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Sample Business Contracts

Master Repurchase Agreement - NovaStar Financial Inc. and First Union National Bank

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                                                                [EXECUTION COPY]


                          MASTER REPURCHASE AGREEMENT

                                                     Dated as of August 21, 1998

Between:

NOVASTAR FINANCIAL, INC.,
 as Seller

and

FIRST UNION NATIONAL BANK,
 as Buyer


1. Applicability

From time to time the parties hereto may enter into transactions in which the
Seller agrees to transfer to the Buyer mortgage loans or other assets (the
"Collateral") against the transfer of funds by the Buyer, with a simultaneous
agreement by the Buyer to transfer to the Seller such Collateral at a date
certain, against the transfer of funds by the Seller. Each such transaction
shall be referred to herein as a "Transaction" and, unless otherwise agreed in
writing, shall be governed by this Agreement.

2. Definitions

As used in this Agreement, and unless the context requires a different meaning,
the following terms shall have the meanings assigned to them below:

     (a)  "1934 Act" shall mean the Securities Exchange Act of 1934.

     (b)  "Act of Insolvency" shall mean, with respect to any party, (i) the
          commencement by such party as debtor of any case or proceeding under
          any bankruptcy, insolvency, reorganization, liquidation, moratorium,
          dissolution, delinquency or similar law, or such party seeking the
          appointment or election of a receiver, conservator, trustee, custodian
          or similar official for such party or any substantial part of its
          property, or the convening of any meeting of creditors for purposes of
          commencing any such case or proceeding or seeking such an appointment
          or election, (ii) the commencement of any such case or proceeding
          against such party, or another seeking such an appointment or
          election, or the filing against a party of an application for a
          protective decree under the provisions of SIPA, which (A) is consented
          to or not timely contested by such party, (B) results in the entry of
          an order for relief, such an appointment or election, the issuance of
          such a protective decree or the entry of an order having a similar
          effect, or (C) is not dismissed within 15 days, (iii) the making by
          such party of a general assignment for the benefit of creditors, or
          (iv) the admission in writing by such party of such party's inability
          to pay such party's debts as they become due.

     (c)  "Additional Collateral" shall mean Mortgage Loans and/or cash provided
          by the Seller to the Buyer pursuant to Paragraph 5(b) hereof.

     (d)  "Additional Required Documents" shall mean the following documents
          with respect to any Mortgage Loan:

          (i)  original disclosure statements complying with Regulation Z
               ("Truth in Lending") of the Board of Governors of the Federal
               Reserve System and all agreements relating thereto, if
               applicable;

          (ii) original Equal Credit Opportunity Act notice and additional
               disclosure statements or agreements relating thereto, if
               applicable;
<PAGE>
 

          (iii)   survey of the property covered by the Mortgage Loan, including
                  a determination of whether or not such property falls into a
                  flood zone as identified by a HUD identified flood map;

          (iv)    an attorney's opinion of title and abstract of title or an
                  ALTA mortgage title insurance policy or such other policy in
                  form acceptable to FNMA or FHLMC, issued by and constituting
                  the valid and binding obligation of a title insurer generally
                  acceptable to prudent mortgage lenders that regularly
                  originate or purchase mortgage loans comparable to the
                  Purchased Loans for sale to prudent investors in the secondary
                  market that invest in mortgage loans such as the Purchased
                  Loans and qualified to do business in the jurisdiction where
                  the related property is located, insuring the Seller, its
                  successors and assigns, as to the first priority lien of the
                  related Mortgage in the case of a Mortgage Loan secured by a
                  first priority lien and the second priority lien of the
                  Mortgage Loan in the case of a Purchased Loan secured by a
                  second lien on the related property, in the original principal
                  amount of the Purchased Loan; provided that the Seller shall
                  be the sole named insured of any such mortgage title insurance
                  policy, the assignment to the Buyer or the Custodian as
                  assignee of the Buyer of the Seller's interest in such
                  mortgage title insurance policy shall not require the consent
                  of or notification to the insurer or the same has been
                  obtained, and such mortgage title insurance policy shall be in
                  full force and effect and will be in full force and effect and
                  inure to the benefit of the Buyer upon the consummation of the
                  transactions contemplated by this Agreement; and, provided
                  further, that no claims shall have been made under such
                  mortgage title insurance policy and no prior holder of the
                  related Mortgage Loan, including the Seller, shall have done,
                  by act or omission, anything that would impair the coverage of
                  such mortgage title insurance policy;

          (v)     written statement signed by the attorney, title company or
                  closing agent responsible for supervising the closing of the
                  Mortgage Loan that such Person closed the Mortgage Loan in
                  accordance with any closing instructions received by such
                  Person;

          (vi)    a property and casualty insurance policy on the property
                  securing the Mortgage Loan covering fire, hazard and extended
                  coverage, and if applicable, flood and earthquake insurance,
                  all in amounts not less than the principal amount of the
                  promissory note relating to the Mortgage Loan (or the maximum
                  amount issuable for flood insurance) which insurance has been
                  endorsed to provide for payment thereof to the Seller, as
                  mortgagee, together with written notice to the mortgagor of
                  the fact, if true, that mortgagor's property lies within a
                  flood zone;

          (vii)   original or copy of executed application by the obligor on
                  such Mortgage Loan for such Mortgage Loan;

          (viii)  original or copy of credit bureau report on the obligor on
                  such Mortgage Loan;

          (ix)    original HUD-1 settlement statement duly executed by the
                  obligor on such Mortgage Loan;

          (x)     original complete appraisal obtained with respect to the
                  applicable property obtained in connection with the Mortgage
                  Loan; and

          (xi)    such other documents as the Buyer may reasonably request from
                  time to time, including but not limited to verification of
                  employment of the obligor on such Mortgage Loan, verification
                  of deposit by such obligor (if applicable), and any inspection
                  reports performed with respect to such obligor or the property
                  covered by such Mortgage Loan.

     (e)  "Agreement" shall mean this Master Repurchase Agreement, together with
          all exhibits, schedules or amendments hereto and all Confirmations
          hereunder.

     (f)  "Aggregate Commitment" shall have the meaning assigned to such term in
          Paragraph 6.


     (g)  "Bankruptcy Code" shall mean Title 11 of the United States Code, as
          amended.
<PAGE>
 
     (h)  "Business Day" shall mean any day except Saturday, Sunday and any day
          which is a legal holiday or a day on which banking institutions are
          authorized or required by law to close in Charlotte, North Carolina.

     (i)  "Buyer" shall mean First Union National Bank, a national banking
          association, with its principal place of business in Charlotte, North
          Carolina.

     (j)  [reserved]

     (k)  "Collateral" shall have the meaning assigned to such term in Paragraph
          1.

     (l)  "Confirmation" shall mean a confirmation for a Transaction as required
          by Paragraph 4(a) hereof, substantially in the form of Exhibit A
          hereto.

     (m)  "Current Margin" shall mean, with respect to any date, the difference
          between (i) the aggregate Market Value of all Purchased Loans held by
          the Buyer on such date and (ii) the aggregate Purchase Price paid by
          the Buyer for all Purchased Loans held by the Buyer on such date.

     (n)  "Custodial Agreement" shall mean the Repurchase Facility Custodial
          Agreement, dated as of August 21, 1998, among the Buyer, the Seller
          and the Custodian.

     (o)  "Custodian" shall mean First Union National Bank, a national bank.

     (p)  "Default Rate" shall mean, for any day, the Pricing Rate for such day
          plus 4.00%.

     (q)  "Eligible Mortgage Loan" shall mean a Mortgage Loan (i) with respect
          to which each of the representations and warranties set out in Exhibit
          B hereto is accurate and complete as of the date of the related
          Confirmation (and the Seller by including any such Mortgage Loan in
          any Transaction shall be deemed to so represent and warrant to the
          Buyer at and as of the date of such Transaction) and (ii) that has
          been outstanding no more than 180 days since first purchased by the
          Buyer in a Transaction.

     (r)  "ERISA" shall mean the Employee Retirement Income Security Act of
          1974.

     (s)  "Event of Default" shall have the meaning assigned to such term in
          Paragraph 12.

     (t)  "FDIA" shall mean the Federal Deposit Insurance Act, as amended.

     (u)  "FDICIA" shall mean the Federal Deposit Insurance Corporation
          Improvement Act of 1991.

     (v)  "GAAP" shall mean generally accepted accounting principles.

     (w)  "Income" shall mean, with respect to any Mortgage Loan at any time,
          any payments of principal thereof and all payments of interest and
          dividends or other distributions thereon.

     (x)  "Indemnified Parties" shall have the meaning assigned to such term in
          Paragraph 15.

     (y)  "LIBOR" shall mean the London Interbank Offered Rate obtained on page
          3750 of Telerate as being the rate at which deposits in immediately
          available U.S. dollars having a maturity of one month are offered to
          or by reference banks in the London interbank market, as determined by
          the Buyer at the time of each Transaction.

     (z)  "Margin" shall mean, with respect to any Mortgage Loan or pool of
          Mortgage Loans, the difference between the Market Value of such loan
          or loans and the Purchase Price for such loan or loans.

     (aa) "Margin Call" shall have the meaning assigned to such term in
          Paragraph 5(b).

     (bb) "Margin Deficit" shall have the meaning assigned to such term in
          Paragraph 5(b).

     (cc) "Market Value" shall mean, with respect to each Purchased Loan, the
          market value of such Purchased Loan as determined by the Buyer in its
          sole discretion.
<PAGE>
 
     (dd) "Mortgage Loan" shall mean a residential real estate secured loan to a
          sub-prime borrower, including, without limitation: (i) a promissory
          note, any reformation thereof and related deed of trust (or mortgage)
          and security agreement; (ii) all guaranties and insurance policies,
          including, without limitation, all mortgage and title insurance
          policies and all fire and extended coverage insurance policies and
          rights of the Seller to return premiums or payments with respect
          thereto; and (iii) all right, title and interest of the Seller in the
          property covered by such deed of trust (or mortgage).

     (ee) "Original Margin" shall mean, with respect to any date, the difference
          between (i) the aggregate Market Value of all Purchased Loans held by
          the Buyer on such date, determined as of the most recent Purchase Date
          for each such Purchased Loan, and (ii) the Purchase Price paid by the
          Buyer for all such Purchased Loans on such Purchase Date(s); provided
          that the Original Margin for any Transaction shall be deemed to be no
          greater than the Original Margin set out in the related Confirmation.

     (ff) "Person" shall mean a corporation, an association, a partnership, an
          organization, a business, a trust, an individual, a government or
          political subdivision thereof, any governmental agency or any other
          entity.

     (gg) "Plan Party" shall have the meaning assigned to such term in Paragraph
          29(a).

     (hh) "Price Differential" shall mean, with respect to any Transaction as of
          any date, the difference between the Purchase Price paid by the Buyer
          and the Repurchase Price to be paid by the Seller. The Pricing
          Differential will equal the aggregate amount obtained by daily
          application of the Pricing Rate for such Transaction to the Purchase
          Price for such Transaction on a 360-day-per-year basis for the actual
          number of days during the period commencing on (and including) the
          Purchase Date for such Transaction and ending on (but excluding) the
          Repurchase Date or other date of determination.

     (ii) "Pricing Rate" shall mean the per annum rate for determination of the
          Price Differential, which rate shall be LIBOR plus [ ] basis points or
          such other rate as may be specified in a Confirmation.

     (jj) "Purchase Date" shall mean the date on which Purchased Loans are to be
          transferred by the Seller to the Buyer.

     (kk) "Purchased Loans" shall mean the Mortgage Loans transferred by the
          Seller to the Buyer in a Transaction hereunder. The term "Purchased
          Loans" with respect to any Transaction at any time also shall include
          Additional Collateral delivered pursuant to Paragraph 5(b) hereof.

     (ll) "Purchase Price" shall mean the price at which Purchased Loans are
          transferred by the Seller to the Buyer.

     (mm) "Replacement Mortgage Loans" shall have the meaning assigned to such
          term in Paragraph 13(c).

     (nn) "Repurchase Date" shall mean the date on which the Seller is required
          to repurchase the Purchased Loans from the Buyer, which shall be (i)
          the 10th day of the calendar month in which the Purchase Date occurs
          or, if such Purchase Date falls on or after the 10th day of such
          month, the 10th day of the following calendar month (or, in each case,
          if such day is not a Business Day, the next Business Day), (ii) such
          earlier date as may be set forth in a Confirmation or (iii) such
          earlier date as may be determined by application of the provisions of
          Paragraph 13 hereof.

     (oo) "Repurchase Price" shall mean the price at which Purchased Loans are
          to be transferred from the Buyer to the Seller upon termination of a
          Transaction, which will be determined in each case as the sum of the
          Purchase Price and the Price Differential as of the date of such
          determination.

     (pp) "Repurchase Term" shall mean, with respect to any Transaction, the
          period beginning on the Purchase Date and continuing through the
          Repurchase Date.

     (qq) "Required Documents" shall mean the following documents with respect
          to any Mortgage Loan:

          (i)   the original executed and fully completed promissory note
                relating to the Mortgage Loan (properly endorsed to the Seller
                if purchased by the Seller from another originator), which

<PAGE>
 
                promissory note shall be duly endorsed in blank without recourse
                by an authorized officer of the Seller;

          (ii)  the original executed and fully completed mortgage or deed of
                trust relating to the Mortgage Loan in proper form for
                recordation in the appropriate jurisdiction and duly recorded in
                the appropriate jurisdiction; provided, however, that a
                certified copy of the executed mortgage or deed of trust
                relating to the Mortgage Loan may be delivered to the Buyer in
                lieu of the original recorded deed of trust or mortgage until
                such time as the original recorded mortgage or deed of trust is
                received from the recording jurisdiction and submitted to the
                Buyer; and

          (iii) an original executed, fully completed and recordable but
                unrecorded assignment of the mortgage or deed of trust relating
                to the Mortgage Loan in proper form for recordation in the
                appropriate jurisdiction (unless the Buyer determines in its
                reasonable judgment that under applicable state law the
                assignment should be recorded in order to adequately protect its
                interest, in which case the assignment shall be recorded by the
                Seller and a certified true copy thereof shall be provided to
                the Buyer), together with the original or a duly certified copy
                of the fully completed and proper assignment or assignments of
                the mortgage or deed of trust from the original holder through
                any subsequent transferees to the Seller in proper form for
                recordation in the appropriate jurisdiction, duly recorded if
                local requirements in the jurisdiction in which the property is
                located required the recordation of such assignment or
                assignments.

     (rr) "SEC" shall mean the Securities and Exchange Commission.

     (ss) "Servicer" shall mean NovaStar Mortgage, Inc.

     (tt) "Servicing Agreement" shall mean the servicing agreement dated as of
          August 21, 1998 between the Seller and the Servicer, as modified by
          the First Amendment and Supplement to Servicing Agreement, dated as of
          August 21, 1998, between the Buyer, the Seller and the Servicer.

     (uu) "SIPA" shall mean the Securities Investor Protection Act of 1970.

     (vv) "Transaction" shall mean each transaction between the Seller and the
          Buyer that is undertaken pursuant to a Confirmation.

     (ww) "Underwriting Standards" shall mean the underwriting policies of the
          Seller set forth in Exhibit C hereto.


3.   Initiation and Termination of Transactions

     (a)  An agreement to enter into a Transaction may be made in writing at the
          initiation of the Seller and shall be evidenced by a Confirmation
          delivered pursuant to Paragraph 4(a). On the Purchase Date for the
          Transaction, the Purchased Loans shall be transferred to the Buyer or
          its agent against the transfer of the Purchase Price to an account of
          the Seller.

     (b)  The Buyer's obligation to purchase any Mortgage Loan shall be subject
          to the following:

          (i)   The Buyer (or the Custodian, if so directed by the Buyer) shall
                have possession of the Required Documents for each Mortgage Loan
                to be purchased provided that such possession may have been
                released to a prospective purchaser of a Mortgage Loan (or a
                custodian acting on its behalf) if the Buyer or the Custodian,
                as applicable, has received a bailment letter for the related
                required documents.

          (ii)  The Buyer's determination that the Mortgage Loans to be
                purchased in the requested Transaction satisfy the requirements
                of this Agreement.

          (iii) The Seller's representations and warranties contained in this
                Agreement and reaffirmed in the Confirmation shall be true and
                correct.

          (iv)  The Purchase Price for such Transaction shall be at least
                $10,000,000.



<PAGE>
 
          (v)   No Event of Default shall have occurred under this Agreement.

     (c)  On the Repurchase Date for each Transaction, termination of the
          Transaction will be effected by transfer to the Seller or its agent of
          the Purchased Loans and any Income in respect thereof received by the
          Buyer (and not previously credited or transferred to, or applied to
          the obligations of the Seller hereunder) against the transfer of the
          Repurchase Price to an account of the Buyer.


4.   Transaction Confirmation

     (a)  Upon the parties' agreement to enter into a Transaction hereunder, the
          Buyer shall prepare and deliver to the Seller, at least one Business
          Day prior to the Purchase Date for the Transaction, a Confirmation for
          such Transaction.

     (b)  The Confirmation shall list the Purchased Loans and set forth (i) the
          Purchase Date, (ii) the Purchase Price, (iii) the anticipated
          Repurchase Date, (iv) the Pricing Rate or Repurchase Price applicable
          to the Transaction, and (v) any additional terms or conditions of the
          Transaction.

     (c)  The Confirmation, together with this Agreement, shall constitute
          conclusive evidence of the terms agreed between the Buyer and the
          Seller, and shall be binding upon the parties unless written notice of
          objection is given by the objecting party prior to the closing of the
          Transaction.

     (d)  In the event of any conflict between the terms of a Confirmation and
          this Agreement, the Confirmation shall prevail.


5.   Margin Maintenance

     (a)  On Monday of each week during the Repurchase Term (or more often, if
          the Buyer in its sole discretion so decides), the Buyer will determine
          (i) the aggregate Market Value of all Purchased Loans and other
          Collateral held by the Buyer and (ii) the Current Margin for such
          date.

     (b)  If on any date during the term of this Agreement the Current Margin
          for such date is less than the Original Margin for such date (such
          shortfall, a "Margin Deficit"), the Buyer may by notice to the Seller
          (such notice, a "Margin Call") require that the Seller, at the
          Seller's option, transfer to the Buyer cash or additional Mortgage
          Loans reasonably acceptable to the Buyer (collectively, "Additional
          Collateral"), so that the Current Margin for such date will then equal
          or exceed the Original Margin for such date; provided, however, that
          the Buyer may not make a Margin Call unless the Margin Deficit exceeds
          $250,000.

     (c)  If any notice is given under subparagraph (b) of this Paragraph 5 on
          any Business Day, then the Seller shall transfer cash or Mortgage
          Loans as provided in such subparagraph no later than the close of
          business on the second Business Day following the date on which such
          notice is received. Any cash transferred to the Buyer pursuant to this
          subparagraph (c) shall be held by the Buyer for so long as any
          Transaction remains in effect and shall be applied against the
          Repurchase Price for any terminated Transaction on the applicable
          Repurchase Date.


6.   Aggregate Commitment and Term

     (a)  The aggregate Purchase Price for all Purchased Loans owned by the
          Buyer on any date shall at no time exceed $200,000,000 (the "Aggregate
          Commitment").

     (b)  This Agreement shall continue in effect for a period of 364 days from
          the date of its execution by both parties.


7.   Payments on Mortgage Loans; Servicing

The parties acknowledge that the Servicer will act as servicer for all Mortgage
Loans, will service all Mortgage Loans in accordance the Servicing Agreement and
will not sell or transfer its rights to service such loans without the Buyer's
consent. Where a particular Transaction's term extends over a payment date on a
Purchased Loan, all Income received with respect to such Purchased Loan shall,
so long as no Event of Default with respect to the Seller shall have occurred
and be continuing, be the property of the Seller, and the Seller shall be
entitled to all Income with respect to Purchased Loans subject to Transactions.
Upon the occurrence and continuance of an Event of Default,



<PAGE>
 
all Income received by the Servicer with respect to the Purchased Loans shall be
held in a segregated account established by the Servicer and shall be paid to
the Buyer within one Business Day of receipt.

8.  Repurchase Prior to Repurchase Date

Notwithstanding any provision hereof to the contrary, the Buyer may require the
Seller to repurchase at the Repurchase Price any of the Purchased Loans subject
to a Transaction as to which a breach of any representation contained in
Paragraph (f) of Exhibit B hereto has occurred upon two Business Days' prior
notice. Notwithstanding the foregoing, the Seller may elect, in lieu of
repurchasing such Purchased Loans, to substitute for such Purchased Loans one or
more Eligible Mortgage Loans having an aggregate Market Value which equals or
exceeds that of the Purchased Loans required to be repurchased under this
Section 8.

9.  Delivery of Mortgage Loans

All of the Required Documents for Mortgage Loans that are to be Purchased Loans
for a Transaction shall be delivered to the Buyer (or the Custodian, if so
directed by the Buyer) at least two Business Days prior to the Purchase Date for
such Transaction.

10.  Representations and Warranties

     (a)  Each of the Buyer and the Seller represents and warrants to the other
          that (i) it is duly authorized to execute and deliver this Agreement,
          to enter into Transactions contemplated hereunder and to perform its
          obligations hereunder and has taken all necessary action to authorize
          such execution, delivery and performance, (ii) it will engage in such
          Transactions as principal, (iii) the individual signing this Agreement
          on its behalf is duly authorized to do so on its behalf, (iv) it has
          obtained all authorizations of any governmental body required in
          connection with this Agreement and the Transactions hereunder and such
          authorizations are in full force and effect and (v) the execution,
          delivery and performance of this Agreement and the Transactions
          hereunder will not violate any law, ordinance, charter, bylaw or rule
          applicable to it or any agreement by which it is bound or by which any
          of its assets are affected.  On the Purchase Date for any Transaction
          the Buyer and the Seller shall each be deemed to repeat all the
          foregoing representations made by it.

     (b)  In addition to the foregoing, the Seller hereby represents and
          warrants that, as of the date of this Agreement and as of the Purchase
          Date for each Transaction:

          (i)   The Seller is servicing or causing to be serviced all Mortgage
                Loans in accordance with industry standards for loans held by
                third parties.

          (ii)  No Event of Default has occurred or is continuing under this
                Agreement.

          (iii) Since the date of the most recent balance sheet or financial
                statement delivered by the Seller to the Buyer pursuant to the
                Agreement, there has been no material adverse change in its
                financial condition or results of operations.

     (c)  The Seller hereby represents and warrants to the Buyer that, as to
          each Mortgage Loan, as of the applicable Purchase Date or such other
          date specified herein:

          (i)  The information set forth in the schedule of Mortgage Loans
               attached to each Confirmation is true and correct in all material
               respects.

          (ii) Such Mortgage Loan is an Eligible Mortgage Loan.

11.  Covenants

The Seller hereby covenants and agrees with the Buyer that, as long as the Buyer
has any obligation to enter into Transactions under the Agreement:

     (a)  The Seller (or the Servicer, at the option of the Seller) shall hold
          all Additional Required Documents for the Mortgage Loans that are
          Purchased Loans in trust for the benefit of the Buyer.

     (b)  The Seller shall furnish or cause to be furnished to the Buyer:

<PAGE>
 
          (i)  Within 90 days after the last day of each fiscal year of the
               Seller, consolidated statements of income (and, in the case of
               the consolidated statement, cash flows) for the Seller for such
               year and consolidated and consolidating balance sheets for the
               Seller as of the end of such year (with the foregoing
               consolidating statements to separately display the income and
               balance sheet of each of the Seller and its consolidated
               subsidiaries in a format reasonably acceptable to the Buyer),
               presented fairly in all material respects in accordance with GAAP
               and accompanied by an unqualified report of a firm of independent
               certified public accountants of nationally recognized standing
               and including therewith a copy of any management letter from such
               certified public accountants; and

          (ii) Within 45 days after the last day of each fiscal quarter, (A)
               unaudited consolidated statements of income (and, in the case of
               the consolidated statement, cash flows) for the Seller for such
               quarter, and unaudited consolidated and consolidating balance
               sheets for the Seller as of the end of such quarter (with the
               foregoing consolidating statements to separately display the
               income and balance sheet of each of the Seller and its
               consolidated subsidiaries in a format reasonably acceptable to
               the Buyer), and (B) a certificate of an officer of the Seller,
               whose position is vice president or higher, stating that such
               financial statements are presented fairly in all material
               respects and in accordance with GAAP, subject to year-end audit
               adjustments, and further certifying that neither the Seller nor
               any affiliate thereof is in default under the terms and
               conditions of any agreement evidencing or securing any
               indebtedness of such entity.

     (c)  The Seller shall promptly furnish such additional financial and other
          information, including, without limitation, financial statements of
          the Seller, and information regarding the Purchased Loans, as the
          Buyer may from time to time reasonably request.

     (d)  The Seller shall pay or otherwise satisfy at or before maturity or
          before it becomes delinquent or accelerated, as the case may be, all
          its indebtedness (including taxes), except indebtedness being
          contested in good faith by appropriate proceedings and for which
          provision is made to the reasonable satisfaction of the Buyer for the
          payment thereof in the event the Seller is found to be obligated to
          pay such indebtedness and which indebtedness is thereupon promptly
          paid by the Seller.

     (e)  The Seller shall maintain its corporate existence and obtain and
          maintain all rights, privileges, licenses, approvals, franchises,
          properties and assets necessary or desirable in the normal conduct of
          its business, including but not limited to all approvals with respect
          to the SEC or the Securities Commission of the State of Maryland and
          comply with all contractual obligations and requirements of law
          (including, without limitation, any requirements of law under or in
          connection with ERISA, the federal Consumer Credit Protection Act, the
          federal Real Estate Settlement Procedures Act, the federal Equal
          Credit Opportunity Act, the federal Truth-in-Lending Act, and any
          regulations promulgated thereunder), except where the failure to so
          comply is not likely to have a material adverse effect on the
          business, operations, assets or financial or other condition of the
          Seller or on the Purchased Loans.

     (f)  The Seller shall keep proper books of record and account in which
          full, true and correct entries in conformity with GAAP and all
          requirements of law shall be made of all dealings and transactions in
          relation to its business and activities.

     (g)  The Seller shall permit representatives of the Buyer to (A) visit and
          inspect any of its properties and examine and make abstracts from any
          of its books and records (including without limitation books and
          records relating to the Purchased Loans) at any reasonable time and as
          often as may reasonably be desired by the Buyer (but, prior to the
          occurrence of an Event of Default, only upon not less than two
          Business Days' prior notice), and (B) discuss the business,
          operations, properties and financial and other condition of the Seller
          with officers and employees of the Seller, and with its independent
          certified public accountants; provided, however, that the results of
          any such visit, inspection, examination, discussion or audit, to the
          extent such results are proprietary and non-public, shall be
          maintained by the Buyer in confidentiality except as required by law
          or regulation or by any governmental agency or regulatory body having
          authority over the Buyer, or to the extent such information may be
          communicated to the legal counsel or auditors of the Buyer.

     (h)  The Seller shall promptly give written notice to the Buyer of:
<PAGE>
 
          (i)   the occurrence of any potential default or Event of Default
                hereunder known to responsible management personnel of the
                Seller and the proposed method of cure thereof;

          (ii)  any litigation or proceeding affecting the Seller or the
                Purchased Loans which could have a material adverse effect on
                the Purchased Loans, or the business, operations, property, 
                or financial or other condition of the Seller;

          (iii) a material adverse change known to responsible management
                personnel of the Seller in the business, operations, property or
                financial or other condition of the Seller;

          (iv)  any changes in the following senior management positions of the
                Seller: President, Chief Executive Officer, Chief Operating
                Officer, Chief Financial Officer or any Executive Vice
                President;

          (v)   any default by the Seller or any of the Seller's affiliates
                under the terms and conditions of any agreement evidencing or
                securing any indebtedness of such entity; and

          (vi)  any breach of a representation or warranty set out in Exhibit B
                hereto.

     (i)  The Seller shall pay (i) all legal expenses of the Buyer incident to
          the preparation and negotiation of this Agreement and related
          documents, up to a maximum of $7,500 and (ii) all reasonable out-of-
          pocket costs and expenses (including fees and disbursements of legal
          counsel) of the Buyer incident to the preparation and negotiation of
          documents relating to Transactions, and incident to the enforcement of
          the Seller's obligations hereunder or under any Confirmation, whether
          by judicial proceedings or otherwise, including, without limitation,
          in connection with bankruptcy, insolvency, liquidations,
          reorganization, moratorium or other similar proceedings involving the
          Seller. The obligations of the Seller under this Paragraph 11(j) shall
          be effective and enforceable whether or not any Transaction is
          outstanding hereunder and shall survive the termination of this
          Agreement.

     (j)  The Seller shall originate and acquire Mortgage Loans only in
          accordance with the Seller's current Underwriting Standards; provided
          that the Seller may permit reasonable exceptions to the Underwriting
          Standards with compensating factors on a case-by-case basis.

     (k)  The Seller shall not, directly or indirectly, create, incur, assume or
          suffer to exist, any lien or other encumbrance upon the Collateral.

     (l)  The Seller shall not, without 10 days' prior written notice to the
          Buyer, alter its current Underwriting Standards in any material manner
          from those disclosed to the Buyer and attached to the Agreement as
          Exhibit C.

     (m)  The Seller shall comply fully with the terms of the Custodial
          Agreement.


12.  Events of Default

The following shall constitute Events of Default hereunder (each, an "Event of
Default"):

     (a)  the Seller's failure to transfer or the Buyer's failure to purchase
          Purchased Loans upon the applicable Purchase Date;

     (b)  the Seller's failure to repurchase or the Buyer's failure to transfer
          Purchased Loans upon the applicable Repurchase Date;

     (c)  the Seller's or the Buyer's failure to comply with Paragraph 5 hereof;

     (d)  an Act of Insolvency occurs with respect to the Seller or the Buyer;

     (e)  any representation or warranty made by the Seller (other than the
          representations and warranties of the Seller set out in Paragraph
          10(c)) or the Buyer in this Agreement shall have been incorrect or
          untrue in any material respect when made or repeated or deemed to have
          been made or repeated;


<PAGE>
 
     (f)  the Seller or the Buyer shall admit to the other its inability to, or
          its intention not to, perform any of its obligations hereunder;

     (g)  if, for any reason, any Transaction is not deemed to be a purchase and
          sale, the Agreement shall for any reason cease to create a valid,
          first priority security interest in any of the Purchased Loans
          purported to be covered thereby;

     (h)  the Seller or the Buyer shall breach any covenant, requirement or
          obligation contained in this Agreement (other than a covenant made
          with respect to a specific Purchased Loan);

     (i)  a default or event of default shall occur under any credit agreement
          or other material agreement for which the Seller is the primary
          obligor, which default or event of default would have a material
          adverse effect on the business or finances of the Seller (as
          reasonably determined by the Buyer);

     (j)  the Seller shall fail to repurchase any Purchased Loans at the
          Repurchase Price when required by Paragraph 8 of this Agreement;

     (k)  the Buyer or the Seller shall have reasonably determined that the
          other party is or will be unable to meet its commitments under this
          Agreement, shall have notified such other party of such determination
          and such other party shall not have responded with appropriate
          information to the contrary to the reasonable satisfaction of the
          notifying party within one Business Day;

     (l)  in the reasonable judgment of the Buyer a material adverse change
          shall have occurred in the business, operations, properties, prospects
          or financial condition of the Seller; or

     (m)  the Seller shall merge or consolidate into any entity, unless the
          surviving or resulting entity shall be acceptable to the Buyer, in its
          reasonable discretion, and such entity expressly assumes by written
          agreement, executed and delivered to the Buyer in form and substance
          reasonably satisfactory to the Buyer, the performance of all the
          Seller's duties and obligations hereunder.


13.  Remedies upon Event of Default

Upon the occurrence of any Event of Default:

     (a)  The nondefaulting party may, at its option (which option shall be
          deemed to have been exercised immediately upon the occurrence of an
          Act of Insolvency), declare an Event of Default to have occurred
          hereunder and, upon the exercise or deemed exercise of such option,
          the Repurchase Date for each Transaction hereunder, shall, if it has
          not already occurred, be deemed immediately to occur (except that, in
          the event that the Purchase Date for any Transaction has not yet
          occurred as of the date of such exercise or deemed exercise, such
          Transaction shall be deemed immediately canceled). The nondefaulting
          party shall (except upon the occurrence of an Act of Insolvency) give
          notice to the defaulting party of the exercise of such option as
          promptly as practicable.

     (b)  Upon the occurrence of an Event of Default by the Seller, if the Buyer
          exercises or is deemed to have exercised the option referred to in
          subparagraph (a) of this Paragraph, (i) the Seller's obligation to
          repurchase all Purchased Loans, at the Repurchase Price therefor on
          the Repurchase Date determined in accordance with subparagraph (a) of
          this Paragraph, shall thereupon become immediately due and payable;
          (ii) all Income paid after such exercise or deemed exercise shall be
          retained by the Buyer and applied to the aggregate unpaid Repurchase
          Price and any other amounts owing by the Seller hereunder; (iii) the
          Seller shall immediately deliver to the Buyer any Purchased Loans that
          are subject to a Transaction which are then in the Seller's possession
          or control; (iv) the Buyer may, without notice to the Seller, (A)
          immediately sell, in a recognized market (or otherwise in a
          commercially reasonable manner) at such price or prices as the Buyer
          may reasonably deem satisfactory, any or all Purchased Loans subject
          to such Transactions and apply the proceeds thereof to the aggregate
          unpaid Repurchase Prices and any other amounts owing by the Seller
          hereunder or (B) in its sole discretion elect, in lieu of selling all
          or a portion of such Purchased Loans, to give the Seller credit for
          such Purchased Loans in an amount equal to the price therefor on such
          date, obtained from a generally recognized source, against the
          aggregate unpaid Repurchase Prices and any other amounts owing by the
          Seller hereunder; and (v) the


<PAGE>
 
          Buyer may refuse to enter into any further Transactions with the
          Seller under this Agreement and may determine that the Agreement is
          terminated.

     (c)  Upon the occurrence of an Event of Default by the Buyer and tender by
          the Seller of payment of the aggregate Repurchase Price for any
          Transaction, (i) all right, title and interest in and entitlement to
          all Purchased Loans subject to such Transaction shall be deemed
          transferred to the Seller; (ii) the Buyer shall deliver all such
          Purchased Loans to the Seller; (iii) the Seller may, without notice to
          the Buyer, (A) immediately purchase, in a commercially reasonable
          manner, at such price or prices as the Seller may reasonably deem
          satisfactory, Mortgage Loans ("Replacement Mortgage Loans") of the
          same class and amount as any Purchased Loans that are not delivered by
          the Buyer to the Seller as required hereunder or (B) in its sole
          discretion elect, in lieu of purchasing Replacement Mortgage Loans, to
          be deemed to have purchased Replacement Mortgage Loans at the price
          therefor on such date, obtained from a generally recognized source;
          and (iv) the Buyer shall be liable to the Seller for any excess of the
          price paid (or deemed paid) by the Seller for Replacement Mortgage
          Loans over the Repurchase Price for the Purchased Loans replaced
          thereby.

     (d)  The parties acknowledge and agree that (i) in the absence of a
          generally recognized source for prices or bid or offer quotations for
          any Mortgage Loan, the nondefaulting party may establish the source
          therefor in its sole discretion; and (ii) all prices, bids and offers
          shall be determined together with accrued Income (except to the extent
          contrary to market practice with respect to the relevant Mortgage
          Loans).

     (e)  For purposes of this Paragraph 13, the Repurchase Price for each
          Transaction hereunder with respect to which the Buyer is in default
          shall not increase above the amount of such Repurchase Price for such
          Transaction determined as of the date of the exercise or deemed
          exercise by the nondefaulting party of the option referred to in
          subparagraph (a) of this Paragraph.

     (f)  The defaulting party shall be liable to the nondefaulting party for
          (i) the amount of all reasonable legal or other expenses incurred by
          the nondefaulting party in connection with or as a result of an Event
          of Default, (ii) damages in an amount equal to the cost (including all
          reasonable fees, expenses and commissions) of entering into
          replacement transactions and entering into or terminating hedge
          transactions in connection with or as a result of an Event of Default,
          and (iii) any other loss, damage, cost or expense directly arising or
          resulting from the occurrence of an Event of Default in respect of a
          Transaction.

     (g)  To the extent permitted by applicable law, the defaulting party shall
          be liable to the nondefaulting party for interest at the Default Rate
          on any amounts owing by the defaulting party hereunder from the date
          the defaulting party becomes liable for such amounts hereunder until
          such amounts are (i) paid in full by the defaulting party or (ii)
          satisfied in full by the exercise of the nondefaulting party's rights
          hereunder.

     (h)  The nondefaulting party shall have, in addition to its rights
          hereunder, any rights otherwise available to it under any other
          agreement or applicable law.

     (i)  Upon default by the Seller, all rights of the Seller to receive
          payments on the Mortgage Loans which it would otherwise be authorized
          to receive hereunder shall cease, and all rights to such payments
          shall become vested in the Buyer, which shall have the sole right to
          receive such payments and apply them to the amounts owed by the Seller
          pursuant to this Agreement. All payments that are received by the
          Seller contrary to the provisions of this clause (i) shall be received
          in trust for the benefit of the Buyer, shall be segregated from other
          funds of the Seller and shall be promptly paid to the Buyer.

     (j)  In addition to the other remedies available to the Buyer upon the
          occurrence and during the continuance of an Event of Default by the
          Seller, the Buyer shall be entitled to the right of set-off with
          respect to any amounts then owed by the Seller to the Buyer under any
          contract, margin account or other arrangement. The Seller hereby
          waives any right it may have to require that any deposits held by the
          Buyer for the Seller be set off by the Buyer against the Seller's
          obligations under the Agreement.


<PAGE>
 
14.  Application of Proceeds

The proceeds of any sale of or other realization on any or all of the Collateral
at the time held by the Buyer under the Agreement shall be applied by the Buyer
in the following order of priority:

     (a)  First, to the payment of all reasonable costs and expenses of such
          sale incurred by the Buyer and its affiliates and all reasonable
          expenses (including the fees and expenses of counsel), liabilities and
          advances reasonably made or incurred by the Buyer and its affiliates
          in connection therewith.

     (b)  Second, to the payment of the outstanding Repurchase Price owed by the
          Seller under this Agreement.

     (c)  Third, to the payment of all other amounts owed by the Seller under
          this Agreement.

     (d)  Fourth, to the payment of any other amounts owed by the Seller to the
          Buyer or any affiliate thereof under any other instrument or
          agreement.

     (e)  Fifth, to the payment to the Seller, or to such other Person as court
          of competent jurisdiction may direct, of any surplus then remaining
          from such proceeds and other cash.

As used in the Agreement, "proceeds" of the Collateral shall mean cash and other
property received or otherwise realized in respect of the Purchased Loans.


15.  Indemnification

If the Buyer becomes involved in any capacity in any action, proceeding or
investigation in connection with any matter contemplated by this Agreement, the
primary focus of which action, proceeding or investigation concerns the Seller,
the Seller will reimburse the Buyer for its legal and other expenses (including
the cost of any investigation and preparation) as they are incurred by the
Buyer. The Seller also agrees to indemnify and hold harmless the Buyer and its
affiliates and their respective directors, officers, employees and agents
(collectively, the "Indemnified Parties"), from and against any and all losses,
claims, damages and liabilities, joint or several, related to or arising out of
any matters contemplated by this Agreement. Notwithstanding the foregoing, the
Seller shall have no obligation to reimburse or indemnify the Buyer hereunder if
it shall be finally judicially determined that such expenses, losses, claims,
damages or liabilities resulted primarily from the gross negligence or willful
misconduct of the Buyer.

If the foregoing indemnification is for any reason unavailable to any of the
Indemnified Parties, then the Seller shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative benefits
received by the Seller, on the one hand, and such Indemnified Parties, on the
other, arising out of the matters contemplated by this Agreement.

The reimbursement, indemnity and contribution provided for herein shall be in
addition to any other liability that the Seller may otherwise have under this
Agreement, at law or in equity, and shall survive the termination or expiration
of this Agreement.


16.  Payment and Transfer

Unless otherwise mutually agreed, all transfers of funds hereunder shall be in
immediately available funds. All Mortgage Loans transferred by one party hereto
to the other party (a) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (b) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (c) shall be transferred by any other method mutually acceptable to the
Seller and the Buyer.


17.  Limited Power of Attorney

The Seller hereby appoints the Buyer to act (but only after the occurrence and
during the continuation of an Event of Default) as the attorney-in-fact of the
Seller for the purpose of carrying out the provisions of this Agreement and
taking any action and executing any instruments that the Buyer shall deem
necessary or advisable to accomplish the purposes hereof. This appointment as
attorney-in-fact is irrevocable and is coupled with an interest. Without
limiting the generality of the foregoing, the Buyer and its assigns shall have
the right and power pursuant to this appointment to sell Purchased Loans and to
receive, endorse and collect all checks made payable to the order of the Seller
on account of the principal or interest on any of the Purchased Loans and to
give full discharge of the same.


<PAGE>
 
18.  Effect of Termination

The termination of this Agreement by either party shall not eliminate any
liability for losses incurred by either party during the duration of this
Agreement.  To the extent that this Agreement is terminated, the terms of this
Agreement shall continue to apply to any Transactions outstanding after the
termination of this Agreement.  The provisions of Paragraph 15 relating to
Indemnification shall survive the termination of this Agreement.

19.  Time

All references to time contained in the Agreement shall be deemed to be local
time in Charlotte, North Carolina on the applicable day.

20.  Fees and Expenses

Nothing in this Agreement shall act as a bar to the collection of any fees or
expenses of the Buyer that the Seller may agree to pay in any separate agreement
relating to any or all of the Transactions.

21.  Payment of Secured Creditors

The Seller may direct the Buyer to pay all or any portion of the Purchase Price
for a Transaction to one or more creditors of the Seller, or any of its
affiliates, if such payment is necessary to release a lien on the Mortgage Loans
that are to be purchased in such Transaction.  Such payment and release of an
existing lien may occur simultaneously with the purchase of Mortgage Loans under
this Agreement.

22.  Opinions of Counsel

The Seller shall, on the date of the first Transaction hereunder and, upon the
request of the Buyer, on the date of any subsequent Transaction, cause to be
delivered to the Buyer, with reliance thereon permitted as to any Person or
entity that purchases the Purchased Loans from the Buyer, a favorable opinion of
the Seller's counsel with respect to the matters set forth in Exhibit D hereto,
in form and substance reasonably acceptable to the Buyer.

23.  Single Agreement

The Buyer and the Seller acknowledge that, and have entered into this Master
Repurchase Agreement and will enter into each Transaction hereunder in
consideration of and in reliance upon the fact that, all Transactions hereunder
constitute a single business and contractual relationship and have been made in
consideration of each other.  Accordingly, each of the Buyer and the Seller
agrees (a) to perform all of its obligations in respect of each Transaction
hereunder, and that a default in the performance of any such obligations shall
constitute a default by it in respect of all Transactions hereunder, (b) that
each of them shall be entitled to set off claims and apply property held by them
in respect of any Transaction against obligations owing to them in respect of
any other Transactions hereunder and (c) that payments, deliveries and other
transfers made by either of them in respect of any Transaction shall be deemed
to have been made in consideration of payments, deliveries and other transfers
in respect of any other Transactions hereunder, and the obligations to make any
such payments, deliveries and other transfers may be applied against each other
and netted.

24.  Notices and Other Communications

Any and all notices, statements, demands or other communications hereunder may
be given by a party to the other by mail, facsimile, telegraph, messenger or
otherwise to the address listed below, or such other address as may be specified
in a notice of change of address hereafter received by the other:

SELLER:        NovaStar Financial, Inc.
               1901 West 47th Place, Suite 105
               Westwood, Kansas  66205
               Attention:  Rodney E. Schwatken
               Telephone:  (913) 362-1090
               Facsimile:  (913) 362-1011
<PAGE>
 
BUYER:         First Union National Bank
               301 South College Street, DC-06
               Charlotte, North Carolina   28288-0166
               Attention:  Mark Mendenhall, Vice President
               Telephone:  (704) 383-9518
               Facsimile:  (704) 383-8121

All notices, demands and requests hereunder may be made orally, to be confirmed
promptly in writing, or by other communication as specified in the preceding
sentence.

25.  Entire Agreement; Severability

This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions.  Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.

26.  Non-assignability; Termination

     (a)  The rights and obligations of the parties under this Agreement and
          under any Transaction shall not be assigned by either party without
          the prior written consent of the other party, and any such assignment
          without the prior written consent of the other party shall be null and
          void.  Subject to the foregoing, this Agreement and any Transactions
          shall be binding upon and shall inure to the benefit of the parties
          and their respective successors and assigns.  This Agreement may be
          terminated by either party upon giving written notice to the other,
          except that this Agreement shall, notwithstanding such notice, remain
          applicable to any Transactions then outstanding.

     (b)  Subparagraph (a) of this Paragraph 26 shall not preclude a party from
          assigning, charging or otherwise dealing with all or any part of its
          interest in any sum payable to it under Paragraph 13 hereof.

27.  Governing Law

THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

28.  No Waivers, Etc.

No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder.  No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless in writing and duly executed by both of the parties hereto.  Without
limitation on any of the foregoing, the failure to give a notice pursuant to
Paragraph 5(b) hereof will not constitute a waiver of any right to do so at a
later date.

29.  Use of Employee Plan Assets

     (a)  If assets of an employee benefit plan subject to any provision of
          ERISA are intended to be used by either party hereto (the "Plan
          Party") in a Transaction, the Plan Party shall so notify the other
          party prior to the Transaction.  The Plan Party shall represent in
          writing to the other party that the Transaction does not constitute a
          prohibited transaction under ERISA or is otherwise exempt therefrom,
          and the other party may proceed in reliance thereon but shall not be
          required so to proceed.

     (b)  Subject to the last sentence of subparagraph (a) of this Paragraph,
          any such Transaction shall proceed only if the Seller furnishes or has
          furnished to the Buyer its most recent available audited statement of
          its financial condition and its most recent subsequent unaudited
          statement of its financial condition.
<PAGE>
 
     (c)  By entering into a Transaction pursuant to this Paragraph, the Seller
          shall be deemed to (i) represent to the Buyer that since the date of
          the Seller's latest such financial statements, there has been no
          material adverse change in the Seller's financial condition which the
          Seller has not disclosed to the Buyer, and (ii) agree to provide the
          Buyer with future audited and unaudited statements of its financial
          condition as they are issued, so long as it is a Seller in any
          outstanding Transaction involving a Plan Party.

30.  Intent

     (a)  The parties recognize that each Transaction is a "repurchase
          agreement" as that term is defined in Section 101 of Title 11 of the
          Bankruptcy Code, and a "securities contract" as that term is defined
          in Section 741 of the Bankruptcy Code. The parties further intend and
          recognize that the Mortgage Loans constitute "securities" as such term
          is defined in Section 101(49) of the Bankruptcy Code.

     (b)  It is understood that either party's right to liquidate Mortgage Loans
          delivered to it in connection with Transactions hereunder or to
          exercise any other remedies pursuant to Paragraph 13 hereof is a
          contractual right to liquidate such Transaction as described in
          Sections 555 and 559 of the Bankruptcy Code.

     (c)  Although the parties intend that all Transactions hereunder be sales
          and purchases and not loans, in the event any such Transactions are
          deemed to be loans, the Seller shall be deemed to have pledged to the
          Buyer as security for the performance by the Seller of its obligations
          under each such Transaction, and shall be deemed to have granted to
          the Buyer a security interest in, all of the Purchased Loans with
          respect to all Transactions hereunder and all Income thereon and other
          proceeds thereof.

     (d)  The parties agree and acknowledge that if a party hereto is an
          "insured depository institution," as such term is defined in FDIA,
          then each Transaction hereunder is a "qualified financial contract,"
          as that term is defined in FDIA and any rules, orders or policy
          statements thereunder (except insofar as the type of assets subject to
          such Transaction would render such definition inapplicable).

     (e)  It is understood that this Agreement constitutes a "netting contract"
          as defined in and subject to Title IV of FDICIA and each payment
          entitlement and payment obligation under any Transaction hereunder
          shall constitute a "covered contractual payment entitlement" or
          "covered contractual payment obligation", respectively, as defined in
          and subject to FDICIA (except insofar as one or both of the parties is
          not a "financial institution" as that term is defined in FDICIA).

31.  Disclosure Relating to Certain Federal Protections

The parties acknowledge that they have been advised that:

     (a)  in the case of Transactions in which one of the parties is a broker or
          dealer registered with the SEC under Section 15 of the 1934 Act, the
          Securities Investor Protection Corporation has taken the position that
          the provisions of SIPA do not protect the other party with respect to
          any Transaction hereunder;

     (b)  in the case of Transactions in which one of the parties is a
          government securities broker or a government securities dealer
          registered with the SEC under Section 15C of the 1934 Act, SIPA will
          not provide protection to the other party with respect to any
          Transaction hereunder; and

     (c)  in the case of Transactions in which one of the parties is a financial
          institution, funds held by the financial institution pursuant to a
          Transaction hereunder are not on deposit and therefore are not insured
          by the Federal Deposit Insurance Corporation or the National Credit
          Union Share Insurance Fund, as applicable.
<PAGE>
 
     IN WITNESS WHEREOF, the Seller and the Buyer have caused this Master
Repurchase Agreement to be executed by their authorized representatives as of
this ___ day of ________, 1998.


                                       NOVASTAR FINANCIAL, INC.,
                                        as Seller



                                       By:
                                          ----------------------------
                                       Name:
                                            --------------------------
                                       Title:
                                             -------------------------


                                       FIRST UNION NATIONAL BANK,
                                        as Buyer



                                       By:
                                          ----------------------------
                                       Name:
                                            --------------------------
                                       Title:
                                             -------------------------
<PAGE>
 
                                   EXHIBIT A

                              FORM OF CONFIRMATION

                                     [Date]


NovaStar Financial, Inc.
1901 West 47th Place, Suite 105
Westwood, Kansas  66205
Attention:  Rodney E. Schwatken

Ladies and Gentlemen:

     Pursuant to the master repurchase agreement (the "Master Repurchase
Agreement"), dated as of August 21, 1998 between the undersigned (the "Buyer")
and you (the "Seller"), the Buyer hereby agrees to purchase the Mortgage Loans
identified on Schedule I attached hereto, subject to the terms set forth below:

     Purchase Date:        ________________

     Repurchase Date:      ________________

     Purchase Price:       ________________

     Pricing Rate:         ________________

     Margin:               [___]%

     Original Margin:      2%

     All of the representations and warranties made in the Master Repurchase
Agreement must be true and correct as of the Purchase Date and no Event of
Default shall have occurred.  Capitalized terms not defined herein shall have
the meanings assigned to them in the Master Repurchase Agreement.

     If you are in agreement with these terms, please execute the
acknowledgement and acceptance set forth below and return one copy of this
Confirmation to the Buyer.

                                     Very truly yours,

                                     FIRST UNION NATIONAL BANK,          
                                      as Buyer                        
                                                                      
                                                                      
                                     By:______________________________
                                     Name:____________________________
                                     Title:___________________________ 



Accepted and Agreed as of
this ____ day of __________, ____.

NOVASTAR FINANCIAL, INC.,
 as Seller

By:______________________________
Name:____________________________
Title:___________________________

<PAGE>
 
                           SCHEDULE I TO CONFIRMATION

                             MORTGAGE LOAN SCHEDULE
<PAGE>
 
                                   EXHIBIT B

                        REPRESENTATIONS AND WARRANTIES
                      RELATING TO ELIGIBLE MORTGAGE LOANS

     (a)  The Mortgage Loan is a binding and valid obligation of the obligor
thereon, in full force and effect and enforceable in accordance with its terms
except as the same may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally.

     (b)  The Mortgage Loan is genuine in all respects as appearing on its face
and as represented in the books and records of the Seller and all information
set forth therein is true and correct in all material respects.

     (c)  The Mortgage Loan is free of any default of any party thereto
(including the Seller), other than as expressly permitted pursuant to
subparagraph (d) below, counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, whether by operation of law or otherwise.

     (d)  No payment under the Mortgage Loan is more than 59 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage); provided that no more than five percent of the Mortgage Loans
purchased by the Buyer in any Transaction may be more than 30 days past due the
payment due date set forth in the underlying promissory note and deed of trust
(or mortgage).

     (e)  The Mortgage Loan contains the entire agreement of the parties thereto
with respect to the subject matter thereof, has not been modified or amended in
any respect and is free of concessions or understandings with the obligor
thereon of any kind not expressed in writing therein.

     (f)  The Mortgage Loan complies in all respects and was originated in
accordance with all applicable laws and regulations governing the same,
including, without limitation, the federal Consumer Credit Protection Act, the
federal Real Estate Settlement Procedures Act, the federal Equal Credit
Opportunity Act, the federal Truth-in-Lending Act, and the regulations
promulgated thereunder and all applicable usury laws and restrictions, and all
notices, disclosures and other statements or information required by law or
regulation to be given, and any other act required by law or regulation to be
performed, in connection with the Mortgage Loan have been given and performed as
required.

     (g)  All proceeds of the Mortgage Loan have been fully disbursed.

     (h)  At all times the Mortgage Loan will be free and clear of all liens.

     (i)  The property covered by the Mortgage Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of the Mortgage Loan with the Seller
named as a loss payee thereon.

     (j)  The property covered by the Mortgage Loan is free and clear of all
liens except:

          (i)  the lien in favor of the Seller;

          (ii) the lien of current real property taxes and assessments not yet
     due and payable;

          (iii) covenants, conditions and restrictions, rights of way, easements
     and other matters of the public record, as of the date of recording, as are
     acceptable to mortgage lending institutions generally and specifically
     referred to in a lender's title insurance policy delivered to the
     originator of the Mortgage Loan and which (A) are referred to or otherwise
     considered in the appraisal made for the originator of the Mortgage Loan or
     (B) do not materially adversely affect the appraised value of the property
     as set forth in such appraisal;

          (iv) other matters to which like properties are commonly subject and
     which do not materially interfere with the benefits of the security
     intended to be provided by the Mortgage Loan or the use, enjoyment, value
     or marketability of the related property;

          (v) liens subordinate in priority to the lien in favor of the Seller;
     and

          (vi) in the case of second priority Mortgage Loans, one lien superior
     in priority to the lien in favor of the Seller.

     (k)  The property shall be improved, and such improvements shall consist of
a completed one- to four-unit single family residence, including, but not
limited to, a condominium, planned unit development or townhouse, but excluding
in any event a co-op or mobile home.

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     (l)  The Mortgage Loan is not subject to any servicing arrangement with any
Person other than the Servicer, nor are any servicing rights relating to the
Mortgage Loan subject to any lien, claim, interest or negative pledge in favor
of any Person other than as permitted hereunder.

     (m)  The Seller obtained an appraisal in connection with the origination of
the Mortgage Loan as would satisfy all appraisal requirements for the Mortgage
Loan if such had been originated by a federally-insured depositary institution
or in a form otherwise approved by the Buyer.

     (n)  The Mortgage Loan is secured by a first or second priority mortgage or
deed of trust on the property covered thereby.

     (o)  The Mortgage Loan is not a revolving credit facility.

     (p)  No real property taxes or insurance payments due and payable with
respect to the property (or escrow installments therefor) covered by the
Mortgage Loan are past due the payment due date thereof.

     (q)  The Mortgage Loan complies with the Underwriting Standards provided
that the Seller may permit reasonable exceptions to the Underwriting Standards
with compensating factors on a case-by-case basis.

     (r)  The Mortgage Loan shall have a cumulative Loan-to-Value Ratio of not
more than 100%.

<PAGE>
 
                                   EXHIBIT C

                        SELLER'S UNDERWRITING STANDARDS

<PAGE>
 
                                   EXHIBIT D

                          FORM OF OPINION OF COUNSEL