ΐΦΜμΜΓappΟΒΤΨ

 
                             SCHEDULE

                              TO THE

                         MASTER AGREEMENT

                   DATED AS OF AUGUST 19, 1998

                             BETWEEN

       β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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:


 



     (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.



 



                              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 β–‡β–‡β–‡β–‡β–�-    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.



 




                              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:       β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� World Headquarters, World Financial
               Center, North Tower, 22nd Floor, β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡,
               β–‡β–‡β–� β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�-β–‡β–‡β–‡β–‡
Attention:     Swap Group
Telex No.:     6716341        Answerback:    MLB SCTR
Facsimile No.: β–‡β–‡β–� β–‡β–‡β–�-β–‡β–‡β–‡β–‡   Telephone No.: β–‡β–‡β–� β–‡β–‡β–�-β–‡β–‡β–‡β–‡

(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
     β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� World Headquarters, World Financial Center,
     North Tower, 23rd Floor
     β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�-β–‡β–‡β–‡β–‡
     Attention:     Swaps Legal
     Facsimile No.: β–‡β–‡β–� β–‡β–‡β–�-β–‡β–‡β–‡β–‡

Address for notices or communications to Party B:-

NovaStar Mortgage Funding Trust, Series 1998-2
c/o Wilmington Trust Company
β–‡β–‡β–‡β–‡β–‡β–‡ Square North
β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–‡β–‡
β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡, β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�
ATTN:  Corporate Trust Administration
Facsimile:  (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡,

with copies to:

First Union National Bank
β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡, β–‡β–‡ 1179
β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–�, β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�
ATTN:  Corporate Trust Administration
Facsimile: (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡; and

MBIA Insurance Corporation
β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–‡β–‡
β–‡β–‡β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�
ATTN:     Insured Portfolio Mgmt -SF (NovaStar Mortgage Funding
          Trust, Series 1998-2)
Facsimile:     (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡

(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.




 



(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 β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� & 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  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.


 



     (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 β–‡β–‡β–‡β–‡β–‡β–‡-β–‡β–‡β–‡β–‡ Companies, Inc.
                    or (b) a financial strength rating of at
                    least A3 or higher from β–‡β–‡β–‡β–‡β–�'β–� 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)  β–‡β–‡β–‡β–‡β–�'β–� 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 β–‡β–‡β–‡β–‡β–�'β–� 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:


 



               (a)  S&P is withdrawn, suspended or falls to or
                    below "A-"; or

               (b)  β–‡β–‡β–‡β–‡β–�'β–� 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.


 



     (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.


 



     (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 β–‡β–‡β–‡β–‡β–�'β–� Investors Service Inc., (2)
               "AA" or higher as determined by Standard & Poor's
               Ratings Services, a division of The β–‡β–‡β–‡β–‡β–‡β–‡-β–‡β–‡β–‡β–‡
               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.



              GUARANTEE OF β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� & CO., INC.


          FOR VALUE RECEIVED, receipt of which is hereby
acknowledged, β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� & 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 β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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.

                                   β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� & CO., INC.

                                   By: _______________________
                                   Name:
                                   Title:
                                   Date:  As of August 19, 1998




                                   World Financial Center
                                   β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�
                                   β–‡β–‡β–� β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Tel:  (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Fax:  (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Telex:  671 6341 MLB SCTR

                                   Debt Markets Division
β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�                      Global Swap Group

Date:     18 AUGUST 1998

TO:       NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2

FROM:     β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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 β–‡β–‡β–‡β–‡β–‡β–‡β–�
β–‡β–‡β–‡β–‡β–� 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


 



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


 



     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:  β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–�)
                              FAO:  β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� CAPITAL
                              SERVICES, INC.
                              DOLLAR SWAPS, NEW YORK, NY
                              A/C#:  β–‡β–‡-β–‡β–‡β–�-β–‡β–‡β–�

     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 (β–‡β–‡β–�) β–‡β–‡β–� β–‡β–‡β–‡β–‡, Attention: 
β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�, telephone:  (β–‡β–‡β–�) β–‡β–‡β–� β–‡β–‡β–‡β–‡.

                         Very truly yours,

                         β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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:  β–‡β–‡β–‡β–‡β–‡β–‡ β–�. β–‡β–‡β–‡β–‡β–‡β–‡
     Title:  Vice President



 



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 [β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡ 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 β–‡β–‡β–� β–‡β–‡β–‡β–‡ 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:


 



"Re Our β–‡β–‡β–� β–‡β–‡β–‡β–‡β–‡β–‡β–�

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:  β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–� β–�. β–‡β–‡β–‡β–‡β–‡β–‡         Name:
Title:  Vice President             Title:
Greenwich Capital Markets, Inc.    Novastar Mortgage Fund Trust
As Agent as stated above           98-2




                                   World Financial Center
                                   β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�
                                   β–‡β–‡β–� β–‡β–‡β–‡β–‡, β–‡β–‡β–� β–‡β–‡β–‡β–‡ β–‡β–‡β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Tel:  (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Fax:  (β–‡β–‡β–�) β–‡β–‡β–�-β–‡β–‡β–‡β–‡
                                   Telex:  671 6341 MLB SCTR

                                   Debt Markets Division
β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�                      Global Swap Group

Date:     18 AUGUST 1998

TO:       NOVASTAR MORTGAGE FUNDING TRUST SERIES 1998-2

FROM:     β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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 β–‡β–‡β–‡β–‡β–‡β–‡β–�
β–‡β–‡β–‡β–‡β–� 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


 


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


 



     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:  β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–‡β–�)
                              FAO:  β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� CAPITAL
                              SERVICES, INC. -
                              DOLLAR SWAPS, NEW YORK, NY
                              A/C#:  β–‡β–‡-β–‡β–‡β–�-β–‡β–‡β–�

     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 (β–‡β–‡β–�) β–‡β–‡β–� β–‡β–‡β–‡β–‡, Attention: 
β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–�, telephone:  (β–‡β–‡β–�) β–‡β–‡β–� β–‡β–‡β–‡β–‡.

                         Very truly yours,

                         β–‡β–‡β–‡β–‡β–‡β–‡β–� β–‡β–‡β–‡β–‡β–� 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:  β–‡β–‡β–‡β–‡β–‡β–‡ β–�. β–‡β–‡β–‡β–‡β–‡β–‡
     Title:  Vice President