UNITED MORTGAGE TRUST, POS AM, 1999-04-08

UNITED MORTGAGE TRUST
POS AM, 1999-04-08
REAL ESTATE INVESTMENT TRUSTS

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As filed with the Securities and Exchange Commission
on April 8, 1999

Registration No. 333-10109

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

POST EFFECTIVE AMENDMENT No. 1
Form S-11
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

UNITED MORTGAGE TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)

1701 N. Greenville, Suite 403
Richardson, Texas 75081
(972) 705-9805

(address and telephone number of Registrant's Principal Executive
offices)

Christine A. "Cricket" Griffin
United Mortgage Trust
1701 N. Greenville, Suite 403
Richardson, Texas 75081

(Name and Address of Agent for Service)

Copy to:

Robert A. Hudson, Esq.
Berry, Moorman, P.C.
600 Woodbridge Place
Detroit, Michigan 48226
(313) 567-1000

Approximate date of commencement of proposed sale to the public:
At any time and from time to time after the effective date of this
Registration Statement.

If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check box: ?

If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. /___/

If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /___/

If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. /___/

<PAGE>
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a), may
determine.

<PAGE>
<TABLE>
<CAPTION>
Cross Reference Sheet Showing Location in prospectus
or Registration Statement of Information
Required by Item 501(b) of Regulation S-K

Form S-11 Caption in prospectus
Item Number and Caption Or Page Reference
<S> <C>
1. Forepart of the Registration Forepart of Registration
Statement and Outside Front Statement and Outside Front
Cover Page of prospectus Cover Page of prospectus

2. Inside Front and Outside Back Inside Front Cover of prospectus;
Cover Pages of prospectus Outside Back Cover Page

3. Summary Information, Risk Cover Page of prospectus;
Factors and Ratio of Earnings Summary of Offering; Risk Factors
to Fixed Changes

4. Determination of Offering Price *

5. Dilution *

6. Selling Security Holders *

7. Plan of Distribution Plan of Distribution

8. Use of Proceeds Estimated Use of Proceeds;
Investment Objectives and Policies

9. Selected Financial Data Selected Financial Data

10. Management's Discussion and Management's Discussion and
Analysis of Financial Condition Analysis of Financial Conditions
and Results of Operations and Results Operations

11. General Information as to Cover Page of prospectus; Summary
Registrant of the Offering; Management;
Summary of Declaration of Trust

12. Policy with Respect to Certain Investment Objectives and Policies;
Activities Summary of Declaration of Trust

13. Investment Policies of Registrant Investment Objectives and Policies;
Summary of Declaration of Trust

14. Description of Real Estate *

15. Operating Data *
<FN>
_____________________
* Not Applicable
</FN>

<PAGE>
<CAPTION>
Form S-11 Caption in prospectus
Items Number and Caption Or Page Reference
<S> <C>
16. Tax Treatment of Registrant Risk Factors; Federal Income
and its Security Holders Tax Considerations
ERISA Considerations

17. Market Price of and Dividends Dividend Policy and Distributions
on the Registrant's Common
Equity and Related Stockholder
Matters

18. Description of Registrant's Plan of Distribution; Summary of
Securities Declaration of Trust

19. Legal Proceedings *

20. Security Ownership of Certain Management; Conflicts of Interest
Beneficial Owners and Management Financial Information and Balance
Sheet

21. Directors and Executive Officers The Company; Management

22. Executive Compensation The Company; Management
Compensation

23. Certain Relationships and Related Risk Factors; Management;
Transactions Conflicts of Interest

24. Selection, Management and Risk Factors; Investment Objectives
Custody of Registrant's Investments and Policies; Management

25. Policies with Respect to Certain Risk Factors; Investment Objectives
Transactions and Policies; Management; Summary
of Declaration of Trust

26. Limitations of Liability Fiduciary Responsibilities of
Trustees; Risk Factors; Summary of
Declaration of Trust

27. Financial Statements and Financial Information and
Information Financial Statements

28. Interests of Named Experts and *
Counsel

29. Disclosure of Commission Position Fiduciary Responsibility
on Indemnification for Securities of Trustees
Act Liabilities

30. Quantitative and Qualitative *
Disclosures About Market Risk
<FN>
* Not Applicable
</FN>

<PAGE>

</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS

Page
<S> <C>
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . .ix
SUMMARY OF THE OFFERING. . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . .6
A. INVESTMENT AND BUSINESS RISKS. . . . . . . . . . . . . . . . .6
1. Lack of Liquidity. . . . . . . . . . . . . . . . . . . . . 6
2. Increased Risk of Default in Non-Conforming Loans. . . . . 6
3. Fees Payable to the Advisor and Affiliates. . . . . . . . .6
4. Purchase of Mortgage Notes from Affiliate. . . . . . . . . 7
5. Non-Arm's-Length Agreements. . . . . . . . . . . . . . . . 7
6. Competition for the Time and Services of Common
Officers and Trustees. . . . . . . . . . . . . . . . . . 7
7. Competition with Affiliates for the Purchase and
Sale of Mortgage Investments. . . . . . . . . . . . . . .8
8. Additional Conflicts with Affiliates. . . . . . . . . . . .8
9. Unspecified Investment; Investors Cannot Assess
Mortgage Investments. . . . . . . . . . . . . . . . . . .9
10. Lack of Diversification. . . . . . . . . . . . . . . . . . 9
11. Experience of Management. . . . . . . . . . . . . . . . . .9
12. Limited Experience of Selling Group Manager. . . . . . . . 9
13. Selling Group Manager is an Affiliate of the Advisor . . . 9
14. Delays in Investment Could Reduce Return to Investors. . . 9
15. Shareholders Must Rely on Management. . . . . . . . . . . 10
16. Limited Ability to Meet Fixed Expenses. . . . . . . . . . 10
17. Investment Company Regulatory Considerations. . . . . . . 10
18. Anti-Takeover Considerations and Restrictions on
Share Accumulation. . . . . . . . . . . . . . . . . . . 10
19. Limited Liability of Trustees and Officers. . . . . . . . 11
20. Majority Rule Prevails. . . . . . . . . . . . . . . . . . 11
21. Short Term Investments; Fixed Rate Trading Losses. . . . .11
22. Risk of Potential Future Offerings
B. OPERATIONS RISKS. . . . . . . . . . . . . . . . . . . . . . . 12
23. Economic Risks. . . . . . . . . . . . . . . . . . . . . . 12
24. Fluctuations In Interest Rates May Affect
Return On Investment. . . . . . . . . . . . . . . . . . 12
25. Risk of Loss on Non-Insured, Non-Guaranteed
Mortgage Loans. . . . . . . . . . . . . . . . . . . . . 12
26. Bankruptcy Of Borrowers May Delay Or Prevent
Recovery. . . . . . . . . . . . . . . . . . . . . . . . 12
27. Ability to Acquire Mortgage Investments; Competition
And Supply. . . . . . . . . . . . . . . . . . . . . . . 13
28. Environmental Liabilities. . . . . . . . . . . . . . . . .13
29. Risk of Leverage. . . . . . . . . . . . . . . . . . . . . 13
30. Reliance On Appraisals Which May Not Be Accurate
Or Which May Be Affected By Subsequent Events. . . . . .13
31. Mortgages May Be Considered Usurious. . . . . . . . . . . 14
32. Risks of Bankruptcy of Mortgage Servicer. . . . . . . . . 14
C. TAX RISKS. . . . . . . . . . . . . . . . . . . . . . . . . . .14
33. Material Tax Risks Associated With Investment
In Shares. . . . . . . . . . . . . . . . . . . . . . . .14
34. Risk of Inability to Qualify as a REIT. . . . . . . . . . 14
35. Restrictions on Maximum Share Ownership. . . . . . . . . .15
36. Limitations on Opinion of Counsel as to Tax Matters . . . 15
D. ERISA RISKS. . . . . . . . . . . . . . . . . . . . . . . . . .15
37. Risks Of Investment By Tax-exempt Investors. . . . . . . .15
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
INVESTMENT PORTFOLIO. . . . . . . . . . . . . . . . . . . . . . . 18
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . .19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY. . . . . . . . . . . . . . . 20

<CAPTION>
TABLE OF CONTENTS (continued)
Page
<S> <C>
Results of Operations - Two Years Ended
December 31, 1998 and 1997. . . . . . . . . . . . . . . . . .21
Capital Resources and Liquidity. . . . . . . . . . . . . . . . 22
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . . . .24
Principal Investment Objectives. . . . . . . . . . . . . . . . 24
Investment Policy. . . . . . . . . . . . . . . . . . . . . . . 24
Underwriting Criteria. . . . . . . . . . . . . . . . . . . . . 24
Temporary Investments. . . . . . . . . . . . . . . . . . . . . 27
Other Policies. . . . . . . . . . . . . . . . . . . . . . . . .27
Changes in Investment Objectives and Policies. . . . . . . . . 28
DIVIDEND POLICY AND DISTRIBUTIONS. . . . . . . . . . . . . . . . 29
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . 30
MANAGEMENT COMPENSATION. . . . . . . . . . . . . . . . . . . . . 32
CONFLICTS OF INTEREST. . . . . . . . . . . . . . . . . . . . . . 36
FIDUCIARY RESPONSIBILITY OF TRUSTEES. . . . . . . . . . . . . . .40
Limitation on Liability of Trustees and Officers. . . . . . . .40
Indemnification of Trustees, Officers and Others. . . . . . . .40
Shareholders' Rights and Remedies. . . . . . . . . . . . . . . 41
Defenses Available to Trustees and the Advisor. . . . . . . . .41
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .42
Our Trustees and Officers. . . . . . . . . . . . . . . . . . . 43
Committees and Meetings. . . . . . . . . . . . . . . . . . . . 44
Compensation of Trustees. . . . . . . . . . . . . . . . . . . .44
The Advisor. . . . . . . . . . . . . . . . . . . . . . . . . . 44
Summary of the Advisory Agreement. . . . . . . . . . . . . . . 45
SCMI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
CRC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . . . . . . . 48
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Qualification as a REIT. . . . . . . . . . . . . . . . . . . . 48
Termination of the Company . . . . . . . . . . . . . . . . . . 51
Taxation of Taxable Shareholders. . . . . . . . . . . . . . . .51
Taxation of Tax-Exempt Entities. . . . . . . . . . . . . . . . 52
Statement of Stock Ownership. . . . . . . . . . . . . . . . . .53
State and Local Taxes. . . . . . . . . . . . . . . . . . . . . 53
ERISA CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . .54
Plan Assets Regulation/Opinion of Counsel. . . . . . . . . . . 54
Annual Valuation. . . . . . . . . . . . . . . . . . . . . . . .55
SUMMARY OF DECLARATION OF TRUST. . . . . . . . . . . . . . . . . 57
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . .57
Shareholder Voting Rights. . . . . . . . . . . . . . . . . . . 57
Shareholder Lists; Inspection of Books and Records. . . . . . .58
Trustees. . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Amendment of the Declaration of Trust. . . . . . . . . . . . . 58
Responsibility of Trustees. . . . . . . . . . . . . . . . . . .59
Limited Liability of Shareholders. . . . . . . . . . . . . . . 59
Description of the Shares. . . . . . . . . . . . . . . . . . . 60
Maryland Anti-Takeover Law Provisions. . . . . . . . . . . . . 60
Restrictions on Transfer of Shares. . . . . . . . . . . . . . .61
Restrictions on Certain Conversion
Transactions and Rollups. . . . . . . . . . . . . . . . . . .62
Ratification of Declaration of Trust. . . . . . . . . . . . . .62
Termination. . . . . . . . . . . . . . . . . . . . . . . . . . 63
Limitation on Total Operating Expenses. . . . . . . . . . . . .63
Limitation on Acquisition Expenses and Fees. . . . . . . . . . 63
Restrictions on Transactions with Affiliates. . . . . . . . . .63
Restrictions on Borrowing. . . . . . . . . . . . . . . . . . . 64
Restriction on Investments. . . . . . . . . . . . . . . . . . .64

<CAPTION>
TABLE OF CONTENTS (continued)
Page
<S> <C>
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS. . . . . . . . . . . . . 66
Mortgages and Deeds of Trust and Contracts
for Deed Generally. . . . . . . . . . . . . . . . . . . . . .66
Foreclosure. . . . . . . . . . . . . . . . . . . . . . . . . . 67
Environmental Risks. . . . . . . . . . . . . . . . . . . . . . 68
Junior Mortgage and Deeds of Trust; Rights of
Senior Mortgages or Beneficiaries. . . . . . . . . . . . . . 70
Statutory Rights of Redemption. . . . . . . . . . . . . . . . .71
Anti-Deficiency Legislation. . . . . . . . . . . . . . . . . . 71
Bankruptcy Laws. . . . . . . . . . . . . . . . . . . . . . . . 72
Enforceability of Certain Provisions. . . . . . . . . . . . . .72
Prepayment Provisions. . . . . . . . . . . . . . . . . . . . . 73
Due-On-Sale Provisions. . . . . . . . . . . . . . . . . . . . .73
Acceleration on Default. . . . . . . . . . . . . . . . . . . . 73
Secondary Financing: Due-on-Encumbrance Provisions. . . . . . .74
Applicability of Usury Laws. . . . . . . . . . . . . . . . . . 74
WHO MAY INVEST. . . . . . . . . . . . . . . . . . . . . . . . . .75
TERMS OF THE OFFERING. . . . . . . . . . . . . . . . . . . . . . 76
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
Suitability Requirements. . . . . . . . . . . . . . . . . . . .76
Termination of the Offering. . . . . . . . . . . . . . . . . . 76
Shares Sold To Advisor Before This Offering. . . . . . . . . . 76
Minimum Purchase Requirements. . . . . . . . . . . . . . . . . 76
Purchases By Qualified Plans. . . . . . . . . . . . . . . . . .76
Broker Compensation. . . . . . . . . . . . . . . . . . . . . . 77
Subscription Procedure. . . . . . . . . . . . . . . . . . . . .77
Escrow Arrangements. . . . . . . . . . . . . . . . . . . . . . 78
SALES MATERIAL. . . . . . . . . . . . . . . . . . . . . . . . . .79
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . 79
REPORTS TO INVESTORS. . . . . . . . . . . . . . . . . . . . . . .79
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
GLOSSARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .81
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . .86
SUBSCRIPTION AGREEMENT. . . . . . . . . . . . . . . . . . . . . .97
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . .105
INFORMATION NOTE REQUIRED IN PROSPECTUS. . . . . . . . . . . . .105
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 109
EHIBIT 10.8. . . . . . . . . . . . . . . . . . . . . . . . . . .110
EXHIBIT 23.1. . . . . . . . . . . . . . . . . . . . . . . . . . 122
EXHIBIT 23.2. . . . . . . . . . . . . . . . . . . . . . . . . . 122

<PAGE>
Subject to Completion, Dated , 1999

UNITED MORTGAGE TRUST

2,500,000 Shares of Beneficial Interest

$20 Per Share

Minimum Investment Per Investor - 250 Shares ($5,000)

(50 Shares ($1,000) for an Individual Retirement Account or Keogh Plan)

United Mortgage Trust is a self administered real estate investment trust
(a "REIT") that invests in mortgages and contracts for deed. Most, if not all,
of the mortgages and contracts for deed that we purchase are not insured or
guaranteed by a federally owned or guaranteed mortgage agency and involve
borrowers who do not satisfy all of the income ratios, credit record criteria,
loan-to-value ratios, employment history and liquidity requirements of
conventional mortgage financing. We use the services of Mortgage Trust
Advisors, Inc., a Texas corporation, to act as our advisor in selecting the
investments that we purchase.

By this prospectus, we are offering to sell a maximum of
2,500,000 of our shares of beneficial interest (which we refer to
herein as the "Shares"). The offering of the Shares commenced on
March 5, 1997 and will continue until the earlier of: (1) the sale of
the maximum of 2,500,000 Shares or (2) December 31, 2000, unless we
terminate the offering earlier. As of December 31, 1998, we had sold
724,271 Shares. The Shares are being sold on a "best efforts" basis
which means that the underwriters are not required to sell any
specific number of the remaining Shares but will use their best
efforts to sell those Shares. All monies paid by subscribers for the
Shares will be deposited in an escrow account and will remain in that
escrow account until the first and fifteenth day of each month (or the
next succeeding business day) when those funds will be paid to us by
the escrow agent. The escrow agent will pay each investor all interest
earned on that investor's funds while those funds are held in the
escrow account.

An investment in the Shares involves certain risks. See "Risk
Factors" commencing on page ______ for information concerning risks
associated with an investment in the Shares that you should read
before deciding to purchase any Shares.

</TABLE>
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price $20.00 $50,000,000
Selling Commissions $ 2.10 $ 5,250,000
Net Proceeds Before Expenses $17.90 $44,750,000
</TABLE>

This is our initial public offering, and no public market
currently exists for the Shares and a public market may not exist
after the offering.

Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.

The use of forecasts in this offering is prohibited. Any
representations to the contrary and any predictions, written or oral,
as to the amount or certainty of any present or future cash benefit or
tax consequence which may flow from an investment in the Shares is not
permitted.
<PAGE>
FIRST FINANCIAL UNITED INVESTMENTS LTD., L.L.P.

The date of this prospectus is , 1999

AVAILABLE INFORMATION

We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Therefore, we file
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). You may inspect and obtain copies of
our reports, proxy statements and other information at:

Public Reference Section
Securities and Exchange Commission
Room 1024, Judiciary Plaza
450 Fifth Street, NW
Washington, D.C. 20549

Midwest Regional Office
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511

Northeast Regional Office
7 World Trade Center
Suite 1300
New York, New York, 10048

The Commission also maintains a website at http://www.sec.gov where you
can retrieve this information.

We have filed with the Commission a Registration Statement on Form S-11
for the Shares offered under this prospectus under the Securities Act of 1933,
as amended (the "Securities Act"). The prospectus and any accompanying
prospectus supplement do not contain all of the information included in the
Registration Statement. We have omitted certain parts of the Registration
Statement in accordance with the rules and regulations of the Commission. For
further information, we refer you to the Registration Statement, including its
exhibits and schedules. Statements contained in this prospectus and any
accompanying prospectus supplement about the provisions or contents of any
contract, agreement or any other document referred to are not necessarily
complete. For each of these contracts, agreements or documents filed as an
exhibit to the Registration Statement, we refer you to the actual exhibit for
a more complete description of the matters involved.

We currently furnish our shareholders with annual reports containing
financial statements audited by its independent auditors and with quarterly
reports containing unaudited summary financial information for each of the
first three-quarters of each fiscal year. See the section of this prospectus
entitled "Reports to Investors" for more information about the reports we
provide to our shareholders.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this prospectus discuss future
expectations, contain projections of results of operation or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks; uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and
was derived using numerous assumptions. Important factors that may cause
actual results to differ from projections include the various risk factors
described in the section of this prospectus entitled "Risk Factors."

PENNSYLVANIA RESIDENTS:

Please note the modified suitability requirements for Pennsylvania
residents under "Who May Invest".

MICHIGAN RESIDENTS:

No sale of Shares may be completed to a Michigan resident until at least
five business days after the date the investor received a final prospectus.

<PAGE>
SUMMARY OF THE OFFERING

This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information
that is important to you. To understand this offering fully, you should read
the entire prospectus carefully, including the risk factors and financial
statements. See the Glossary located at the back of this prospectus page ____
for the definition of certain terms that are capitalized in this prospectus.

OUR ORGANIZATION: We were formed as a real estate investment trust under
the laws of Maryland on July 12, 1996. Similar to a corporation's articles of
incorporation and bylaws, the rights and privileges of our investors are
governed by the declaration of trust that we filed with the State of Maryland.
We will refer to that document as the "Declaration of Trust." Our
Declaration of Trust provides for us to have perpetual life. See "Summary of
Declaration of Trust". Similar to the directors in a corporation, we have
trustees who manage and control our affairs. We currently have five Trustees:
Christine "Cricket" Griffin, Paul R. Guernsey, Douglas R. Evans, Richard D.
O'Connor, Jr. and Michele A. Cadwell. Christine "Cricket" Griffin is not
considered independent because she is our President and the Chairman of our
Board of Trustees. Richard D. O'Connor, Jr. is not considered independent
because he provides legal services to us and to our Affiliates. The other
three Trustees are Independent Trustees. See "Management".

Our offices are located at 1701 N. Greenville, Suite 403, Richardson,
Texas 75081. Our telephone number is (972) 705-9805 or (800) 955-7917 and our
facsimile number is (972) 705-9304.

INVESTMENT POLICY: We are a self administered real estate investment
trust (a "REIT") that invests exclusively in the following types of
investments: (1) first lien, fixed rate mortgages secured by single family
residential property throughout the United States (we refer to those
investments as "Residential Mortgages"); (2) the seller's unencumbered
interest in fixed rate contracts for deed (also known as land contracts) for
the purchase of single family residential property throughout the United
States (we refer to those investments as "Contracts for Deed"); and (3) loans
of 12 months or less in term, made to investors for the purchase, renovation
and sale of single family homes (we refer to those investments as "Interim
Mortgages"). Any references in this prospectus to "Mortgage Investments" will
refer to the Residential Mortgages, Contracts for Deed and Interim Mortgages.
The Mortgage Investments are originated by others to our specifications or to
specifications approved by us. Most, if not all, of the Residential Mortgages
and Contracts for Deed will not be insured or guaranteed by a federally owned
or guaranteed mortgage agency and will involve borrowers who do not satisfy
all of the income ratios, credit record criteria, loan-to-value ratios,
employment history and liquidity requirements of conventional mortgage
financing. See "Investment Objectives and Policies - Investment Policy".

ADVISOR: We use the services of Mortgage Trust Advisors, Inc., a Texas
corporation formed on June 11, 1996, to act as our advisor in selecting the
investments we purchase. The Advisor is owned and controlled by Todd F.
Etter, Dan H. Hill, James P. Hollis and Timothy J. Kopacka. Mr. Hill is an
Affiliate of the Selling Group Manager. Mr. Etter is an Affiliate of South
Central Mortgage, Inc. ("SCMI"), a Texas corporation that sells Mortgage
Investments to us and services some of our Residential Mortgages. Mr. Etter
is also an Affiliate of Capital Reserve Corp. ("CRC"), a Texas corporation
that sells Interim Mortgages to us and services those Interim Mortgages for
us. See "Management" - The Advisor".

SCMI: We have and will continue to acquire Mortgage Investments from
SCMI and will continue to use the services of SCMI to service some or all of
our Residential Mortgages. See "Conflicts of Interest - Purchase of Mortgage
Notes from Affiliate", "Summary of the Offering - Mortgage Servicers" and
"Management Compensation". SCMI is a Texas based mortgage bank of which the
sole beneficial shareholder is Todd Etter, an officer and principal
shareholder of the Advisor. Ms. Christine Griffin, one of our Trustees and
our President, was previously the Chief Financial Officer of SCMI. We lease
our office space from SCMI. See "Management - SCMI". Since its inception in
1992, SCMI has purchased more than 1,500 residential mortgage notes totaling
approximately $60,000,000. SCMI sells whole notes to institutional and
private investors. SCMI also offers note servicing on notes it sells. SCMI
currently services over 1,500 loans totaling approximately $60,000,000.

MORTGAGE SERVICERS: We use the services of SCMI and nonaffiliated third
parties to service the Residential Mortgages and Contracts for Deed we own. We
use the services of CRC to service the Interim Mortgages we own. All
servicing fees paid to SCMI will be at competitive rates that are no higher
than the rates charged by unaffiliated third parties. No servicing fee is
paid to CRC for servicing the Interim Mortgages. See "Management
Compensation". The servicing of the Mortgage Investments includes the
collection of monthly payments from the borrower, the distribution of all
principal and interest to us, the payment of all real estate taxes and
insurance to be paid out of escrow, regular distribution of information
regarding the application of all funds received and enforcement of collection
for all delinquent accounts, including foreclosure of such accounts when and
as necessary.

THE OFFERING: A maximum of 2,500,000 Shares are being offered on a "best
efforts" basis, which means that no one is guaranteeing that any minimum
number of Shares will be sold. The Selling Group Manager and other NASD
member broker-dealer firms selected by the Selling Group Manager are
distributing the Shares. There is a minimum investment per investor of 250
Shares ($5,000) or 50 Shares ($1,000) if the investor is an IRA or Keogh Plan.
The offering of the Shares commenced on March 5, 1997 and has continued since
then. As of December 31, 1998, we had sold 724,271 Shares in this offering.
The offering will continue until the earlier of: (1) the sale of the maximum
of 2,500,000 Shares or (2) December 31, 2000, unless we terminate the offering
earlier. Subscription payments by investors will be held in an escrow account
at Chase Bank of Texas NA (the "Escrow Agent") until the next Interim Closing,
at which time those funds will be paid by the Escrow Agent to us and the
Selling Group Manager and the interest earned on those funds will be paid to
the investors. See "Terms of the Offering" and "Plan of Distribution".

AMOUNTS AVAILABLE FOR ACQUISITIONS OF MORTGAGE INVESTMENTS: As of
December 31, 1998, approximately 1.2% of the Gross Offering Proceeds were used
for Organization and Offering Expenses, 10.5% were used for Selling
Commissions and Due Diligence Fees and approximately 2.4% of the Gross
Offering Proceeds were used to pay Acquisition Fees payable to the Advisor.
The balance of approximately 85.9% of the proceeds were invested in or
reserved for our activities. If the maximum of 2,500,000 Shares is sold
hereunder, approximately 0.4% of the Gross Offering Proceeds will be used for
Organization and Offering Expenses, 10.5% for Selling Commissions and Due
Diligence Fees and, approximately 2.7% of the Gross Offering Proceeds will be
used to pay Acquisition Fees payable to the Advisor and the balance of
approximately 86.5% of the proceeds will be invested in or reserved for our
activities. See "Estimated Use of Proceeds" and "Management Compensation".

COMPENSATION TO AFFILIATES: The Advisor and other Affiliates will receive
substantial fees and compensation in connection with our organization,
investment of the proceeds and the management of our investments. See
"Management Compensation".

INVESTMENT OBJECTIVES: Our principal investment objectives are to:

(1) produce net interest income on our Mortgage Investments;

(2) provide monthly Distributions to shareholders from net income
earned on our Mortgage Investments; and

3) reinvest payments of principal and proceeds of prepayments, sales
and insurance net of expenses.

There is no assurance that these objectives will be attained. See
"Investment Objectives and Policies" and "Risk Factors".

RISK FACTORS: An investment in Shares will be subject to various risk
factors, including the following:

Your ability to liquidate your investment will be limited because no
public market currently exists for the Shares and we have no plan to
liquidate and distribute proceeds to our shareholders.

Although we intend to have the Shares listed on NASDAQ or an exchange
after the sale of all of the Shares offered hereby, there can be no
assurance that a public trading market for the Shares will ever develop.

Most, if not all, of our Residential Mortgages and Contracts for Deed
will be comprised of loans made to borrowers who do not satisfy all of
the underwriting requirements for conventional mortgage financing.
Therefore, we may experience a higher incidence of loan defaults and
foreclosures that may adversely affect our financial condition and
results of operations.

We will be subject to various conflicts of interest arising out of our
relationship with our officers, the Advisor and Affiliates of our
officers and the Advisor, including the payment of fees, the purchase of
Mortgage Investments from Affiliates and other related party
transactions.

The Advisor and its Affiliates will receive substantial compensation
from the proceeds of the offering and our operations, including: (1)
commissions, due diligence fees and SGM Shares payable to the Selling
Group Manager; (2) Acquisition Fees payable to the Advisor; (3) loan
servicing fees; (4) real estate brokerage commissions; and (5) a
Subordinated Incentive Fee. These fees, other than the Subordinated
Incentive Fee, will be payable even if we are not profitable.

Although we currently have a portfolio of Mortgage Investments, we have
not yet identified any additional Mortgage Investments we will purchase
with the proceeds of this offering.

There are tax risks associated with this offering. If we fail to
maintain our qualification as a REIT, we will be subject to federal
income tax as a regular corporation. See "Risk Factors".

CONFLICTS OF INTEREST: The affiliated Trustees, the President, the
Advisor and their Affiliates will be subject to various conflicts of interest
in their business dealings with us due to the structure of their compensation
and related party transactions. In addressing these conflicts of interest,
the Trustees, the President and the Advisor will be required to abide by their
fiduciary duties to our shareholders and us. See "Conflicts of Interest" and
"Fiduciary Responsibilities of Trustees".

RESTRICTION ON "ROLLUPS" AND CONVERSION TRANSACTIONS: We are prohibited
from participating in a transaction, commonly known as a "Rollup", which
affect certain shareholder rights and involve our sale to another firm or any
merger or consolidation between us and another firm. The restriction on our
participation in a "Rollup" is more fully described in the section of this
prospectus entitled "Summary of Declaration of Trust - Restriction on Certain
Conversion Transactions and Rollups". With respect to permissible Rollups, we
must first obtain approval of the shareholders by a majority vote. In
addition, certain conversion transactions require the prior approval of 80% of
the shareholders and the unanimous approval of the Independent Trustees.

MORTGAGE INVESTMENT DESCRIPTIONS: We currently have a portfolio of
Mortgage Investments and will use the proceeds from the sale of additional
Shares to purchase additional Mortgage Investments. We have not yet invested
in or committed to invest in any additional Mortgage Investments but intend to
do so as soon as possible after each Interim Closing. There may be a delay
between the time investors purchase Shares and the time the investment
proceeds are invested in Mortgage Investments. See "Investment Objectives and
Policies - Temporary Investments". Therefore, there may be a corresponding
delay in the receipt by shareholders of Distributions relating to investment
in Mortgage Investments and in the achievement of our investment objectives.
See "Risk Factors".

TEMPORARY INVESTMENTS: Until our funds are invested in Mortgage
Investments, we will invest our funds in short-term investments, including
investments with various financial institutions (meeting certain asset or net
worth requirements). See "Investment Objectives and Policies".

SOURCES OF DISTRIBUTIONS AND THEIR TAX TREATMENT: Distributions will be
made monthly to shareholders based on Cash Flow from all sources and net of
operating expenses, depending upon our financial condition. We began making
Distributions in September 1997. See "Dividend Policy and Distributions". A
Distribution may be made from Cash Flow and/or Disposition Proceeds; and may
constitute a return of capital to the shareholders, ordinary income, capital
gain and/or items of tax preference. We will attempt to maintain monthly
Distributions at a specified level to be determined by our Trustees. To the
extent that some Mortgage Investments are sold in order to make Distributions,
those payments may reduce the amount available for investment. If we maintain
our qualification as a REIT under the Internal Revenue Code, we will pay no
tax on amounts we distribute to shareholders. Except for those shareholders
who are entities which are exempt from federal income taxation ("Tax-Exempt
Entities") distributions to shareholders will generally be considered taxable
dividends to the extent they represent distributions of our earnings and
profits and will be considered portfolio rather than passive income, thus
enabling a shareholder to offset investment expense deductions but not passive
losses. Any Distributions in excess of our earnings and profits will reduce
the shareholder's basis in their Shares. Shareholders that are Tax-Exempt
Entities are not expected to have unrelated business taxable income ("UBTI")
as a result of their investment in the Shares unless they borrow to acquire
Shares. See "Federal Income Tax Considerations - Taxation of Taxable
Shareholders - Dividend Income" and "Federal Income Tax Considerations -
Taxation of Tax-Exempt Entities".

REINVESTMENT AND DISTRIBUTIONS OF DISPOSITION PROCEEDS OF MORTGAGE
INVESTMENTS: We intend generally to reinvest principal payments and
Disposition Proceeds received by us, net of expenses, except to the extent
those Disposition Proceeds represent capital gains on loans purchased at a
discount. Disposition Proceeds may also be held as reserves or reinvested in
Mortgage Investments to the extent deemed advantageous. Since the
reinvestment of Disposition Proceeds that represent taxable income presents
significant REIT qualification problems in light of the requirement that 95%
of our income be distributed to shareholders, reinvestment of Disposition
Proceeds may be limited to the portion that represents a return of capital.

LIMITATION ON TOTAL OPERATING EXPENSES: Effective January 1, 1997, the
Advisor has been funding all of our general and administrative expenses in
return for a contribution by us of an amount equal to 0.5% of our Average
Invested Assets for the immediately preceding month. However, our
contributions to the Advisor shall not exceed the lesser of (a) the total
general and administrative expenses funded by the Advisor or (b) an amount
equal to the maximum allowable Total Operating Expenses under the Declaration
of Trust. See "Summary of Declaration of Trust - Limitation on Total
Operating Expenses". The Declaration of Trust provides that our Total
Operating Expenses may not exceed in any fiscal year the greater of (a) 2% of
the Average Invested Assets (defined generally as the average book value our
Mortgage Investments, without regard for non-cash reserves) or (b) 25% of our
Net Income.

RESTRICTION ON BORROWINGS: Under certain circumstances, we are permitted
to borrow funds in connection with our purchase of Mortgage Investments.
Subject to certain restrictions, those borrowings may not exceed 50% of our
Net Assets. See "Investment Objectives and Policies", "Federal Income Tax
Considerations - Qualification as a REIT - Distributions to Shareholders" and
"Summary of Declaration of Trust - Restrictions on Borrowing".

FISCAL YEAR: We have adopted a fiscal year ending on December 31 of each
year.

GLOSSARY: See the Glossary at the back of this prospectus for
definitions of certain key terms used in this prospectus.

<PAGE>
RISK FACTORS

The purchase of the Shares offered hereby involves a high degree of risk
and is suitable only for persons with the financial capability of making and
holding long-term investments that are not readily reducible to cash.
Prospective investors must, therefore, have adequate means of providing for
their current needs and personal contingencies. Prospective investors should
also consider the following factors together with all of the information set
forth in this prospectus in determining whether to purchase any Shares.
Information contained in this prospectus may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, which statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate," or
"continue" or the negative thereof or other comparable terminology. The
following matters and certain other factors noted throughout this prospectus
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and
uncertainties, that could cause our actual results to differ materially from
those contained in any such forward-looking statements.

A. INVESTMENT AND BUSINESS RISKS

1. Lack of Liquidity. There is currently no established trading market
for the Shares and we have no plans to liquidate by selling all of our assets
and distributing the proceeds to our shareholders. Although we intend to seek
to have the Shares listed on NASDAQ or an exchange after the sale of all of
the Shares offered hereby, there can be no assurance that those efforts will
be successful or that an established trading market for the Shares will
develop. As a result, you may not be able to resell your Shares or use them
as collateral for a loan. Furthermore, even if a market for the sale of
Shares develops, you may experience a substantial loss on the sale of those
Shares. Consequently, the purchase of Shares should be considered only as a
long-term investment. See "Who May Invest".

2. Increased Risk of Default in Non-Conforming Loans. We are in the
business of lending money and, as such, take the risk of defaults by the
borrower. Most, if not all, of the Residential Mortgages and Contracts for
Deed that we purchase will not be insured or guaranteed by a federally owned
or guaranteed mortgage agency and will involve borrowers who do not satisfy
all of the income ratios, credit record criteria, loan-to-value ratios,
employment history and liquidity requirements of conventional mortgage
financing. See "Investment Objectives and Policies - Investment Policy".
Accordingly, the risk of default by the borrower in those "non-conforming
loans" is higher than the risk of default in loans made to persons who qualify
for conventional mortgage financing. If the borrower defaults on a
Residential Mortgage, we may be forced to purchase the property at a
foreclosure sale. If the borrower defaults on a Contract for Deed, we may be
forced to forfeit or cancel the borrower's interest in that Contract for Deed
and eliminate the borrower's interest in that property. If we cannot quickly
sell or refinance that property, and the property does not produce any
significant income, our profitability will be adversely affected. See "Risk
Factors - Risk of Loss on Non-Insured, Non-Guaranteed Mortgage Loans" and
"Risk Factors - Bankruptcy of Borrowers May Delay or Prevent Recovery".

3. Fees Payable to the Advisor and Affiliates. The Advisor and its
Affiliates will receive substantial compensation from the sale of our Shares
and our operations, including: (1) commissions, due diligence fees and SGM
Shares payable to the Selling Group Manager; (2) Acquisition Fees payable to
the Advisor equal to 3% of the principal amount of each Residential Mortgage
or Contract for Deed we acquire (no Acquisition Fees are paid with respect to
Interim Mortgages); (3) loan servicing fees payable to SCMI; (4) real estate
brokerage commissions; and (5) a Subordinated Incentive Fee payable to the
Advisor. These fees, other than the Subordinated Incentive Fee, will be
payable even if we are not profitable. See "Management Compensation" for a
discussion of the fees payable to the Advisor and its Affiliates. The
structure of those fees may cause conflicts of interest between us, the
Advisor and its Affiliates. In addressing these conflicts of interest, the
Trustees, the President and the Advisor will be required to abide by their
fiduciary duties to us and our shareholders. See "Conflicts of Interest" and
"Fiduciary Responsibilities of Trustees".

4. Purchase of Mortgage Investments from Affiliates. We intend to
acquire our Mortgage Investments from several sources, including SCMI and CRC,
Affiliates of the Advisor. See "Management - SCMI." The amount of Mortgage
Investments that we will acquire from SCMI and CRC cannot be determined at
this time and will depend upon the amount of funds we have available to invest
and the amount of Mortgage Investments that are available from SCMI and CRC or
other sources at the time we have funds to invest. At this time, SCMI and CRC
are the only Affiliates that are expected to sell Mortgage Investment to us.
During the year ended December 31, 1997, of the 71 Residential Mortgages we
acquired, 62 were purchased from SCMI. The 62 mortgages had an unpaid
principal balance of $2,440,000. The other nine Residential mortgages were
acquired from private individuals, representing an unpaid principal balance of
$354,000. As of December 31, 1997, we had a total of 30 Interim Mortgages with
an aggregate $877,275 principal balance. All of these loans were acquired from
SCMI. During the year ended December 31, 1998, of the 171 Residential
Mortgages and 30 Contracts for Deed that were acquired, 125 Residential
Mortgages and 7 Contracts for Deed were purchased from SCMI. They had an
unpaid principal balance of $5,447,000 and $299,000, respectively. The other
46 Residential mortgages and 23 Contracts for Deed were acquired from private
individuals, representing unpaid principal balances of $2,005,000 and
$982,000, respectively. As of December 31, 1998, we had a total of 102 Interim
Mortgages with an aggregate $877,275 principal balance. All of these loans
were acquired from SCMI. At the year ended December 31, 1998, we had 102
Interim Mortgages with an aggregate $3,285,023 principal amount. Ninety-seven
of the Interim Mortgages were acquired from CRC, representing $3,169,591
principal investment. Due to the affiliation between the Advisor, SCMI and CRC
and the fact that SCMI and CRC may make a profit on the sale of Mortgage
Investments to us, the Advisor will have a conflict of interest in determining
if Mortgage Investments should be purchased from SCMI or CRC or unaffiliated
third parties. However, all Mortgage Investments purchased from SCMI, CRC or
other Affiliates will be at prices no higher than those that would be paid to
unaffiliated third parties for mortgages with comparable terms, rates, credit
risks and seasoning. See "Conflicts of Interest - Purchase of Mortgage Notes
from Affiliates".

5. Non-Arm's-Length Agreements. The agreements and arrangements
relating to compensation between ourselves and the Advisor or its Affiliates
are not the result of arm's-length negotiations. However, the majority of the
Trustees are Independent Trustees and all of the Trustees may be removed, with
or without cause, by the holders of a majority of the outstanding Shares. The
Advisor may be removed for cause by a majority of such Independent Trustees
without ratification by the shareholders. See "Risk Factors - Shareholders
Must Rely on Management", "Summary of Declaration of Trust -Trustees",
"Management - Summary of the Advisory Agreement" and "Fiduciary
Responsibilities of Trustees".

6. Competition for the Time and Services of Common Officers and
Trustees. We will rely on the Advisor and its Affiliates for supervision of
the management of our operations. In the performance of their duties, the
officers, directors and employees of the Advisor and its Affiliates may, for
their own account or that of others, originate mortgages and acquire
investments similar to those that we will purchase. The Trustees also may act
as trustees, directors or officers, or engage in other capacities, in other
REITs or limited partnerships, and may acquire and originate similar Mortgage
Investments for their own account or that of others. Accordingly, conflicts
of interest may arise in operating more than one entity with respect to
allocating time between those entities. The Trustees, the President and the
Advisor will devote such time to our affairs and to the other entities in
which they are involved as they determine in their sole discretion to be
necessary for our benefit and the benefit of those other entities. In
exercising that discretion, they must act in good faith and in compliance with
their fiduciary obligations to us. See "Management" and "Fiduciary
Responsibilities of Trustees".

The Advisor and its Affiliates believe they have sufficient staff
personnel to be fully capable of discharging their responsibilities to us and
to all other entities to which they or their officers or Affiliates are
responsible. See "Management - the Advisor".

7. Competition with Affiliates for the Purchase and Sale of Mortgage
Investments. Various REITs, partnerships or other entities may in the future
be formed by the Advisor or its Affiliates to engage in businesses which may
be competitive with us and which may have the same management personnel as we
do. To the extent that any other REITs, partnerships or entities with similar
investment objectives (or programs with dissimilar objectives for which a
particular Mortgage Investments may nevertheless be suitable) (which we will
collectively refer to herein as the "Affiliated Programs") have funds
available for investment at the same time as we do and a potentially suitable
investment has been offered to us or an Affiliated Program, conflicts of
interest will arise as to which entity should acquire the investment.

If any conflict arises between us and any of the other Affiliated
Programs, the Advisor will initially review our investment portfolio and the
investment portfolios of each of those Affiliated Programs and will determine
whether or not that investment should be made by us or by the Affiliated
Program. That decision will be based upon such factors as the amount of funds
available for investment, yield, portfolio diversification, type and location
of the property that is the subject of that Mortgage Investment, and proposed
loan terms. The Trustees (including the Independent Trustees) will be
responsible for monitoring this allocation method (and also the allocation
method described below with respect to new Affiliated Programs established in
the future) to be sure that each is applied fairly to us. See "Summary of
Declaration of Trust - Responsibility of Trustees".

If the Advisor or its Affiliates establish new Affiliated Programs after
the date of this prospectus, and the making of a Mortgage Investment appears
equally appropriate for us and one or more of such subsequently formed
Affiliated Programs, the Mortgage Investment will be allocated to one program
on a basis of rotation with the initial order of priority determined by the
dates of formation of the programs.

Further, our Trustees and the officers, directors and employees of the
Advisor and its Affiliates may for their own account or the account of others
originate and acquire Mortgage Investments similar to the Mortgage Investments
that we will purchase. The Trustees and the Advisor are, however, subject to
a fiduciary duty to us and our shareholders. See "Fiduciary Responsibility of
Trustees". Each Trustee, on his own behalf, and the Advisor, on behalf of
itself, the officers and directors of the Advisor, and all Persons controlled
by the Advisor and its officers and directors, has agreed to first present
suitable investments to us before recommending or presenting such
opportunities to others or taking advantage of those opportunities on their
own behalf, except as otherwise described with respect to Affiliated Programs
or in connection with the existing business of SCMI and CRC. See "Management
- - Summary of the Advisory Agreement". Except as described above, and subject
to their fiduciary duty to us and our shareholders, neither the Trustees, the
Advisor nor its Affiliates will be obligated to present to us any particular
investment opportunity which comes to their attention, even if such
opportunity is of a character which might be suitable for investment by us.

The Advisor may also have conflicts of interest between us and any other
Affiliates of the Advisor when we attempt to sell Mortgage Investments, as
well as in other circumstances.

See "Investment Objectives and Policies - Other Policies" and "Summary of
Declaration of Trust".

8. Additional Conflicts with Affiliates. Although we do not presently
expect to do so, we are permitted to invest in mortgage loans on properties
owned by Affiliates. However, we may only do so if those transactions are
approved by a majority of the Trustees who are not otherwise interested in the
transactions and they determine that those transactions are fair and
reasonable to us and on terms and conditions that are not less favorable to us
than those that are available from third parties. See "Summary of Declaration
of Trust - Restrictions on Transactions with Affiliates".

9. Unspecified Investment; Investors Cannot Assess Mortgage Investments.
Other than the Mortgage Investments we already own, we have not made any
commitments to invest in any specific Mortgage Investments. Therefore, you
will not have an opportunity to evaluate any of the Mortgage Investments that
we will purchase with the proceeds from the sale of additional Shares and must
rely entirely on the judgement of Management. See "Investment Objectives and
Policies" and "Management".

10. Lack of Diversification. We will sell a maximum of 2,500,000 Shares
in this offering. As of December 31, 1998, we have sold 724,271 Shares for
$14,485,420. We can terminate the offering at any time in our sole discretion
for any reason whatsoever. In the event we do not sell any additional Shares,
our ability to reduce our risk of loss by spreading that risk over a larger
number of Mortgage Investments would be reduced. See "Estimated Use of
Proceeds".

11. Experience of Management The Advisor was formed for the purpose of
advising us in the selection and purchase of Mortgage Investments and has
performed those duties for us since we commenced operations. The Trustees,
the President and the management team of the Advisor have considerable
expertise in the acquisition and management of mortgage assets, mortgage
finance, asset/liability management, public company management and
administration and the management of corporations in the real estate lending
business. However, although the Trustees, the President and the officers,
directors and shareholders of the Advisor have had substantial prior
experience in connection with the types of investments we make and the
administration of those investments, they have not previously sponsored nor
managed any private or public real estate investment programs and, except for
their services to us, do not have any experience in the management of a REIT.
See "Risk Factors - Shareholders Must Rely on Management" and "Management -
The Advisor".

12. Limited Experience of Selling Group Manager. First Financial United
Investments Ltd., L.L.P., the Selling Group Manager of the offering, is a
broker-dealer that has not previously participated as a broker-dealer in a
public offering of securities. As a result, other than its efforts in the
sale of the Shares, the Selling Group Manager has no track record in selling
publicly offered securities itself or in recruiting Selected Dealers to assist
in the sale of publicly offered securities, which may make it more difficult
for us to sell the Shares offered hereby. See "Risk Factors - Lack of
Diversification". As of December 31, 1998, the Selling Group Manager had
recruited 8 Selected Dealers to assist in the sale of the Shares. However,
the Selling Group Manager has no experience in helping to establish and
support a public trading market for securities after those securities are
sold, which may make it more difficult for a public trading market to develop
for the Shares. See "Risk Factors - Lack of Liquidity".

13. Selling Group Manager is an Affiliate of the Advisor. First
Financial United Investments Ltd., L.L.P., the Selling Group Manager of the
offering, is an Affiliate of the Advisor. See "Management - the Advisor". As
an Affiliate of the Advisor, the Selling Group Manager may experience a
conflict in performing its obligations to exercise due diligence with respect
to the statements made in this prospectus.

14. Delays in Investment Could Reduce Return to Investors. We may be
delayed in making Mortgage Investments due to delays in the completion of the
underwriting process, delays in obtaining the necessary purchase
documentation, a shortage of suitable investments or other factors. During
the time our funds are held pending investment in Mortgage Investments, those
funds will be invested in temporary investments. See "Investment Objectives
and Policies - Temporary Investments ". Temporary investment of funds pending
investment in Mortgage Investments may result in a lower rate of return.

15. Shareholders Must Rely on Management. The Trustees will be
responsible for our management, but employ the President to manage our day to
day affairs. The Trustees retain the Advisor to use its best efforts to seek
out and present to us a sufficient number of suitable investment opportunities
which are consistent with our investment policies and objectives and
consistent with such investment programs as the Trustees may adopt from time
to time in conformity with the Declaration of Trust. The Trustees have
initially delegated to the Advisor, subject to the supervision and review of
the Trustees and consistent with the provisions of our Declaration of Trust,
the power and duty to: (1) develop underwriting criteria and a model for our
investment portfolio; (2) acquire, retain or sell Mortgage Investments; (3)
seek out, present and recommend investment opportunities consistent with our
investment policies and objectives, and negotiate on our behalf with respect
to potential investments or the disposition thereof; (4) pay our debts and
fulfill our obligations, and handle, prosecute and settle any of our claims,
including foreclosing and otherwise enforcing mortgages and other liens
securing investments; (5) obtain for us such services as may be required for
mortgage brokerage and servicing and other activities relating to our
investment portfolio; (6) evaluate, structure and negotiate prepayments or
sales of Mortgage Investments; (7) from time to time, or as requested by the
Trustees, make reports to us as to its performance of the foregoing services
and (8) to supervise other aspects of our business. Our success will, to a
large extent, depend on the quality of the management provided by the Advisor,
particularly as it relates to evaluating the merits of proposed investments.
Although our shareholders elect our Trustees annually, shareholders have no
right or power otherwise to take part in our management, except to the extent
permitted by the Declaration of Trust. Accordingly, no person should purchase
any of the Shares offered hereby unless he is willing to entrust all aspects
of the management and control of our business to the Trustees, the President
and the Advisor. See "Management".

16. Limited Ability to Meet Fixed Expenses. Our operating expenses,
including certain compensation to our President, servicing and administration
expenses payable to an Affiliate and unaffiliated mortgage servicers and the
Independent Trustees, must be met regardless of our profitability. See
"Management Compensation" and "Management". We are also obligated to
distribute 95% of our REIT Taxable Income (which may under certain
circumstances exceed our Cash Flow) in order to continue to qualify as a REIT
for federal income tax purposes. See "Federal Income Tax Considerations -
Qualification as a REIT". Accordingly, it is possible that we may be required
to borrow funds or liquidate a portion of our investments in order to pay our
expenses or to make the required cash distributions to shareholders. Although
we generally may borrow funds, there can be no assurance that such funds will
be available to the extent, and at the time, required by us. See "Summary of
Declaration of Trust - Restrictions on Borrowing".

17. Investment Company Regulatory Considerations. We are not a mutual
fund or any other type of investment company subject to the registration and
regulatory provisions of the Investment Company Act of 1940 (the "Investment
Company Act"). The Trustees will attempt to monitor the proportion of our
portfolio which is placed in various investments so that we do not come within
the definition of an investment company under the Investment Company Act. As
a result, we may have to forego certain investments which would produce a more
favorable return.

18. Anti-Takeover Considerations and Restrictions on Share Accumulation.
Provisions of the Maryland corporation law that apply to us make it more
difficult for others to engage in a business combination with us and place
restrictions on persons acquiring more than 10% of our outstanding Shares.
Further, in order for us to qualify as a REIT, no more than 50% of the
outstanding Shares may be owned, directly or indirectly, by five or fewer
individuals at any time during the last half of our taxable year. To ensure
that we will not fail to qualify as a REIT under this test, our Declaration of
Trust grants the Trustees the power to place restrictions on the accumulation
of Shares and provides that Shares held by one shareholder in excess of 9.8%
of the total Shares outstanding no longer entitle the shareholder to vote or
receive Distributions. Those restrictions are more fully described in the
section of this prospectus entitled "Summary of Declaration of Trust -
Description of the Shares". While these restrictions are designed to prevent
any five individuals from owning more than 50% of the Shares, they would also
discourage others from attempt to gain control of us. The restrictions and
provisions under law and these adopted by us may also (1) deter individuals
and entities from making tender offers for Shares, which offers may be
attractive to shareholders or (2) limit the opportunity for shareholders to
receive a premium for their Shares in the event an investor is making
purchases of Shares in order to acquire a block of Shares. See "Summary of
Declaration of Trust".

19. Limited Liability of Trustees And Officers. Our Declaration of
Trust provides that our Trustees and officers shall have the fullest
limitation on liability permitted by the laws of the State of Maryland.
Pursuant to the Maryland statute under which we were formed, a Trustee is not
personally liable for our obligations except, if a Trustee otherwise would be
liable, that provision does not relieve the Trustee from any liability to us
or our shareholders for any act that constitutes: (1) bad faith; (2) willful
misfeasance; (3) gross negligence; or (4) reckless disregard of the Trustee's
duties. However, as permitted by the Maryland statute, our Declaration of
Trust further limits the liability of our Trustees and officers by providing
that the Trustees and the officers shall be liable to us or our shareholders
only (1) to the extent the Trustee or officer actually received an improper
benefit or profit in money, property or services, in which case any such
liability shall not exceed the amount of the benefit or profit in money,
property or services actually received; or (2) to the extent that a judgment
or other final adjudication adverse to such Trustee or officer is entered in a
proceeding based on a finding in the proceeding that such Trustee's or
officer's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. In all situations in which the limitations of liability contained
therein apply, the remedies available to us or to our shareholders shall be
limited to equitable remedies, such as injunctive relief or rescission, and
shall not include the right to recover money damages. As a result of that
limitation on liability, we and our shareholders may be limited in our ability
to recover from our Trustees and officers for any damages caused by a breach
of the duties those persons owe to us.

20. Majority Rule Prevails. Shareholders by a majority vote may take
certain actions, including termination of our existence or approving
amendments to our Declaration of Trust, except for such actions and amendments
that require supermajority approval. See "Summary of Declaration of Trust -
Termination" "- Amendment of the Declaration of Trust" and "- Restrictions on
Certain Conversion Transactions and Rollups". Any such change, if approved by
the holders of the requisite number of Shares, would be binding on all non-
consenting shareholders. Certain of these provisions may discourage or make
it more difficult for a person to acquire control of us or to effect a change
in our operation.

21. Short Term Investments; Fixed Rate Trading. Pending acquisition of
Mortgage Investments, we are authorized to invest our funds in short term
investments. We view short term investments as those with a maturity date
which is less than 2 years. We expect to dispose of those short term
investments in order to acquire Mortgage Investments and may incur a loss upon
such disposition. Additionally, we will acquire fixed rate instruments for
both short term investments and Mortgage Investments. We may dispose of these
fixed rate instruments, for, among other purposes, acquiring other Mortgage
Investments, or liquidating our portfolio. See "Investment Objectives and
Policies - Temporary Investments".

22. Risk of Potential Future Offerings. We may in the future increase
our capital resources by making additional offerings of Shares on terms deemed
advisable by our Trustees. Depending upon the terms upon which any additional
Shares might be offered, the effect of additional equity offerings may be the
dilution of the equity of our shareholders or the reduction of the price of
our Shares, or both. We are unable to estimate the amount, timing or nature
of additional offerings as they will depend upon market conditions and other
factors.

B. OPERATIONS RISKS

23. Economic Risks. The results of our operations are affected by
various factors, many of which are beyond our control. The results of our
operations depend on, among other things, the level of net interest income
generated by our Mortgage Investments, the market value of those Mortgage
Investments and the supply of and demand for those Mortgage Investments. Our
net interest income varies primarily as a result of changes in short-term
interest rates, borrowing costs and prepayment rates, the behavior of which
involve various risks and uncertainties as set forth below. Interest rates,
borrowing costs and credit losses depend upon the nature and terms of the
Mortgage Investments, the geographic location of the properties securing the
Mortgage Investments, conditions in financial markets, the fiscal and monetary
policies of the United States government and the Board of Governors of the
Federal Reserve System, international economic and financial conditions,
competition and other factors, none of which can be predicted with any
certainty. Because changes in interest rates may affect our activities, our
operating results depend, in large part, upon our ability effectively to
manage our interest rate risks while maintaining our status as a REIT. See
"Risk Factors - Fluctuations in Interest Rates May Affect Return on
Investment".

24. Fluctuations In Interest Rates May Affect Return On Investment.
Recent years have demonstrated that mortgage interest rates are subject to
abrupt and substantial fluctuations. If prevailing interest rates rise above
the average interest rate being earned by our Mortgage Investments, investors
may be unable to quickly liquidate their investment in order to take advantage
of higher returns available from other investments. See "Risk Factors - Lack
of Liquidity". Furthermore, interest rate fluctuations may have a
particularly adverse effect if we used money borrowed at variable rates to
fund fixed rate Mortgage Investments. In that event, if prevailing interest
rates rise, our cost of money could exceed the income we earned from that
money, thus reducing our profitability or causing losses through liquidation
of Mortgage Investments in order to repay the debt on the borrowed money or
default if we cannot cover the debt on the borrowed money.

25. Risk of Loss on Non-Insured, Non-Guaranteed Mortgage Loans. We
generally do not intend to obtain credit enhancements for our Mortgage
Investments, because the majority, if not all, of those mortgage loans will be
"non-conforming" in that they will not meet all of the underwriting criteria
required for the sale of the mortgage loan to a federally owned or guaranteed
mortgage agency. Accordingly, during the time we hold Mortgage Investments
for which third party insurance is not obtained, we will be subject to the
general risks of borrower defaults and bankruptcies and special hazard losses
that are not covered by standard hazard insurance (such as those occurring
from earthquakes or floods). In the event of a default on any Mortgage
Investment held by us, including, without limitation, defaults resulting from
declining property values and worsening economic conditions, we would bear the
risk of loss of principal to the extent of any deficiency between the value of
the related mortgage property and the amount owing on the mortgage loan.
Defaulted mortgage loans would also cease to be eligible collateral for
borrowings and would have to be financed by us out of other funds until those
loans are ultimately liquidated, which could cause increased financing costs
and reduced net income or a net loss. See "Certain Legal Aspects of Mortgage
Loans".

26. Bankruptcy Of Borrowers May Delay Or Prevent Recovery. The recovery
of money owed to us may be delayed or impaired by the operation of the federal
bankruptcy laws. Any borrower has the ability to delay a foreclosure sale for
a period ranging from a few months to several months or more by filing a
petition in bankruptcy, which automatically stays any actions to enforce the
terms of the loan. The length of this delay and the costs associated
therewith will generally have an adverse impact on our profitability. See
"Certain Legal Aspects of Mortgage Loans".

27. Ability to Acquire Mortgage Investments; Competition and Supply. In
acquiring Mortgage Investments, we will compete with other REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, other lenders, Ginnie Mae, Fannie Mae,
Freddie Mac and other entities purchasing Mortgage Investments, most of which
will have greater financial resources than we do. In addition, there are
mortgage REITs similar to us, and others may be organized in the future. Some
of these entities can be expected to have substantially greater experience in
originating or acquiring Mortgage Investments than the Advisor and we have.
The effect of the existence of additional potential purchasers of Mortgage
Investments may be to increase competition for the available supply of
Mortgage Investments suitable for purchase by us. See also "Conflicts of
Interest - Competition with Affiliates for the Purchase and Sale of Mortgage
Investments".

28. Environmental Liabilities. In the event that we are forced to
foreclose on a defaulted Mortgage Investment to recover our investment, we may
be subject to environmental liabilities in connection with that real property
which may cause its value to be diminished. While we intend to exercise due
diligence to discover potential environmental liabilities prior to the
acquisition of any property through foreclosure, hazardous substances or
wastes, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during our
ownership or after a sale of that property to a third party. If those
hazardous substances are discovered on a property, we may be required to
remove those substances or sources and clean up the property. There can be no
assurances that we would not incur full recourse liability for the entire cost
of any removal and clean up, that the cost of such removal and clean up would
not exceed the value of the property or that we could recover any of those
costs from any third party. We may also be liable to tenants and other users
of neighboring properties. In addition, we may find it difficult or
impossible to sell the property prior to or following any such clean up. See
"Certain Legal Aspects of Mortgage Loans - Environmental Risks".

29. Risk of Leverage. Subject to certain restrictions described in
"Summary of Declaration of Trust - Restrictions on Borrowing", including the
affirmative vote of the Independent Trustees, we would be allowed to incur
financing with respect to the acquisition of Mortgage Investments in an
aggregate amount not to exceed 50% of our Net Assets. The effect of
leveraging is to increase the risk of loss. The higher the rate of interest
on the financing, the more difficult it would be for us to meet our
obligations and the greater the chance of default. That financing may be
secured by liens on our Mortgage Investments. Accordingly, we could lose our
Mortgage Investments if we default on the indebtedness. To the extent
possible, such debt will be of non-recourse type, meaning that we will be
liable for any deficiency between the proceeds of a sale or other disposition
of the Mortgage Investments and the amount of the debt. See "Investment
Objectives and Policies - Borrowing Policies".

30. Reliance On Appraisals Which May Not Be Accurate Or Which May Be
Affected By Subsequent Events. Since we are an "asset" rather than a "credit"
lender, we will rely primarily on the real property securing the Mortgage
Investments to protect our investment. Thus, we will rely on appraisals and
Broker Price Opinions ("BPO's"), to determine the fair market value of real
property used to secure the Mortgage Investments we purchase. See "Investment
Objectives and Policies - Underwriting Criteria". No assurance can be given
that such appraisals or BPO's will, in any or all cases, be accurate.
Moreover, since an appraisal or BPO is given with respect to the value of real
property at a given point in time, subsequent events could adversely affect
the value of real property used to secure a loan. Such subsequent events may
include general or local economic conditions, neighborhood values, interest
rates and new construction. Moreover, subsequent changes in applicable
governmental laws and regulations may have the effect of severely limiting the
permitted uses of the property, thereby drastically reducing its value.
Accordingly, if an appraisal is not accurate or subsequent events adversely
effect the value of the property, the Mortgage Investment would not be as
secure as anticipated, and, in the event of foreclosure, we may not be able to
recover our entire investment.

31. Mortgages May Be Considered Usurious. Most, if not all, of the
Mortgage Investments we will purchase will not be exempt from state usury laws
and thus there exists some uncertainty with respect to mortgage loans in
states with restrictive usury laws. However, we anticipate that we will only
purchase Mortgage Investments if they provide that the amount of the interest
charged thereon will be reduced if, and to the extent that, the interest or
other charges would otherwise be usurious. See "Certain Legal Aspects of
Mortgage Loans - Applicability of Usury Laws".

32. Risks of Bankruptcy of Mortgage Servicer. Our Residential Mortgages
and Contracts for Deed will be serviced by SCMI or by other entities. We
intend to obtain fidelity bonds and directors' and officers' indemnity
insurance to lower risks of liability from the actions of such entities.
However, there may be additional risks in the event of the bankruptcy or
insolvency of any of those entities or in the event of claims by their
creditors. Those additional risks which would not be present if we were
qualified in all instances to service our Residential Mortgages and Contracts
for Deed directly. For example, SCMI will, from time to time, receive on our
behalf, payments of principal, interest, prepayment premiums and sales
proceeds. In the event of bankruptcy or insolvency of SCMI, its creditors
could seek to attach those funds to pay of their claims against SCMI. That
could delay payment of those funds to us. If SCMI or any other entities
acting on our behalf hold these payments in segregated accounts as they are
contractually obligated to do, then the Advisor believes any such claim should
be resolved in our favor as the beneficial owner.

C. TAX RISKS

33. Material Tax Risks Associated With Investment In Shares. An
investment in Shares involves material tax risks. Each prospective purchaser
of Shares is urged to consult his own tax adviser with respect to the federal
(as well as state and local) income tax consequences of that investment. For
a more detailed description of the tax consequences of an investment in
Shares. See "Federal Income Tax Considerations".

34. Risk of Inability to Qualify as a REIT. We were organized and
conduct our operations in a manner that we believe will enable us to be taxed
as a REIT under the Internal Revenue Code (the "Code". To qualify as a REIT,
and thereby avoid the imposition of federal income tax on any income we
distribute to our shareholders, we must continually satisfy three income
tests, two asset tests and one distribution test. See "Federal Income Tax
Considerations - Qualification as a REIT". We have received an opinion of our
legal counsel that it is more likely than not that we will qualify as a REIT.
See "Risk Factors - Limitations on Opinion of Counsel as to Tax Matters" and
"Federal Income Tax Considerations - General".

If, in any taxable year, we fail to distribute at least 95% of our
taxable income, we would be taxed as a corporation and distributions to our
shareholders would not be deductible in computing its taxable income for
federal income tax purposes. Because of the possible receipt of income
without corresponding cash receipts due to timing differences that may arise
between the realization of taxable income and net cash flow (e.g. by reason of
the original issue discount rules) or our payment of amounts which do not give
rise to a current deduction (such as principal payments on indebtedness) it is
possible that we may not have sufficient cash or liquid assets at a particular
time to distribute 95% of our taxable income. In that event, we could declare
a consent dividend or we could be required to borrow funds or liquidate a
portion of our investments in order to pay our expenses, make the required
Distributions to shareholders, or satisfy our tax liabilities, including the
possible imposition of a 4 percent excise tax. There can be no assurance that
such funds will be available to the extent, and at the time, required by us.
In the event of any adjustment of deductions of gross income by the IRS we
could declare a deficiency dividend. See "Federal Income Tax Considerations -
Qualification as a REIT - Distributions to Shareholders".

If we were taxed as a corporation, our payment of tax would substantially
reduce the funds available for distribution to shareholders or for
reinvestment and, to the extent that Distributions had been made in
anticipation of our qualification as a REIT, we might be required to borrow
additional funds or to liquidate certain of our investments in order to pay
the applicable tax. Moreover, should our election to be taxed as a REIT be
terminated or voluntarily revoked, we may not be able to elect to be treated
as a REIT for the following four year period. See "Federal Income Tax
Considerations - Qualification as a REIT".

35. Restrictions on Maximum Share Ownership. In order for us to qualify
as a REIT, no more than 50% of the outstanding Shares may be owned, directly
or indirectly, by five or fewer individuals at any time during the last half
of our taxable year. To ensure that we will not fail to qualify as a REIT
under this test, our Declaration of Trust grants the Trustees the power to
place restrictions on the accumulation of Shares. These restrictions may (1)
deter others from making tender offers for Shares, which offers may be
attractive to shareholders or (2) limit the opportunity for shareholders to
receive a premium for their Shares in the event an investor is making
purchases of Shares in order to acquire a block of Shares. See "Summary of
Declaration of Trust - Restriction on Transfer of Shares" and "Risk Factors -
Anti-Takeover Considerations and Restrictions on Share Accumulation".

36. Limitations on Opinion of Counsel as to Tax Matters. As set forth
more fully in "Federal Income Tax Considerations - General", our attorneys
have expressed their opinion based on the facts described in this prospectus,
on the Declaration of Trust, and on certain representations by us and the
Advisor, that it is more likely than not (1) that we will qualify as a REIT;
and (2) that Distributions to a Shareholder which is a Tax-Exempt Entity will
not constitute unrelated business taxable income ("UBTI"), provided that
Shareholder has not financed the acquisition of its Shares with "acquisition
indebtedness" within the meaning of the Code. Our attorneys have not given an
opinion as to certain other issues because of the factual nature of those
issues or the lack of clear authority in the law. Accordingly, there may be a
risk that our treatment of certain tax items could be challenged by the IRS
and that we or our shareholders could be adversely affected as a result. It
should be noted, in any event, that our attorneys' opinions are based on
existing laws, judicial decisions and administrative regulations, rulings and
practice, all of which are subject to change, which may be retroactive, and,
further, are not in all cases binding on the IRS.

D. ERISA RISKS

37. Risks Of Investment By Tax-exempt Investors. If you are a plan
fiduciary of a trust of a pension or profit-sharing plan qualified under
Section 401(a) of the Code and exempt from tax under Section 501(a), you
should consider the following items before deciding whether to purchase
Shares: (1) whether the investment satisfies the diversification requirements
of Section 404(a)(3) of the Employee Retirement Income Security Act of 1974
("ERISA"); (ii) whether the investment is prudent, since Shares are not freely
transferable and there may not be a market created in which you can sell or
otherwise dispose of the Shares; (iii) whether interests in us or the
underlying assets owned by us constitute "plan assets" for purposes of Section
4975 of the Code and (iv) whether the "prohibited transaction" rules of ERISA
would apply and prohibit certain of the contemplated transactions between us
and the Advisor or its Affiliates. ERISA requires that the assets of a plan
be valued at their fair market value as of the close of the plan year, and it
may not be possible to adequately value the Shares from year to year, since
there will not be a market for the Shares and the appreciation of any property
may not be shown in the value of the Shares until we sell or otherwise
disposes of our investments See "ERISA Considerations".

<PAGE>
THE COMPANY

We are a Maryland real estate investment trust formed on July 12, 1996.
We invest in Residential Mortgages, Contracts for Deed and Interim Mortgages
financed by the proceeds of this offering. We seek to produce net interest
income on our portfolio of Mortgage Investments while maintaining strict cost
controls in order to generate net income for monthly distribution to our
shareholders. We intend to continue to operate in a manner that will permit
us to continue to qualify as a REIT for federal income tax purposes. As a
result of that REIT status, we are permitted to deduct dividend distributions
to shareholders, thereby effectively eliminating the "double taxation" that
generally results when a corporation earns income and distributes that income
to stockholders in the form of dividends. See "Federal Income Tax
Considerations - Taxation of Taxable Shareholders". Our principal executive
offices are located at 1701 N. Greenville, Suite 403, Richardson, Texas 75081,
telephone (972) 705-9805 or (800) 955-7917, facsimile (972) 705-9304.

We are self-administered by our President who manages our day-to-day
operations, subject to the supervision of our Board of Trustees. Our Advisor
is Mortgage Trust Advisors, Inc. The Advisor has been retained to use its
best efforts to seek out and present to us, whether through its own efforts or
those of third parties retained by it, a sufficient number of suitable
investment opportunities which are consistent with our investment policies and
objectives and consistent with the investment programs the Trustees may adopt
from time to time in conformity with the Declaration of Trust. See
"Management".

Our Trustees, our President and the management team of the Advisor have
considerable expertise in the acquisition and management of mortgage assets,
mortgage finance, asset/liability management, public company management and
administration and the management of corporations in the real estate lending
business.

<PAGE>
INVESTMENT PORTFOLIO

The following table sets forth certain information about our portfolio of
Mortgage Investments in the aggregate as of the year's ended December 31, 1998
and 1997.
<TABLE>
<CAPTION>
12/31/98 12/31/97
<S> <C> <C>
Residential Mortgages
Number 243 72
Interest rate 11.46% 11.39%
Principal balance (1) $10,276,000 $2,824,000
Remaining term (1) 326 Months 308 Months
Current Yield (1) 12.14% 12.20%
Investment to Value ratio (1)(2) 83.50% 83.49%

Contracts for Deed
Number 30 0
Interest rate 11.49% 0
Principal balance (1) $1,281,000 0
Remaining term (1) 348 Months 0
Current Yield (1) 11.71% 0
Investment to Value ratio (1)(2) 89.30% 0

Interim Mortgages
Number 102 30
Interest rate 12.78% 16.75%
Principal balance (1) $3,285,000 $877,000
Remaining term (1) 10.8 Months 9.7 Months
Current Yield (1) 13.04% 16.98%
Investment to Value ratio (1)(2) 50% 46%
<FN>
(1) These amounts were determined at the time the Mortgage Investments were
purchased.

(2) The Investment to Value ratio is determined at the time a Mortgage
Investment is bought and is determined by dividing the amount paid to buy that
Mortgage Investment by the value of the underlying real estate that is
security for that Mortgage Investment.
</FN>
</TABLE>

As of December 31, 1998 we had 11 Mortgage Investments (representing 2.9%
of our total portfolio) that were in default. All of those Mortgage
Investments were covered by the recourse provisions under which they were
purchased. As a result of the recourse provisions, we did not experience a
loss of interest income because of the defaults.

All of the properties that are security for the Residential Mortgages and
Interim Mortgages are located in Texas. Each of the properties is adequately
covered by a mortgagees title insurance policy and hazard insurance.

<PAGE>
SELECTED FINANCIAL DATA

The following table contains certain selected financial data and is
qualified by the more detailed Financial Statements and notes thereto included
elsewhere in this prospectus. The Balance Sheet Data as of December 31, 1998
and 1997, and the Statement of Operations Data for the year ended December 31,
1998 and 1997 have been derived from our financial statements for such years,
which have been audited by Jackson & Rhodes P. C., independent public
accountants, and are included elsewhere in this prospectus. This data should
be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
and notes thereto included in this prospectus.

<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997

OPERATING DATA:
<S> <C> <C>
Total revenues $ 1,131,154 $ 172,027
Total expenses 114,619 (27,573)

Net income 1,016,535 199,600

Net income per Share 2.12 2.66

Weighted average Shares outstanding 480,057 75,089

<CAPTION>
As of
December 31,
1998 1997

BALANCE SHEET DATA:
<S> <C> <C>
Cash $ 58,054 $ 248
Residential mortgages 11,159,863 2,722,036
Interim mortgages 3,285,023 877,275

Total assets 14,658,939 3,654,608

Bank loan 1,484,308 138,000
Total liabilities 1,606,991 172,682

Total shareholders' equity 13,051,948 3,481,926
</TABLE>

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OF THE COMPANY

The following table sets forth certain information about the Mortgage
Investments that we purchased during the periods set forth below.

<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997

Residential Mortgages
<S> <C> <C>
Purchase Price $ 7,058,000 $2,608,000
Total Number 171 71
Number Purchased From Affiliates 125 62
Number Purchased From Other Sources 46 9
Interest Rate 11.48% 11.38%
Aggregate Principal Balance $ 7,452,000 $2,794,000
Average Principal Balance $43,600 $39,400
Remaining Term (1) 333 months 308 months
Current Yield (1) 12.12% 12.20%
Purchase Price/ Principal Balance (1) 94.71% 93.33%
Investment to Value Ratio (1)(2) 83.61% 83.53%

Contracts for Deed
Purchase Price $1,257,000 0
Total Number 30 0
Number Purchased From Affiliates 7 0
Number Purchased From Other Sources 23 0
Interest Rate 11.49% 0
Aggregate Principal Balance $1,281,000 0
Average Principal Balance $42,700 0
Remaining Term (1) 348 0
Current Yield (1) 11.71% 0
Purchase Price/ Principal Balance (1) 98.12% 0
Investment to Value Ratio (1)(2) 89.34% 0

Interim Mortgages
Purchase Price $3,285,000 $ 877,000
Total Number Participated In 227 32
Balance at Year End 102 30
Number Purchased From Affiliates 227 32
Number Purchased From Other Sources 0 0
Interest Rate at year-end 12.78% 16.75%
Remaining Term (1) 10.8 Months 9.7 months
Current Yield at year-end(1) 13.04% 16.98%
Purchase Price/ Principal Balance (1) 100% 100%
Investment to Value Ratio (1)(2) 46% 50%
<FN>
(1) These amounts were determined at the time the Mortgage Investments were
purchased.

(2) The Investment to Value ratio is determined at the time a Mortgage
Investment is acquired and is determined by dividing the amount paid to
acquire that Mortgage Investment by the value of the underlying real estate
that is security for that Mortgage Investment.
</FN>
</TABLE>

<PAGE>
RESULTS OF OPERATIONS - THE YEARS ENDED DECEMBER 31, 1998 AND 1997

We were formed on July 12, 1996, however our business operations
commenced in March 1997 when the Securities and Exchange Commission issued its
order of registration for our initial public offering of Shares.

During 1998, we purchased 171 Residential Mortgages with an unpaid
principal balance of $7,452,000, as of the dates of purchase, for a discounted
price of $7,058,000. One hundred twenty-five of the Residential Mortgages were
purchased from SCMI and 46 were purchased from unaffiliated third parties. The
Residential Mortgages had a blended annual interest rate of 11.48%, a current
annual yield of 12.12%, and an investment-to-value ratio of 83.6% (the amount
paid by us to purchase a Mortgage Investment divided by the value of the real
estate that is the security for that Mortgage Investment.) The average
Residential Mortgage had an unpaid principal balance of $43,600, a term
remaining of 333 months, and was purchased at a discount from face value for
94.7% of the unpaid principal balance of the Mortgages as of the purchase
dates. This compares to 1997, during which we purchased 71 Residential
Mortgages with an unpaid principal balance of $2,794,000, as of the dates of
purchase, for a discounted price of $2,608,000. Sixty-two of the Residential
Mortgages were purchased from SCMI and 9 were purchased from unaffiliated
third parties. The Residential Mortgages had a blended annual interest rate of
11.38%, a current annual yield of 12.20%, and an investment-to-value ratio of
83.5% (the amount paid by us to purchase a Mortgage Investment divided by the
value of the real estate that is the security for that Mortgage Investment.)
The average Residential Mortgage acquired in 1997 had an unpaid principal
balance of $39,400, a term remaining of 308 months, and was purchased at a
discount from face value for 93.3% of the unpaid principal balance of the
Mortgages as of the purchase dates.

During 1998, we purchase 30 Contracts for Deed with an unpaid principal
balance of $1,281,000, as of the dates of purchase, for a discounted price of
$1,257,000. Seven of the Contracts for Deed were purchased from SCMI and 23
were purchased from unaffiliated third parties. The Contracts for Deed had a
blended annual interest rate of 11.49%, a current annual yield of 11.71%, and
an investment-to-value ratio of 89.3% (the amount paid by us to purchase a
Mortgage Investment divided by the value of the real estate that is the
security for that Mortgage Investment.) The average Contract for Deed had an
unpaid principal balance of $42,700, a term remaining of 348 months, was
purchased at a discount from face value for 98.1% of the unpaid principal
balance of the Mortgages as of the purchase dates. We did not acquire
Contracts for Deed in 1997.

As of December 31, 1998, our mortgage portfolio in the aggregate
consisted of 243 Residential Mortgages and 30 Contracts for Deed. As of the
dates of purchase, the portfolio had an unpaid principal balance of
$11,557,000, and was purchased for a discounted price of $10,950,000 (94.75%
of the unpaid principal balance). One hundred ninety-five of the loans were
purchased from SCMI and 78 were purchased from unaffiliated third parties. The
average loan in the portfolio had an interest rate of 11.46%, an unpaid
principal balance of $42,300, a term remaining of 328 months, and a current
annual yield of 12.09%, and an investment-to-value ratio of 84.1% (the amount
paid by us to purchase a Mortgage Investment divided by the value of the real
estate that is the security for that Mortgage Investment.)

In 1998 we participated in 227 Interim Mortgage Loans, of which 125 were
paid in full during the twelve month period and 102 remained active at
December 31, 1998. As of December 31, 1998 we had $3,285,000 invested in our
active interim loans. Those interim loans had an average interest rate of
12.78%, a term remaining of 10.8 months and an annual current yield of 13.04%.
The loan-to-value ratio of the portfolio did not exceed 50%. This compares to
1997 during which we participated in 32 interim loans, of which two were paid
in full during the twelve month period and 30 remained active at year-end. At
December 31, 1997 we had $877,000 in our active interim loans. The interim
loans had an average interest rate of 16.75%, a term remaining of 9.7 months
and an annual current yield of 16.98%. The loan-to-value ratio of the
portfolio did not exceed 50%.

All of the properties that are security for the Residential Mortgages and
Interim Mortgage Loan were located in Texas. Each of the properties was
adequately covered by a mortgagee title insurance policy and hazard insurance.

Our Mortgage Investments generated $1,131,154 and $172,027 of total
revenues in 1998 and 1997, respectively. The increase in revenues for 1998 was
attributed to the significant increase Mortgage Investments we purchased using
Net Offering Proceeds derived from the sale of our Shares during 1998. The
sale of 531,763 of our Shares in 1998 compared to 192,508 in 1997 generated
Net Offering Proceeds of $9,512,292 in 1998 compared with $3,444,989 in 1997.
Expenses of $314,901 in 1998 were offset by reimbursement from the Advisor to
us of $202,282. Expenses of $122,556 in 1997 were offset by reimbursement from
the Advisor of $105,212 for 1997 and an additional $44,917 as reimbursement
for a portion of the 1996 overhead expenses. The increase in expenses from
1997 to 1998 was attributed to a dramatic increase in operating activities
during a full year of operations, including the legal and accounting costs to
audit the Company's financial statements and to comply with state and federal
reporting requirements, and the costs of printing quarterly and annual reports
to our Shareholders. Overhead expense reimbursement from our Advisor
commenced when we entered into a Funding Agreement which provides that the
Advisor will fund all of our general and administrative expenses. In turn, we
will contribute to the Advisor, as a contribution to the Advisor's overhead
costs, on a monthly basis, an amount equal to one-half of 1% of our Average
Invested Assets for the immediately preceding month. Our total contributions
to the Advisor shall not exceed the lesser of (a) the total of general and
administrative expenses funded by the Advisor, or (b) an amount equal to the
maximum allowable Total Operating Expenses under the Declaration of Trust. The
result of increased revenues less net expenses was net income of $1,016,535
for the year ended December 31, 1998 and $199,600 for the year ended December
31, 1997. Earnings per share were $2.12 for 1998 and $2.66 for 1997.

We began making distributions to our shareholders on September 29, 1997.
Monthly distributions have continued each month thereafter. Distributions for
the year ended December 31, 1998 and December 31, 1997 resulted in an
annualized rate of return for Shareholders of 10.3% and 10.2%, respectively.

CAPITAL RESOURCES AND LIQUIDITY

We utilize funds available from the sale of Shares and funds available on
our bank lines of credit for the purchase of Mortgage Investments. During
1998 we sold 531,763 Shares resulting in Gross Offering Proceeds of
$10,635,260 and Net Offering Proceeds (after the deduction of selling
commissions and fees) of $9,512,292 (89.4% of gross proceeds). This compares
to 192,508 Shares sold during 1997, resulting in Gross Offering Proceeds of
$3,850,160 and Net Offering Proceeds of $3,444,989 (89.5% of gross proceeds).
During this offering, and as of December 31, 1998, we have sold a total of
724,271 Shares for Gross Offering Proceeds of $14,485,420 and Net Offering
Proceeds to us (after the deduction of selling commissions and fees) of
$12,955,786 (89.4% of gross proceeds).

On March 27, 1998 we renewed and increased our Revolving Loan Agreement
(the "Loan Agreement") with our lending bank wherein we can borrow up to
$500,000 on a revolving basis for a term of one year from the date of the
Agreement. Interest on the outstanding principal balance of the loan is paid
monthly at a varying rate per annum which is one and one-half percent (1-1/2%)
in excess of that bank's prime rate of interest. The outstanding balance of the
line of credit at December 31, 1998 was $389,000. We use the line of credit to
purchase Mortgage Investments prior to the receipt of funds from the next
Interim Closing of the sale of Shares.

On October 28, 1998 we entered into a Revolving Loan Agreement (the
Legacy Agreement") with Legacy Bank of Texas, a Texas State Bank ("Legacy"),
wherein we can borrow up to $1,500,000 on a revolving basis for a term of
one year from the date of the Legacy Agreement. Interest on the outstanding
principal balance of the loan is paid monthly at a varying rate per annum
which is 1-1/2% above the "Wall Street Journal Prime" rate of interest. As
security for the prompt satisfaction of all obligations of the Legacy
Agreement, we have pledged through collateral assignment $3,000,000 of
residential mortgages. As of December 31, 1998 the outstanding balance on
the Legacy line of credit was $1,095,308. We use the line of credit to
purchase Mortgage Investments prior to the receipt of funds from the next
Interim Closing of the sale of Shares.

We have expanded the selling group to total eight broker/dealers, in
addition to the Selling Group Manager, First Financial United Investments Ltd.,
L.L.P. We will continue to expand the selling group and register the shares in
additional states as deemed appropriate by management.

<PAGE>
INVESTMENT OBJECTIVES AND POLICIES

PRINCIPAL INVESTMENT OBJECTIVES

Our principal investment objectives are to invest the Net Offering
Proceeds in Mortgage Investments consisting of Residential Mortgages,
Contracts for Deed and Interim Mortgages secured by single family residential
real estate. Those investments are expected to:

(1) produce net interest income;

(2) provide monthly Distributions from, among other things, interest
on Mortgage Investments; and

(3) permit reinvestment of payments of principal and proceeds of
prepayments, sales and insurance net of expenses.

There is no assurance that these objectives will be attained. See "Risk
Factors".

INVESTMENT POLICY

Our primary investment policy is to purchase the following types of
mortgage investments: (1) first lien, fixed rate mortgages secured by single
family residential property throughout the United States (which we refer to
herein as "Residential Mortgages"); (2) the Seller's unencumbered interest in
fixed rate Contracts for Deed (also known as land contracts) for the purchase
of single family residential property throughout the United States (which we
refer to herein as "Contracts for Deed"); and (3) loans of 12 months or less
in term, made to investors for the purchase, renovation and sale of single
family homes (which we refer to herein as "Interim Mortgages "). The
Residential Mortgages, Contracts for Deed and the Interim Mortgages that we
invest in are collectively referred to herein as the "Mortgage Investments".
See "Certain Legal Aspects of Mortgage Loans" for a discussion concerning
mortgages, deeds of trust, contracts for deed, foreclosure and certain risks
related to an investment in mortgages.

A significant portion of the home buying public is unable to qualify for
government insured or guaranteed or conventional mortgage financing. Strict
income ratios, credit record criteria, loan-to-value ratios, employment
history and liquidity requirements serve to eliminate conventional financing
alternatives for many working class home buyers. A large market of what are
referred to as "B", "C", "D", and "DD" grade mortgage notes has been generated
through utilization of non-conforming underwriting criteria for those
borrowers who do not satisfy the underwriting requirements for government
insured or guaranteed or conventional mortgage financing. Although there is
no industry standard for the grading of those non-conforming loans, the grade
is primarily based on the credit worthiness of the borrower.

We intend to acquire what we consider to be "B", "C" and "D" grade
mortgage loans. Typically non-conforming notes bear interest at above market
rates consistent with the perceived increased risk of default. In practice,
non-conforming notes experience their highest percentage of default in the
initial 12 months of the loan. We intend to reduce the rate and expense of
early payment defaults through the adherence to investment policies that
require the seller of a note to us with a payment history of less than 12
months to replace or repurchase any non-performing note and to reimburse us
for any interest, escrows, foreclosure, eviction, and property maintenance
costs.

UNDERWRITING CRITERIA

We will not originate loans, except to facilitate the resale of a
foreclosed property. Funds awaiting investment in Mortgage Investments will
be invested in government securities, money market accounts or other assets
that are permitted investments for REITs. See "Investment Objectives and
Policies - Temporary Investments ".

The underwriting criteria for our purchase of Mortgage Investments are as
follows:

1. Priority of Lien. All notes purchased must be secured by a first lien
that is insured by a title insurance company. We will not purchase second
liens or other subordinate or junior liens. Purchase of "wrap notes" will be
permitted subject to loan to value ratios specified below. A "wrap note" is a
secured lien note that "wraps" around an existing first lien and on which the
holder has the right to service the first lien indebtedness. All Contracts
for Deed must provide us with unencumbered title to the real estate
collateral.

2. Rate. The Advisor seeks to acquire Mortgage Investments that will
provide us with a satisfactory net yield. Net yield is determined by the
yield realized after payment of the note servicing fee (1/2 of 1% of note
balance, annually) and administrative costs (estimated to be 1/2 of 1% of our
average invested capital). See "Summary of Declaration of Trust - Limitation
on Total Operating Expenses". The servicing and administrative cost burden is
estimated to approximate 1% of the interest income. All rates will be fixed
rates. We will not acquire adjustable rate loans. Some notes will be bought
at a discount to increase their yield above the contractual rate. No notes
will be purchased at a premium above the outstanding principal balance. This
investment policy allows for acquisition of notes at various rates.

3. Term and Amortization. There is no minimum term for the notes we
acquire. The maximum term for Residential Mortgages and Contracts for Deed is
360 months and Interim Mortgages may not exceed 12 months in term.
Amortization will vary from 0 (interest only on loans 12 months and less) to
360 months. Balloon notes are allowed, so the amortization period does not
need to match the term. No amortization may exceed 360 months.

4. Loan-to-Value Ratio. Except as set forth below, any loan purchased
may not exceed a 85% loan-to-value ratio ("LTV"). Exceptions will be made
for: (1) loans with LTV's in excess of 85% which may be purchased if
discounted sufficiently to bring the Investment-To-Value Ratio to 85% or less
(the LTV's will be established by appraisal on unseasoned loans, and by broker
price opinion (BPO) or appraisals not more than 12 months old on seasoned
notes); (2) loans that have seller recourse through the 12th monthly payment;
and (3) Interim Mortgages (loans to real estate investors for purchase of
homes for resale) may be purchased if they will not exceed a 50% LTV and will
have a maturity of one year or less. However, the President shall have the
authority to purchase Interim Mortgages with a LTV ratio up to 60% on a case
by case basis.

5. Seasoning. Residential Mortgages and Contracts for Deed must have a
minimum of 12 months payment history or will be required to have seller
recourse through the twelfth payment. Those seller recourse agreements will
require the seller of a Residential Mortgage or Contract for Deed to us to
replace or repurchase any non-performing note and reimburse us for any
interest, escrows, foreclosure, eviction, and property maintenance costs. A
note will be considered non performing if any portion of the principal,
interest or escrow payment is 30 days past due. No seasoning is required for
Interim Mortgages.

6. Borrower, Loan and Property Information. A completed Uniform
Residential Loan Application (FNMC form 1003, FDMC form 65), or other form
acceptable to us must accompany each loan acquired. The Form must include
property address, year built, square footage, type of construction, purchase
price of the property, date of purchase, down payment and original loan
amount, rate, term and amortization, borrower and co-borrower name, address,
home and work telephone numbers, prior residence, prior mortgagee or landlord,
current employer and, if employed less than one year at current employer,
previous employer, monthly income and expense information, listing of assets
and liabilities and a listing of three references, with phone numbers and
addresses, including next of kin. In addition, each loan file should include
a Verification of Employment (completed) and a Verification of Rent
(completed), if applicable.

7. Appraisals and BPO's. Each unseasoned loan must have an appraisal
demonstrating a LTV ratio or Investment-To-Value Ratio of not more than 85%
(subject to the exceptions set forth in 4 above). The appraisals may be
limited in scope (not requiring interior inspection) but must be performed by
appraisers approved by the Advisor. Each seasoned note must be accompanied by
an appraisal or a Broker Price Opinion (not more than 12 months old),
demonstrating a LTV ratio or Investment-To-Value Ratio not in excess of 85%
(subject to the exceptions set forth in 4 above), and photographs of the
property securing the loan.

8. Credit. Payment histories reflecting no late payments (30 days +) for
twelve consecutive months will be deemed a sufficient demonstration of
creditworthiness of the borrower for seasoned notes. For unseasoned notes,
the borrower must have the following:

- Current credit report with acceptable explanations for any adverse
ratings, no active bankruptcies, no prior foreclosures.
- Employment, verified, with current employer, or no lapse in employment
for the last 12 months.
- Income ratio, verified, indicating income at least 2.5 times the monthly
payment inclusive of escrows.
- Prior mortgage payment or rental history demonstrating 12 consecutive
months pay history with no late pays (30 days past due).

9. Escrow Requirement. All loans must have adequately funded tax and
insurance escrow accounts and a continuing obligation to fund 1/12th of the
annual insurance and tax amounts each month.

10. Estoppel Letters. Each loan purchased must be accompanied with both
a maker's and a payee's estoppel letter attesting to loan balances, payment
amount, rate, term, security, escrow balance, current status of account, and
next payment date. Estoppel letters must be no more than 30 days old at time
of loan acquisition.

11. Hazard Insurance. Each loan purchased must have, in effect, a
prepaid hazard insurance policy with a mortgagee's endorsement for our benefit
in an amount not less than the outstanding principal balance on the loan. We
reserve the right to review the credit rating of the insurance issuer and, if
deemed unsatisfactory, request replacement of the policy by an acceptable
issuer.

12. Geographical Boundaries. We may purchase loans in any of the 48
contiguous United States. However, in states which provide redemption rights
after foreclosure, the maximum loan to value ratio will be 80%, or
alternatively the loan must provide mortgage insurance.

13. Mortgagees' Title Insurance. Each loan purchased must have a valid
mortgagees' title insurance policy insuring a first lien position in an amount
not less than the outstanding principal balance of the loan.

14. Guarantees, Recourse Agreements, and Mortgage Insurance. Mortgage
Investments with investment-to-value ratios in excess of 85% and/or less than
12 months seasoning will not be purchased without one or more of the
following: government guarantees, seller recourse agreement, mortgage
insurance or similar guarantees or insurances approved by the Board of
Trustees, including a majority of the Independent Trustees.

15. Pricing. Mortgage Investments will be purchased at no minimum
percentage of the principal balance, but in no event in excess of the
outstanding principal balance. Prices paid for notes will vary with
seasoning, interest rate, credit, loan-to-value ratios, pay histories,
guarantees or recourse agreements, and average yield of our loan portfolio
among other factors. Our objectives will be accomplished through purchase of
high rate loans, prepayment of notes purchased at a discount, reinvestment of
principal payments, interim home purchase loans and other short term
investment of cash reserves and, if utilized, leverage of capital to purchase
additional loans.

The principal amounts of Mortgage and the number of mortgages in which we
invest will be affected by market availability and also depends upon the
amount of Net Offering Proceeds available to us from the sale of our Shares.
If less than the maximum Net Offering Proceeds are obtained, the number of
different mortgages available for investment will be reduced. There is no way
to predict the future composition of our portfolio since it will depend in
part on the interest rate environment at the time of investment. See
"Investment Portfolio" for a description of the Mortgage Investments currently
owned by us.

TEMPORARY INVESTMENTS

We intend to use the Net Offering Proceeds to acquire Mortgage
Investments. There can be no assurance as to when we will be able to invest
the full amount of the Net Offering Proceeds in Mortgage Investments, although
we will use our best efforts to invest or commit for investment the full
amount of Net Offering Proceeds within 60 days of receipt. We will
temporarily invest any Net Offering Proceeds not immediately invested in
Mortgage Investments or for the other purposes described above, in certain
short term investments appropriate for a trust account or investments which
yield "qualified temporary investment income" within the meaning of Section
856(c)(6)(D) of the Code or other investments which invest directly or
indirectly in any of the foregoing (such as repurchase agreements
collateralized by any of the foregoing types of securities) and/or such
investments necessary for us to maintain our REIT qualification or in short
term highly liquid investments such as in investments with banks having assets
of at least $50,000,000, savings accounts, bank money market accounts,
certificates of deposit, bankers' acceptances or commercial paper rated A-1 or
better by Moody's Investors Service, Inc., or securities issued, insured or
guaranteed by the United States government or government agencies, or in money
market funds having assets in excess of $50,000,000 which invest directly or
indirectly in any of the foregoing.

OTHER POLICIES

We will not: (a) issue senior securities; (b) invest in the securities of
other issuers for the purpose of exercising control; (c) invest in securities
of other issuers, other than in temporary investments as described under
"Investment Objectives and Policies - Temporary Investments"; (d) underwrite
the securities of other issuers; or (e) offer securities in exchange for
property.

We may borrow funds to make Distributions to our shareholders or to
acquire additional Mortgage Investments. Our ability to borrow funds is
subject to certain limitations set forth in the Declaration of Trust. See
"Summary of Declaration of Trust - Restrictions on Borrowing".

Other than in connection with the purchase of Mortgage Investments, which
may be deemed to be a loan from us to the borrower, we do not intend to loan
funds to any person or entity. Our ability to lend funds to the Advisor, a
Trustee or Affiliates thereof is subject to certain restrictions as described
in "Summary of Declaration of Trust - Restrictions on Transactions with
Affiliates".

We shall not sell property to the Advisor, a Trustee or Affiliates
thereof at terms less favorable than could be obtained from a non-affiliated
party. See "Summary of Declaration of Trust - Restrictions on Transactions
With Affiliates".

Although we do not intend to invest in real property, to the extent we
do, a majority of the Trustees shall determine the consideration paid for such
real property, based on the fair market value of the property. If a majority
of the Independent Trustees determine, or if the real property is acquired
from the Advisor, as Trustee or Affiliates thereof, such fair market value
shall be determined by a qualified independent real estate appraiser selected
by the Independent Trustees.

We will use our best efforts to conduct our operations so as not to be
required to register as an investment company under the Investment Company Act
of 1940 and so as not to be deemed a "dealer" in mortgages for federal income
tax purposes. See "Federal Income Tax Considerations".

We will not engage in any transaction which would result in the receipt
by the Advisor or its Affiliates of any undisclosed "rebate" or "give-up" or
in any reciprocal business arrangement which results in the circumvention of
the restrictions contained in the Declaration of Trust and in applicable state
securities laws and regulations upon dealings between us and the Advisor and
its Affiliates.

The Advisor and its Affiliates, including companies, other partnerships
and entities controlled or managed by such Affiliates, may engage in
transactions described in this prospectus, including acting as Advisor,
receiving Distributions and compensation from us and others, the purchasing,
warehousing, servicing and reselling of mortgage notes, property and
investments and engaging in other businesses or ventures that may be in
competition with us See "Conflicts of Interest", "Management Compensation" and
"Management".

CHANGES IN INVESTMENT OBJECTIVES AND POLICIES

The investment restrictions contained in the Declaration of Trust may
only be changed by amending the Declaration of Trust with the approval of the
shareholders. However, subject to those investment restrictions, the methods
for implementing our investment policies may vary as new investment techniques
are developed.

<PAGE>
DIVIDEND POLICY AND DISTRIBUTIONS

We intend to reinvest any Disposition Proceeds except to the extent they
represent capital gains on loans purchased at a discount. We intend to
distribute substantially all of our taxable income with respect to each year
(which does not ordinarily equal net income as calculated in accordance with
GAAP) to our shareholders so as to comply with the REIT provisions of the
Code. To the extent we have funds available, we will declare regular monthly
dividends. Any taxable income remaining after the distribution of the final
regular monthly dividend each year will be distributed together with the first
regular monthly dividend payment of the following taxable year or in a special
dividend distributed prior thereto. The dividend policy is subject to
revision at the discretion of our Board of Trustees. All Distributions will
be made by us at the discretion of our Board of Trustees and will depend on
our taxable earnings, our financial condition, maintenance of REIT status and
such other factors as the Board of Trustees deems relevant.

Distributions to our shareholders will generally be subject to tax as
ordinary income, although a portion of such Distributions may be designated by
us as capital gain or may constitute a tax-free return of capital. We do not
intend to declare dividends that would result in a return of capital. Any
Distribution to shareholders of income or capital assets will be accompanied
by a written statement disclosing the source of the funds distributed. If, at
the time of distribution, this information is not available, a written
explanation of the relevant circumstances will accompany the Distribution and
the written statement disclosing the source of the funds distributed will be
sent to the shareholders not later than 60 days after the close of the fiscal
year in which the Distribution was made. In addition, we will annually furnish
to each of our shareholders a statement setting forth Distributions paid
during the preceding year and their characterization as ordinary income,
capital gains, or return of capital. For a discussion of the federal income
tax treatment of Distributions that we pay, see "Certain Federal Income Tax
Considerations - Taxation of Shareholders".

We commenced paying monthly dividends to our shareholders on September
29, 1997. The following table shows the dividends per Share that have been
paid by us since that date.

<TABLE>
<CAPTION>
Month Dividend Annual Rate
Per Share of Return
<S> <C> <C>
September 1997 $ 0.1688 10.13%
October 1997 $ 0.1791 10.75%
November 1997 $ 0.1667 10.00%
December 1997 $ 0.1667 10.00%
January 1998 $ 0.1669 10.01%
February 1998 $ 0.1668 10.01%
March 1998 $ 0.1750 10.50%
April 1998 $ 0.1850 11.10%
May 1998 $ 0.1750 10.50%
June 1998 $ 0.1780 10.68%
July 1998 $ 0.1667 10.00%
August 1998 $ 0.1667 10.00%
September 1998 $ 0.1667 10.00%
October 1998 $ 0.1690 10.14%
November 1998 $ 0.1690 10.14%
December 1998 $ 0.1680 10.08%
</TABLE>

<PAGE>
USE OF PROCEEDS

The following table sets forth information concerning (1) the actual use
of proceeds from the Sale of Shares that have been sold as of December 31,
1998 and (2) the estimated use of proceeds of the offering if all of the
Shares being offered are sold. The Gross Offering Proceeds will be retained
in trust for the benefit of the investors and used only for the purposes set
forth below and under "Investment Objectives and Policies". Regardless of the
particular level of Gross Offering Proceeds that is raised by the offering of
Shares, it is estimated that not less than 85% of all Gross Offering Proceeds
will be invested in Mortgage Investments. Certain of the amounts set forth in
the table cannot be precisely calculated at this time and consequently could
vary from the amounts shown.

<TABLE>
<CAPTION>
Shares Sold Through Maximum
December 31, 1998 Offering
(724,271 Shares)(1) (2,500,000 Shares )(1)

Percentage Percentage
of Gross of Gross
Amount Proceeds Amount Proceeds
<S> <C> <C> <C> <C>
Gross Offering Proceeds (1) $14,485,420 100.00% $50,000,000 100.00%

Less Public Offering Expenses:

Selling Commissions
and Due Diligence Fees (2) $1,527,269 10.54% $5,250,000 10.50%

Other Organization and
Offering Expenses (3) $175,000 1.21% $175,000 0.35%

Available for Investment,
Net of Offering Expenses
(Net Offering Proceeds) $12,783,151 88.25% $44,575,000 89.15%

Less Acquisition Fees & Expenses:

Acquisition Fees (4) $343,357 2.37% $1,337,250 2.67%

Minimum Net Offering Proceeds
Available for Investment in
Mortgage Investments (5) $12,439,794 85.88% $43,237,750 86.48%
<FN>
(1) The Gross Offering Proceeds are exclusive of: (a) the 10,000 Shares
purchased by the Advisor at an aggregate purchase price of $200,000 prior to
this initial public offering; (b) the maximum of 12,500 SGM Shares (1 SGM
Share for each 200 Shares sold in this offering) to be sold to the Selling
Group Manager and/or designated Selected Dealers at a price of $.01 per Share
($125 if all SGM Shares are sold); (c) Shares that may be issued upon the
exercise of options that may be granted to the Advisor if it earns a
Subordinated Incentive Fee (d) up to 12,500 Shares that are issuable upon the
exercise of options that may be granted to our President over a five year
period and (e) up to 37,500 Shares that are issuable upon the exercise of
options that may be granted to the three Independent Trustees over a five year
period. See "Management Compensation".

(2) We will pay to the Selling Group Manager selling commissions and due
diligence fees equal to 10.5% of the Gross Offering Proceeds (subject to any
volume discounts for Institutional Investors). The Selling Group Manager will
pay a portion of those selling commissions to Selected Dealers. The Selling
Group Manager may, in its sole discretion, provide volume discounts of up to
2% on a negotiated basis to Institutional Investors who purchase at least
50,000 Shares. The application of any volume discounts will reduce the amount
of commissions that would be paid to the Selling Group Manager but will not
change the Net Offering Proceeds that we receive. See "Plan of Distribution".
The Selling Group Manager will also receive the SGM shares equal to 0.5% of
all Shares sold. Although the SGM Shares may be deemed an offering expense,
they do not require the payment of cash by us but will affect the amount of
expenses that may need to be paid by the Advisor. See footnote (3) below.

(3) Represents costs, other than those described in footnote (2) above,
incurred for legal, accounting, filing fees, printing, marketing and other
expenses related to the preparation and filing of the registration statement
and the marketing of Shares offered hereby. The Advisor has paid all expenses
with respect to our organization of and the offering of Shares to the extent
they, excluding selling commissions, any applicable volume discounts and due
diligence fees described in footnote (2) above, exceed $175,000.

(4) An Acquisition Fee equal to 3% of the principal amount of each
Residential Mortgage or Contract for Deed is paid to the Advisor upon the
purchase of each Residential Mortgage or Contract for Deed (no Acquisition Fee
is paid with respect to the purchase of Interim Mortgages). The amount set
forth herein to be paid if all Shares are sold assumes that we do not borrow
any funds to acquire Residential Mortgages or Contracts for Deed (other than
temporarily to enable us to acquire investments pending the receipt of funds
at the next Interim Closing). If we borrow funds and acquire additional
Residential Mortgages or Contracts for Deed with those borrowed funds, the
amount of the Acquisition Fees would increase. See "Management Compensation"
and "Summary of Declaration of Trust - Restrictions on Borrowing".

(5) We do not presently intend to set aside any amounts as initial
reserves, but may do so at a later date.
</FN>
</TABLE>

<PAGE>
MANAGEMENT COMPENSATION

The following table summarizes all forms, estimated maximum amounts and
recipients of compensation anticipated to be paid to the Advisor, the Selling
Group Manager and its Affiliates. Other than as set forth in this prospectus,
no compensation is anticipated to be paid to the Advisor and its Affiliates.
These fees were not determined by arm's length negotiations. See "Conflicts of
Interest".
<TABLE>
<CAPTION>
Estimated Amount
Actual Amount Maximum Number
Entity Receiving Compensation and Form Paid Through (2,500,000) of
and Method of Compensation December 31, 1998 Shares are Sold

OFFERING AND ORGANIZATION STAGE
<S> <C> <C>
Selling Group Manager receives Due
Diligence Fees equal to 0.5% of the
Gross Offering Proceeds $72,727 $250,000

Selling Group Manager or Selected
Dealers receive Selling Commissions
equal to 10% of the Gross Offering
Proceeds of all Shares sold by them.(1) $1,454,542 $5,000,000

Selling Group Manager may receive
"SGM Shares". The Selling Group
Manager will be entitled to purchase
one SGM Share at a price of $0.01
per Share for each 200 Shares that
are sold hereunder.(2) $0 $249,875

Advisor receives Acquisition Fee
equal to 3.0% of the principal
amount of each Residential Mortgages
or Contract for Deed.(3) $343,357 $1,337,250(4)

SCMI, CRC or Other Affiliates of
the Advisor may receive Gain on Sale
of Mortgage Investments.(5) $0 Not determinable
at this time.

OPERATING STAGE(6)

SCMI receives Loan Servicing Fees
equal to 0.5% of the principal
balance of all Residential Mortgages
and Contract for Deeds serviced by SCMI.
CRC does not receive servicing fees
for servicing Interim Mortgages. $36,175 $216,200(4)

Advisor, Trustees or Affiliates may
receive Real Estate Brokerage
Commissions.(9) $0 Not determinable
at this time.

Advisor receives Subordinated
Incentive Fee subject to certain
conditions described in footnote
(1) below, the Advisor will receive
a Subordinated Incentive Fee equal to
25% of the amount by which our Net
Income for a year exceeds a 10% per
annum non-compounded cumulative
return on our Adjusted Contributions.
For each year which it receives a
Subordinated Incentive Fee, the
Advisor shall also receive 5-year
options to purchase 10,000 Shares
at the initial offering price of the
Shares (not to exceed 50,000 Shares).
See "Management-Summary
of Advisory Agreement.(10)(11) $0 Not determinable
at this time.

Advisor and Affiliates receive
reimbursement for costs of goods,
materials and services used for and by
us obtained from unaffiliated third
parties except for note servicing and
for travel expenses incurred in
seekingany investments or seeking the
disposition of any of our investments.(5) $0 Not determinable
at this time.

President receives salary, bonus and
options as compensation for her services
(1) an annual salary of $60,000, (2) a
bonus equal to 25% of the amount by
which our administrative expenses fall
below the approved administrative budget,
and (3) 5-year options to purchase 2,500
shares at an exercise price of $20 per
share for each year she serves as
President (up to a maximum of 12,500
Shares). See "Management-The President". $60,000 per $60,000 per
year. No bonus year plus any
paid through bonus and
12/31/98 options

Independent Trustees receive fees and
options equal to (1) the greater of
$1,000 per meeting or $4,000 per year,
(2) for each full year they serve 5-year
options to purchase 2,500 Shares at an Up to $4,000
exercise price of $20 per Share (not to per year per
exceed 12,500 Shares per Trustee.) $12,000, plus Trustee, plus
options options
<FN>
(1) The Selling Group Manager may, in its sole discretion, provide volume
discounts of up to 2% on a negotiated basis to Institutional Investors who
purchase at least 50,000 Shares. The application of any volume discounts will
reduce the amount of commissions that would be paid to the Selling Group
Manager but will not change the Net Offering Proceeds we will receive. The
Selling Group Manager will pay to Selected Dealers a commission equal to 4% of
the offering price of the Shares sold by them unless a higher commission (up
to, but not exceeding 8%) is designated by the Selling Group Manager. See
"Plan of Distribution".

(2) The Selling Group Manager may allocate all or a portion of the SGM
Shares to Selected Dealers and registered representatives of the Selling Group
Manager. The SGM Shares are identical to the Shares. See "Plan of
Distribution".

(3) Acquisition Fees are payable to the Advisor for sourcing, evaluating,
structuring and negotiating the acquisition terms of Mortgage Investments. No
Acquisition Fees are paid on Interim Mortgage Loans. The estimated amount
assumes all Net Offering Proceeds are invested in Mortgage Investments. The
actual amounts of the fees paid will depend on the amount of Net Offering
Proceeds and any borrowed funds that are invested.

(4) The amounts that are stated would be paid if we did not utilize
borrowed funds to acquire Mortgage Investments. If we do use borrowed funds
equal to 50% of our Net Asset Value and utilize all of those funds to acquire
Mortgage Investments, then the amounts would be higher relative to the amount
of funds borrowed and utilized in purchasing Mortgage Investments. Although we
are permitted to utilize borrowed funds to acquire Mortgage Investments, we do
not currently intend to do so except for temporary borrowings made to acquire
Mortgage Investments before the next Interim Closing. See "Summary of
Declaration of Trust - Restrictions on Borrowing".

(5) We will obtain Mortgage Investments from several sources, including
SCMI, CRC or other Affiliates of the Advisor. All Mortgage Investments
purchased from SCMI, CRC or other Affiliates of the Advisor will be at prices
no higher than those that would be paid to unaffiliated third parties for
mortgages with comparable terms, rates, credit risks and seasoning. See
"Conflicts of Interest - Purchase of Mortgage Notes from Affiliates". SCMI or
CRC may realize a gain or a loss on the sale of a Mortgage Investment that it
sells to us, with the amount of that gain or loss depending upon the price it
paid for that Mortgage Investment and the price at which it sells it to us.

(6) Effective January 1, 1997, the Advisor has been funding all of our
general and administrative expenses in return for a contribution by us of an
amount equal to 0.5% of our Average Invested Assets for the immediately
preceding month. However, our contributions to the Advisor shall not exceed
the lesser of (a) the total general and administrative expenses funded by the
Advisor or (b) an amount equal to the maximum allowable Total Operating
Expenses under the Declaration of Trust. See "Summary of Declaration of Trust
- - Limitation on Total Operating Expenses". The Declaration of Trust provides
that our Total Operating Expenses may not exceed in any fiscal year the
greater of (a) 2% of the Average Invested Assets (defined generally as the
average book value of our Mortgage Investments, without regard for non-cash
reserves) or (b) 25% of our Net Income. The President will have the
responsibility of preparing an annual budget and submitting that budget to the
Trustees.

(7) We will utilize the services of SCMI, and nonaffiliated third parties
to service the Residential Mortgages and Contracts for Deed we purchase and
utilize CRC to service our Interim Mortgages. For its efforts in servicing
those items, SCMI will be paid a fee equal to 0.5% of the principal balance of
the mortgages or Contracts for Deed being serviced by SCMI, a rate we believe
is a competitive rate that is no higher than the rates charged by unaffiliated
third parties. CRC is not paid a fee for servicing the Interim Mortgages.
The servicing of the mortgages includes the collection of monthly payments
from the borrower, the payment of all principal and interest to us, the
payment of all real estate taxes and insurance to be paid out of escrow,
regular distribution of information regarding the application of all funds
received and enforcement of collection for all delinquent accounts, including
foreclosure of an account when and as necessary.

(8) The amount of servicing fees paid to SCMI will depend upon the
principal balance of the loans serviced by SCMI or CRC. The numbers set forth
herein assume that SCMI services all of our Mortgage Investments.

(9) If we foreclose on a property securing a mortgage loan and sell the
property, we may pay real estate brokerage fees which are reasonable,
customary and competitive, taking into consideration the size, type and
location of the property (the "Competitive Commission"), which shall not in
the aggregate exceed 6% of the gross sales price of the property; however, as
to the Advisor, a Trustee, or an Affiliate thereof, such fees shall be paid
only if such person provides a substantial amount of services in the sales
effort, in which case such fees shall not exceed the lesser of (i) a
percentage of the gross sales price of a property equal to 50% of the
Competitive Commission, or (ii) 3% (three percent) of the gross sales price of
a property.

(10) When our audited annual financial statements are received each year,
the Advisor shall determine if the following conditions are satisfied:

(i) (A) the total of the Adjusted Contributions as of the end of the
most recent fiscal year and any undistributed cash as of that date
equals (B) the Gross Offering Proceeds as of that date less cumulative
Capital Distributions made through that date; and

(ii) for the year then ended, our Net Income equals or exceeds a 10%
per annum non-compounded cumulative return on our Adjusted
Contributions. The determination of our annual non-compounded
cumulative return on our Adjusted Contributions shall be made by
dividing our total Net Income for that year by the average of the month
end Adjusted Contributions during that year.

If our Trustees agree that both of those conditions are satisfied, we
will, subject to the restrictions set forth in footnote (11) below, pay the
Advisor the Subordinated Incentive Fee.

(11) In no event may the Subordinated Incentive Fee exceed the amount
permitted under Section IV.D. of the Statement of Policy on Real Estate
Investment Trusts adopted by the North American Securities Administrators
Association and in effect on the date of this prospectus.
</FN>
</TABLE>

<PAGE>
CONFLICTS OF INTEREST

Although a majority of the Trustees are Independent Trustees, the
relationships among us, our Trustees, our President, the Advisor and their
Affiliates will result in various conflicts of interest. The Advisor, the
Trustees, the President, and their respective Affiliates are engaged in
business activities involving real estate oriented investments and anticipate
engaging in additional business activities in the future which may be
competitive with our business. The Advisor, although not currently engaged in
any competitive activities, may engage in the future in business activities
which will be competitive with us. With respect to the conflicts of interest
described in this prospectus, the Trustees, the President and the Advisor will
exercise their fiduciary duties to us and our shareholders in a manner which
will preserve and protect our rights and the rights of our shareholders. See
"Fiduciary Responsibility of Trustees".

In addition, our Declaration of Trust imposes certain restrictions upon
dealings between us and the Advisor, any Trustee or Affiliates thereof. In
particular, the Declaration of Trust provides that we shall not engage in
transactions with any Sponsor, the Advisor, a Trustee or Affiliates thereof,
except to the extent that each such transaction has, after disclosure of such
affiliation, been approved or ratified by the affirmative vote of a majority
of the Independent Trustees, not otherwise interested in such transaction, who
have determined that (a) the transaction is fair and reasonable to us and our
shareholders; (b) the terms of such transaction are at least as favorable as
the terms of any comparable transactions made on arms length basis and known
to the Trustees; and (c) the total consideration is not in excess of the
appraised value of the property being acquired, if an acquisition is involved.
See "Summary of Declaration of Trust - Restrictions on Transactions with
Affiliates."

Certain conflicts of interest may arise in our management and operation,
including those described below.

1. Payment of Fees and Compensation. The Advisor and its Affiliates
will receive substantial compensation from the proceeds of the offering and
our operations, including: (1) commissions, due diligence fees and SGM Shares
payable to the Selling Group Manager; (2) Acquisition Fees payable to the
Advisor equal to 3% of the principal amount of each Residential Mortgage or
Contract for Deed that we acquire; (3) loan servicing fees payable to SCMI;
(4) real estate brokerage commissions; and (5) a Subordinated Incentive Fee
payable to the Advisor. These fees, other than the Subordinated Incentive
Fee, will be payable even if we are not profitable. See "Management
Compensation" for a discussion of the fees payable to the Advisor and its
Affiliates. Subject to the compliance with our investment objectives and
policies and the supervision of the Board of Trustees, the Advisor will have
absolute discretion with respect to all investments we make.

2. Purchase of Mortgage Investments from Affiliates. We intend to
acquire our Mortgage Investments from several sources, including South Central
Mortgage, Inc. ("SCMI"), and Capital Reserve Corp. (CRC"). SCMI and CRC are
Affiliates of the Advisor. See "Investment Portfolio" for information about
the number of Mortgage Investments that have already been acquired from SCMI
and CRC. The amount of additional Mortgage Investments to be acquired from
SCMI or CRC in the future cannot be determined at this time and will depend
upon the Mortgage Investments that are available from SCMI and CRC or other
sources at the time we have funds to invest. At this time, SCMI and CRC are
the only Affiliates that are expected to sell any Mortgage Investment to us.
SCMI is a Texas corporation that is in the business of purchasing, selling and
servicing mortgages and CRC is a Texas corporation that finances home
purchases and renovations by investors. All Mortgage Investments purchased
from SCMI, CRC or other Affiliates of the Advisor will be at prices no higher
than would be paid to unaffiliated third parties for loans with comparable
terms, rates, credit risks and seasoning.

SCMI has agreed that, if the obligor on any Residential Mortgage or
Contract for Deed that has had less than 12 payments made on it that either
SCMI or its Affiliate sells to us defaults in the making of any payment or
other obligation thereon during the period ending before the 12th payment
after we bought that Residential Mortgage or Contract for Deed, then SCMI
shall buy that Mortgage Investment from us or our assignee at a price equal to
the total unpaid principal balance due thereon, plus accrued interest to the
date of the purchase, plus insurance premiums, taxes and any other amounts
that we spent in the maintenance, protection or defense of our interest
therein or in the real property, including reasonable attorneys' fees. SCMI
may satisfy its obligations under the foregoing purchase or repurchase
requirement by either:

(a) Assigning and transferring to us a replacement Residential Mortgage
or Contract for Deed (the "Replacement Mortgage Investment"), provided:
(i) the real property securing the Replacement Mortgage Investment, the
creditworthiness of the obligor on the Replacement Residential Mortgage
Investment and other general underwriting criteria are reasonably
acceptable to us; and (ii) the value of the Replacement Residential
Mortgage Investment at the date of transfer to us shall be computed by
us in accordance with our then applicable pricing schedule for
acquisition of such Residential Mortgages or Contracts for Deed, giving
due regard to principal balance, interest rate, term, amortization and
other general factors used by us for acquisition of Residential
Mortgages at that time; or

(b) Payment by SCMI to us, on a month to month basis, of all lost
interest, tax and insurance escrow payments, as well as any costs
incurred by us related to curing the default or obtaining title to and
possession of the property securing the defaulted obligation, including
but not limited to foreclosure, deed in lieu of foreclosure, bankruptcy
claims or motions, evictions, maintaining and/or securing the property
and remarketing costs less any additional down payments or settlements
received by us.

3. Non-Arm's-Length Agreements. The agreements and arrangements relating
to compensation between us and the Advisor or its Affiliates are not the
result of arm's-length negotiations. However, the majority of the Trustees
are Independent Trustees and all of the Trustees may be removed, with or
without cause, by the holders of a majority of the outstanding Shares. The
Advisor may be removed for cause by a majority of such Independent Trustees
without ratification by the shareholders. See "Risk Factors - Shareholders
Must Rely on Management", "Summary of Declaration of Trust -Trustees" and
"Management - Summary of the Advisory Agreement".

4. Competition for the Time and Services of Common Officers and Trustees.
We will rely on the Advisor and its Affiliates for supervision of the
management of our operations. In the performance of their duties, the
officers, directors and employees of the Advisor and its Affiliates may, for
their own account or that of others, originate mortgages and acquire
investments similar to those made or acquired by us. The Trustees also may
act as trustees, directors or officers, or engage in other capacities, in
other REITs or limited partnerships, and may acquire and originate similar
Mortgage Investments for their own account or that of others. Accordingly,
conflicts of interest may arise in operating more than one entity with respect
to allocating time between such entities. Our Trustees, President and Advisor
will devote such time to our affairs and the affairs of any other entities in
which they are involved as they determine in their sole discretion to be
necessary for our benefit and the benefit of those other entities. In
exercising that discretion those persons will act in good faith and in
compliance with the fiduciary duties they owe to us and to our shareholders.
See "Management".

The Advisor and its Affiliates believe they have sufficient staff
personnel to be fully capable of discharging their responsibility to us and to
all other entities to which they or their officers or Affiliates are
responsible.

5. Competition with Affiliates for the Purchase and Sale of Mortgage
Investments. Various REITs, partnerships or other entities may in the future
be formed by the Advisor or its Affiliates to engage in businesses which may
be competitive with us and which may have the same management as ours. To the
extent that those other REITs, partnerships or entities with similar
investment objectives (or programs with dissimilar objectives for which a
particular Mortgage Investments may nevertheless be suitable) (which we will
collectively refer to herein as "Affiliated Programs") have funds available
for investment at the same time as we do and a potentially suitable investment
has been offered to us or an Affiliated Program, conflicts of interest will
arise as to which entity should acquire the investment.

If any conflict arises between us and any of the other Affiliated
Programs, the Advisor will initially review our investment portfolio and the
investment portfolios of each of those Affiliated Programs and will determine
whether or not that Mortgage Investment should be made by us or that
Affiliated Program. The Advisor's decision will be based upon such factors as
the amount of funds available for investment, yield, portfolio
diversification, type and location of the property on which the loan will be
made, and proposed loan terms. The Trustees (including the Independent
Trustees) will be responsible for monitoring this allocation method (and that
described below with respect to new Affiliated Programs established in the
future) to be sure that each is applied fairly to us. See "Summary of
Declaration of Trust - Responsibility of Trustees".

If the Advisor or its Affiliates establish new Affiliated Programs after
the date of this prospectus, and the making of a Mortgage Investment appears
equally appropriate for us and one or more of those subsequently formed
Affiliated Programs, the Mortgage Investment will be allocated to one program
on a basis of rotation with the initial order of priority determined by the
dates of formation of the programs.

Further, our Trustees and the officers, directors and employees of the
Advisor and its Affiliates may for their own account or that of others
originate and acquire Mortgages and Mortgage Investments similar to those that
we will make or acquire. The Trustees and the Advisor are, however, subject
to a fiduciary duty to us and our shareholders. See "Fiduciary Responsibility
of Trustees". Each Trustee, on his or her own behalf, and the Advisor, on
behalf of itself, the officers and directors of the Advisor, and all Persons
controlled by the Advisor and its officers and directors, has agreed to first
present suitable investments to us before recommending or presenting those
opportunities to others or taking advantage of those opportunities on their
own behalf. However, the provisions of the preceding sentence shall apply
with respect to Affiliated Programs only in the manner described above and
shall not apply to the activities conducted by SCMI or CRC. See "Management
- - Summary of the Advisory Agreement". Except as described above, and subject
to their fiduciary duty to us and our shareholders, neither the Trustees, the
Advisor nor its Affiliates will be obligated to present to us any particular
investment opportunity which comes to their attention, even if such
opportunity is of a character which might be suitable for investment by us.

There may be conflicts of interest on the part of the Advisor between us
and any other Affiliates of the Advisor which have the same investment
objectives at such time as we attempt to sell Mortgage Investments, as well as
in other circumstances. See "Investment Objectives and Policies - Other
Policies" and "Summary of Declaration of Trust".

6. Additional Conflicts with Affiliates. Although we do not presently
expect to do so, we are permitted to invest in mortgage loans on properties
owned by Affiliates if those transactions are approved by a majority of our
Trustees who are not otherwise interested in the transactions. In giving that
approval, those transactions must be found to be as fair and reasonable to us
and on terms and conditions not less favorable to us than those that are
available from third parties. See "Summary of Declaration of Trust -
Restrictions on Transactions with Affiliates".

7. Selling Group Manager is an Affiliate. First Financial United
Investments Ltd., L.L.P., the Selling Group Manager of the offering, is an
Affiliate of the Advisor. See "Management - the Advisor". For its services
in acting as Selling Group Manager, it will receive commissions and due
diligence fees equal to up to 10.5% of the Gross Offering Proceeds from all
Shares sold and, for nominal consideration, will also receive Shares (the "SGM
Shares") equal to 0.5% of all Shares sold.

Before its efforts to sell the Shares offered by us, the Selling Group
Manager was a newly formed broker-dealer that had not previously participated
as a broker-dealer in a public offering of securities. As a result, the
Selling Group Manager had no track record in selling publicly offered
securities itself or in recruiting Selected Dealers to assist in the sale of
publicly offered securities. That lack of prior experience may make it more
difficult for us to sell the Shares offered hereby. See "Risk Factors - Lack
of Diversification". As of December 31, 1998, the Selling Group Manager had
recruited 8 Selected Dealers to assist in the sale of the Shares. The Selling
Group Manager has no experience in helping to establish and support a public
trading market for securities after those securities are sold, which may make
it more difficult for a public trading market to develop for the Shares. See
"Risk Factors - Lack of Liquidity".

Due to the fact that we were newly formed and had no prior track record
when we commenced the sale of the Shares, we believed it would be difficult to
obtain another broker dealer to act as the Selling Group Manager on terms and
conditions that would be as favorable as those that could be obtained from
First Financial United Investments Ltd., L.L.P. Accordingly, we believe that
the use of First Financial United Investments Ltd., L.L.P., to act as the
Selling Group Manager of the offering of the Shares is in our best interests
and the best interests of our shareholders.

8. Lack of Separate Representation. We sometimes use the same attorneys
as the Advisor. Our attorneys and the attorneys for various experts who
provide real property services for us may also perform services for the
Advisor and its Affiliates. It is anticipated that such multiple
representation will continue in the future. However, should a dispute arise
between us and the Advisor, the Advisor will cause us to retain separate
counsel for those matters. Should there be a necessity in the future to
negotiate or prepare contracts and agreements between us and the Advisor for
services other than those existing or contemplated on the effective date of
this prospectus, those transactions will require approval by a majority of the
Trustees, including a majority of the Independent Trustees, as being fair and
reasonable to us and on terms and conditions not less favorable to us than
those available from unaffiliated third parties.

9. Rights of Trustees and Officers. Except with respect to certain voting
rights, any trustee or officer may acquire, own, hold and dispose of Shares
for his individual account and may exercise all rights of a shareholder, to
the same extent and in the same manner as if he were not a Trustee or officer.
Any Affiliated Trustee or officer may be interested as trustee, officer,
director, stockholder, partner, member advisor or employee, or otherwise have
a direct or indirect interest in any person who may be engaged to render
advice or services to us, and may receive compensation from that person as
well as compensation as Trustee, officer or otherwise hereunder. Those
activities shall not necessarily be deemed to conflict with his duties and
powers as Trustee or officer.

<PAGE>
FIDUCIARY RESPONSIBILITY OF TRUSTEES

Consistent with the duties and obligations of, and limitations on, the
Trustees as set forth in our Declaration of Trust, and under the laws of the
State of Maryland, the Trustees are accountable to our shareholders as
fiduciaries. As a result, the Trustees are required to perform their duties
in good faith and in a manner each Trustee believes to be in our best interest
and the best interest of our shareholders and act with such care, including
reasonable inquiry, as a prudent person in a similar position would use under
similar circumstances. The Trustees will review annually our budget that will
be prepared by our President. In addition, the Independent Trustees must
review our relationship with the Advisor and the Advisor's performance of its
duties under the Advisory Agreement, and must determine that the compensation
paid to the Advisor is reasonable in relation to the nature and quality of the
services performed. The Advisor also has a fiduciary duty to both us and our
shareholders.

LIMITATION ON LIABILITY OF TRUSTEES AND OFFICERS

The Declaration of Trust provides that Trustees and officers shall have
the fullest limitation on liability permitted under Maryland law. Pursuant to
such statutory provisions Trustees and officers have no liability for breach
of the duty of loyalty, unless such breach of duty results in an improper
personal benefit or was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. In all
situations in which the limitations of liability contained apply, the remedies
available to us or our shareholders are limited to equitable remedies, such as
injunctive relief or rescission, and do not include the right to recover money
damages. The Trustees and other officers are liable to us or to our
shareholders only (i) to the extent the Trustee or officer actually received
an improper benefit or profit in money, property or services, in which case
any such liability shall not exceed the amount of the benefit or profit in
money, property or services actually received; or (ii) to the extent that a
judgment or other final adjudication adverse to such Trustee or officer is
entered in a proceeding based on a finding in the proceeding that such
Trustee's or officer's action or failure to act was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding.

INDEMNIFICATION OF TRUSTEES, OFFICERS AND OTHERS

The Declaration of Trust provides that, to the fullest extent allowed by
Maryland law, we will indemnify the Trustees, the Advisor and their Affiliates
and employees of each against losses incurred by them arising in connection
with our business; provided that (1) the Trustees, the President, or the
Advisor has determined, in good faith, that the course and conduct which
caused the loss or liability was in our best interests, (2) that liability or
loss was not the result of negligence or misconduct with respect to the
affiliated Trustee, the President, the Advisor and its Affiliates or the
result of bad faith, willful misfeasance, gross negligence or reckless
disregard of the Trustee's duties, and (3) the indemnification or agreement to
hold harmless is recoverable only out of our assets and not from our
shareholders.

To the extent that the indemnification of the Trustees may apply to the
liabilities arising under the Securities Act of 1933, we have been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is contrary to public policy and therefore unenforceable. In
the event that a claim for indemnification by us of expenses incurred or paid
by an indemnified party in the successful defense of any action, suit or
proceeding is asserted by that person in connection with the offering of the
Shares, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether that indemnification is against public
policy as expressed in the Securities Act of 1933. We will then be governed
by the final adjudication of such issue. In addition, the Trustees, the
Advisor and their Affiliates shall not be indemnified by us for liabilities
arising under a violation of federal and state securities laws associated with
the offer and sale of Shares. We may indemnify a Trustee, the Advisor and
their Affiliates who are performing services on our behalf for settlements and
related expenses incurred in successfully defending such lawsuits, provided,
that (1) a court either (a) approves the settlement and finds that
indemnification of the settlement and related costs should be made or (b)
approves indemnification of litigation costs if there has been a successful
defense, or (2) there has been a dismissal with prejudice on the merits
(without a settlement). Any person seeking indemnification shall inform the
court of the published position of the Securities and Exchange Commission with
respect to indemnification for securities law violations before seeking court
approval for indemnification.

SHAREHOLDERS' RIGHTS AND REMEDIES

In addition to potential legal action against the Trustees, the
Declaration of Trust and laws of the State of Maryland provide each
shareholder with certain legal rights and remedies, including the right, by a
majority vote of the outstanding shares entitled to vote, to remove the
Trustees, with or without cause, or to terminate our existence. See "Summary
of Declaration of Trust".

DEFENSES AVAILABLE TO TRUSTEES AND THE ADVISOR

There are certain defenses under Maryland law and pursuant to the
Declaration of Trust that are available to the Trustees and the Advisor in the
event of a shareholder action against them. One such defense is the "business
judgment rule". A Trustee or the Advisor can, under the "business judgment
rule", argue that he performed the action giving rise to the shareholder's
action in good faith and in a manner he reasonably believed to be in our best
interests, and with such care as an ordinarily prudent person in a like
position would have used under similar circumstances. The Trustees and the
Advisor are also entitled to rely on information, opinions, reports or records
prepared by experts (including accountants, consultants, counsel, etc.) who
were selected with reasonable care. In the event a shareholder challenges an
amendment to the Declaration of Trust made by Trustees without the
shareholders' approval, the Trustees can defend by arguing that the
Declaration of Trust permits amendments to the Declaration of Trust without
shareholder vote in certain circumstances.

<PAGE>
MANAGEMENT

Our Trustees are responsible for the overall management and control of
our business. The Trustees employ our President to manage our day-to-day
operations, subject to the Trustees' supervision. We are self-administered
with our President acting as administrator. See "Management - Our Trustees
and Officers". Our Advisor is Mortgage Trust Advisors, Inc., a Texas
corporation. The Advisor has been retained to use its best efforts to seek
out and present to us, whether through its own efforts or those of third
parties retained by it, a sufficient number of suitable investment
opportunities which are consistent with our investment policies and objectives
and consistent with the investment programs that the Trustees may adopt from
time to time in conformity with the Declaration of Trust. See "Management -
The Advisor" and "Management - Summary of the Advisory Agreement".

We utilize the services of SCMI and nonaffiliated third parties to
service our Residential Mortgages and Contracts for Deed. Interim Mortgage
Loans are serviced by CRC. The servicing of the Mortgage Investments includes
the collection of monthly payments from the borrower, the payment of all
principal and interest to us, the payment of all real estate taxes and
insurance to be paid out of escrow, regular distribution of information
regarding the application of all funds received and enforcement of collection
for all delinquent accounts, including foreclosure of such account when and as
necessary. See "Management - SCMI", below.

Our Declaration of Trust provides for not less than three nor more than
nine Trustees, a majority of whom must be Independent Trustees. Each Trustee
will serve for a one year term.

We currently have five Trustees, three of whom are Independent Trustees.
The Trustees establish written policies on investments and borrowings and
monitor our administrative procedures and investment operations and also
monitor the performance of our President and the Advisor to assure that those
policies are carried out. Until modified by the Trustees, we will follow the
policies on investments and borrowings set forth in this prospectus. The
Independent Trustees are responsible for reviewing our investment policies not
less often than annually and with sufficient frequency to determine that the
policies being followed are in the best interests of our shareholders.

A vacancy in the Board of Trustees created by the death, resignation, or
incapacity of a Trustee or by an increase in the number of Trustees (within
the limits referred to above) may be filled by the vote of a majority of the
remaining Trustees (with respect to a vacancy created by the death,
resignation, or incapacity of an Independent Trustee, the remaining
Independent Trustees shall nominate a replacement). Vacancies occurring as a
result of the removal of Trustees by shareholders shall be filled by the
shareholders. Any Trustee may resign at any time and may be removed by the
holders of at least a majority of the outstanding Shares (with or without
cause) or by a majority of the Trustees (only for cause).

The Trustees (including the Independent Trustees) shall periodically
monitor the allocation of Mortgage Investments between us and any Affiliated
Programs to insure that the allocation method described herein under the
caption "Conflicts of Interest - Competition with Affiliates for the Purchase
and Sale of Mortgage Investments" is being applied fairly to us.

OUR TRUSTEES AND OFFICERS

Our Trustees and officers are as follows:

<TABLE>
<CAPTION>
Name Age Offices Held
<S> <C> <C>
Christine "Cricket" Griffin 46 Trustee, Chairman of the Board
and President
Richard D. O'Connor, Jr. 44 Trustee
Paul R. Guernsey 48 Independent Trustee
Douglas R. Evans 53 Independent Trustee
Michele A. Cadwell 47 Independent Trustee
</TABLE>

Christine "Cricket" Griffin has been our President and a Trustee since
July 1996. From June 1995 until July 1996, Ms. Griffin served as Chief
Financial Officer of SCMI, a Texas based mortgage banking firm that is an
Affiliate of the Advisor and that sells Mortgages and provides mortgage
servicing services to us. Her responsibilities at SCMI included day to day
bookkeeping through financial statement preparation, mortgage warehouse lines
administration, and investor communications and reporting. Additionally, Ms.
Griffin was responsible for researching and implementing a note servicing
system for SCMI and its subservicer. Before joining SCMI, Ms. Griffin was
Vice President of Woodbine Petroleum, Inc., a publicly traded oil and gas
company for 10 years, during which time her responsibilities included
regulatory reporting, shareholder relations, and audit supervision. Ms.
Griffin is a 1978 graduate of George Mason University, Virginia with a
Bachelor of Arts degree, summa cum laude, in Politics and Government.

Richard D. O'Connor, Jr. has been one of our Trustees since July 1996
and, prior to August 1997 was one of our Independent Trustees. In 1998 Mr.
O'Connor became a shareholder of Stollenwerck, Moore & Silverberg, P.C., a
Dallas law firm. From 1993 to 1998, Mr. O'Connor practiced law as a sole
practitioner specializing in the areas of real estate, business and contract
law. Between 1985 and 1993, Mr. O'Connor was a partner with the Dallas law
firm of Scoggins, O'Connor and Blanscet. Between 1989 and 1993, Mr. O'Connor
was an attorney in the real estate department of J.C. Penney Corporation. Mr.
O'Connor received a Bachelor of Business Administration degree from the
University of Texas at Austin in 1976, and a J.D. degree from the University
of Houston in 1978. Mr. O'Connor has been Board Certified in Commercial Real
Estate law by the Texas Board of Legal Specialization since 1987.

Paul R. Guernsey has been one of our Independent Trustees since July
1996. Since 1993 Mr. Guernsey has been a Partner and Chief Financial Officer
of The Hartnett Group, Ltd. and related companies. These companies invest
primarily in the financial markets, income and non-income producing real
estate development, and residential mortgage loans. From 1991 through 1993
Mr. Guernsey was Chief Financial Officer of American Financial Network, Inc. a
public company which operated a computerized loan origination network, seven
residential mortgage brokerage companies, and a wholesale mortgage brokerage
operation. From 1987 through 1991, he was Chief Financial Officer and then
Vice President of operations for Discovery Learning Centers, Inc., a chain of
childcare centers. From 1986 to 1987, he worked with James Grant &
Associates, a Dallas based merchant banking firm. From 1973 through 1985, he
served in the audit, tax and management services departments of both a
regional CPA firm, and as a partner of a local firm in Michigan. Mr. Guernsey
graduated with a Bachelors Degree in Business (Accounting) from Ferris State
University, Michigan in 1973 and is a member of the American Institute of
CPA's and Texas Society of CPA's.

Douglas R. Evans has been one of our Independent Trustees since July
1996. Since February 1995, Mr. Evans has been a Principal of PetroCap, Inc.,
a firm that provides investment and merchant banking services to a variety of
clients active in the oil and gas industry. From 1987 until February 1995,
Mr. Evans was President and Chief Executive Officer of Woodbine Petroleum,
Inc., which was a publicly traded oil and gas company until it was taken
private through a merger in September 1992. As part of his responsibilities
at Woodbine, Mr. Evans managed and negotiated the sale of the parent company's
REIT portfolio including mortgages and real property. Mr. Evans has been a
licensed real estate broker in Texas since 1979 and a licensed real estate
agent since 1976. Mr. Evans received an MBA from Southern Methodist University
in 1972 and a Bachelors of Arts degree from the University of North Carolina
in 1967.

Michele A. Cadwell has been one of our Independent Trustees since August
1997. Ms. Cadwell is an attorney who has worked in the oil and gas industry
since 1980. Since 1998, Ms. Cadwell has been Manager - Onshore Land
Operations with EEX Corp. Her primary responsibilities include drafting and
negotiating exploration and marketing agreements, analysis of legislation and
regulatory proposals, researching complex mineral titles, organization and
management of non-core property divestitures, settlement of land owner
disputes and advising and testifying on matters before the Oklahoma
Corporation Commission. From 1980 until 1998 she was employed with Enserch
Exploration, Inc. as Senior Land Representative. Ms. Cadwell is a 1974
graduate of the University of Oklahoma with a Bachelors of Arts Degree in
English and a Juris Doctor Degree in 1978. She is admitted to both the
Oklahoma and Texas bars.

COMMITTEES AND MEETINGS

Our Board of Trustees does not have any audit, nominating, compensation
or other standing committees.

The Board of Trustees held 3 regular meetings during 1998. None of the
Trustees attended fewer than 75% of the meetings of the Board of Trustees.

COMPENSATION OF TRUSTEES

Trustees who are not Independent Trustees do not receive any compensation
for acting as Trustees. Independent Trustees are entitled to receive the
greater of $1,000 per meeting or $4,000 per year. For each year in which they
serve, each Independent Trustee shall also receive 5-year options to purchase
2,500 Shares at an exercise price of $20 per Share (not to exceed 12,500
shares per Trustee). During 1997, Independent Trustees waived their rights to
fees and each Trustee who served during all of 1997 also received 5-year stock
options to purchase 2,500 Shares at an exercise price of $20 per Share. During
1998 each Independent Trustee received $ 3,000 for attending all three
meetings and waived their rights to further fees and each received 5-year
stock options to purchase 2,500 Shares at an exercise price of $20 per Share

THE ADVISOR

Our Advisor is Mortgage Trust Advisors, Inc. The Advisor has been
retained to use its best efforts to seek out and present to us, whether
through its own efforts or those of third parties retained by it, a sufficient
number of suitable investment opportunities which are consistent with our
investment policies and objectives and consistent with such investment
programs as the Trustees may adopt from time to time in conformity with the
Declaration of Trust. The services of the Advisor include managing our
development of investment guidelines, overseeing servicing, negotiating
purchases of loans and overseeing the acquisition or disposition of
investments, and managing our assets. The Advisor has a fiduciary duty to us
and to our shareholders.

The directors and officers of the Advisor are set forth below. These
officers of the Advisor may also provide services to us on behalf of the
Advisor.

<PAGE>
<TABLE>
<CAPTION>
Name Age Offices Held
<S> <C> <C>
Todd Etter 48 President
Timothy J. Kopacka 39 Vice President/Secretary
James P. Hollis 58 Vice President
Dan H. Hill 48 Vice President/Treasurer
</TABLE>

Todd Etter is a 1972 graduate of Michigan State University. Since 1992
Mr. Etter has been President of South Central Mortgage, Inc. ("SCMI"), a
Dallas based mortgage banking firm that he founded. From 1987 to 1992, Mr.
Etter served as President of South Central Financial Group, a Dallas based
investment banking firm. From 1980 through 1987, Mr. Etter was President of
South Central Securities, a NASD member firm Broker-Dealer that he founded.
From 1972 through 1979, he was Vice President of Crawford, Etter and
Associates, a developer, builder and marketer of residential properties.

Timothy J. Kopacka, a Certified Public Accountant, received a Bachelors
of Arts degree in Accounting and Finance from Michigan State University. He
is a member of the Michigan Association of CPA's, the Hawaii Association of
Public Accountants and the American Institute of CPA's. Since 1984, he has
been President of Kopacka & Associates, Inc., dba Grosse Pointe Financial, a
financial advisory firm. From 1980 to 1983, he was employed with Deloitte,
Haskins & Sells, an international accounting and consulting firm. From 1983
through 1986, Mr. Kopacka was Chief Financial Officer for Federal Tax
Workshops, Inc., an educational and consulting firm for CPA's. From 1987 to
1990, he served as Vice President of Marketing and Operations for Kemper
Financial Services in their retirement plans division.

James P. Hollis is a Chartered Life Underwriter (CLU) and a Fellow, Life
Management Institute (FLMI) in pension planning. Mr. Hollis has a business
degree from Chattanooga State College, Tennessee. Since 1995, he has been
Vice President and Secretary for First Financial USA, Inc. ("FFUSA"), a
financial products marketing company with offices in Houston, Texas and
Melbourne, Florida. Mr. Hollis is the sole proprietor of First Financial USA
- - Florida, a financial products marketing company within the state of Florida.
He is an Advisor to SAFECO's Life's President Advisory Board. Mr. Hollis is
a Brokerage General Agent for the following life insurance companies: SAFECO
Life Insurance Company, Fidelity & Guaranty Life Insurance Company,
Philadelphia Life Insurance Company, General Electric Capital Assurance
Company, Physicians Life Insurance Company, Jefferson Pilot Life Insurance
Company and United Life & Annuity Insurance Company. He also represents
several other life insurance companies in a "recruiting" capacity. Mr. Hollis
is a registered representative in the securities industry and holds Series 7,
24 and 63 licenses.

Dan H. Hill has a Bachelor of Business Administration degree in
accounting. Mr. Hill is currently licensed as an insurance general agent, a
securities principal and a Texas real estate broker. In 1998, Mr. Hill began
First Financial United Management, Inc. as a Registered Investment Advisor to
provide investment advice and fee based financial planning services. Since
1995, Mr. Hill has been President of First Financial USA, Inc., a national
financial products marketing company. Mr. Hill is also President of H&H
Services, Inc., the general partner of First Financial United Investments
Ltd., L.L.P., a broker-dealer and Selling Group Manager. In Addition, he owns
First Financial Management Group, a financial planning firm specializing in
the small business market. Since 1978, he has been actively involved in the
financial services industry, including accounting, insurance, real estate and
securities. Prior to that he was a corporate accountant for several
Halliburton companies.

SUMMARY OF THE ADVISORY AGREEMENT

With the approval of our Trustees, including all of the Independent
Trustees, we entered into a contract with the Advisor (the "Advisory
Agreement') under which the Advisor is obligated to use its best efforts to
develop and present to us, whether through its own efforts or those of third
parties retained by it, a sufficient number of suitable investment
opportunities which are consistent with our investment policies and objectives
and also consistent with any investment programs that the Trustees may adopt
from time to time in conformity with the Declaration of Trust. Although the
Trustees have continuing exclusive authority over our management, the conduct
of our affairs and the management and disposition of our assets, the Trustees
have initially delegated to the Advisor, subject to the supervision and review
of the Trustees and consistent with the provisions of our Declaration of
Trust, the power and duty to: (1) develop underwriting criteria and a model
for our investment portfolio; (2) acquire, retain or sell Mortgage
Investments; (3) seek out, present and recommend investment opportunities
consistent with our investment policies and objectives, and negotiate on our
behalf with respect to potential investments or the disposition thereof; (4)
pay our debts and fulfill our obligations, and handle, prosecute and settle
any of our claims, including foreclosing and otherwise enforcing mortgages and
other liens securing investments; (5) obtain for us such services as may be
required for mortgage brokerage and servicing and other activities relating to
our investment portfolio; (6) evaluate, structure and negotiate prepayments or
sales of Mortgage Investments; (7) from time to time, or as requested by the
Trustees, make reports to us regarding the Advisor's performance of the
foregoing services and (8) supervise other aspects of our business.

The original term of the Advisory Agreement expired on August 8, 1998
(one year from the date on which the first closing of the sale of Shares
offered to the public occurred) and was renewed for a term expiring August 8,
1999. Thereafter, the Advisory Agreement may be renewed annually by us,
subject to an evaluation of the performance of the Advisor by the Trustees.
The Advisory Agreement may be terminated (1) without cause by the Advisor or
(2) with or without cause by a majority of the Independent Trustees.
Termination under either of those provisions may be made without penalty and
upon 60 days' prior written notice to the non-terminating party.

The Advisor may engage in other business activities related to real
estate, Mortgage Investments or other investments whether similar or
dissimilar to those made by us or act as advisor to any other person or entity
having investment policies whether similar or dissimilar to ours (including
other REITs). See "Investment Objectives and Policies". However, except for
the allocation of investments between us and other Affiliated Programs as
described under the caption "Conflicts of Interest - Competition with
Affiliates for the Purchase and Sale of Mortgage Investments" or except for
the operations of SCMI or CRC, before the Advisor, the officers and directors
of the Advisor and all persons controlled by the Advisor and its officers and
directors may take advantage of an opportunity for their own account or
present or recommend it to others, they are obligated to present an investment
opportunity to us if (1) that opportunity is of a character which could be
taken by us, (2) that opportunity is compatible with our investment objectives
and policies and (3) we have the financial resources to take advantage of that
opportunity. SCMI is currently in the business of purchasing, selling and
servicing mortgages and CRC is currently in the business of financing home
purchases and renovations by investors. SCMI and CRC will each continue in
their business. However, SCMI and CRC have each agreed that, if it has any
loans that it desires to sell, it will give us the right of first refusal to
purchase that loan if (1) it is of a character which could be bought by us,
(2) it is compatible with our investment objectives and policies and (3) we
have the financial resources to purchase it.

For a description of the compensation to be paid to the Advisor in
consideration of the services it will render to us, see "Management
Compensation".

The Declaration of Trust provides that the Independent Trustees are to
determine, at least annually, that the amount of compensation which we agree
to pay the Advisor is reasonable in relation to the nature and quality of the
services performed, based on the factors set forth in the Declaration of Trust
and such other factors as they deem relevant, including the size of the fee in
relation to the size, composition and profitability of our investment
portfolio, the success of the Advisor in generating opportunities that meet
our investment objectives, the rates charged to other REITs and to investors
other than REITs by advisors performing similar services, the amount of
additional revenues realized by the Advisor and its Affiliates for other
services performed for us, the quality and extent of service and advice
furnished by the Advisor, the performance of our investment portfolio and the
quality of our investment portfolio in relationship to the investments
generated by the Advisor for its own account.

The Advisory Agreement provides for us to pay all of our expenses and to
reimburse the Advisor for any expenses that should have been paid by us but
which were instead paid by the Advisor. However, the Advisor remains
obligated to pay: (1) the employment expenses of its employees, (2) its rent,
utilities and other office expenses (except those relating to office space
occupied by the Advisor that is maintained by us) and (3) the cost of other
items that generally fall under the category of the Advisor's overhead that is
directly related to the performance of services for which it is otherwise
receiving fees from us.

SCMI

We have and will continue to acquire Mortgage Investments from SCMI and
will utilize the services of SCMI to service some or all of the Residential
Mortgages that we purchase. See "Conflicts of Interest - Purchase of Mortgage
Notes from Affiliates", "Summary of the Offering - Mortgage Servicers",
"Investment Portfolio" and "Management Compensation".

SCMI is a Texas based mortgage bank of which the sole beneficial
shareholder is Todd Etter, an officer and principal Shareholder of the
Advisor. Ms. Christine Griffin, our President and one of our Trustees, was
previously the Chief Financial Officer of SCMI. Since its inception in 1992,
SCMI has purchased more than 1,500 residential mortgage notes totaling
approximately $60,000,000. SCMI sells whole notes to institutional and
private investors. SCMI also offers note servicing on notes it sells. SCMI
currently services over 1,500 loans totaling approximately $60,000,000.

CRC

CRC is a Texas corporation that is 50% owned by Todd Etter, an officer
and principal shareholder of the Advisor. CRC is in the business of financing
home purchases and renovations by real estate investors.

We have and will continue to purchase Interim Mortgages from CRC. See
"Conflicts of Interest - Purchase of Mortgage Notes from Affiliates", "Summary
of the Offering - Mortgage Servicers", "Investment Portfolio" and "Management
Compensation".

<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes material Federal income tax
considerations to us and our shareholders. This discussion is based on
existing Federal income tax law, which is subject to change, possibly
retroactively. This discussion does not discuss all aspects of Federal income
taxation which may be relevant to a particular shareholder in light of its
personal investment circumstances or to certain types of investors subject to
special treatment under the Federal income tax laws (including financial
institutions, insurance companies, broker dealers and, except to the extent
discussed below, tax exempt entities and foreign taxpayers) and it does not
discuss any aspects of state, local or foreign tax law. This discussion
assumes that investors will hold their Shares as "capital assets" (generally,
property held for investment) under the Code. Prospective investors are
advised to consult their tax advisors as to the specific tax consequences of
purchasing, holding and disposing of the Shares, including the application and
effect of Federal, state, local and foreign income and other tax laws.

GENERAL

We elected to become subject to tax as a REIT, for Federal income tax
purposes, commencing with the taxable year ending December 31, 1996. Our
Board of Trustees currently expects that we will operate in a manner that will
permit us to qualify a REIT for the taxable year ending December 31, 1998, and
in each taxable year thereafter. This treatment will permit us to deduct
dividend distributions to our stockholders for Federal income tax purposes,
thus effectively eliminating the "double taxation" that generally results when
a corporation earns income and distributes that income to its stockholders in
the form of dividends.

We have obtained an opinion of Berry Moorman, P.C. ("Counsel") concerning
the likely outcome on the merits of the material federal income tax issues.
In particular, it is Counsel's opinion that it is more likely than not that
(i) we have been organized in conformity with the requirements for
qualification as a REIT, and our proposed method of operation described in
this prospectus and in the Declaration of Trust will meet the requirements for
taxation as a REIT under the Code for any taxable year with respect to which
we make the necessary election; and (ii) Distributions to a shareholder which
is a Tax-Exempt Entity will not constitute UBTI, provided that shareholder has
not financed the acquisition of its Shares with "acquisition indebtedness"
within the meaning of the Code. In rendering this opinion, Counsel relied
upon information and undertakings supplied by the Advisor and us, and the
facts contained in the prospectus concerning our organization and operation.
Any alteration of the foregoing may adversely affect the validity of the
opinions rendered.

Each prospective investor should note that the opinions described herein
represent only Counsel's best legal judgment as to the most likely outcome of
an issue if the matter were litigated. Opinions of counsel have no binding
effect or official status of any kind, and in the absence of a ruling from the
IRS, there can be no assurance that the IRS will not challenge the conclusion
or propriety of any of Counsel's opinions. We do not intend to apply for a
ruling from the IRS that we qualify as a REIT.

QUALIFICATION AS A REIT

Under the Code, a trust, corporation or unincorporated association
meeting certain requirements (set forth below) may elect to be treated as a
REIT for purposes of federal income taxation. If a valid election is made,
then, subject to certain conditions, our income which is distributed to our
shareholders will be taxed to those shareholders without being subject to tax
at the company level. We will be taxed on any of our income that is not
distributed to our shareholders. Once made, the REIT election continues in
effect until voluntarily revoked or automatically terminated by our failure to
qualify as a REIT for a taxable year. If our election to be treated as a REIT
is terminated automatically, we will not be eligible to elect REIT status
until the fifth taxable year after the year for which our election was
terminated. However, this prohibition on a subsequent election to be taxed as
a REIT is not applicable if (1) we did not willfully fail to file a timely
return with respect to the termination taxable year, (2) inclusion of
incorrect information in that return was not due to fraud with intent to evade
tax, and (3) we establish that failure to meet the requirements was due to
reasonable cause and not to willful neglect. While we have no intention of
voluntarily revoking our REIT election, if we do so, we will be prohibited
from electing REIT status for the year to which such revocation relates and
for the next four taxable years.

There can be no assurance, however, that we will continue to qualify as a
REIT in any particular taxable year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual determinations and
the possibility of future changes in our circumstances. If we were not to
qualify as a REIT in any particular year, we would be subject to Federal
income tax as a regular, domestic corporation, and our stockholders would be
subject to tax in the same manner as stockholders of a corporation. In this
event, we could be subject to potentially substantial income tax liability in
respect of each taxable year that we fail to qualify as a REIT, and the amount
of earnings and cash available for distribution to our stockholders could be
significantly reduced or eliminated.

The following is brief summary of certain technical requirements that we
must meet on an ongoing basis in order to qualify, and remain qualified, as a
REIT under the Code.

Share Ownership Tests Our Shares (1) must be transferable, (2) must be
held by 100 or more persons during at least 335 days of a taxable year of 12
months (or during a proportionate part of a taxable year of less than 12
months), and (3) no more than 50% of the outstanding Shares may be owned,
directly or indirectly, by five or fewer individuals at any time during the
last half of our taxable year. The requirements of (2) and (3) are not
applicable to the first taxable year for which an election to be treated as a
REIT is made. On the date of the initial closing of the sale of the Shares,
we had at least 100 shareholders who were independent of each other and of us.
In addition, the Declaration of Trust permits a restriction on transfers of
Shares that would result in violation of the rule in (3) above. See "Summary
of Declaration of Trust". Applicable Treasury Regulations state that such a
restriction will not cause the shares to be nontransferable as required by
(i).

Asset Tests We must generally meet the following asset tests (the "REIT
Asset Tests") at the close of each quarter of each taxable year.

(a) at least 75% of the value of our total assets must consist of
Qualified REIT Real Estate Assets, Government securities, cash, and cash
items (the "75% Asset Test"); and

(b) the value of securities held by us but not taken into account for
purposes of the 75% Asset Test must not exceed (i) 5% of the value of
our total assets in the case of securities of any one non-government
issuer, or (ii) 10% of the outstanding voting securities of any such
issuer.

Gross Income Tests We must generally meet the following gross income
tests (the "REIT Gross Income Tests") for each taxable year.

(a) at least 75% of our gross income must be derived from certain
specified real estate sources including interest income and gain from
the disposition of Qualified REIT Real Estate Assets or "qualified
temporary investment income" (i.e., income derived form "new capital"
within one year of the receipt of such capital) (the "75% Gross Income
Test");

(b) at least 95% of our gross income for each taxable year must be
derived from sources of income qualifying for the 75% Gross Income Test,
dividends, interest, and gains from the sale of stock or other
securities not held for sale in the ordinary course of business (the
"95% Gross Income Test"); and

(c) less than 30% of our gross income must be derived from the sale of
Qualified REIT Real Estate Assets held for less than four years, stock
or securities held for less than one year (including certain interest
rate swap and cap agreements entered into to hedge variable rate debt
incurred to acquire Qualified Real Estate Assets) and certain "dealer"
property (the "30% Gross Income Test").

We intend to maintain our REIT status by carefully monitoring our income,
to comply with the REIT Gross Income Tests. See "Taxation of the Company" for
a discussion of the tax consequences of failure to comply with the REIT
provisions of the Code.

Distributions to Shareholders Each year, we must distribute to our
shareholders an amount equal to (a) 95% of the sum of (i) our REIT Taxable
Income (defined below) before deduction of dividends paid and excluding any
net capital gain and (ii) the excess of net income from "foreclosure property"
(described above in "Sources of Income") over the tax on such income, minus
(b) any "excess non-cash income" (income attributable to leveled stepped
rents, original issue discount on purchase money debt, or a like kind exchange
that is later determined to be taxable) (the "95% Distribution Test").

REIT Taxable Income is the taxable income of a REIT, computed as if the
REIT were an ordinary corporation, but with an allowance for a deduction for
dividends paid, an exclusion for net income from foreclosure property, a
deduction for the 100% tax on the greater of the amount by which the REIT
fails the 75% or the 95% income test, and an exclusion for an amount equal to
any net income derived from prohibited transactions.

Dividends that are either (1) paid during the taxable year or (2)
declared before our tax return for the taxable year must be filed (including
extensions) and paid within 12 months of the end of such taxable year and no
later than our next regular distribution payment, are considered distributions
for purposes of the 95% Distribution Test. Those dividends are taxable to our
shareholders (other than Tax-Exempt Entities) in the years in which they are
paid, even though they reduce our REIT Taxable Income for the year in which
declared. However, see "Taxation of the Company" for discussion of an excise
tax provision which could require us to distribute our fourth quarter dividend
in each year on or before January 31st of the following year.

The Trustees intend to make Distributions to our shareholders on a
monthly basis sufficient to meet the 95% Distribution Test. Because of (1)
the possible receipt of income from certain sources without corresponding cash
receipts, (2) timing differences that may arise between the realization of
taxable income and net cash flow (e.g. as a result of the original issue
discount rules), and (3) possible adjustments by the IRS to deductions and
gross income reported by us, it is possible that we may not have sufficient
cash or liquid assets at a particular time to distribute 95% of our REIT
Taxable Income. In such event, we may attempt to declare a consent dividend,
which is a hypothetical distribution to shareholders out of our earnings and
profits. The effect of such a consent dividend, to those shareholders who
agree to such treatment, and as long as such consent dividend is not
preferential, would be that those shareholders would be treated for federal
income tax purposes as if that amount had been paid to them in cash and they
had then immediately contributed that amount back to us as additional paid-in
capital. This would result in taxable income distribution but would also
increase their tax basis in their Shares by the amount of the taxable income
recognized.

If we fail to meet the 95% Distribution Test due to an adjustment to our
income by reason of a judicial decision or by agreement with the IRS, we may
pay a "deficiency dividend" to shareholders in the taxable year of the
adjustment, which would relate back to the year being adjusted. In that case,
we would also be required to pay interest plus a penalty to the IRS. However,
a deficiency dividend cannot be used to meet the 95% Distribution Test if the
failure to meet that test was not due to a later adjustment to our income but
rather was attributable to our failure to distribute sufficient amounts to our
shareholders. If we cannot declare a consent dividend or if we lack
sufficient cash to distribute 95% of our REIT Taxable Income or to pay a
"deficiency dividend" in appropriate circumstances, we could be required to
borrow funds or liquidate a portion of our investments in order to pay our
expenses, make the required cash distributions to shareholders, or satisfy our
tax liabilities. There can be no assurance that those funds will be available
to the extent, and at the time, that we would require them.

In addition, if the IRS successfully challenged our deduction of all or a
portion of the fees we pay to the Advisor, those payments could be
recharacterized as dividend distributions to the Advisor in its capacity as
shareholder. If those distributions were viewed as preferential distributions
they would not count toward the 95% Distribution Test. Because of the factual
nature of the inquiry, Counsel is unable to opine as to the deductibility of
such fees. See "Taxation of the Company - Fees paid by the Company", below.

TERMINATION OF THE COMPANY

In any year in which we qualify as a REIT, we will generally not be
subject to Federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to our shareholders. We will, however, be
subject to Federal income tax at normal corporate income tax rates upon any
undistributed taxable income or capital gain.

Notwithstanding our qualification as a REIT, we may also be subject to
tax in certain other circumstances. If we fail to satisfy either the 75% or
the 95% Gross Income Test, but nonetheless maintain our qualification as a
REIT because certain other requirements are met, we will generally be subject
to a 100% tax on the greater of the amount by which we fail either the 75% or
the 95% Gross Income Test. We will also be subject to a tax of 100% on net
income derived from any "prohibited transaction", and if we have (1) net
income from the sale or other disposition of "foreclosure property' which is
held primarily for sale to customers in the ordinary course of business or (2)
other non-qualifying income from foreclosure property, we will be subject to
Federal income tax on that income at the highest corporate income tax rate.
In addition, if we fail to distribute during each calendar year at least the
sum of (1) 85% of our REIT ordinary income for such year and (2) 95% of its
REIT capital gain net income for such year, we would be subject to a 4%
Federal excise tax on the excess of such required distribution over the
amounts actually distributed during the taxable year, plus any undistributed
amount of ordinary and capital gain net income from the preceding taxable
year. We may also be subject to the corporate alternative minimum tax, as
well as other taxes in certain situations not presently contemplated.

TAXATION OF TAXABLE SHAREHOLDERS

Dividend Income. Distributions we pay to our shareholders will be
taxable to shareholders who are not Tax-Exempt Entities as ordinary income to
the extent of our current or accumulated earnings and profits. Distributions
we pay which are designated as capital gains dividends by us will be taxed as
long-term capital gains to taxable shareholders to the extent that they do not
exceed our actual net capital gain for the taxable year. Shareholders that
are corporations may be required to treat up to 20% of any such capital gains
dividends as ordinary income. Such distributions, whether characterized as
ordinary income or as capital gain, are not eligible for the 70% dividends
received deduction for corporations.

Distributions we pay to shareholders which are not designated as capital
gains dividends and which are in excess of our current or accumulated earnings
and profits are treated as a return of capital to the shareholders and reduce
the tax basis of a shareholder's Shares (but not below zero). Any such
distribution in excess of the tax basis is taxable to any such shareholder
that is not a Tax-Exempt Entity as a gain realized from the sale of the
Shares.

Our declaration of the consent dividend would result in taxable income to
consenting shareholders other than Tax-Exempt Entities) without any
corresponding cash distributions. See "Qualification as a REIT -
Distributions to Shareholders", above.

Portfolio Income. Dividends paid to shareholders will be treated as
portfolio income with respect to shareholders who are subject to the passive
activity loss rules. Such income therefore will not be subject to reduction
by losses from passive activities (i.e. any interest in a rental activity or
in a trade or business in which the shareholder does not materially
participate, such as an interest held as a limited partner) of that
shareholder. Such Distributions will, however, be considered investment
income which may be offset by certain investment expense deductions.

No Flow Through of Losses. Shareholders should note that they are not
permitted to deduct any of our net losses.

Sale of Shares. Shareholders who sell their Shares will recognize
taxable gain or loss equal to the difference between the amount realized on
that sale and their basis in those Shares. Gain or loss recognized by a
shareholder who is not a dealer in securities and whose Shares have been held
for more than one year will generally be taxable as long-term capital gain or
loss.

Back-up Withholding. Distributions will ordinarily not be subject to
withholding of federal income taxes. Withholding of such tax at a rate of 31%
may be required, however, by reason of a failure of a shareholder to supply us
or our agent with the shareholder's Taxpayer Identification Number. Such
"Backup" withholding may also apply to a shareholder who is otherwise exempt
from backup withholding if that shareholder fails properly to document his
status as an exempt recipient of distributions. Each shareholder will
therefore be asked to provide and certify his correct Taxpayer Identification
Number or to certify that he is an exempt recipient.

TAXATION OF TAX-EXEMPT ENTITIES

In general, a shareholder which is a Tax-Exempt Entity will not be
subject to tax on Distributions received from us. The IRS has ruled that
amounts distributed as dividends by a qualified REIT do not constitute
unrelated business taxable income ("UBTI") when received by a Tax-Exempt
Entity. Thus, Distributions paid to a Shareholder which is a Tax-Exempt
entity and gain on the sale of Shares by a Tax-Exempt Entity (other than those
Tax-Exempt Entities described below) will not be treated as UBTI, even if we
incur indebtedness in connection with the acquisition of real property or the
acquisition or making of a Mortgage Investment, provided that the Tax-Exempt
Entity has not financed the acquisition of its Shares.

For Tax-Exempt Entities which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Shares will constitute UBTI unless the organization is able
properly to deduct amounts set aside or placed in reserve for certain purposes
so as to offset the UBTI generated by its investment in the Shares. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.

In the case of a "qualified trust" (generally, a pension or profit
sharing trust) holding stock in a REIT, the Revenue Reconciliation Act of 1993
treats the beneficiaries of that trust as holding stock in the REIT in
proportion to their actuarial interests in the qualified trust, instead of the
prior law treatment of a qualified trust as a single individual. The Revenue
Reconciliation Act of 1993 also requires a qualified trust that holds more
than 10% of the shares of a REIT to treat a percentage of REIT dividends as
UBTI if the REIT incurs debt to acquire or improve real property. This new
rule applies to taxable years beginning in 1994 only if (1) the qualification
of the REIT depends upon the application of the "look through" exception
(described above) to the restriction on REIT shareholdings by five or fewer
individuals, including qualified trusts, and (2) the REIT is "predominantly
held" by qualified trusts. A REIT is "predominantly held" by qualified trusts
if either (A) a single qualified trust holds more than 25% by value each
owning more than 10% by value, hold in the aggregate more than 50% of the
interests in the REIT. The percentage of any dividend paid (or treated as
paid) to a qualified trust that is treated as UBTI is equal to the amount of
modified gross income (gross income less directly connected expenses) from the
unrelated trade or business of the REIT (treating the REIT as if it were a
qualified trust), divided by the total modified gross income of the REIT. A
de minimis exception applies where the percentage is less than 5%. Because
(1) we expect the Shares to be widely held, and (2) the Declaration of Trust
prohibits any shareholder from owning more than 9.8 percent of the Shares
entitled to vote, this new provision should not result in UBTI to any Tax-
Exempt Entity.

STATEMENT OF STOCK OWNERSHIP

We are required to demand annual written statements from the record
holders of designated percentages of our Shares disclosing the actual owners
of the Shares. We must also maintain, within the Internal Revenue District in
which we are required to file our federal income tax return, permanent records
showing the information we have received regarding the actual ownership of
those Shares and a list of those persons failing or refusing to comply with
those demands.

STATE AND LOCAL TAXES

Our tax treatment and the tax treatment of our shareholders in states
having taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation is provided herein
nor is any representation made as to our tax status or the tax status of the
Shares or shareholders in such states. Each shareholder should consult his
own tax advisor as to the status of the Shares under the state tax laws
applicable to him.

<PAGE>
ERISA CONSIDERATIONS

In considering whether to purchase Shares with the assets of a Qualified
Plan, the plan fiduciary should consider (1) whether the investment is in
accordance with the documents and instruments governing the Qualified Plan;
(2) whether such an investment, alone and in conjunction with any other plan
investment, satisfies the diversification, prudence and liquidity requirements
of ERISA, to the extent applicable; (3) the need to value the assets of the
Qualified Plan annually; and (4) the effect if our assets are treated as "plan
assets" following that investment.

The plan fiduciary should also recognize that ERISA generally requires
that the assets of an employee benefit plan be held in trust and that the
trustee, or a duly authorized investment manager (within the meaning of
Section 3(38) of ERISA), has exclusive authority and discretion to manage and
control the assets of the plan. As discussed below, we have received an
opinion of Berry Moorman P.C. ("Counsel") that, under current law (and subject
to certain reservations and requirements set forth therein), it is more likely
than not that our assets will not be deemed to be "plan assets" if Qualified
Plans invest in Shares. In the event that our assets are nevertheless deemed
to be plan assets under ERISA despite such opinion of Counsel, the Trustees
and the Advisor would be deemed fiduciaries to each Qualified Plan which
purchased Shares. As such, they would be held to the fiduciary standards of
ERISA in all of our investments, and the person or persons who have investment
discretion over the assets of Qualified Plans subject to ERISA who authorized
the investment could be liable under ERISA for investments made by us which do
not conform to such standards.

If the Trustees and the Advisors are considered fiduciaries under ERISA
and the Code, they will also be "parties in interest" under ERISA (and
"disqualified persons" under the Code) with respect to an investing Qualified
Plan and one or more of their Affiliates could also be so characterized.
ERISA and the Code absolutely prohibit certain transactions between a
Qualified Plan and a "party in interest" (or "disqualified person"). Under
these rules, certain of the contemplated transactions between us and the
Trustees and the Advisor or any of their Affiliates could constitute
"prohibited transactions" under ERISA and the Code. In such event, certain of
the parties involved in the transaction could be required to take any or all
of the following actions: (1) undo the transaction, (2) restore to the
Qualified Plan any profit realized on the transaction, (3) make good to the
Qualified Plan any loss suffered by it as a result of such transaction, and
(4) pay an excise tax. If an IRA engages in a prohibited transaction, it could
lose its tax-exempt status, but, in that case, the other penalties for
prohibited transactions would not apply.

A fiduciary of a Qualified Plan is prohibited from taking certain actions
with respect to the assets of such plan, including investing the assets with
respect to which it is a fiduciary in an entity from which the fiduciary could
derive a benefit. To prevent a violation of these rules, we will not permit
the purchase of Shares with assets of any Qualified Plan (including an IRA) if
we, the Sponsor, the Advisor or any of their Affiliates (1) has investment
discretion with respect to the assets of the Qualified Plan to be invested,
(2) regularly gives individualized investment advice which serves as the
primary basis for the investment decisions made with respect to such assets,
or (3) is otherwise a fiduciary with respect to the assets for purposes of the
prohibited transaction provisions of ERISA or the Code.

PLAN ASSETS REGULATION/OPINION OF COUNSEL

On November 13, 1986, the Department of Labor promulgated a final
regulation defining the term "plan assets" for purposes of ERISA and the
prohibited transaction rules of the Code (the "Final Regulation"). Under the
Final Regulation, when a plan makes an equity investment in another entity,
the underlying assets of that entity generally will not be considered plan
assets if (1) the equity interest is a "publicly offered security" (as such
term is used in the Final Regulation) or a security issued by an investment
company registered under the Investment Company Act of 1940, (2) the entity is
a "real estate operating company" (as such term is used in the Final
Regulation), or (3) equity participation by benefit plan investors is "not
significant" (as such term is used in the Final Regulation).

The Final Regulation provides that a "publicly offered security" is a
security that is (1) freely transferable, (2) part of a class of securities
that is owned by 100 or more investors independent of the issuer and of one
another, and (3) sold to the plan as part of an offering of securities to the
public pursuant to an effective registration statement under the Securities
Act of 1933 and the class of securities of which such security is a part is
registered under the Securities Exchange Act of 1934 within 120 days (or such
later time as may be allowed by the Securities and Exchange Commission) after
the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. The initial closing for the sale of Shares
did not take place until a minimum of 100 investors independent of us and of
each other subscribed for Shares and condition (3) in the preceding sentences
was met with respect to the Shares.

Our underlying assets will not be considered to be plan assets so long as
the Shares remain "freely transferable" under the Final Regulation. The Final
Regulation provides that a determination as to whether a security is freely
transferable is inherently factual in nature and must be made on the basis of
all relevant facts and circumstances. The Final Regulation also provides that
if a security is part of an offering in which the minimum investment is
$10,000 or less (as the case with the Shares), certain enumerated restrictions
on transfer and assignment ordinarily will not, along or in combination,
affect a finding that such securities are freely transferable. The preamble
to the Final Regulation (which is not considered primary legal authority) goes
one step further providing that if the minimum investment requirement is
satisfied and there are no transfer restrictions other than those enumerated,
the security in effect will be presumed to be freely transferable. A security
that is not entitled to the presumption may still qualify as freely
transferable if the facts and circumstances so indicate.

We have represented that no restrictions on transferability of the Shares
exist other than those set forth in the Declaration of Trust. Accordingly,
the Shares should qualify as "freely transferable" under the Final Regulation,
and Counsel has rendered an opinion that, if the Shares are "widely held" and
properly registered for securities purposes under the requirements described
above, it is more likely than not that the Shares will be "publicly offered
securities" and that our underlying assets will not be considered to be plan
assets under the Final Regulation.

ANNUAL VALUATION

A fiduciary of a Qualified Plan subject to ERISA is required to determine
annually the fair market value of the assets of such Qualified Plan as of the
end of such Plan's fiscal year and to file annual reports reflecting such
value. In addition, a trustee of an IRA must provide an IRA participant with
a statement of the value of the IRA each year.

Because the Shares are not expected to be listed for quotation and a
public market is unlikely to develop until the sale of all of the Shares, it
is likely that no determination of the fair market value of a Share will be
readily available. In these circumstances, the Declaration of Trust provides
that we may, but need not, make available to fiduciaries of Qualified Plans an
annual good faith estimate of the value of our portfolio of investments, on
the basis of their value if then liquidated, and the amount attributable to
each Share. There can be no assurance that, if we do provide this estimate,
(1) such value could or will actually be realized by us or by shareholders
upon liquidation (in part because appraisals or estimates of value do not
necessarily indicate the price at which assets could be sold and because no
attempt will be made to estimate the expenses of selling any of our assets),
(2) shareholders could realize such value if they were to attempt to sell
their Shares, or (3) such value would comply with the ERISA or IRA
requirements described above.

<PAGE>
SUMMARY OF DECLARATION OF TRUST

Each shareholder shall be bound by and deemed to have agreed to the terms
of the Declaration of Trust by his election to become a shareholder. Our
Declaration of Trust is our organizational document and it has been reviewed
and approved unanimously by the Trustees. The following is a summary of the
material provisions of the Declaration of Trust but is qualified in its
entirety by specific reference to the Declaration of Trust attached as an
exhibit to the Registration Statement.

SHAREHOLDER MEETINGS

An annual meeting of shareholders for the election of the Trustees and
such other business as shall be stated in the notice of meeting will be held
each year, not less than 30 days after delivery of the annual report, but in
no event later than June 30 of each such year. Special meetings may be called
by the Chairman of the Board, by the President, by a majority of Trustees or
by a majority of the Independent Trustees, or by shareholders holding, in the
aggregate, not less than 10% of the outstanding Shares. At any meeting of
shareholders, each Shareholder is entitled to one vote for each Share owned of
record (other than Excess Shares, described below) on the applicable record
date. In general, the presence in person or by proxy of a majority of the
outstanding Shares shall constitute a quorum, and a majority vote of the
shareholders will be binding on all of our shareholders. See "Description of
the Shares", below.

SHAREHOLDER VOTING RIGHTS

Except as otherwise provided, all Shares shall have equal voting rights.
Shareholders are entitled to vote by written consent and do not have
cumulative voting rights.

Excess Shares (Shares held by a Shareholder in excess of 9.8% of the
outstanding Shares entitled to vote) are not entitled to any voting rights and
are not considered outstanding for the purpose of determining a quorum.

All elections for Trustees shall be decided by a plurality vote (at a
meeting or without a meeting, provided that at least a majority of the
outstanding Shares shall cast a vote in such election). Unless otherwise
provided by the Declaration of Trust, all other questions shall be decided by
a majority of the votes cast at a meeting at which a quorum is present or a
majority of outstanding Shares cast, without a meeting.

Each Shareholder entitled to vote may do so (1) at a meeting, in person,
by written proxy or by a signed writing or consent directing the manner in
which he desires that his vote be cast (which must be received by the
Trustees prior to such meeting) or (2) without a meeting, by a signed writing
or consent directing the manner in which he desires that his vote be cast
(which must be received by the Trustees prior to the date the votes of the
shareholders are to be counted).

Any or all Trustees may be removed, with or without cause, by the
affirmative vote of the holders of at least a majority of the outstanding
Shares entitled to vote.

None of the Advisor, the Trustees nor their Affiliates may vote any
Shares held by them on matters submitted to the shareholders regarding: (1)
the removal of the Advisor, the Trustees or their Affiliates and (2) any
transaction between us and the Advisor, the Trustees or their Affiliates.
Shares held by the Advisor, the Trustees and their Affiliates shall not be
included in determining the number of outstanding Shares entitled to vote on
these matters, nor in the Shares actually voted thereon.

The holders of a majority of the outstanding Shares may vote to terminate
our existence at any time.

A vote of the majority of the outstanding Shares entitled to vote is
necessary to amend the Declaration of Trust, except that amendment of the
provision regarding supermajority approval of certain Rollups or conversion
transactions requires the vote of the holders of 80% of the outstanding
Shares. See "Summary of Declaration of Trust - Amendment of the Declaration
of Trust", below.

SHAREHOLDER LISTS; INSPECTION OF BOOKS AND RECORDS

An alphabetical list of names, record addresses and business telephone
numbers of all shareholders with the number of Shares held by each, shall be
maintained as part of our books and records at our principal office. That list
shall be updated at least quarterly, and shall be open for inspection by a
shareholder or his designated agent upon a shareholder's request. That list
shall also be mailed to any shareholder requesting the list within 10 days of
the request. We may require the shareholder who requests a shareholder's list
to represent that the list is not requested for a commercial purpose unrelated
to the shareholder's interest as a shareholder.

Any shareholder and any designated representative thereof shall be
permitted access to all of our records at all reasonable times, and may
inspect and copy any of them. In addition, our books and records shall be
open for inspection by state securities administrators upon reasonable notice
and during normal business hours at our principal place of business.

TRUSTEES

A majority of the Trustees shall at all times be Independent Trustees.
The Board of Trustees currently consists of five Trustees, including three
Independent Trustees and one Trustee employed by us. Each Trustee shall serve
a term of one year.

The Declaration of Trust provides that the number of Trustees may be
increased or decreased by the Trustees but shall not be less than three nor
more than nine at any one time. Any Trustee may resign at any time and may be
removed by a majority of the Trustees for cause only or by a majority of the
outstanding Shares entitled to vote with or without cause. Vacancies
occurring as a result of the removal of Trustees by shareholders shall be
filled by the shareholders.

No bond is required to secure the performance of a Trustee unless the
Trustees so provide. The Trustees are empowered to fix the compensation of
all officers whom they select, including the President. The Independent
Trustees will be paid the greater of $1,000 per meeting or $4,000 per year.
Trustees affiliated with the Advisor or employed by us will not be compensated
by the us for their service as Trustees.

Our President, the Advisor, the Trustees nor their Affiliates may not
vote any Shares held by them on matters submitted to the shareholders
regarding the removal of the President, Advisor, the Trustees or their
Affiliates. Shares held by the President, the Advisor, the Trustees and their
Affiliates may not be included in determining the number of outstanding Shares
entitled to vote on these matters, nor in the Shares actually voted thereon.

AMENDMENT OF THE DECLARATION OF TRUST

Our Declaration of Trust may be amended by the vote of the holders of a
majority of the outstanding Shares and a majority of the Trustees, including a
majority of the Independent Trustees, except that: (a) the amendment of the
provision contained in the Declaration of Trust regarding super majority
shareholder approval of certain Roll-Up or conversion transactions requires
the vote of the holders of 80% of the outstanding Shares; and (b) any
amendment which would change any rights with respect to any outstanding class
of our securities, by reducing the amount payable thereon upon our
liquidation, or by diminishing or eliminating any voting rights pertaining
thereto, requires the vote or written consent of the holders of two-thirds of
the outstanding securities of such class. Notwithstanding the foregoing, a
majority of the Trustees, including a majority of the Independent Trustees,
are authorized to amend our Declaration of Trust without the consent of
shareholders (1) to the minimum extent necessary, based on an opinion of
counsel, if any provision of the Declaration of Trust conflicts with the
provisions of the Code applicable to REITs, the regulations thereunder, or to
comply with other laws or regulations, (2) to delete or add any provision
required to be deleted or added by the Securities and Exchange Commission or a
state "blue sky" commissioner, which addition or deletion is deemed by such
official to be for the benefit or protection of shareholders, or (3) to
clarify an ambiguity, correct an inconsistency or supplement the Declaration
of Trust in a manner not inconsistent with any other provision contained
therein.

RESPONSIBILITY OF TRUSTEES

The Board of Trustees is responsible for our general policies and for
such general supervision and management of our business as may be necessary to
insure that such business conforms to the provisions of the Declaration of
Trust.

The Trustees are accountable to the shareholders as fiduciaries and are
required to perform their duties in good faith and in a manner each Trustee
believes to be in our best interest and in the best interest of our
shareholders. The Trustees are also required to perform their duties, with
such care, including reasonable inquiry, as a prudent person in a like
position would use under similar circumstances. See "Fiduciary
Responsibilities of Trustees".

The laws of the State of Maryland and our Declaration of Trust provide
certain limits on the liability of our Trustees and officers to us and our
shareholders. See "Fiduciary Responsibility of Trustees - Limitation on
Liability of Trustees and Officers". In addition, the Declaration of Trust
provides for us to indemnify the Trustees, the Advisor and their Affiliates
against certain liabilities. See "Fiduciary Responsibility of Trustees -
Indemnification of Trustees, Officers and Others".

The Declaration of Trust provides that the Trustees shall have full,
absolute and exclusive power, control, management and authority over our
assets and over our business and affairs to the same extent as if the Trustees
were the sole owners thereof in their own right. The Trustees have the power
to enter into commitments to make any investment, purchase or acquisition, or
to exercise any power authorized by the Declaration of Trust. We use our
President to supervise our day to day operations, subject to compliance with
our investment objectives and policies, and also subject to the supervision of
the Trustees.

The Trustees have the responsibility to establish written policies on
investments and borrowings and shall monitor both ours and the Advisor's
administrative procedures, investment operations and performance to assure
that those policies are carried out. Until modified by the Trustees, we shall
follow the policies on investments and borrowings set forth in this
prospectus. The approval of a majority of the Independent Trustees must
approve any change in our investment objectives.

In addition, the Trustees have a fiduciary duty to our shareholders to
review our relationship with the Advisor.

The Trustees (including the Independent Trustees) have the responsibility
periodically to monitor the allocation of Mortgage Investments among us and
the Affiliated Programs to insure that the allocation method described herein
is being applied fairly to us. See "Conflicts of Interest - Competition with
Affiliates for Purchase and Sale of Mortgages".

LIMITED LIABILITY OF SHAREHOLDERS

The Maryland statute under which we were formed provides that
shareholders are not personally liable for our obligations. The Declaration
of Trust also provides that every written agreement entered into by us shall
contain a provision that our obligations are not enforceable against the
shareholders personally.

DESCRIPTION OF THE SHARES

Except with respect to "Excess Shares" (which are Shares held by a
shareholder which are in excess of 9.8% of the outstanding Shares entitled to
vote), all of the Shares are of one class and have a par value of $.01 per
Share. We are authorized to issue as many Shares (including fractional
shares) as the Trustees may determine. Shareholders are entitled to one vote
for each Share held on all matters presented for a vote of shareholders. In
meetings where a quorum is present, a majority of the votes cast by
shareholders is required to adopt a provision, unless otherwise provided. All
Shares participate equally in distributions when and as declared by the
Trustees and in the assets available for distribution after payment of
liabilities upon dissolution and liquidation. The Shares, when issued, will
be fully paid and nonassessable and will not be subject to redemption by us
(except in the case of a redemption to prevent a violation of the
concentration of ownership provisions of the Code applicable to REITs), nor
will they have any preference, conversion, exchange, preemptive or cumulative
voting rights.

Any demands or distributions with respect to the Excess Shares (see
"Shareholder Voting Rights") shall be held by us in a savings bank account for
the benefit of the holders of such Excess Shares until such time as the Excess
Shares cease to be Excess Shares.

Excess Shares shall be deemed to have been offered for sale to the
Company for a period of 120 days from the date of (i) the transfer that
created the Excess Shares, if the Company had actual knowledge of the
transfer, or (ii) if the Company does not know of the transfer, the
determination by the Trustees that a transfer creating Excess Shares has taken
place. The price for such Excess Shares shall be their fair market value as
of the date of either (i) or (ii) above. After the Company gives notice of
its intention to purchase the Excess Shares, such Shares shall have no further
rights (beyond the right of the Shareholder to receive payment therefor). In
the event the Company determines not to purchase the Excess Shares, said
Shares shall have no further rights until they are held by a Shareholder
owning 9.8% or less of the outstanding Shares of the Company.

MARYLAND ANTI-TAKEOVER LAW PROVISIONS

The Declaration of Trust provides that we elect to be governed by the
special voting requirements of the Maryland Corporations and Associations
Article (the "Special Voting Article").

The Special Voting Article contains an "interested stockholder" provision
that prohibits a Maryland corporation (which includes a Maryland real estate
investment trust) from engaging in a broad range of business combination or
other similar transaction with an interested stockholder for a period of five
years after that person first became an interested stockholder. After that
five year period, those transactions may not be consummated unless (i) the
transaction is first recommended by our Trustees, (ii) the transaction is
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all of our shareholders and 66 2/3% of the votes entitled to be cast
by all shareholders other than the interested stockholder unless, among other
things, our shareholders receive a minimum price (as defined in the Special
Voting Article) for their shares and the consideration is received in cash or
in the same form as previously paid by the interested stockholder for its
shares.

A business combination with an interested stockholder which is approved
by our Trustees at any time before a person first becomes an interested
stockholder is not subject to the special voting requirements or fair price
provisions of the Special Voting Article. An amendment to our Declaration of
Trust charter electing not to be subject to the foregoing requirements must be
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not interested stockholders. That amendment would not be effective until
eighteen months after the vote of shareholders and does not apply to any
business combination with a person who was an interested stockholder on the
date of the shareholder vote.

The Special Voting Article also contains a control share provision which
states that "control shares" acquired in a "control share acquisition" have no
voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares of stock owned by
the acquirer or by officers or Trustees who are our employees. "Control
shares" are voting shares of stock which, if aggregated with all other shares
of stock previously acquired by such a person, would entitle the acquirer to
exercise voting power in electing Trustees within one of the following ranges
of voting power: (i) 20% or more but less than 33 1/3%, or (ii) 33 1/3% or
more but less than a majority, or (iii) a majority of all voting power.
Control shares do not include shares the acquiring person is entitled to vote
as a result of having previously obtained shareholder approval. A "control
share acquisition" means, subject to certain exceptions, the acquisition of,
ownership of, or the power to direct the exercise of voting power with respect
to, control shares.

A person who has made or proposes to make a control share acquisition
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel our Trustees to call a special meeting of shareholders
to be held within 50 days of demand to consider the voting rights of the
shares. If no request for a meeting is made, we may present the question
ourselves at any shareholders' meeting.

If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, we may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value, without regard to voting rights.
Fair value shall be determined as of the date of the meeting of the
shareholders at which the voting rights of the control shares are considered
as of the date of the last acquisition of control shares by the acquiring
person. If voting rights for control shares are approved at a shareholders'
meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid in the control share
acquisition, and certain limitations and restrictions otherwise applicable to
the exercise of dissenters' rights do not apply in the context of a control
share acquisition.

RESTRICTIONS ON TRANSFER OF SHARES

Certain transfers or purchases may be prohibited by our Trustees to
ensure our continued qualification as a REIT under the Code.

For us to continue to qualify as a REIT under the Code, not more than 50%
of our outstanding Shares may be owned by five or fewer individuals during the
last half of the year, and the Shares must be owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. In order to prevent five or
fewer individuals from acquiring more than 50% of our outstanding Shares, and
our resulting failure to qualify as a REIT, we will limit the ownership and
transfer of the Shares in order to comply with those limitations.

The Trustees will require each proposed transferee of Shares to deliver a
statement or affidavit setting forth the number of Shares, if any, already
owned, directly or indirectly, by that transferee and will refuse to permit
any transfer of Shares which would cause an accumulation of Shares that would
jeopardize our status as a REIT.

The Declaration of Trust also provides that the Board of Trustees may
redeem Shares in order to maintain our REIT status. Except for the redemption
of "Excess Shares" which will be at the price set forth under "Summary of
Declaration of Trust - Description of the Shares" above, the redemption price
shall be determined in good faith by the Independent Trustees.

RESTRICTIONS ON CERTAIN CONVERSION TRANSACTIONS AND ROLLUPS

The Declaration of Trust requires that 80% in interest of our
shareholders and all the Independent Trustees approve certain exchange offers,
mergers, consolidations or similar transactions in which our shareholders
receive securities in a surviving entity having a substantially longer
duration or materially different investment objectives and policies, or that
provides significantly greater compensation to management from that which is
described in this prospectus, except for any such transaction effected because
of changes in applicable law, or to preserve tax advantages for a majority in
interest of the shareholders. It should be noted that standards such as
"substantially longer life", "materially different investment objectives and
policies" or "provides significantly greater compensation to management" are
not defined and are by their nature potentially ambiguous. Any ambiguities
will be resolved by the Trustees (a majority of whom are independent).

Notwithstanding the foregoing, we may not participate in any proposed
Roll-Up which would:

(a) result in our shareholders having voting rights that are less than
those provided in the Declaration of Trust;

(b) result in our shareholders having rights to receive reports that are
less than those provided in the Declaration of Trust;

(c) include provisions which would operate materially to impede or
frustrate the accumulation of Shares by any purchaser of the securities
of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity);

(d) limit the ability of an investor to exercise the voting rights of its
securities in the Roll-Up Entity on the basis of the number of the
Shares hold by that investor;

(e) result in investors in the Roll-Up Entity having rights of access to
the records of the Roll-Up Entity that are less than those provided in
the Declaration of Trust; or

(f) require us to pay the cost of the transaction if the Roll-Up is not
approved by our shareholders;

provided, however, that nothing shall be construed to prevent participation in
any proposed Roll-Up which would result in shareholders having rights and
restrictions comparable to those contained in the Declaration of Trust, with
the prior approval of a majority of the shareholders.

The Declaration of Trust also requires that an appraisal of all our
assets shall be obtained from a competent independent expert in connection
with a proposed Roll-Up.

RATIFICATION OF DECLARATION OF TRUST

The Declaration of Trust has been reviewed and ratified by all of the
Trustees by unanimous written consent.

TERMINATION

We may be dissolved at any time without approval of a majority of the
Board of Trustees by an affirmative vote of the holders of a majority of the
outstanding Shares.

LIMITATION ON TOTAL OPERATING EXPENSES

Our goal is to limit our annual Total Operating Expenses (exclusive of
loan servicing fees) to 0.5% of our Average Invested Assets. Effective January
1, 1997, the Advisor has been funding all of our general and administrative
expenses in return for a contribution by us of an amount equal to 0.5% of our
Average Invested Assets for the immediately preceding month. However, our
contributions to the Advisor shall not exceed the lesser of (a) the total
general and administrative expenses funded by the Advisor or (b) an amount
equal to the maximum allowable Total Operating Expenses under the Declaration
of Trust. The Declaration of Trust provides that our Total Operating Expenses
may not exceed in any fiscal year the greater of (a) 2% of the Average
Invested Assets (defined generally as the average book value our Mortgage
Investments, without regard for non-cash reserves) or (b) 25% of our Net
Income. In the event our Total Operating Expenses exceed the limitations
described above then within 60 days after the end of the Company's fiscal
year, the Advisor shall reimburse the Company the amount by which the
aggregate annual Total Operating Expenses paid or incurred by the Company
exceed the limitation.

LIMITATION ON ACQUISITION EXPENSES AND FEES

The total of Acquisition Fees and Acquisition Expenses shall be
reasonable, and shall not exceed an amount equal to 6% of the purchase price
of any Mortgage Investment. Notwithstanding the above, a majority of the
Trustees (including a majority of the Independent Trustees) not otherwise
interested in the transaction may approve fees in excess of these limits if
they determine the transaction to be commercially competitive, fair and
reasonable to us. However, notwithstanding the foregoing, the Acquisition
Fees to be paid to the Advisor or its Affiliates for sourcing, evaluating,
structuring and negotiating the acquisition terms of Mortgage Investments
shall not exceed 3.0% of the principal amount of each Mortgage Investment.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

Our Declaration of Trust imposes certain restrictions upon dealings
between us and the Advisor, any Trustee or Affiliates thereof. In particular,
the Declaration of Trust provides that we shall not engage in transactions
with any Sponsor, the Advisor, a Trustee or Affiliates thereof, except to the
extent that each such transaction has, after disclosure of such affiliation,
been approved or ratified by the affirmative vote of a majority of the
Independent Trustees, not otherwise interested in such transaction, who have
determined that (a) the transaction is fair and reasonable to us and our
shareholders; (b) the terms of such transaction are at least as favorable as
the terms of any comparable transactions made on arms length basis and known
to the Trustees; and (c) the total consideration is not in excess of the
appraised value of the property being acquired, if an acquisition is involved.
As a result of the foregoing, a majority of the Independent Trustees, not
otherwise interested in the transaction, will be required to approve the
purchase of each Mortgage Investment that is purchased from a Sponsor, the
Advisor or an Affiliate thereof, after determining that those purchases are
made on terms and conditions that are no less favorable than those that could
be obtained from independent third parties for mortgages with comparable
terms, rates, credit risks and seasoning. The Advisory Agreement with the
Advisor and the use of SCMI, an affiliate of the Advisor, to service the
mortgage notes acquired by us for an annual service fee equal to 0.5% of the
outstanding principal balance of each note that it services for us have been
approved by the Trustees. See "Investment Objectives and Policies - Other
Policies".

Payments to the Advisor, the Trustees and their Affiliates for services
rendered in a capacity other than that as the Advisor or Trustees may only be
made upon a determination of a majority of the Independent Trustees, not
otherwise interested in such transaction that: (1) the compensation is not in
excess of their compensation paid for any comparable services; and (2) the
compensation is not greater than the charges for comparable services available
from others who are competent and not affiliated with any of the parties
involved.

RESTRICTIONS ON BORROWING

The Declaration of Trust provides that we may not incur indebtedness
unless: (1) that indebtedness is not in excess of 50% of our Net Asset Value;
or (2) a majority of the Independent Trustees have determined that such
indebtedness is otherwise necessary to satisfy the requirement that we
distribute at least 95% of our REIT Taxable Income or is advisable to assure
that we maintain our qualification as a REIT for federal income tax purposes.
In addition, our aggregate secured and unsecured borrowings shall be
reasonable in relation to our Net Assets and shall be reviewed by the Trustees
at least quarterly. In the absence of satisfactory showing that a higher
level of borrowing is appropriate, the maximum amount of those borrowings
shall not exceed 50% of our Net Assets. Any excess over such 50% level shall
be approved by a majority of Independent Trustees and disclosed to
shareholders in our next quarterly report, along with justification for that
excess.

RESTRICTION ON INVESTMENTS

The Declaration of Trust prohibits investments in (1) any foreign
currency, bullion, commodities or commodities future contracts (this
limitation is not intended to apply to interest rate futures, when used solely
for hedging purposes); (2) short sales; and (3) any security in any entity
holding investments or engaging in activities prohibited by the Declaration of
Trust.

In addition to other investment restrictions imposed by the Trustees from
time to time consistent with our objective to qualify as a REIT, we will
observe the following restrictions on our investments set forth in our
Declaration of Trust:

(a) Not more than 10% of our total assets will be invested in unimproved
real property or mortgage loans on unimproved real property. For
purposes of this paragraph, "unimproved real properties" does not
include properties under construction, under the contract for
development or plan for development within one year;

(b) We may not invest in real estate contracts of sale unless those
contracts of sale are recordable in the chain of title and unless that
investment is made in conjunction with the acquisition or sale of real
property or when held as security for Mortgages made or acquired by us;

(c) Except for the types of investments described herein in the section
entitled "Investment Objectives and Policies", we may not invest in
equity securities unless a majority of Trustees, including a majority of
Independent Trustees, not otherwise interested in that transaction
approve the transaction as being fair, competitive and commercially
reasonable;

(d) We may not make or invest in any mortgage loans that are subordinate
to any mortgage or equity interest of the Advisor, a Trustee or
Affiliates thereof;

(e) To the extent we invest in real property, a majority of the Trustees
shall determine the consideration paid for that real property, based on
the fair market value of the property. If a majority of the Independent
Trustees so require, or if the real property is acquired from the
Advisor, as Trustee or Affiliates thereof, the fair market value of that
real property shall be determined by a qualified independent real estate
appraiser selected by the Independent Trustees;

(f) We will not invest in indebtedness (herein called "junior debt")
secured by a mortgage on real property which is subordinate to the lien
of other indebtedness (herein called "senior debt"), except where the
amount of that junior debt, plus the outstanding amount of the senior
debt, does not exceed 85% of the appraised value of that property, if
after giving effect thereto, the value of all such investments of the
Company (as shown on our books in accordance with generally accepted
accounting principles after all reasonable reserves but before provision
for depreciation) would not then exceed 25% of our tangible assets.

(g) We will not engage in trading, as compared with investment
activities; and

(h) We will not engage in underwriting or the agency distribution of
securities issued by others.

<PAGE>
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS

The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because many of the legal aspects
of mortgage loans are governed by applicable state laws (which may vary
substantially), the following summaries do not purport to be complete, to
reflect the laws of any particular state, to reflect all the laws applicable
to any particular mortgage loan or to encompass the laws of all states in
which the properties securing mortgage loans in which we might invest are
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing mortgage loans.

MORTGAGES AND DEEDS OF TRUST AND CONTRACT FOR DEED GENERALLY

Mortgage loans are secured by either mortgages or deeds of trust or
contracts for deed (also known as a land contract) or other similar security
instruments, depending upon the prevailing practice in the state in which the
related mortgaged property is located. There are two parties to a mortgage,
the mortgagor, who is the borrower and owner of the mortgaged property, and
the mortgagee, who is the lender. In a mortgage transaction, the mortgagor
delivers to the mortgagee a note, bond or other written evidence of
indebtedness and a mortgage. A mortgage creates a lien upon the real property
encumbered by the mortgage as security for the obligation evidenced by the
note, bond or other evidence of indebtedness. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties, the borrower-
property owner called the trustor (similar to a mortgagor), a lender called
the beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, until the
debt is paid, in trust for the benefit of the beneficiary to the trustee to
secure payment of the obligation generally with a power of sale. The
trustee's authority under a deed of trust and the mortgagee's authority under
a mortgage are governed by applicable law, the express provisions of the deed
of trust or mortgage, and, in some cases, the direction of the beneficiary.

A Contract for Deed (also known as a land contract) is a document
evidencing the agreement between a seller of real estate ("mortgagor") and a
buyer pursuant to which the seller retains legal title to the property and
agrees with the purchaser to transfer the property in exchange for the payment
of the purchase price, plus interest, over the term. Upon full performance of
the contract by the purchaser, the seller is obligated to convey title to the
property. As with mortgage or deed of trust financing, during the effective
period of the contract of deed, the purchaser is typically responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.

The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in
real property such as a tenant's interest in a lease of land and improvements
and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage to
protect the mortgagee against termination of such interest before the mortgage
is paid.

The Priority of liens on real estate created by mortgages and deeds of
trust depends on their terms and, generally, on the order of filing with a
state, county or municipal office, although such priority may in some states
be altered by the mortgagee's or beneficiary's knowledge of unrecorded liens
against the mortgaged property. However, filing or recording does not
establish priority over governmental claims for real estate taxes and
assessments. In addition, the Internal Revenue Code of 1986, as amended,
provides priority to certain tax liens over the lien of the mortgage.

FORECLOSURE

Foreclosure of a mortgage is generally accomplished by judicial actions
initiated by the service of legal pleadings upon all necessary parties having
an interest in the real property. Delays in completion of foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
When the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time-consuming. A judicial foreclosure
may be subject to most of the delays and expenses of other litigation,
sometimes requiring up to several years to complete. At the completion of the
judicial foreclosure proceedings, if the mortgagee prevails, the court
ordinarily issues a judgment of foreclosure and appoints a referee or other
designated official to conduct the sale of the property. Such sales are made
in accordance with procedures which vary from state to state. The purchaser
at such sale acquires the estate or interest in real property covered by the
mortgage.

Foreclosure of a deed of trust is generally accomplished by a non-
judicial trustee's sale under a specific provision in the deed of trust and/or
applicable statutory requirements which authorizes the trustee, generally
following a request from the beneficiary/lender, to sell the property to a
third party upon any default by the borrower under the terms of the note or
deed of trust. A number of states may also require that a lender provide
notice of acceleration of a note to the borrower. Notice requirements under a
trustee' sale vary from state to state. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest in the real property, including any junior
lien holders. In some states, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expense incurred in enforcing the obligations. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be covered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.

The method of enforcing the rights of the mortgagee under a contract for
deed varies on a state-by-state basis depending upon the extent to which state
courts are willing or able to enforce the contract for deed strictly according
to its terms. The terms of contracts for deed generally provide that upon
default by the mortgagor, the mortgagor loses his or her right to occupy the
property, the entire indebtedness is accelerated, and the mortgagor's
equitable interest in the property is forfeited. The mortgagee in such a
situation does not have to foreclose in order to obtain title to the property,
although in some cases, both a quiet title action to clear title to the
property (if the mortgagor has recorded notice of the contract for deed) and
an ejectment action to recover possession may be necessary. In a few states,
particularly in cases of default during the early years of a contract for
deed, ejectment of the mortgagor and a forfeiture of his or her interest in
the property will be permitted. However, in most states, laws (analogous to
mortgage laws) have been enacted to protect mortgagors under contracts for
deed from the harsh consequences of forfeiture. These laws may require the
mortgagee to pursue a judicial or nonjudicial foreclosure with respect to the
property and give the mortgagor a notice of default and some grace period
during which the contract for deed may be reinstated upon full payment of the
default amount.

In case of foreclosure under either a mortgage or deed of trust, the sale
by the referee or other designated official or by the trustee is often a
public sale. However, because of the difficulty a potential buyer at the sale
might have in determining the exact status of title to the property subject to
the lien of the mortgage or deed of trust and the redemption rights that may
exist (see "Statutory Rights of Redemption" below), and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings and/or for a variety of other reasons (including exposure to
potential fraudulent transfer allegations), a third party may be unwilling to
purchase the property at the foreclosure sale. For these and other reasons,
it is common for the lender to purchase the property from the trustee, referee
or other designated official for an amount equal to the outstanding principal
amount of the indebtedness secured by the mortgage or deed of trust, together
with accrued, and unpaid interest and the expenses of foreclosure, in which
event, if the amount bid by the lender equals the full amount of such debt,
interest and expenses, the mortgagee's debt will be extinguished. Thereafter,
the lender will assume the burdens of ownership, including paying operating
expenses and real estate taxes and making repairs. The lender is then
obligated as an owner until it can arrange a sale of the property to a third
party. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Moreover, a
lender commonly incurs substantial legal fees and court costs in acquiring a
mortgaged property through contested foreclosure, forfeiture and/or bankruptcy
proceedings. Furthermore, an increasing number of states require that any
environmental hazards be eliminated before a property may be resold. In
addition, a lender may be responsible under federal or state law for the cost
of cleaning up a mortgaged property that is environmentally contaminated. See
"Environmental Risks" below. As a result, a lender could realize an overall
loss on a mortgage loan even if the related mortgaged property is sold at
foreclosure or resold after it is acquired through foreclosure for an amount
equal to the full outstanding principal amount of the mortgage loan, plus
accrued interest.

In foreclosure proceedings, some courts have applied general equitable
principles. These equitable principles are generally designed to relieve the
borrower from the legal effects of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and expensive actions to
determine the causes of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower's failing
to maintain adequately the property or the borrower's executing a second
mortgage or deed of trust affecting the property. Finally, some courts have
been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under mortgages receive notices in addition to the statutorily-
prescribed minimum. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale under a deed of
trust, or under a mortgage having a power of sale, or under a contract for
deed does not involve sufficient state action to afford constitutional
protection to the borrower.

ENVIRONMENTAL RISKS

Real property pledged as security to a lender may be subject to potential
environmental risks. Of particular concern may be those mortgaged properties
which are, or have been, the site of manufacturing, industrial or disposal
activity. Such environmental risks may give rise to a diminution in value of
property securing any mortgage loan or, as more fully described below,
liability for clean-up costs or other remedial actions, which liability could
exceed the value of such property or the principal balance of the related
mortgage loan. In certain circumstances, a lender may choose not to foreclose
on contaminated property rather than risk incurring liability for remedial
actions.

Under the laws of certain states, the owner's failure to perform remedial
actions required under environmental laws may in certain circumstances give
rise to a lien on mortgaged property to ensure the reimbursement of remedial
costs incurred by the same. In some states such lien law priority over the
lien of an existing mortgage against such property. Because the costs of
remedial action could be substantial, the value of a mortgaged property as
collateral for a mortgage loan could be adversely affected by the existence of
an environmental condition giving rise to a lien.

The state of law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, can
be imposed on a secured lender. Under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended ("CERCLA"), current ownership or operation of a property
provides a sufficient basis for imposing liability for the costs of addressing
releases or threatened releases of hazardous substances on that property.
Under such laws, a secured lender who holds indicia of ownership primarily to
protect its interest in a property could under certain circumstances fall
within the liberal terms of the definition of "owner or operator",
consequently, such laws often specifically exclude such a secured lender,
provided that the lender does not participate in the facility's management of
environmental matters.

In 1992, the United States Environmental Protection Agency (the "EPA")
issued a rule interpreting and delineating CERCLA's secured creditor
exemption. This rule defined and specified the range of permissible actions
that may be undertaken by a lender who holds a contaminate facility as
collateral without exceeding the bounds of the secured creditor exemption. In
February 1994, however, the United States Court of Appeals for the D.C.
Circuit struck down the EPA's lender liability rule on the grounds that it
exceeded EPA's rule making authority under CERCLA. A petition for writ of
certiorari to the United States Supreme Court appealing the D.C. Circuit's
decision was denied in January 1995. At the present time, the future status
of the rule and similar legislation now pending in Congress is unclear,
although the EPA has stated that it will continue to adhere to the rule as a
matter of policy and is in the process of preparing guidance to this effect.
Certain courts that have addressed the issue of lender liability under CERCLA
have, in some cases without relying on any EPA rule or policy, nonetheless
interpreted the secured creditor exemption consistent with the EPA rule. In
any event, the EPA rule does not or would not necessarily affect the potential
for liability under state law or federal laws other than CERCLA. Furthermore,
it is not clear at the present time whether any such lender protections would
be binding in actions brought by a party other than the federal government.

We expect that at the time most, if not all, mortgage loans are
purchased, no environmental assessment or a very limited environmental
assessment of the mortgaged properties will have been conducted.

"Hazardous substances" are generally defined as any dangerous, toxic or
hazardous pollutants, chemicals, wastes or substances, including, without
limitation, those so identified pursuant to CERCLA or any other environmental
laws now existing, and specifically including, without limitation, asbestos
and asbestos containing materials, polychlorinated biphenyls, radon gas,
petroleum and petroleum products, and urea formaldehyde.

If a lender is or becomes liable for clean up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the loan
documents. Similarly, in some states anti-deficiency legislation and other
statutes requiring the lender to exhaust its security before bringing a
personal action against the borrower (see "Anti-Deficiency Legislation" below)
may curtail the lender's ability to recover from its borrower the
environmental clean up and other related costs and liabilities incurred by the
lender.

JUNIOR MORTGAGE AND DEEDS OF TRUST; RIGHTS OF SENIOR MORTGAGES OR
BENEFICIARIES

Priority of liens on mortgaged property created by mortgages or deeds of
trust depends on their terms and, generally, on the order of filing with a
state, county or municipal office, although such priority may in some states
be altered by the mortgagee's or beneficiary's knowledge of unrecorded liens,
leases or encumbrances against the mortgaged property. However, filing or
recording does not establish priority over governmental claims for real estate
taxes and assessments or, in some states, for reimbursement of remediation
costs of certain environmental conditions. See "Environmental Risks". In
addition, the Code provides priority to certain tax liens over the lien of a
mortgage.

We do not presently intend to acquire junior mortgages or deeds of trust
which are subordinate to senior mortgages or deeds of trust held by the other
lenders. Our rights as mortgagee or beneficiary under a junior mortgage or
deed of trust will be subordinate to those of the mortgagee as beneficiary
under the senior mortgage or deeds of trust, including the prior rights of the
senior mortgagee as beneficiary to receive rents, hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to
be sold upon default of the mortgagor, thereby extinguishing the junior
mortgagee's or beneficiary's lien unless we assert our subordinate interest in
foreclosure litigation or satisfies the defaulted senior loan. As discussed
more fully below, in many states a junior mortgagee may satisfy a defaulted
senior loan in full, or may cure such default, and bring the senior loan
current, in either event adding the amounts expended to the balance due on the
junior loan. Absent a provision in the senior mortgage, no notice of default
is required to be given to the junior mortgagee or beneficiary.

The form of mortgage or deed of trust used by many institutional lenders
confers on the mortgagee or beneficiary the right both to receive proceeds
collected under any hazard insurance policy and awards made in connection with
any condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property
is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior indebtedness will, in most cases, be applied to the
indebtedness secured by a junior mortgage or deed of trust. The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply
the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be
allowed to use the proceeds of hazard insurance to repair the damage unless
the security of the mortgagee or beneficiary has been impaired. Similarly, in
certain states, the mortgagee or beneficiary is entitled to the award for a
partial condemnation of the real property security only to the extent that its
security is impaired.

The form of mortgage or deed of trust used by many institutional lenders
typically contains a "future advance" clause, which provides that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust While such
a clause is valid under the laws of most states, the priority of any advance
made under the clause depends, in some states, on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee or beneficiaries
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage
or deed of trust and the date of the future advance, and notwithstanding that
the mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional
amounts and has actual knowledge of the intervening junior mortgages or deeds
of trust and other liens, the advance may be subordinate to such intervening
junior mortgages or deeds of trust and other liens. Priority of advances
under a "future advance" clause rests, in other states, on state law giving
priority to advances made under the loan agreement up to a "credit limit"
amount stated in the recorded mortgage or deed of trust.

Another provision typically found in the forms of mortgage and deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when
due, all encumbrances, charges and liens on the property which appear prior to
the mortgage, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste
thereof, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor or trustor to perform any of these obligations, the
mortgagee or beneficiary is given the right under the mortgage or deed of
trust to perform the obligation itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the mortgagor or
trustor. All sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage.

STATUTORY RIGHTS OF REDEMPTION

In some states, after a foreclosure sale pursuant to a mortgage or deed
of trust, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the borrower pays only a portion of
the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The right of
redemption may defeat the title of any purchaser as a foreclosure sale or any
purchaser from the lender subsequent to a foreclosure sale. Certain states
permit a lender to avoid a post-sale redemption by waiving its right to a
deficiency judgment. Consequently, the practical effect of the redemption
right is often to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run. Under the laws of some
states, Mortgages under contracts for deed may also have a post-foreclosure
right of redemption and a mortgager with a sufficient equity investment in the
property may be permitted to share in the proceeds of any sale of the property
after the indebtedness is paid or may otherwise be entitled to a prohibition
of the enforcement and the forfeiture clause.

ANTI-DEFICIENCY LEGISLATION

We may acquire interests in mortgage loans which are nonrecourse loans as
to which, in the event of default by a borrower, recourse may be had only
against the specific property pledged to secure the related mortgage loan and
not against the borrower's other assets. Even if recourse is available
pursuant to the terms of the mortgage loan against the borrower's assets in
addition to the mortgaged property, certain states have imposed statutory
prohibitions which impose prohibitions against or limitations on such
recourse. Some state statutes limit the right of the mortgagee or beneficiary
to obtain a deficiency judgment against the borrower following foreclosure. A
deficiency judgment is a personal judgment against the former borrower equal
in most cases to the difference between the net amount realized upon the
public sale of the security and the amount due to the lender. Other statutes
require the mortgagee or beneficiary to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing
a personal action against the borrower. In certain states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. The practical effect of such an election requirement is that
lenders will usually proceed first against the security rather than bringing
personal action against the borrower. Other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to
the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a mortgagee form obtaining a large deficiency judgment against the
borrower as a result of low bids or the absence of bids at the judicial sale.

BANKRUPTCY LAWS

Statutory provisions, including the Bankruptcy Code and state laws
affording relief to debtors, may interfere with and delay the ability of the
secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. Under the Bankruptcy
Code, virtually all actions (including foreclosure actions and deficiency
judgment proceeding) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and consequences
thereof caused by such automatic stay can be significant. However, that
automatic stay can be removed unless the debtor can provide adequate security
to the Creditor, usually in the form of post-petition payments on the debt.
Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or
on behalf of a junior lienor, including, without limitation, any junior
mortgagee, may stay the senior lender form taking action to foreclose that
junior lien.

Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured
by property of the debtor may be modified under certain circumstances. The
outstanding amount of the loan secured by the real property may be reduced to
the then current value of the property (with a corresponding partial reduction
of the amount of the lender's security interest) pursuant to a confirmed plan
or lien avoidance proceeding, thus leaving the lender a general unsecured
creditor for the differences between such value and the outstanding balance of
the loan. Other modifications may include the reduction in the amount of each
monthly payment, which reduction may result from a reduction in the rate of
interest and/or the alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or an extension (or
reduction) of the final maturity date. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearage over a number of years. Also, under the Bankruptcy Code, a
bankruptcy court may permit a debtor through its rehabilitative plan to de-
accelerate a secured loan and to reinstate the loan even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's petition. This may be done even if the
full amount due under the original loan is never repaid. Other types of
significant modifications to the terms of the mortgage or deed of trust may be
acceptable to the bankruptcy court, often depending on the particular facts
and circumstances of the specific case.

In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor
under the related mortgage loan to the lender. Payments on long-term debt may
be protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.

ENFORCEABILITY OF CERTAIN PROVISIONS

Prepayment Provisions

In the absence of state statutory provisions prohibiting prepayment fees
(e.g., in the case of single-family residential loans) courts generally
enforce claims requiring prepayment fees unless enforcement would be
unconscionable. However, the laws of certain states may render prepayment
fees unenforceable for certain residential loans or after a mortgage loan has
been outstanding for a certain number of years, or may limit the amount of any
prepayment fee to a specified percentage of the original principal amount of
the mortgage loan, to a specified percentage of the outstanding principal
balance of a mortgage loan, or to a fixed number of month's interest on the
prepaid amount. In certain states, prepayment fees payable on default or
other involuntary acceleration of a mortgage loan may not be enforceable
against the mortgagor or trustor. Some state statutory provisions may also
treat certain prepayment fees as usurious if in excess of statutory limits.
See "Certain Laws and Regulations - Applicability of Usury Laws". We may
invest in mortgage loans that do not require the payment of specified fees as
a condition to prepayment or the requirements of which have expired, and to
the extent mortgage loans do require such fees, such fees generally may not be
a material deterrent to the prepayment of mortgage loans by the borrowers.

Due-On-Sale Provisions

The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states, and in some cases, typically
involving single family residential mortgage transactions, their
enforceability has been limited or denied. The Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of due-
on-sale clauses and permits lenders to enforce these claims in accordance with
their terms, subject to certain exceptions. As a result, due-on-sale clauses
have become generally enforceable except in those states whose legislatures
exercised their authority to regulate the enforceability of such clauses with
respect to certain mortgage loans. The Garn-St. Germain Act does "encourage"
lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market
rates.

Under federal bankruptcy law, due-on-sale clauses may not be enforceable
in bankruptcy proceedings and may, under certain circumstances, be eliminated
in any modified mortgage resulting from such bankruptcy proceeding.

Acceleration on Default

We may invest in mortgage loans which contain a "debt-acceleration"
clause, which permits the lender to accelerate the full debt upon a monetary
or non-monetary default of the borrower. The courts of most states will
enforce clauses providing for acceleration in the event of a material payment
default after giving effect to any appropriate notices. The equity courts of
any state, however, may refuse to foreclose a mortgage or deed of trust when
an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. Furthermore, in
some states, the borrower may avoid foreclosure and reinstate an accelerated
loan by paying only the defaulted amounts and the costs and attorneys' fees
incurred by the lender in collecting such defaulted payments.

State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of installment
contracts. For example, a lender's practice of accepting late payments from
the borrower may be deemed a waiver of the forfeiture clause. State courts
also may impose equitable grace periods for payment of arrearage or otherwise
permit reinstatement of the contract following a default. Not infrequently,
if a borrower under an installment contract has significant equity in the
property, equitable principles will be applied to reform or reinstate the
contract or to permit the borrower to share the proceeds upon a foreclosure
sale of the property if the sale price exceeds the debt.

Secondary Financing: Due-on-Encumbrance Provisions

Some mortgage loans may have no restrictions on secondary financing,
thereby permitting the borrower to use the mortgaged property as security for
one or more additional loans. Some mortgage loans may preclude secondary
financing (often by permitting the first lender to accelerate the maturity of
its loan if the borrower further encumbers the mortgaged property) or may
require the consent of the senior lender to any junior or substitute
financing; however, such provisions may be unenforceable in certain
jurisdictions under certain circumstances.

Where the borrower encumbers the mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
borrower may have difficulty servicing and repaying multiple loans. Second,
acts of the senior lender which prejudice the junior lender or impair the
junior lender's security may create a superior equity in favor of the junior
lender. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with, delay and in certain circumstances even prevent the taking of
action by the senior lender. Fourth, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.

Applicability of Usury Laws

State and federal usury laws limit the interest that lenders are entitled
to receive on a mortgage loan. In determining whether a given transaction is
usurious, courts may include charges in the form of "points" and "fees" as
"interest", but may exclude payments in the form of "reimbursement of
foreclosure expenses" or other charges found to be distinct from "interest".
If, however, the amount charged for the use of the money loaned is found to
exceed a statutorily established maximum rate, the form employed and the
degree of overcharge are both immaterial. Statutes differ in their provision
as to the consequences of a usurious loan. One group of statues requires the
lender to forfeit the interest above the applicable limit or imposes a
specified penalty. Under this statutory scheme, the borrower may have the
recorded mortgage or deed of trust cancelled upon paying its debt with lawful
interest, or the lender may foreclose, but only for the debt plus lawful
interest. Under a second, more severe type of statute, a violation of the
usury law results in the invalidation of the transaction, thereby permitting
the borrower to have the recorded mortgage or deed of trust cancelled without
any payment and prohibiting the lender from foreclosing.

<PAGE>
WHO MAY INVEST

A purchase of Shares is suitable for persons who desire an investment
intended to provide income from the Mortgage Investments that we will make,
which are not insured by the FHA or guaranteed by Ginnie Mae, Fannie Mae or
Freddie Mac. Because no public market is expected to develop for the Shares
before the completion of this offering, a purchase of the Shares is most
suitable for persons who do not have an immediate need for liquidity.

We have established the following suitability standards which must be met
before subscription for the purchase of Shares from any individual investor
will be accepted:

RESIDENTS OF STATES OTHER THAN FLORIDA OR PENNSYLVANIA

A minimum gross income of $45,000 and a minimum net worth of
$45,000 (exclusive of home, home furnishings and automobiles) or a
minimum net worth of $150,000 (exclusive of home, home furnishings
and automobiles).

FLORIDA RESIDENTS

A minimum gross income of $45,000 and a minimum net worth of
$45,000 (exclusive of home, home furnishings and automobiles) or a
minimum net worth of $125,000 (exclusive of home, home furnishings
and automobiles). In addition, the investment must not exceed 20%
of the investor's net worth.

PENNSYLVANIA RESIDENTS

A minimum gross income of $60,000 and a minimum net worth of
$60,000 (exclusive of home, home furnishings and automobiles) or a
minimum net worth of $250,000 (exclusive of home, home furnishings
and automobiles). In addition, the investment must not exceed 10%
of the investor's net worth.

In the case of sales to IRA's, qualified pension or profit sharing or
other retirement plans including KEOGH plans and trusts and to other fiduciary
accounts, the foregoing suitability standards must be met by the beneficiary,
the fiduciary account, or by the donor or grantor who directly or indirectly
supplies the funds to purchase the Shares if the donor or grantor is the
fiduciary.

We reserve the right to modify those suitability standards for investors
in states where the securities administrator has required higher standards or
agreed to lower standards.

Each person selling the Shares on our behalf shall make every reasonable
effort to determine that the purchase of Shares is a suitable and appropriate
investment for the investor.

<PAGE>
TERMS OF THE OFFERING

SHARES OFFERED

We are offering maximum of 2,500,000 Shares at $20 each. As of December
31, 1998, we had sold a total of 724,271 Shares in this offering. The Shares
are being offered on a "best efforts" basis through First Financial United
Investments Ltd., L.L.P. (the "Selling Group Manager") and broker-dealers
selected by the Selling Group Manager. The term "best efforts" basis means
that no broker-dealer participating in the offering will be under any
obligation to purchase any Shares from us, and that each broker-dealer has
agreed to provide its best commercially reasonable efforts to sell Shares to
be issued by us.

SUITABILITY REQUIREMENTS

We have established certain suitability standards for the purchase of
Shares applicable to individual investors. See "Who May Invest". We reserve
the right to reject subscriptions in our sole discretion. To prevent a
possible violation of REIT concentration of ownership standards, we intend to
limit Share ownership so that at no time will five or fewer shareholders own
more than 50% of the outstanding Shares. See "Summary of Declaration of Trust
- - Redemption and Restriction on Transfer of Shares".

TERMINATION OF THE OFFERING

The offering will terminate December 31, 2000, unless we terminate the
offering earlier (which we are entitled to do in our sole discretion for any
reason whatsoever).

SHARES SOLD TO ADVISOR BEFORE THIS OFFERING

The Advisor purchased 10,000 Shares at an aggregate purchase price of
$200,000 ($20.00 per share) prior to this initial public offering. The
Advisor has represented that it will hold those Shares for investment and not
with a view to the sale or distribution thereof within the meaning of the
Securities Act of 1933. The Declaration of Trust provides that the Sponsors
or any Affiliates may not withdraw its initial investment of $200,000 while
the Sponsor remains a Sponsor but may transfer those 10,000 Shares to other
Affiliates.

MINIMUM PURCHASE REQUIREMENTS

Shares will be sold only to a person who makes a minimum purchase of 250
Shares ($5,000). Notwithstanding the foregoing, a minimum of 50 Shares
($1,000) may be purchased by an Individual Retirement Account ("IRA")
established under Section 408 of the Code, or a Keogh Plan established under
Section 401 of the Code. It should be noted, however, that an investment in
Shares, in and of itself, will not create an IRA or a Keogh Plan for any
investor and that in order to create an IRA or Keogh Plan, an investor must
comply with the provisions of the Code.

PURCHASES BY QUALIFIED PLANS

Depending upon the particular circumstances, and subject to the terms of
the governing plan instruments, the purchase of Shares may be a suitable
investment for IRAs and qualified pension, profit sharing or other retirement
plans (including Keogh plans) and trusts and bank commingled trust funds for
such plans (collectively, "Qualified Plans"). ERISA and the Code, however,
impose significant penalties for certain investments by Qualified Plans
(including IRAs). In order to ensure that any investment contemplated by a
Qualified Plan will not result in the imposition of such penalties, we will
not permit the purchase of Shares with assets of any Qualified Plan (including
Keogh Plans and IRAs) if we, the Advisor or any of our Affiliates (1) has
investment discretion with respect to the assets of the Qualified Plan to be
invested, (2) regularly gives individualized investment advice which serves as
the primary basis for the investment decisions made with respect to such
assets, or (3) is otherwise a fiduciary with respect to those assets for
purposes of the prohibited transaction provisions of ERISA or the Code. See
"ERISA Considerations".

BROKER COMPENSATION

The Selling Group Manager will receive a commission of 10% of the Gross
Offering Proceeds, plus 0.5% of the Gross Offering Proceeds as a due diligence
fee. The Selling Group Manager may, in its sole discretion, provide volume
discounts of up to 2% on a negotiated basis to Institutional Investors who
purchase at least 50,000 Shares. The application of any volume discounts will
reduce the amount of commissions that would be paid to the Selling Group
Manager but will not change the Net Offering Proceeds to us. The Selling
Group Manager will pay to Selected Dealers a commission equal to 4% of the
offering price of Shares sold through them unless a higher commission (up to,
but not exceeding, 8%) is designated by the Selling Group Manager.

The Selling Group Manager will also receive, for nominal consideration,
Shares (the "SGM Shares") equal to 0.5% of all Shares sold (12,500 Shares if
all Shares offered hereunder are sold). The Selling Group Manager may
allocate all or a portion of the SGM Shares to Selected Dealers and registered
representatives of the Selling Group Manager.

The Selling Group Manager Agreement provides that we shall indemnify the
Selling Group Manager and the Selected Dealers with respect to any liabilities
arising out of the Securities Act. The Selling Group Manager and certain
Selected Dealers may be deemed to be "underwriters" as that term is defined in
the Securities Act of 1933 (the "Securities Act"), and compensation paid the
Selling Group Manager and any Selected Dealers in connection with the sale of
Shares may be deemed to be "underwriting commissions" within the meaning of
the Securities Act.

SUBSCRIPTION PROCEDURE

In order to purchase Shares, the investor must complete and execute a
Subscription Agreement in the form attached to this prospectus. Payment for
the Shares in an amount equal to $20 per Share, should be delivered to the
Selling Group Manager or Selected Dealer, together with executed Subscription
Agreements, where applicable.

Payment for subscriptions may be made by an investor: (a) by delivery to
the Selling Group Manager or Selected Dealer of a check made payable to "Chase
Bank of Texas Escrow" or (b) by authorizing his broker to wire transfer the
purchase price for shares indicated in the Subscription Agreement to the
Escrow Agent, in each case in the amount of $20 for each Share he wishes to
purchase and in total amount of not less than the minimum subscription of 250
Shares ($5,000) (50 Shares ($1,000) for IRA's and Keogh plans). A subscriber
must have his subscription payment in the escrow account on the specified
settlement date. All payments should be made directly to the escrow account
so that good funds are available on the settlement date. Properly completed
Subscription Agreement must be in the Selling Group Manager's possession at
that time.

An investor, by subscribing for Shares and accepting confirmation of the
purchase of Shares without objection after receipt of such confirmation
accompanied by the prospectus and our Declaration of Trust, will be assenting
to all of the terms and conditions of the Declaration of Trust. In addition,
by placing an order for Shares, an investor (i) represents that he, she or it
has authority to order Shares and, if appropriate, to execute a Subscription
Agreement, (ii) if he, she or it is a qualified plan (including a Keogh plan
or an Individual Retirement Account) or is otherwise a "benefit plan investor"
as defined in Department of Labor Regulation 2510.3-101(f)(2), represents
that to the best of his, her or its knowledge neither we, the Advisor or any
Affiliate (a) has investment discretion with respect to the assets being used
to purchase Shares, (b) regularly gives individualized investment advice which
serves as the primary basis for the investment decisions made with respect to
such assets, or (c) is otherwise a fiduciary with respect to such assets, and
(iii) represents that he, she or it meets the suitability requirements
established by us or, if different, the standard applicable to residents of
the state in which the investor resides, as set forth in "Who May Invest".

ESCROW ARRANGEMENTS

All funds from subscriptions for Shares will be placed in escrow with the
Escrow Agent [unless otherwise directed by the Selling Group Manager]. The
Escrow Agent, at our direction, is given the right of investments permitted
under Rule 15c2-4 of the Securities Exchange Act of 1934 in bank accounts,
including savings accounts, bank money market accounts, short-term
certificates of deposit, or short term securities issued by the United States
government, including treasury notes and obligations guaranteed by the full
faith and credit of the United States government.

Until the termination of the offering of the Shares, additional sales of
Shares will become effective on each Interim Closing. The subscription
proceeds will be held in escrow until the next Interim Closing and interest
earned on those subscription proceeds pending that Interim Closing will be
distributed to each subscriber, pro rata, calculated based upon the number of
days each such subscriber's funds are held in escrow hereunder, subject to any
applicable withholding provisions of the Code. A certificate evidencing the
Shares will be issued to such holder not later than 60 days after the
subscription proceeds are released from escrow.

<PAGE>
SALES MATERIAL

In addition to and apart from this prospectus, we will utilize certain
sales material in connection with the offering of Shares. This material may
include fact sheets and other guides to be used internally by broker dealers,
an investor sales promotion brochure, speeches for public seminars, audio
video and slide presentations, invitations to attend public seminars,
prospecting letters, mailing cards, articles and publications concerning real
estate and mortgage investments, and so called "tombstone" advertisements. In
certain jurisdictions, such sales material will not be available. Use of any
materials, including sales materials to be distributed to NASD members and
their associated persons will be conditioned on filing with and, if required,
clearance by appropriate regulatory authorities. Such clearance does not
mean, however, that the agency allowing use of the sales literature has passed
on the merits of this offering or the accuracy of the material contained in
such literature.

Other than as described herein, we have not authorized the use of other
sales material, other than marketing bulletins to be used internally by broker
dealers. The offering is made only by means of this prospectus. Although the
information contained in such material does not conflict with any of the
information contained in this prospectus, such material does not purport to be
complete, and should not be considered as part of this prospectus or the
Registration Statement of which this prospectus is a part, or as incorporated
in this prospectus or the Registration Statement by reference, or as forming
the basis of the offering of the Shares which are offered hereby.

LEGAL MATTERS

Legal matters in connection with the Shares offered hereby will be passed
on for us by Berry Moorman P.C., Detroit, Michigan. Certain tax matters will
be passed on by Berry Moorman P.C.

REPORTS TO INVESTORS

We will distribute to our shareholders, within 120 days after the end of
our fiscal year, copies of our annual report which will include annual
financial statements (balance sheet, statement of income or loss, statement of
shareholders' equity, statement of cash flows and a statement of surplus)
accompanied by a report containing an opinion of independent certified public
accountants. We shall also include in our annual report: (1) the ratio of the
costs of raising capital during the period to the capital raised, (2) the
total Operating Expenses as a percentage of Average Invested Assets and as a
percentage of Net Income, (3) full disclosure of all material terms, factors
and circumstances describing any and all transactions with the Advisor, a
Trustee, a Sponsor or Affiliates thereof and of fees, commissions,
compensation and other benefits paid or accrued to the Advisor, a Trustee, a
Sponsor or Affiliates thereof for the fiscal year completed, showing the
aggregate amount paid or accrued to each recipient and the services performed
for such year (including fees or charges paid or accrued to the Advisor, a
Trustee, the Sponsor or Affiliates thereof by third parties doing business
with us), (4) a statement of distributions to the shareholders and their
sources and (5) a report from the Independent Trustees that the policies being
followed by us are in the best interests of our shareholders and the basis for
that determination. The Independent Trustees shall have the duty to examine
and comment in the annual report on the fairness of any such transactions with
the Advisor, a Trustee, the Sponsor or Affiliates thereof. Within 75 days
after December 31 in each year, we will distribute to our shareholders all of
our information necessary in the preparation of their federal income tax
returns.

We shall distribute to the shareholders within 60 days after the end of
our first three fiscal quarters of each fiscal year, copies of an quarterly
report which will include an unaudited balance sheet, an unaudited statement
of income for the year to date, and an unaudited statement of cash flows for
the year to date.

Financial information contained in all reports to investors will be
prepared on an accrual basis of accounting in accordance with generally
accepted accounting principles.

EXPERTS

Our financial statements as of December 31, 1998 and 1997 are included
herein and elsewhere in the registration statement has been included herein
and in the registration statement in reliance upon the report of Jackson &
Rhodes, P.C., independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.

<PAGE>
GLOSSARY

The definitions of terms used in this prospectus are set forth below.

"Acquisition Expenses" shall mean expenses related to our selection of,
and investment in, Mortgage Investments, whether or not acquired or made,
including but not limited to legal fees and expenses, travel and
communications expenses, costs of appraisals, accounting fees and expenses,
title insurance and miscellaneous other expenses.

"Acquisition Fees" shall mean the total of all fees and commissions,
however designated, paid by any party in connection with the origination or
acquisition of Residential Mortgages or Contracts for Deed by us. Included in
the computation of such fees or commissions shall be any real estate
commission, selection fee, development fee, nonrecurring management fee, loan
fees or points or any fee of a similar nature, however designated.

"Adjusted Contributions", used in calculating the Subordinated Incentive
Fee, shall mean (1) the product of $20 times the number of outstanding Shares,
reduced by (2) the total of cash distributed to shareholders with respect to
the Shares from Disposition Proceeds and the return (if any) of uninvested Net
Offering Proceeds.

"Advisor" shall mean the person(s) or entity retained by the Trustees
that will be responsible for providing advice with respect to developing a
model for our portfolio, developing underwriting criteria and monitoring
yields and performing other duties as described in the Advisory Agreement,
including a person or entity to which an Advisor subcontracts substantially
all such functions. Initially the Advisor shall be Mortgage Trust Advisors,
Inc., or anyone which succeeds it in such capacity.

"Advisory Agreement" shall mean the agreement between the Advisor and us
whereby pursuant the Advisor will act as our investment advisor.

"Affiliate" shall mean (i) any Person directly or indirectly controlling,
controlled by or under common control with another Person, (ii) any Person
owning or controlling 10% or more of the outstanding voting securities or
beneficial interests of such other Person, (iii) any executive officer,
director, trustee, general partner of such Person, and (iv) if such other
Person is an executive officer, director, trustee or partner of another
entity, then the entity for which that Person acts in any such capacity.

"Affiliated Programs" shall mean any and all REITs, partnerships or other
entities which may in the future be formed by the Advisor, a Sponsor or their
Affiliates to engage in businesses which may be competitive with us and which
have similar investment objectives as we do (or programs with dissimilar
objectives for which a particular Mortgage Investment may nevertheless be
suitable). An Affiliated Program may have the same management as we do.

"Average Invested Assets" shall mean the average of the aggregate book
value of our assets for any period invested, directly or indirectly, in
Mortgage Investments before reserves for depreciation or bad debts or other
similar non-cash reserves, computed by taking the average of such values at
the end of each month during such period.

"Capital Distributions" shall mean Distributions of: (1) non-reinvested
principal payments and (2) Proceeds of Mortgage Prepayments, Sales and
Insurance.

"Cash Flow" shall mean, with respect to any period, (a) all cash receipts
derived from payments of principal and base interest on Mortgages held by us
(exclusive of any Proceeds of Mortgage Prepayments, Sales and Insurance) plus
(b) cash receipts from operations (including any interest from our temporary
investments) without deduction for depreciation or amortization, less (c) cash
receipts used to pay operating expenses.

"Code" shall mean the Internal Revenue Code of 1986, as amended, or
corresponding provisions of subsequent revenue laws.

"Contract for Deed" refers to the Seller's unencumbered interest in
contracts for deed (also known as land contracts) for the purchase of single
family residential property throughout the United States in which we will
invest.

"Counsel" shall mean Berry Moorman P.C.

"CRC" shall mean Capital Reserve Corporation, a Texas corporation that is
50% owned by Todd Etter, a principal shareholder of the Advisor. CRC is
engaged in the business of financing home purchase and renovations.

"Declaration of Trust" shall mean our Declaration of Trust, as amended
and/or amended and restated from time to time.

"Disposition Proceeds" shall mean: (1) Proceeds of Mortgage Prepayments,
Sales or Insurance and (2) payments of principal when due which are paid to us
with respect to Mortgage Investments and other Mortgages.

"Distributions" shall mean any cash distributed to shareholders arising
from their interest in the Shares.

"Escrow Agent" shall mean Chase Bank of Texas, NA or any other qualified
financial institution designated as escrow agent by the Company and the
Selling Group Manager.

"Gross Offering Proceeds" shall mean the total proceeds from the sale of
Shares during the offering period before deductions for Organization and
Offering Expenses. For purposes of calculating Gross Offering Proceeds, the
purchase price of all Shares shall be deemed to be $20 per Share.

"Independent Trustees" shall mean the Trustees who (1) are not
affiliated, directly or indirectly, with the Advisor, a Sponsor or any of
their Affiliates, whether by ownership of, ownership interest in, employment
by, any material business or professional relationship with, or service as an
officer or director of the Advisor, a Sponsor or any of their Affiliates, (2)
do not serve as a director or Trustee of more than two other REITs organized
by a Sponsor or advised by the Advisor and (3) perform no other services for
us, except as Trustees. For this purpose, an indirect relationship shall
include circumstances in which a member of the immediate family of a Trustee
has one of the foregoing relationships with the Advisor, a Sponsor or the
Company.

"Institutional Investors" shall mean a bank, trust company, savings
institution, insurance company, securities dealer, investment company or
business development company as defined in the Investment Company Act of 1940,
or a pension or profit sharing trust with assets of at least $5,000,000.

"Interim Closing" refers to the closings of the sale of Shares that are
anticipated to be held on the first and fifteenth of each month (or the next
business day). All Subscriber's funds will be deposited into the escrow
account maintained by the Escrow Agent and will be disbursed by the Escrow
Agent to us and the selling Group Manager at the next Interim Closing.

"Interim Mortgages" shall mean loans of 12 months or less in term, made
to investors for the purchase, renovation and sale of single family homes.

"Investment-to-Value Ratio" means the amount paid by us to purchase a
Mortgage Investment divided by the value of the real estate that is the
security for that Mortgage Investment.

"Mortgage Investments" shall mean our investments in Residential
Mortgages, Contracts for Deed and Interim Mortgages.

"Mortgage Prepayments, Sales or Insurance" shall mean any transaction by
us (other than the receipt of base interest, principal payments when due on a
Mortgage Investment and the issuance of Shares) including without limitation
prepayments, sales, exchanges, foreclosures, or other dispositions of Mortgage
Investments held by us or the receipt of insurance proceeds or of guarantee
proceeds from any insurer or recoursing party or otherwise, or any other
disposition of our assets.

"Mortgages" shall mean, in a broad sense, beneficial interests or
participation interests in whole mortgages, mortgage certificates, mortgage-
backed securities, participation certificates backed by either a single
mortgage or a pool of mortgages or interests in pass-through entities which,
under the REIT provisions of the Internal Revenue Code, would be considered to
be qualifying real estate assets for purposes of our qualification as a REIT
(e.g. regular interests in real estate mortgage investment conduits
("REMICs")).

"Net Assets" or "Net Asset Value" shall mean our total assets (other than
intangibles) valued at cost before deducting depreciation or other non-cash
reserves less our total liabilities. The Net Asset Value shall be calculated
at least quarterly on a basis consistently applied.

"Net Income" shall mean, for any period, total revenues applicable to
such period, less the expenses applicable to such period other than additions
to allowances or reserves for depreciation, amortization or bad debts or other
similar non-cash reserves; provided, however, that Net Income shall not
include any gain from the sale or other disposition of our Mortgage
Investments or other assets.

"Net Offering Proceeds" shall mean the Gross Offering Proceeds received
by us with respect to the sale of Shares less Organization and Offering
Expenses.

"Organization and Offering Expenses" shall mean all expenses incurred by
and to be paid from our assets in connection with and in preparing ourselves
for registration and subsequently offering and distributing the Shares to the
public, including, but not limited to, total underwriting and brokerage
discounts and commissions (including fees of the underwriters' attorneys),
expenses for printing, engraving, mailing, salaries of employees while engaged
in sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositaries, experts, expenses of qualification of the sale of the
securities under Federal and State laws, including taxes and fees,
accountants' and attorneys' fees. For the purposes of determining
"Organization and Offering Expenses", any volume discounts that are given by
the Selling Group Manager shall be deemed to be part of the selling
commissions paid to brokers for selling the Shares.

"Person" shall mean and include individuals, corporations, limited
liability companies, limited partnerships, general partnerships, joint stock
companies or associations, joint ventures, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof.

"Proceeds of Mortgage Prepayments, Sales and Insurance" shall mean
receipts from Mortgage Prepayments, Sales or Insurance less the following:

(i) the amount paid or to be paid in connection with or as an expense of
such Mortgage Prepayments, Sales or Insurance; and

(ii) the amount necessary for the payment of all debts and obligations of
the Company including but not limited to fees to the Advisor or
Affiliates and amounts, if any, required to be paid to, arising from or
otherwise related to the particular Mortgage Prepayments, Sales or
Insurance.

"Qualified Plan" shall mean any qualified pension, profit sharing or
other retirement plan (including a Keogh plan) and any trust, bank commingled
trust fund for such a plan and any IRA.

"REIT" shall mean a corporation or trust which qualifies as a real estate
investment trust described in sections 856 through 860 of the Code (the "REIT
Provisions").

"REIT Taxable Income" shall mean the taxable income as computed for a
corporation which is not a REIT, (1) without the deductions allowed by
sections 241 through 247, 249 and 250 of the Code (relating generally to the
deduction for dividends received); (2) excluding amounts equal to (a) the net
income from foreclosure property, and (b) the net income derived form
prohibited transactions; (3) deducting amounts equal to (x) any net loss
derived from prohibited transactions, and (y) the tax imposed by section
857(b)(5) of the Code upon a failure to meet the 95% and/or the 75% gross
income tests; and (4) disregarding the dividends paid, computed without regard
to the amount of the net income from foreclosure property which is excluded
from REIT Taxable Income.

"Residential Mortgage" shall mean the first lien, fixed rate mortgages
secured by single family residential property throughout the Unites States
that we will invest in.

"Roll-Up" shall mean a transaction involving the acquisition, merger,
commission or consolidation either directly or indirectly of us and the
issuance of securities of a Roll-Up Entity. Such term does not include:

(i) a transaction involving our securities of that have been for at least
12 months listed on a national securities exchange or traded through the
National Association of Securities Dealers Automated Quotation Market
System; or

(ii) a transaction involving the conversion to corporate, trust or
association form of only ourselves, if as a consequence of the
transaction, there will be no significant adverse change in any of the
following:

(A) shareholders' voting rights;

(B) our term and existence;

(D) our investment objectives.

"Roll-Up Entity" shall mean a partnership, real estate investment trust,
corporation, trust or other entity that would be created or would survive
after the successful completion of a proposed Roll-Up transaction.

"Selling Group Manager" shall mean First Financial United Investments
Ltd., L.L.P., the Selling Group Manager of the public offering of the Shares.

"Shares" shall mean our shares of beneficial interest.

"Selected Dealers" shall mean the dealer members of the National
Association of Securities Dealers, Inc. that are designated by the Selling
Group Manager to participate in the sale of the Shares.

"Sponsor" shall mean any person directly or indirectly instrumental in
organizing us, wholly or in part, or any Person who will control, manage or
participate in our management and any Affiliate of such Person, but does not
include (1) any person whose only relationship with us is that of an
independent asset manager whose only compensation from us is as such, and (2)
wholly-independent third parties such as attorneys, accountants, and
underwriters whose only compensation from us is for professional services. A
Person may also be deemed one of our Sponsors by: (1) taking the initiative,
directly or indirectly, in founding or organizing our business or enterprise,
either alone or in conjunction with one or more other Persons; (2) receiving a
material participation in us in connection with the founding or organizing of
our business, in consideration of the services or property, or both services
and property; (3) having a substantial number of relationships and contacts
with us; (4) possessing significant rights to control our Company properties;
(5) receiving fees for providing services to us which are paid on a basis that
is not customary in the industry; or (6) providing goods or services to us on
a basis which was not negotiated at arms length with us.

"Subordinated Incentive Fee" shall mean the fee paid to the Advisor
pursuant to the Advisory Agreement. The Subordinated Incentive Fee shall be
equal to 25% of the amount by which our Net Income for a year exceeds a 10%
per annum non-compounded cumulative return on its Adjusted Contributions. For
each year which it receives a Subordinated Incentive Fee, the Advisor shall
also receive 5-year options to purchase 10,000 Shares at the initial offering
price of $20 per share. See "Management - Summary of Advisory Agreement".

"Tax-Exempt Entities" shall mean any investor that is exempt from federal
income taxation, including without limitation a Qualified Plan, an endowment
fund, or a charitable, religious, scientific or educational organization.

"Total Operating Expenses" shall mean all of our operating, general, and
administrative expenses as determined by generally accepted accounting
principles, exclusive of the expenses of raising capital, interest payments,
taxes, non-cash expenditures (i.e. depreciation, amortization, bad debt
reserve), Acquisition Fees and other costs related directly to a specific
Mortgage Investment by us, such as expenses for originating, acquiring,
servicing or disposing of a Mortgage.

"Trustees" shall mean our trustees.

"UBTI" shall mean unrelated business taxable income as described in the
Code.

<PAGE>
FINANCIAL STATEMENTS

UNITED MORTGAGE TRUST

INDEX TO FINANCIAL STATEMENTS

Page

Independent Auditors' Report 87

Balance Sheets as of December 31, 1998 and 1997 88

Statements of Income
Years Ended December 31, 1998 and 1997 89

Statements of Changes in Shareholders' Equity
Years Ended December 31, 1998 and 1997 90

Statements of Cash Flows
Years Ended December 31, 1998 and 1997 91

Notes to Financial Statements 92

INDEPENDENT AUDITORS' REPORT

Board of Trustees
United Mortgage Trust

We have audited the accompanying balance sheets of United
Mortgage Trust as of December 31, 1998 and 1997, and the related
statements of income, changes in shareholders' equity and cash flows
for the years then ended. These financial statements are the
responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
United Mortgage Trust as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the years then
ended are in conformity with generally accepted accounting
principles.

Jackson & Rhodes P.C.

Dallas, Texas
March 5, 1999

<TABLE>
UNITED MORTGAGE TRUST
BALANCE SHEETS (Audited)
For the Years Ending
December 31, 1998 and 1997
<CAPTION>
December 31,
1998 1997
ASSETS
<S> <C> <C>
Cash $ 58,054 $ 248
Investment in residential mortgages
and contracts for deed 11,159,863 2,722,036
Interim mortgages 3,285,023 877,275
Accrued interest receivable 133,478 38,746
Receivable from affiliate (Note 5) 15,185 12,116
Equipment, less accumulated depreciation
of $1,256 and $736, respectively 1,986 1,850
Other assets 5,350 2,337
----------- ----------
Total Assets $14,658,939 $3,654,608
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Lines of credit (Note 3) $ 1,484,308 $ 138,000
Dividend payable 121,164 33,799
Accounts payable & accrued
liabilities 1,519 883
----------- ----------
Total Liabilities $ 1,606,991 $ 172,682
----------- ----------
Commitments and contingencies (Note 6)

Shareholders' equity:
Shares of beneficial interest; $.01 par
Value; 100,000,000 shares authorized
734,271 and 202,508 shares
outstanding $ 7,343 $ 2,025
Additional paid-in capital 12,974,938 3,467,964
Retained earnings 69,667 11,937
----------- ----------
Total Shareholders' Equity $13,051,948 $3,481,926
----------- ----------
Total $14,658,939 $3,654,608
----------- ----------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
UNITED MORTGAGE TRUST
STATEMENTS OF INCOME (Audited)
For the Years Ended
December 31, 1998 and 1997
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Revenues:
Interest income $1,131,154 $172,027
Expenses: ---------- --------
Salaries and wages 67,361 62,198
General and administrative 203,963 52,554
Interest expense 43,577 7,804
Expense reimbursement from
affiliate (Note 5) (200,282) (150,129)
---------- --------
114,619 27,573
---------- --------

Net income $1,016,535 $199,600
---------- --------

Net income per share of
beneficial interest $2.12 $2.66
---------- --------
Weighted average shares
outstanding 480,057 75,089
---------- --------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
UNITED MORTGAGE TRUST
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Audited)
For the Years Ending
December 31, 1998 and 1997
<CAPTION>
Shares of Additional Retained
Beneficial Interest Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, Dec 31, 1996 10,000 $ 100 $ 199,900 $ (47,004) $ 152,996

Proceeds from shares issued 192,508 1,925 3,443,064 -- 3,444,989
Offering costs -- -- (175,000) -- (175,000)
Dividends ($.85 per share) -- -- -- (140,659) (140,659)
Net income 199,600 199,600
------- ------ ----------- ---------- -----------
Balance, Dec 31, 1997 202,508 2,025 3,467,964 11,937 3,481,926

Proceeds from shares issued 531,763 5,318 9,506,974 -- 9,512,292
Dividends ($2.05 per share) -- -- -- (958,805) (958,805)
Net income -- -- -- 1,016,535 1,016,535
------- ------ ----------- ---------- -----------
Balance, Dec 31, 1998 734,271 $7,343 $12,974,938 $ 69,667 $13,051,948
------- ------ ----------- ---------- -----------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
UNITED MORTGAGE TRUST
STATEMENTS OF CASH FLOWS (Audited)
For the Years Ending
December 31, 1998 and 1997
<CAPTION>

December 31,
1998 1997
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,016,535 $ 199,600
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,257 700
Amortization of discount on
mortgage investments (55,864) (10,277)
Accrued interest receivable (94,732) (38,609)
Other assets (3,750) (1,600)
Accounts payable and other liabilities 88,001 16,806
Net cash provided by operating ------------ -----------
activities: 951,447 166,620
------------ -----------
Cash flow from investing activities:
Investment in residential mortgages and
contracts for deed (8,344,441) (2,607,692)
Principal receipts on residential
mortgages and contracts for deed 223,063 6,538
Investment in interim mortgages (6,755,077) (877,275)
Principal receipts on interim
mortgages 4,347,329 --
Loan acquisition costs (260,585) (82,771)
Purchase of equipment (656) --
Net cash used in investing ------------- -----------
activities: (10,790,367) (3,561,200)
------------- -----------
Cash flow from financing activities:
Proceeds from issuance of shares of
beneficial interest 9,512,292 3,444,989
Offering costs -- (48,437)
Net borrowings on lines of credit 1,346,308 138,000
Receivable from affiliate (3,069) (12,116)
Dividends (958,805) (140,659)
Net cash provided by financing ------------ -----------
activities: 9,896,726 3,381,777
------------ -----------
Net increase (decrease) in cash 57,806 (12,803)

Cash at beginning of year 248 13,051
------------ -----------
Cash at end of period $ 58,054 $ 248
------------ -----------
Interest paid $ 43,577 $ 7,804
------------ -----------
<FN>
See accompanying note to financial statements.
</FN>
</TABLE>
<PAGE>

UNITED MORTGAGE TRUST
Notes to Financial Statements
December 31, 1998 and 1997

1. Description of Business

The Company

United Mortgage Trust (the "Company") is a Maryland real estate investment
trust which intends to continue to qualify as a real estate investment
trust (a "REIT") under federal income tax laws. The Advisor to the Company
is a shareholder, Mortgage Trust Advisors, Inc. (the "Advisor"), a Texas
corporation. The Company invests in first lien, fixed rate Mortgage
Investments secured by single family residential property throughout the
United States. Such loans are originated by others to the Company's
specifications or to specification approved by the Company. Most, if not
all, of such loans are not insured or guaranteed by a federally owned or
guaranteed mortgage agency.

The Company is currently offering up to 2,500,000 shares in a public
offering at an offering price of $20 per share. After December 31, 1998 and
as of March 1, 1999, the Company had sold an additional 37,419 shares
aggregating net proceeds of $669,675.

2. Summary of Significant Accounting Policies

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include
cash and certificates of deposit with original maturities of less than
three months.

Residential Mortgages, Contracts for Deed and Interim Mortgages

Residential mortgages, Contracts for Deed and Interim Mortgages are
recorded at the lower of cost or estimated net realizable value, net of
discounts and including loan acquisition costs. The Mortgage Investments
are collateralized by real property owned by the borrowers. Loan
acquisition fees are incurred when we purchase Residential Mortgages and
Contracts for Deed but not when it purchases Interim Mortgages. Loan
acquisition fees and discounts on the notes are amortized using the
interest method over the estimated life of the mortgages (5-1/2 years).
Unamortized discount amounted to $434,029 and $170,088 at December 31, 1998
and 1997, respectively. Unamortized loan acquisition costs were $251,893
and $74,082 at December 31, 1998 and 1997, respectively.

Office Equipment

Office Equipment is recorded at cost and depreciated by the straight-line
method over the five-year expected useful lives of the assets. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized.

Income Taxes

The Company intends to continue to qualify as a REIT under the Internal
Revenue Code of 1986 as amended (the "Code"). A REIT is generally not
subject to federal income tax on that portion of its REIT taxable income
("Taxable Income") which is distributed to its shareholders provided that
at least 95% of Taxable Income is distributed. No provision for taxes will
be made in the financial statements, as we believe we are in compliance
with the Code.

Basic Earnings Per Share

In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Shares
("SFAS 128"). SFAS 128 provides a different method of calculating earnings
per share than was formerly used in APB Opinion 15. SFAS 128 provides for
the calculation of basic and diluted earnings per share. Basic earnings per
share include no dilution and are computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflect the
potential dilution of securities that could share in the earning of the
company. The Company was required to adopt this standard in the fourth
quarter of calendar 1997. Because the Company's potential dilutive
securities are not dilutive, the accompanying presentation is only the
basic earnings per share.

3. Lines of Credit

The Company has a $500,000 line of credit maturing on March 27, 1999, that
is collateralized with the assignment of certain Residential Mortgages.
Interest is calculated at 1-1/2 per cent above the bank's prime interest
rate, which translated to a 9.25% rate at year-end. The Company has an
additional $1,500,000 line of credit maturing on October 28, 1999, that is
collateralized with the assignment of certain Residential Mortgages.
Interest is calculated at 1-1/2 per cent above the bank's prime interest
rate, which translated to a 9.25% rate at year-end.

4. Employment Contract/Stock Options

The Company has entered into an employment agreement with its Chairperson
which provides for a salary plus a bonus equal to 25% multiplied by the
amount which the Company's administrative expenses fall below the approved
administrative budget. The Chairperson has received options to purchase
2,500 shares of the Company stock at $20 per share. The Chairperson also
will receive, at the end of each year of service for five years, additional
options to purchase 2,500 shares of the Company's stock at $20 per share.

For each year in which they serve, each Trustee of the Company also
receives 5-year options to purchase 2,500 shares of the Company's stock at
$20 per share. Following is a summary of the option transactions for 1998
and 1997:

<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Outstanding at beginning of year 10,000 --

Granted 10,000 10,000
Expired -- --
Exercised -- --
Outstanding at end of year 20,000 10,000

Exercisable at end of year 20,000 10,000

Exercise price per share $20.00 $20.00
</TABLE>

In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. Under fair value based method, compensation cost is
measured at the grant date based on the value of the award. However, SFAS
123 also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees."

Under the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Entities electing to continue to follow the accounting method provided in
APB Opinion 25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting had been applied.
The pro forma disclosure requirements are effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
has elected to measure compensation cost, including options issued, under
APB Opinion 25.

5. Related Party Transactions

The Company purchased Residential Mortgages and Contracts for Deed from
South Central Mortgage, Inc., a related party, and from unaffiliated third
parties. The unpaid principal balance of the Residential Mortgages and
Contracts for Deed purchased from South Central Mortgage, Inc. was
$5,746,000 and $2,440,000 for the years ended December 31, 1998 and 1997,
respectively. The Company has also entered into a Mortgage Servicing
Agreement with South Central Mortgage, Inc., incurring service fees of
$32,341 and $3,834 during 1998 and 1997, respectively. The Company also
paid acquisition fees to the Advisor of $260,585 and $82,771 during 1998
and 1997, respectively.

In 1997, the Company entered into a Funding Agreement with the Advisor
whereby the Advisor agreed to fund the Company's general and administrative
expenses. In consideration of the agreement, the Company will contribute to
the Advisor, as a contribution to the Advisor's overhead on a monthly
basis, an amount equal to .5% (one-half of one percent) of the Company's
average invested assets for the immediately preceding month. Expense
reimbursements for 1998 and 1997 were $200,282 and $105,212, respectively.
A similar agreement applied to the 1996 period and $44,917 of the
additional expense reimbursement in 1997 related to 1996 expenses.

The Company leases its office space for $685 per month from an affiliate
under terms of a month-to-month lease. Rent expense amounted to $7,101 and
$3,540 for the years ended December 31, 1998 and 1997.

6. Commitments and Contingencies

Concentration of Credit Risk

Financial instruments which potentially expose the Company to
concentrations of credit risk are primarily temporary cash investments and
mortgage notes receivable. The Company places its temporary cash
investments with major financial institutions and, by policy, limits the
amount of credit exposure to any one financial institution. The majority
of all residential mortgages and contracts for deed receivable are "Sub-
Prime, B and C Grade" notes secured by single family homes, principally in
the Dallas/Fort Worth and Houston Metropolitan areas.

Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies.

The fair value of financial instruments classified as current assets or
liabilities including cash and cash equivalents, receivables and accounts
payable approximate carrying value due to the short-term maturity of the
instruments. The fair value of mortgage investments approximates carrying
value based on their effective interest rates compared to current market
rates.

7. New Accounting Pronouncements

SFAS 129

Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"), effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires disclosure
of the pertinent rights and privileges of various securities outstanding
(stock, option, warrants, preferred stock, debt and participating rights)
including dividend and liquidation preferences, participant rights, call
prices and dates, conversion or exercise prices and redemption requirements.
Adoption of SFAS 129 has had no effect on the Company as it currently
discloses the information specified.

SFAS 130

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," ("SFAS 130"), establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Results of operations and
financial position are unaffected by implementation of this new
standard.

SFAS 131

SFAS 131, "Disclosure about Segments of a Business Enterprise,"
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements
and requirements of selected information about operating segments in
interim financial statements issued to the public. It also
establishes standards for disclosure regarding products and services,
geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources
and in assessing performance. This accounting pronouncement will not
have an effect on the Company's financial statements, since the
Company only operates in one segment of business, investing in
Mortgage Investments.

<PAGE>
UNITED MORTGAGE TRUST

Subscription Agreement

First Financial United Investments Ltd., L.L.P.
16801 Greenspoint Park Drive
Suite 155
Houston, Texas 77060
Attention: New Subscription/
United Mortgage Trust

Gentlemen:

The Subscriber named below (the "Subscriber"), who is executing and
delivering the Subscription Agreement attached hereto or, alternatively, who
has authorized the execution and delivery of the Subscription Agreement
attached hereto, hereby tenders payment and applies for the purchase of the
number of shares of beneficial interest (the "Shares") specified below in
United Mortgage Trust, a Maryland real estate investment trust (the
"Company"). A check or other payment in the amount of the number of Shares
subscribed for is attached hereto. By tendering payment for Shares and
accepting confirmation of purchase without objection following the mailing of
such confirmation accompanied by the Prospectus, the Subscriber assents to all
the terms and conditions of this Subscription Agreement and of the Declaration
of Trust.

The Subscriber's subscription payment will be held by Chase Bank National
Association, as Escrow Agent, and will be returned promptly to the Subscriber
with interest in the event that at least 125,000 Shares offered by the
Prospectus are not subscribed for and payment therefore not received within
one year of the date of the Prospectus. If the Subscription Agreement
submitted by or on behalf of the Subscriber is not accompanied by payment in
full, the Subscription Agreement will not be processed. Upon receipt of a
properly executed Subscription Agreement at First Financial United
Investments, Ltd., a confirmation will be sent to the Subscriber at his, her
or its registered address and to the selling representative at the registered
office address. If the confirmation is not received within 14 days after
submission of the order, the Subscriber should contact First Financial United
Investments Ltd., L.L.P. at the above address immediately.

NOTICE TO SUBSCRIBERS

An investment in the Company involves certain risks and is not suitable
for all investors. All investors are advised to carefully read the entire
Prospectus to make sure that they understand the risks involved with an
investment in the Company and to determine that the investment is suitable for
them.

(LOGO)
Subscription Agreement
UNITED MORTGAGE TRUST

/1/ Investor Information (Please print. Check only one.)

/ / A - Individual or Joint Account

- - --------------------- --- - --- - ---------
Individual Owner's Name Social Security Number
- - --------------------- --- - --- - ---------
Joint Owner's Name (if applicable) Social Security Number

/ / B - Gift or Transfer to a Minor

______________________, as custodian for ______________________
Custodian's Name (only one) Minor's Name

under the _________ UGMA/UTMA (circle one) _____ - _____ - ______
State Minor's S S N

/ / C - Trust (Including Retirement Plans)

- - ----------------------- ----------------------
Trustee(s) Name of Trust
- - ----------------------- ----------------------
Date of Trust Trust's T I N

/ / D - Other Entities

TYPE:/ /Corporation / /Partnership / /Foundation
/ /Charitable Organization / /Other: _____________

- ----------------------- ----- - ---------------
Name of Entity Taxpayer ID Number

2. Address

- - ------------------ (----)--------- (---)----------
Street Address or P.O. Box Home Tel # Business Tel #

- -------------------- --------------- ----------------
City State Zip Code Country of Citizenship

Check One: / /U S Citizen / /Resident Alien / /Non-Resident Alien

3. Investment Information (Minimum $5,000/250 Shares or $1,000/50 =
Shares for IRA and Keogh Accounts)

I wish to invest $___________ to purchase ________ shares of United Mortgage
Trust.
/ / By Check: $___________ Please make your check payable to Chase Bank
Escrow.
/ / By Wire: Funds were wired on ________, _____ in the amount of
$_______________ Date
Do you already own shares of United Mortgage Trust? ____________ (If yes,
minimum reorder is $1,000 / 50 Shares. )

4. Payment Instructions

Please make the check payable to Chase Bank Escrow. The check and completed
Subscription Agreement are to be sent to the following address:
First Financial United Investments Ltd., L.L.P.
16801 Greenspoint Park Drive, Suite 155,
Houston, Texas 77060

5. Investor Services

DIRECT DEPOSIT If you would like direct deposit
of dividend checks into your brokerage
account, please complete the section
below. Direct Deposit is not to be used
for IRAs. (The Company or Affiliates
cannot be responsible for any adverse
consequences of direct deposit.)

Institution/Investment Name _________________________________________

Account Number ________________ Street Address _____________________

City __________________________ State ___ Zip Code __________________

ADDITIONAL MAILINGS If you would like investment
mailings sent to an address other than
the one listed in Section 2 of this
agreement, please fill in below.
(Recommended for IRA accounts.)

Name __________________________ Street Address _____________________

City __________________________ State ___ Zip Code __________________

6. Subscriber Representations (The Subscriber must initial an answer to each
section below)

By signing this Subscription Agreement, the Subscriber represents, under
penalty of perjury, that:

(i) The Subscriber has received a copy of the Prospectus of United Mortgage
Trust. YES _______ NO_______

(ii) The Subscriber has the authority and legal capacity to purchase the
Shares being subscribed for and to execute this Subscription Agreement. If the
Subscriber is an individual, he or she is of legal age in his or

(iii) The Subscriber meets the suitability requirements set forth in "Who May
Invest" in the Prospectus. YES _______ NO_______

(iv) The subscriber or beneficial owner is a United States citizen, United
States resident alien individual, domestic corporation, domestic partnership,
domestic trust or domestic estate, as these terms are defined in Section 7701
of the Internal Revenue Code. YES _______ NO_______

(v) if the Subscriber is a qualified plan (including a KEOGH plan or an
Individual Retirement Account) or is otherwise a "benefit plan investor" as
defined in Department of Labor Regulations ss.2510.3-101(f)(2), to the best of
Subscriber's knowledge none of the Company, the Advisor, a Sponsor or any
Affiliate (a) has investment discretion with respect to the assets being used
to purchase Shares, (b) regularly gives individualized investment advice which
serves as the primary basis for the investment decisions made with respect to
such assets, or (c) is otherwise a fiduciary with respect to such assets. YES
_______ N/A_______

7. Signature, Authorization and Backup Withholding Certification

The Subscriber hereby authorizes United Mortgage Trust and its affiliates to
act on any instructions believed to be genuine for any service authorized on
this Subscription Agreement and agrees that they will not be liable for any
resulting loss or expense. Under penalties of perjury I certify that : (I) the
social security or taxpayer identification number entered in Section 1 above
is correct; and 2) unless the following box is checked, I have not been
notified by the IRS that I am subject to backup withholding, or the IRS has
notified me that I am no longer subject to backup withholding. / /If you are
subject to backup withholding check the box.

- ---------------------------------------- ------------------
Signature of Owner, Trustee or Custodian Date

- ---------------------------------------- ------------------
Signature of Joint Owner (if any) Date

8. Broker/Dealer or Investment Advisor Authorization

The undersigned Dealer/Adviser agrees to all applicable provisions in the
Subscription Agreement, and guarantees the genuineness of the signature on the
Subscription Agreement. If the Subscriber does not sign this Agreement, the
undersigned Dealer/Adviser warrants that this Agreement is completed in
accordance with the Subscriber's authorization and instructions and agrees to
indemnify United Mortgage Trust for any loss or liability from acting or
relying upon such instructions.

- - ------------------------------- --------------------------------
Firm's Name Representative's/Advisor's Name

- - ------------------------------- --------------------------------
Firm's Address Authorized Signature

- ------------------------------------------------------------------------
INSTRUCTIONS FOR COMPLETION OF FORMS
- ------------------------------------------------------------------------

A completed and signed Subscription Agreement is required for all Investors in
United Mortgage Trust (the "Company"). Please follow the following
instructions when completing the Subscription Agreement.

1. INVESTOR INFORMATION. Be sure to complete the INVESTOR INFORMATION
section on the Subscription Agreement by checking the appropriate box for the
Investor's status and completing all relevant information about the Investor
in Section 1. Make sure to include the Investor's taxpayer identification
number("TIN") which is the taxpayer's social security number or employer
identification number, as the case may be. For most individual taxpayers, the
TIN is the social security number. For trusts, estates, pension trusts,
corporations and partnerships, the TIN is the employer identification number.
See Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 on page A-9.

IF AN INVESTOR DOES NOT HAVE A TIN, he should obtain Form SS-5 Application for
a Social Security Number, or Form SS-4 Application for an Employer ID Number
from his local office of the Social Security Administration or the IRS. IF THE
INVESTOR HAS APPLIED FOR A TIN and has not yet received it, he should write
"APPLIED FOR" in Section 1 and complete and sign a Substitute Form W-9,
certifying under penalties of perjury that he is not subject to backup
withholding. The Investor should also understand that if he does not provide a
TIN to the Company within 60 days, the Company is required to withhold 31% of
all reportable payments thereafter until a certified TIN is provided.

When Shares are being purchased by a retirement plan or other entity, you can
use the Additional Mailing Address in Section 4 to fill in the name and
address of the individual other than the registered owner who would wish to
receive additional copies of Company correspondence.

ADDITIONAL DOCUMENTATION REQUIRED FROM INVESTORS THAT ARE ENTITIES. If Shares
are being purchased by a Corporation, please furnish an appropriate corporate
resolution authorizing the purchase of the Shares and the name and title of
the person authorized to sign any documents or make any certifications
relating to this subscription. If Shares are being purchased by a
municipality, a credit union (other than a federal credit union), a national
or state chartered bank, or a pension plan or profit sharing plan, please
furnish appropriate evidence of the authorization of the purchase of the
Shares and the name and title of the person authorized to sign any document or
make any certifications relating to this subscription. If Shares are being
purchased by a Trust or a Partnership, please provide a copy of the Trust or
Partnership Agreement.

2. ADDRESS. Please be sure to complete the ADDRESS section of the Subscription
Agreement with the Investor's name, address, city and state. The address
should be the Investor's primary state of =
residence.

3. INVESTMENT INFORMATION. Fill in the number of Shares subscribed for
(minimum purchase is 250 Shares or $5,000, except for IRA or KEOGH accounts
whose minimum purchase is 50 Shares or $1,000, and except as otherwise noted
in the Prospectus under "Who May Invest"). Minimum reorder is 50 Shares or
$1,000. Purchase of fractional Shares are not allowed pursuant to the initial
public offering of Shares.

Please indicate if the investor is investing by check or by wire. All checks
should be made payable to "Texas Commerce Bank Escrow".

4. PAYMENT INSTRUCTIONS. Please make the check payable to "Chase Bank Escrow".
The check and completed Subscription Agreement are to be sent to:

First Financial United Investments Ltd., L.L.P.
16801 Greenspoint Park Drive
Suite 155
Houston, Texas 77060
Attention: New Subscription/
United Mortgage Trust

NO SUBSCRIPTION AGREEMENT
WILL BE PROCESSED
UNLESS IT IS ACCOMPANIED BY
PAYMENT IN FULL

5. INVESTOR SERVICES.

ADDITIONAL MAILING ADDRESS. When Shares are being purchased by a Trust,
Individual Retirement Account (IRA) or Keogh Plan, use this area to fill in
the name and address of the individual other than the registered owner who
would wish to receive additional copies of Company correspondence.

DIRECT DEPOSIT ADDRESS. This section should be left blank if the form of
ownership is an IRA. It should be completed only if the Investor wishes
distribution checks sent directly to the client brokerage account identified
in Section 4 or Section 7.

6. SUBSCRIBER REPRESENTATIONS.

Each Subscriber must initial an answer to each of the statements set forth in
Section 6 to provide certain representations to the Company.

For purposes of subsection 6(iv) of the Subscription Agreement, a "resident
alien individual" is a non-U.S. citizen who is a "resident" of the United
States, as defined below). A "resident" is an individual who (i) is a lawful
permanent resident of the United States at any time during the calendar year
(such as an individual who holds an immigrant visa - a "green card") or (ii)
was physically present in the United States on (a) at least 31 days during the
calendar year, and (b) 183 days or more in the aggregate during the current
year and the two preceding calendar years, determined by aggregating the
actual presence days of the current year, 1/3 of such days of the first
preceding year and 1/8 of such days of the second preceding year). See Section
7701(b) of the Internal Revenue Code for other special rules and elections for
determining residency.

An individual investor who is not a citizen of the United States but is a
resident (as defined above) must furnish the Company with a signed copy of IRS
Form 1078 verifying that status so as to avoid withholding.

7. SIGNATURE, AUTHORIZATION AND BACKUP WITHHOLDING CERTIFICATION.

The Investor must read and sign the authorization and backup withholding
certification set forth in Section 7.

The signature of an IRA or other retirement plan trustee is always required.
The signature of the beneficiary is not necessary. All other Investors must
sign and date. If ownership is held by joint tenants with rights of
survivorship, tenants in common, tenants by the entirety or community
property, then all parties must sign and date.

BACKUP WITHHOLDING. Under the federal income tax law, payers of interest,
dividends and certain other payments must withhold 31% of such amounts (this
is referred to as "backup withholding") if the payee fails to furnish the
payer with (1) the payee's correct Taxpayer Identification Number ("TIN") and
(2) a certification under penalties of perjury that (a) the payee has supplied
an accurate TIN and (b) the payee is not subject to backup withholding because
the Internal Revenue Service ("IRS") has not informed the payee that he is
subject to backup withholding due to a failure to report all interest and
dividends. If an investor's TIN and the foregoing certification (contained in
Section 7 of the Subscription Agreement) is not received, backup withholding
will be applicable to payments of escrow interest and to Distributions. False
certifications or the provision of an inaccurate TIN can result in the
imposition of penalties by the IRS or criminal sanctions. Certain payees
(including corporations, tax exempt entities, such as employee benefit plans,
and certain foreign individuals and entities) are exempt from backup
withholding and information reporting requirements.

FOR PAYEES SUBJECT TO BACKUP WITHHOLDING. If the IRS has notified the record
owner of the account that the record owner is subject to backup withholding
and the record owner has not received notice from the IRS advising that backup
withholding has terminated, then the record owner, prior to signing the
certification, must check the backup withholding box in Section 7. In such
event, backup withholding will apply to payments of escrow interest and to
Distributions.

CAUTION: If the Investor checks box for backup withholding, the account
executive and/or office manager must make sure the Investor has properly
completed and signed a W- 9 or substitute W-9 and that it is on file with the
office manager's member firm.

FOREIGN INVESTOR BACKUP WITHHOLDING. Foreign Investors (as defined below) may
be exempt from backup withholding and reporting requirements if they certify
that they are exempt by completing and filing with the Company an IRS Form W-
8. A Foreign Investor is a (i) nonresident alien individual (i.e., a non-U.S.
citizen who is not a "resident" of the United States, as defined in
Instruction 6),(ii) foreign corporation, (iii) foreign partnership, (iv)
foreign trust, or (v) foreign estate, within the meaning of Section 7701 of
the United States Internal Revenue Code (the "Code"). An investor who is not
currently a Foreign Investor must notify the Company immediately upon a change
in status A foreign Investor should check the box on Form W-8 indicating that
he is an "exempt foreign person" if the Shares of the Company will not be held
in connection with a trade or business conducted by or planned by, the Foreign
Investor in the United States that has effectively connected gains from a
broker or barter exchange or there is a tax treaty between the Foreign
Investor's country and the United States exempting the Foreign Investor's
transactions from United States taxes. However, a Foreign Investor who is a
non-resident alien individual, married to a U.S. citizen or resident and who
has made an election to be treated as a resident under Code Section 6013(g) or
(h) is considered to be a U.S. resident for back-up withholding purposes and
may not use Form W-8. Foreign Investors should also delete the Substitute Form
W-9.

8. BROKER/DEALER SIGNATURES. This section on this form should be completed by
the selling broker who should include his full name, representative number,
branch office address and telephone number.

<TABLE>
<CAPTION>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9.
<S> <C>
For this type of account: Give the identification number for:

A. Individual The individual

B. Two or more individuals The actual owner of the account
or, if (joint account) combined
funds, the first individual
on the account

C. Custodian account of a minor The minor(Uniform Gift to Minors
Act)

D. (i) The usual revocable savings The grantor-trustee, who should
trust be listed first.(Grantor is
also trustee)

(ii) So-called trust account that The actual owner, who should be
is not a legal or valid trust listed first
under state law

E. Sole proprietorship The owner, who should be named

F. A valid trust, estate or pension The legal entity (unless the legal
trust entity itself is not designated in
the account title) which should be
listed first

G. Corporate The corporation

H. Association, club, religious, The organization educational
charitable organization or other tax-exempt organization

I. Partnership The Partnership

J. Broker or registered nominee The broker or nominee
</TABLE>

Until , 1999, (90 days after the date of this prospectus)
all dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
prospectus. This prospectus does not constitute an offer or solicitation by
anyone in any state or other jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer is not qualified to
do so or to any person to whom it is unlawful to make such offer or
solicitation.

2,500,000 SHARES OF BENEFICIAL INTEREST
(Maximum Offering)

UNITED MORTGAGE TRUST,
a Maryland Real Estate Investment Trust

PROSPECTUS

FIRST FINANCIAL UNITED INVESTMENTS LTD., L.L.P.

Dated , 1999

No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus or in Supplements to this prospectus, or in literature issued by
the Company, the Advisor or the Selling Group Manager (which shall not be
deemed to be a part of this prospectus), in connection with the offering
contained herein and if given or made such information or representation must
not be relied upon. The statements in this prospectus or in any Supplement
are made as of the date hereof or thereof, unless another time is specified,
and neither the delivery of this prospectus or any Supplement nor any sale
made hereunder shall, under any circumstances, create an implication that
there has been no change in the facts set forth herein since the date hereof
or thereof. However, if any such material adverse changes occur during the
period when a prospectus is required to be delivered, this prospectus or any
Supplement will be amended or supplemented accordingly.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 31. Other Expenses of Issuance and Distribution.

The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered are as set forth below. All
such expenses, except for the SEC registration and filing fees, are estimated:

SEC Registration Fee $ 17,241
NASD Filing Fee 5,500
Blue Sky Filing Fees and Expenses 13,760
Legal Fees and Expenses 75,000
Accounting Fees and Expenses 5,000
Printing and Engraving Fees 16,000
Marketing 15,000
Miscellaneous 27,499
Total $ 175,000

Item 32. Sales to Special Parties.

As part of its compensation for selling the Shares, the Selling Group
Manager will receive, for a purchase price of $.01 per Share, Shares (the "SGM
Shares") equal to 0.5% of all Shares sold (12,500 Shares if all 2,500,000
Shares offered hereunder are sold). The Selling Group Manager may allocate
all or a portion of the SGM Shares to Selected Dealers and registered
representatives of the Selling Group Manager.

Item 33. Recent Sales of Unregistered Securities.

The Advisor has purchased 10,000 Shares for a purchase price of $20 per
Share.

Since the transaction described above was not considered to have involved
a "public offering" within the meaning of Section 4(2) of the Securities Act
of 1933, as amended, the interests issued were deemed to be exempt from
registration under said Act. The recipient of Shares in the foregoing
transaction represented that such Shares were being acquired for the purpose
of investment and not with a view to the distribution thereof.

Item 34. Indemnification of Directors and Officers.

Indemnification of the Advisor and of the Trustees of the Company is
provided for in Article XI, Section 2 of the Declaration of Trust (Exhibits 3,
4 to the prospectus). See also the discussion under "Fiduciary Responsibility
of Trustees" in the prospectus.

Item 35. Treatment of Proceeds From Stock Being Registered.

None

Item 36. Financial Statements and Exhibits.

(a) Financial Statements: The following are included in the prospectus:

Balance Sheet and related Notes thereto of Registrant, United Mortgage
Trust, at December 31, 1998 and 1997.

(b) Exhibits:

No Description

1.1 Form of Selling Group Manager Agreement

1.2 Form of Selected Dealer Agreement

3.1C Form of Second Amended and Restated Declaration of Trust
filed with the State of Maryland (this supersedes prior
Exhibits 3.1, 3.1A and 3.1B)

3.2 Bylaws of the Company

4.1 Form of certificate to be issued to represent the Shares

4.2 Instruments defining the rights of security holders
(See Exhibits 3.1, 3.2 and 4.1)

5 Opinion of Berry, Moorman, King and Hudson, P.C.
as to the legality of the securities being registered

8.1 Opinion of Berry, Moorman, King and Hudson, P.C.
regarding tax matters.

10.1 Form of Escrow Agreement between the Company and
Texas Commerce Bank National Association (now known as Chase Bank
of Texas NA

10.2 Advisory Agreement dated August 6, 1996 between the
Company and Mortgage Trust Advisors, Inc.

10.3 Agreement of Employment dated August 6, 1996 between the
Company and Christine Griffin

10.4 Note Sale, Recourse and Remarketing Agreement dated
August 6, 1996 between the Company and South Central
Mortgage, Inc.

10.5 Form of Mortgage Servicing Agreement to be entered into between
the Company and South Central Mortgage, Inc.

10.6* Funding Agreement dated December 15, 1997 but effective
January 1, 1997 between the Company and the Advisor

10.7 One Year $500,000 Revolving Loan Renewal Agreement dated
March 27, 1998 between the Company and Abrams Centre National Bank

10.8* One Year $1,500,000 Revolving Loan Agreement dated October 28, 1998
between the Company and Legacy Bank of Texas

23.1* Consent of Jackson & Rhodes, P.C.

23.2* Consent of Berry, Moorman, King & Hudson, P.C. (included
in Exhibits 5 and 8.1)

24.1 Power of Attorney (included as part of page II-5 of the original
filing of this Registration Statement)

99 This Exhibit is deleted

* Filed as an exhibit with this Post-Effective Amendment No. 1.

Item 37. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed;

(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.

(5) To send to each investor at least on an annual basis a detailed
statement of any transactions with the President, Advisor or its Affiliates,
and of fees, commissions, compensation and other benefits paid or accrued to
the Advisor or its Affiliates for the fiscal year completed, showing the
amount paid or accrued to each recipient and the services performed;

(6) To provide to the investors the financial statements required by Form
10-K for the first full year of operations of the Company;

(7) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

(8) The undersigned Registrant hereby undertakes that: (1) for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant; pursuant to Rule 424(b)(1) or (4) or 497(b) under the
Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and (2) for the purpose of
determining any liability under the Securities Act of 1933, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(9) The Registrant undertakes to file a sticker supplement pursuant to
Rule 424(c) under the Act during the distribution period describing each
material Mortgage Investment (or Mortgage Investments which, in the aggregate,
are material) not identified in the prospectus as such time as there arises a
reasonable probability that such Mortgage Investment(s) will be acquired and
to consolidate all such stickers into a post-effective amendment filed at
least once every three months, with the information contained in such
amendment provided simultaneously to the existing shareholders. Each sticker
supplement should disclose all compensation and fees received by the Trustee,
the Advisor and their Affiliates in connection with any such acquisition. The
post-effective amendment shall include audited financial statements meeting
the requirements of Rule 3-14 of Regulation S-X only for properties acquired
during the distributed period.

The Registrant also undertakes to file, after the end of the distribution
period, a current report on Form 8-K containing the financial statements and
any additional information required by Rule 3-14 of Regulation S-X, to reflect
each commitment (i.e., the signing of a binding purchase agreement) made after
the end of the distribution period involving the use of 10% or more (on a
cumulative basis) of the net proceeds of the offering and to provide the
information contained in such report to the shareholders at least once each
quarter after the distribution period of the offering has ended.

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richardson, State of
Texas on the day of February, 1999.

UNITED MORTGAGE TRUST

By: /S/ CHRISTINE A. GRIFFIN
------------------------
Christine A. Griffin, President

Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

Signatures Title Date

Principal Executive Officer:

/S/ CHRISTINE A. GRIFFIN Trustee, Chairman of the
- ------------------------- Board and March 11, 1999
Christine A. Griffin

Principal Financial and
Accounting Officer:

/S/ CHRISTINE A. GRIFFIN Trustee, Chairman of the
- ------------------------- Board and President March 11, 1999
Christine A. Griffin

* Trustee March 11, 1999
- -------------------------
Paul R. Guernsey

* Trustee March 11, 1999
- -------------------------
Douglas R. Evans

* Trustee March 11, 1999
- -------------------------
Richard D. O'Connor, Jr.

* Trustee March 11, 1999
- -------------------------
Michele A. Cadwell

* By /S/ CHRISTINE A. GRIFFIN
Attorney-in-fact

<PAGE>
EXHIBIT 10.8

ONE (1) YEAR
$1,500,000
REVOLVING LOAN AGREEMENT

THIS REVOLVING LOAN AGREEMENT, dated the 28th day of October, 1998, by and
between UNITED MORTGAGE TRUST, a Trust organized under the laws of the State
of Maryland (the "Borrower"), and LEGACY BANK OF TEXAS, a Texas state bank
(the "Bank").
WITNESSETH:

BACKGROUND. Borrower is in the business of buying mortgage notes secured
by first and prior liens on residential properties located within the State of
Texas (collectively called the "Residential Paper"). Borrower has requested
the Bank to extend a loan ONE MILLION FIVE HUNDRED THOUSAND (1,500,000.00)
DOLLARS, in aggregate, on a revolving loan basis (the "Loan") from which to
reimburse Borrower up to $1,500,000 for all or part of Borrower's cost of
acquisition of Residential Paper obtained for investment; and, Borrower
maintains an inventory ("Eligible Inventory") of unencumbered current
Residential Paper of not less than $3,000,000 with which to secure Loan. Bank
is willing to advance the Loan upon the terms and conditions hereinafter set
forth.

NOW, THEREFORE, in consideration of the promises herein contained, and
each intending to be legally bound hereby, the parties agree as follows:

Section I: The Loan

1.01 Disbursement of the Loan. Subject to the terms hereof, Bank will
credit the proceeds of the revolving Loan advanced from time to time to the
Borrower's deposit account with the Bank or, at Bank's discretion, to other
depository accounts designated by Borrower.

1.02 General Terms. Subject to the terms hereof and the Note (defined
below), the Bank will lend the Borrower, from time to time until twelve months
(12) months after this date (the "Loan Termination Date"), such sums as the
Borrower may request by draw ("Draw") request to the Bank, received by the
Bank not less than one (1) banking day before Bank is requested to fund such
Draw and which shall not exceed, in the aggregate principal amount at any one
time outstanding, an amount equal to the lesser of $1,500,000.00 (the "Loan
Commitment") or the Borrowing Base, defined in Section 1.06. The Borrower may
borrow, repay without penalty or premium and reborrow hereunder, from the date
of this Agreement until the Loan Termination Date, either the full amount of
the Loan Commitment or any lesser sum. It is the intention of the parties that
the outstanding principal amount of the Loan shall at no time exceed the
amount of the then existing Borrowing Base, and if, at any time, an excess
shall for any reason exist, the full amount of such excess, together with
accrued and unpaid interest thereon as herein provided, shall be immediately
due and payable in full.

This Loan will be secured inter alia by Pledged Residential Paper
(hereinafter defined) which shall at all times during the term of the loan
have an aggregate outstanding principal balance equal to at least 200% of the
outstanding principal balance of the Loan.

1.03 Draws and Draw Fees. Draws will be submitted not more frequently
than weekly on forms acceptable to Bank accompanied in each case by a $50.00
fee to process each Draw.

1.04 The Note. The Loan shall be evidenced by a note ("Note"), having a
stated maturity on the Loan Termination Date, in form acceptable to Bank.

1.05 The Origination and/or Commitment Fees. In exchange for Bank's
agreement to set aside funds to accommodate Borrower's rights to draw
hereunder, Borrower will pay Bank $15,000.00 upon execution of this Agreement
by Borrower.

1.06 Borrowing Base. The Borrowing Base is an amount equal to fifty (50%)
percent of the aggregate unpaid principal of the Pledged Residential Paper.
For purposes hereof, the term "Pledged Residential Paper" shall mean
Residential Paper pledged to Bank by Borrower, excluding any Residential Paper
which is or becomes past due by more than sixty (60) days. Borrower will
remove from the Pledged Residential Paper pledged to the Bank at once and
without demand any Residential Paper that is more than sixty (60) days past
due and will replace the same with unpledged Residential Paper that is
current, i.e. not more than sixty (60) days past due; and, such replenishment
will be accomplished by Borrower promptly without notice from Bank to do so.
Borrower will submit a reconciliation of collateral and debt on the first day
of each month (the "Settlement Date") on which will be reported the Borrowing
Base for that month. If the reconciliation shows available borrowing, the
Borrower may draw up to the available amount for borrowing. If the
reconciliation shows available borrowing to be less than the amount
outstanding, the Loan will be paid down to the available amount, i.e. the
Borrowing Base, at that time. No Draw will be funded if any default by
Borrower is threatened or has occurred under any of Bank's Loan Documents in
Bank's reasonable commercial judgment.

1.07 Residential Paper Tracking. In order to induce Bank to enter into
this Agreement, Borrower has represented to Bank that Borrower will furnish
Bank with all information needed/requested by Bank to track each item of
Pledged Residential Paper ("Item") viz. each first lien note and each first
lien securing the payment of such first lien note pledged to Bank in order to
independently determine its currency, and to remain assured that no Item of
Pledged Residential Paper considered in the Borrowing Base is more than sixty
(60) days past due. In addition, Borrower will furnish any certification of
Residential Paper currency under oath that Bank may request from time to time
during the term of the Loan.

1.08 Interest Rate and Payments of Interest.

(A) Except as otherwise provided under 1.08(B), interest on the
principal balance of the Loan from time to time outstanding will be
payable in monthly installments at a varying rate per annum (the
"Variable Rate") which is one and one half (1.50%) percent per annum in
excess of "Wall Street Journal Prime" rate of interest, as published
from time to time and as further defined in the Note, but in no event to
exceed the maximum rate of nonusurious interest allowed by law, as may
hereafter be in effect (hereinafter called the "Highest Lawful Rate"),
with adjustments in such Variable Rate to be made on the same day as any
change in the Wall Street Journal Prime Rate. All past due principal and
interest shall bear interest at a rate per annum which is equal to the
Highest Lawful Rate from maturity until paid. Notwithstanding the
foregoing provisions concerning such varying rate, if at any time the
Variable Rate exceeds the Highest Lawful Rate, the rate of interest to
accrue on the Note shall be limited to the Highest Lawful Rate, but if
thereafter the Variable Rate is less than the Highest Lawful Rate, the
rate of interest to accrue on the Note shall be the Highest Lawful Rate
until the total amount of interest accrued on the Note equals the amount
of interest which would have accrued if the Variable Rate had at all
times been in effect.

(B) It is the intention of the parties hereto to comply with the usury
laws applicable to the Loan; accordingly, it is agreed that
notwithstanding any provision to the contrary in Agreement or in any of
the documents securing payment of the Loan, no such provision shall
require the payment or permit the collection of interest in excess of
the maximum permitted by law. If any excess interest is provided for,
contracted for, charged for or received, then the provisions of this
paragraph shall govern and control and neither the Borrower hereof nor
any other party liable for the payment thereof shall be obligated to pay
the amount of such excess interest. Any such excess interest which may
have been collected shall be, at the Bank's option, either applied as a
credit against the then unpaid amount hereof or refunded to Borrower.
The effective rate of interest shall be automatically subject to
reduction to the maximum lawful contract rate allowed under the usury
laws as now or hereafter construed. It is further agreed that without
limitation of the foregoing, all calculations of the rate of interest
contracted for, charged for, or received under this Agreement which are
made for the purposes of determining whether such rate exceeds the
maximum lawful rate, shall be made, to the extent permitted by law, by
amortizing, prorating, allocating and spreading in equal parts during
the full stated term of the Loan, all interest contracted for, charged
for or received from the Borrower or otherwise by the Bank.

1.09 Payment to the Bank. All sums payable to the Bank hereunder shall be
paid directly to the Bank in immediately available funds. The Bank may send
the Borrower statements of all amounts due hereunder, which statements shall
be considered correct and conclusively binding on the Borrower unless the
Borrower notifies the Bank to the contrary within thirty (30) days of its
receipt of any statement that it deems to be incorrect. Alternatively, at its
sole discretion, the Bank may charge against any deposit account of the
Borrower all or any part of any amount due hereunder.

Section II. Conditions Precedent

In addition to the provisions set forth in 3.06 below, the obligation of
the Bank to make any advance on the Loan is subject to the following
conditions precedent:

2.01 Documents Required for the Closing. The Borrower shall have
delivered to the Bank, prior to the initial disbursement of any Loan amounts
(the "Closing"), the following:

(A) The Note (Exhibit "A"), duly executed by the Borrower, in the form
acceptable to Bank;

(B) A duly executed Guaranty Agreement (Exhibit "B") ("Guaranty"), in
form acceptable to Bank signed by Theodore F. Etter, Jr. ("Guarantor"),
together with his current financial statement in form/substance
acceptable to Bank;

(C) Borrower's current financial statements (the "Financial Statements")
reviewed by its certified public accountant, which shall be satisfactory
in form/content to Bank;

(D) Assignments of Notes/Liens (Exhibit "C") ("Assignments") encumbering
the Residential Paper comprising the Pledged Residential Paper
acceptable to Bank, including physical possession of the Notes endorsed
to Bank and Financing Statements mentioned in Section III;

(E) A copy, certified as of the date of the Closing, of resolutions of
the Trustees of the Borrower (Exhibit "D"), authorizing the execution,
delivery, and performance of this Agreement, the Note, and all other
documents to be delivered pursuant hereto at such time.

(F) A duly executed Termination Agreement (Exhibit "E") from South
Central Mortgage, Inc., a Texas corporation, an affiliate of Borrower,
terminating Bank's obligations with that certain $2,000,000 Revolving
Loan Agreement, dated March 17, 1998.

The documents evidencing, securing or otherwise furnished by Bank in
connection with the Loan including this agreement, collectively are called
"Loan Documents".

Section III. Security Agreement

3.01 Grant of Security Interest. (a) As collateral security for the
payment and performance of the Note and any and all other liabilities of
Borrower to Bank, direct or contingent, of any nature whatsoever, including
both purchase money and non-purchase money transactions, and whether now
existing or hereafter arising (collectively the "Obligations") Borrower hereby
grants to Bank a continuing security interest in the following as collateral
security for the payment and performance of the Obligations, wherever the
following is located and whether the following is now owned or existing or is
owned, acquired, or arises hereafter, including, without limitation,
acquisition by contract or by operation of law (all terms used in this Section
3.01 which are defined in the Uniform Commercial Code shall have the meanings
given to such terms in the Uniform Commercial Code as adopted in the statutes
of Texas): (i) all right, title and interest of the Borrower in and to the
promissory notes constituting the "Pledged Residential Paper"; (ii) all right,
title and interest of the Borrower in and to each and every deed of trust,
mortgage, guarantee, loan document, title policy, insurance policy, or any
other right ancillary to or securing or relating to the promissory notes;
(iii) all accounts and receivables of Borrower arising out of or relating to
the Pledged Residential Paper; (iv) all general intangibles of Borrower
relating to or arising out of the Pledged Residential Paper; (v) all of the
rights of Borrower to the payment of money, including, without limitation, tax
refund and insurance proceeds, relating to the Pledged Residential Paper or
the real properties securing same; (vi) all files, records, books, ledger
cards (including without limitation, computer programs, tapes and related
electronic data processing software) and writings of Borrower or in which it
has an interest in any way relating to the Pledged Residential Paper; (vii)
all other personal property of Borrower of any kind or type whatsoever
relating to the Pledged Residential Paper; (viii) all additions,
substitutions, replacements, proceeds and products of each of the foregoing
described in this Section 3.01.

3.02 Power of Attorney. Borrower hereby designates and/or appoints Bank
and each of its designees or agents as attorney-in-fact of Borrower,
irrevocably and with power of substitution, with authority to take any or all
of the following actions upon the occurrence of an Event of Default: (i) with
respect to any Pledged Residential Paper, demand, collect, receive, settle,
compromise, adjust, foreclose and resell and/or give discharges and releases,
all as Bank may determine; (ii) commence and prosecute any actions in any
court for the purposes of collecting amounts owed on Pledged Residential Paper
and enforcing any other rights in respect thereof; (iii) defend, settle or
compromise any action brought and, in connection therewith, give such
discharge or release as Bank may deem appropriate; (iv) receive, open and
dispose of mail addressed to Borrower and endorse checks, notes, drafts,
acceptances, money orders, bills of lading, warehouse receipts or other
instruments or documents evidencing payment made on account of or funds paid
relating to Pledged Residential Paper on behalf of and in the name of
Borrower; (v) sell, assign, transfer, make any agreement in respect of, or
otherwise deal with or exercise rights in respect of, any Pledged Residential
Paper as fully and completely as though Bank were the absolute owner thereof
for all purposes; (vi) adjust and settle claims under any insurance policy
related thereto; and (vii) execute financing statements or amendments thereto
or any other documents or writing deemed necessary by Bank to evidence or
perfect Bank's security interest in the Pledged Residential Paper; provided
that Bank agrees to furnish copy of any document executed hereunder to
Borrower, as applicable, upon request; and (viii) enter on the premises of
Borrower in order to exercise any of Bank's rights and remedies. The
appointment of Bank as attorney-in-fact is coupled with an interest and is
irrevocable.

3.03 No Duty of Bank. Bank shall have no duty as to the collection or
protection of the Pledged Residential Paper nor as to the preservation of any
rights pertaining thereto. Borrower hereby releases Bank from any claims,
causes of action and demands at any time arising out of the Pledged
Residential Paper and its use and/or any actions taken by Bank with respect
thereto, and Borrower hereby agrees to indemnify Bank and to hold Bank
harmless from any and all such claims, causes of action and demands.

3.04 Collection of Pledged Residential Paper. Prior to the Bank
exercising its right to collect the Pledged Residential Paper pursuant to this
section 3.04, Borrower shall collect with diligence all payments due under the
Pledged Residential Paper. After the occurrence of an Event of Default,
Borrower shall, at the request of Bank, notify the account debtors of the
Pledged Residential Paper provided for in this Agreement and direct such
Account Debtors to make all such payments directly to Bank. Bank itself may
at any time after the occurrence of an Event of Default, so notify the account
debtors.

3.05 Perfection and Protection of Liens and Security Interest. Borrower
will from time to time deliver to Bank any financing statements, continuation
statements, extension agreements and other documents, properly completed and
executed (and acknowledged when required) by Borrower in form and substance
satisfactory to Bank for the purpose of perfecting confirming, or protecting
Bank's security interest and other rights in the Pledged Residential Paper.

3.06 Notice of Assignment. All Pledged Residential Paper and all
promissory notes, instruments, documents and other agreements entered into by
Borrower and covering any of the use or proceeds of Pledged Residential Paper
shall contain (by way of stamp or other means satisfactory to Bank) the
following language: "COLLATERALLY ASSIGNED TO LEGACY BANK OF TEXAS".

3.07 Rights in Property Held by the Bank. As further security for the
prompt satisfaction of all Obligations, the Borrower hereby assigns,
transfers, and sets over to the Bank all of its right, title, and interest in
and to, and grants the Bank a lien on and a security interest in, all amounts
that may be owing, from time to time, by the Bank to the Borrower in any
capacity, including, but without limitation, any deposit or other account with
the Bank, which lien and security interest shall be independent of, and in
addition to, any right of set-off that the Bank has hereunder or otherwise,
excluding escrow accounts.

3.08 Priority of Liens. The foregoing liens and security interest in
favor of Bank shall be first and prior liens and security interest except for
any liens heretofore approved by Bank in writing.

3.09 Financing Statements. Assignments and Deeds of Trust.

(A) The Borrower will:

(1) Join with the Bank in executing such financing statements
(including amendments thereto and continuation statements thereof)
(Exhibit "H"), Assignments and any other collateral documents in form
satisfactory to the Bank as the Bank, from time to time, may specify;

(2) Pay, or reimburse the Bank for paying, all costs and taxes of
filing or recording the same in such public offices as the Bank may
designate; and

(3) Take such other steps as the Bank, from time to time, may direct
to perfect, to the satisfaction of the Bank, the Bank's interest in the
Pledged Residential Paper.

3.10 Residential Paper Draw Agreements. No Draw will be submitted,
processed or approved until all of the following special conditions relating
to the Draw have been satisfied:

(A) Bank has approved the form/content of any and all Residential Paper
to be pledged to the Bank;

(B) such Pledged Residential Paper has been assigned to Bank as follows:

(1) the promissory notes evidencing the indebtedness have been
delivered and endorsed by Borrower to Bank with full recourse
against Borrower;

(2) the deeds of trust ("Mortgages") securing payment of such
Pledged Residential Paper have been transferred to Bank;

(C) Borrower has delivered a Request for Advance (Exhibit "E") and a
Borrowing Base Certificate (Exhibit "G") in form/content acceptable to
Bank;

(D) Borrower has delivered an estoppel certificate in form/content
acceptable to Bank regarding the Pledged Residential Paper;

(E) evidence that each of the Mortgages is an insured first lien has
been delivered to Bank (including the original mortgage title insurance
policies together with such endorsements as Bank may deem necessary;

(F) the real properties described in each of the Mortgages have been
insured against loss by fire and other casualty in the full amount of
the indebtedness secured by such Mortgages and Bank is shown as a loss
payee in such policies, as its interests may appear;

(G) appraisals relating to the properties described in such Mortgages,
and, if the Bank rejects any such appraisals for any reason, in its sole
discretion, Borrower shall obtain a current appraisal of any such
property, which is deemed satisfactory by the Bank; and

(H) Borrower has submitted to Bank such evidence of such environmental
safety and soundness as Bank may request regarding any of the properties
described in the Mortgages;

(I) Evidence acceptable to Bank is provided establishing that no Pledged
Residential Paper comprising the Borrowing Base is more than sixty (60)
days past due, and that the outstanding principal balance of the Loan is
not more than 50% of the aggregate outstanding principal balance of the
Pledged Residential Paper; and

(J) No Event of Default has occurred hereunder.

3.11 Real Property Described in the Residential Paper. Bank does not make
any warranties or representations, expressed or implied with respect to the
Pledged Residential Paper or the real property securing the Pledged
Residential Paper or its quality, marketability fitness, suitability, or
condition; and, Borrower agrees that Bank is not responsible for (and Borrower
indemnifies Bank against) any claim, loss, damage, liability or expense of any
kind incurred by Bank arising directly or remotely from such real property
and/or Pledged Residential Paper or any sale, disposition, use, inadequacy,
defect or deficiency thereof.

Section IV. Covenants, Representations and Warranties of Borrower and
Guarantor

4.01 Agreements. To induce the Bank to enter into this Agreement, the
Borrower and Guarantor jointly and severally represent and warrant to and
covenant with the Bank as follows:

(A) The Borrower is a real estate investment trust duly organized,
validly existing, and in good standing under the laws of the State of
Maryland.

(B) Borrower is not directly or indirectly controlled by, or acting on
behalf of, any person which is an "Investment Company", within the
meaning of the Investment Company Act of 1940, as amended;

(C) Borrower and Guarantor are not in default with respect to any of
their existing indebtedness, and the making and performance of this
Agreement, the Note, and the other Loan Documents will not (immediately
or with the passage of time, the giving of notice, or both):

(1) Violate the documents of formation or constitution of the
Borrower, or violate any laws or result in a default under any
contract, agreement, or instrument to which the Borrower or the
Guarantor are a party or by which the Borrower, the Guarantor or
their respective properties are bound; or

(2) Result in the creation or imposition of any security interest
in, or lien or encumbrance upon, any of the assets of the Borrower
except in favor of the Bank;

(D) The Borrower (and Guarantor, to the extent applicable to him) has
the power and authority to enter into and perform this Agreement, the
Note, and the other Loan Documents, and to incur the obligations herein
and therein provided for, and has taken all actions necessary to
authorize the execution, delivery, and performance thereof;

(E) This Agreement, the Note, and the other Loan Documents are, or when
delivered will be, valid, binding and enforceable in accordance with
their respective terms;

(F) Except as otherwise shown herein, there is no pending order, notice,
claim, litigation, proceeding, or investigation against or affecting the
Borrower or Guarantor, whether or not covered by insurance, that would
or could materially or adversely affect the financial condition or
business prospects of the Borrower or Guarantor if adversely determined;

(G) As of the date hereof, except for any other indebtedness owed by
Borrower to Bank, the Borrower has no material indebtedness of any
nature, including, but without limitation, liabilities for taxes and any
interest or penalties relating thereto, except the extent disclosed in
Borrower's financial statement or disclosed in, or permitted by, this
Agreement;

(H) Borrower understands that Borrower only may collect monthly
installments due on the Pledged Residential Paper as they mature monthly
and then only for so long as an Event of Default has not occurred. All
amounts, if any, representing principal prepayments or payoffs and all
amounts, if any, collected by Borrower after the occurrence of any Event
of Default represent trust funds which are assigned and belong to Bank
and which are to be immediately delivered to the Bank, and any retention
of such funds by Borrower after the occurrence of an Event of Default
shall be deemed a conversion by Borrower of Bank's property, ipso facto;

(I) Borrower will take all actions and pay all costs to keep and
maintain the validity, enforceability, security, priority and
collectability of the Pledged Residential Paper and will pay all other
amounts which may be necessary or desirable to preserve, maintain and
protect Bank's interest in the Pledged Residential Paper. Borrower will
pay or reimburse Bank for all costs incurred by Bank to document,
protect and enforce the Loan including legal fees, mortgage title
insurance, etc;

(J) Bank shall have all rights, benefits and remedies provided in the
Loan Documents as well as those provided by law and may (but is not
obligated to) perform any act or pay any amount which Borrower is
required and fails to pay or perform, as the case may be, at the cost
and for the account of the Borrower; and, Borrower agrees to reimburse
Bank upon demand for any and all such expenditures, together with
interest thereon at the highest lawful contract rate together with all
cost of collection;

(K) Borrower and Guarantor will take all necessary action to prevent the
occurrence of any default/dispute under any agreement or obligation
between Borrower or Guarantor and any other persons or entities in
connection with any matter including but not limited to the Pledged
Residential Paper or any part thereof;

(L) To the best of Borrower's knowledge, no hazardous substances or
solid wastes have been disposed of or otherwise released on or to any of
the properties described in the Mortgages securing the Pledged
Residential Paper. The terms "hazardous substance" and "release" shall
have the meanings specified in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, ("CERCLA"), and the
terms "solid waste" and "disposal" (or "disposed") shall have the
meanings specified in the Resource Conservation and Recovery Act of
1976, as amended, ("RCRA"); provided, to the extent that the laws of the
State of Texas establish a meaning for hazardous substance," "release,"
"solid waste," or "disposal" which is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply;

(M) Borrower and Guarantor indemnify Bank against any loss to Bank,
including without limitation attorney's fees and costs of site
investigation and cleanup, incurred by or imposed on Bank as a result of
any use, handling, storage, transportation, or disposal of hazardous or
toxic materials on or about any property described in the liens
comprising the Pledged Residential Paper. This indemnity at the election
of Bank shall survive repayment of the Loan and shall continue as long
any risk of loss or liability by Bank exists;

(N) As additional security for the punctual payment and performance of
the Note, and as part of the security therefor, Borrower hereby grants
to Bank a security interest, and a pledge and assignment of, any and all
money, property, deposit accounts, accounts, securities, documents,
chattel paper, claims, demands, instruments, items or deposits of the
Borrower, now held or hereafter coming within Bank's custody or control,
including without limitation, all certificates of deposit and other
depository accounts whether such have matured or the exercise of Bank's
rights result in loss of interest or principal or other penalty on such
deposits, but excluding deposits subject to tax penalties if assigned
and excluding escrow accounts. Without prior notice or demand upon the
Borrower, Bank may exercise its rights granted above at any time when a
default has occurred. Bank's rights and remedies under this paragraph
shall be in addition to and cumulative of any other rights or remedies
at law and equity including, without limitation, any rights of set-off
to which Bank may be entitled; and,

(O) Borrower and Guarantor will give immediate written notice to the
Bank of (1) any default of Borrower or Guarantor hereunder; (2) any
litigation or proceeding in which it is a party if any adverse decision
therein would require it to pay more than $5,000.00 or deliver assets
the value of which exceeds such sum (whether or not the claim is
considered to be covered by insurance); and (3) the institution of any
other suit or proceeding involving it that might materially and
adversely affect its operation financial condition, property, or
business prospects.

(P) Borrower shall not incur any indebtedness other than indebtedness
owed by Borrower to Bank and trade debt incurred and paid in the
ordinary course of business, and Borrower shall not assign, pledge,
grant any security interests or liens in or otherwise transfer or
encumber any of the Residential Paper now owned and held or subsequently
acquired by Borrower; it being the intent of this provision that
although the Bank shall not have a direct lien or security interest in
the Residential Paper which is not or does not become Pledged
Residential Paper, such unpledged Residential Paper shall constitute a
secondary source of repayment of the Loan, and the continued
availability of such unpledged Residential Paper constitutes a material
inducement for the Bank to make and advance the loan.

4.02 Survival. All of the covenants representations and warranties set
forth in Section 4.01 shall survive until all Obligations are satisfied in
full and there remain no outstanding Commitments hereunder; and, in the case
of subparagraph 4.01 (M), such indemnity will remain in effect for so long as
the risk of loss to be indemnified against exists.

Section V. Default

5.01 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" hereunder:

(A) The Borrower shall fail to pay when due any installment of principal
or interest or fee payable hereunder, and such failure shall continue
for a period of ten (10) days;

(B) The Borrower shall fail to observe or perform any other obligation
to be observed or performed by it hereunder or under any of the Loan
Documents, and such failure shall continue for ten (10) days after: (1)
notice of such failure from Bank; or (2) the Bank is notified of such
failure or should have been so notified pursuant to the provision of
4.01 (O), whichever is earlier;

(C) The Borrower shall fail to pay any indebtedness due any third
persons, and such failure shall continue beyond any applicable grace
period, or the Borrower shall suffer to exist any other event of default
under any agreement binding the Borrower;

(D) Any financial statement, representation, warranty, or certificate
made or furnished by or with respect to Guarantor or Borrower to the
Bank in connection with this Agreement, or as an inducement to the Bank
to enter into this Agreement, or in any separate statement or document
delivered or to be delivered to the Bank hereunder, shall be materially
false, incorrect, or incomplete when made;

(E) The dissolution of Borrower or death of Guarantor, or Borrower shall
admit its inability to pay its debts as they mature or shall make an
assignment for the benefit of itself or any of its creditors;

(F) Proceedings in bankruptcy, or for reorganization of the Borrower or
Guarantor, or for the readjustment of any of their respective debts
under the Bankruptcy Code, as amended, or any part thereof, or under any
other laws, whether state or federal, for the relief of debtors, now or
hereafter existing, shall be commenced against or by the Borrower or
Guarantor and, except with respect to any such proceedings instituted by
the Borrower, shall not be discharged within thirty (30) days of their
commencement;

(G) In Bank's discretion, if any item of Pledged Residential Paper
becomes more than sixty (60) days past due without prior substitution of
alternative Pledged Residential Paper, or if the aggregate outstanding
principal balance of the Pledged Residential Paper shall ever be less
than 200% of the outstanding principal balance on the Loan, and such
continues uncured for ten (10) days following written notice from Bank;

(H) The Guarantor shall fail to comply fully with the requirements of
his Guaranty;

(I) The occurrence of a material adverse change in the financial
condition of either the Borrower or the Guarantor; and

(J) The sale, transfer or assignment of any of the assets or properties
of the Borrower or the Guarantor except for sales, transfers or
assignments of individual assets or properties in the ordinary course of
business and for equivalent value received.

The occurrence of any default by Borrower or Guarantor under any other
obligations of Borrower to Bank automatically constitutes a default by
Borrower under the Loan Documents.

5.02 Acceleration. Immediately, at the option of Bank and without notice,
upon the occurrence of an Event of Default specified in the foregoing
5.01(E) or (F) or at the option of the Bank, but only upon notice to the
Borrower, upon the occurrence of any other Event of Default, all obligations,
whether hereunder or otherwise, shall immediately become due and payable
without further action of any kind.

5.03 Remedies. After any acceleration, as provided for in 5.02, the
Bank shall have, in addition to the rights and remedies given it by this
Agreement and the Loan Documents, all those allowed by all applicable laws,
including, but without limitation, the Uniform Commercial Code.

Section VI. Release (Reassignment) Agreements

6.01 Bank will release its liens and security interests against the
Pledged Residential Paper, (i.e. Bank will reassign without warranty or
recourse the Pledged Residential Paper) under the following agreements:

(i) no default or dispute is pending or threatened under the Loan
Documents;

(ii) such release is documented, recorded and otherwise accomplished
without cost to Bank; and

(w) with respect to any request for a partial release of Pledged
Residential Paper, the Bank has received (a) substituted Pledged
Residential Paper with an outstanding principal balance at least equal
to the outstanding principal balance of the Pledged Residential Paper to
be released or (b) cash equal to 50% of the outstanding principal
balance of the Pledged Residential Paper to be released; or

(x) the Loan is paid in full and Bank has no further obligation to make
advances hereunder.

Section VII. Miscellaneous

7.01 Construction. The provisions of this Agreement shall be in addition
to those of any guaranty, security agreement, note, or other evidence of
liability now or hereafter held by the Bank, all of which shall be construed
as complementary to each other. Nothing herein contained shall prevent the
Bank from enforcing any or all other guaranty, pledge or security agreements,
notes, or other evidences of liability in accordance with their respective
terms.

7.02 Further Assurance. From time to time, the Borrower will execute and
deliver to the Bank such additional documents and will provide such additional
information, including but not limited, to supplementary Financial Statement
information as the Bank may reasonably require to carry out the terms of this
Agreement and be informed of the status and affairs of the Borrower and
Guarantor.

In particular, Borrower will furnish to Bank (and will cause Guarantor to
furnish) Financial Statements in form/content acceptable to Bank, as follows:

Borrower: Guarantor

Monthly Status Reports on Pledged Annual Statement
Residential Paper;
Monthly Borrowing Base Certificates;
Annual Statement; and
Quarterly Statements

The annual statements of Borrower will be audited by such party's certified
public accountant and the quarterly statements of Borrower will be reviewed by
such party's certified public accountant. Statements will be prepared in form
acceptable to Bank and will include, inter alia complete contingent liability
information, cash flow reports and income and expense statements. In addition,
Borrower and Guarantor will furnish Bank copies of their current (filed)
income tax returns and future returns as and when they are filed with the
Internal Revenue Service during the term of the Loan.

7.03 Enforcement and Waiver by the Bank. The Bank shall have the right at
all times to enforce the provisions of this Agreement and the Loan Documents
in strict accordance with the terms hereof and thereof, notwithstanding any
conduct or custom on the part of the Bank in refraining from so doing at any
time or times. The failure of the Bank at any time or times to enforce its
rights under such provisions, strictly in accordance with the same, shall not
be construed as having created a custom in any way or manner modified or
waived the same. All rights and remedies of the Bank are cumulative and
concurrent and the exercise of one right or remedy shall not be deemed a
waiver or release of any other right or remedy. In the event and to the
extent, if any, that Borrower is indebted to Bank under any obligation arising
prior to the execution of this Loan Agreement ("Prior Indebtedness"), Borrower
agrees that Borrower has no off-sets, defense or counterclaims to payment of
the Prior Indebtedness.

7.04 Future Advances Secured. The Pledged Residential Paper mentioned
herein secures and enforces the payment of the Obligations including but not
limited to all sums advanced by Bank to Borrower pursuant to the Note and all
other present and future debts, obligations and liabilities of Borrower and/or
Guarantor to Bank (a) as principal, surety, endorser, guarantor, accommodation
party or otherwise, (b) arising by operation of law or otherwise, (c) as a
member of any partnership, joint venture, firm, trust or other association or
(d) payable to or in favor of third parties and hereafter acquired by Bank
with or without the knowledge, consent or insistence of Borrower, it being
contemplated that Borrower and/or Guarantor will from time to time become
additionally indebted to Bank all of which indebtedness shall be secured by
said Pledged Residential Paper unless and until released by Bank.

7.05 Expenses of the Bank. The Borrower will, on demand, reimburse the
Bank for all expenses, including the reasonable fees and expenses of legal
counsel for the Bank, incurred by the Bank in connection with the preparation,
administration, amendment, modification, or enforcement of this Agreement and
the Loan Documents and the collection or attempted collection of the Note.

7.06 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail postage prepaid, return receipt requested,
or telegraph to the parties at their address shown by their names below,
unless such address is changed by written notice hereunder.

7.07 Waiver Release and Indemnity by the Guarantor and Borrower. To the
maximum extent permitted by applicable laws, each of the Guarantor and the
Borrower:

(A) Waives (1) protest of all commercial paper at any time held by the
Bank on which the Borrower is in any way liable; (2) except as the same
may herein be specifically granted, notice of acceleration and of
intention to accelerate; and (3) notice and opportunity to be heard,
after acceleration before exercise by the Bank of the remedies of self-
help, set-off, or of other summary procedures permitted by any applicable
laws or by any agreement with the Guarantor or Borrower, and, except
where required hereby or by any applicable laws, notice of any other
action taken by the Bank;

(B) Releases the Bank and its officers, attorneys, agents, and employees
from all claims for loss or damage caused by any act or omission on the
part of any of them except for willful misconduct; and

(C) Indemnifies Bank against any loss, claim, cost, damage or liability
incurred by Bank in connection with or arising from any failure, breach
or default of any statement, warranty, agreement, obligation or agreement
of Borrower or Guarantor contained herein or made/delivered to Bank in
connection herewith without regard to any act or omission of Bank and
waives trial by jury.

7.08 Applicable Law. This Agreement is entered into and performable in
Plano, Collin County, Texas and shall be subject to and construed and enforced
in accordance with the laws of the State of Texas.

7.09 Binding Effect. Assignment and Entire Agreement. This Agreement
shall inure to the benefit of, and shall be binding upon, the respective
successors and permitted assigns of the parties hereto. The Borrower has no
right to assign any of its rights or obligations hereunder without the prior
written consent of the Bank. This Agreement, including any Exhibits hereto,
all of which are hereby incorporated herein by reference, and the documents
executed and delivered pursuant hereto, constitute the entire agreement
between the parties and may be amended only by a writing signed on behalf of
each party.

7.10 Severability. If any provision of this Agreement shall be held
invalid under any applicable laws, such invalidity shall not affect any other
provision of this Agreement that can be given effect without the invalid
provision, and to this end, the provisions hereof are severable.

7.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute but one and the same instrument.

THIS WRITTEN LOAN AGREEMENT (AND ALL RELATED DOCUMENTS MENTIONED HEREIN
OR PREPARED OR APPROVED IN WRITING BY LENDER CONCURRENTLY HEREWITH, INCLUDING
THE NOTE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS. OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.

LENDER:

Address: LEGACY BANK OF TEXAS
3512 Preston Rd.
Dallas, Texas 75093 By:/S/Ken Mixon
-------------------------
Ken Mixon, Vice President

BORROWER:

Address: UNITED MORTGAGE TRUST
1701 N. Greenville Avenue
Suite 403 By:/S/Christine Griffin
Richardson, Texas 75081 --------------------------
Christine Griffin, President

GUARANTOR:

By:/S/Theodore F. Etter, Jr.
--------------------------
Theodore F. Etter, Jr.

<PAGE>
EXHIBIT 23.1

The Board of Trustees
United Mortgage Trust

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Post Effective Amendment to the
Registration Statement on Form S-11.

/S/ Jackson & Rhodes P.C.

Dallas, Texas
March 5, 1999

EXHIBIT 23.2

The Board of Trustees
United Mortgage Trust

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Post Effective Amendment to the
Registration Statement on Form S-11.

/S/ Berry Moorman P.C.

Detroit, Michigan
March 5, 1999

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