and expenses of the
Indenture Trustee) connected therewith.
Every replacement Bond issued pursuant to this Section 4.03
in replacement of any mutilated, destroyed, lost or stolen Bond
shall constitute an original additional contractual obligation of
the Issuer, whether or not the mutilated, destroyed, lost or
stolen Bond shall be at any time enforceable by anyone, and shall
be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Bonds duly issued here-
under.
The provisions of this Section 4.03 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies
with respect to the replacement or payment of mutilated, destroy-
ed, lost or stolen Bonds.
Section 4.04. Persons Deemed Owners. Prior to due present-
ment for registration of transfer of any Bond, the Issuer, the
Bond Insurer, the Indenture Trustee and any agent of the Issuer,
the Bond Insurer, or the Indenture Trustee may treat the Person
in whose name any Bond is registered <PAGE> (as of the day of
determination) as the owner of such Bond for the purpose of
receiving payments of principal of and interest, if any, on such
Bond and for all other purposes whatsoever, whether or not such
Bond be overdue, and neither the Issuer, the Bond Insurer, the
Indenture Trustee nor any agent of the Issuer, the Bond Insurer
or the Indenture Trustee shall be affected by notice to the
contrary.
Section 4.05. Cancellation. All Bonds surrendered for
payment, registration of transfer, exchange or redemption shall,
if surrendered to any Person other than the Indenture Trustee, be
delivered to the Indenture Trustee and shall be promptly canceled
by the Indenture Trustee. The Issuer may at any time deliver to
the Indenture Trustee for cancellation any Bonds previously
authenticated and delivered hereunder which the Issuer may have
acquired in any manner whatsoever, and all Bonds so delivered
shall be promptly canceled by the Indenture Trustee. No Bonds
shall be authenticated in lieu of or in exchange for any Bonds
canceled as provided in this Section 4.05, except as expressly
permitted by this Indenture. All canceled Bonds may be held or
disposed of by the Indenture Trustee in accordance with its
standard retention or disposal policy as in effect at the time
unless the Issuer shall direct by an Issuer Request that they be
destroyed or returned to it; provided, however, that such Issuer
Request is timely and the Bonds have not been previously disposed
of by the Indenture Trustee.
Section 4.06. Book-Entry Bonds. The Bonds, upon original
issuance, will be issued in the form of definitive Bonds
representing the Book-Entry Bonds, to be delivered to The
Depository Trust Company, the initial Depository, by, or on
behalf of, the Issuer. Such Bonds shall initially be registered
on the Bond Register in the name of Cede & Co., the nominee of
the initial Depository, and no Beneficial Owner will receive a
Definitive Bond representing such Beneficial Owner's interest in
such Bond, except as provided in Section 4.08. Unless and until
definitive, fully registered Bonds (the "Definitive Bonds") have
been issued to Beneficial Owners pursuant to Section 4.08:
(i) the provisions of this Section 4.06 shall be in
full force and effect;
(ii) the Bond Registrar, the Bond Insurer and the
Indenture Trustee shall be entitled to deal with the
Depository for all purposes of this Indenture (including the
payment of principal of and interest on the Bonds and the
giving of instructions or directions hereunder) as the sole
holder of the Bonds, and shall have no obligation to the
Beneficial Owners of Bonds;
(iii) to the extent that the provisions of this
Section 4.06 conflict with any other provisions of this
Indenture, the provisions of this Section 4.06 shall
control;
(iv) subject to the last sentence of Section 4.12,
the rights of Beneficial Owners shall be exercised only
through the Depository and shall be limited to those
established by law and agreements between such Beneficial
Owners of Bonds and the Depository and/or the Depository
Participants. Unless and until Definitive Bonds are issued
pursuant to Section 4.08, the initial Depository will make
book-entry transfers among the Depository Participants <PAGE> and
receive and transmit payments of principal of and interest
on the Bonds to such Depository Participants; and
(v) subject to the last sentence of Section 4.12,
whenever this Indenture requires or permits actions to be
taken based upon instructions or directions of Holders of
Bonds evidencing a specified percentage of the Bond
Principal Balances of the Bonds, the Depository shall be
deemed to represent such percentage only to the extent that
it has received instructions to such effect from Beneficial
Owners and/or Depository Participants owning or
representing, respectively, such required percentage of the
beneficial interest in the Bonds and has delivered such
instructions to the Indenture Trustee.
Section 4.07. Notices to Depository. Whenever a notice or
other communication to the Bondholders is required under this
Indenture, unless and until Definitive Bonds shall have been
issued to Beneficial Owners pursuant to Section 4.08, the
Indenture Trustee shall give all such notices and communications
specified herein to be given to Holders of the Bonds to the
Depository, and shall have no obligation to the Beneficial
Owners.
Section 4.08. Definitive Bonds. If (i) the Indenture
Trustee determines that the Depository is no longer willing or
able to properly discharge its responsibilities with respect to
the Bonds and the Indenture Trustee is unable to locate a
qualified successor, (ii) the Indenture Trustee elects to
terminate the book-entry system through the Depository or
(iii) after the occurrence of an Event of Default, Beneficial
Owners of Bonds representing beneficial interests aggregating at
least a majority of the Bond Principal Balances of the Bonds
advise the Depository in writing that the continuation of a book-
entry system through the Depository is no longer in the best
interests of the Beneficial Owners, then the Depository shall
notify all Beneficial Owners and the Indenture Trustee of the
occurrence of any such event and of the availability of
Definitive Bonds to Beneficial Owners requesting the same. Upon
surrender to the Indenture Trustee of the typewritten Bonds
representing the Book-Entry Bonds by the Depository, accompanied
by registration instructions, the Issuer shall execute and the
Indenture Trustee shall authenticate the Definitive Bonds in
accordance with the instructions of the Depository. None of the
Issuer, the Bond Registrar or the Indenture Trustee shall be
liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such
instructions. Upon the issuance of Definitive Bonds, the
Indenture Trustee shall recognize the Holders of the Definitive
Bonds as Bondholders. The Indenture Trustee shall notify the
Bond Insurer upon the issuance of Definitive Bonds.
Section 4.09. Tax Treatment. The Issuer has entered into
this Indenture, and the Bonds will be issued, with the intention
that, for federal, state and local income, single business and
franchise tax purposes, the Bonds will qualify as indebtedness.
The Issuer, by entering into this Indenture, and each Bondholder,
by its acceptance of its Bond (and each Beneficial Owner by its
acceptance of an interest in the applicable Book-Entry Bond),
agree to treat the Bonds for federal, state and local income,
single business and franchise tax purposes as indebtedness.
<PAGE>
Section 4.10. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect with respect
to the Bonds, except as to (i) rights of registration of transfer
and exchange, (ii) substitution of mutilated, destroyed, lost or
stolen Bonds, (iii) rights of Bondholders (and the Bond Insurer,
as subrogee of the Bondholders) to receive payments of principal
thereof and interest thereon, (iv) Sections 3.03, 3.04, 3.06,
3.09, 3.16, 3.18 and 3.19, (v) the rights, obligations and
immunities of the Indenture Trustee hereunder (including the
rights of the Indenture Trustee under Section 6.07 and the obli-
gations of the Indenture Trustee under Section 4.11) and (vi) the
rights of Bondholders as beneficiaries hereof with respect to the
property so deposited with the Indenture Trustee payable to all
or any of them, and the Indenture Trustee, on demand of and at
the expense of the Issuer, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture with
respect to the Bonds and shall release and deliver the Collateral
to or upon the order of the Issuer, when
(A) either
(1) all Bonds theretofore authenticated and delivered
(other than (i) Bonds that have been destroyed, lost or
stolen and that have been replaced or paid as provided in
Section 4.03 hereof and (ii) Bonds for whose payment money
has theretofore been deposited in trust or segregated and
held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from such trust, as provided in Section
3.03) have been delivered to the Indenture Trustee for
cancellation; or
(2) all Bonds not theretofore delivered to the Inden-
ture Trustee for cancellation
a. have become due and payable,
b. will become due and payable at the Final
Scheduled Payment Date within one year, or
c. have been called for early redemption
pursuant to Section 8.07 hereof,
and the Issuer, in the case of a. or b. above, has
irrevocably deposited or caused to be irrevocably deposited
with the Indenture Trustee cash or direct obligations of or
obligations guaranteed by the United States of America
(which will mature prior to the date such amounts are pay-
able), in trust for such purpose, in an amount sufficient to
pay and discharge the entire indebtedness on such Bonds then
outstanding not theretofore delivered to the Indenture
Trustee for cancellation when due on the Final Scheduled
Payment Date or other final Payment Date and has delivered
to the Indenture Trustee and the Bond Insurer a verification
report from a nationally recognized accounting firm
certifying that the amounts deposited with the Indenture
Trustee are sufficient to pay and discharge the entire
indebtedness of such Bonds, or, in the case of c. above, the
Issuer shall have complied with all requirements of Section
8.07 hereof;
<PAGE>
(B) the Issuer has paid or caused to be paid all other
sums payable hereunder and under the Insurance Agreement by
the Issuer as evidenced by the written consent of the Bond
Insurer; and
(C) the Issuer has delivered to the Indenture Trustee
and the Bond Insurer an Officer's Certificate and an Opinion
of Counsel, each meeting the applicable requirements of
Section 10.01 hereof, each stating that all conditions
precedent herein provided for relating to the satisfaction
and discharge of this Indenture have been complied with and,
if the Opinion of Counsel relates to a deposit made in
connection with Section 4.10(A)(2)b. above, such opinion
shall further be to the effect that such deposit will
constitute an "in-substance defeasance" within the meaning
of Revenue Ruling 85-42, 1985-1 C.B. 36, and in accordance
therewith, the Issuer will be the owner of the assets
deposited in trust for federal income tax purposes.
Section 4.11. Application of Trust Money. All monies
deposited with the Indenture Trustee pursuant to Section 4.10
hereof shall be held in trust and applied by it, in accordance
with the provisions of the Bonds and this Indenture, to the pay-
ment, either directly or through any Paying Agent or the Issuer,
Certificate Paying Agent as designee of the Issuer or the Bond
Insurer, as applicable, as the Indenture Trustee may determine,
to the Holders of Bonds, of all sums due and to become due
thereon for principal and interest or otherwise; but such monies
need not be segregated from other funds except to the extent
required herein or required by law.
Section 4.12. Subrogation and Cooperation. (a) The Issuer
and the Indenture Trustee acknowledge (and each Bondholder by
acceptance of its Bond hereby agrees) that (i) to the extent the
Bond Insurer makes payments under the Bond Insurance Policy on
account of principal of or interest on the Bonds, the Bond
Insurer will be fully subrogated to the rights of such Holders to
receive such principal and interest from the Issuer, and (ii) the
Bond Insurer shall be paid such principal and interest but only
from the sources and in the manner provided herein and in the
Insurance Agreement for the payment of such principal and
interest.
Insured Payments disbursed by the Indenture Trustee from
proceeds of the Bond Insurance Policy shall not be considered
payment by the Issuer with respect to the Bonds, nor shall such
disbursement of such Insured Payments discharge the obligations
of the Issuer with respect to the amounts thereof, and the Bond
Insurer shall become the owner of such amounts as the deemed
subrogee of such Bondholders.
So long as no Bond Insurer Default exists, the Indenture
Trustee shall cooperate in all respects with any reasonable
request by the Bond Insurer for action to preserve or enforce the
Bond Insurer's rights or interest under this Indenture or the
Insurance Agreement, consistent with this Indenture and without
limiting the rights of the Bondholders as otherwise set forth in
the Indenture, including, without limitation, upon the occurrence
and continuance of a default under the Insurance Agreement, a
request to take any one or more of the following actions:
<PAGE>
(i) institute Proceedings for the collection of all
amounts then payable on the Bonds, or under this Indenture
in respect to the Bonds and all amounts payable under the
Insurance Agreement, enforce any judgment obtained and
collect from the Issuer monies adjudged due;
(ii) sell the Trust Estate or any portion thereof
or rights or interest therein, at one or more public or
private Sales called and conducted in any manner permitted
by law;
(iii) file or record all Assignments of Mortgage
that have not previously been recorded;
(iv) institute Proceedings from time to time for
the complete or partial foreclosure of this Indenture; and
(v) exercise any remedies of a secured party under the
UCC and take any other appropriate action to protect and
enforce the rights and remedies of the Bond Insurer
hereunder;
provided, however, action shall be taken pursuant to this Section
4.12 by the Indenture Trustee to preserve the Bond Insurer's
rights or interest under this Agreement or the Insurance
Agreement only to the extent such action is available to the
Bondholders or the Bond Insurer under other provisions of this
Indenture.
Notwithstanding any provision of this Indenture to the
contrary, so long as no Bond Insurer Default exists, the Bond
Insurer shall at all times be treated as if it were the exclusive
Bondholder for the purposes of all approvals, consents, waivers
and the institution of any action and the direction of all
remedies hereunder, and the Indenture Trustee shall act in
accordance with the directions of the Bond Insurer so long as it
is indemnified therefor to its reasonable satisfaction; provided,
however, that the provisions of the first paragraph of Section
5.06 shall not apply to the Bond Insurer when the Bond Insurer is
exercising the rights of the Bondholders pursuant to this
paragraph.
Section 4.13. Repayment of Monies Held by Paying Agent. In
connection with the satisfaction and discharge of this Indenture
with respect to the Bonds, all monies then held by any Person
other than the Indenture Trustee under the provisions of this
Indenture with respect to such Bonds shall, upon demand of the
Issuer, be paid to the Indenture Trustee to be held and applied
according to Section 3.05 and thereupon such Person shall be
released from all further liability with respect to such monies.
Section 4.14. Temporary Bonds. Pending the preparation of
any Definitive Bonds, the Issuer may execute and upon its written
direction, the Indenture Trustee may authenticate and make
available for delivery, temporary Bonds that are printed,
lithographed, typewritten, photocopied or otherwise produced, in
any denomination, substantially of the tenor of the Definitive
Bonds in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other <PAGE> variations as the
officers executing such Bonds may reasonably determine, as
evidenced by their execution of such Bonds.
If temporary Bonds are issued, the Issuer will cause
Definitive Bonds to be prepared without unreasonable delay.
After the preparation of the Definitive Bonds, the temporary
Bonds shall be exchangeable for Definitive Bonds upon surrender
of the temporary Bonds at the office or agency of the Indenture
Trustee, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Bonds, the Issuer shall
execute and the Indenture Trustee shall authenticate and make
available for delivery, in exchange therefor, Definitive Bonds of
authorized denominations and of like tenor and aggregate
principal amount. Until so exchanged, such temporary Bonds shall
in all respects be entitled to the same benefits under this
Indenture as Definitive Bonds.
ARTICLE V
Default and Remedies
Section 5.01. Events of Default. The Issuer shall deliver
to the Indenture Trustee and the Bond Insurer, within five days
after learning of the occurrence of a Default or an Event of
Default, written notice in the form of an Officer's Certificate
of the occurrence of such Default or Event of Default, its status
and what action the Issuer is taking or proposes to take with
respect thereto.
Section 5.02. Acceleration of Maturity; Rescission and
Annulment. If an Event of Default should occur and be continu-
ing, then and in every such case the Indenture Trustee may (with
the prior written consent of the Bond Insurer), and, at the
written direction of the Bond Insurer (which such written
direction shall include a statement to the effect that such
acceleration is at the sole option of the Bond Insurer and that
an amount equal to the excess, if any, of the sum of the unpaid
Bond Principal Balance of the Bonds together with accrued and
unpaid interest thereon through the date of payment of such
accelerated Bonds, over Available Funds for such date of payment,
would constitute a Deficiency Amount pursuant to the terms of the
Bond Insurance Policy and will be paid by the Bond Insurer in
connection with the acceleration in accordance with the terms of
the Bond Insurance Policy), or if a Bond Insurer Default exists,
the Holders of Bonds representing not less than a majority of the
Bond Principal Balances of all Bonds, shall, declare the Bonds to
be immediately due and payable, by a notice in writing to the
Issuer (and to the Indenture Trustee if given by Bondholders),
and upon any such declaration the unpaid Bond Principal Balance
of the Bonds, together with accrued and unpaid interest thereon
through the date of acceleration, shall become immediately due
and payable.
At any time after such declaration of acceleration of
maturity with respect to an Event of Default has been made and
before a judgment or decree for payment of the money due has been
obtained by the Indenture Trustee as hereinafter in this
Article V provided, the Bond Insurer or, if a Bond Insurer
Default exists, the Holders of Bonds representing a majority of
the Bond Principal <PAGE> Balances of all Bonds, by written notice to
the Issuer and the Indenture Trustee, may waive the related Event
of Default and rescind and annul such declaration and its
consequences if:
(i) the Issuer or the Bond Insurer has paid or
deposited with the Indenture Trustee a sum sufficient to
pay:
(A) all payments of principal of and interest on
the Bonds and all other amounts that would then be due
hereunder or upon the Bonds if the Event of Default
giving rise to such acceleration had not occurred; and
(B) all sums reasonably paid or advanced by the
Indenture Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of
the Indenture Trustee and its agents and counsel; and
(ii) all Events of Default, other than the
nonpayment of the principal of the Bonds that has become due
solely by such acceleration, have been cured or waived as
provided in Section 5.12.
provided, however, the Bond Insurer, so long as no Bond Insurer
Default exists, may waive an Event of Default regardless of
Section 5.02(i) or (ii) above.
No such rescission shall affect any subsequent default or
impair any right consequent thereto.
Section 5.03. Collection of Indebtedness and Suits for
Enforcement by Indenture Trustee. (a) The Issuer covenants that
if (i) default is made in the payment of any interest (including
the Interest Payment Amount) on any Bond when the same becomes
due and payable, and such default continues for a period of five
days, or (ii) default is made in the payment of the principal
(including the Principal Payment Amount and the Subordination
Increase Amount) of or any installment of the principal of any
Bond when the same becomes due and payable, the Issuer shall,
upon demand of the Indenture Trustee, at the direction of the
Bond Insurer, so long as no Bond Insurer Default exists, pay to
the Indenture Trustee, for the benefit of the Holders of Bonds
and of the Bond Insurer, the whole amount then due and payable on
the Bonds for principal and interest, with interest at the Bond
Interest Rate upon the overdue principal, and in addition thereto
such further amount as shall be sufficient to cover the
reasonable costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of
the Indenture Trustee and its agents and counsel.
(b) In case the Issuer shall fail forthwith to pay
such amounts upon such demand, the Indenture Trustee, in its own
name and as trustee of an express trust, and at the direction of
the Bond Insurer, so long as no Bond Insurer Default exists,
subject to the provisions of Section 10.16 hereof, may institute
a Proceeding for the collection of the sums so due and unpaid,
and may prosecute such Proceeding to judgment or final decree,
and may enforce the same against the Issuer or other obligor <PAGE> upon
the Bonds and collect in the manner provided by law out of the
property of the Issuer or other obligor the Bonds, wherever
situated, the monies adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing,
the Indenture Trustee, at the direction of the Bond Insurer, so
long as no Bond Insurer Default exists, subject to the provisions
of Section 10.16 hereof may, as more particularly provided in
Section 5.04 hereof, in its discretion, proceed to protect and
enforce its rights and the rights of the Bondholders and the Bond
Insurer, by such appropriate Proceedings as the Indenture
Trustee, at the direction of the Bond Insurer, so long as no Bond
Insurer Default exists, shall deem most effective to protect and
enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other
proper remedy or legal or equitable right vested in the Indenture
Trustee by this Indenture or by law.
(d) In case there shall be pending, relative to the
Issuer or any other obligor upon the Bonds or any Person having
or claiming an ownership interest in the Trust Estate,
Proceedings under Title 11 of the United States Code or any other
applicable federal or state bankruptcy, insolvency or other
similar law, or in case a receiver, assignee or trustee in
bankruptcy or reorganization, liquidator, sequestrator or similar
official shall have been appointed for or taken possession of the
Issuer or its property or such other obligor or Person, or in
case of any other comparable judicial Proceedings relative to the
Issuer or other obligor upon the Bonds, or to the creditors or
property of the Issuer or such other obligor, the Indenture
Trustee, at the direction of the Bond Insurer, so long as no Bond
Insurer Default exists, irrespective of whether the principal of
any Bonds shall then be due and payable as therein expressed or
by declaration or otherwise and irrespective of whether the
Indenture Trustee shall have made any demand pursuant to the
provisions of this Section, shall be entitled and empowered, by
intervention in such Proceedings or otherwise:
(i) to file and prove a claim or claims for the whole
amount of principal and interest owing and unpaid in respect
of the Bonds and to file such other papers or documents as
may be necessary or advisable in order to have the claims of
the Indenture Trustee (including any claim for reasonable
compensation to the Indenture Trustee and each predecessor
Indenture Trustee, and their respective agents, attorneys
and counsel, and for reimbursement of all reasonable
expenses and liabilities incurred, and all advances made, by
the Indenture Trustee and each predecessor Indenture
Trustee, except as a result of negligence or bad faith), the
Bond Insurer and of the Bondholders allowed in such
Proceedings;
(ii) unless prohibited by applicable law and
regulations, to vote on behalf of the Holders of Bonds in
any election of a trustee, a standby trustee or Person
performing similar functions in any such Proceedings;
(iii) to collect and receive any monies or other
property payable or deliverable on any such claims and to
distribute all amounts received with respect to the claims
of the Bondholders, the Bond Insurer and of the Indenture
Trustee on their behalf; and
<PAGE>
(iv) to file such proofs of claim and other papers
or documents as may be necessary or advisable in order to
have the claims of the Indenture Trustee, the Bond Insurer
or the Holders of Bonds allowed in any judicial proceedings
relative to the Issuer, its creditors and its property;
and any trustee, receiver, liquidator, custodian or other similar
official in any such Proceeding is hereby authorized by each of
such Bondholders to make payments to the Indenture Trustee, and,
in the event that the Indenture Trustee, with the consent of the
Bond Insurer, so long as no Bond Insurer Default exists, shall
consent to the making of payments directly to such Bondholders,
to pay to the Indenture Trustee such amounts as shall be
sufficient to cover reasonable compensation to the Indenture
Trustee, each predecessor Indenture Trustee and their respective
agents, attorneys and counsel, all other reasonable expenses and
liabilities incurred, all advances made, by the Indenture Trustee
and each predecessor Indenture Trustee, except as a result of
negligence or bad faith, and all amounts due to the Bond Insurer.
(e) Nothing herein contained shall be deemed to
authorize the Indenture Trustee to authorize or consent to or
vote for or accept or adopt on behalf of any Bondholder any plan
of reorganization, arrangement, adjustment or composition
affecting the Bonds or the rights of any Holder thereof or to
authorize the Indenture Trustee to vote in respect of the claim
of any Bondholder in any such proceeding except, as aforesaid, to
vote for the election of a trustee in bankruptcy or similar
Person.
(f) All rights of action and of asserting claims under
this Indenture, or under any of the Bonds, may be enforced by the
Indenture Trustee without the possession of any of the Bonds or
the production thereof in any trial or other Proceedings relative
thereto, and any such action or proceedings instituted by the
Indenture Trustee shall be brought in its own name as trustee of
an express trust, and any recovery of judgment, subject to the
payment of the reasonable expenses, disbursements and
compensation of the Indenture Trustee, each predecessor Indenture
Trustee and their respective agents and attorneys, shall be for
the ratable benefit of the Holders of the Bonds and the Bond
Insurer, subject to Section 5.05 hereof.
(g) In any Proceedings brought by the Indenture
Trustee with the consent of the Bond Insurer, so long as no Bond
Insurer Default exists (and also any Proceedings involving the
interpretation of any provision of this Indenture to which the
Indenture Trustee shall be a party), the Indenture Trustee shall
be held to represent all the Holders of the Bonds, and it shall
not be necessary to make any Bondholder a party to any such
Proceedings.
Section 5.04. Remedies; Priorities. (a) If an Event of
Default shall have occurred and be continuing and if an
acceleration has been declared and not rescinded pursuant to
Section 5.02 hereof, the Indenture Trustee, subject to the
provisions of Section 10.16 hereof and with the consent of the
Bond Insurer so long as no Bond Insurer Default exists, may and,
at the direction of the Bond Insurer so long as no Bond Insurer
Default exists, shall, do one or more of the following (subject
to Section 5.05 hereof):
<PAGE>
(i) institute Proceedings in its own name and as
trustee of an express trust for the collection of all
amounts then payable on the Bonds or under this Indenture
with respect thereto, whether by declaration or otherwise,
and all amounts payable under the Insurance Agreement,
enforce any judgment obtained, and collect from the Issuer
and any other obligor upon such Bonds monies adjudged due;
(ii) institute Proceedings from time to time for
the complete or partial foreclosure of this Indenture with
respect to the Trust Estate;
(iii) exercise any remedies of a secured party
under the UCC and take any other appropriate action to
protect and enforce the rights and remedies of the Indenture
Trustee, the Holders of the Bonds and the Bond Insurer; and
(iv) sell the Trust Estate or any portion thereof
or rights or interest therein, at one or more public or
private sales called and conducted in any manner permitted
by law;
provided, however, that so long as a Bond Insurer Default exists,
the Indenture Trustee may not sell or otherwise liquidate the
Trust Estate following an Event of Default, unless (A) the
Indenture Trustee obtains the consent of the Holders of 100% of
the aggregate Bond Principal Balance, (B) the proceeds of such
sale or liquidation distributable to the Holders of the Bonds are
sufficient to discharge in full all amounts then due and unpaid
upon the Bonds for principal and interest and to reimburse the
Bond Insurer for any amounts drawn under the Bond Insurance
Policy and any other amounts due to the Bond Insurer under the
Insurance Agreement or (C) the Indenture Trustee determines that
the Mortgage Loans will not continue to provide sufficient funds
for the payment of principal of and interest on the Bonds as they
would have become due if the Bonds had not been declared due and
payable, and the Indenture Trustee obtains the consent of the
Holders of a majority of the aggregate Bond Principal Balance.
In determining such sufficiency or insufficiency with respect to
clause (B) and (C), the Indenture Trustee may, but need not,
obtain and rely upon an opinion of an Independent investment
banking or accounting firm of national reputation as to the
feasibility of such proposed action and as to the sufficiency of
the Trust Estate for such purpose.
(b) If the Indenture Trustee collects any money or
property pursuant to this Article V, it shall pay out the money
or property in the following order; provided, however, that any
amounts representing Insured Payments from the Bond Insurer under
the Bond Insurance Policy or payments under the NCFC Demand Note
or payments by the Bond Insurer under the Surety Bond shall only
be used to pay interest and principal to the Bondholders pursuant
to clauses FOURTH and FIFTH below:
FIRST: to the Indenture Trustee for amounts due under
Section 6.07 hereof;
SECOND: to the Bond Insurer, provided no Bond Insurer
Default exists, with respect to any Bond Insurance
Premium then due;
<PAGE>
THIRD: to the First and Second CAP Provider, any
amounts including termination payments then due and
owing under the First and Second CAP Agreements to the
extent such amounts have not been paid by the Servicer
out of the Collection Account pursuant to Section 3.10
of the Servicing Agreement; provided, however, that no
such amounts in respect of termination payments shall
be paid unless (A) the Bond Insurer has directed a
termination of the First and Second CAP Agreements
pursuant to the terms thereof, or (B) the Bond Insurer
has failed to pay any insured amount to the First and
Second CAP Provider under the CAP Agreement Insurance
Policy;
FOURTH: to the Bondholders for amounts due and unpaid
on the Bonds with respect to interest, ratably, without
preference or priority of any kind, based on the Class
A-1 Interest Payment Amount due and payable on the
Class A-1 Bonds and the Class A-2 Interest Payment
Amount due and payable on the Class A-2 Bonds (but not
including any Prepayment Interest Shortfalls, any
Relief Act Shortfalls and the Carry-Forward Amount)
from amounts available in the Trust Estate for the
Bondholders;
FIFTH: to the Bondholders for amounts due and unpaid
on the Bonds with respect to principal (including, but
not limited to, any Principal Payment Amount), from
amounts available in the Trust Estate for the
Bondholders, ratably, without preference or priority of
any kind, based on the Bond Principal Balance of the
Class A-1 Bonds and the Class A-2 Bonds, until the Bond
Principal Balance of each such Class of Bonds is
reduced to zero;
SIXTH: to the Bond Insurer, the sum of (a) all
payments previously paid by the Bond Insurer under the
Bond Insurance Policy, the CAP Agreement Insurance
Policy and the Surety Bond which have not previously
been reimbursed, (b) any other amounts due to the Bond
Insurer pursuant to the Insurance Agreement, to the
extent not previously paid or reimbursed and (c)
interest on the foregoing as set forth in the Insurance
Agreement from the date such amounts become due until
paid in full (including any Bond Insurance Premium not
paid pursuant to clause SECOND above);
SEVENTH: to the Bondholders for amounts due and unpaid
on the Bonds with respect to the Carry-Forward Amount,
ratably, without preference or priority of any kind,
based on the Class A-1 Carry-Forward Amount payable on
the Class A-1 Bonds and the Class A-2 Carry-Forward
Amount payable on the Class A-2 Bonds, from amounts
available in the Trust Estate for the Bondholders.
EIGHTH: to the First and Second CAP Provider, for
amounts due and owing under the First and Second CAP
Agreements and not paid pursuant to clause THIRD above;
NINTH: to the Servicer, any amounts due and unpaid to
the Servicer pursuant to Section 5.03 of the Servicing
Agreement in connection with the indemnity by the
<PAGE>
Issuer thereunder, and in the event there is a
successor servicer, additional compensation, if
necessary, pursuant to Section 6.02(a) of the Servicing
Agreement; and
TENTH: to the payment of the remainder, if any, to the
Issuer or the Certificate Paying Agent as its designee
on behalf of the Certificateholders, or any other
person legally entitled thereto.
The Indenture Trustee may fix a record date and payment date
for any payment to Bondholders pursuant to this Section 5.04.
With respect to any acceleration at the direction of the Bond
Insurer, the first payment date after the acceleration shall be
the first Payment Date after the acceleration. At least 15 days
before such record date, the Indenture Trustee shall mail to each
Bondholder a notice that states the record date, the payment date
and the amount to be paid.
Section 5.05. Optional Preservation of the Trust Estate.
If the Bonds have been declared to be due and payable under
Section 5.02 following an Event of Default and such declaration
and its consequences have not been rescinded and annulled, the
Indenture Trustee may, with the consent of the Bond Insurer, and
shall, at the direction of the Bond Insurer, so long as no Bond
Insurer Default exists, elect to take and maintain possession of
the Trust Estate. It is the desire of the parties hereto and the
Bondholders that there be at all times sufficient funds for the
payment of principal of and interest on the Bonds and other
obligations of the Issuer including payment to the Bond Insurer,
and the Indenture Trustee shall take such desire into account
when determining whether or not to take and maintain possession
of the Trust Estate. In determining whether to take and maintain
possession of the Trust Estate, the Indenture Trustee may, but
need not, obtain and rely upon an opinion of an Independent
investment banking or accounting firm of national reputation as
to the feasibility of such proposed action and as to the
sufficiency of the Trust Estate for such purpose.
Section 5.06. Limitation of Suits. No Holder of any Bond
shall have any right to institute any Proceeding, judicial or
otherwise, with respect to this Indenture, or for the appointment
of a receiver or trustee, or for any other remedy hereunder,
unless subject to the provisions of Section 10.16 hereof:
(i) such Holder has previously given written notice to
the Indenture Trustee of a continuing Event of Default;
(ii) the Holders of not less than 25% of the Bond
Principal Balances of the Bonds have made a written request
to the Indenture Trustee to institute such Proceeding in
respect of such Event of Default in its own name as
Indenture Trustee hereunder;
(iii) such Holder or Holders have offered to the
Indenture Trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in complying with
such request;
(iv) the Indenture Trustee for 60 days after its
receipt of such notice of request and offer of indemnity has
failed to institute such Proceedings;
<PAGE>
(v) no direction inconsistent with such written
request has been given to the Indenture Trustee during such
60-day period by the Holders of a majority of the Bond
Principal Balances of the Bonds; and
(vi) such Holder or Holders have the consent of
the Bond Insurer, unless a Bond Insurer Default exists.
It is understood and intended that no one or more Holders of
Bonds shall have any right in any manner whatever by virtue of,
or by availing of, any provision of this Indenture to affect,
disturb or prejudice the rights of any other Holders of Bonds or
to obtain or to seek to obtain priority or preference over any
other Holders or to enforce any right under this Indenture,
except in the manner herein provided.
Subject to the last paragraph of Section 4.12 herein, in the
event the Indenture Trustee shall receive conflicting or
inconsistent requests and indemnity from two or more groups of
Holders of Bonds, each representing less than a majority of the
Bond Principal Balances of the Bonds, the Indenture Trustee in
its sole discretion may determine what action, if any, shall be
taken, notwithstanding any other provisions of this Indenture.
Section 5.07. Unconditional Rights of Bondholders To
Receive Principal and Interest. Notwithstanding any other pro-
visions in this Indenture, the Holder of any Bond shall have the
right, which is absolute and unconditional, to receive payment of
the principal of and interest, if any, on such Bond on or after
the respective due dates thereof expressed in such Bond or in
this Indenture and to institute suit for the enforcement of any
such payment, and such right shall not be impaired without the
consent of such Holder.
Section 5.08. Restoration of Rights and Remedies. If the
Indenture Trustee or any Bondholder has instituted any Proceeding
to enforce any right or remedy under this Indenture and such
Proceeding has been discontinued or abandoned for any reason or
has been determined adversely to the Indenture Trustee, the Bond
Insurer or to such Bondholder, then and in every such case the
Issuer, the Indenture Trustee, the Bond Insurer and the
Bondholders shall, subject to any determination in such
Proceeding, be restored severally and respectively to their
former positions hereunder, and thereafter all rights and
remedies of the Indenture Trustee, the Bond Insurer and the
Bondholders shall continue as though no such Proceeding had been
instituted.
Section 5.09. Rights and Remedies Cumulative. No right or
remedy herein conferred upon or reserved to the Indenture
Trustee, the Bond Insurer or to the Bondholders is intended to be
exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
<PAGE>
Section 5.10. Delay or Omission Not a Waiver. No delay or
omission of the Indenture Trustee, the Bond Insurer or any Holder
of any Bond to exercise any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this
Article V or by law to the Indenture Trustee, the Bond Insurer or
to the Bondholders may be exercised from time to time, and as
often as may be deemed expedient, by the Indenture Trustee, the
Bond Insurer or by the Bondholders, as the case may be.
Section 5.11. Control by Bond Insurer. The Bond Insurer,
or if a Bond Insurer Default exists, the Holders of a majority of
the Bond Principal Balances of Bonds shall have the right
(subject to the provisions of Section 5.06) to direct the time,
method and place of conducting any Proceeding for any remedy
available to the Indenture Trustee with respect to the Bonds or
exercising any trust or power conferred on the Indenture Trustee;
provided that:
(i) such direction shall not be in conflict with any
rule of law or with this Indenture;
(ii) if a Bond Insurer Default exists, subject to
the express terms of Section 5.04, any direction to the
Indenture Trustee to sell or liquidate the Trust Estate
shall be by Holders of Bonds representing 100% of the Bond
Principal Balances of the Bonds;
(iii) if the conditions set forth in Section 5.05
hereof have been satisfied and the Indenture Trustee, with
the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, elects to retain the Trust Estate pursuant
to such Section, then any direction to the Indenture Trustee
by Holders of Bonds (other than with respect to the Bond
Insurer exercising the rights of Bondholders pursuant to the
last sentence of Section 4.12) to sell or liquidate the
Trust Estate shall be of no force and effect; and
(iv) if a Bond Insurer Default exists, the
Indenture Trustee may take any other action deemed proper by
the Indenture Trustee that is not inconsistent with such
direction.
Notwithstanding the rights of Bondholders set forth in this
Section, subject to Section 6.01, the Indenture Trustee need not
take any action that it determines might involve it in liability
or, if a Bond Insurer Default exists, might materially adversely
affect the rights of any Bondholders not consenting to such
action.
Section 5.12. Waiver of Past Defaults. Prior to the
declaration of the acceleration of the maturity of the Bonds as
provided in Section 5.02 hereof, the Bond Insurer, or if a Bond
Insurer Default exists, the Holders of Bonds of not less than a
majority of the Bond Principal Balances of the Bonds, may waive
any past Event of Default and its consequences except an Event of
Default (a) with respect to payment of principal of or interest
on any of the Bonds or (b) in respect of a covenant or provision
hereof which cannot be modified or amended without the consent of
the Holder of each Bond or (c) the waiver of which would mate-
rially and adversely affect the interests of the Bond <PAGE> Insurer or
modify its obligation under the Bond Insurance Policy. In the
case of any such waiver, the Issuer, the Indenture Trustee and
the Holders of the Bonds shall be restored to their former
positions and rights hereunder, respectively; but no such waiver
shall extend to any subsequent or other Event of Default or
impair any right consequent thereto.
Upon any such waiver, any Event of Default arising therefrom
shall be deemed to have been cured and not to have occurred, for
every purpose of this Indenture; but no such waiver shall extend
to any subsequent or other Event of Default or impair any right
consequent thereto.
Section 5.13. Undertaking for Costs. All parties to this
Indenture agree, and each Holder of any Bond by such Holder's
acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of
any right or remedy under this Indenture, or in any suit against
the Indenture Trustee for any action taken, suffered or omitted
by it as Indenture Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and
that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant
in such suit, having due regard to the merits and good faith of
the claims or defenses made by such party litigant; but the
provisions of this Section 5.13 shall not apply to (a) any suit
instituted by the Indenture Trustee or the Bond Insurer, (b) any
suit instituted by any Bondholder, or group of Bondholders, in
each case holding in the aggregate more than 10% of the Bond
Principal Balances of the Bonds or (c) any suit instituted by any
Bondholder for the enforcement of the payment of principal of or
interest on any Bond on or after the respective due dates
expressed in such Bond and in this Indenture.
Section 5.14. Waiver of Stay or Extension Laws. The Issuer
covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead or in any manner whatso-
ever, claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this
Indenture; and the Issuer (to the extent that it may lawfully do
so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not hinder, delay or impede the
execution of any power herein granted to the Indenture Trustee,
but will suffer and permit the execution of every such power as
though no such law had been enacted.
Section 5.15. Sale of Trust Estate. (a) The power to
effect any sale or other disposition (a "Sale") of any portion of
the Trust Estate pursuant to Section 5.04 hereof is expressly
subject to the provisions of Section 5.05 hereof and this Section
5.15. The power to effect any such Sale shall not be exhausted
by any one or more Sales as to any portion of the Trust Estate
remaining unsold, but shall continue unimpaired until the entire
Trust Estate shall have been sold or all amounts payable on the
Bonds and under this Indenture and under the Insurance Agreement
shall have been paid. The Indenture Trustee with the consent of
the Bond Insurer, so long as no Bond Insurer Default exists, may
from time to time postpone any public Sale by public announcement
made at the time and place of such Sale. The Indenture Trustee
hereby expressly waives its right to any amount fixed by law as
compensation for any Sale.
<PAGE>
(b) The Indenture Trustee shall not in any private
Sale sell the Trust Estate, or any portion thereof, unless
(1) the Bond Insurer or, if a Bond Insurer Default
exists, the Holders of all Bonds, consent to or direct the
Indenture Trustee to make, such Sale, or
(2) unless the Bond Insurer otherwise consents, the
proceeds of such Sale would be not less than the entire
amount which would be payable to the Bondholders under the
Bonds and the Bond Insurer in respect of amounts drawn under
the Bond Insurance Policy and any other amounts due to the
Bond Insurer under the Insurance Agreement, in full payment
thereof in accordance with Section 5.02 hereof, on the
Payment Date next succeeding the date of such Sale, or
(3) The Indenture Trustee determines with the consent
of the Bond Insurer, so long as no Bond Insurer Default
exists, that the conditions for retention of the Trust
Estate set forth in Section 5.05 hereof cannot be satisfied
(in making any such determination, the Indenture Trustee may
rely upon an opinion of an Independent investment banking
firm obtained and delivered as provided in Section 5.05
hereof), and the Bond Insurer consents to such Sale, or if a
Bond Insurer Default exists, the Holders of Bonds
representing at least 66-2/3% of the Bond Principal Balances
of the Bonds consent to such Sale.
The purchase by the Indenture Trustee of all or any portion of
the Trust Estate at a private Sale shall not be deemed a Sale or
other disposition thereof for purposes of this Section 5.15(b).
(c) Unless the Bond Insurer or, if a Bond Insurer
Default exists, the Holders of Bonds representing at least 66-2/3%
of the Bond Principal Balances of the Bonds have otherwise
consented or directed the Indenture Trustee, at any public Sale
of all or any portion of the Trust Estate at which a minimum bid
equal to or greater than the amount described in paragraph (2) of
subsection (b) of this Section 5.15 has not been established by
the Indenture Trustee and no Person bids an amount equal to or
greater than such amount, the Indenture Trustee shall bid an
amount at least $1.00 more than the highest other bid.
(d) In connection with a Sale of all or any portion of
the Trust Estate,
(1) any Holder or Holders of Bonds may bid for and
with the consent of the Bond Insurer purchase the property
offered for Sale, and upon compliance with the terms of sale
may hold, retain and possess and dispose of such property,
without further accountability, and may, in paying the
purchase money therefor, deliver any Bonds or claims for
interest thereon in lieu of cash up to the amount which
shall, upon distribution of the net proceeds of such sale,
be payable thereon, and such Bonds, in case the amounts so
payable thereon shall be less than the amount due thereon,
shall be returned to the Holders thereof after being
appropriately stamped to show such partial payment;
<PAGE>
(2) the Indenture Trustee, with the consent of the
Bond Insurer, so long as no Bond Insurer Default exists, may
bid for and acquire the property offered for Sale in
connection with any Sale thereof, and, subject to any
requirements of, and to the extent permitted by, applicable
law in connection therewith, may purchase all or any portion
of the Trust Estate in a private sale, and, in lieu of
paying cash therefor, may make settlement for the purchase
price by crediting the gross Sale price against the sum of
(A) the amount which would be distributable to the Holders
of the Bonds and Holders of Certificates and amounts owing
to the Bond Insurer as a result of such Sale in accordance
with Section 5.04(b) hereof on the Payment Date next
succeeding the date of such Sale and (B) the reasonable
expenses of the Sale and of any Proceedings in connection
therewith which are reimbursable to it, without being
required to produce the Bonds in order to complete any such
Sale or in order for the net Sale price to be credited
against such Bonds, and any property so acquired by the
Indenture Trustee shall be held and dealt with by it in
accordance with the provisions of this Indenture;
(3) the Indenture Trustee shall execute and deliver an
appropriate instrument of conveyance transferring its
interest in any portion of the Trust Estate in connection
with a Sale thereof;
(4) the Indenture Trustee is hereby irrevocably
appointed the agent and attorney-in-fact of the Issuer to
transfer and convey its interest in any portion of the Trust
Estate in connection with a Sale thereof, and to take all
action necessary to effect such Sale; and
(5) no purchaser or transferee at such a Sale shall be
bound to ascertain the Indenture Trustee's authority,
inquire into the satisfaction of any conditions precedent or
see to the application of any monies.
Section 5.16. Action on Bonds. The Indenture Trustee's
right to seek and recover judgment on the Bonds or under this
Indenture shall not be affected by the seeking, obtaining or
application of any other relief under or with respect to this
Indenture. Neither the lien of this Indenture nor any rights or
remedies of the Indenture Trustee, the Bond Insurer or the
Bondholders shall be impaired by the recovery of any judgment by
the Indenture Trustee against the Issuer or by the levy of any
execution under such judgment upon any portion of the Trust
Estate or upon any of the assets of the Issuer. Any money or
property collected by the Indenture Trustee shall be applied in
accordance with Section 5.04(b) hereof.
Section 5.17. Performance and Enforcement of Certain Obli-
gations. (a) Promptly following a request from the Indenture
Trustee to do so, the Issuer, in its capacity as holder of the
Mortgage Loans, shall take all such lawful action as the
Indenture Trustee or the Bond Insurer may request to cause the
Issuer to compel or secure the performance and observance by the
Seller, the Company and the Servicer, as applicable, of each of
their obligations to the Issuer under or in connection with the
Mortgage Loan Purchase Agreement and the Servicing Agreement, and
to exercise any and all rights, remedies, powers and privileges
lawfully available to the Issuer under or in connection with the
<PAGE>
Mortgage Loan Purchase Agreement and the Servicing Agreement to
the extent and in the manner directed by the Indenture Trustee,
with the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, as pledgee of the Mortgage Loans, including the
transmission of notices of default on the part of the Seller, the
Company or the Servicer thereunder and the institution of legal
or administrative actions or proceedings to compel or secure
performance by the Seller, the Company or the Servicer of each of
their obligations under the Mortgage Loan Purchase Agreement and
the Servicing Agreement. So long as no Bond Insurer Default
exists, the Bond Insurer shall have the right to approve or
reject any proposed successor to the Servicer (other than the
Indenture Trustee) under the Servicing Agreement.
(b) The Indenture Trustee, as pledgee of the Mortgage
Loans, subject to the rights of the Bond Insurer under this
Agreement and the Servicing Agreement may, and at the direction
(which direction shall be in writing or by telephone (confirmed
in writing promptly thereafter)) of the Bond Insurer or, if a
Bond Insurer Default exists, the Holders of 66-2/3% of the Bond
Principal Balances of the Bonds, shall exercise all rights,
remedies, powers, privileges and claims of the Issuer against the
Seller or the Servicer under or in connection with the Mortgage
Loan Purchase Agreement and the Servicing Agreement, including
the right or power to take any action to compel or secure
performance or observance by the Seller or the Servicer, as the
case may be, of each of their obligations to the Issuer
thereunder and to give any consent, request, notice, direction,
approval, extension or waiver under the Mortgage Loan Purchase
Agreement and the Servicing Agreement, as the case may be, and
any right of the Issuer to take such action shall not be
suspended.
ARTICLE VI
The Indenture Trustee
Section 6.01. Duties of Indenture Trustee. (a) If an
Event of Default has occurred and is continuing, the Indenture
Trustee shall exercise the rights and powers vested in it by this
Indenture 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.
(b) Except during the continuance of an Event of
Default:
(i) the Indenture Trustee undertakes to perform such
duties and only such duties as are specifically set forth in
this Indenture and no implied covenants or obligations shall
be read into this Indenture against the Indenture Trustee;
and
(ii) in the absence of bad faith on its part, the
Indenture Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the
Indenture Trustee and conforming to the requirements of this
Indenture; however, the Indenture Trustee shall examine the
certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
<PAGE>
(c) The Indenture Trustee may not be relieved from
liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that:
(i) this paragraph does not limit the effect of
paragraph (b) of this Section 6.01;
(ii) the Indenture Trustee shall not be liable for
any error of judgment made in good faith by a Responsible
Officer unless it is proved that the Indenture Trustee was
negligent in ascertaining the pertinent facts; and
(iii) the Indenture Trustee shall not be liable
with respect to any action it takes or omits to take in good
faith in accordance with a direction received by it (A)
pursuant to Sections 5.11 or 5.15 or (B) from the Bond
Insurer, which it is entitled to give under any of the Basic
Documents.
(d) The Indenture Trustee shall not be liable for
interest on any money received by it except as the Indenture
Trustee may agree in writing with the Issuer.
(e) Money held in trust by the Indenture Trustee need
not be segregated from other trust funds except to the extent
required by law or the terms of this Indenture or the Trust
Agreement.
(f) No provision of this Indenture shall require the
Indenture Trustee to expend or risk its own funds or otherwise
incur financial liability in the performance of any of its duties
hereunder or in the exercise of any of its rights or powers, if
it shall have reasonable grounds to believe that repayment of
such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
(g) Every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to
the Indenture Trustee shall be subject to the provisions of this
Section and to the provisions of the TIA.
(h) The Indenture Trustee shall act in accordance with
Sections 6.03 and 6.04 of the Servicing Agreement and shall act
as successor to the Servicer in accordance with Section 6.02 of
the Servicing Agreement.
(i) For all purposes under this Indenture, the Indenture
Trustee shall not be deemed to have notice or knowledge of any
Default or Event of Default unless a Responsible Officer assigned
to and working in the Indenture Trustee's corporate trust
department has actual knowledge thereof or unless written notice
of any event which is in fact such an Event of Default or Default
is received by the Indenture Trustee at the Corporate Trust
Office, and such notice references the Bonds generally, the
Issuer, the Trust Estate or this Indenture.
The Indenture Trustee is hereby authorized to execute and
shall execute the Servicing Agreement, the Mortgage Loan Purchase
Agreement, the Insurance Agreement and the Remarketing <PAGE> Spread
Calculation Agent Letter Agreement, and shall perform its duties
and satisfy its obligations thereunder. Every provision of this
Indenture relating to the conduct or affecting the liability of
or affording protection to the Indenture Trustee shall apply to
the Indenture Trustee's execution of the Servicing Agreement, the
Mortgage Loan Purchase Agreement, the Insurance Agreement and the
Remarketing Spread Calculation Agent Letter Agreement, and the
performance of its duties and satisfaction of its obligations
thereunder.
Section 6.02. Rights of Indenture Trustee. (a) The Inden-
ture Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper
person. The Indenture Trustee need not investigate any fact or
matter stated in the document.
(b) Before the Indenture Trustee acts or refrains from
acting, it may require an Officer's Certificate or an Opinion of
Counsel reasonably satisfactory in form and substance to the
Indenture Trustee, which Officer's Certificate or Opinion of
Counsel shall not be at the expense of the Indenture Trustee or
the Trust Estate (except in the priority set forth in Section
3.05(a)(viii)). The Indenture Trustee shall not be liable for
any action it takes or omits to take in good faith in reliance on
an Officer's Certificate or Opinion of Counsel.
(c) The Indenture Trustee may execute any of the
trusts or powers hereunder or perform any duties hereunder either
directly or by or through agents or attorneys or a custodian or
nominee.
(d) The Indenture Trustee shall not be liable for any
action it takes or omits to take in good faith which it believes
to be authorized or within its rights or powers; provided,
however, that the Indenture Trustee's conduct does not constitute
willful misconduct, negligence or bad faith.
(e) The Indenture Trustee may consult with counsel
chosen by it with due care, and the advice or opinion of counsel
with respect to legal matters relating to this Indenture and the
Bonds shall be full and complete authorization and protection
from liability in respect to any action taken, omitted or
suffered by it hereunder in good faith and in accordance with the
advice or opinion of such counsel.
Section 6.03. Individual Rights of Indenture Trustee. The
Indenture Trustee in its individual or any other capacity may
become the owner or pledgee of Bonds and may otherwise deal with
the Issuer or its Affiliates with the same rights it would have
if it were not Indenture Trustee. Any Bond Registrar, co-
registrar or co-paying agent may do the same with like rights.
However, the Indenture Trustee must comply with Section 6.11
hereof.
Section 6.04. Indenture Trustee's Disclaimer. The Inden-
ture Trustee shall not be responsible for and makes no represen-
tation as to the validity or adequacy of this Indenture or the
Bonds, it shall not be accountable for the Issuer's use of the
proceeds from the Bonds, and it shall not be responsible for any
statement of the Issuer in the Indenture or in any document
issued in connection with the sale of the Bonds or in the Bonds
other than the Indenture Trustee's certificate of authentication.
<PAGE>
Section 6.05. Notice of Event of Default. If an Event of
Default occurs and is continuing and if it is known to a Respon-
sible Officer of the Indenture Trustee, the Indenture Trustee
shall give notice thereof to the Bond Insurer. The Trustee shall
mail to each Bondholder notice of the Event of Default within 10
days after a Responsible Officer has actual knowledge thereof
unless such Event of Default shall have been waived or cured.
Except in the case of an Event of Default in payment of principal
of or interest on any Bond, the Indenture Trustee may withhold
the notice if and so long as a committee of its Responsible
Officers in good faith determines that withholding the notice is
in the interests of Bondholders.
Section 6.06. Tax Administration of the Issuer. The
Indenture Trustee, based solely on information timely provided by
the Servicer, shall prepare and file (or cause to be prepared and
filed), on behalf of the Owner Trustee, all tax returns and
information reports, tax elections and such annual or other
reports of the Issuer as are necessary for preparation of tax
returns and information reports as provided in Section 5.03 of
the Trust Agreement, including without limitation Form 1099. All
tax returns and information reports shall be signed by the Owner
Trustee as provided in Section 5.03 of the Trust Agreement.
Section 6.07. Compensation and Indemnity. The Issuer shall
pay to the Indenture Trustee on each Payment Date reasonable
compensation for its services. The amount of the Indenture
Trustee Fee shall be paid to the Indenture Trustee on each
Payment Date pursuant to Section 3.05(a)(i) of this Indenture,
and all amounts owing to the Indenture Trustee hereunder in
excess of such amount shall be paid solely as provided in Section
3.05(a)(viii) hereof and Section 5.06 of the Servicing Agreement.
The Indenture Trustee's compensation shall not be limited by any
law on compensation of a trustee of an express trust. The Issuer
shall reimburse the Indenture Trustee for all reasonable out-of-
pocket expenses incurred or made by it hereunder or under any of
the other Bond Documents, including costs of collection, in
addition to compensation for its services, subject to the
priorities established by Sections 3.05(a)(viii) and 5.04(b) of
this Indenture. Such expenses shall include reasonable
compensation and expenses, disbursements and advances of the
Indenture Trustee's agents, counsel, accountants and experts.
Subject to the priorities established in Section 3.05(a)(viii)
and Section 5.04(b) of this Indenture, the Issuer shall indemnify
the Indenture Trustee against any and all loss, liability or
expense (including reasonable attorneys' fees) incurred by it in
connection with the administration of this Trust Estate and the
performance of its duties hereunder. The Indenture Trustee shall
notify the Issuer promptly of any claim for which it may seek
indemnity. Failure by the Indenture Trustee to so notify the
Issuer shall not relieve the Issuer of its obligations hereunder.
The Issuer shall defend any such claim, and the Indenture Trustee
may have separate counsel and the Issuer shall pay the reasonable
fees and expenses of such counsel. The Issuer is not obligated
to reimburse any expense or indemnify against any loss, liability
or expense incurred by the Indenture Trustee through the
Indenture Trustee's own willful misconduct, negligence or bad
faith.
The Issuer's payment obligations to the Indenture Trustee
pursuant to this Section 6.07 shall survive the discharge of this
Indenture. When the Indenture Trustee incurs expenses after the
occurrence of an Event of Default with respect to the Issuer, the
expenses are intended to constitute <PAGE> expenses of administration
under Title 11 of the United States Code or any other applicable
federal or state bankruptcy, insolvency or similar law.
Section 6.08. Replacement of Indenture Trustee. No resig-
nation or removal of the Indenture Trustee and no appointment of
a successor Indenture Trustee shall become effective until the
acceptance of appointment by the successor Indenture Trustee
pursuant to this Section 6.08. The Indenture Trustee may resign
at any time by so notifying the Issuer and the Bond Insurer. The
Bond Insurer or, if a Bond Insurer Default exists, the Holders of
a majority of Bond Principal Balances of the Bonds may remove the
Indenture Trustee by so notifying the Issuer and the Indenture
Trustee and the Bond Insurer and may appoint a successor
Indenture Trustee. The Issuer shall, with the consent of the
Bond Insurer, so long as no Bond Insurer Default exists, remove
the Indenture Trustee if:
(i) the Indenture Trustee fails to comply with Section
6.11 hereof;
(ii) the Indenture Trustee is adjudged a bankrupt
or insolvent;
(iii) a receiver or other public officer takes
charge of the Indenture Trustee or its property; or
(iv) the Indenture Trustee otherwise becomes
incapable of acting.
If the Indenture Trustee resigns or is removed or if a
vacancy exists in the office of the Indenture Trustee for any
reason (the Indenture Trustee in such event being referred to
herein as the retiring Indenture Trustee), the Issuer shall, with
the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, promptly appoint a successor Indenture Trustee
reasonably acceptable to the Bond Insurer.
A successor Indenture Trustee shall deliver a written
acceptance of its appointment to the retiring Indenture Trustee,
the Bond Insurer and to the Issuer. Thereupon, the resignation
or removal of the retiring Indenture Trustee shall become
effective, and the successor Indenture Trustee shall have all the
rights, powers and duties of the Indenture Trustee under this
Indenture. The successor Indenture Trustee shall mail a notice
of its succession to the Bondholders. The retiring Indenture
Trustee shall promptly transfer all property held by it as
Indenture Trustee to the successor Indenture Trustee.
If a successor Indenture Trustee does not take office within
60 days after the retiring Indenture Trustee resigns or is
removed, the retiring Indenture Trustee, the Issuer, the Bond
Insurer or the Holders of a majority of Bond Principal Balances
of the Bonds may petition any court of competent jurisdiction for
the appointment of a successor Indenture Trustee.
Notwithstanding the replacement of the Indenture Trustee
pursuant to this Section, the Issuer's obligations under
Section 6.07 shall continue for the benefit of the retiring
Indenture Trustee.
<PAGE>
Section 6.09. Successor Indenture Trustee by Merger. If
the Indenture Trustee consolidates with, merges or converts into,
or transfers all or substantially all of its corporate trust
business or assets to, another corporation or banking associa-
tion, the resulting, surviving or transferee corporation, without
any further act, shall be the successor Indenture Trustee;
provided, that such corporation or banking association shall be
otherwise qualified and eligible under Section 6.11 hereof. The
Indenture Trustee shall provide the Issuer, the Rating Agencies
and the Bond Insurer with prior written notice of any such
transaction.
If at the time such successor or successors by merger,
conversion or consolidation to the Indenture Trustee shall
succeed to the trusts created by this Indenture and any of the
Bonds shall have been authenticated but not delivered, any such
successor to the Indenture Trustee may adopt the certificate of
authentication of any predecessor trustee and deliver such Bonds
so authenticated; and if at that time any of the Bonds shall not
have been authenticated, any successor to the Indenture Trustee
may authenticate such Bonds either in the name of any predecessor
hereunder or in the name of the successor to the Indenture
Trustee; and in all such cases such certificates shall have the
full force which it is in the Bonds or in this Indenture provided
that the certificate of the Indenture Trustee shall have.
Section 6.10. Appointment of Co-Indenture Trustee or
Separate Indenture Trustee. (a) Notwithstanding any other pro-
visions of this Indenture, at any time, for the purpose of meet-
ing any legal requirement of any jurisdiction in which any part
of the Trust Estate may at the time be located, the Indenture
Trustee shall have the power and may execute and deliver all
instruments to appoint one or more Persons to act as a co-trustee
or co-trustees, or separate trustee or separate trustees, of all
or any part of the Trust Estate, and to vest in such Person or
Persons, in such capacity and for the benefit of the Bondholders
and the Bond Insurer, such title to the Trust Estate, or any part
hereof, and, subject to the other provisions of this Section,
such powers, duties, obligations, rights and trusts as the
Indenture Trustee or the Bond Insurer may consider necessary or
desirable. No co-trustee or separate trustee hereunder shall be
required to meet the terms of eligibility as a successor trustee
under Section 6.11 hereof and notice to, and the consent of, the
Bond Insurer (but not the Bondholders) of the appointment of any
co-trustee or separate trustee shall be required.
(b) Every separate trustee and co-trustee shall, to
the extent permitted by law, be appointed and act subject to the
following provisions and conditions:
(i) all rights, powers, duties and obligations
conferred or imposed upon the Indenture Trustee shall be
conferred or imposed upon and exercised or performed by the
Indenture Trustee and such separate trustee or co-trustee
jointly (it being understood that such separate trustee or
co-trustee is not authorized to act separately without the
Indenture Trustee joining in such act), except to the extent
that under any law of any jurisdiction in which any particu-
lar act or acts are to be performed the Indenture Trustee
shall be incompetent or unqualified to perform such act or
acts, in which event such rights, powers, duties and obli-
gations (including the holding of title to the Trust Estate
or any portion thereof <PAGE> in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or
co-trustee, but solely at the direction of the Indenture
Trustee;
(ii) no trustee hereunder shall be personally
liable by reason of any act or omission of any other trustee
hereunder; and
(iii) the Indenture Trustee may at any time accept
the resignation of or remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the
Indenture 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 VI. Each separate trustee and co-
trustee, upon its acceptance of the trusts conferred, shall be
vested with the estates or property specified in its instrument
of appointment, either jointly with the Indenture Trustee or
separately, as may be provided therein, subject to all the pro-
visions of this Indenture, specifically including every provision
of this Indenture relating to the conduct of, affecting the
liability of, or affording protection to, the Indenture Trustee.
Every such instrument shall be filed with the Indenture Trustee.
(d) Any separate trustee or co-trustee may at any time
constitute the Indenture 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 Indenture Trustee,
to the extent permitted by law, without the appointment of a new
or successor trustee.
Section 6.11. Eligibility; Disqualification. The Indenture
Trustee shall at all times be reasonably acceptable to the Bond
Insurer and authorized to exercise corporate trust powers. The
Indenture Trustee shall also satisfy the requirements of TIA
Section 310(a) and have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual
report of condition and it or its parent shall have a long-term
debt rating of Baa3 or better by Moody's and BBB or better by
Standard & Poor's. The Indenture Trustee shall comply with TIA
Section 310(b), including the optional provision permitted by the
second sentence of TIA Section 310(b)(9); provided, however, that
there shall be excluded from the operation of TIA Section 310(b)(1) any
indenture or indentures under which other securities of the
Issuer are outstanding if the requirements for such exclusion set
forth in TIA Section 310(b)(1) are met. If at any time the Indenture
Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the
manner and with the effect specified in Section 6.08 hereof.
Section 6.12. Preferential Collection of Claims Against
Issuer. The Indenture Trustee shall comply with TIA Section 311(a),
excluding any creditor relationship listed in TIA Section 311(b). An
Indenture Trustee who has resigned or been removed shall be
subject to TIA Section 311(a) to the extent indicated.
<PAGE>
Section 6.13. Representations and Warranties. The
Indenture Trustee hereby represents that:
(i) The Indenture Trustee is duly organized and
validly existing as a national banking association in good
standing under the laws of the United States with power and
authority to own its properties and to conduct its business
as such properties are currently owned and such business is
presently conducted;
(ii) The Indenture Trustee has the power and
authority to execute and deliver this Indenture and to carry
out its terms; and the execution, delivery and performance
of this Indenture have been duly authorized by the Indenture
Trustee by all necessary corporate action;
(iii) The consummation of the transactions
contemplated by this Indenture and the fulfillment of the
terms hereof do not conflict with, result in any breach of
any of the terms and provisions of, or constitute (with or
without notice or lapse of time) a default under, the
articles of organization or bylaws of the Indenture Trustee
or any agreement or other instrument to which the Indenture
Trustee is a party or by which it is bound; and
(iv) To the Indenture Trustee's best knowledge,
there are no proceedings or investigations pending or
threatened before any court, regulatory body, administrative
agency or other governmental instrumentality having
jurisdiction over the Indenture Trustee or its properties:
(A) asserting the invalidity of this Indenture, (B) seeking
to prevent the consummation of any of the transactions
contemplated by this Indenture or (C) seeking any
determination or ruling that might materially and adversely
affect the performance by the Indenture Trustee of its
obligations under, or the validity or enforceability of,
this Indenture.
Section 6.14. Directions to Indenture Trustee. The Inden-
ture Trustee is hereby directed:
(a) to accept the pledge of the Mortgage Loans
and hold the assets of the Owner Trust Estate in trust for
the Bondholders and the Bond Insurer;
(b) to authenticate and deliver the Class A-1
Bonds and the Class A-2 Bonds substantially in the form
prescribed by Exhibits A and B, respectively, in accordance
with the terms of this Indenture; and
(c) to take all other actions as shall be
required to be taken by the terms of this Indenture.
Section 6.15. The Agents. The provisions of this Indenture
relating to the limitations of the Indenture Trustee's liability
and to its indemnity shall inure also to the Paying Agent, the
Bond Registrar, the Certificate Paying Agent and the Certificate
Registrar.
<PAGE>
ARTICLE VII
Bondholders' Lists and Reports
Section 7.01. Issuer To Furnish Indenture Trustee Names and
Addresses of Bondholders. The Issuer will furnish or cause to be
furnished to the Indenture Trustee (a) not more than five days
after each Record Date, a list, in such form as the Indenture
Trustee may reasonably require, of the names and addresses of the
Holders of Bonds as of such Record Date, (b) at such other times
as the Indenture Trustee and the Bond Insurer may request in
writing, within 30 days after receipt by the Issuer of any such
request, a list of similar form and content as of a date not more
than 10 days prior to the time such list is furnished; provided,
however, that so long as the Indenture Trustee is the Bond Regis-
trar, no such list shall be required to be furnished.
Section 7.02. Preservation of Information; Communications
to Bondholders. (a) The Indenture Trustee shall preserve, in as
current a form as is reasonably practicable, the names and
addresses of the Holders of Bonds contained in the most recent
list furnished to the Indenture Trustee as provided in Section
7.01 hereof and the names and addresses of Holders of Bonds
received by the Indenture Trustee in its capacity as Bond Regis-
trar. The Indenture Trustee may destroy any list furnished to it
as provided in such Section 7.01 upon receipt of a new list so
furnished.
(b) Bondholders may communicate pursuant to TIA
Section 312(b) with other Bondholders with respect to their rights under
this Indenture or under the Bonds.
(c) The Issuer, the Indenture Trustee and the Bond
Registrar shall have the protection of TIA Section 312(c).
Section 7.03. Reports by the Indenture Trustee; Issuer
Fiscal Year. (a) The Indenture Trustee shall:
(i) file with the Commission, on behalf of the Issuer,
the annual reports and information, documents and other
reports (or copies of such portions of any of the foregoing
as the Commission may from time to time by rules and
regulations prescribe) that the Issuer may be required to
file with the Commission pursuant to Section 13 or 15(d) of
the Exchange Act. Such filings shall be as follows: within
15 days after each Payment Date, the Indenture Trustee shall
file with the Commission via the Electronic Data Gathering,
Analysis and Retrieval System, a Form 8-K with a copy of the
statement to Bondholders for such Payment Date as an exhibit
thereto. Prior to January 31, 1999, the Indenture Trustee
shall file a Form 15 Suspension Notification with respect to
the Trust Fund, if applicable. Prior to March 31, 1999, the
Indenture Trustee shall file a Form 10-K, in substance
conforming to industry standards, with respect to the Trust
Fund. The Issuer hereby grants to the Indenture Trustee a
limited power of attorney to execute and file each such
document on behalf of the Issuer. Such power of attorney
shall continue until the earlier of (i) receipt by the
Trustee from the Issuer of written termination of such power
of attorney and (ii) the termination of the Trust <PAGE> Fund. The
Indenture Trustee shall deliver to the Company and the Bond
Insurer within three Business Days after filing any Form 8-K
or Form 10-K pursuant to this Section 7.03 a copy of such
Form 8-K or Form 10-K, as the case may be; and
(ii) file with the Commission (with copies to the
Company and the Bond Insurer) in accordance with rules and
regulations prescribed from time to time by the Commission
such additional information, documents and reports with
respect to compliance by the Issuer with the conditions and
covenants of this Indenture as may be required from time to
time by such rules and regulations.
(b) Unless the Issuer otherwise notifies the Indenture
Trustee, the fiscal year of the Issuer shall end on December 31
of each year.
Section 7.04. Reports by Indenture Trustee. If required by
TIA Section 313(a), within 60 days after each January 1 beginning with
January 1, 1999, the Indenture Trustee shall mail to each Bond-
holder as required by TIA Section 313(c) and to the Bond Insurer a
brief report dated as of such date that complies with TIA
Section 313(a). The Indenture Trustee also shall comply with TIA
Section 313(b).
A copy of each report at the time of its mailing to Bond-
holders shall be filed by the Indenture Trustee with the Commis-
sion and each stock exchange, if any, on which the Bonds are
listed. The Issuer shall notify the Indenture Trustee and the
Bond Insurer if and when the Bonds are listed on any stock
exchange.
Section 7.05. Statements to Bondholders. (a) Subject to
Section 3.26 of this Indenture, with respect to each Payment
Date, the Indenture Trustee shall deliver to each
Certificateholder and Bondholder, the Bond Insurer, the Company,
the Owner Trustee, the Certificate Paying Agent and each Rating
Agency, a statement setting forth the following information as to
the Bonds, to the extent applicable:
(i) the aggregate amount of collections with respect
to the Mortgage Loans with respect to such Payment Date;
(ii) the Class A-1 Interest Payment Amount and the
Principal Payment Amount payable to the Bondholders holding
the Class A-1 Bonds for such Payment Date, the Class A-1
Guaranteed Interest Payment Amount and the Class A-1 Carry-
Forward Amount for such Payment Date, and the aggregate
unpaid Class A-1 Carry-Forward Amount for all prior Payment
Dates, and the Class A-2 Interest Payment Amount and the
Principal Payment Amount payable to the Bondholders holding
the Class A-2 Bonds for such Payment Date, the Class A-2
Guaranteed Interest Payment Amount and the Class A-2 Carry-
Forward Amount for such Payment Date, and the aggregate
unpaid Class A-2 Carry-Forward Amount for all prior Payment
Dates;
<PAGE>
(iii) the amount of the aggregate distribution to
the Bondholders holding the Class A-1 Bonds and the
Bondholders holding the Class A-2 Bonds for such Payment
Date;
(iv) the Insured Payments, if any, paid by the Bond
Insurer under the Bond Insurance Policy for such Payment
Date and the aggregate Insured Payments for all prior
Payment Dates paid by the Bond Insurer under the Bond
Insurance Policy and not yet reimbursed;
(v) the aggregate Principal Balance of the Mortgage
Loans as of the end of the preceding Due Period;
(vi) the number and aggregate Principal Balances of
Mortgage Loans (a) as to which the Monthly Payment is
delinquent for 30-59 days, 60-89 days and 90 or more days
(excluding any Mortgage Loans in foreclosure or that have
become REO Property), respectively, (b) in foreclosure and
(c) that have become REO Property, in each case as of the
end of the preceding Due Period; provided, however, that
such information will not be provided on the statements
relating to the first Payment Date;
(vii) the Weighted Average Mortgage Rate for the
related Payment Date;
(viii) the Required Subordination Amount,
Subordination Amount, Subordination Increase Amount, Net
Monthly Excess Cashflow and Subordination Reduction Amount
for such Payment Date;
(ix) the amount of any Advances and Compensating
Interest payments for such Payment Date;
(x) the aggregate Realized Losses with respect to the
related Payment Date and cumulative Realized Losses since
the Closing Date;
(xi) the amount of any unpaid accrued interest on the
Class A-1 Bonds and the Class A-2 Bonds after such Payment
Date;
(xii) the aggregate Bond Principal Balance, Class
A-1 Bond Principal Balance and Class A-2 Bond Principal
Balance after giving effect to the distribution of principal
on such Payment Date;
(xiii) the Maximum Interest Rate, Class A-1 Bond
Interest Rate, Class A-2 Bond Interest Rate and Bond
Interest Rate for such Payment Date;
(xiv) the number and aggregate Principal Balance of
Mortgage Loans repurchased pursuant to the Mortgage Loan
Purchase Agreement for the related Payment Date and
cumulatively since the Closing Date;
<PAGE>
(xv) the Cumulative Loss Percentage, Delinquency
Percentage, Delinquency Amount and Rolling Delinquency
Percentage for such Payment Date;
(xvi) the amount of any Prepayment Interest
Shortfalls or Relief Act Shortfalls for such Payment Date;
(xvii) the aggregate Principal Balance of Mortgage
Loans purchased pursuant to Section 3.18 of the Servicing
Agreement for the related Payment Date and cumulatively
since the Closing Date;
(xviii) the aggregate amount collected with respect
to any prepayment penalties on the Mortgage Loans;
(xix) the aggregate amount of all payments received
from the First and Second CAP Provider under the First and
Second CAP Agreements and from ML&Co pursuant to the ML&Co
Guaranty, all payments made to the First and Second CAP
Provider under the First and Second CAP Agreements, and all
payments received from the Third CAP Provider under the
Third CAP Agreement.
(xxx) if a PMI Insurer Insolvency Event has
occurred; and
(xxxi) the aggregate amount of all payments received
from NCFC under the NCFC Demand Note and from the Bond Insurer
under the Surety Bond.
Items (iii) and (xii) above shall be presented on the basis
of a Bond having a $1,000 denomination. In addition, by January
31 of each calendar year following any year during which the
Bonds are outstanding, the Indenture Trustee shall furnish a
report to each Bondholder of record if so requested in writing at
any time during each calendar year as to the amounts reported
pursuant to (iii) and (xii) with respect to the Bonds for such
calendar year.
The Indenture Trustee in the absence of manifest error may
conclusively rely upon the Determination Date Report provided by
the Servicer pursuant to Section 4.01 of the Servicing Agreement
in its preparation of its Statement to the Bondholders pursuant
to this Section 7.04.
Section 7.06. Books and Records. The Issuer hereby
covenants with the Indenture Trustee and the Bond Insurer that,
so long as any of the Bonds remain Outstanding, it shall:
(a) at all times cause to be kept proper books of
account and allow the Indenture Trustee and the Bond Insurer
and any person appointed by it, to whom the Issuer shall
have no reasonable objection, access to the books of account
of the Issuer at all reasonable times, on reasonable prior
notice and during normal business hours;
<PAGE>
(b) at all times conduct and continue to conduct
business in its own corporate name;
(c) at all times act and continue to act through
its duly authorized officers and agents; and
(d) so far as permitted by law, at all times
cause to be given to the Indenture Trustee and the Bond
Insurer such information as it shall reasonably require for
the purpose of the discharge of the duties, powers, trusts,
authorities and discretions vested in it by this Indenture
or by operation of law.
ARTICLE VIII
Accounts, Disbursements and Releases
Section 8.01. Collection of Money. Except as otherwise
expressly provided herein, the Indenture Trustee may demand
payment or delivery of, and shall receive and collect, directly
and without intervention or assistance of any fiscal agent or
other intermediary, all money and other property payable to or
receivable by the Indenture Trustee pursuant to this Indenture.
The Indenture Trustee shall apply all such money received by it
as provided in this Indenture. Except as otherwise expressly
provided in this Indenture, if any default occurs in the making
of any payment or performance under any agreement or instrument
that is part of the Trust Estate, the Indenture Trustee may take
such action as may be appropriate to enforce such payment or
performance, including the institution and prosecution of appro-
priate Proceedings. Any such action shall be without prejudice
to any right to claim a Default or Event of Default under this
Indenture and any right to proceed thereafter as provided in
Article V.
Section 8.02. Trust Accounts. (a) On or prior to the
Closing Date, the Issuer shall cause the Indenture Trustee to
establish and maintain, in the name of the Indenture Trustee, for
the benefit of the Bondholders and the Bond Insurer, the Payment
Account as provided in Section 3.01 hereof.
(b) All monies deposited from time to time in the
Payment Account (other than investments made with such monies
including all income or other gain from such investments pursuant
to this Indenture), including assumption fees and prepayment
penalties, and all deposits therein pursuant to this Indenture
are for the benefit of the Bondholders and the Bond Insurer.
On each Payment Date, the Indenture Trustee shall distribute
all amounts on deposit in the Payment Account to Bondholders in
respect of the Bonds and to such other persons in the order of
priority set forth in Section 3.05 hereof (except as otherwise
provided in Section 5.04(b) hereof).
The Indenture Trustee may invest any funds in the Payment
Account (other than the proceeds of the Bond Insurance Policy) in
Eligible Investments, in its discretion, maturing no later than
the <PAGE> Business Day preceding each Payment Date (provided, however,
that with respect to Eligible Investments that consist of
obligations of the Indenture Trustee or its affiliates, such
Eligible Investments may mature on the related Payment Date) and
such Eligible Investments shall not be sold or disposed of prior
to their maturity. All income or other gain from such
investments may be released from the Payment Account and paid to
the Indenture Trustee from time to time as part of its
compensation for acting as Indenture Trustee.
Section 8.03. Officer's Certificate. The Indenture Trustee
shall receive at least seven days' notice when requested by the
Issuer to take any action pursuant to Section 8.05(a) hereof,
accompanied by copies of any instruments to be executed, and the
Indenture Trustee shall also require, as a condition to such
action, an Officer's Certificate, in form and substance
reasonably satisfactory to the Indenture Trustee, stating the
legal effect of any such action, outlining the steps required to
complete such action, and concluding that all conditions
precedent to the taking of such action have been complied with.
Section 8.04. Termination Upon Distribution to Bondholders.
This Indenture and the respective obligations and responsibili-
ties of the Issuer and the Indenture Trustee created hereby shall
terminate upon the distribution to Bondholders, the Bond Insurer,
the Certificate Paying Agent on behalf of the Certificateholders
and the Indenture Trustee of all amounts required to be
distributed pursuant to Article III; provided, however, that in
no event shall the trust created hereby continue beyond the
expiration of 21 years from the death of the survivor of the
descendants of Joseph P. Kennedy, the late ambassador of the
United States to the Court of St. James, living on the date
hereof.
Section 8.05. Release of Trust Estate. (a) Subject to the
payment of its reasonable fees and expenses, the Indenture
Trustee may, and when required by the provisions of this
Indenture shall, execute instruments to release property from the
lien of this Indenture, or convey the Indenture Trustee's
interest in the same, in a manner and under circumstances that
are not inconsistent with the provisions of this Indenture.
(b) The Indenture Trustee shall, at such time as (i)
there are no Bonds Outstanding, (ii) all sums due to the
Indenture Trustee pursuant to this Indenture have been paid, and
(iii) all sums due to the Bond Insurer have been paid, release
any remaining portion of the Trust Estate that secured the Bonds
from the lien of this Indenture.
(c) The Indenture Trustee shall release property from
the lien of this Indenture pursuant to this Section 8.05 only
upon receipt of a request from the Issuer accompanied by an
Officers' Certificate and an Opinion of Counsel stating that all
applicable requirements have been satisfied, and a letter from
the Bond Insurer stating that the Bond Insurer has no objection
to such request from the Issuer.
<PAGE>
Section 8.06. Surrender of Bonds Upon Final Payment. By
acceptance of any Bond, the Holder thereof agrees to surrender
such Bond to the Indenture Trustee promptly, prior to such Bond-
holder's receipt of the final payment thereon.
Section 8.07. Optional Redemption of the Bonds. (a) The
Issuer shall have the option to redeem the Bonds in whole, but
not in part, on any Payment Date on or after the earlier of (i)
the Payment Date on which the aggregate Principal Balance of the
Initial Mortgage Loans is less than or equal to 25% of the sum of
the aggregate Principal Balance of the Initial Mortgage Loans as
of the Cut-Off Date and the Original Pre-Funded Amount or (ii)
the Payment Date occurring in August, 2005. The aggregate
redemption price for the Bonds will be equal to the unpaid Bond
Principal Balance of the Bonds as of the Payment Date on which
the proposed redemption will take place in accordance with the
foregoing, together with accrued and unpaid interest thereon at
the Bond Interest Rate through such Payment Date (including any
Carry-Forward Amount), plus an amount sufficient to pay in full
all amounts owing to the Bond Insurer and the Indenture Trustee
under this Indenture and the Insurance Agreement (which amounts
shall be specified in writing upon request of the Issuer by the
Indenture Trustee and the Bond Insurer).
(b) In order to exercise the foregoing option, the
Issuer shall, not less than 15 days prior to the proposed Payment
Date on which such redemption is to be made, deposit the
aggregate redemption price specified in (a) above with the
Indenture Trustee (and the Indenture Trustee shall deposit such
funds in the Payment Account), and shall provide written notice
of its exercise of such option to the Indenture Trustee, the Bond
Insurer, the Owner Trustee and the Servicer. Following receipt
of the notice and the aggregate redemption price, calculated as
specified in Section 8.07(a) hereof, pursuant to the foregoing,
the Indenture Trustee shall provide notice to the Bondholders of
the final payment on the Bonds and shall apply such funds to make
final payments of principal and interest on the Bonds in
accordance with Section 3.05(a) hereof, and this Indenture shall
be discharged, subject to the provisions of Section 4.10 hereof.
If for any reason the amount deposited by the Issuer is not
sufficient to make such redemption or such redemption cannot be
completed for any reason, the amount so deposited by the Issuer
with the Indenture Trustee shall be immediately returned to the
Issuer in full and shall not be used for any other purpose or be
deemed to be part of the Trust Estate.
Section 8.08. Pre-Funding Account. (a) No later than the
Closing Date, the Indenture Trustee shall establish and maintain
in the name of the Indenture Trustee one or more segregated trust
accounts that are Eligible Accounts, which shall be titled "Pre-
Funding Account, First Union National Bank, as indenture trustee
for the registered Bondholders of NovaStar Mortgage Funding
Trust, Series 1998-2 Home Equity Loan Asset-Backed Bonds" (the
"Pre-Funding Account"). On the Closing Date, the Original Pre-
Funded Amount shall be deposited in the Pre-Funding Account from
the proceeds of the sale of the Bonds and retained therein.
Funds deposited in the Pre-Funding Account shall be held in trust
by the Indenture Trustee for the Holders of the Bonds and the
Bond Insurer for the uses and purposes set forth in the Indenture
and the Mortgage Loan Purchase Agreement. If the Indenture
Trustee shall not have received an investment direction from the
Issuer, the Indenture Trustee will invest funds deposited in the
Pre-Funding Account in Eligible Investments <PAGE> of the kind described
in clause (vii) of the definition of Eligible Investments. The
Issuer shall be the owner of the Pre-Funding Account and shall
report all items of income, deduction, gain or loss arising
therefrom. All income and gain realized from investment of funds
deposited in the Pre-Funding Account shall be transferred to the
Interest Coverage Account on each Payment Date.
(b) Amounts on deposit in the Pre-Funding Account
shall be withdrawn by the Indenture Trustee as follows:
(i) On any Subsequent Transfer Date, the
Indenture Trustee shall withdraw from the Pre-Funding
Account an amount equal to 100% of the Principal Balances of
the Subsequent Mortgage Loans transferred and assigned to
the Indenture Trustee on such Subsequent Transfer Date and
pay such amount to or upon the order of the Company upon
satisfaction of the conditions set forth in Section 2.2 of
the Mortgage Loan Purchase Agreement with respect to such
transfer and assignment; and
(ii) If the Pre-Funded Amount has not been reduced
to zero during the Funding Period, on the Payment Date
following the end of the Funding Period, the Indenture
Trustee shall deposit into the Payment Account any amounts
remaining in the Pre-Funding Account.
Section 8.09. Interest Coverage Account. (a) No later
than the Closing Date, the Indenture Trustee shall establish and
maintain on behalf of itself one or more segregated trust
accounts, which shall be Eligible Accounts, titled "Interest
Coverage Account, First Union National Bank, as indenture trustee
for the registered Bondholders of NovaStar Mortgage Funding
Trust, Series 1998-2 Home Equity Loan Asset-Backed Bonds" (the
"Interest Coverage Account"). On the Closing Date, the Interest
Coverage Amount shall be deposited into the Interest Coverage
Account and retained therein. In addition, the Indenture Trustee
shall deposit into the Interest Coverage Account all income and
gain on investments in the Pre-Funding Account pursuant to
Section 8.08. Funds deposited in the Interest Coverage Account
shall be held in trust by the Indenture Trustee for the Holders
of the Bonds and the Bond Insurer for the uses and purposes set
forth herein. The Issuer shall be the owner of the Interest
Coverage Account and shall report all items of income, deduction,
gain or loss arising therefrom.
(b) On each Payment Date during the Funding Period,
the Indenture Trustee shall withdraw from the Interest Coverage
Account and deposit into the Payment Account the applicable
Interest Coverage Addition.
(c) Upon the earlier of (i) termination of the Trust
Fund in accordance with Section 8.01 of the Trust Agreement and
(ii) the Payment Date following the end of the Funding Period,
any amount remaining on deposit in the Interest Coverage Account
shall be withdrawn by the Indenture Trustee and deposited in the
Payment Account.
<PAGE>
ARTICLE IX
Supplemental Indentures
Section 9.01. Supplemental Indentures Without Consent of
Bondholders. (a) Without the consent of the Holders of any
Bonds but with the prior written consent of the Bond Insurer and
prior notice to the Rating Agencies, the Issuer and the Indenture
Trustee, when authorized by an Issuer Request, at any time and
from time to time, may enter into one or more indentures
supplemental hereto (which shall conform to the provisions of the
TIA as in force at the date of the execution thereof), in form
reasonably satisfactory to the Indenture Trustee and the Bond
Insurer, for any of the following purposes:
(i) to correct or amplify the description of any
property at any time subject to the lien of this Indenture,
or better to assure, convey and confirm unto the Indenture
Trustee any property subject or required to be subjected to
the lien of this Indenture, or to subject to the lien of
this Indenture additional property;
(ii) to evidence the succession, in compliance
with the applicable provisions hereof, of another person to
the Issuer, and the assumption by any such successor of the
covenants of the Issuer herein and in the Bonds contained;
(iii) to add to the covenants of the Issuer, for
the benefit of the Holders of the Bonds, or to surrender any
right or power herein conferred upon the Issuer;
(iv) to convey, transfer, assign, mortgage or
pledge any property to or with the Indenture Trustee;
(v) to cure any ambiguity or to correct or supplement
any provision herein or in any supplemental indenture that
may be inconsistent with any other provision herein or in
any supplemental indenture;
(vi) to make any other provisions with respect to
matters or questions arising under this Indenture or in any
supplemental indenture; provided, that such action shall not
materially and adversely affect the interests of the Holders
of the Bonds;
(vii) to evidence and provide for the acceptance of
the appointment hereunder by a successor Indenture Trustee
with respect to the Bonds and to add to or change any of the
provisions of this Indenture as shall be necessary to
facilitate the administration of the trusts hereunder by
more than one trustee, pursuant to the requirements of
Article VI hereof; or
(viii) to modify, eliminate or add to the provisions
of this Indenture to such extent as shall be necessary to
effect the qualification of this Indenture under the TIA or
under any <PAGE> similar federal statute hereafter enacted and to
add to this Indenture such other provisions as may be
expressly required by the TIA;
provided, however, that no such supplemental indenture shall be
entered into unless the Indenture Trustee shall have received an
Opinion of Counsel that entering into such supplemental indenture
will not (A) result in a "substantial modification" of the Bonds
under Treasury Regulation Section 1.1001.3 or adversely affect
the status of the Bonds as indebtedness for federal income tax
purposes or (B) cause the Trust to be subject to an entity level
tax.
The Indenture Trustee is hereby authorized to join in the
execution of any such supplemental indenture and to make any
further appropriate agreements and stipulations that may be
therein contained.
(b) The Issuer and the Indenture Trustee, when
authorized by an Issuer Request, may, also without the consent of
any of the Holders of the Bonds but with the prior written
consent of the Bond Insurer and prior notice to the Rating
Agencies, enter into an indenture or indentures supplemental
hereto for the purpose of adding any provisions to, or changing
in any manner or eliminating any of the provisions of, this
Indenture or of modifying in any manner the rights of the Holders
of the Bonds under this Indenture; provided, however, that such
action shall not, as evidenced by an Opinion of Counsel (or, in
the alternative, with respect to clause (i), as evidenced by a
rating letter confirming the existing ratings on the Bonds
(without taking into account the Bond Insurance Policy)) (i)
adversely affect in any material respect the interests of any
Bondholder or (ii) if 100% of the Certificates are not owned by
NCFC or if the Bond Insurance Policy is outstanding, cause the
Issuer to be subject to an entity level tax for federal income
tax purposes.
Section 9.02. Supplemental Indentures With Consent of Bond-
holders. The Issuer and the Indenture Trustee, when authorized
by an Issuer Request, also may, with prior notice to the Rating
Agencies and with the prior written consent of the Bond Insurer
and the consent of the Holders of not less than a majority of the
Bond Principal Balances of the Bonds affected thereby, by Act (as
defined in Section 10.03 hereof) of such Holders delivered to the
Issuer and the Indenture Trustee, enter into an indenture or
indentures supplemental hereto for the purpose of adding any
provisions to, or changing in any manner or eliminating any of
the provisions of, this Indenture or of modifying in any manner
the rights of the Holders of the Bonds under this Indenture;
provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Bond affected thereby:
(i) change the date of payment of any installment of
principal of or interest on any Bond, or reduce the prin-
cipal amount thereof or the interest rate thereon, change
the provisions of this Indenture relating to the application
of collections on, or the proceeds of the sale of, the Trust
Estate to payment of principal of or interest on the Bonds,
or change any place of payment where, or the coin or
currency in which, any Bond or the interest thereon is pay-
able, or impair the right to institute suit for the enforce-
ment of the provisions of this <PAGE> Indenture requiring the
application of funds available therefor, as provided in
Article V, to the payment of any such amount due on the
Bonds on or after the respective due dates thereof;
(ii) reduce the percentage of the Bond Principal
Balances of the Bonds, the consent of the Holders of which
is required for any such supplemental indenture, or the
consent of the Holders of which is required for any waiver
of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences provided
for in this Indenture;
(iii) modify or alter the provisions of the proviso
to the definition of the term "Outstanding" or modify or
alter the exception in the definition of the term
"Bondholder";
(iv) reduce the percentage of the Bond Principal
Balances of the Bonds required to direct the Indenture
Trustee to direct the Issuer to sell or liquidate the Trust
Estate pursuant to Section 5.04 hereof;
(v) modify any provision of this Section 9.02 except
to increase any percentage specified herein or to provide
that certain additional provisions of this Indenture or the
Basic Documents cannot be modified or waived without the
consent of the Holder of each Bond affected thereby;
(vi) modify any of the provisions of this
Indenture in such manner as to affect the calculation of the
amount of any payment of interest or principal due on any
Bond on any Payment Date (including the calculation of any
of the individual components of such calculation); or
(vii) permit the creation of any lien ranking prior
to or on a parity with the lien of this Indenture with
respect to any part of the Trust Estate or, except as
otherwise permitted or contemplated herein, terminate the
lien of this Indenture on any property at any time subject
hereto or deprive the Holder of any Bond of the security
provided by the lien of this Indenture; and provided,
further, that such action shall not, as evidenced by an
Opinion of Counsel, cause the Issuer to be subject to an
entity level tax.
The Indenture Trustee may, with the consent of the Bond
Insurer, so long as no Bond Insurer Default exists, in its
discretion determine whether or not any Bonds would be affected
by any supplemental indenture and any such determination shall be
conclusive upon the Holders of all Bonds, whether theretofore or
thereafter authenticated and delivered hereunder. The Indenture
Trustee shall not be liable for any such determination made in
good faith.
It shall not be necessary for any Act of Bondholders under
this Section 9.02 to approve the particular form of any proposed
supplemental indenture, but it shall be sufficient if such Act
shall approve the substance thereof.
<PAGE>
Promptly after the execution by the Issuer and the Indenture
Trustee of any supplemental indenture pursuant to this Section
9.02, the Indenture Trustee shall mail to the Holders of the
Bonds to which such amendment or supplemental indenture relates a
notice setting forth in general terms the substance of such
supplemental indenture. Any failure of the Indenture Trustee to
mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental
indenture.
Section 9.03. Execution of Supplemental Indentures. In
executing, or permitting the additional trusts created by, any
supplemental indenture permitted by this Article IX or the
modification thereby of the trusts created by this Indenture, the
Indenture Trustee shall be entitled to receive, and subject to
Sections 6.01 and 6.02 hereof, shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this
Indenture. The Indenture Trustee may, but shall not be obligated
to, enter into any such supplemental indenture that affects the
Indenture Trustee's own rights, duties, liabilities or immunities
under this Indenture or otherwise.
Section 9.04. Effect of Supplemental Indenture. Upon the
execution of any supplemental indenture pursuant to the pro-
visions hereof, this Indenture shall be and shall be deemed to be
modified and amended in accordance therewith with respect to the
Bonds affected thereby, and the respective rights, limitations of
rights, obligations, duties, liabilities and immunities under
this Indenture of the Indenture Trustee, the Issuer and the
Holders of the Bonds shall thereafter be determined, exercised
and enforced hereunder subject in all respects to such modifica-
tions and amendments, and all the terms and conditions of any
such supplemental indenture shall be and be deemed to be part of
the terms and conditions of this Indenture for any and all
purposes.
Section 9.05. Conformity with Trust Indenture Act. Every
amendment of this Indenture and every supplemental indenture
executed pursuant to this Article IX shall conform to the
requirements of the Trust Indenture Act as then in effect so long
as this Indenture shall then be qualified under the Trust Inden-
ture Act.
Section 9.06. Reference in Bonds to Supplemental Inden-
tures. Bonds authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article IX may, and
if required by the Indenture Trustee shall, bear a notation in
form approved by the Indenture Trustee as to any matter provided
for in such supplemental indenture. If the Issuer or the Inden-
ture Trustee shall so determine, new Bonds so modified as to
conform, in the opinion of the Indenture Trustee and the Issuer,
to any such supplemental indenture may be prepared and executed
by the Issuer and authenticated and delivered by the Indenture
Trustee in exchange for Outstanding Bonds.
<PAGE>
ARTICLE X
Miscellaneous
Section 10.01. Compliance Certificates and Opinions,
etc. (a) Upon any application or request by the Issuer to the
Indenture Trustee to take any action under any provision of this
Indenture, the Issuer shall furnish to the Indenture Trustee and
to the Bond Insurer (i) an Officer's Certificate stating that all
conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with and
(ii) an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied
with, except that, in the case of any such application or request
as to which the furnishing of such documents is specifically
required by any provision of this Indenture, no additional
certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with
a condition or covenant provided for in this Indenture shall
include:
(1) a statement that each signatory of such certif-
icate or opinion has read or has caused to be read such
covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of
the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are
based;
(3) a statement that, in the opinion of each such
signatory, such signatory has made such examination or
investigation as is necessary to enable such signatory to
express an informed opinion as to whether or not such
covenant or condition has been complied with;
(4) a statement as to whether, in the opinion of each
such signatory, such condition or covenant has been complied
with; and
(5) if the signatory of such certificate or opinion is
required to be Independent, the statement required by the
definition of the term "Independent".
(b) (i) Except with respect to the substitution of
Mortgage Loans pursuant to Section 2.1 of the Mortgage Loan
Purchase Agreement, prior to the deposit of any Collateral or
other property or securities with the Indenture Trustee that is
to be made the basis for the release of any property or
securities subject to the lien of this Indenture, the Issuer
shall, in addition to any obligation imposed in Section 10.01(a)
or elsewhere in this Indenture, furnish to the Indenture Trustee
and the Bond Insurer an Officer's Certificate certifying or
stating the opinion of each person signing such certificate as to
the fair value (within 90 days of such deposit) to the Issuer of
the Collateral or other property or securities to be so deposited
and a report from a nationally recognized accounting firm
verifying such value.
<PAGE>
(ii) Whenever the Issuer is required to furnish to
the Indenture Trustee and the Bond Insurer an Officer's
Certificate certifying or stating the opinion of any signer
thereof as to the matters described in clause (i) above, the
Issuer shall also deliver to the Indenture Trustee an
Independent Certificate from a nationally recognized
accounting firm as to the same matters, if the fair value to
the Issuer of the securities to be so deposited and of all
other such securities made the basis of any such withdrawal
or release since the commencement of the then-current fiscal
year of the Issuer, as set forth in the certificates
delivered pursuant to clause (i) above and this clause (ii),
is 10% or more of the Bond Principal Balances of the Bonds,
but such a certificate need not be furnished with respect to
any securities so deposited, if the fair value thereof to
the Issuer as set forth in the related Officer's Certificate
is less than $25,000 or less than one percent of the Bond
Principal Balances of the Bonds.
(iii) Except with respect to the substitution of
Mortgage Loans pursuant to Section 2.1 of the Mortgage Loan
Purchase Agreement, whenever any property or securities are
to be released from the lien of this Indenture, the Issuer
shall also furnish to the Indenture Trustee and the Bond
Insurer an Officer's Certificate certifying or stating the
opinion of each person signing such certificate as to the
fair value (within 90 days of such release) of the property
or securities proposed to be released and stating that in
the opinion of such person the proposed release will not
impair the security under this Indenture in contravention of
the provisions hereof.
(iv) Whenever the Issuer is required to furnish to
the Indenture Trustee and the Bond Insurer an Officer's
Certificate certifying or stating the opinion of any signer
thereof as to the matters described in clause (iii) above,
the Issuer shall also furnish to the Indenture Trustee an
Independent Certificate as to the same matters if the fair
value of the property or securities and of all other
property, other than securities released from the lien of
this Indenture since the commencement of the then-current
calendar year, as set forth in the certificates required by
clause (iii) above and this clause (iv), equals 10% or more
of the Bond Principal Balances of the Bonds, but such
certificate need not be furnished in the case of any release
of property or securities if the fair value thereof as set
forth in the related Officer's Certificate is less than
$25,000 or less than one percent of the then Bond Principal
Balances of the Bonds.
Section 10.02. Form of Documents Delivered to Indenture
Trustee. In any case where several matters are required to be
certified by, or covered by an opinion of, any specified Person,
it is not necessary that all such matters be certified by, or
covered by the opinion of, only one such Person, or that they be
so certified or covered by only one document, but one such Person
may certify or give an opinion with respect to some matters and
one or more other such Persons as to other matters, and any such
Person may certify or give an opinion as to such matters in one
or several documents.
Any certificate or opinion of an Authorized Officer of the
Issuer may be based, insofar as it relates to legal matters, upon
a certificate or opinion of, or representations by, counsel,
unless such <PAGE> officer knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion
is based are erroneous. Any such certificate of an Authorized
Officer or Opinion of Counsel may be based, insofar as it relates
to factual matters, upon a certificate or opinion of, or repre-
sentations by, an officer or officers of the Seller or the
Issuer, stating that the information with respect to such factual
matters is in the possession of the Seller or the Issuer, unless
such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with
respect to such matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements,
opinions or other instruments under this Indenture, they may, but
need not, be consolidated and form one instrument.
Whenever in this Indenture, in connection with any applica-
tion or certificate or report to the Indenture Trustee, it is
provided that the Issuer shall deliver any document as a condi-
tion of the granting of such application, or as evidence of the
Issuer's compliance with any term hereof, it is intended that the
truth and accuracy, at the time of the granting of such applica-
tion or at the effective date of such certificate or report (as
the case may be), of the facts and opinions stated in such docu-
ment shall in such case be conditions precedent to the right of
the Issuer to have such application granted or to the sufficiency
of such certificate or report. The foregoing shall not, however,
be construed to affect the Indenture Trustee's right to rely upon
the truth and accuracy of any statement or opinion contained in
any such document as provided in Article VI.
Section 10.03. Acts of Bondholders. (a) Any request,
demand, authorization, direction, notice, consent, waiver or
other action provided by this Indenture to be given or taken by
Bondholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Bond-
holders in person or by agents duly appointed in writing; and
except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are
delivered to the Indenture Trustee, and, where it is hereby
expressly required, to the Issuer. Such instrument or instru-
ments (and the action embodied therein and evidenced thereby) are
herein sometimes referred to as the "Act" of the Bondholders
signing such instrument or instruments. Proof of execution of
any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and
(subject to Section 6.01 hereof) conclusive in favor of the
Indenture Trustee and the Issuer, if made in the manner provided
in this Section 10.03.
(b) The fact and date of the execution by any person
of any such instrument or writing may be proved in any manner
that the Indenture Trustee deems sufficient.
(c) The ownership of Bonds shall be proved by the Bond
Registrar.
(d) Any request, demand, authorization, direction,
notice, consent, waiver or other action by the Holder of any
Bonds shall bind the Holder of every Bond issued upon the
registration thereof or in exchange therefor or in lieu thereof,
in respect of anything done, omitted or suffered to be done <PAGE> by
the Indenture Trustee or the Issuer in reliance thereon, whether
or not notation of such action is made upon such Bond.
Section 10.04. Notices, etc., to Indenture Trustee,
Issuer, Bond Insurer and Rating Agencies. Any request, demand,
authorization, direction, notice, consent, waiver or Act of Bond-
holders or other documents provided or permitted by this Inden-
ture shall be in writing and if such request, demand, authoriza-
tion, direction, notice, consent, waiver or Act of Bondholders is
to be made upon, given or furnished to or filed with:
(i) the Indenture Trustee by any Bondholder or by the
Issuer or the Bond Insurer shall be sufficient for every
purpose hereunder if made, given, furnished or filed in
writing to or with the Indenture Trustee at the Corporate
Trust Office. The Indenture Trustee shall promptly transmit
any notice received by it from the Bondholders to the
Issuer; or
(ii) the Issuer by the Indenture Trustee or by any
Bondholder or the Bond Insurer shall be sufficient for every
purpose hereunder if in writing and mailed first-class,
postage prepaid, to the Issuer addressed to: NovaStar
Mortgage Funding Trust, Series 1998-2, in care of Wilmington
Trust Company, Rodney Square North, 1100 North Market
Street, Wilmington, Delaware 19890-0001, Attention:
Corporate Trust Administration (telecopy number (302) 651-
1576), or at any other address previously furnished in
writing to the Indenture Trustee by the Issuer. The Issuer
shall promptly transmit any notice received by it from the
Bondholders to the Indenture Trustee; or
(iii) the Company by the Indenture Trustee or by any
Bondholder or the Bond Insurer shall be sufficient for every
purpose hereunder if in writing and mailed first-class,
postage prepaid, to the Company addressed to: NovaStar
Mortgage Funding Corporation, 1901 West 47th Place, Suite
105, Westwood, Kansas 66205, Attention: David Lee (telecopy
number (913) 362-1011), or at any other address previously
furnished in writing to the Indenture Trustee by the
Company. The Company shall promptly transmit any notice
received by it from the Bondholders to the Indenture
Trustee; or
(iv) the Seller by the Indenture Trustee or by any
Bondholder or the Bond Insurer shall be sufficient for every
purpose hereunder if in writing and mailed first-class,
postage prepaid, to the Issuer addressed to: NovaStar
Financial, Inc., 1901 West 47th Place, Suite 105, Westwood,
Kansas 66205, Attention: Scott F. Hartman (telecopy number
(913) 362-1011), or at any other address previously
furnished in writing to the Indenture Trustee by the Seller.
The Seller shall promptly transmit any notice received by it
from the Bondholders to the Indenture Trustee; or
(v) the Bond Insurer by the Issuer, the Indenture
Trustee or by any Bondholders shall be sufficient for every
purpose hereunder if in writing and mailed, first-class,
postage pre-paid, or personally delivered or telecopied to:
MBIA Insurance Corporation, 113 King <PAGE> Street, Armonk, New
York 10504, Attention: Insured Portfolio Mgmt - SF (NovaStar
Mortgage Funding Trust, Series 1998-2) (telecopy number
(914) 765-3810).
Notices required to be given to the Rating Agencies by the
Issuer, the Indenture Trustee or the Owner Trustee shall be in
writing, personally delivered or mailed first-class postage pre-
paid, to (i) in the case of Moody's, at the following address:
Moody's Investors Service, Inc., Residential Mortgage Monitoring
Department, 99 Church Street, New York, New York 10007 and
(ii) in the case of Standard & Poor's, at the following address:
Standard & Poor's Ratings Group, 26 Broadway (15th Floor), New
York, New York 10004, Attention of Asset Backed Surveillance
Department; or as to each of the foregoing, at such other address
as shall be designated by written notice to the other parties.
Section 10.05. Notices to Bondholders; Waiver. Where
this Indenture provides for notice to Bondholders of any event,
such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed first-class, postage
prepaid, to each Bondholder affected by such event, at such
Person's address as it appears on the Bond Register, not later
than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice. In any case where
notice to Bondholders is given by mail, neither the failure to
mail such notice nor any defect in any notice so mailed to any
particular Bondholder shall affect the sufficiency of such notice
with respect to other Bondholders, and any notice that is mailed
in the manner herein provided shall conclusively be presumed to
have been duly given regardless of whether such notice is in fact
actually received.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by any Person entitled to receive
such notice, either before or after the event, and such waiver
shall be the equivalent of such notice. Waivers of notice by
Bondholders shall be filed with the Indenture Trustee but such
filing shall not be a condition precedent to the validity of any
action taken in reliance upon such a waiver.
In case, by reason of the suspension of regular mail service
as a result of a strike, work stoppage or similar activity, it
shall be impractical to mail notice of any event to Bondholders
when such notice is required to be given pursuant to any pro-
vision of this Indenture, then any manner of giving such notice
as shall be satisfactory to the Indenture Trustee shall be deemed
to be a sufficient giving of such notice.
Where this Indenture provides for notice to the Rating
Agencies, failure to give such notice shall not affect any other
rights or obligations created hereunder, and shall not under any
circumstance constitute an Event of Default.
Section 10.06. Conflict with Trust Indenture Act. If
any provision hereof limits, qualifies or conflicts with another
provision hereof that is required to be included in this Inden-
ture by any of the provisions of the Trust Indenture Act, such
required provision shall control.
<PAGE>
The provisions of TIA Sections 310 through 317 that impose duties
on any Person (including the provisions automatically deemed
included herein unless expressly excluded by this Indenture) are
a part of and govern this Indenture, whether or not physically
contained herein.
Section 10.07. Effect of Headings. The Article and
Section headings herein are for convenience only and shall not
affect the construction hereof.
Section 10.08. Successors and Assigns. All covenants
and agreements in this Indenture and the Bonds by the Issuer
shall bind its successors and assigns, whether so expressed or
not. All agreements of the Indenture Trustee in this Indenture
shall bind its successors, co-trustees and agents.
Section 10.09. Separability. In case any provision in
this Indenture or in the Bonds shall be invalid, illegal or
unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired
thereby.
Section 10.10. Benefits of Indenture. The Bond Insurer
and its successors and assigns shall be a third-party beneficiary
to the provisions of this Indenture. To the extent that this
Indenture confers upon or gives or grants to the Bond Insurer any
right, remedy or claim under or by reason of this Indenture, the
Bond Insurer may enforce any such right, remedy or claim
conferred, given or granted hereunder. Nothing in this Indenture
or in the Bonds, express or implied, shall give to any Person,
other than the parties hereto and their successors hereunder, and
the Bondholders and the Bond Insurer, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
Section 10.11. Legal Holidays. In any case where the
date on which any payment is due shall not be a Business Day,
then (notwithstanding any other provision of the Bonds or this
Indenture) payment need not be made on such date, but may be made
on the next succeeding Business Day with the same force and
effect as if made on the date on which nominally due, and no
interest shall accrue for the period from and after any such
nominal date.
Section 10.12. Governing Law. THIS INDENTURE SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS (BUT WITH
REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS
LAW, WHICH BY ITS TERMS APPLIES TO THIS INDENTURE), AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL
BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.13. Counterparts. This Indenture may be
executed in any number of counterparts, each of which so executed
shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
Section 10.14. Recording of Indenture. If this
Indenture is subject to recording in any appropriate public
recording offices, such recording is to be effected by the Issuer
and at its expense accompanied by an Opinion of Counsel (which
may be counsel to the Indenture Trustee or any other <PAGE> counsel
reasonably acceptable to the Indenture Trustee) to the effect
that such recording is necessary either for the protection of the
Bondholders or any other Person secured hereunder or for the
enforcement of any right or remedy granted to the Indenture
Trustee under this Indenture.
Section 10.15. Issuer Obligation. No recourse may be
taken, directly or indirectly, with respect to the obligations of
the Issuer, the Owner Trustee or the Indenture Trustee on the
Bonds or under this Indenture or any certificate or other writing
delivered in connection herewith or therewith, against (i) the
Indenture Trustee or the Owner Trustee in its individual
capacity, (ii) any owner of a beneficial interest in the Issuer
or (iii) any partner, owner, beneficiary, agent, officer,
director, employee or agent of the Indenture Trustee or the Owner
Trustee in its individual capacity, any holder of a beneficial
interest in the Issuer, the Owner Trustee or the Indenture
Trustee or of any successor or assign of the Indenture Trustee or
the Owner Trustee in its individual capacity, except as any such
Person may have expressly agreed (it being understood that the
Indenture Trustee and the Owner Trustee have no such obligations
in their individual capacity) and except that any such partner,
owner or beneficiary shall be fully liable, to the extent pro-
vided by applicable law, for any unpaid consideration for stock,
unpaid capital contribution or failure to pay any installment or
call owing to such entity. For all purposes of this Indenture,
in the performance of any duties or obligations of the Issuer
hereunder, the Owner Trustee shall be subject to, and entitled to
the benefits of, the terms and provisions of Article VI, VII and
VIII of the Trust Agreement.
Section 10.16. No Petition. The Indenture Trustee, by
entering into this Indenture, and each Bondholder, by accepting a
Bond, hereby covenant and agree that they will not at any time
institute against the Company or the Issuer, or join in any
institution against the Company or the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States federal
or state bankruptcy or similar law in connection with any
obligations relating to the Bonds, this Indenture or any of the
Basic Documents. This Section 10.16 will survive for one year and
one day following the termination of this Indenture.
Section 10.17. Inspection. The Issuer agrees that, on
reasonable prior notice, it shall permit any representative of
the Indenture Trustee and the Bond Insurer, during the Issuer's
normal business hours, to examine all the books of account,
records, reports and other papers of the Issuer, to make copies
and extracts therefrom, to cause such books to be audited by
Independent certified public accountants, and to discuss the
Issuer's affairs, finances and accounts with the Issuer's
officers, employees, and Independent certified public
accountants, all at such reasonable times and as often as may be
reasonably requested. The Indenture Trustee and the Bond Insurer
shall cause their representatives to hold in confidence all such
information except to the extent disclosure may be required by
law (and all reasonable applications for confidential treatment
are unavailing) and except to the extent that the Indenture
Trustee may reasonably determine that such disclosure is
necessary to perform its obligations hereunder.
<PAGE>
IN WITNESS WHEREOF, the Issuer and the Indenture Trustee
have caused their names to be signed hereto by their respective
officers thereunto duly authorized, all as of the day and year
first above written.
NOVASTAR MORTGAGE FUNDING TRUST,
SERIES 1998-2, as Issuer
By: WILMINGTON TRUST COMPANY, not
in its individual capacity but
solely as Owner Trustee
By: ________________________
Name:
Title:
FIRST UNION NATIONAL BANK, not in
its individual capacity but solely
as Indenture Trustee and as Bond
Registrar
By:____________________________
Name:
Title:
FIRST UNION NATIONAL BANK
hereby accepts the appointment as Certificate
Paying Agent pursuant to Section 3.10 of the
Trust Agreement and as Certificate Registrar
pursuant to Section 4.02 hereof.
By: ________________________
Name:
Title:
<PAGE>
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
On this ____ day of August, before me personally appeared
___________________, to me known, who being by me duly sworn, did
depose and say, that he resides at _____________, he is the
Administrative Account Manager of the Owner Trustee, one of the
corporations described in and which executed the above
instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it
was so affixed by order of the Board of Directors of said
corporation; and that he signed his name thereto by like order.
______________________________
Notary Public
[NOTARIAL SEAL]
<PAGE>
STATE OF NORTH CAROLINA )
) ss.:
COUNTY OF MECKLENBURG )
On this ____ day of August, before me personally appeared
___________________, to me known, who being by me duly sworn, did
depose and say, that he resides at 230 South Tryon Street,
Charlotte, North Carolina, he is a _________________ of the
Indenture Trustee, one of the corporations described in and which
executed the above instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by order of the Board of
Directors of said corporation; and that he signed his name there-
to by like order.
_____________________________
Notary Public
[NOTARIAL SEAL]
<PAGE>
EXHIBIT A
FORM OF CLASS A-1 BONDS
UNLESS THIS CLASS A-1 BOND IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CLASS A-1 BOND ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
& CO., HAS AN INTEREST HEREIN.
THIS CLASS A-1 BOND IS A NON-RECOURSE OBLIGATION OF THE ISSUER,
AND IS LIMITED IN RIGHT OF PAYMENT TO AMOUNTS AVAILABLE FROM THE
TRUST ESTATE AND THE BOND INSURANCE POLICY AS PROVIDED IN THE
INDENTURE REFERRED TO BELOW. THE ISSUER IS NOT OTHERWISE
PERSONALLY LIABLE FOR PAYMENTS ON THIS CLASS A-1 BOND.
PRINCIPAL OF THIS CLASS A-1 BOND IS PAYABLE OVER TIME AS SET
FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL OF THIS
CLASS A-1 BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON
THE FACE HEREOF.
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
HOME EQUITY LOAN ASSET-BACKED BONDS
CLASS A-1
AGGREGATE CLASS A-1 BOND PRINCIPAL
BALANCE: $315,000,000
INITIAL CLASS A-1 BOND PRINCIPAL
BALANCE OF THIS CLASS A-1 BOND: $115,000,000.00 CUSIP NO.
66987XAB1
BOND NUMBER: 1
<PAGE>
NovaStar Mortgage Funding Trust, Series 1998-2 (the
"Issuer"), a Delaware business trust, for value received, hereby
promises to pay to Cede & Co. or registered assigns, the
principal sum of One Hundred Fifteen Million Dollars
($115,000,000) in monthly installments on the twenty-fifth day of
each month or, if such day is not a Business Day, the next
succeeding Business Day (each a "Payment Date"), commencing in
September 1998 and ending on or before the Payment Date occurring
in August 2028 (the "Final Scheduled Payment Date") and to pay
interest on the Class A-1 Bond Principal Balance of this Class A-1
Bond outstanding from time to time as provided below.
This Class A-1 Bond is one of a duly authorized issue of
NovaStar Mortgage Funding Trust, Series 1998-2 Home Equity Loan
Asset-Backed Bonds (the "Bonds"), issued under an Indenture,
dated as of August 1, 1998 (the "Indenture"), between the Issuer
and First Union National Bank, as indenture trustee (the
"Indenture Trustee", which term includes any successor Indenture
Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a
statement of the respective rights thereunder of the Issuer, the
Indenture Trustee, and the Holders of the Class A-1 Bonds and the
terms upon which the Class A-1 Bonds are to be authenticated and
delivered. All terms used in this Class A-1 Bond which are
defined in the Indenture shall have the meanings assigned to them
in the Indenture.
On each Payment Date, Holders of Class A-1 Bonds will be
entitled to receive interest payments in an aggregate amount
equal to the Class A-1 Interest Payment Amount for such Payment
Date. Principal payments will be payable concurrently on the
Class A-1 Bonds and the Class A-2 Bonds on a pro rata basis, in
accordance with the outstanding Class A-1 Bond Principal Balance
and the Class A-2 Bond Principal Balance, on each Payment Date in
an aggregate amount equal to the Principal Payment Amount for
such Payment Date. In addition, on each Payment Date, Holders of
Class A-1 Bonds in the aggregate will be entitled to receive
additional interest payments equal to the Class A-1 Carry-Forward
Amount for such Payment Date on a pro rata basis, in accordance
with the Class A-1 Carry-Forward Amount and Class A-2 Carry-
Forward Amount, to the extent of available funds. The "Class A-1
Bond Principal Balance" of a Class A-1 Bond as of any date of
determination is equal to the initial principal balance thereof
as of the Closing Date, reduced by the aggregate of all amounts
previously paid with respect to such Class A-1 Bond on account of
principal.
The principal of, and interest on, this Class A-1 Bond are
due and payable as described in the Indenture, in such coin or
currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
All payments made by the Issuer with respect to this Class A-1
Bond shall be equal to this Class A-1 Bond's pro rata share of
the aggregate payments on all Class A-1 Bonds as described above,
and shall be applied as between interest and principal as
provided in the Indenture.
MBIA Insurance Corporation (the "Bond Insurer"), in
consideration of the payment of the premium and subject to the
terms of the financial guaranty insurance policy (the "Bond
Insurance Policy") issued thereby, has unconditionally and
irrevocably guaranteed the payment of the Insured Payment. The
Bond Insurance Policy will not cover any Prepayment Interest
Shortfalls, Relief Act Shortfalls or Carry-Forward Amount.
<PAGE>
All principal and interest accrued on the Class A-1 Bonds,
if not previously paid, will become finally due and payable at
the Final Scheduled Payment Date.
The Bonds are subject to redemption in whole, but not in
part, by the Issuer on any Payment Date on or after the earlier
of (i) the Payment Date on which the outstanding Bond Principal
Balance is reduced to less than 25% of the original Bond
Principal Balance or (ii) the Payment Date in August 2005.
The Issuer shall not be liable upon the indebtedness
evidenced by the Bonds except to the extent of amounts available
from the Trust Estate which constitutes security for the payment
of the Bonds. The assets included in the Trust Estate and
payments under the Bond Insurance Policy will be the sole source
of payments on the Bonds, and each Holder hereof, by its
acceptance of this Bond, agrees that (i) such Bond will be
limited in right of payment to amounts available from the Trust
Estate and the Bond Insurance Policy as provided in the Indenture
and (ii) such Holder shall have no recourse to the Issuer, the
Owner Trustee, the Indenture Trustee, the Company, the Servicer
or any of their respective affiliates, or to the assets of any of
the foregoing entities, except the assets of the Issuer pledged
to secure the Bonds pursuant to the Indenture.
Any installment of interest or principal, if any, payable on
this Class A-1 Bond that is punctually paid or duly provided for
by the Issuer on the applicable Payment Date shall, so long as
this Class A-1 Bond is a Book-Entry Bond registered in the name
of the Depository or its nominee, be paid by wire transfer to the
Depository or its nominee, except for the final installment of
principal and interest payable with respect to this Class A-1
Bond, which shall be payable as provided below; otherwise, if the
Holder of this Class A-1 Bond shall have so requested at least
five Business Days prior to the related Record Date and holds an
aggregate initial Class A-1 Bond Principal Balance of at least
$5,000,000, such installment, other than the final installment of
principal or interest, shall be paid on such Payment Date to the
Holder of record on such Record Date, by wire transfer to an
account specified in writing by such Holder reasonably satisfac-
tory to the Indenture Trustee, and in all other cases, other than
the payment of the final installment of principal or interest, or
if no such instructions have been delivered to the Indenture
Trustee, by check to such Bondholder mailed to such Holder's
address as it appears in the Bond Register in the amount required
to be distributed to such Holder on such Payment Date; provided,
however, that the Indenture Trustee shall not pay to such Holder
any amount required to be withheld from a payment to such Holder
by the Code. The Indenture Trustee may deduct a reasonable wire
transfer fee from any payment made by wire transfer. All
reductions in the principal amount of a Class A-1 Bond (or one or
more predecessor Class A-1 Bonds) effected by payments of
principal made on any Payment Date shall be binding upon all
Holders of this Class A-1 Bond and of any bond issued upon the
registration of transfer thereof or in exchange therefor or in
lieu thereof, whether or not such payment is noted on such Class
A-1 Bond. The final payment of this Class A-1 Bond shall be
payable upon presentation and surrender thereof on or after the
Payment Date thereof at the Corporate Trust Office or the office
or agency of the Issuer maintained by it for such purpose
pursuant to Section 3.02 of the Indenture.
<PAGE>
Subject to the foregoing provisions, each Bond delivered
under the Indenture, upon registration of transfer of or in
exchange for or in lieu of any other Bond, shall carry the rights
to unpaid principal and interest that were carried by such other
Bond.
If an Event of Default as defined in the Indenture shall
occur and be continuing with respect to the Bonds, the Bonds may
become or be declared to be due and payable in the manner and
with the effect provided in the Indenture. If any such
acceleration of maturity occurs prior to the payment of the
entire unpaid Class A-1 Bond Principal Balance of the Class A-1
Bonds, the amount payable to the Holder of this Class A-1 Bond
will be equal to the unpaid Class A-1 Bond Principal Balance of
this Class A-1 Bond, together with accrued and unpaid interest
thereon as described in the Indenture. The Indenture provides
that, notwithstanding the acceleration of the maturity of the
Bonds, under certain circumstances specified therein, all amounts
collected as proceeds of the Trust Estate securing the Bonds or
otherwise shall continue to be applied to payments of principal
of and interest on the Bonds as if they had not been declared due
and payable.
The failure to pay any Subordination Increase Amount or
Carry-Forward Amount at any time when funds are not available to
make such payment as provided in the Indenture shall not
constitute an Event of Default under the Indenture.
Pursuant to the Indenture, unless a Bond Insurer Default
exists (i) the Bond Insurer shall be deemed to be the holder of
the Bonds for certain purposes specified in the Indenture (other
than with respect to payment on the Bonds), and will be entitled
to exercise all rights of the Bondholders thereunder, including
the rights of Bondholders relating to the occurrence of, and the
remedies with respect to, an Event of Default, without the
consent of such Bondholders, and (ii) the Indenture Trustee may
take actions which would otherwise be at its option or within its
discretion, including actions relating to the occurrence of, and
the remedies with respect to, an Event of Default, only at the
direction of the Bond Insurer.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Class A-1
Bond may be registered on the Bond Register of the Issuer. Upon
surrender for registration of transfer of, or presentation of a
written instrument of transfer for, this Class A-1 Bond at the
Corporate Trust Office, accompanied by proper instruments of
assignment in form satisfactory to the Indenture Trustee, one or
more new Class A-1 Bonds of any authorized denominations and of a
like aggregate initial Class A-1 Bond Principal Balance will be
issued to the designated transferee or transferees.
Prior to the due presentment for registration of transfer of
this Class A-1 Bond, the Issuer, the Bond Insurer, the Indenture
Trustee and any agent of the Issuer, the Bond Insurer or the
Indenture Trustee may treat the Person in whose name this Class
A-1 Bond is registered as the owner of such Class A-1 Bond (i) on
the applicable Record Date for the purpose of making payments and
interest of such Class A-1 Bond, and (ii) on any other date for
all other purposes whatsoever, as the owner hereof, whether or
not this Class A-1 Bond be overdue, and none of the Issuer, the
Bond <PAGE> Insurer, the Indenture Trustee or any such agent of the
Issuer or the Indenture Trustee shall be affected by notice to
the contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the
rights and obligations of the Issuer and the rights of the
Holders of the Bonds under the Indenture at any time by the
Issuer with the consent of the Bond Insurer and the Holders of a
majority of all Bonds at the time outstanding. The Indenture
also contains provisions permitting (i) the Bond Insurer or
(ii) if a Bond Insurer Default exists, the Holders of Bonds
representing specified percentages of the aggregate Bond
Principal Balance of the Bonds on behalf of the Holders of all
the Bonds, to waive any past Event of Default under the Indenture
and its consequences. Any such waiver by the Holder, at the time
of the giving thereof, of this Class A-1 Bond (or any one or more
predecessor Class A-1 Bonds) shall bind the Holder of every Class
A-1 Bond issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof, whether or not notation of
such consent or waiver is made upon such Class A-1 Bond. The
Indenture also permits the Issuer and the Indenture Trustee to
amend or waive certain terms and conditions set forth in the
Indenture without the consent of the Holders of the Bonds issued
thereunder.
Initially, the Class A-1 Bonds will be represented by one
bond registered in the name of CEDE & Co. as nominee of DTC,
acting in its capacity as the Depository for the Bonds. The
Class A-1 Bonds will be delivered in denominations as provided in
the Indenture and subject to certain limitations therein set
forth. The Class A-1 Bonds are exchangeable for a like aggregate
initial Class A-1 Bond Principal Balance of Class A-1 Bonds of
different authorized denominations, as requested by the Holder
surrendering the same.
Unless the Certificate of Authentication hereon has been
executed by the Indenture Trustee by manual signature, this Class
A-1 Bond shall not be entitled to any benefit under the
Indenture, or be valid or obligatory for any purpose.
Each Bondholder, by accepting a Bond, hereby covenants and
agrees that such Bondholder will not at any time institute
against the Company or the Issuer, or join in any institution
against the Company or the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States federal
or state bankruptcy or similar law in connection with any
obligations relating to the Bonds, the Indenture or any of the
Basic Documents.
So long as no Bond Insurer Default exists, the Bond Insurer
shall at all times be treated as if it were the exclusive
Bondholder for the purposes of all approvals, consents, waivers
and the institution of any action and the direction of all
remedies, and the Indenture Trustee shall act in accordance with
the directions of the Bond Insurer so long as it is indemnified
therefor to its reasonable satisfaction.
AS PROVIDED IN THE INDENTURE, THIS CLASS A-1 BOND AND THE
INDENTURE CREATING THIS CLASS A-1 BOND SHALL BE CONSTRUED IN
<PAGE>
ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN.
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be duly executed by Wilmington Trust Company, not in its
individual capacity but solely as Owner Trustee.
Dated:
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
BY: WILMINGTON TRUST COMPANY, not in its
individual capacity but solely in its
capacity as Owner Trustee
By:______________________________________________
Authorized Signatory
INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Class A-1 Bonds referred to in the within-
mentioned Indenture.
FIRST UNION NATIONAL BANK, not in its individual
capacity but solely as Indenture Trustee
By: _____________________________
Authorized Signatory
ABBREVIATIONS
The following abbreviations, when used in the inscription on
the face of the Class A-1 Bond, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants in
common
UNIF GIFT MIN ACT -- _______ Custodian _____________________
(Cust) (Minor)
under Uniform Gifts to Minor Act________
(State)
Additional abbreviations may also be used though not in the above
list.
_________________________________________________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE:
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(Please print or typewrite name and address, including zip code,
of assignee)
_________________________________________________________________
the within bond and all rights thereunder, hereby irrevocably
constitution and appointing _________________ attorney to
transfer said Class A-1 Bond on the books of the Issuer, with
full power of substitution in the premises.
Dated:__________________________ ______________________________
Signature Guaranteed by _________________________________________
NOTICE: The signature(s) to this assignment must correspond with
the name as it appears upon the face of the within Class A-1 Bond
in every particular, without alteration or enlargement or any
change whatsoever. Signature(s) must be guaranteed by a
commercial bank or by a member firm of the New <PAGE> York Stock
Exchange or another national securities exchange. Notarized or
witnessed signatures are not acceptable.
<PAGE>
EXHIBIT B
FORM OF CLASS A-2 BONDS
UNLESS THIS CLASS A-2 BOND IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE TRUSTEE OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CLASS A-2 BOND ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
& CO., HAS AN INTEREST HEREIN.
THIS CLASS A-2 BOND IS A NON-RECOURSE OBLIGATION OF THE ISSUER,
AND IS LIMITED IN RIGHT OF PAYMENT TO AMOUNTS AVAILABLE FROM THE
TRUST ESTATE AND THE BOND INSURANCE POLICY AS PROVIDED IN THE
INDENTURE REFERRED TO BELOW. THE ISSUER IS NOT OTHERWISE
PERSONALLY LIABLE FOR PAYMENTS ON THIS CLASS A-2 BOND.
PRINCIPAL OF THIS CLASS A-2 BOND IS PAYABLE OVER TIME AS SET
FORTH HEREIN. ACCORDINGLY, THE OUTSTANDING PRINCIPAL OF THIS
CLASS A-2 BOND AT ANY TIME MAY BE LESS THAN THE AMOUNT SHOWN ON
THE FACE HEREOF.
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
HOME EQUITY LOAN ASSET-BACKED BONDS
CLASS A-2
AGGREGATE CLASS A-2 BOND PRINCIPAL
BALANCE: $315,000,000
INITIAL CLASS A-2 BOND PRINCIPAL
BALANCE OF THIS CLASS A-2 BOND: $200,000,000 CUSIP NO.
66987XAB9
BOND NUMBER: 2
<PAGE>
NovaStar Mortgage Funding Trust, Series 1998-2 (the
"Issuer"), a Delaware business trust, for value received, hereby
promises to pay to Cede & Co. or registered assigns, the
principal sum of Two Hundred Million Dollars ($200,000,000) in
monthly installments on the twenty-fifth day of each month or, if
such day is not a Business Day, the next succeeding Business Day
(each a "Payment Date"), commencing in September 1998 and ending
on or before the Payment Date occurring in August 2028 (the
"Final Scheduled Payment Date") and to pay interest on the Class
A-2 Bond Principal Balance of this Class A-2 Bond outstanding
from time to time as provided below.
This Class A-2 Bond is one of a duly authorized issue of
NovaStar Mortgage Funding Trust, Series 1998-2 Home Equity Loan
Asset-Backed Bonds (the "Bonds"), issued under an Indenture,
dated as of August 1, 1998 (the "Indenture"), between the Issuer
and First Union National Bank, as indenture trustee (the
"Indenture Trustee", which term includes any successor Indenture
Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a
statement of the respective rights thereunder of the Issuer, the
Indenture Trustee, and the Holders of the Class A-2 Bonds and the
terms upon which the Class A-2 Bonds are to be authenticated and
delivered. All terms used in this Class A-2 Bond which are
defined in the Indenture shall have the meanings assigned to them
in the Indenture.
On each Payment Date, Holders of Class A-2 Bonds will be
entitled to receive interest payments in an aggregate amount
equal to the Class A-2 Interest Payment Amount for such Payment
Date. Principal payments will be payable concurrently on the
Class A-1 Bonds and the Class A-2 Bonds on a pro rata basis, in
accordance with the outstanding Class A-1 Bond Principal Balance
and the Class A-2 Bond Principal Balance, on each Payment Date in
an aggregate amount equal to the Principal Payment Amount for
such Payment Date. In addition, on each Payment Date, Holders of
Class A-2 Bonds in the aggregate will be entitled to receive
additional interest payments equal to the Class A-2 Carry-Forward
Amount for such Payment Date on a pro rata basis, in accordance
with the Class A-1 Carry-Forward Amount and Class A-2 Carry-
Forward Amount, to the extent of available funds. The "Class A-2
Bond Principal Balance" of a Class A-2 Bond as of any date of
determination is equal to the initial principal balance thereof
as of the Closing Date, reduced by the aggregate of all amounts
previously paid with respect to such Class A-2 Bond on account of
principal.
The principal of, and interest on, this Class A-2 Bond are
due and payable as described in the Indenture, in such coin or
currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts.
All payments made by the Issuer with respect to this Class A-2
Bond shall be equal to this Class A-2 Bond's pro rata share of
the aggregate payments on all Class A-2 Bonds as described above,
and shall be applied as between interest and principal as
provided in the Indenture.
MBIA Insurance Corporation (the "Bond Insurer"), in
consideration of the payment of the premium and subject to the
terms of the financial guaranty insurance policy (the "Bond
Insurance Policy") issued thereby, has unconditionally and
irrevocably guaranteed the payment of the Insured Payment. The
Bond Insurance Policy will not cover any Prepayment Interest
Shortfalls, Relief Act Shortfalls or Carry-Forward Amount.
<PAGE>
All principal and interest accrued on the Class A-2 Bonds,
if not previously paid, will become finally due and payable at
the Final Scheduled Payment Date.
The Bonds are subject to redemption in whole, but not in
part, by the Issuer on any Payment Date on or after the earlier
of (i) the Payment Date on which the outstanding Bond Principal
Balance is reduced to less than 25% of the original Bond
Principal Balance or (ii) the Payment Date in August 2005.
The Issuer shall not be liable upon the indebtedness
evidenced by the Bonds except to the extent of amounts available
from the Trust Estate which constitutes security for the payment
of the Bonds. The assets included in the Trust Estate and
payments under the Bond Insurance Policy will be the sole source
of payments on the Bonds, and each Holder hereof, by its
acceptance of this Bond, agrees that (i) such Bond will be
limited in right of payment to amounts available from the Trust
Estate and the Bond Insurance Policy as provided in the Indenture
and (ii) such Holder shall have no recourse to the Issuer, the
Owner Trustee, the Indenture Trustee, the Company, the Servicer
or any of their respective affiliates, or to the assets of any of
the foregoing entities, except the assets of the Issuer pledged
to secure the Bonds pursuant to the Indenture.
Any installment of interest or principal, if any, payable on
this Class A-2 Bond that is punctually paid or duly provided for
by the Issuer on the applicable Payment Date shall, so long as
this Class A-2 Bond is a Book-Entry Bond registered in the name
of the Depository or its nominee, be paid by wire transfer to the
Depository or its nominee, except for the final installment of
principal and interest payable with respect to this Class A-2
Bond, which shall be payable as provided below; otherwise, if the
Holder of this Class A-2 Bond shall have so requested at least
five Business Days prior to the related Record Date and holds an
aggregate initial Class A-2 Bond Principal Balance of at least
$5,000,000, such installment, other than the final installment of
principal or interest, shall be paid on such Payment Date to the
Holder of record on such Record Date, by wire transfer to an
account specified in writing by such Holder reasonably satisfac-
tory to the Indenture Trustee, and in all other cases, other than
the payment of the final installment of principal or interest, or
if no such instructions have been delivered to the Indenture
Trustee, by check to such Bondholder mailed to such Holder's
address as it appears in the Bond Register in the amount required
to be distributed to such Holder on such Payment Date; provided,
however, that the Indenture Trustee shall not pay to such Holder
any amount required to be withheld from a payment to such Holder
by the Code. The Indenture Trustee may deduct a reasonable wire
transfer fee from any payment made by wire transfer. All
reductions in the principal amount of a Class A-2 Bond (or one or
more predecessor Class A-2 Bonds) effected by payments of
principal made on any Payment Date shall be binding upon all
Holders of this Class A-2 Bond and of any bond issued upon the
registration of transfer thereof or in exchange therefor or in
lieu thereof, whether or not such payment is noted on such Class
A-2 Bond. The final payment of this Class A-2 Bond shall be
payable upon presentation and surrender thereof on or after the
Payment Date thereof at the Corporate Trust Office or the office
or agency of the Issuer maintained by it for such purpose
pursuant to Section 3.02 of the Indenture.
<PAGE>
Subject to the foregoing provisions, each Bond delivered
under the Indenture, upon registration of transfer of or in
exchange for or in lieu of any other Bond, shall carry the rights
to unpaid principal and interest that were carried by such other
Bond.
If an Event of Default as defined in the Indenture shall
occur and be continuing with respect to the Bonds, the Bonds may
become or be declared to be due and payable in the manner and
with the effect provided in the Indenture. If any such
acceleration of maturity occurs prior to the payment of the
entire unpaid Class A-2 Bond Principal Balance of the Class A-2
Bonds, the amount payable to the Holder of this Class A-2 Bond
will be equal to the unpaid Class A-2 Bond Principal Balance of
this Class A-2 Bond, together with accrued and unpaid interest
thereon as described in the Indenture. The Indenture provides
that, notwithstanding the acceleration of the maturity of the
Bonds, under certain circumstances specified therein, all amounts
collected as proceeds of the Trust Estate securing the Bonds or
otherwise shall continue to be applied to payments of principal
of and interest on the Bonds as if they had not been declared due
and payable.
The failure to pay any Subordination Increase Amount or
Carry-Forward Amount at any time when funds are not available to
make such payment as provided in the Indenture shall not
constitute an Event of Default under the Indenture.
Pursuant to the Indenture, unless a Bond Insurer Default
exists (i) the Bond Insurer shall be deemed to be the holder of
the Bonds for certain purposes specified in the Indenture (other
than with respect to payment on the Bonds), and will be entitled
to exercise all rights of the Bondholders thereunder, including
the rights of Bondholders relating to the occurrence of, and the
remedies with respect to, an Event of Default, without the
consent of such Bondholders, and (ii) the Indenture Trustee may
take actions which would otherwise be at its option or within its
discretion, including actions relating to the occurrence of, and
the remedies with respect to, an Event of Default, only at the
direction of the Bond Insurer.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Class A-2
Bond may be registered on the Bond Register of the Issuer. Upon
surrender for registration of transfer of, or presentation of a
written instrument of transfer for, this Class A-2 Bond at the
Corporate Trust Office, accompanied by proper instruments of
assignment in form satisfactory to the Indenture Trustee, one or
more new Class A-2 Bonds of any authorized denominations and of a
like aggregate initial Class A-2 Bond Principal Balance will be
issued to the designated transferee or transferees.
Prior to the due presentment for registration of transfer of
this Class A-2 Bond, the Issuer, the Bond Insurer, the Indenture
Trustee and any agent of the Issuer, the Bond Insurer or the
Indenture Trustee may treat the Person in whose name this Class
A-2 Bond is registered as the owner of such Class A-2 Bond (i) on
the applicable Record Date for the purpose of making payments and
interest of such Class A-2 Bond, and (ii) on any other date for
all other purposes whatsoever, as the owner hereof, whether or
not this Class A-2 Bond be overdue, and none of the Issuer, the
Bond <PAGE> Insurer, the Indenture Trustee or any such agent of the
Issuer or the Indenture Trustee shall be affected by notice to
the contrary.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the
rights and obligations of the Issuer and the rights of the
Holders of the Bonds under the Indenture at any time by the
Issuer with the consent of the Bond Insurer and the Holders of a
majority of all Bonds at the time outstanding. The Indenture
also contains provisions permitting (i) the Bond Insurer or
(ii) if a Bond Insurer Default exists, the Holders of Bonds
representing specified percentages of the aggregate Bond
Principal Balance of the Bonds on behalf of the Holders of all
the Bonds, to waive any past Event of Default under the Indenture
and its consequences. Any such waiver by the Holder, at the time
of the giving thereof, of this Class A-2 Bond (or any one or more
predecessor Class A-2 Bonds) shall bind the Holder of every Class
A-2 Bond issued upon the registration of transfer hereof or in
exchange hereof or in lieu hereof, whether or not notation of
such consent or waiver is made upon such Class A-2 Bond. The
Indenture also permits the Issuer and the Indenture Trustee to
amend or waive certain terms and conditions set forth in the
Indenture without the consent of the Holders of the Bonds issued
thereunder.
Initially, the Class A-2 Bonds will be represented by one
bond registered in the name of CEDE & Co. as nominee of DTC,
acting in its capacity as the Depository for the Bonds. The
Class A-2 Bonds will be delivered in denominations as provided in
the Indenture and subject to certain limitations therein set
forth. The Class A-2 Bonds are exchangeable for a like aggregate
initial Class A-2 Bond Principal Balance of Class A-2 Bonds of
different authorized denominations, as requested by the Holder
surrendering the same.
Unless the Certificate of Authentication hereon has been
executed by the Indenture Trustee by manual signature, this Class
A-2 Bond shall not be entitled to any benefit under the
Indenture, or be valid or obligatory for any purpose.
Each Bondholder, by accepting a Bond, hereby covenants and
agrees that such Bondholder will not at any time institute
against the Company or the Issuer, or join in any institution
against the Company or the Issuer of, any bankruptcy,
reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States federal
or state bankruptcy or similar law in connection with any
obligations relating to the Bonds, the Indenture or any of the
Basic Documents.
So long as no Bond Insurer Default exists, the Bond Insurer
shall at all times be treated as if it were the exclusive
Bondholder for the purposes of all approvals, consents, waivers
and the institution of any action and the direction of all
remedies, and the Indenture Trustee shall act in accordance with
the directions of the Bond Insurer so long as it is indemnified
therefor to its reasonable satisfaction.
AS PROVIDED IN THE INDENTURE, THIS CLASS A-2 BOND AND THE
INDENTURE CREATING THIS CLASS A-2 BOND SHALL BE CONSTRUED IN
<PAGE>
ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED THEREIN.
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to
be duly executed by Wilmington Trust Company, not in its
individual capacity but solely as Owner Trustee.
Dated:
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2
BY: WILMINGTON TRUST COMPANY, not in its
individual capacity but solely in its
capacity as Owner Trustee
By: _______________________________________
Authorized Signatory
INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Class A-2 Bonds referred to in the within-
mentioned Indenture.
FIRST UNION NATIONAL BANK, not in its individual
capacity but solely as Indenture Trustee
By: ______________________________
Authorized Signatory
<PAGE>
ABBREVIATIONS
The following abbreviations, when used in the inscription on
the face of the Class A-2 Bond, shall be construed as though they
were written out in full according to applicable laws or
regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants in
common
UNIF GIFT MIN ACT -- ______ Custodian _______________________
(Cust) (Minor)
under Uniform Gifts to Minor Act _______
(State)
Additional abbreviations may also be used though not in the above
list.
_________________________________________________________________
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE:
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
(Please print or typewrite name and address, including zip code,
of assignee)
_________________________________________________________________
the within bond and all rights thereunder, hereby irrevocably
constitution and appointing ____________________ attorney to
transfer said Class A-2 Bond on the books of the Issuer, with
full power of substitution in the premises.
Dated:_______________________ _____________________________
Signature Guaranteed by _________________________________________
NOTICE: The signature(s) to this assignment must correspond with
the name as it appears upon the face of the within Class A-2 Bond
in every particular, without alteration or enlargement or any
change whatsoever. Signature(s) must be guaranteed by a
commercial bank or by a member firm of the New <PAGE> York Stock
Exchange or another national securities exchange. Notarized or
witnessed signatures are not acceptable.
<PAGE>
EXHIBIT C
FORM OF TRUSTEE INITIAL CERTIFICATION
[Closing Date]
[Seller]
[Servicer]
[Bond Insurer]
[Company]
_________________________
_________________________
Re: Indenture, dated as of August 1, 1998 (the
"Indenture"), between NovaStar Mortgage Funding
Trust, Series 19981 (the "Issuer") and First Union
National Bank (the "Indenture Trustee") --
NovaStar Mortgage Funding Trust, Series 1998-2
Home Equity Loan Asset-Backed Bonds.
Gentlemen:
In accordance with Section 2.03 of the above-captioned
Indenture, and Section 2.1(b) of the Mortgage Loan Purchase
Agreement, dated as of August 1, 1998, between NovaStar
Financial, Inc., the Issuer, the Indenture Trustee and NovaStar
Mortgage Funding Corporation (the "Mortgage Loan Purchase
Agreement"; and together with the Indenture, the "Agreements"),
the undersigned, as Indenture Trustee, hereby certifies that as
to each Mortgage Loan listed in the Mortgage Loan Schedule (other
than any Mortgage Loan paid in full or listed on the attachment
hereto) it has reviewed the Mortgage File and the Mortgage Loan
Schedule and has determined that: (i) all documents required to
be included in the Mortgage File are in its possession; (ii) such
documents have been reviewed by it and appear regular on their
face and relate to such Mortgage Loan; and (iii) based on
examination by it, and only as to such documents, the information
set forth in items (i) - (vii) and (xiv) of the definition or
description of "Mortgage Loan Schedule" is correct.
The Indenture Trustee has made no independent
examination of any documents contained in each Mortgage File
beyond the review specifically required in the above-referenced
Agreements. The Indenture Trustee makes no representation that
any documents specified in clause (vi) of Section 2.1(b) of the
Mortgage Loan Purchase Agreement should be included in any
Mortgage File. The Indenture Trustee makes no representations as
to and shall not be responsible to verify: (i) the validity,
legality, sufficiency, enforceability, due authorization,
recordability or genuineness of any <PAGE> of the documents contained in
each Mortgage File of any of the Mortgage Loans identified on the
Mortgage Loan Schedule, (ii) the collectability, insurability,
effectiveness or suitability of any such Mortgage Loan, or
(iii) the existence of any assumption, modification, written
assurance or substitution agreement with respect to any Mortgage
File if no such documents appear in the Mortgage File delivered
to the Indenture Trustee.
Capitalized words and phrases used herein shall have
the respective meanings assigned to them in the above-captioned
Indenture.
FIRST UNION NATIONAL BANK, not in
its individual capacity but solely
as Indenture Trustee
By:______________________________
Name:
Title:
<PAGE>
EXHIBIT D
FORM OF TRUSTEE FINAL CERTIFICATION
[date]
[Seller]
[Servicer]
[Bond Insurer]
[Company]
__________________________
__________________________
Re: Indenture, dated as of August 1, 1998 (the
"Indenture"), between NovaStar Mortgage Funding Trust,
Series 1998-2 (the "Issuer") and First Union National
Bank (the "Indenture Trustee") -- NovaStar Mortgage
Funding Trust, Series 1998-2 Home Equity Loan Asset-Backed Bonds.
Gentlemen:
In accordance with Section 2.03 of the above-captioned
Indenture, and Section 2.1(b) of the Mortgage Loan Purchase
Agreement, dated as of August 1, 1998, between NovaStar
Financial, Inc., the Issuer, the Indenture Trustee and NovaStar
Mortgage Funding Corporation (the "Mortgage Loan Purchase
Agreement"; and together with the Indenture, the "Agreements"),
the undersigned, as Indenture Trustee, hereby certifies that as
to each Mortgage Loan listed in the Mortgage Loan Schedule (other
than any Mortgage Loan paid in full or listed on the attachment
hereto) it has received the documents set forth in Section 2.1(b)
of the Mortgage Loan Purchase Agreement.
The Indenture Trustee has made no independent
examination of any documents contained in each Mortgage File
beyond the review specifically required in the Agreements. The
Indenture Trustee makes no representation that any documents
specified in clause (vi) of Section 2.1(b) should be included in
any Mortgage File. The Indenture Trustee makes no
representations as to and shall not be responsible to verify: (i)
the validity, legality, sufficiency, enforceability, due
authorization, recordability or genuineness of any of the
documents contained in each Mortgage File of any of the Mortgage
Loans identified on the Mortgage Loan Schedule, (ii) the
collectability, insurability, effectiveness or suitability of any
such Mortgage Loan or (iii) the existence of any assumption,
modification, written assurance or substitution agreement with
respect to any Mortgage File if no such documents appear in the
Mortgage File delivered to the Indenture Trustee.
<PAGE>
Capitalized words and phrases used herein shall have
the respective meanings assigned to them in the above-captioned
Indenture.
FIRST UNION NATIONAL BANK, not in
its individual capacity but solely
as Indenture Trustee
By: ______________________________
Name:
Title:
<PAGE>
EXHIBIT E
MORTGAGE LOAN SCHEDULE
<PAGE>
TABLE OF CONTENTS
Page
GRANTING CLAUSE. . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE I Definitions. . . . . . . . . . . . . . . . . . . . . .2
Section 1.01. Definitions. . . . . . . . . . . . . . . . .2
Section 1.02. Incorporation by Reference of Trust
Indenture Act. . . . . . . . . . . . . . . .2
Section 1.03. Rules of Construction. . . . . . . . . . . .3
ARTICLE II Original Issuance of Bonds. . . . . . . . . . .3
Section 2.01. Form . . . . . . . . . . . . . . . . . . . .3
Section 2.02. Execution, Authentication and Delivery . . .4
Section 2.03. Acceptance of Mortgage Loans by Indenture
Trustee. . . . . . . . . . . . . . . . . . .4
ARTICLE III Covenants . . . . . . . . . . . . . . . . . . .6
Section 3.01. Collection of Payments with respect to the
Mortgage Loans . . . . . . . . . . . . . . .6
Section 3.02. Maintenance of Office or Agency. . . . . . .6
Section 3.03. Money for Payments To Be Held in Trust;
Paying Agent . . . . . . . . . . . . . . . .6
Section 3.04. Existence. . . . . . . . . . . . . . . . . .8
Section 3.05. Payment of Principal and Interest. . . . . .8
Section 3.06. Protection of Trust Estate . . . . . . . . 10
Section 3.07. Opinions as to Trust Estate. . . . . . . . 11
Section 3.08. Performance of Obligations . . . . . . . . 11
Section 3.09. Negative Covenants . . . . . . . . . . . . 12
Section 3.10. Annual Statement as to Compliance. . . . . 13
Section 3.11. Servicing and Administration of the CAP
Agreements . . . . . . . . . . . . . . . . 13
Section 3.12. Representations and Warranties Concerning the
Mortgage Loans . . . . . . . . . . . . . . 13
Section 3.13. Amendments to Servicing Agreement. . . . . 13
Section 3.14. Servicer as Agent and Bailee of the Indenture
Trustee. . . . . . . . . . . . . . . . . . 14
Section 3.15. Investment Company Act . . . . . . . . . . 14
Section 3.16. Issuer May Consolidate, etc. . . . . . . . 14
Section 3.17. Successor or Transferee. . . . . . . . . . 16
Section 3.18. No Other Business. . . . . . . . . . . . . 16
Section 3.19. No Borrowing . . . . . . . . . . . . . . . 17
Section 3.20. Guarantees, Loans, Advances and Other
Liabilities. . . . . . . . . . . . . . . . 17
Section 3.21. Capital Expenditures.. . . . . . . . . . . 17
Section 3.22. Purchase of Mortgage Loans Pursuant to the
Servicing Agreement. . . . . . . . . . . . 17
Section 3.23. Restricted Payments. . . . . . . . . . . . 18
Section 3.24. Notice of Events of Default. . . . . . . . 18
Section 3.25. Further Instruments and Acts . . . . . . . 18
Section 3.26. Statements to Bondholders and Merrill
Lynch. . . . . . . . . . . . . . . . . . . 18
<PAGE>
Section 3.27. Determination of Bond Interest Rate. . . . 18
Section 3.28. Payments under the Bond Insurance Policy . 18
section 3.29. Servicing and Administration of the PMI
Policies . . . . . . . . . . . . . . . . . 19
Section 3.30. NCFC Demand Note and Surety Bond . . . . . 19
ARTICLE IV The Bonds; Satisfaction and Discharge of
Indenture . . . . . . . . . . . . . . . . . . 20
Section 4.01. The Bonds. . . . . . . . . . . . . . . . . 20
Section 4.02. Registration of and Limitations on Transfer
and Exchange of Bonds; Appointment of
Certificate Registrar. . . . . . . . . . . 21
Section 4.3. Mutilated, Destroyed, Lost or Stolen Bonds 22
Section 4.04. Persons Deemed Owners. . . . . . . . . . . 22
Section 4.05. Cancellation . . . . . . . . . . . . . . . 23
Section 4.06. Book-Entry Bonds . . . . . . . . . . . . . 23
Section 4.07. Notices to Depository. . . . . . . . . . . 24
Section 4.08. Definitive Bonds . . . . . . . . . . . . . 24
Section 4.09. Tax Treatment. . . . . . . . . . . . . . . 24
Section 4.10. Satisfaction and Discharge of Indenture. . 25
Section 4.11. Application of Trust Money . . . . . . . . 26
Section 4.12. Subrogation and Cooperation. . . . . . . . 26
Section 4.13. Repayment of Monies Held by Paying Agent . 27
Section 4.14. Temporary Bonds. . . . . . . . . . . . . . 27
ARTICLE V Default and Remedies . . . . . . . . . . . . . . . . 28
Section 5.01. Events of Default. . . . . . . . . . . . . 28
Section 5.02. Acceleration of Maturity; Rescission and
Annulment. . . . . . . . . . . . . . . . . 28
Section 5.03. Collection of Indebtedness and Suits for
Enforcement by Indenture Trustee . . . . . 29
Section 5.04. Remedies; Priorities . . . . . . . . . . . 31
Section 5.05. Optional Preservation of the Trust Estate. 34
Section 5.06. Limitation of Suits. . . . . . . . . . . . 34
Section 5.07. Unconditional Rights of Bondholders To
Receive Principal and Interest . . . . . . 35
Section 5.08. Restoration of Rights and Remedies . . . . 35
Section 5.09. Rights and Remedies Cumulative . . . . . . 35
Section 5.10. Delay or Omission Not a Waiver . . . . . . 36
Section 5.11. Control by Bond Insurer. . . . . . . . . . 36
Section 5.12. Waiver of Past Defaults. . . . . . . . . . 36
Section 5.13. Undertaking for Costs. . . . . . . . . . . 37
Section 5.14. Waiver of Stay or Extension Laws . . . . . 37
Section 5.15. Sale of Trust Estate . . . . . . . . . . . 37
Section 5.16. Action on Bonds. . . . . . . . . . . . . . 39
Section 5.17. Performance and Enforcement of Certain
Obligations. . . . . . . . . . . . . . . . 39
<PAGE>
ARTICLE VI The Indenture Trustee . . . . . . . . . . . . 40
Section 6.01. Duties of Indenture Trustee. . . . . . . . 40
Section 6.02. Rights of Indenture Trustee. . . . . . . . 42
Section 6.03. Individual Rights of Indenture Trustee . . 42
Section 6.04. Indenture Trustee's Disclaimer . . . . . . 42
Section 6.05. Notice of Event of Default . . . . . . . . 43
Section 6.06. Tax Administration of the Issuer . . . . . 43
Section 6.07. Compensation and Indemnity . . . . . . . . 43
Section 6.08. Replacement of Indenture Trustee . . . . . 44
Section 6.09. Successor Indenture Trustee by Merger. . . 45
Section 6.10. Appointment of Co-Indenture Trustee or
Separate Indenture Trustee45 . . . . . . . .
Section 6.11. Eligibility; Disqualification. . . . . . . 46
Section 6.12. Preferential Collection of Claims Against
Issuer . . . . . . . . . . . . . . . . . . 46
Section 6.13. Representations and Warranties . . . . . . 47
Section 6.14. Directions to Indenture Trustee. . . . . . 47
Section 6.15. The Agents . . . . . . . . . . . . . . . . 47
ARTICLE VII Bondholders' Lists and Reports. . . . . . . . . . 48
Section 7.01. Issuer To Furnish Indenture Trustee Names
and Addresses of Bondholders . . . . . . . 48
Section 7.02. Preservation of Information; Communications
to Bondholders . . . . . . . . . . . . . . 48
Section 7.03. Reports by the Indenture Trustee; Issuer
Fiscal Year. . . . . . . . . . . . . . . . 48
Section 7.04. Reports by Indenture Trustee . . . . . . . 49
Section 7.05. Statements to Bondholders. . . . . . . . . 49
Section 7.06. Books and Records. . . . . . . . . . . . . 51
ARTICLE VIII Accounts, Disbursements and Releases . . . . . . 52
Section 8.01. Collection of Money. . . . . . . . . . . . 52
Section 8.02. Trust Accounts . . . . . . . . . . . . . . 52
Section 8.03. Officer's Certificate. . . . . . . . . . . 53
Section 8.04. Termination Upon Distribution to
Bondholders. . . . . . . . . . . . . . . . 53
Section 8.05. Release of Trust Estate. . . . . . . . . . 53
Section 8.06. Surrender of Bonds Upon Final Payment. . . 54
Section 8.07. Optional Redemption of the Bonds . . . . . 54
Section 8.08. Pre-Funding Account. . . . . . . . . . . . 54
Section 8.09. Interest Coverage Account. . . . . . . . . 55
ARTICLE IX Supplemental Indentures . . . . . . . . . . . 56
Section 9.01. Supplemental Indentures Without Consent
of Bondholders . . . . . . . . . . . . . . 56
Section 9.02. Supplemental Indentures With Consent of
Bondholders. . . . . . . . . . . . . . . . 57
Section 9.03. Execution of Supplemental Indentures.. . . 59
<PAGE>
Section 9.04. Effect of Supplemental Indenture . . . . . 59
Section 9.05. Conformity with Trust Indenture Act. . . . 59
Section 9.06. Reference in Bonds to Supplemental
Indentures.. . . . . . . . . . . . . . . . 59
ARTICLE X Miscellaneous. . . . . . . . . . . . . . . . . . . . 60
Section 10.01. Compliance Certificates and Opinions, etc. 60
Section 10.02. Form of Documents Delivered to Indenture
Trustee. . . . . . . . . . . . . . . . . . 61
Section 10.03. Acts of Bondholders. . . . . . . . . . . . 62
Section 10.04. Notices, etc., to Indenture Trustee, Issuer,
Bond Insurer and Rating Agencies . . . . . 63
Section 10.05. Notices to Bondholders; Waiver . . . . . . 64
Section 10.06. Conflict with Trust Indenture Act. . . . . 64
Section 10.07. Effect of Headings . . . . . . . . . . . . 65
Section 10.08. Successors and Assigns . . . . . . . . . . 65
Section 10.09. Separability . . . . . . . . . . . . . . . 65
Section 10.10. Benefits of Indenture. . . . . . . . . . . 65
Section 10.11. Legal Holidays . . . . . . . . . . . . . . 65
Section 10.12. Governing Law. . . . . . . . . . . . . . . 65
Section 10.13. Counterparts . . . . . . . . . . . . . . . 65
Section 10.14. Recording of Indenture . . . . . . . . . . 65
Section 10.15. Issuer Obligation. . . . . . . . . . . . . 66
Section 10.16. No Petition. . . . . . . . . . . . . . . . 66
Section 10.17. Inspection . . . . . . . . . . . . . . . . 66
EXHIBIT A FORM OF CLASS A-1 BONDS. . . . . . . . . . . . . . . 70
EXHIBIT B FORM OF CLASS A-2 BONDS. . . . . . . . . . . . . . . 79
EXHIBIT C FORM OF TRUSTEE INITIAL CERTIFICATION. . . . . . . . 88
EXHIBIT D FORM OF TRUSTEE FINAL CERTIFICATION. . . . . . . . . 90
EXHIBIT E MORTGAGE LOAN SCHEDULE . . . . . . . . . . . . . . . 92
<PAGE>
APPENDIX A
DEFINITIONS
Addition Notice: With respect to the transfer of
Subsequent Mortgage Loans to the Trust pursuant to Section 2.2(b)
of the Mortgage Loan Purchase Agreement, a notice given to the
Rating Agencies, the Indenture Trustee, the Bond Insurer and the
Owner Trustee, which shall be given not later than six Business
Days prior to the related Subsequent Transfer Date, of the
Seller's and the Company's designation of Subsequent Mortgage
Loans to be sold to the Trust and the aggregate principal balance
as of the Subsequent Cut-off Date of such Subsequent Mortgage
Loans.
Adjustable Rate Initial Mortgage Loan: Each of the
Adjustable Rate Mortgage Loans transferred to the Trust on the
Closing Date.
Adjustable Rate Mortgage Loan: Each of the Mortgage
Loans identified in the Mortgage Loan Schedule as having a
Mortgage Rate that is subject to adjustment.
Adjustment Date: As to each Adjustable Rate Mortgage
Loan, each date set forth in the related Mortgage Note on which
an adjustment to the interest rate on such Mortgage Loan becomes
effective.
Administrative Fee: The sum of the Owner Trustee Fee
and the Bond Insurance Premium.
Advance: As to any Mortgage Loan, any advance made by
the Servicer pursuant to Section 4.02 of the Servicing Agreement.
Affiliate: With respect to any Person, any other
Person controlling, controlled by or under common control with
such Person. For purposes of this definition, "control" means
the power to direct the management and policies of a Person,
directly or indirectly, whether through ownership of voting
securities, by contract or otherwise and "controlling" and
"controlled" shall have meanings correlative to the foregoing.
Applicable Spread: A percentage equal to the greater
of (i) the Minimum Spread or (ii) the lesser of (a) the
Remarketing Spread or (b) the Maximum Spread, which formula
results in, with respect to the first year following the Closing
Date, 0.07% per annum.
Appraised Value: The appraised value of a Mortgaged
Property based upon the lesser of (i) the appraisal made at the
time of the origination of the related Mortgage Loan, or (ii) the
sales price of such Mortgaged Property at such time of
origination. With respect to a Mortgage Loan the proceeds of
which were used to refinance an existing mortgage loan, the
appraised value of the <PAGE> Mortgaged Property based upon the
appraisal (as reviewed and approved by the Seller) obtained at
the time of refinancing.
Assignment of Mortgage: An assignment of Mortgage,
notice of transfer or equivalent instrument, in recordable form,
which is sufficient under the laws of the jurisdiction wherein
the related Mortgaged Property is located to reflect of record
the sale of the Mortgage, which assignment, notice of transfer or
equivalent instrument may be in the form of one or more blanket
assignments covering Mortgages secured by Mortgaged Properties
located in the same county, if permitted by law.
Authorized Newspaper: A newspaper of general
circulation in the Borough of Manhattan, The City of New York,
printed in the English language and customarily published on each
Business Day, whether or not published on Saturdays, Sundays or
holidays.
Authorized Officer: With respect to the Issuer, any
officer of the Owner Trustee who is authorized to act for the
Owner Trustee in matters relating to the Issuer and who is iden-
tified on the list of Authorized Officers delivered by the Owner
Trustee to the Indenture Trustee on the Closing Date (as such
list may be modified or supplemented from time to time there-
after).
Available Funds: As to any Payment Date, an amount
equal to the amount on deposit in the Payment Account on such
Payment Date and available for distribution to the Bondholders
(minus (i) the Bond Insurance Premium and the Indenture Trustee
Fee and (ii) if the Bonds have been declared due and payable
following an Event of Default on such Payment Date, any amounts
owed to the Indenture Trustee by the Issuer pursuant to Section
6.07 of the Indenture and any amounts owed to the Bond Insurer by
the Issuer pursuant to Section 5.04(b) of the Indenture).
Bankruptcy Code: The Bankruptcy Code of 1978, as
amended.
Base Prospectus: The base Prospectus, dated April 23,
1998, with respect to the Bonds.
Base Specified Overcollateralization Amount:
$16,065,000, which equals the product of the Base Target
Percentage and the Original Pool Balance.
Base Target Percentage: 5.10%.
Basic Documents: The Trust Agreement, the Certificate
of Trust, the Indenture, the Mortgage Loan Purchase Agreement,
each Seller's Subsequent Transfer Instrument, each Company's
Subsequent Transfer Instrument, the Insurance Agreement, the
Indemnification Agreement, the Servicing Agreement, the
Certificates Sale Agreement, the CAP Agreements, the NCFC Demand
Note and the other documents and certificates delivered in
connection with any of the above.
<PAGE>
Beneficial Owner: With respect to any Bond, the Person
who is the beneficial owner of such Bond as reflected on the
books of the Depository or on the books of a Person maintaining
an account with such Depository (directly as a Depository
Participant or indirectly through a Depository Participant, in
accordance with the rules of such Depository).
Bond Insurance Policy: The financial guaranty
insurance policy number 27292(1), issued by the Bond Insurer to
the Indenture Trustee for the benefit of the Bondholders.
Bond Insurance Premium: The premium payable to the
Bond Insurer, as specified in the Insurance Agreement.
Bond Insurer: MBIA Insurance Corporation, a New York
stock insurance company, or any successor thereto.
Bond Insurer Default: The existence and continuance of
any of the following: (a) a failure by the Bond Insurer to make a
payment required under the Bond Insurance Policy, the CAP
Agreement Insurance Policy or the Surety Bond in accordance with
their terms; or (b)(i) the Bond Insurer (A) files any petition or
commences any case or proceeding under any provision or chapter
of the Bankruptcy Code or any other similar federal or state law
relating to insolvency, bankruptcy, rehabilitation, liquidation
or reorganization, (B) makes a general assignment for the benefit
of its creditors, or (C) has an order for relief entered against
it under the Bankruptcy Code or any other similar federal or
state law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization which is final and nonappealable;
or (ii) a court of competent jurisdiction, the New York
Department of Insurance or other competent regulatory authority
enters a final and nonappealable order, judgment or decree (A)
appointing a custodian, trustee, agent or receiver for the Bond
Insurer or for all or any material portion of its property or (B)
authorizing the taking of possession by a custodian, trustee,
agent or receiver of the Bond Insurer (or the taking of
possession of all or any material portion of the property of the
Bond Insurer).
Bond Interest Rate: On any Payment Date, the weighted
average of the Class A-1 Bond Interest Rate and Class A-2 Bond
Interest Rate, determined by adding (i) the Class A-1 Bond
Interest Rate multiplied by a fraction, the numerator of which is
the Class A-1 Bond Principal Balance and the denominator of which
is the sum of (a) the Class A-1 Bond Principal Balance and (b)
the Class A-2 Bond Principal Balance, and (ii) the Class A-2 Bond
Interest Rate multiplied by a fraction, the numerator of which is
the Class A-2 Bond Principal Balance and the denominator of which
is the sum of (x) the Class A-1 Bond Principal Balance and (y)
the Class A-2 Bond Principal Balance.
Bond Owner: The Beneficial Owner of a Bond.
Bond Percentage: With respect to any Payment Date and
any Bond, the ratio expressed as a percentage of the Bond
Principal Balance of such Bond to the aggregate Bond Principal
Balance of all Bonds immediately prior to such Payment Date.
<PAGE>
Bond Principal Balance: With respect to the Bonds as
of any date of determination, the sum of the Class A-1 Bond
Principal Balance and the Class A-2 Bond Principal Balance, and
with respect to any individual Bond or class of Bonds as of any
date of determination, the initial principal balance of such Bond
or class of Bonds as of the Closing Date reduced by all payments
of principal thereon prior to such determination date.
Bond Register: The register maintained by the Bond
Registrar in which the Bond Registrar shall provide for the
registration of Bonds and of transfers and exchanges of Bonds.
Bond Registrar: The Indenture Trustee, in its capacity
as Bond Registrar.
Bondholder or Holder: The Person in whose name a Bond
is registered in the Bond Register, except that, any Bond
registered in the name of the Seller, the Company, the Issuer or
the Indenture Trustee or any Affiliate of any of them shall be
deemed not to be a Bondholder or Holder, nor shall any Bond so
owned be considered outstanding, for purposes of giving any
request, demand, authorization, direction, notice, consent or
waiver under the Indenture or the Trust Agreement, provided that,
in determining whether the Indenture Trustee shall be protected
in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Bonds that the
Indenture Trustee knows to be so owned shall be so disregarded.
Pledgees of Bonds that have been pledged in good faith may be
regarded as Holders if the pledgee establishes to the satisfac-
tion of the Indenture Trustee the pledgee's right so to act with
respect to such Bonds and that the pledgee is not the Issuer, any
other obligor upon the Bonds or any Affiliate of any of the
foregoing Persons. Any Bonds on which payments are made under the
Bond Insurance Policy shall be deemed Outstanding until the Bond
Insurer has been reimbursed with respect thereto and the Bond
Insurer shall be deemed the Bondholder thereof to the extent of
such unreimbursed payment.
Bonds: NovaStar Mortgage Funding Trust, Series 1998-2,
Home Equity Loan Asset-Backed Bonds, Series 1998-2, designated as
the "Bonds" in the Indenture, issued in two classes, the Class A-1
Bonds in an aggregate principal amount of $115,000,000 and the
Class A-2 Bonds in an aggregate principal amount of $200,000,000.
Book-Entry Bonds: Beneficial interests in the Bonds,
ownership and transfers of which shall be made through book
entries by the Depository as described in Section 4.06 of the
Indenture.
Business Day: Any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the City of
New York, Delaware, California or Kansas or in the city in which
the corporate trust offices of the Indenture Trustee or the
principal office of the Bond Insurer are located, are required or
authorized by law to be closed.
Business Trust Statute: Chapter 38 of Title 12 of the
Delaware Code, 12 Del. Code Sections 3801 et seq., as the same may be
amended from time to time.
<PAGE>
CAP Agreements: The First CAP Agreement, the Second CAP
Agreement and the Third CAP Agreement.
CAP Agreement Insurance Policy: The interest rate swap
insurance policy, number 27292(2), issued by the Bond Insurer to
the First and Second CAP Provider.
CAP Providers: The First and Second CAP Provider and
the Third CAP Provider.
Carry-Forward Amount: With respect to the Bonds and
any Payment Date, the sum of the Class A-1 Carry-Forward Amount
and the Class A-2 Carry-Forward Amount.
Cash Liquidation: As to any defaulted Mortgage Loan
other than a Mortgage Loan as to which an REO Acquisition
occurred, a determination by the Servicer that it has received
all Liquidation Proceeds and other payments or cash recoveries
which the Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.
Certificate Distribution Account: The account or
accounts created and maintained pursuant to Section 3.10(c) of
the Trust Agreement. The Certificate Distribution Account shall
be an Eligible Account.
Certificate Paying Agent: The meaning specified in
Section 3.10 of the Trust Agreement.
Certificate Percentage Interest: With respect to each
Certificate, the Certificate Percentage Interest on the face
thereof.
Certificate Register: The register maintained by the
Certificate Registrar in which the Certificate Registrar shall
provide for the registration of Certificates and of transfers and
exchanges of Certificates.
Certificate Registrar: Initially, the Indenture
Trustee, in its capacity as Certificate Registrar, or any
successor to the Indenture Trustee in such capacity.
Certificates Sale Agreement: The Certificates Sale
Agreement, dated as of August 19, 1998, between NovaStar Mortgage
Funding Corporation and NCFC.
Certificate of Trust: The Certificate of Trust filed
for the Trust pursuant to Section 3810(a) of the Business Trust
Statute.
Certificates: The NovaStar Mortgage Funding Trust,
Series 1998-2, Home Equity Loan Asset-Backed Certificates,
evidencing the beneficial ownership interest in the Issuer and
executed by the Owner Trustee in substantially the form set forth
in Exhibit A to the Trust Agreement.
<PAGE>
Certificateholder: The Person in whose name a
Certificate is registered in the Certificate Register. Pledgees
of Certificates that have been pledged in good faith may be
regarded as Certificateholders if the pledgee establishes to the
satisfaction of the Certificate Paying Agent or the Owner
Trustee, as the case may be, the pledgee's right so to act with
respect to such Certificates and that the pledgee is not the
Issuer, any other obligor upon the Certificates or any Affiliate
of any of the foregoing Persons.
Class A-1 Bond Interest Rate: With respect to each
Payment Date after the first Payment Date, a floating rate equal
to the lesser of (i)(a) with respect to each Payment Date up to
and including the earlier of (x) the Payment Date in August 2005
and (y) the Payment Date which occurs on or prior to the date on
which the outstanding Bond Principal Balance is reduced to less
than 25% of the original Bond Principal Balance, One-Month LIBOR
plus 0.18%, and (b) with respect to each Payment Date thereafter,
One-Month LIBOR plus 0.43% and (ii) the Maximum Interest Rate.
The Class A-1 Bond Interest Rate for the first Payment Date will
equal 5.82453% per annum.
Class A-1 Bond Principal Balance: On any date of
determination, the initial principal balance of the Class A-1
Bonds as of the Closing Date, reduced by all payments of
principal thereon prior to such date of determination.
Class A-1 Bonds: The class of Bonds identified as the
"Class A-1 Bonds" in the Indenture, substantially in the form of
Exhibit A to the Indenture.
Class A-1 Carry-Forward Amount: With respect to any
Payment Date, an amount equal to the excess, if any, of (a) the
amount determined pursuant to clause (i) of the definition of the
Class A-1 Interest Payment Amount minus (b) the Class A-1
Guaranteed Interest Payment Amount.
Class A-1 Guaranteed Interest Payment Amount: For any
Payment Date, an amount equal to the Class A-1 Bond's pro rata
portion of the Guaranteed Interest Payment Amount, determined by
multiplying the Guaranteed Interest Payment Amount for such
Payment Date by a fraction, the numerator of which is the amount
calculated pursuant to clause (i) of the definition of Class A-1
Interest Payment Amount and the denominator of which is the sum
of (x) the amount calculated pursuant to clause (i) of the
definition of Class A-1 Interest Payment Amount and (y) the
amount calculated pursuant to clause (i) of the definition of
Class A-2 Interest Payment Amount.
Class A-1 Interest Payment Amount: With respect to any
Payment Date, an amount equal to the lessor of (i) interest
accrued on the Class A-1 Bond Principal Balance immediately prior
to such Payment Date at the Class A-1 Bond Interest Rate for the
related Interest Period, and (ii) the Class A-1 Guaranteed
Interest Payment Amount.
Class A-2 Bond Interest Rate: With respect to each
Payment Date after the first Payment Date, a floating rate equal
to the lessor of (i) (a) with respect to each Payment Date up to
and including the earlier of (x) the Payment Date in August 2005
and (y) the Payment Date which <PAGE> occurs on or prior to the date on
which the outstanding Bond Principal Balance is reduced to less
than 25% of the original Bond Principal Balance, One-Month LIBOR
plus the Applicable Spread, and (b) with respect to each Payment
Date thereafter, One Month LIBOR plus 0.40%, and (ii) the Maximum
Interest Rate. The Class A-2 Bond Interest Rate for the first
Payment Date will equal 5.71453% per annum.
Class A-2 Bond Principal Balance: On any date of
determination, the initial principal balance of the Class A-2
Bonds as of the Closing Date, reduced by all payments of
principal thereon prior to such date of determination.
Class A-2 Bonds: the class of Bonds identified as the
"Class A-2 Bonds" in the Indenture, substantially in the form of
Exhibit B to the Indenture.
Class A-2 Carry-Forward Amount: With respect to any
Payment Date, an amount equal to the excess, if any, of (a) the
amount determined pursuant to clause (i) of the definition of
the Class A-2 Interest Payment Amount minus (b) the Class A-2
Guaranteed Interest Payment Amount.
Class A-2 Guaranteed Interest Payment Amount: For any
Payment Date, an amount equal to the Class A-2 Bond's pro rata
portion of the Guaranteed Interest Payment Amount, determined by
multiplying the Guaranteed Interest Payment Amount for much
Payment Date by a fraction, the numerator of which is the amount
calculated pursuant to clause (i) of the definition of Class A-2
Interest Payment Amount and the denominator of which is the sum
of (x) the amount calculated pursuant to cause (i) of the
definition of class A-1 Interest Payment Amount and (y) the
amount calculated pursuant to clause (i) of the definition of
Class A-2 Interest Payment Amount.
Class A-2 Interest Payment Amount: With respect to any
Payment Date, an amount equal to the lessor of (i) interest
accrued on the Class A-2 Bond Principal Balance immediately prior
to such Payment Date at the Class A-2 Bond Interest Rate for the
related Interest Period and (ii) the Class A-2 Guaranteed
Interest Payment Amount.
Closing Date: August 19, 1998.
Code: The Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder.
Collateral: The meaning specified in the Granting
Clause of the Indenture.
Collection Account: The account or accounts created
and maintained pursuant to Section 3.06(d) of the Servicing
Agreement. The Collection Account shall be an Eligible Account.
Combined Loan-to-Value Ratio: With respect to any
Mortgage Loan which is secured by a second lien on the related
Mortgaged Property at any given time generally will be the ratio,
<PAGE>
expressed as a percentage, the numerator of which is the sum of
(i) the original principal balance of the Mortgage Loan plus (ii)
the unpaid principal balance of any first lien on the related
Mortgaged Property as of such date, and the denominator of which
is the lesser of (i) the appraised value of the related Mortgaged
Property as of the date of the appraisal used by or on behalf of
the Seller to underwrite such Mortgage Loan or (ii) the sale
price of the related Mortgaged Property if such a sale occurred
at origination of the Mortgage Loan.
Company: NovaStar Mortgage Funding Corporation, a
Delaware corporation, and its successors and assigns.
Compensating Interest: With respect to any
Determination Date, an amount equal to the lesser of (i) the
aggregate amount of Prepayment Interest Shortfall for the related
Prepayment Period and (ii) the Servicing Fee for the related
Payment Date.
Conversion Date: The date on which a Convertible
Mortgage Loan becomes a Converted Mortgage Loan according to the
terms of the related Mortgage Note.
Converted Mortgage Loan: Any convertible Mortgage Loan
as to which the Mortgagor has exercised the option to convert to
a fixed Mortgage Rate and satisfied all of the conditions to
conversion set forth in the Mortgage Note.
Convertible Mortgage Loans: Any Mortgage Loan
evidenced by a Mortgage Note that according to its terms is
convertible at the option of the Mortgagor from a variable
Mortgage Rate to a fixed Mortgage Rate, subject to satisfaction
of the conditions set forth in such note.
Corporate Trust Office: With respect to the Indenture
Trustee, Certificate Registrar, Certificate Paying Agent and
Paying Agent, the principal corporate trust office of the
Indenture Trustee and Bond Registrar at which at any particular
time its corporate trust business shall be administered, which
office at the date of the execution of this instrument is located
at 230 S. Tryon Street, 9th Floor, Charlotte, North Carolina
28288-1179, Attention: NovaStar Mortgage Funding Trust, Series
1998-2. With respect to the Owner Trustee, the principal
corporate trust office of the Owner Trustee at which at any
particular time its corporate trust business shall be admin-
istered, which office at the date of the execution of this Trust
Agreement is located at Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware 19801,
Attention: NovaStar Mortgage Funding Trust, Series 1998-2.
Cumulative Loss Percentage: As to any Payment Date and
the Mortgage Loans, the percentage equivalent of the fraction
obtained by dividing (i) the aggregate of Realized Losses on the
Mortgage Loans (without giving any effect to coverage provided by
any PMI Policy) from the Cut-off Date through such Payment Date
by (ii) the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date.
Cut-off Date: July 1, 1998.
<PAGE>
Cut-off Date Principal Balance: With respect to any
Initial Mortgage Loan, the unpaid principal balance thereof as of
the opening of business on the last day of the related Due Period
immediately prior to the Cut-off Date, and with respect to the
Initial Mortgage Loans, the sum of $272,360,471.
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
constituting a Deficient Valuation or any reduction that results
in a permanent forgiveness of principal.
Default: Any occurrence which is or with notice or the
lapse of time or both would become an Event of Default.
Deficiency Amount: The meaning provided in the Bond
Insurance Policy.
Deficient Valuation: With respect to any Mortgage
Loan, a valuation by a court of competent jurisdiction of the
Mortgaged Property in an amount less than the then outstanding
indebtedness under the Mortgage Loan, or any reduction in the
amount of principal to be paid in connection with any scheduled
Monthly Payment that constitutes a permanent forgiveness of
principal, which valuation or reduction results from a proceeding
under the Bankruptcy Code.
Definitive Bonds: The meaning specified in Section
4.08 of the Indenture.
Deleted Mortgage Loan: A Mortgage Loan replaced or to
be replaced with an Eligible Substitute Mortgage Loan.
Delinquency Amount: The product of the Rolling
Delinquency Percentage and the aggregate Principal Balances of
the Mortgage Loans as of the close of business on the last day of
the related Due Period.
Delinquency Percentage: As of the last day of any Due
Period and with respect to the Mortgage Loans, the percentage
equivalent of a fraction, the numerator of which equals the
aggregate Principal Balance of the Mortgage Loans that are 90 or
more days delinquent, in foreclosure or converted to REO
Properties as of such last day of such Due Period, and the
denominator of which is the aggregate Principal Balance of the
Mortgage Loans as of the last day of such Due Period.
Depository or Depository Agency: The Depository Trust
Company or a successor appointed by the Indenture Trustee with
the approval of the Issuer. Any successor to the Depository
shall be an organization registered as a "clearing agency"
pursuant to Section 17A of the Exchange Act and the regulations
of the Securities and Exchange Commission thereunder.
<PAGE>
Depository Participant: A Person for whom, from time
to time, the Depository effects book-entry transfers and pledges
of securities deposited with the Depository.
Determination Date: With respect to any Payment Date,
the 15th day of the related month, or if the 15th day of such
month is not a Business Day, the immediately preceding Business
Day.
Determination Date Report: The meaning specified in
Section 4.01 of the Servicing Agreement.
Due Date: The first day of the month of the related
Payment Date.
Due Period: With respect to any Mortgage Loan and Due
Date, the period commencing on the second day of the month
preceding the month of such Payment Date (or, with respect to the
first Due Period, the day following the Cut-off Date) and ending
on the related Due Date.
Eligible Account: An account that is either: (A) a
segregated account or accounts maintained with an institution
whose deposits are insured by the FDIC, the unsecured and
uncollateralized long term debt obligations of which institution
shall be rated AA or higher by Standard & Poor's and Aa2 or
higher by Moody's and in the highest short term rating category
by each of the Rating Agencies, and which is (i) a federal
savings and loan association duly organized, validly existing and
in good standing under the federal banking laws, (ii) an
institution duly organized, validly existing and in good standing
under the applicable banking laws of any state; (iii) a national
banking association duly organized, validly existing and in good
standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company or (v) approved in writing
by the Bond Insurer and each Rating Agency or (B) a segregated
trust account or accounts maintained with the trust department of
a federal or state chartered depository institution acceptable to
the Bond Insurer and each Rating Agency, having capital and
surplus of not less than $100,000,000, acting in its fiduciary
capacity.
Eligible Investments: One or more of the following:
(i) direct obligations of, and obligations fully
guaranteed by, the United States of America, any of the
Federal Home Mortgage Corporation, the Federal National
Mortgage Association, the Federal Home Loan Banks or any
agency or instrumentality of the United States of America
the obligations of which are backed by the full faith and
credit of the United States of America;
(ii) (A) demand and time deposits in, certificates
of deposit of, banker's acceptances issued by or federal
funds sold by any depository institution or trust company
(including the Indenture Trustee or its agent acting in
their respective commercial capacities) incorporated under
the laws of the United States of America or any State
thereof and subject <PAGE> to supervision and examination by
federal and/or state authorities, so long as at the time of
such investment or contractual commitment providing for such
investment, such depository institution or trust company has
a short term unsecured debt rating in the highest available
rating category of each of the Rating Agencies and provided
that each such investment has an original maturity of no
more than 365 days, and (B) any other demand or time deposit
or deposit which is fully insured by the Federal Deposit
Insurance Corporation;
(iii) repurchase obligations with a term not to
exceed 30 days with respect to any security described in
clause (i) above and entered into with a depository
institution or trust company (acting as a principal) rated
"A" or higher by S&P and A2 or higher by Moody's; provided,
however, that collateral transferred pursuant to such
repurchase obligation must (A) be valued daily at current
market price plus accrued interest, (B) pursuant to such
valuation, equal, at all times, 105% of the cash transferred
by the Indenture Trustee in exchange for such collateral and
(C) be delivered to the Indenture Trustee or, if the
Indenture Trustee is supplying the collateral, an agent for
the Indenture Trustee, in such a manner as to accomplish
perfection of a security interest in the collateral by
possession of certificated securities.
(iv) securities bearing interest or sold at a
discount issued by any corporation incorporated under the
laws of the United States of America or any State thereof
which has a long term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at
the time of such investment;
(v) commercial paper having an original maturity
of less than 365 days and issued by an institution having a
short term unsecured debt rating in the highest available
rating category of each of the Rating Agencies at the time
of such investment;
(vi) a guaranteed investment contract approved by
each of the Rating Agencies and the Bond Insurer and issued
by an insurance company or other corporation having a long
term unsecured debt rating in the highest available rating
category of each of the Rating Agencies at the time of such
investment;
(vii) money market funds having ratings in the
highest available long-term rating category of each of the
Rating Agencies at the time of such investment; any such
money market funds which provide for demand withdrawals
being conclusively deemed to satisfy any maturity
requirement for Eligible Investments set forth in the
Indenture; and
(viii) any investment approved in writing by each of
the Rating Agencies and the Bond Insurer;
provided, however, that each such instrument shall be acquired in
an arm's length transaction and no such instrument shall be an
Eligible Investment if it represents, either (1) the right to
receive only interest payments with respect to the underlying
debt instrument or (2) the right to receive both <PAGE> principal and
interest payments derived from obligations underlying such
instrument and the principal and interest payments with respect
to such instrument provide a yield to maturity greater than 120%
of the yield to maturity at par of such underlying obligations;
provided further, however, that each such instrument acquired
shall not be acquired at a price in excess of par.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Eligible Investments listed
above.
Eligible Substitute Mortgage Loan: A Mortgage Loan
substituted by the Seller for a Deleted Mortgage Loan which must,
on the date of such substitution, as confirmed in an Officer's
Certificate delivered to the Indenture Trustee and the Bond
Insurer, (i) have an outstanding principal balance, after
deduction of the principal portion of the monthly payment due in
the month of substitution (or in the case of a substitution of
more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate outstanding principal balance, after such deduction),
not in excess of the outstanding principal balance of the Deleted
Mortgage Loan (the amount of any shortfall to be deposited by the
Seller in the Collection Account in the month of substitution);
(ii) comply in all material respects with each representation and
warranty set forth in clauses (ii) through (lxviii) of Section
3.1(b) of the Mortgage Loan Purchase Agreement other than clauses
(iii), (v)-(xiv), (xlii), (xlv), (lvi), (lvii), (lx) and (lxiii);
(iii) have a Mortgage Rate and, with respect to an Adjustable
Rate Mortgage Loan, a Gross Margin no lower than and not more
than 1% per annum higher than the Mortgage Rate and Gross Margin,
respectively, of the Deleted Mortgage Loan as of the date of
substitution; (iv) have a Loan-to-Value Ratio and Combined Loan-to-
Value Ratio, if applicable, at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of
substitution; (v) have a remaining term to stated maturity not
greater than (and not more than one year less than) that of the
Deleted Mortgage Loan; (vi) not be 30 days or more delinquent;
(vii) not be a negative amortization loan; and (viii) have a lien
priority equal to or superior to the lien priority of the Deleted
Mortgage Loan .
ERISA: The Employee Retirement Income Security Act of
1974, as amended.
Event of Default: With respect to the Indenture, any
one of the following events (whatever the reason for such Event
of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) a default by the Issuer in the payment
of (a) the Interest Payment Amount or the Principal Payment
Amount with respect to a Payment Date on such Payment Date or (b)
the Subordination Increase Amount or the Carry-Forward Amount,
but only, with respect to clause (b), to the extent funds are
available to make such payment as provided in the Indenture
(provided that for purposes of this clause, payment by the
Indenture Trustee from proceeds of the <PAGE> Bond Insurance Policy
shall not be considered payment by the Issuer with respect to the
Bonds); or
(2) the failure by the Issuer on the Final
Scheduled Payment Date to reduce the Bond Principal Balance to
zero (provided that for purposes of this clause, payment by the
Indenture Trustee from proceeds of the Bond Insurance Policy
shall not be considered payment by the Issuer with respect to the
Bonds) ; or
(3) there occurs a default in the observance
or performance of any covenant or agreement of the Issuer made in
the Indenture, or any representation or warranty of the Issuer
made in the Indenture or in any certificate or other writing
delivered pursuant thereto or in connection therewith proving to
have been incorrect in any material respect as of the time when
the same shall have been made, and such default shall continue or
not be cured, or the circumstance or condition in respect of
which such representation or warranty was incorrect shall not
have been eliminated or otherwise cured, for a period of 30 days
after there shall have been given, by registered or certified
mail, to the Issuer by the Indenture Trustee or to the Issuer and
the Indenture Trustee by the Bond Insurer, or if a Bond Insurer
Default exists, the Holders of at least 25% of the aggregate Bond
Principal Balance of the Bonds, a written notice specifying such
default or incorrect representation or warranty and requiring it
to be remedied and stating that such notice is a notice of
default hereunder; or
(4) there occurs the filing of a decree or
order for relief by a court having jurisdiction in the premises
in respect of the Issuer or any substantial part of the Trust
Estate in an involuntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of
the Issuer or for any substantial part of the Trust Estate, or
ordering the winding-up or liquidation of the Issuer's affairs,
and such decree or order shall remain unstayed and in effect for
a period of 60 consecutive days; or
(5) there occurs the commencement by the
Issuer of a voluntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in
effect, or the consent by the Issuer to the entry of an order for
relief in an involuntary case under any such law, or the consent
by the Issuer to the appointment or taking possession by a
receiver, liquidator, assignee, custodian, <PAGE> trustee, sequestrator
or similar official of the Issuer or for any substantial part of
the assets of the Trust Estate, or the making by the Issuer of
any general assignment for the benefit of creditors, or the
failure by the Issuer generally to pay its debts as such debts
become due, or the taking of any action by the Issuer in
furtherance of any of the foregoing.
Event of Servicer Termination: With respect to the
Servicing Agreement, a Servicing Default as defined in Section
6.01 of the Servicing Agreement.
Excess Subordination Amount: With respect to any
Payment Date, the excess, if any, of (a) the Subordination Amount
that would apply on such Payment Date after taking into account
all distributions to be made on such Payment Date (exclusive of
any reductions thereto attributable to Subordination Reduction
Amounts on such Payment Date) over (b) the Required Subordination
Amount for such Payment Date.
Exchange Act: The Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
Expenses: The meaning specified in Section 7.02 of the
Trust Agreement.
FDIC: The Federal Deposit Insurance Corporation or any
successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, or
any successor thereto.
Final Scheduled Payment Date: The Payment Date
occurring in August 2028.
First and Second CAP Agreements: The First CAP
Agreement and the Second CAP Agreement.
First and Second CAP Provider: Merrill Lynch Capital
Services, Inc., a Delaware corporation, and its successors and
assigns.
First CAP Agreement: The interest rate CAP Agreement,
dated the Closing Date, between the Issuer and the First and
Second CAP Provider, in the notional principal amount of
$60,000,000.
Fixed Rate Initial Mortgage Loan: Each of the Fixed
Rate Mortgage Loans transferred to the Trust on the Closing Date.
Fixed Rate Mortgage Loan: Each of the Mortgage Loans
identified in the Mortgage Loan Schedule as having a Mortgage
Rate that is fixed.
<PAGE>
FNMA: The Federal National Mortgage Association, or
any successor thereto.
Foreclosure Profit: With respect to a Liquidated
Mortgage Loan, the amount, if any, by which (i) the aggregate of
its Net Liquidation Proceeds exceeds (ii) the related Principal
Balance (plus accrued and unpaid interest thereon at the
applicable Mortgage Rate from the date interest was last paid
through the date of receipt of the final Liquidation Proceeds) of
such Liquidated Mortgage Loan immediately prior to the final
recovery of its Liquidation Proceeds.
Funding Period: The period beginning on the Closing
Date and ending on the earlier of the date on which (a) the
amount on deposit in the Pre-Funding Account is less than $10,000
or (b) the close of business on October 25, 1998.
Grant: Pledge, bargain, sell, warrant, alienate,
remise, release, convey, assign, transfer, create, and grant a
lien upon and a security interest in and right of set-off
against, deposit, set over and confirm pursuant to the Indenture.
A Grant of the Collateral or of any other agreement or instrument
shall include all rights, powers and options (but none of the
obligations) of the granting party thereunder, including the
immediate and continuing right to claim for, collect, receive and
give receipt for principal and interest payments in respect of
such collateral or other agreement or instrument and all other
moneys payable thereunder, to give and receive notices and other
communications, to make waivers or other agreements, to exercise
all rights and options, to bring proceedings in the name of the
granting party or otherwise, and generally to do and receive
anything that the granting party is or may be entitled to do or
receive thereunder or with respect thereto.
Gross Margin: With respect to any Mortgage Loan, the
percentage set forth as the "Gross Margin" for such Mortgage Loan
on the Mortgage Loan Schedule, as adjusted from time to time in
accordance with the terms of the Servicing Agreement.
Guaranteed Interest Payment Amount: As to any Payment
Date, an amount equal to interest accrued on the aggregate
outstanding Principal Balance of the Mortgage Loans payable on
the related Due Date and any amount paid by any CAP Provider to
the Issuer under any CAP Agreement, minus the aggregate amount of
the related Servicing Fee, the Indenture Trustee Fee, the Owner
Trustee Fee, the Bond Insurance Premium, the PMI Premium, any
amounts paid to the First and Second CAP Provider under the First
and Second CAP Agreements and the Minimum Interest Spread.
Indemnification Agreement: The Indemnification Agree-
ment, dated as of August 14, 1998, among the Bond Insurer, the
Seller, the Company and the Underwriter, including any amendments
and supplements thereto.
Indemnified Party: The meaning specified in Section
7.02 of the Trust Agreement.
Indenture: The indenture, dated as of August 1, 1998,
between the Issuer, as debtor, and the Indenture Trustee, as
Indenture Trustee.
<PAGE>
Indenture Trustee: First Union National Bank, a
national banking association, and its successors and assigns or
any successor indenture trustee appointed pursuant to the terms
of the Indenture.
Indenture Trustee Fee: With respect to each Payment
Date, the product of (i) the Indenture Trustee Fee Rate divided
by 12 and (ii) the sum of the Principal Balance of the Mortgage
Loans and the Pre-Funded Amount as of such date.
Indenture Trustee Fee Rate: 0.0125% per annum.
Independent: When used with respect to any specified
Person, the Person (i) is in fact independent of the Issuer, any
other obligor on the Bonds, the Seller, the Company, the Servicer
and any Affiliate of any of the foregoing Persons, (ii) does not
have any direct financial interest or any material indirect
financial interest in the Issuer, any such other obligor, the
Seller, the Company, the Servicer, the Issuer or any Affiliate of
any of the foregoing Persons and (iii) is not connected with the
Issuer, any such other obligor, the Seller, the Company, the
Servicer, the Issuer, or any Affiliate of any of the foregoing
Persons as an officer, employee, promoter, underwriter, trustee,
partner, director or person performing similar functions.
Independent Certificate: A certificate or opinion to
be delivered to the Indenture Trustee under the circumstances
described in, and otherwise complying with, the applicable
requirements of Section 10.01 of the Indenture, made by an
Independent appraiser or other expert appointed by the Issuer
and approved by the Indenture Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that
the signer has read the definition of "Independent" in this
Indenture and that the signer is Independent within the meaning
thereof.
Index: With respect to any Adjustable Rate Mortgage
Loan, the index for the adjustment of the Mortgage Rate set forth
as such on the related Mortgage Note.
Initial Mortgage Loan: A Mortgage Loan transferred and
conveyed by the Company to the Issuer on the Closing Date, as
listed on the Mortgage Loan Schedule.
Insurance Agreement: The Insurance Agreement, dated as
of August 1, 1998, among the Servicer, the Seller, the Company,
the Issuer, the Indenture Trustee and the Bond Insurer, including
any amendments and supplements thereto.
Insured Payment: Shall have the meaning set forth in
the Bond Insurance Policy.
Insurance Proceeds: Proceeds paid by any insurer
(excluding the Bond Insurer) pursuant to any insurance policy
covering a Mortgage Loan which are required to be remitted to the
Servicer, including PMI Insurance Proceeds in the case of
Mortgage Loans covered under a PMI Policy, or amounts required to
be paid by the Servicer pursuant to the Servicing Agreement, net
of any component thereof (i) covering any expenses incurred by or
on behalf of the Servicer in <PAGE> connection with obtaining such pro-
ceeds, (ii) that is applied to the restoration or repair of the
related Mortgaged Property or (iii) released to the Mortgagor in
accordance with the Servicer's normal servicing procedures.
Insurer Subsequent Mortgage Loan Certificate: The
certificate set forth as an Exhibit to the Insurance Agreement.
Interest Coverage Account: The account established and
maintained by the Indenture Trustee pursuant to Section 8.09 of
the Indenture.
Interest Coverage Addition: As to any Payment Date
during the Funding Period, an amount, not less than $0.00, equal
to the remainder of (x) the product of (A) the Original Pre-
Funded Amount and (B) a rate equal to the sum of (i) the Bond
Interest Rate for the related Interest Period, (ii) the rate used
to calculate the Bond Insurance Premium and (iii) the rate used
to calculate the Indenture Trustee Fee (all rates calculated as
one-twelfth of the annual rate) minus (y) interest collected on
all Subsequent Mortgage Loans during the related Interest Period
(and after the related Subsequent Cut-off Date with respect to
any Subsequent Mortgage Loans transferred during such Interest
Period).
Interest Coverage Amount: The amount to be paid from
proceeds received from the sale of the Bonds for deposit into the
Interest Coverage Account pursuant to Section 8.09 of the
Indenture, which amount shall be $376,631 on the Closing Date.
Interest Determination Date: With respect to any
Interest Period, the second London Business Day preceding the
commencement of such Interest Period.
Interest Payment Amount: With respect to any Payment
Date, the sum of the Class A-1 Interest Payment Amount and Class
A-2 Interest Payment Amount.
Interest Period: With respect to any Payment Date
other than the first Payment Date, the period beginning on the
preceding Payment Date and ending on the day preceding such
Payment Date, and in the case of the first Payment Date, the
period beginning on the Closing Date and ending on the day
preceding the first Payment Date.
Interest Rate Adjustment Date: With respect to each
Adjustable Rate Mortgage Loan, the date or dates on which the
Mortgage Rate is adjusted in accordance with the related Mortgage
Note.
Investment Company Act: The Investment Company Act of
1940, as amended, and any amendments thereto.
Issuer: NovaStar Mortgage Funding Trust, Series 1998-2,
a Delaware business trust, or its successor in interest.
<PAGE>
Issuer Request: A written order or request signed in
the name of the Issuer by any one of its Authorized Officers and
approved in writing by the Bond Insurer, so long as no Bond
Insurer Default exists, and delivered to the Indenture Trustee.
LIBOR Business Day: Any day other than (i) a Saturday
or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required
or authorized by law to be closed.
Lien: Any mortgage, deed of trust, pledge, conveyance,
hypothecation, assignment, participation, deposit arrangement,
encumbrance, lien (statutory or other), preference, priority
right or interest or other security agreement or preferential
arrangement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agree-
ment, any financing lease having substantially the same economic
effect as any of the foregoing and the filing of any financing
statement under the UCC (other than any such financing statement
filed for informational purposes only) or comparable law of any
jurisdiction to evidence any of the foregoing.
Lifetime Rate Cap: With respect to each Adjustable
Rate Mortgage Loan with respect to which the related Mortgage
Note provides for a lifetime rate cap, the maximum Mortgage Rate
permitted over the life of such Mortgage Loan under the terms of
such Mortgage Note, as set forth on the Mortgage Loan Schedule
and initially as set forth on Exhibit A to the Servicing
Agreement.
Liquidated Mortgage Loan: With respect to any Payment
Date, (i) any Mortgage Loan in respect of which the Servicer has
determined, in accordance with the servicing procedures specified
in the Servicing Agreement, as of the end of the related
Prepayment Period that substantially all Liquidation Proceeds
which it reasonably expects to recover with respect to the
disposition of the related Mortgaged Property or REO Property
have been recovered and, (ii) any Mortgage Loan secured by a
second lien of which any portion of a scheduled monthly payment
of principal and interest is in excess of 180 days past due.
Liquidation Expenses: Out-of-pocket expenses
(exclusive of overhead) which are incurred by or on behalf of the
Servicer in connection with the liquidation of any Mortgage Loan
and not recovered under any insurance policy, such expenses
including, without limitation, legal fees and expenses, any
unreimbursed amount expended respecting the related Mortgage Loan
and any related and unreimbursed expenditures for real estate
property taxes or for property restoration, preservation or
insurance against casualty loss or damage.
Liquidation Proceeds: Proceeds (including Insurance
Proceeds but not including amounts received under the Bond
Insurance Policy) received in connection with the liquidation of
any Mortgage Loan or related REO Property, including any proceeds
received on second lien Mortgage Loans in excess of 180 days past
due, whether through trustee's sale, foreclosure sale or
otherwise.
Loan-to-Value Ratio: With respect to any Mortgage
Loan, as of any date of determination, a fraction expressed as a
percentage, the numerator of which is the then current <PAGE> principal
amount of the Mortgage Loan, and the denominator of which is the
lesser of the Purchase Price or the Appraised Value of the
related Mortgaged Property.
Loan Year: With respect to any Mortgage Loan, the one
year period commencing on the day succeeding the origination of
such Mortgage Loan and ending on the anniversary date of such
Mortgage Loan, and each annual period thereafter.
London Business Day: Any day on which banks in the
City of London, England are open and conducting transactions in
United States dollars.
Master Assignment Agreement: The Master Assignment
Agreement, dated as of April 20, 1998, as amended by the First
Amendment to Master Assignment Agreement, dated as of June 19,
1998, in both cases by and between NCFC and MLMCI, including any
amendments and supplements thereto.
Maximum Interest Rate: 13.00% per annum.
Maximum Mortgage Rate: With respect to each Adjustable
Rate Mortgage Loan, the maximum Mortgage Rate specified in the
related Mortgage Note.
Maximum Spread: 0.40% per annum.
Minimum Interest Spread: With respect to each Mortgage
Loan and any Payment Date the product of (i) 0.50% divided by 12
and (ii) the Principal Balance of such Mortgage Loan as of such
date.
Minimum Mortgage Rate: With respect to each Adjustable
Rate Mortgage Loan, the minimum Mortgage Rate.
Minimum Spread: 0.07% per annum.
ML&Co: Merrill Lynch & Co., Inc., a Delaware
corporation, and its successors and assigns.
ML&Co Guaranty: The Guarantee of Merrill Lynch & Co.
Inc., dated as of August 19, 1998, pursuant to which ML&Co
guarantees the obligation of the First and Second CAP Provider
under the First and Second CAP Agreements.
MLMCI: Merrill Lynch Mortgage Capital, Inc., a
Delaware corporation, and its successors and assigns.
Monthly Payment: With respect to any Mortgage Loan
(including any REO Property) and any Due Date, the payment of
principal and interest due thereon in accordance with the
<PAGE>
amortization schedule at the time applicable thereto (after
adjustment, if any, for partial Principal Prepayments and for
Deficient Valuations occurring prior to such Due Date but before
any adjustment to such amortization schedule by reason of any
bankruptcy, other than a Deficient Valuation, or similar
proceeding or any moratorium or similar waiver or grace period).
Moody's: Moody's Investors Service, Inc. or its
successor in interest.
Mortgage: The mortgage, deed of trust or other
instrument creating a first lien on an estate in fee simple
interest in real property securing a Mortgage Loan.
Mortgage File: The file containing the Related
Documents pertaining to a particular Mortgage Loan and any addi-
tional documents required to be added to the Mortgage File pur-
suant to the Mortgage Loan Purchase Agreement or the Servicing
Agreement.
Mortgage Loan Schedule: With respect to any date, the
schedule of Mortgage Loans pledged under the Indenture on such
date. The schedule of Initial Mortgage Loans as of the Cut-off
Date is the schedule set forth in Exhibit E of the Indenture and
the schedule or schedules of Subsequent Mortgage Loans, if any,
as of the Subsequent Cut-off Date, which schedules set forth as
to each Mortgage Loan
(i) the loan number and name of the Mortgagor;
(ii) the street address, city, state and zip code of
the Mortgaged Property;
(iii) the Mortgage Rate at origination;
(iv) with respect to an Adjustable Rate Mortgage
Loan, the Maximum Rate and the Minimum Rate;
(v) the maturity date;
(vi) the original principal balance;
(vii) the first payment date;
(viii) the type of Mortgaged Property;
(ix) the Monthly Payment in effect as of the Cut-off
Date (with respect to an Initial Mortgage Loan)
or Subsequent Cut-off Date (with respect to a
Subsequent Mortgage Loan);
<PAGE>
(x) the Principal Balance as of the Cut-off Date
(with respect to an Initial Mortgage Loan) or
Subsequent Cut-off Date (with respect to a
Subsequent Mortgage Loan);
(xi) with respect to an Adjustable Rate Mortgage
Loan, the Index, the Gross Margin; the Lifetime
Rate Cap and the Periodic Rate Cap;
(xii) with respect to an Adjustable Rate Mortgage
Loan, the first Adjustment Date and next
Adjustment Date, if any;
(xiii) with respect to an Adjustable Rate Mortgage
Loan, the Adjustment Date frequency and Payment
Date frequency;
(xiv) the occupancy status;
(xv) the purpose of the Mortgage Loan;
(xvi) the Appraised Value of the Mortgaged Property;
(xvii) the original term to maturity;
(xviii) the paid-through date of the Mortgage Loan;
(xix) the Loan-to-Value Ratio;
(xx) whether the Mortgage Loan is an Adjustable Rate
Mortgage Loan or a Fixed Rate Mortgage Loan;
(xxi) whether or not the Mortgage Loan was
underwritten pursuant to a limited
documentation program;
(xxii) whether or not the Mortgage Loan is a
Convertible Mortgage Loan; and
(xxiii) whether the Mortgage Loan is covered by a PMI
Policy.
The Mortgage Loan Schedule shall also set forth the
total of the amounts described under (ix) above for all of the
Mortgage Loans.
Mortgage Loans: At any time, collectively, all
Mortgage Loans that have been sold to the Company under the
Mortgage Loan Purchase Agreement or sold to or substituted for
pursuant to Section 2.1 and 3.1 of the Mortgage Loan Purchase
Agreement, and transferred and conveyed to the Issuer, in each
case together with the Related Documents, and that remain subject
to the terms <PAGE> of the Indenture. As applicable, Mortgage Loan
shall be deemed to refer to the related REO Property and both
Initial Mortgage Loans and Subsequent Mortgage Loans.
Mortgage Note: The note or other evidence of the
indebtedness of a Mortgagor under a Mortgage Loan.
Mortgage Rate: With respect to any Mortgage Loan, the
annual rate at which interest accrues on such Mortgage Loan.
Mortgaged Property: The underlying property, including
real property and improvements thereon, securing a Mortgage Loan.
Mortgagor: The obligor or obligors under a Mortgage
Note.
NCFC: NovaStar Certificates Financing Corp., a Delaware
corporation, and its successors and assigns.
NCFC Demand Note: The demand promissory note of NCFC,
dated August 19, 1998, in the principal amount of $6,300,000.00,
payable to the order of the Company.
Net Liquidation Proceeds: With respect to any
Liquidated Mortgage Loan, Liquidation Proceeds net of Liquidation
Expenses.
Net Monthly Excess Cashflow: For any Payment Date, the
amount of Available Funds remaining after distributions pursuant
to clauses (i) through (xi) of Section 3.05 of the Indenture
(minus any Subordination Reduction Amount).
Net Mortgage Rate: With respect to any Mortgage Loan
and any day, the related Mortgage Rate less the sum of the
related Servicing Fee Rate and the Indenture Trustee Fee Rate.
Nonrecoverable Advance: With respect to any Mortgage
Loan, any Advance (i) which was previously made or is proposed to
be made by the Servicer; and (ii) which, in the good faith
judgment of the Servicer, will not or, in the case of a proposed
Advance, would not, be ultimately recoverable by the Servicer
from Liquidation Proceeds, Insurance Proceeds, Repurchase Price
or future payments on such Mortgage Loan.
Officer's Certificate: With respect to the Servicer, a
certificate signed by the President, a Director, a Vice President
or an Assistant Vice President, of the Servicer and delivered to
the Indenture Trustee. With respect to the Issuer, a certificate
signed by any Authorized Officer of the Issuer, under the
circumstances described in, and otherwise complying with, the
applicable requirements of Section 10.01 of the Indenture, and
delivered to the Indenture Trustee. With respect to the Seller,
a certificate signed by the President, a Director, a Vice
President or an Assistant Vice President of the Seller and
delivered to the Indenture Trustee and the Bond Insurer. Unless
otherwise <PAGE> specified, any reference in the Indenture to an
Officer's Certificate shall be to an Officer's Certificate of any
Authorized Officer of the Issuer.
One-Month LIBOR: With respect to any Interest Period,
the rate determined by the Indenture Trustee on the related
Interest Determination Date on the basis of the offered rates of
the Reference Banks for one-month United States dollar deposits,
as such rates appear on the Telerate Page 3750, as of 11:00 a.m.
(London time) on such Interest Determination Date. If such rate
does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in
United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on that day to prime banks
in the London interbank market for a period equal to the relevant
Interest Period (commencing on the first day of such Interest
Period). The Indenture Trustee will request the principal London
office of each of the Reference Banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic mean of the quotations. If
fewer than two quotations are provided as requested, the rate for
that day will be the arithmetic mean of the rates quoted by major
banks in New York City, selected by the Indenture Trustee, at
approximately 11:00 a.m., New York City time, on that day for
loans in United States dollars to leading European banks for a
period equal to the relevant Interest Period (commencing on the
first day of such Interest Period).
The establishment of One-Month LIBOR on each Interest
Determination Date by the Indenture Trustee and the Indenture
Trustee's calculation of the rate of interest applicable to the
Bonds for the related Interest Period shall (in the absence of
manifest error) be final and binding.
Opinion of Counsel: A written opinion of counsel
acceptable to the Bond Insurer, who may be in-house counsel for
the Servicer if acceptable to the Indenture Trustee, the Bond
Insurer and the Rating Agencies or counsel for the Company, as
the case may be.
Original Pool Balance: The sum of the aggregate of the
Principal Balances of all Initial Mortgage Loans as of the Cut-off
Date and the Original Pre-Funded Amount.
Original Pre-Funded Amount: The amount deposited (from
the Bond proceeds) in the Pre-Funding Account on the Closing
Date, which amount is $42,639,529.
Original Value: Except in the case of a refinanced
Mortgage Loan, the lesser of the Appraised Value or sales price
of Mortgaged Property at the time a Mortgage Loan is closed, and
for a refinanced Mortgage Loan, the Original Value is the value
of such property set forth in an appraisal acceptable to the
Servicer.
Outstanding: With respect to the Bonds, as of the date
of determination, all Bonds theretofore executed, authenticated
and delivered under this Indenture except:
(i) Bonds theretofore canceled by the Bond
Registrar or delivered to the Indenture Trustee for
cancellation; and
<PAGE>
(ii) Bonds in exchange for or in lieu of which other
Bonds have been executed, authenticated and delivered pur-
suant to the Indenture unless proof satisfactory to the
Indenture Trustee is presented that any such Bonds are held
by a holder in due course;
All Bonds that have been paid with funds provided under the Bond
Insurance Policy shall be deemed to be Outstanding until the Bond
Insurer has been reimbursed with respect thereto.
Owner Trust Estate: The corpus of the Issuer created
by the Trust Agreement which consists of items referred to in
Section 2.05 of the Trust Agreement.
Owner Trustee: Wilmington Trust Company, and its
successors and assigns, or any successor owner trustee appointed
pursuant to the terms of the Trust Agreement.
Owner Trustee Fee: $4,000 per annum, payable on
September 25, 1998 and on the Payment Date occurring in August of
each year.
Paying Agent: Any paying agent or co-paying agent
appointed pursuant to Section 3.03 of the Indenture, which
initially shall be the Indenture Trustee.
Payment Account: The account established by the
Indenture Trustee pursuant to Section 3.01 of the Indenture. The
Payment Account shall be an Eligible Account.
Payment Adjustment Date: With respect to each negative
amortization loan, the date set forth in the related Mortgage
Note on which the Monthly Payment may change each month. The
first Payment Adjustment Date as to each negative amortization
loan is set forth in the Mortgage Loan Schedule.
Payment Cap: With respect to each negative
amortization loan and each Payment Adjustment Date, the amount
(expressed as a percentage) by which the Monthly Payment on such
negative amortization loan due in the month preceding such
Payment Adjustment Date is multiplied for purposes of calculating
the maximum amount to which the Monthly Payment may be adjusted,
as identified as such on the Mortgage Loan Schedule.
Payment Date: The 25th day of each month, or if such
day is not a Business Day, then the next Business Day, commencing
on September 25, 1998.
Percentage Interest: With respect to any Bond, the
percentage obtained by dividing the Bond Principal Balance of
such Bond by the aggregate of the Bond Principal Balances of all
Bonds. With respect to any Certificate, the percentage on the
face thereof.
Periodic Rate Cap: With respect to any Adjustable Rate
Mortgage Loan, the maximum rate, if any, by which the Mortgage
Rate on such Mortgage Loan can adjust on any Adjustment Date, as
stated in the related Mortgage Note or Mortgage.
<PAGE>
Person: Any individual, corporation, partnership,
joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or
political subdivision thereof.
PMI Insurance Agreement: Collectively, (i) the Master
Policy, dated as of August 1, 1998, between the Seller and the
PMI Insurer, (ii) the Letter Agreement, dated August 14, 1998,
between the Seller and the PMI Insurer, (iii) all exhibits and
schedules attached to any of the foregoing and (iv) all
amendments or supplements to any of the foregoing.
PMI Insurance Proceeds: Proceeds paid by the PMI
Insurer pursuant to a PMI Policy.
PMI Insurer: Commonwealth Mortgage Assurance Company,
a Pennsylvania mortgage insurance company, and its successors and
assigns.
PMI Insurer Insolvency Event: (A) The determination by
the applicable regulatory or supervisory agency having
jurisdiction over the PMI Insurer that the PMI Insurer is
insolvent or unable to pay its obligations as they mature, (B)
following the failure of the PMI Insurer to pay any claim under
the PMI Policy, the determination by the Bond Insurer and the
Servicer that the PMI Insurer is insolvent or unable to pay its
obligations as they become due, (C) following the failure of the
PMI Insurer to pay either (i) claims under ten (10) different PMI
Policies or (ii) claims under any number of PMI Policies in an
aggregate amount of $200,000 or more, the joint determination of
the Servicer and the Bond Insurer that the PMI Insurer is not
paying its obligations under the PMI Policies in accordance with
their terms; (D) the long-term rating on the claims paying
ability of the PMI Insurer shall be lowered by Moody's below
Baa3, if the PMI Insurer is then rated by Moody's, or shall be
lowered by S&P below BBB-, if the PMI Insurer is then rated by
S&P, (E) following the failure of the PMI Insurer to pay any
claim under a PMI Policy, the determination by the Servicer that
the PMI Insurer is not performing its obligations under the PMI
Policies in accordance with their terms, or (F) following both
(i) the failure of the PMI Insurer to pay either (a) claims under
ten (10) different PMI Policies or (b) claims under any number of
PMI Policies in an aggregate amount of $200,000 or more and (ii)
any continuing failure of the Servicer to indemnify the Issuer
pursuant to Section 5.06(c) of the Servicing Agreement, a
determination by the Bond Insurer to declare a PMI Insurer
Insolvency Event.
PMI Policy: The private mortgage insurance policy
underwritten by the PMI Insurer with respect to an individual
Mortgage Loan, issued pursuant to the PMI Insurance Agreement.
PMI Premium: The primary mortgage insurance premium
for each PMI Policy, payable annually to the PMI Insurer, as
specified in the PMI Insurance Agreement, and with respect to
each monthly premium payment, 1/12 of the annual premium.
Pool Balance: With respect to any date, the sum of the
aggregate of the Principal Balances of all Mortgage Loans and the
Pre-Funded Amount as of such date.
<PAGE>
Pre-Funded Amount: With respect to any date of
determination, the amount on deposit in the Pre-Funding Account.
Pre-Funding Account: The account established and
maintained by the Indenture Trustee pursuant to Section 8.08 of
the Indenture.
Preference Amount: Any amount previously distributed
to a Holder on the Bonds that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Prepayment Interest Shortfall: As to any Payment Date
and any Mortgage Loan (other than a Mortgage Loan relating to an
REO Property) that was the subject of (a) a Principal Prepayment
in full during the related Prepayment Period, an amount equal to
the excess of interest accrued during the related Prepayment
Period at the Mortgage Rate (net of the Servicing Fee) on the
Principal Balance of such Mortgage Loan over the amount of
interest (adjusted to the Mortgage Rate (net of the Servicing
Fee)) paid by the Mortgagor for such Prepayment Period to the
date of such Principal Prepayment in full or (b) a partial
Principal Prepayment during the prior calendar month, an amount
equal to interest accrued during the related Prepayment Period at
the Mortgage Rate (net of the Servicing Fee) on the amount of
such partial Prepayment.
Prepayment Period: As to any Payment Date, the
calendar month preceding the month of such Payment Date.
Principal Balance: With respect to any Mortgage Loan
or related REO Property, at any given time, (i) the Principal
Balance of the Mortgage Loan as of the Cut-off Date or Subsequent
Cut-off Date, as applicable, minus (ii) the sum of (a) the
principal portion of the Monthly Payments due with respect to
such Mortgage Loan or REO Property during each Due Period ending
prior to the most recent Payment Date which were received or with
respect to which an Advance was made, and (b) all Principal
Prepayments with respect to such Mortgage Loan or REO Property,
and all Insurance Proceeds, Liquidation Proceeds and REO
Proceeds, to the extent applied by the Servicer as recoveries of
principal in accordance with the Servicing Agreement with respect
to such Mortgage Loan or REO Property, and (c) the principal
portion of any Realized Loss with respect thereto for any
previous Payment Date.
Principal Payment Amount: (a) With respect to any
Payment Date, other than the Final Scheduled Payment Date and the
first Payment Date following any acceleration of the Bonds
following an Event of Default, the lesser of (a) the sum of (x)
the Available Funds remaining after distributions pursuant to
clauses (i) through (iv) of Section 3.05 of the Indenture and (y)
any portion of any Insured Payment for such Payment Date
representing a Subordination Deficit and (b) the sum of:
<PAGE>
(1) the principal portion of all Monthly
Payments received and Advances made during the
related Due Period (and with respect to the
first Payment Date, received since the Cut-off
Date) on each Mortgage Loan;
(2) the Principal Balance of any Mortgage
Loan repurchased during the related Prepayment
Period pursuant to the Mortgage Loan Purchase
Agreement or Sections 3.12 or 3.18 of the
Servicing Agreement and the amount of any
Substitution Adjustment Amounts received during
the related Prepayment Period (and with respect
to the first Payment Date, since the Cut-off
Date);
(3) the principal portion of all other
unscheduled collections received during the
related Prepayment Period (or deemed to be
received during the related Prepayment Period)
(including, without limitation and without
duplication, Principal Prepayments in full,
partial Principal Prepayments, Insurance
Proceeds, Liquidation Proceeds and REO
Proceeds) to the extent applied by the Servicer
as payments or recoveries of principal of the
related Mortgage Loan;
(4) any Insured Payment paid with respect to
any Subordination Deficit; and
(5) with respect to the Payment Date
immediately following the end of the Funding
Period, any amounts in the related Pre-Funding
Account and the Interest Coverage Account after
giving effect to any purchase of related
Subsequent Mortgage Loans;
minus
(6) the amount of any Subordination Reduction
Amount for such Payment Date;
and (b) with respect to the Final Scheduled Payment Date and the
first Payment Date following any acceleration of the Bonds
following an Event of Default, the amount necessary to reduce the
Bond Principal Balance to zero.
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 scheduled interest due on any date or
dates in any month or months subsequent to the month of
prepayment.
Proceeding: Any suit in equity, action at law or other
judicial or administrative proceeding.
<PAGE>
Prospectus: The Prospectus Supplement together with the
Base Prospectus attached thereto with respect to the Bonds.
Prospectus Supplement: The Prospectus Supplement dated
August 14, 1998, with respect to the Bonds.
Purchase Agreement: The Mortgage Loan Purchase
Agreement, dated as of August 1, 1998, among the Seller, the
Company, the Indenture Trustee and the Issuer.
Purchase Price: The meaning specified in Section
2.1(a) of the Mortgage Loan Purchase Agreement.
Rating Agency: Any nationally recognized statistical
rating organization, or its successor, that rated the Bonds at
the request of the Company at the time of the initial issuance of
the Bonds. Initially such rating agencies shall consist of
Moody's and Standard & Poor's. If such organization or a
successor is no longer in existence, "Rating Agency" shall be
such nationally recognized statistical rating organization, or
other comparable Person, designated by the Bond Insurer so long
as no Bond Insurer Default exists, notice of which designation
shall be given to the Indenture Trustee. References herein to
the highest short term unsecured rating category of a Rating
Agency shall mean A-1 or better in the case of Standard & Poor's
and P-1 or better in the case of Moody's and in the case of any
other Rating Agency shall mean such equivalent rating.
References herein to the highest long-term rating category of a
Rating Agency shall mean "AAA" in the case of Standard & Poor's
and "Aaa" in the case of Moody's and in the case of any other
Rating Agency, such equivalent rating.
Realized Loss: With respect to each Mortgage Loan (or
REO Property) as to which a Cash Liquidation or REO Disposition
has occurred, an amount (not less than zero) equal to (i) the
Principal Balance of the Mortgage Loan (or REO Property) as of
the date of Cash Liquidation or REO Disposition, plus (ii)
interest (and REO Imputed Interest, if any) at the Net Mortgage
Rate from the Due Date as to which interest was last paid or
advanced to Bondholders up to the last day of the month in which
the Cash Liquidation (or REO Disposition) occurred on the
Principal Balance of such Mortgage Loan (or REO Property)
outstanding during each Due Period that such interest was not
paid or advanced, minus (iii) Net Liquidation Proceeds, if any,
received with respect to such Cash Liquidation (or REO
Disposition), minus the portion thereof reimbursable to the
Servicer or any Subservicer with respect to related Advances or
expenses as to which the Servicer or Subservicer is entitled to
reimbursement thereunder but which have not been previously
reimbursed. With respect to each Mortgage Loan which has become
the subject of a Deficient Valuation, the difference between the
principal balance of the Mortgage Loan outstanding immediately
prior to such Deficient Valuation and the principal balance of
the Mortgage Loan as reduced by the Deficient Valuation. With
respect to each Mortgage Loan which has become the object of a
Debt Service Reduction, the amount of such Debt Service
Reduction.
<PAGE>
Record Date: With respect to the Bonds and any Payment
Date, the last day of the calendar month preceding such Payment
Date or in the case of the first Payment Date, the Record Date
shall be the Closing Date.
Reference Banks: Bankers Trust Company, Barclay's Bank
PLC, The Bank of Tokyo-Mitsubishi, LTD. and National Westminster
Bank PLC and their successors in interest; provided that if any
of the foregoing banks are not suitable to serve as a Reference
Bank, then any leading banks selected by the Indenture Trustee
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 Company 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 Indenture Trustee.
Registered Holder: The Person in whose name a Bond is
registered in the Bond Register on the applicable Record Date.
Related Documents: With respect to each Mortgage Loan,
the documents specified in Section 2.1(b) of the Mortgage Loan
Purchase Agreement and any documents required to be added to such
documents pursuant to the Mortgage Loan Purchase Agreement, the
related Seller's Subsequent Transfer Instrument, the related
Company's Subsequent Transfer Instrument, the Trust Agreement,
the Indenture or the Servicing Agreement.
Relief Act: The Soldiers' and Sailors' Civil Relief
Act of 1940, as amended.
Relief Act Shortfall: As to any Payment Date and any
Mortgage Loan (other than a Mortgage Loan relating to an REO
Property), any shortfalls relating to the Relief Act or similar
legislation or regulations.
Remarketing Spread: With respect to each anniversary of
the Closing Date, (a) an amount expressed as a percentage by
which (i) the interest rate then payable on similarly-structured,
monthly floating-rate, taxable debt securities with a remaining
term to maturity of not more than 397 days rated either (A) in
one of the two highest short term rating categories by both S&P
and Moody's or (B) if at that time the rating on the Class A-2
Bonds is lower, then the lowest rating category assigned at that
time to the Class A-2 Bonds by S&P or Moody's, exceeds (ii) One-
Month LIBOR, or (b) if the amount under clause (a) cannot be
calculated, then an amount expressed as a percentage by which (i)
the interest rate then payable on similarly-structured, monthly
floating-rate, asset-backed bonds rated either (A) in the highest
rating category by both S&P and Moody's or (B) if at that time
the rating on the Class A-2 Bonds is lower, then the lowest
rating category assigned at that time to the Class A-2 Bonds by
S&P or Moody's, exceeds (ii) One-Month LIBOR, in either case as
reasonably determined and certified to the Indenture Trustee by
the Remarketing Spread Calculation Agent; provided, that in
determining the rates under clauses (a)(i) and (b)(i) above, the
Remarketing Spread Calculation Agent shall take into account
prevailing market conditions and current spreads to LIBOR for
such securities, the principal amount of such securities that
prospective purchasers and/or current holders of such securities
are willing to purchase or hold, and indications from prospective
purchasers <PAGE> and/or current holders of such securities of the
interest rates at which they would be willing to purchase and/or
hold such securities.
Remarketing Spread Calculation Agent: Merrill Lynch
Capital Services, Inc., a Delaware corporation, and its
successors and assigns.
Remarketing Spread Calculation Agent Letter Agreement:
The letter agreement, dated as of August 19, 1998, among the
Issuer, the Indenture Trustee and the Remarketing Spread
Calculation Agent, pursuant to which the Remarketing Spread
Calculation Agent agrees to determine the Remarketing Spread.
REO Acquisition: The acquisition by the Servicer on
behalf of the Indenture Trustee for the benefit of the
Bondholders and the Bond Insurer of any REO Property pursuant to
Section 3.13 of the Servicing Agreement.
REO Disposition: As to any REO Property, a
determination by the Servicer that it has received substantially
all Insurance Proceeds, Liquidation Proceeds, REO Proceeds and
other payments and recoveries (including proceeds of a final
sale) which the Servicer expects to be finally recoverable from
the sale or other disposition of the REO Property.
REO Imputed Interest: As to any REO Property, for any
period, an amount equivalent to interest (at the Net Mortgage
Rate that would have been applicable to the related Mortgage Loan
had it been outstanding net, with respect to a negative
amortization loan, of amounts that would have been Deferred
Interest, if any) on the unpaid principal balance of the Mortgage
Loan as of the date of acquisition thereof for such period as
such balance is reduced pursuant to Section 3.13 of the Servicing
Agreement by any income from the REO Property treated as a
recovery of principal and with respect to a negative amortization
loan, as such balance is increased by the addition of Deferred
Interest.
REO Proceeds: Proceeds, net of expenses, received in
respect of any REO Property (including, without limitation,
proceeds from the rental of the related Mortgaged Property),
which proceeds are required to be deposited into the Collection
Account within two days of receipt by the Servicer.
REO Property: A Mortgaged Property that is acquired by
the Issuer by foreclosure or by deed in lieu of foreclosure.
Repurchase Event: With respect to any Mortgage Loan,
either (i) a discovery that, as of the Closing Date the related
Mortgage was not a valid lien on the related Mortgaged Property
subject only to (A) the lien of real property taxes and
assessments not yet due and payable, (B) covenants, conditions,
and restrictions, rights of way, easements and other matters of
public record as of the date of recording of such Mortgage and
such other permissible title exceptions as are <PAGE> permitted and (C)
other matters to which like properties are commonly subject which
do not materially adversely affect the value, use, enjoyment or
marketability of the related Mortgaged Property or (ii) with
respect to any Mortgage Loan as to which the Seller delivers an
affidavit certifying that the original Mortgage Note has been
lost or destroyed, a subsequent default on such Mortgage Loan if
the enforcement thereof or of the related Mortgage is materially
and adversely affected by the absence of such original Mortgage
Note.
Repurchase Price: With respect to any Mortgage Loan
required to be repurchased on any date pursuant to the Mortgage
Loan Purchase Agreement or permitted or required to be purchased
by the Servicer pursuant to the Servicing Agreement, an amount
equal to the sum, without duplication, of (i) 100% of the
Principal Balance thereof (without reduction for any amounts
charged off) and (ii) unpaid accrued interest at the Mortgage
Rate on the outstanding principal balance thereof from the Due
Date to which interest was last paid by the Mortgagor (or with
respect to which an Advance was last made by the Servicer) to the
first day of the month following the month of purchase plus (iii)
the amount of any unreimbursed Servicing Advances or unreimbursed
Advances made with respect to such Mortgage Loan plus (iv) any
other amounts owed to the Servicer or the Subservicer pursuant to
Section 3.07 of the Servicing Agreement and not included in
clause (iii) of this definition.
Required Subordination Amount: For any Payment Date
occurring during any of the following periods, the Subordination
Amount specified below for such period:
Period I - For any Payment Date occurring during the
period commencing on the Closing Date and ending on the first
Payment Date on which the Subordination Amount equals or exceeds
the Target Overcollateralization Amount, the Required
Subordination Amount is the Target Overcollateralization Amount;
provided, however, that if on or prior to any such Payment Date
either (i) a PMI Insurer Insolvency Event has occurred and is
continuing and the Bond Insurer has not obtained an additional or
a replacement PMI Policy with the consent of the Servicer
pursuant to Section 3.22(e)(ii) of the Servicing Agreement or
(ii) a Bond Insurer Default has occurred and is continuing, then
the Required Subordination Amount is the amount specified under
Period III below;
Period II - For any Payment Date occurring during the
period commencing on the day after the first Payment Date on
which the Subordination Amount equals or exceeds the Target
Overcollateralization Amount and ending on the Final Scheduled
Payment Date, the Required Subordination Amount is zero;
provided, however, that if on or prior to any such Payment Date
either (i) a PMI Insurer Insolvency Event has occurred and is
continuing, and the Bond Insurer has not obtained an additional
or a replacement PMI Policy with the consent of the Servicer
pursuant to Section 3.22(e)(ii) of the Servicing Agreement or
(ii) a Bond Insurer Default has occurred and is continuing, then
the Required Subordination Amount is the amount specified under
Period III below;
Period III - For any Payment Date occurring after
either (i) a PMI Insurer Insolvency Event has occurred and is
continuing and the Bond Insurer has not obtained an additional or
a replacement PMI Policy with the consent of the Servicer
pursuant to Section 3.22(e)(ii) of the Servicing Agreement or
(ii) a Bond Insurer Default has occurred and is continuing, and:
<PAGE>
(a) occurring during the period commencing on
the Closing Date and ending on the later of the
thirtieth Payment Date following the Closing Date and
the date upon which the principal in the amount of one-
half of the Original Pool Balance has been received by
the Bondholders, the Required Subordination Amount is
the greater of: (i) the Base Specified
Overcollateralization Amount and (ii) 100% of the
Delinquency Amount; or
(b) occurring after the end of the period in
clause (a) above, the Required Subordination Amount is
the greatest of (i) two times the product of the Base
Target Percentage and the Pool Balance as of the close
of business as of the last day of the related Due
Period, (ii) 100% of the Delinquency Amount, (iii)
0.50% of the Original Pool Balance and (iv) an amount
equal to the sum of the Principal Balances of the three
Mortgage Loans with the largest Principal Balances.
On or prior to the day the Funding Period ends, the Bond Insurer
may increase the Required Subordinated Amount determined under
this Period III. The Required Subordinated Amount determined
under this Period III may also be increased by the Rating
Agencies at the time of the delivery of any Subsequent Mortgage
Loans. Notwithstanding the above, the Required Subordination
Amount shall not step-down pursuant to clause (b) above, (i) if a
claim on the Bond Insurance Policy has occurred, (ii) if a
Servicing Default has occurred which has not been waived by the
Bond Insurer or (iii) if the Delinquency Amount equals or exceeds
8% of the aggregate of the Principal Balance of the Mortgage
Loans as of the close of business on the last day of the related
Due Period.
Responsible Officer: With respect to the Indenture
Trustee, any officer of the Indenture Trustee with direct respon-
sibility for the administration of the Indenture and also, with
respect to a particular matter, any other officer to whom such
matter is referred because of such officer's knowledge of and
familiarity with the particular subject.
Rolling Delinquency Percentage: For any Payment Date,
the average of the Delinquency Percentages for the Mortgage Loans
as of the last day of each of the three (or 1 and 2 in the case
of the first two Payment Dates, as applicable) most recently
ended Due Periods.
Sale: The meaning assigned in Section 5.15 of the
Indenture.
Second CAP Agreement: The interest rate CAP Agreement,
dated the Closing Date, between the Issuer and the First and
Second CAP Provider, in the notional principal amount of
$40,000,000.
Securities Act: The Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
Security: Any of the Certificates or Bonds.
<PAGE>
Securityholder or Holder: Any Bondholder or a
Certificateholder.
Security Instrument: A written instrument creating a
valid first lien on a Mortgaged Property securing a Mortgage
Note, which may be any applicable form of mortgage, deed of
trust, deed to secure debt or security deed, including any riders
or addenda thereto.
Seller: NovaStar Financial, Inc., a Maryland corpora-
tion, and its successors and assigns.
Servicer: NovaStar Mortgage, Inc., a Virginia
corporation, and its successors and assigns.
Servicing Account: The separate trust account created
and maintained by the Servicer or each Subservicer with respect
to the Mortgage Loans or REO Property, which shall be an Eligible
Account, for collection of taxes, assessments, insurance premiums
and comparable items as described in Section 3.08 of the
Servicing Agreement.
Servicing Advances: All customary, reasonable and
necessary "out of pocket" costs and expenses incurred in
connection with a default, delinquency or other unanticipated
event in the performance by the Servicer of its servicing
obligations, including, without duplication, but not limited to,
the cost of (i) the preservation, restoration and protection of a
Mortgaged Property, (ii) any enforcement or judicial proceedings,
including foreclosures, (iii) the management and liquidation of
any REO Property and (iv) compliance with the obligations under
Section 3.13 of the Servicing Agreement.
Servicing Agreement: The Servicing Agreement, dated as
of August 1, 1998, among the Servicer, the Indenture Trustee and
the Issuer.
Servicing Default: The meaning assigned in Section
6.01 of the Servicing Agreement.
Servicing Fee: With respect to the Mortgage Loans and
any Payment Date, the product of (i) the Servicing Fee Rate
divided by 12 and (ii) the Principal Balance of such Mortgage
Loans as of such Payment Date.
Servicing Fee Rate: With respect to any Mortgage Loan,
0.50% per annum.
Servicing Officer: Any officer of the Servicer
involved in, or responsible for, the administration and servicing
of the Mortgage Loans whose name and specimen signature appear on
a list of servicing officers furnished to the Indenture Trustee
(with a copy to the Bond Insurer) by the Servicer or a
Subservicer, as such list may be amended from time to time.
Single Bond: A Bond in the amount of $1,000.
<PAGE>
Standard & Poor's: Standard & Poor's Ratings Services,
a division of The McGraw Hill Companies, Inc., or its successor
in interest.
Subordination Amount: As of any Payment Date, the
excess, if any, of (x) the sum of the Pool Balance as of the
close of business on the last day of the related Due Period, over
(y) the Bond Principal Balance of the Bonds as of such Payment
Date (and following the making of all distributions on such
Payment Date).
Subordination Deficit: With respect to any Payment
Date, the amount, if any, by which (x) the aggregate Bond
Principal Balance of the Bonds as of such Payment Date, and
following the making of all distributions to be made on such
Payment Date (except for any payment to be made as to principal
from proceeds of the Bond Insurance Policy), exceeds (y) the Pool
Balance as of the close of business on the related Due Date for
such Payment Date.
Subordination Increase Amount: With respect to any
Payment Date, the amount of any Net Monthly Excess Cashflow
(including any Subordination Reduction Amount) available in the
Payment Account to increase the Subordination Amount up to the
Required Subordination Amount.
Subordination Reduction Amount: With respect to any
Payment Date, an amount equal to the lesser of (a) the Excess
Subordination Amount and (b) the principal collections received
by the Servicer with respect to the prior Due Period.
Subsequent Cut-off Date: With respect to those
Subsequent Mortgage Loans which are sold to the Trust pursuant to
a Subsequent Transfer Instrument, one Business Day prior to the
Subsequent Transfer Date.
Subsequent Mortgage Loan: A Mortgage Loan sold by the
Seller to the Company, who in turn sold such Mortgage Loan to the
Trust, pursuant to Section 2.2 of the Mortgage Loan Purchase
Agreement, such Mortgage Loan being identified on the Mortgage
Loan Schedule attached to a Subsequent Transfer Instrument.
Subsequent Transfer Date: With respect to each
Subsequent Transfer Instrument, the date on which the related
Subsequent Mortgage Loans are sold to the Trust.
Subsequent Transfer Instrument: Each Seller's
Subsequent Transfer Instrument dated as of a Subsequent Transfer
Date executed by the Seller and the Company substantially in the
form of Exhibit 2(A) to the Mortgage Loan Purchase Agreement, by
which Subsequent Mortgage Loans are sold to the Company and each
Company's Subsequent Transfer Instrument dated as of a Subsequent
Transfer Date executed by the Company and the Issuer
substantially in the form of Exhibit 2(B) to the Mortgage Loan
Purchase Agreement, by which Subsequent Mortgage Loans are sold
to the Trust.
<PAGE>
Subservicer: Any Person with whom the Servicer has
entered into a Subservicing Agreement as a Subservicer.
Subservicing Account: An Eligible Account established
or maintained by a Subservicer as provided for in Section 3.06(e)
of the Servicing Agreement.
Subservicing Agreement: The written contract between
the Servicer and any Subservicer relating to servicing and
administration of certain Mortgage Loans as provided in Section
3.02 of the Servicing Agreement.
Subservicing Fee: With respect to each Mortgage Loan
and any Payment Date, the portion of the Servicing Fee paid to a
Subservicer.
Substitution Adjustment Amount: With respect to any
Eligible Substitute Mortgage Loan, the amount as defined in
Section 2.03 of the Servicing Agreement.
Superior Lien: With respect to any Mortgage Loan which
is secured by a second lien, the mortgage loan(s) having a
superior priority on the related Mortgaged Property.
Surety Bond: The Surety Bond number 27293, issued by
the Bond Insurer to the Indenture Trustee for the benefit of the
Bondholders that guarantees certain payments under the NCFC
Demand Note.
Target Percentage: 3.80%
Target Overcollateralization Amount: $11,970,000,
which equals the product of the Target Percentage and the
Original Pool Balance.
Telerate Page 3750: The display page currently so
designated on the Dow Jones Telerate Service (or such other page
as may replace that page on that service for the purpose of
displaying comparable rates or prices) and "Reference Banks"
means leading banks selected by the Indenture Trustee and engaged
in transactions in European deposits in the international
Eurocurrency market.
Third CAP Agreement: The interest rate CAP Agreement,
dated the Closing Date, between the Issuer and the Third CAP
Provider, in the notional principal amount of $80,000,000.
Third CAP Provider: National Westminster Bank PLC, an
English bank, and its successors and assigns.
Treasury Regulations: Regulations, including proposed
or temporary Regulations, promulgated under the Code. References
herein to specific provisions of proposed or temporary <PAGE> regula-
tions shall include analogous provisions of final Treasury
Regulations or other successor Treasury Regulations.
Trust: The NovaStar Mortgage Funding Trust, Series
1998-2, a Delaware business trust, to be created pursuant to the
Trust Agreement.
Trust Agreement: The Trust Agreement, dated as of
August 1, 1998, as amended and restated by the Amended and
Restated Trust Agreement, dated as of August 19, 1998, between
the Owner Trustee and the Company.
Trust Estate: The meaning specified in the Granting
Clause of the Indenture.
Trust Indenture Act or TIA: The Trust Indenture Act of
1939, as amended from time to time, as in effect on any relevant
date.
UCC: The Uniform Commercial Code, as amended from time
to time, as in effect in any specified jurisdiction.
Underwriter: Merrill Lynch, Pierce Fenner & Smith
Incorporated, a Delaware corporation and its successors and
assigns.
Underwriting Agreement: The Underwriting Agreement
dated as of August 6, 1998 among the Underwriter and the Company
with respect to the offer and sale of the Bonds, as the same may
be amended from time to time.
Underwriting Guidelines: The underwriting guidelines
set forth in the Prospectus Supplement under the heading
"Description of the Mortgage Pool--Underwriting Standards for the
Initial Mortgage Loans" and in the Base Prospectus under the
heading "Description of the Assets--Mortgage Loans--Underwriting
Standards for Subprime Mortgage Loans" and attached as Exhibit B
to the Letter Agreement, dated August 14, 1998, between the
Seller and the PMI Insurer.
FINANCIAL GUARANTY INSURANCE POLICY
OBLIGATIONS: $315,000,000 POLICY NUMBER: 27292(1)
NovaStar Home Equity Loan
Asset-Backed Bonds, Series 1998-2
Class A-1 and Class A-2
MBIA Insurance Corporation (the "Insurer"),in
consideration of the payment of the premium and subject to the
terms of this Financial Guaranty Insurance Policy (this
"Policy"), hereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured
Payment will be received by First Union National Bank, or its
successor, as indenture trustee for the Owners (the "Indenture
Trustee"), on behalf of the Owners from the Insurer, for
distribution by the Indenture Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Insurer's
obligations hereunder with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Indenture Trustee,
whether or not such funds are properly applied by the Indenture
Trustee. Insured Payments shall be made only at the time set
forth in this Policy and no accelerated Insured Payments shall be
made regardless of any acceleration of the Obligations, unless
such acceleration is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, this Policy
does not cover shortfalls, if any, attributable to the liability
of the Issuer or the Indenture Trustee for withholding taxes, if
any (including interest and penalties in respect of any such
liability). This Policy does not cover, and Insured Payments
shall not include, any Prepayment Interest Shortfalls, any Relief
Act Shortfalls or any Carry-Forward Amounts.
The Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a
Business Day by the Fiscal Agent (as described below) of (i) a
certified copy of the order requiring the return of a preference
payment, (ii) an opinion of counsel satisfactory to the Insurer
that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Insurer,
irrevocably assigning to the Insurer all rights and claims of the
Owner relating to or arising under the Obligations against the
debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Insurer as agent for
such Owner in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the
Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed
to be received on the following Business Day. Such payments shall
be disbursed to the receiver or trustee in bankruptcy named in
the final order of the court exercising jurisdiction on behalf of
the Owner and not to any Owner directly unless such Owner has
returned principal or interest paid on the Obligations to such
receiver or trustee in bankruptcy, in which case such payment
shall be disbursed to such Owner.
<PAGE>
The Insurer will pay any other amount payable hereunder
no later than 12:00 noon New York City time on the later of the
Payment Date on which the related Deficiency Amount is due or the
second Business Day following receipt in New York, New York on a
Business Day by State Street Bank and Trust Company, N.A., as
Fiscal Agent for the Insurer or any successor fiscal agent
appointed by the Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder
it shall be deemed not to have been received by the Fiscal Agent
for purposes of this paragraph, and the Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Indenture
Trustee and the Indenture Trustee may submit an amended Notice.
Insured Payments due hereunder unless otherwise stated
herein will be disbursed by the Fiscal Agent to the Indenture
Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Insurer only and
the Fiscal Agent shall in no event be liable to Owners for any
acts of the Fiscal Agent or any failure of the Insurer to deposit
or cause to be deposited, sufficient funds to make payments due
under this Policy.
Subject to the terms of the Agreement, the Insurer
shall be subrogated to the rights of each Owner to receive
payments under the Obligations to the extent of any payment by
the Insurer hereunder.
As used herein, the following terms shall have the
following meanings:
"Agreement" means the Indenture dated as of August 1,
1998 between the NovaStar Mortgage Funding Trust, Series 1998-2,
as Issuer, and the Indenture Trustee, without regard to any
amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Insurer.
"Business Day" means any day other than a Saturday, a
Sunday or a day on which the Insurer or banking institutions in
New York City or in the city in which the corporate trust office
of the Indenture Trustee under the Agreement or the principal
office of the Insurer is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means (a) with respect to each
Payment Date prior to the Final Scheduled Payment Date, an amount
equal to the sum of (i) the excess, if any, of the Interest
Payment Amount (net of any Prepayment Interest Shortfalls, to the
extent not covered by the Servicer by Compensating Interest, and
any Relief Act Shortfalls for such Payment Date) over the
Available Funds for such Payment Date and (ii) any Subordination
Deficit; (b) with respect to the Final Scheduled Payment Date, an
amount equal to the sum of (i) the excess, if any, of the
Interest Payment Amount (net of any Prepayment Interest
Shortfalls, to the extent not covered by <PAGE> the Servicer by
Compensating Interest, and any Relief Act Shortfalls for such
Payment Date) over the Available Funds for such Payment Date and
(ii) the excess, if any, of the Bond Principal Balance of all
Outstanding Bonds due on such Final Scheduled Payment Date over
Available Funds not used to pay the Interest Payment Amount (net
of any Prepayment Interest Shortfalls, to the extent not covered
by the Servicer by Compensating Interest, and any Relief Act
Shortfalls for such Payment Date) for such Final Scheduled
Payment Date; and (c) for any date on which the acceleration of
the Bonds has been directed or consented to by the Insurer
pursuant to Section 5.02 of the Indenture, an amount equal to the
excess, if any, of the sum of the Bond Principal Balance of the
Bonds, together with accrued and unpaid interest thereon through
the date of payment of such accelerated Bonds, over the Available
Funds for such date of payment.
"Insured Payment" means (i) as of any Payment Date, any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice,
promptly confirmed in writing by telecopy substantially in the
form of Exhibit A attached hereto, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be
due and owing on the applicable Payment Date.
"Owner" means each Bondholder (as defined in the
Agreement) of an Obligation who, on the applicable Payment Date,
is entitled under the terms of the applicable Obligations to
payment thereunder.
"Preference Amount" means any amount previously
distributed to an Owner on the Obligations that is recoverable
and sought to be recovered as a voidable preference by a trustee
in bankruptcy pursuant to the United States Bankruptcy Code (11
U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
"Relief Act Shortfalls" means for any Payment Date, any
shortfalls relating to the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, or similar legislation or regulations.
Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the
Agreement as of the date of execution of this Policy, without
giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved
in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal
Agent may be made at the address listed below for the Fiscal
Agent or such other address as the Insurer shall specify in
writing to the Indenture Trustee.
The notice address of the Fiscal Agent is l5th Floor,
61 Broadway, New York, New York 10006 Attention: Municipal
Registrar and Paying Agency, or such other address as the Fiscal
Agent shall specify to the Indenture Trustee in writing.
<PAGE>
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL
BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
This Policy is not cancelable for any reason. The premium
on this Policy is not refundable for any reason including
payment, or provision being made for payment, prior to maturity
of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be
executed and attested this 19 day of August, 1998.
MBIA INSURANCE CORPORATION
/s/ Richard L. Weill
President
Attest: /s/ Linda A. _________
Assistant Secretary
<PAGE>
EXHIBIT A
TO FINANCIAL GUARANTY INSURANCE
POLICY NUMBER: 27292(1)
NOTICE UNDER FINANCIAL GUARANTY
INSURANCE POLICY NUMBER: 27292(1)
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of [NAME OF
TRUSTEE], as indenture trustee (the "Indenture Trustee"), hereby
certifies to State Street Bank and Trust Company, N.A. (the
"Fiscal Agent") and MBIA Insurance Corporation (the "Insurer"),
with reference to Financial Guaranty Insurance Policy Number:
27292(1) (the "Policy") issued by the Insurer in respect of the
$315,000,000 NovaStar Home Equity Loan Asset-Backed Bonds, Series
1998-2, Class A-1 and Class A-2 (the "Obligations"), that:
(i) the Indenture Trustee is the indenture trustee
under the Indenture dated as of August 1, 1998, between the
NovaStar Mortgage Funding Trust, Series 1998-2, as Issuer and the
Indenture Trustee, as indenture trustee for the Owners;
(ii) the amount due under clause (a) of the definition
of Deficiency Amount for the Payment Date occurring on [_____]
the "Applicable Payment Date") is $[______] (and the amounts due
under sub-clauses (i) and (ii) of clause (a) are $[______] and
$[_______] respectively);
(iii) the amount due under clause (b) of the definition
of Deficiency Amount for the Applicable Payment Date is
$[______];
(iv) the amount due under clause (c) of the definition
of Deficiency Amount for the Applicable Payment Date is $[_____];
(v) the sum of the amounts listed in paragraphs (ii),
(iii) and (iv) above is $[______] (the "Deficiency Amount");
<PAGE>
(vi) the amount of previously distributed payments on
the Obligations that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to the
Bankruptcy Code in accordance with a final nonappealable order of
a court having competent jurisdiction is $[_______] (the
"Preference Amount");
(vii) the total Insured Payment due is $[_____], which
amount equals the sum of the Deficiency Amount and the Preference
Amount;
(viii) the Indenture Trustee is making a claim under and
pursuant to the terms of the Policy for the dollar amount of the
Insured Payment set forth in (v) above to be applied to the
payment of the Deficiency Amount for the Applicable Payment Date
in accordance with the Agreement and for the dollar amount of the
Insured Payment set forth in (vi) above to be applied to the
payment of any Preference Amount; and
(ix) the Indenture Trustee directs that payment of the
Insured Payment be made to the following account by bank wire
transfer of federal or other immediately available funds in
accordance with the terms of the Policy: [INDENTURE TRUSTEE'S
ACCOUNT NUMBER].
Any capitalized term used in this Notice and not otherwise
defined herein shall have the meaning assigned thereto in the
Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance
Company Or Other Person Files An Application For Insurance Or
Statement Of Claim Containing Any Materially False Information,
Or Conceals For The Purpose Of Misleading, Information Concerning
Any Fact Material Thereto, Commits A Fraudulent Insurance Act,
Which Is A Crime, And Shall Also Be Subject To A Civil Penalty
Not To Exceed Five Thousand Dollars And The Stated Value Of The
Claim For Each Such Violation.
IN WITNESS WHEREOF, the Indenture Trustee has executed and
delivered this Notice under the Policy as of the [____] day of
[_________], [___].
[NAME OF TRUSTEE], as Indenture Trustee
By __________________________
Title _______________________
SCHEDULE
TO THE
MASTER AGREEMENT
DATED AS OF AUGUST 19, 1998
BETWEEN
MERRILL LYNCH CAPITAL SERVICES, INC., a corporation
organized under the laws of Delaware
("PARTY A")
and
NOVASTAR MORTGAGE FUNDING TRUST, SERIES 1998-2,
a Trust organized under the laws of Delaware
("PARTY B")
PART 1
TERMINATION PROVISIONS
In this Agreement:-
(a) "SPECIFIED ENTITY" means in relation to Party A for the
purpose of: -
Section 5(a) (v), Not Applicable
Section 5(a) (vi), Not Applicable
Section 5(a)(vii), Not Applicable
Section 5(b) (iv), Not Applicable
in relation to Party B for the purpose of:-
Section 5(a)(v), Not Applicable
Section 5(a)(vi), Not Applicable
Section 5(a)(vii), Not Applicable
Section 5(b) (iv), Not Applicable
(b) "SPECIFIED TRANSACTION" will have the meaning specified in
Section 14 of this Agreement unless another meaning is specified
here: No change from Section 14.
(c) The "CROSS DEFAULT" provisions of Section 5(a)(vi) will
apply to Party A and to Party B.
If such provisions apply: -
"SPECIFIED INDEBTEDNESS" will have the meaning specified in
Section 14 of this Agreement unless another meaning is specified
here: No change from Section 14.
"THRESHOLD AMOUNT" means, in respect of Party A, U.S. $35,000,000
or its equivalent in other currencies, and in respect of Party B,
U.S. $35,000,000 or its equivalent in other currencies.
(d) The "CREDIT EVENT UPON MERGER" provisions of Section
5(b)(iv) will apply to Party A and Party B. Notwithstanding
Section 5(b)(iv) of this Agreement, "Credit Event Upon Merger"
means that a Designated Event (as defined below) occurs with
respect to a parry, any Credit Support Provider of such party or
any Specified Entity of such party and such action does not
constitute an event described in Section 5(a) (viii) but that, in
the reasonable opinion of the other party, the creditworthiness
of the successor, surviving or transferee entity taking into
account any applicable Credit Support Document (which will be the
Affected Party) is materially weaker than that of its
predecessor, immediately prior to the occurrence of the
Designated Event. For purposes hereof, a Designated Event means
that, after the Trade Date of a Transaction:
<PAGE>
(i) the party consolidates or amalgamates with, or
merges with or into, or transfers all or
substantially all its assets (or any substantial
part of the assets comprising the business
conducted by that party as of the Trade Date of
that Transaction) to, or receives all or
substantially all the assets and obligations of,
another entity;
(ii) any person or entity acquires directly or
indirectly the beneficial ownership of equity
securities having the power to elect a majority of
the board of directors of the party; or
(iii) the party enters into any agreement providing for
any of the foregoing.
(e) The "AUTOMATIC EARLY TERMINATION" provision of Section 6(a)
will not apply to Party A or to Party B.
(f) PAYMENTS ON EARLY TERMINATION. For the purpose of Section
6(e) of this Agreement: -
(i) Market Quotation will apply.
(ii) The Second Method will apply.
(g) "TERMINATION CURRENCY" means United States Dollars.
(h) ADDITIONAL TERMINATION EVENT will not apply.
PART 2
TAX REPRESENTATIONS
(a) PAYER REPRESENTATIONS. For the purpose of Section 3(e) of
this Agreement, Party A will make the following representation
and Party B will make the following representation:-
It is not required by any applicable law, as modified by the
practice of any relevant governmental revenue authority, of
any Relevant Jurisdiction to make any deduction or
withholding for or on account of any Tax from any payment
(other than interest under Section 2(e), 6(d) (ii) or 6(e)
of this Agreement) to be made by it to the other party under
this Agreement. In making this representation, it may rely
on (i) the accuracy of any representations made by the other
party pursuant to Section 3(f) of this Agreement, (ii) the
satisfaction of the agreement contained in Section 4(a)(i)
or 4(a)(iii) of this Agreement and the accuracy and
effectiveness of any document provided by the other party
pursuant to Section 4(a)(i) or 4(a) (iii) of this Agreement
and (iii) the satisfaction of the agreement of the other
party contained in Section 4(d) of this Agreement, provided
that it shall not be a breach of this representation where
reliance is placed on clause (ii) and the other party does
not deliver a form or document under Section 4(a)(iii) by
reason of material prejudice to its legal or commercial
position.
(b) PAYEE REPRESENTATIONS. For the purpose of Section 3(f) of
this Agreement, Party A and Party B make the representations
specified below:-
(i) The following representation WILL NOT apply to
Party A and WILL NOT apply to Party B:-
It is fully eligible for the benefits of the
"Business Profits" or "Industrial and Commercial
Profits" provision, as the case may be, the
"Interest" provision or the "Other Income"
provision (if any) of the Specified Treaty with
respect to any payment described in such
provisions and received or to be received by it in
connection with this Agreement and no such payment
is attributable to a trade or business carried on
by it through a permanent establishment in the
Specified Jurisdiction.
<PAGE>
PART 3
DOCUMENTS TO BE DELIVERED
For the purpose of Sections 4(a)(i) and (ii) of this Agreement,
each party agrees to deliver the following documents as
applicable: -
(a) Tax forms, documents or certificates to be delivered are:-
None.
(b) Other Documents to be delivered are: -
PARTY REQUIRED FORM/DOCUMENT/ DATE BY COVERED BY SECTION
TO DELIVER CERTIFICATE WHICH TO 3(D)REPRESENTATION
DOCUMENT BE DELIVERED
Party A/ Annual audited financial Promptly Yes.
Party B. statements (in the case of after request.
Party A, of its Credit Sup-
port Provider) prepared in
accordance with generally
accepted accounting
principles in the country
in which the party is
organized.
Party A/ Quarterly unaudited finan- Promptly Yes.
Party B. cial statements (in the case after request.
of Party A, of its Credit
Support Provider) prepared in
accordance with generally
accepted accounting principles
in the country in which the
party is organized.
Party A/ A duly executed copy of the At execution No.
Party B. Credit Support Document hereof.
specified in Part 4 of the
Schedule.
Party A. Opinion of inside counsel At the execution No.
in respect of this Agree- of this Agreement.
ment and Party A's Credit
Support Document.
<PAGE>
PART 4
MISCELLANEOUS
(a) ADDRESSES FOR NOTICES: For the purpose of Section 12(a) of
this Agreement:-
Address for notices or communications to Party A:-
Address: Merrill Lynch World Headquarters, World Financial
Center, North Tower, 22nd Floor, 250 Vesey Street,
New York, New York 10281-1322
Attention: Swap Group
Telex No.: 6716341 Answerback: MLB SCTR
Facsimile No.: 212 449-1788 Telephone No.: 212 449-0291
(For all purposes)
Additionally, a copy of all notices pursuant to Sections 5,6 and
7 as well as any changes to Party B's address, telephone number
or facsimile number should be sent to:
CICG Counsel
Merrill Lynch World Headquarters, World Financial Center,
North Tower, 23rd Floor
250 Vesey Street, New York, New York 10281-1323
Attention: Swaps Legal
Facsimile No.: 212 449-6993
Address for notices or communications to Party B:-
NovaStar Mortgage Funding Trust, Series 1998-2
c/o Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
ATTN: Corporate Trust Administration
Facsimile: (302) 651-1576,
with copies to:
First Union National Bank
230 South Tryon Street, NC 1179
Charlotte, North Carolina 28288
ATTN: Corporate Trust Administration
Facsimile: (704) 383-6039; and
MBIA Insurance Corporation
113 King Street
Armonk, New York 10504
ATTN: Insured Portfolio Mgmt -SF (NovaStar Mortgage Funding
Trust, Series 1998-2)
Facsimile: (914) 765-3810
(For all purposes)
(b) PROCESS AGENT. For the purpose of Section 13(c):-
Party A appoints as its Process Agent: Not Applicable
Party B appoints as its Process Agent: Not Applicable
(c) OFFICES. The provisions of Section 10(a) will apply to this
Agreement.
<PAGE>
(d) MULTIBRANCH PARTY. For the purpose of Section 10(c) of
this Agreement:
Party A is not a Multibranch Party.
Party B is not a Multibranch Party.
(e) CALCULATION AGENT. The Calculation Agent is Party A,
unless otherwise specified in a Confirmation in relation to the
relevant Transaction.
(f) CREDIT SUPPORT DOCUMENT. Details of any Credit Support
Document:-
Party A:- Guarantee of Merrill Lynch & Co., Inc. ("ML & Co.") in
the form attached hereto as Exhibit A.
Party B:- The Swap Policy (as defined below) and the Indenture,
dated as of August 19, 1998 (the "Indenture"), between Party B
and First Union National Bank, as Indenture Trustee.
(g) CREDIT SUPPORT PROVIDER.
Credit Support Provider means in relation to Party A, ML & Co.
Credit Support Provider means in relation to Party B, Not
Applicable.
(h) GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York
without reference to choice of law doctrine.
(i) NETTING OF PAYMENTS. Subparagraph (ii) of Section 2(c) of
this Agreement will not apply to all Transactions under this
Agreement following 15 days prior notice from one party to the
other.
(j) "AFFILIATE" will have the meaning specified in Section 14 of
this Agreement.
PART 5
OTHER PROVISIONS
(1) Section 3 of the Agreement is hereby amended by adding at
the end thereof the following subsection (g):
"(g) ELIGIBLE SWAP PARTICIPANT. It is an "eligible swap
participant" within the meaning of Part 35.1 (b)(2) of the
General Regulations under the Commodity Exchange Act."
(2) Notwithstanding the provisions of Section 7, Party A may
assign and delegate its rights and obligations under any
Transaction to any subsidiary of ML & Co. organized under the
laws of any State of the United States of America effective upon
delivery to Party B of an assumption by such subsidiary and a
Guarantee of the obligations of such subsidiary in the form of
Exhibit A hereto.
(3) Without affecting the provisions of this Agreement requiring
the calculation of certain net payment amounts, all payments
under this Agreement will be made without setoff or counterclaim;
provided, however, that upon the designation or deemed
designation of any Early Termination Date, in addition to and not
in limitation of any other right or remedy (including any right
to setoff, counterclaim, or otherwise withhold payment) under
applicable law:
the non-Defaulting Party or non-Affected Party (in either
case, "X") may set off any sum or obligation arising under
this Agreement (whether matured or unmatured) owed or due by
the Defaulting Party or Affected Party (in either case, "Y")
to X against any sum or obligation arising under this
Agreement (whether matured or unmatured) owed or due by X
(the "Original Obligation") to Y, and, for this purpose, may
convert one currency into another. Any such setoff shall
automatically satisfy and discharge the Original Obligation
and the obligation so set off and, if the Original
Obligation exceeds the sum or obligation to be set off
against, the Original Obligation shall be novated and
replaced by an obligation to pay Y only the excess of the
Original Obligation over such sum or obligation.
(4) If by reason of the time difference between the cities in
which payments are to be made, it is not possible for
simultaneous payments to be made on any date on which both
parties are required to make payments hereunder, either party may
at its option and in its sole discretion notify the other party
that payments on that date are to be made in escrow. In this case
deposit of the payment due earlier on that date shall be made by
2:00 p.m. (local time at the place for the earlier payment) on
that date with an escrow agent selected by the notifying party,
accompanied by irrevocable <PAGE> payment instruction (i) to release the
deposited payment to the intended recipient upon receipt by the
escrow agent of the required deposit of the corresponding payment
from the other party on the same date accompanied by irrevocable
payment instructions to the same effect or (ii) if the required
deposit of the corresponding payment is not made on that same
date, to return the payment deposited to the party that paid it
in escrow. The party that elects to have payments made in escrow
shall pay the costs of the escrow arrangements and shall cause
those arrangements to provide that the intended recipient of the
payment due to be deposited first shall be entitled to interest
on that deposited payment for each day in the period of its
deposit at the rate offered by the escrow agent for that day for
overnight deposits in the relevant currency in the office where
it holds that deposited payment (at 11:00 a.m. local time on that
day) if that payment is not released by 5:00 p.m. local time on
the date it is deposited for any reason other than the intended
recipient's failure to make the escrow deposit it is required to
make hereunder in a timely fashion.
(5) Party B acknowledges and agrees that (i) Party A is acting
solely in the capacity of an arm's-length contractual
counterparty with respect to this Agreement and any Transaction
hereunder, (ii) Party A is not acting as a financial advisor or
fiduciary of Party B (or in any similar capacity) with respect to
this Agreement and any Transaction hereunder and (iii) any advice
given by Party A under or in connection with this Agreement or
any Transaction is and will be merely incidental to the provision
of Party A's services hereunder and does not and will not serve
as a primary basis of any investment decision by Party B. Party B
represents to Party A (which representation shall be deemed to be
repeated by Party B on each date on which a Transaction is
entered into) that its decision to enter into each Transaction
has been based solely on the independent evaluation of Party B
and its representatives.
PART 6
MBIA PROVISIONS
The following provisions shall apply to any Transactions to
which the Interest Rate Swap Insurance Policy issued on August
19, 1998 (the "Swap Policy") by MBIA Insurance Corporation
("MBIA"), for the account of Party B, as principal, and for the
benefit of Party A, as beneficiary, relates ("Insured
Transactions").
(i) Designation of Early Termination Date.
Notwithstanding anything to the contrary in
Section 6 of this Agreement, if any:
(A) Event of Default in respect of any Insured
Transaction under this Agreement occurs, or
(B) any Termination Event in respect of any
Insured Transaction under this Agreement
occurs (other than the Additional Termination
Event described at (iii) below),
then, in either case, neither Party A nor Party B shall designate
an Early Termination Date in respect of any such Insured
Transaction unless:
(Y) MBIA has failed to pay any payment due to
Party A under the terms and conditions of the
Swap Policy; or
(Z) MBIA has otherwise consented in writing to
such designation.
(ii) MBIA-directed termination. If any Event of Default
under this Agreement occurs with respect to Party
B as the Defaulting Party, then MBIA (so long as
it has not failed to pay any payment due to Party
A under the terms and conditions of the Swap
Policy) shall have the right (but not the
obligation) upon notice to Party A and Party B to
designate an Early Termination Date with respect
to Party B with the same effect as if such
designation were made by Party A. For purposes of
the foregoing sentence, an Event of Default with
respect to Party B shall be considered to be
continuing, notwithstanding any payment by MBIA
under the Swap Policy. The parties acknowledge
that, except as the Swap Policy may be otherwise
endorsed, unless MBIA designates an Early
Termination Date (as opposed to merely consenting
to such designation by one of the parties)
pursuant to its right to do so hereunder payments
due from Party B because an Early Termination Date
has been designated will not be insured.
<PAGE>
(iii) Additional Termination Event. Additional
Termination Events will apply. The following shall
constitute an Additional Termination Event:
(A) MBIA fails to meet its payment obligations
under the Swap Policy and such failure is
continuing with respect to MBIA under the
Swap Policy; or
(B) MBIA fails at any time during the term of
this Agreement to have (a) a claim paying
ability rating of at least A- or higher from
Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc.
or (b) a financial strength rating of at
least A3 or higher from Moody's Investors
Service, Inc.; provided, however, that
additionally:
(X) an Event of Default has occurred or is
continuing with respect to Party B as
the Defaulting Party; or
(Y) a Termination Event has occurred or is
continuing with respect to Party B.
For the purpose of the foregoing Termination
Event, the "Affected Party" shall be Party B.
(C) The long-term senior unsecured debt rating of
Party A's Credit Support Provider from:
(a) S&P is withdrawn, suspended or falls to
or below "A-"; or
(b) Moody's is withdrawn, suspended or fails
to or below "A3"; and
Party A has not, within 30 days executed a
collateral agreement with Party B, MBIA and a
third-party collateral agent providing for the
collateralization of Party A's obligations under
the Agreement as measured by the estimated
Settlement Amount, such amount to be established
by Party A monthly and on demand, collateral to be
marked-to-market weekly; provided that the
collateral, collateral levels, collateral agent
and terms of such collateral agreement must all be
reasonably satisfactory to MBIA, it being
understood that cash and United States treasury
and agency securities shall be deemed reasonably
satisfactory to MBIA (a "Collateral Agreement").
For the purpose of the foregoing Termination
Event, the "Affected Party" shall be Party A.
(D) The long-term senior unsecured debt rating of
Party A's Credit Support Provider from (a)
S&P is withdrawn, suspended or falls to or
below "BBB+"; or (b) from Moody's is
withdrawn, suspended or falls to or below
"Baa1."
For the purpose of the foregoing Termination
Event, the "Affected Party" shall be Party A.
(iv) No suspension of payments. Notwithstanding Section
2(a)(iii) of this Agreement, Party A shall not
suspend any payments due under an Insured
Transaction under Section 2(a) (iii) unless:
(A) MBIA is in default in respect of any payment
obligations under the Swap Policy; or
(B) MBIA has not provided to Party A, in
accordance with the terms of this Agreement,
any ministerial notices (including, and
limited to, wire instructions for payments)
required by this Agreement to be provided by
Party B to Party A, which notices Party B has
failed to provide, and Party A has given
three (3) Business Days' notice to MBIA of
such failure.
(v) Collateral. If the long term senior unsecured debt
rating of Party A's Credit Support Provider from:
<PAGE>
(a) S&P is withdrawn, suspended or falls to or
below "A-"; or
(b) Moody's is withdrawn, suspended or falls to
or below "A3"; and
then Party A will, within 30 days, execute a
Collateral Agreement with Party B, MBIA and a
third-party collateral agent.
(vi) Replacement. Party A agrees that if Party B or
MBIA has a right to designate an Early Termination
Date pursuant to Part 6 (iii) (C) or (D) above,
then, upon the request of MBIA or Party B with the
consent of MBIA, Party A shall procure a
replacement Transaction at its own expense (and at
no expense to Party B) with a swap counterparty on
the same terms as this Agreement mutatis mutandis,
or else with such amendments to the terms of this
Agreement as have been approved by S&P, Moody's
and MBIA.
(vii) Representations and agreements. Each party agrees
that each of its representations and agreements in
this Agreement is expressly made to and for the
benefit of MBIA.
(viii) Third-party beneficiary. Party A and Party B
hereby each acknowledge and agree that MBIA shall
be an express third-party beneficiary (and not
merely an incidental third-party beneficiary) of
this Agreement and the obligations of such party
under any Insured Transaction, and as such,
entitled to enforce the Agreement and the terms of
any such Insured Transaction against such party on
its own behalf and/or on behalf of the holders of
the Bonds (as defined in the Indenture referenced
above) and otherwise shall be afforded all
remedies available hereunder or otherwise afforded
by law against the parties hereto to redress any
damage or loss incurred by MBIA including, but not
limited to, fees (including professional fees),
costs and expenses incurred by MBIA which are
related to, or resulting from any breach by such
party of its obligations hereunder.
(ix) Policy coverage. Party A and Party B hereby each
acknowledge and agree that MBIA's obligation with
respect to Insured Transactions shall be limited
to the terms of the Swap Policy. Notwithstanding
Section 2(e) or any other provision of this
Agreement, MBIA shall not have any obligation to
pay interest on any amount payable by Party B
under this Agreement.
(x) Subrogation. Notwithstanding any other term of
this Agreement, Party A and Party B hereby
acknowledge that to the extent of payments made by
MBIA to Party A under the Swap Policy, MBIA shall
be fully subrogated to the rights of Party A
against Party B under the Insured Transaction to
which such payments relate, including, but not
limited to, the right to receive payment from
Party B and the enforcement of any remedies.
Notwithstanding any other term of this Agreement,
Party A hereby agrees to assign to MBIA its right
to receive payment from Party B under any Insured
Transactional the extent of any payment thereunder
by MBIA to Party A. Party B hereby acknowledges
and consents to the assignment by Party A to MBIA
of any rights and remedies that Party A has under
any Insured Transaction or any other document
executed in connection herewith.
(xi) Isolation of Insured Transactions in designating
an Early Termination Date. Notwithstanding Section
6 of this Agreement, any designation of an Early
Termination Date in respect of the Insured
Transactions by MBIA or by Party A with the
consent of MBIA pursuant to paragraph (i) above
shall apply only to the Insured Transactions and
not to any other Transaction under this Agreement,
unless Party A shall designate an Early
Termination Date in respect of such other
Transaction. Nothing contained in this paragraph
(xi) shall affect the rights of Party A under this
Agreement to designate an Early Termination Date
in respect of any Transaction other than the
Insured Transactions, which designation shall not
apply to the Insured Transactions unless expressly
provided in such designation and unless MBIA shall
have designated, or consented to the designation
by Party A of, an Early Termination Date in
respect of the Insured Transactions in accordance
with paragraph (i) above.
<PAGE>
(xii) No netting. Notwithstanding Section 2(c) of this
Agreement, in no event shall either Party A or
Party B be entitled to net its payment obligations
in respect of the Insured Transactions against the
payment obligations of the other party in respect
of other Transactions under this Agreement if such
Transactions are not Insured Transactions, nor may
either Party A or Party B net the payment
obligations of the other party under Transactions
that are not Insured Transactions against the
payment obligations of such party under Insured
Transactions, it being the intention of the
parties that their payment obligations under
Insured Transactions be treated separate and apart
from all other Transactions. Section 6(e) of this
Agreement shall apply to all Insured Transactions
with the same effect as if the Insured
Transactions constituted a single master
agreement. Notwithstanding Section 6(e) of this
Agreement, the amount payable under Section 6(e)
of this Agreement upon the termination of any
Insured Transaction shall be determined without
regard to any Transactions other than the Insured
Transactions, it being the intention of the
parties that their payment obligations under the
Insured Transactions be treated separate and apart
from all other Transactions unless otherwise
specified in such other Transaction and agreed to
in writing by MBIA.
(xiii) No set-off or counterclaim. In no event shall
either Party A or Party B be entitled to:
(A) set-off its payment obligations in respect of
an Insured Transaction against the payment
obligations of the other party (whether by
counterclaim or otherwise) if such
obligations are not Insured Transactions, or
(B) net the payment obligations of the other
party that are not with respect to Insured
Transactions against the payment obligations
of such party under Insured Transactions,
it being the intention of the parties that
their payment obligations under Insured
Transactions be treated separate and apart
from all other obligations. Notwithstanding
Section 6(e) of this Agreement, the amount
payable under Section 6(e) of this Agreement
upon the termination of any Insured
Transaction shall be determined without
regard to any obligation other than those
under the Insured Transactions, it being the
intention of the parties that their payment
obligations under the Insured Transactions be
treated separate and apart from all other
obligations unless otherwise specified in
such other obligation and agreed to in
writing by MB IA.
(xiv) Expenses. Party B agrees to reimburse MBIA
immediately and unconditionally upon demand for
all reasonable expenses incurred by MBIA in
connection with the issuance of the Swap Policy
and the enforcement by MBIA of Party B's
obligations under this Agreement and any other
documents executed in connection with the
execution and delivery of this Agreement,
including, but not limited to, fees (including
professional fees), costs and expenses incurred by
MBIA which are related to, or resulting from any
breach by Party B of its obligations hereunder.
(xv) Transfers/Assignments. Notwithstanding Section 7
of the Agreement, no Insured Transaction may be
assigned by either Party A or Party B without the
prior written consent of MBIA. However Party A may
make such an assignment to an affiliate of Party A
without MBIA's prior written consent, if Party A
(or the entity currently guaranteeing the
obligations of Party A, if any) provides a
guaranty of the Swap, as assigned, acceptable to
MBIA (it being understood that a guaranty
substantially in the form of the guaranty
delivered to MBIA by Party A's Credit Support
Provider in connection with the execution of this
Agreement shall be acceptable).
(xvi) Amendments/waivers. Section 9(b) of the Agreement
is hereby amended by (A) adding the words "or any
Credit Support Document" after the word
"Agreement" in the first line thereof and (B)
adding the phrase "and MBIA" following the words
"parties" in the third line thereof.
<PAGE>
(xvii) Notices. A copy of each notice or other
communication between the parties with respect to
this Agreement must be forwarded to MBIA.
(xviii) "Reference Market Makers." The definition of
"Reference Market-makers" set forth in Section 12
of the Agreement shall be amended in its entirety
to read as follows:
"Reference Market-makers" means four (4) leading
dealers in the relevant swap market selected by
the party determining a Market Quotation in good
faith (a) from among dealers of the highest credit
standing which satisfy all the criteria that such
party applies generally at the time in deciding
whether to offer or to make an extension of credit
and (b) to the extent practicable, from among
dealers having an office in the same city. The
rating classification assigned to any outstanding
long-term senior debt securities issued by such
dealers shall be at least (1) "Aa" or higher as
determined by Moody's Investors Service Inc., (2)
"AA" or higher as determined by Standard & Poor's
Ratings Services, a division of The McGraw-Hill
Companies, Inc. or (3) an equivalent investment
grade rating determined by a nationally-recognized
rating service acceptable to both parties,
provided, however, that, in any case, if Market
Quotations cannot be determined by four (4) such
dealers, the party making the determination of the
Market Quotation may designate, with the consent
of the other party and MBIA, one (1) or more
leading dealers whose long-term senior debt bears
a lower investment grade rating.
<PAGE>
GUARANTEE OF MERRILL LYNCH & CO., INC.
FOR VALUE RECEIVED, receipt of which is hereby
acknowledged, MERRILL LYNCH & CO., INC., a corporation duly
organized and existing under the laws of the State of Delaware
("ML & CO."), hereby unconditionally guarantees to NOVASTAR
MORTGAGE FUNDING TRUST, SERIES 1998-2 (the "Company"), its
successors and permitted assigns, the due and punctual payment of
any and all amounts payable by Merrill Lynch Capital Services,
Inc., a corporation organized under the laws of the State of
Delaware ("MLCS"), under the terms of the Master Agreement
between the Company and MLCS, dated as of August 19, 1998 (the
"Agreement"), including, in case of default, expenses of
collection, interest on any amount due, when and as the same
shall become due and payable, whether on the scheduled payment
dates, at maturity, upon declaration of termination or otherwise,
according to the terms thereof. In case of the failure of MLCS
punctually to make any such payment, ML & Co. hereby agrees to
make such payment, or cause such payment to be made, promptly
upon demand made by the Company to ML & Co.; provided, however,
that delay by the Company in giving such demand shall in no event
affect ML & Co.'s obligations under this Guarantee. This
Guarantee shall remain in full force and effect or shall be
reinstated (as the case may be) if at any time any payment
guaranteed hereunder, in whole or in part, is rescinded or must
otherwise be returned by the Company upon the insolvency,
bankruptcy or reorganization of MLCS or otherwise, all as though
such payment had not been made.
ML & Co. hereby agrees that its obligations hereunder
shall be unconditional, irrespective of the validity, regularity
or enforceability of the Agreement; the absence of any action to
enforce the same; any waiver or consent by the Company concerning
any provisions thereof; the rendering of any judgment against
MLCS or any action to enforce the same; or any other
circumstances that might otherwise constitute a legal or
equitable discharge of a guarantor or a defense of a guarantor.
ML & Co. covenants that this guarantee will not be discharged
except by complete payment of the amounts payable under the
Agreement. This Guarantee shall continue to be effective if MLCS
merges or consolidates with or into another entity, loses its
separate legal identity or ceases to exist.
ML & Co. hereby waives diligence; presentment; protest;
notice of protest, acceleration, and dishonor; filing of claims
with a court in the event of insolvency or bankruptcy of MLCS;
all demands whatsoever, except as noted in the first paragraph
hereof; and any right to require a proceeding first against MLCS.
ML & Co. further waives any right of subrogation to the rights of
the Company until such time as all obligations of MLCS to the
Company under the Agreement have been discharged in full.
ML & Co. hereby certifies and warrants that this
Guarantee constitutes the valid obligation of ML & Co. and
complies with all applicable laws.
This Guarantee shall be governed by, and construed in
accordance with, the laws of the State of New York.
This Guarantee may be terminated at any time by notice
by ML & Co. to the Company given in accordance with the notice
provisions of the Agreement, effective upon receipt of such
notice by the Company or such later date as may be specified in
such notice; provided, however, that this Guarantee shall
continue in full force and effect with respect to any obligation
of MLCS under the Agreement entered into prior to the
effectiveness of such notice of termination.
This Guarantee becomes effective concurrent with the
effectiveness of the Agreement, according to its terms.
IN WITNESS WHEREOF, ML & Co. has caused this Guarantee
to be executed in its corporate name by its duly authorized
representative.
MERRILL LYNCH & CO., INC.
By: _______________________
Name:
Title:
Date: As of August 19, 1998
<PAGE>
World Financial Center
North Tower
New York, New York 10281-1322
Tel: (212) 449-0291
Fax: (212) 449-6219
Telex: 671 6341 MLB SCTR
Debt Markets Division
MERRILL LYNCH Global Swap Group
Date: 18 AUGUST 1998
TO: NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2
FROM: MERRILL LYNCH CAPITAL SERVICES, INC.
RE: TRANSACTION - REFERENCE 98DL2709
Dear Sirs:
The purpose of this communication is to set forth the terms
and conditions of the Transaction entered into between Merrill
Lynch Capital Services, Inc. (MLCS) and Novastar Mortgage Funding
Trust Series 1998-2 ("Counterparty"), on the Trade Date specified
below (the "Transaction"). This communication constitutes a
"Confirmation" as referred to in the Agreement specified below.
THIS FACSIMILE TRANSMISSION WILL BE THE ONLY WRITTEN
COMMUNICATION REGARDING THIS TRANSACTION EXCHANGE BETWEEN US,
UNLESS YOU REQUEST THAT WE SIGN HARD COPY VERSIONS OF THIS
CONFIRMATION. PLEASE CONTACT THE INDIVIDUAL INDICATED IN THE
LAST PARAGRAPH OF THIS LETTER TO RECEIVE SUCH COPIES.
PLEASE SIGN AND RETURN THIS CONFIRMATION AT YOUR EARLIEST
CONVENIENCE. BECAUSE OF THE IMPORTANCE OF CONFIRMING
TRANSACTIONS PROMPTLY AND ACCURATELY, WE REGRET THAT ANY
CONFIRMATIONS WHICH ARE NOT SIGNED AND RETURNED WITHIN TEN DAYS
MAY RESULT IN A DELAY IN PAYMENTS.
This Confirmation incorporates the definitions and
provisions contained in the 1991 ISDA Definitions, as published
by the International Swap Dealers Association, Inc. ("ISDA") (the
"Definitions"). The Definitions shall apply to this
communication even if the Agreement between the parties
incorporates the provisions of the 1985 ISDA Code of Swaps, the
1986 ISDA Code of Swaps, or the 1987 Interest Rate and Currency
Exchange Definitions. In the event of any inconsistency between
this Confirmation and the Agreement or the Definitions, the terms
of this Confirmation shall govern this Agreement.
1. This Confirmation supplements, forms part of, and is
subject to, the ISDA Master Agreement dated as of August 19,
1998, as amended and supplemented from time to time (the
"Agreement"), between you and us. All provisions contained in
the Agreement govern this Confirmation except as expressly
modified below.
2. The terms of this particular Transaction to which this
Confirmation relates are as follows:
Type of Transaction: Rate Cap Transaction
Notional Amount: USD 60,000,000.00
Trade Date: 18 August 1998
Effective Date: 19 August 1998
<PAGE>
Termination Date: 23 March 2001
Fixed Amounts:
Fixed Rate Payer: Counterparty
Fixed Rate Payer
Payment Dates: 23 March, 23 June, 23 September and
23 December in each year,
commencing on 23 September 1998,
and ending on the Termination Date,
inclusive, subject to adjustment in
accordance with the Modified
Following Business Day Convention
Fixed Rate Payer initial
Calculation Period: From and including 23 June 1998, to
but excluding 23 September 1998,
subject to adjustment in accordance
with the Modified Following
Business Day Convention
Fixed Rate: 0.3690%
Fixed Rate Day
Count Fraction: Actual/360
Floating Amounts:
Floating Rate Payer: MLCS
Cap Rate: 5.75%
Floating Rate Payer
Payment Dates: 23 March, 23 June, 23 September and
23 December in each year,
commencing on 23 September 1998,
and ending on the Termination Date,
inclusive, subject to adjustment in
accordance with the Modified
Following Business Day Convention
Floating Rate Payer initial
Calculation Period: From and including 23 June 1998, to
but excluding 23 September, 1998,
subject to adjustment in accordance
with the Modified Following
Business Day Convention
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: Three months
Floating Rate Day
Count Fraction: Actual/360
Reset Dates: The first day of each Floating Rate
Payer Calculation Period
Rate Cut-off Dates: Inapplicable
<PAGE>
Method of Averaging: Inapplicable
Compounding: Inapplicable
Calculation Agent: MLCS
Business Days: New York, London
3. Account Details
Payment to MLCS: BANKERS TRUST COMPANY, NEW YORK, NY
(FED. ABA: 021001033)
FAO: MERRILL LYNCH CAPITAL
SERVICES, INC.
DOLLAR SWAPS, NEW YORK, NY
A/C#: 00-811-874
Payments to
Counterparty: Please advise
Please confirm that the foregoing correctly sets forth the terms
of our agreement by executing this Confirmation and returning it
to us by facsimile transmission on (212) 449 6219, Attention:
Keith Doree, telephone: (212) 449 7412.
Very truly yours,
MERRILL LYNCH CAPITAL SERVICES, INC.
By: __________________________________
Authorized Signatory
Accepted and confirmed as
of the Trade Date written above:
NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2
By: ________________________________
Name: Emmett R. Harmon
Title: Vice President
<PAGE>
ACCOUNT DETAILS
Payments to NatWest For account of NatWest Bank Group
Swaps Book [SWIFT NWIB GP2P SWP]
with Chase Manhattan Bank, New York
Account Number 0011009156 CHIPS
273948 [SWIFT CHAS US 33]
Payments to Counterparty Please advise in return
Confirmation
OFFICES
The Office of Counterparty for the Transaction is Westwood,
Kansas.
The Office of NatWest for the Transaction is London.
Broker/Arranger Greenwich Capital Markets, Inc.
Representations and Warranties
To induce the other to enter into the Transaction, each party
represents and warrants to the other that (i) it is an "eligible
swap participant" as such term is defined in Section 35.1(b)(2)
of the Regulations (17 CFR 35) promulgated under the Commodity
Exchange Act, as amended and it has entered into this Transaction
in conjunction with its line of business (including financial
intermediation services) or the financing of business, (ii) it is
acting for its own account, and it has made its own independent
decisions to enter into this Transaction and as to whether this
Transaction is appropriate or proper for it based upon its own
judgement and upon advice from such advisers as it has deemed
necessary, (iii) it is not relying on any communication (written
or oral) of the other party as investment advice or as a
recommendation to enter into this Transaction (it being
understood that information and explanation related to the terms
and conditions of this Transaction shall not be considered
investment advice or a recommendation to enter into this
Transaction), (iv) no communication (written or oral) received
from the other party shall be deemed to be an assurance or
guarantee as to the expected results of this Transaction, (v) it
is capable of assessing the merits of and understanding (on its
own behalf or through independent professional advice), and
understand and accepts, the terms, conditions and risks of this
Transaction, and it is capable of assuming, and assumes, the risk
of this Transaction, and (vi) the other party is not acting as
fiduciary for or an adviser to it in respect of this Transaction.
This Transaction has been entered into by Greenwich Capital
Markets, Inc., as agent for NatWest Capital Markets Limited,
regulated by the Securities and Futures Authority, which itself
acts as agent for National Westminster Bank PLC, regulated by
IMRO. Your transactions with National Westminster Bank PLC in
Schedule 5 instruments are at present exempt from the Financial
Services Act 1986 but are subject to the Bank of England's London
Code of Conduct.
NatWest Capital Markets Limited shall act as settlement agent on
behalf of National Westminster Bank Plc in respect of this
Transaction.
This Confirmation is in final form. No hard copy will follow.
Please ensure that you respond promptly to this Confirmation. If
you disagree with any part of it please telephone the sender so
that the discrepancy may be quickly resolved.
We are pleased to have completed this Rate Protection Transaction
and look forward to dealing with you again in the near future.
Please confirm that the foregoing correctly sets forth the terms
of our agreement by a return document to Greenwich Capital
Markets, Inc. substantially to the following effect:
<PAGE>
"Re Our Ref NY11432
We acknowledge receipt of your document dated 5 August 1998 with
respect to the above-referenced Transaction between National
Westminster Bank PLC and Novastar Mortgage Fund Trust 98-2. with
an Effective Date of 26 March 2001 and a Termination Date of 26
June 2003 and confirm that such document correctly sets forth the
terms of our agreement relating to the Transaction described
therein. Yours faithfully, Novastar Mortgage Fund Trust 98-2.,
by (specify name and title of authorised officer)."
Confirmed as of the Confirmed as of the
date first written date first written
Name: Elizabeth C. Parker Name:
Title: Vice President Title:
Greenwich Capital Markets, Inc. Novastar Mortgage Fund Trust
As Agent as stated above 98-2
<PAGE>
World Financial Center
North Tower
New York, New York 10281-1322
Tel: (212) 449-0291
Fax: (212) 449-6219
Telex: 671 6341 MLB SCTR
Debt Markets Division
MERRILL LYNCH Global Swap Group
Date: 18 AUGUST 1998
TO: NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2
FROM: MERRILL LYNCH CAPITAL SERVICES, INC.
RE: TRANSACTION - REFERENCE 98DL2708
Dear Sirs:
The purpose of this communication is to set forth the terms
and conditions of the Transaction entered into between Merrill
Lynch Capital Services, Inc. (MLCS) and Novastar Mortgage Funding
Trust Series 1998-2 ("Counterparty"), on the Trade Date specified
below (the "Transaction"). This communication constitutes a
"Confirmation" as referred to in the ISDA Master Agreement
specified below.
THIS FACSIMILE TRANSMISSION WILL BE THE ONLY WRITTEN
COMMUNICATION REGARDING THIS TRANSACTION EXCHANGED BETWEEN US,
UNLESS YOU REQUEST THAT WE SIGN HARD COPY VERSIONS OF THIS
CONFIRMATION. PLEASE CONTACT THE INDIVIDUAL INDICATED IN THE
LAST PARAGRAPH OF THIS LETTER TO RECEIVE SUCH COPIES.
PLEASE SIGN AND RETURN THIS CONFIRMATION AT YOUR EARLIEST
CONVENIENCE. BECAUSE OF THE IMPORTANCE OF CONFIRMING
TRANSACTIONS PROMPTLY AND ACCURATELY, WE REGRET THAT ANY
CONFIRMATIONS WHICH ARE NOT SIGNED AND RETURNED WITHIN TEN DAYS
MAY RESULT IN A DELAY IN PAYMENTS.
This Confirmation incorporates the definitions and
provisions contained in the 1991 ISDA Definitions, as published
by the International Swap Dealers Association, Inc. ("ISDA") (the
"Definitions"). The Definitions shall apply to this
communication even if the Agreement between the parties
incorporates the provisions of the 1985 ISDA Code of Swaps, the
1986 ISDA Code of Swaps, or the 1987 Interest Rate and Currency
Exchange Definitions. In the event of any inconsistency between
this Confirmation and the Agreement or the Definitions, the terms
of this Confirmation shall govern this Agreement.
1. This Confirmation supplements, forms part of, and is
subject to, the ISDA Master Agreement dated as of August 19,
1998, as amended and supplemented from time to time (the
"Agreement"), between you and us. All provisions contained in
the Agreement govern this Confirmation except as expressly
modified below.
2. The terms of the particular Transaction to which this
Confirmation relates are as follows:
Type of Transaction: Rate Cap Transaction
Notional Amount: USD 40,000,000.00
Trade Date: 18 August 1998
Effective Date: 19 August 1998
<PAGE>
Termination Date: 13 March 2001
Fixed Amounts:
Fixed Rate Payer: Counterparty
Fixed Rate Payer
Payment Dates: 13 March, 13 June, 13 September and
13 December in each year,
commencing on 13 September 1998,
and ending on the Termination Date,
inclusive, subject to adjustment in
accordance with the Modified
Following Business Day Convention
Fixed Rate Payer initial
Calculation Period: From and including 13 June 1998, to
but excluding 13 September 1998,
subject to adjustment in accordance
with the Modified Following
Business Day Convention
Fixed Rate: 0.36625%
Fixed Rate Day
Count Fraction: Actual/360
Floating Amounts:
Floating Rate Payer: MLCS
Cap Rate: 5.75%
Floating Rate Payer
Payment Dates: 13 March, 13 June, 13 September and
13 December in each year,
commencing on 13 September 1998,
and ending on the Termination Date,
inclusive, subject to adjustment in
accordance with the Modified
Following Business Day Convention
Floating Rate Payer initial
Calculation Period: From and including 13 June 1998, to
but excluding 13 September, 1998,
subject to adjustment in accordance
with the Modified Following
Business Day Convention
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: Three months
Floating Rate Day
Count Fraction: Actual/360
Reset Dates: The first day of each Floating Rate
Payer Calculation Period
Rate Cut-off Dates: Inapplicable
<PAGE>
Method of Averaging: Inapplicable
Compounding: Inapplicable
Calculation Agent: MLCS
Business Days: New York, London
3. Account Details
Payment to MLCS: BANKERS TRUST COMPANY, NEW YORK, NY
(FED ABA: 021001033)
FAO: MERRILL LYNCH CAPITAL
SERVICES, INC. -
DOLLAR SWAPS, NEW YORK, NY
A/C#: 00-811-874
Payments to
Counterparty: Please advise
Please confirm that the foregoing correctly sets forth the terms
of our agreement by executing this Confirmation and returning it
to us by facsimile transmission on (212) 449 6219, Attention:
Keith Doree, telephone: (212) 449 7412.
Very truly yours,
MERRILL LYNCH CAPITAL SERVICES, INC.
By: __________________________________
Authorized Signatory
Accepted and confirmed as
of the Trade Date written above:
NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2
By: ________________________________
Name: Emmett R. Harmon
Title: Vice President
August 5,1998
Novastar Mortgage Fund Trust 98-2
Attn: Swaps Department
Facsimile: 913-514-3515
Dear Sirs
OUR REFERENCE: NY 11432
RE: USD 80,000,000 INTEREST RATE CAP
The purpose of this communication is to set forth the
terms and conditions of the swap transaction entered into between
us on the Trade Date specified below (the "Transaction"). This
communication constitutes a "Confirmation" as referred to in the
Agreement specified below.
The definitions and provisions contained in the 1991
ISDA Definitions (as published by the International Swap Dealers
Association, Inc. now known as the International Swaps and
Derivatives Association, Inc. ("ISDA")) are incorporated into
this Confirmation. In the event of any inconsistency between
those definitions and provisions and this Confirmation, this
Confirmation will govern.
This Confirmation evidences a complete binding
agreement between you and us as to the terms of the Transaction
to which this Confirmation relates. In addition you and we agree
to use all reasonable efforts promptly to negotiate, execute and
deliver an agreement in the form of the ISDA Master Agreement
(Muiticurrency-Cross Border) (the "Agreement"), with such
modifications as you and we will in good faith agree. Upon such
execution, this Confirmation will supplement, form a part of, and
be subject to such Agreement, and all provisions contained or
incorporated by reference in such Agreement upon its execution
shall govern this Confirmation except as expressly modified
herein.
The parties agree that, prior to execution of the Agreement, this
Transaction (together with all other transactions between the
parties which refer to, and incorporate the terms of, the form of
ISDA Master Agreement (Multicurrency-Cross Border)) will be
governed by and subject to the terms and conditions which would
be applicable if, prior to the Trade Date (or, if prior
transactions have been entered into between us, then prior to the
Trade Date of the first such transaction), the parties had
executed and delivered a Master Agreement (Multicurrency-Cross
Border), in the form published by ISDA (but without any
Schedule), with the revisions provided below (this Transaction,
all previous transactions and such Master Agreement, as modified
below, forming a single agreement between the parties), except
that in the event of any inconsistency between the provisions of
such Master Agreement and this Confirmation, this Confirmation
will prevail for the purpose of this Transaction:
1) The "Cross Default" provision of Section 5(a)(vi)
of the Master Agreement will apply to both parties;
2) The "Credit Event Upon Merger" provision of
Section 5(b)(iv) of the Master Agreement will apply to both
parties;
3) Market Quotation and the Second Method will apply
for purposes of Section 6(e) of the Master Agreement; and
4) The "Automatic Early Termination" provision of
Section 6(a) of the Master Agreement will not apply to either
party.
This Transaction shall be governed by the law of the
State of New York, without regard to conflict of laws principles.
The terms of the particular Transaction to which this
Confirmation relates are as follows:
<PAGE>
Type of Transaction Cap
Notional Amount USD 80,000,000
Trade Date 4 August 1998
Effective Date 26 March 2001
Termination Date 26 June 2003 subject to
adjustment in accordance with
the Modified Following Business
Day Convention
FIXED AMOUNTS
Fixed Amount Payer Novastar Mortgage Fund Trust 98-
2 ("Counterparty")
Fixed Amount USD 52,000
Fixed Amount Payer
Payment Date 6 August 1998
FLOATING AMOUNTS
Cap Floating Rate
Payer National Westminster Bank PLC ("NatWest")
Cap Floating Rate The 26th of each June,
Payer Payment Dates September, December and March
commencing 26 June 2001 to and
including the Termination Date
subject to adjustment in
accordance with the Modified
Following Business Day
Convention
Cap Rate 9.00 pct
Floating Rate Option USD-LIBOR-BBA
Floating Rate Actual/360 day basis
Day Count Fraction
Designated Maturity 3 Months
Spread None
Reset Date The first day of each
Calculation Period
Business Days London, New York
Calculation Agent NatWest Capital Markets Limited,
(as agent for National
Westminster Bank Plc)
